-----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, HWBsz3WtwnT/v5HPineFl5t+6VX0nQOKQEANny7rgh9qpxJ18RiKP7J8pXaa9Zsr o065VNN+9WEFEUOlC/iYvQ== 0000927797-03-000042.txt : 20030328 0000927797-03-000042.hdr.sgml : 20030328 20030328130456 ACCESSION NUMBER: 0000927797-03-000042 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 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: 1934 Act SEC FILE NUMBER: 000-27672 FILM NUMBER: 03623928 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 ncbform10k_12-02.txt DECEMBER 31, 2002 FORM 10-K 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, 2002 | | 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 Incorporation or Organization) Identification Number) 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] Indicate by check mark if whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act. YES NO X --- The aggregate value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of the Common Stock as of June 30, 2002 was $45,106,605. As of March 10 2003, there were issued and outstanding 1,613,380 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Proxy Statement for the Registrant's 2003 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof. 2. Portions of the 2002 Annual Report to Shareholders are incorporated by reference into Items 7, 7A, 8 and 9 of Part II hereof. - -------------------------------------------------------------------------------- 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 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 ("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 North Central Bancshares 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. -2- 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 eight branch offices located in Iowa. Five of the Bank's branches are located in north central and central Iowa, in the cities of Fort Dodge, Nevada, Ames, Perry and Ankeny. Three of the Bank's offices are loacted in south east 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, 2002, the Bank had total assets of $403.9 million, total deposits of $277.0 million, and total shareholders' equity of $38.7 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. Market Area and Competition The Company is an independent savings and loan holding company serving its primary market area of Webster, Story, Dallas, Polk, Henry and Des Moines Counties, which are located in the central 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 2002 for Webster County was 3.5%, for Story County 2.6%, for Dallas County 3.3%, for Polk County 3.5%, for Henry County 6.0% and for Des Moines County 5.6%. These compare to the national rate of 6.0% and the State of Iowa rate of 3.9%. 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-rate 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, 2002, the Company's total loans receivable totalled $344.6 million, of which $148.8 million, or 43.2%, were one-to four-family residential real estate first mortgage loans, $70.8 million, or 20.5%, were multifamily real estate first mortgage loans, primarily purchased by the Company and $71.3 million, or 20.7%, were commercial real estate first mortgage loans, primarily purchased by the Company. Consumer loans, consisting primarily of automobile loans and second mortgage loans, totalled $53.8 million, or 15.6%, of the Company's loan portfolio. -3- 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. At December 31, 2002, it was the Company's policy to limit loans to one borrower to $3.0 million. At December 31, 2002, the Company's largest aggregate outstanding loans to one borrower was $2.7 million and the second largest borrower had an aggregate balance of $2.5 million, both of which were first mortgage multifamily residential real estate loans and both were performing, pursuant to their respective terms, as of that date. -4- Analysis of Loan Portfolio. Set forth below are selected data relating to the composition of the Company's loan portfolio by type of loan as of the dates indicated:
At December 31, ----------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------ ------------------- ------------------ ------------------ ----------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total --------- -------- --------- --------- --------- --------- --------- -------- -------- -------- (Dollars in thousands) First mortgage loans: One-to four-family residential(1) $ 148,751 43.17% $ 161,549 51.81% $ 176,615 54.78% $ 164,057 56.23% $ 148,992 57.46% Multifamily ..................... 70,779 20.54 74,396 23.86 75,858 23.53 73,417 25.16 64,895 25.02 Commercial ...................... 71,251 20.68 25,722 8.25 24,127 7.48 17,723 6.07 11,396 4.39 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total first mortgage loans .... 290,781 84.39% 261,667 83.91 276,600 85.79 255,197 87.47 225,283 86.87 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Consumer loans: Automobiles ..................... $ 10,115 2.94% $ 9,406 3.02% $ 8,803 2.73% $ 8,003 2.74% $ 7,348 2.83% Second mortgage(2) .............. 38,239 11.10 35,619 11.42 31,910 9.90 23,604 8.09 20,784 8.01 Other(3) ......................... 5,438 1.58 5,134 1.65 5,095 1.58 4,956 1.70 5,946 2.29 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total consumer loans ........... 53,792 15.61 50,159 16.09 45,808 14.21 36,563 12.53 34,078 13.13 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total loans receivable ......... $ 344,573 100.00% $ 311,826 100.00% $ 322,408 100.00% $ 291,760 100.00% $ 259,361 100.00% ========= ====== ========= ====== ========= ====== ========= ====== ========= ====== Less: Undisbursed portion of construction loans ............. $ 929 0.27% $ 1,055 0.34% $ 1,493 0.45% $ 1,982 0.68 $ 2,025 0.78% Unearned loan (premium) discount . (623) (0.18) (37) (0.01) 69 0.02 136 0.05 312 0.12 Net deferred loan origination fees(costs) ................... 3 0.00 (56) (0.02) (23) (0.01) 106 0.04 316 0.12 Allowance for loan losses ........ 3,118 0.90 2,883 0.92 2,843 0.88 2,777 0.95 2,676 1.03 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total loans receivable, net . $ 341,146 99.01% $ 307,981 98.77% $ 318,026 98.64% $ 286,759 98.29 $ 254,032 97.95% ========= ===== ========= ===== ========= ===== ========= ===== ========= =====
- ---------- (1) Includes interest-only construction loans that convert to permanent loans. (2) Second mortgage loans included $4.0 million, $2.0 million, $1.6 million, $1.5 million and $1.4 million of nonowner-occupied residential first mortgage loans at December 31, 2002, 2001, 2000, 1999 and 1998, respectively. (3) Other consumer loans included $1.9 million, $1.9 million, $1.5 million, $1.6 million and $2.3 million of commercial mortgage loans at December 31, 2002, 2001, 2000, 1999 and 1998, 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, 2002. 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, 2002 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)........ $ 27,124 $ 21,018 $ 35,698 $ 47,979 $ 15,994 $ 939 $ 148,752 Multifamily............... 15,668 23,943 20,952 9,832 386 - 70,779 Commercial................ 5,539 19,038 12,562 22,832 11,280 - 71,251 Consumer loans (2).......... 5,160 11,738 30,766 4,857 1,271 - 53,792 --------- --------- --------- --------- --------- --------- --------- Total .................. $ 53,489 $ 75,737 $ 99,978 $ 85,500 $ 28,931 $ 939 $ 344,574 ========= ========= ========= ========= ========= ========= =========
________________________ (1) One-to four-family loans include $40.2 million of loans with repricing periods greater than 5 years that have been classified as fixed rate loans. $36.3 million of these loans with repricing periods less than 5 years have been classified as adjustable rate loans. (2) Includes second mortgage loans of $38.2 million at December 31, 2002. The following table sets forth the dollar amounts of all fixed rate and adjustable rate loans in each loan category at December 31, 2002 due after December 31, 2003.
Due After December 31, 2003 ------------------------------------------------ Fixed Adjustable Total --------- ---------- --------- (In thousands) First mortgage loans: One-to four-family residential(1)..... $ 60,957 $ 60,671 $ 121,628 Multifamily........................... 6,921 48,192 55,113 Commercial............................ 46,191 19,521 65,712 Consumer loans (2)........................ 48,525 108 48,633 --------- --------- --------- Total............................... $ 162,594 $ 128,492 $ 291,086 ========= ========= =========
________________________ (1) One-to four-family loans include $40.2 million of loans with repricing periods greater than 5 years have been classified as fixed rate loans. (2) Includes second mortgage loans of $35.9 million at December 31, 2002. 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 2002, 41.2% of the Company's residential real estate loans had fixed rates, and 58.8% 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 Fannie Mae purchase and guarantee programs and that otherwise permit resale in the secondary mortgage market. The Company has sold fixed-rate loans with maturities equal to or in excess of 15 years in the secondary mortgage market. For the year ended December 31, 2002, the Company sold $53.6 million of one-to four-family residential mortgage loans, generally to lower the Company's interest rate risk. One-to four-family loans are underwritten and originated according to policies approved by the Board of Directors. 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 -6- 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%. 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 $87.4 million, or 25.4%, of the Company's total loan portfolio at December 31, 2002. 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 2002 Annual Report to Shareholders, which is attached to this Form 10-K as Exhibit 13.1. 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. "See 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 $142.0 million, or 41.2%, of the Company's total loan portfolio at December 31, 2002. Of such loans, $124.6 million, or 87.7%, were purchased or originated by the Company and were secured by properties outside the State of Iowa (the "out of state" properties). There was one loan secured by commercial real estate in the amount of $37,000 that was more than 90 days past due at December 31, 2002. The multifamily and commercial real estate loans are primarily secured by multifamily residences such as apartment buildings and by commercial facilities such as office buildings and retail buildings. Multifamily residential 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 multifamily or commercial real estate loans in excess of $500,000 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 $500,000 are approved -7- 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. $21.0 million, or 16.8%, of out of state multifamily and commercial real estate loans are serviced by the Bank. $103.6 million, or 83.2% of the out of state multifamily and commercial real estate loans are serviced by the originating financial institution or mortgage company. The Company imposes a $3.0 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. As a result, these types of loans present greater potential loan delinquencies and loan losses than single family residential loans. Consumer Loans, Including Second Mortgage Loans. The Company also originates consumer loans, which primarily include second mortgage loans. As of December 31, 2002, consumer loans totalled $53.8 million, of which second mortgage loans totalled $38.2 million, or 11.1%, of the Company's total loan portfolio. The Company's second mortgage loans generally 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 $18,000. 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. At December 31, 2002, automobile loans totalled $10.1 million, or 2.9% of the Company's total loan portfolio. In addition, the Company also makes other types of consumer loans, primarily unsecured signature loans for various purposes. At December 31, 2002, other consumer loans totalled $5.4 million, or 1.6% of the Company's net total loan portfolio. Included in the other consumer loans are unsecured consumer loans totalled $929,000, or 0.3% of the Company's total loan portfolio. The minimum loan amount for unsecured signature loans is $1,000, the maximum loan amount for such loans is generally $7,500, and the average balance of such loans is approximately $1,000. 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 existing customer base. Consumer loans generally provide for shorter terms and higher yields as compared to residential first mortgage loans, but generally carry higher risks of default. At December 31, 2002, $172,000, or 0.32%, of the Company's consumer loan portfolio was on non-accrual status. Loan Originations, Solicitation, Processing, and Commitments. Loan originations are derived from a number of sources such as real estate agent referrals, existing customers, borrowers, builders, and walk-in customers. Upon receiving a loan application, the Company obtains a credit report and employment verification to verify specific information relating to the applicant's employment, income, and credit standing. In the case of a real estate loan, an appraiser approved by the Company appraises the real estate intended to collateralize the proposed loan. An underwriter in the Company's loan department checks the loan application file for accuracy and completeness, and verifies the information provided. Pursuant to the Company's written -8- loan policies, senior management approves all first mortgage loans. The Loan Committee of the Board of Directors meets quarterly to review a sampling of all loans originated in the previous three months. After a loan is approved, a loan commitment letter is promptly issued to the borrower. The commitment letter specifies the terms and conditions of the proposed loan including the amount of the loan, interest rate, 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, 2002, the Company had outstanding commitments to originate $6.0 million 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 $135.6 million of loans secured by out of state properties. These loans represented 39.3% of the Company's total loan portfolio at December 31, 2002. All of the one-to four-family, multifamily residential and commercial real estate loans in the Company's loan portfolio which are purchased out of state by the Company are without recourse to the seller. At December 31, 2002, approximately $33.9 million of these purchased or originated out of state loans represented loans secured by real estate in the state of California, located primarily in southern California. The Company's investment in properties in Colorado totalled $21.0 million and was primarily distributed between the Colorado Springs and Denver areas. The Company's investment in properties located in Wisconsin totalled $14.3 million and was primarily distributed between the Milwaukee and Madison areas. The Company's investment in properties located in Missouri totalled $15.5 million. The remainder of the Company's purchased or out of state originated loans are distributed in various states. At December 31, 2002, the Company's multifamily residential and commercial real estate loans had an average balance of $592,000 and the largest loan had a principal balance of $2.7 million. As of December 31, 2002 there was one commercial real estate loan in the amount of $37,000 that was more than 90 days past due and was 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, 2002, $11.0 million, or 3.2%, of the Company's total loan portfolio consisted of purchased one-to four-family loans, of which $5.5 million were secured by properties located in Missouri. As of December 31, 2002 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 against the seller. $28.7 million, or 21.1%, of out of state loans are serviced by the Bank. $106.9 million, or 78.9% 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. In an effort to reduce the risk of loss on out of state purchased loans, the Company generally purchases loans that meet the underwriting policies for loans originated by the Company although specific rates and terms may differ from the rates and terms offered by the Company. The Company also requires appropriate documentation, and personal inspections of the underlying real estate collateral by an executive officer or director prior to purchase. -9- 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, 2002. Balance as of Percentage as of State December 31, 2002 December 31, 2002 (In thousands) - -------------------------------------------------------------------------------- Arizona $ 1,920 1.4% California 33,880 25.0 Colorado 20,964 15.5 Georgia 13 0.0 Illinois 3,122 2.3 Indiana 5,807 4.3 Michigan 2,102 1.6 Minnesota 12,270 9.1 Missouri 15,474 11.4 Montana 12 0.0 Nebraska 7,325 5.4 Nevada 1,706 1.3 North Carolina 585 0.4 North Dakota 16 0.0 Ohio 1,541 1.1 Oregon 2,913 2.2 South Dakota 4,266 3.1 Tennessee 64 0.0 Texas 2,162 1.6 Utah 4,304 3.2 Virginia 20 0.0 Washington 851 0.6 Wisconsin 14,273 10.5 ---------- ------ Total $ 135,590 100.0% ========= ===== -10- Origination, Purchase and Sale of Loans. The table below shows the Company's originations, purchases and sales of loans for the periods indicated.
For the Years Ended December 31, -------------------------------------------------------- 2002 2001 2000 ------------- ------------- ------------- (In thousands) Total loans receivable at beginning of period......... $ 311,826 $ 322,408 $ 291,760 --------- --------- --------- Originations: First mortgage loans: One-to four-family residential..................... 84,143 83,270 48,937 Multifamily........................................ - - - Commercial......................................... 264 - - Consumer loans: Automobile......................................... 8,573 8,003 6,856 Second mortgage ................................... 28,577 27,033 21,500 Other.............................................. 4,303 4,339 2,853 --------- --------- --------- Total originations:.............................. 125,860 122,645 80,146 Loan Purchases: First mortgage-- one-to four-family................ 5,104 1,865 1,677 First mortgage-- multifamily....................... 22,891 20,876 10,449 First mortgage-- commercial........................ 56,434 5,043 7,499 Loan Sales: First mortgage-- one-to four-family................ (52,899) (49,309) (14,080) Transfer of mortgage loans to (from) foreclosed real estate............................. (107) 889 (166) Repayments............................................ (124,535) (110,813) (55,209) --------- --------- --------- Net loan activity..................................... 32,748 (10,582) 30,648 --------- --------- --------- Total loans receivable at end of period.......... $ 344,574 $ 311,826 $ 322,408 =========== =========== ===========
Loan Origination Fees and Other Income. In addition to interest earned on loans, the Company generally receives fees in connection with loan originations. Such loan origination fees, net of costs to originate, are deferred and amortized using an interest method over the contractual life of the loan. Net deferred fees and costs are recognized into income immediately upon prepayment of the related loan. At December 31, 2002, the Company had $3,000 of deferred loan origination fees, net. Such fees vary with the type of loans and commitments made. The Company typically charges a document preparation fee on fixed- and adjustable-rate first mortgage loans. In addition to loan origination fees, the Company also receives other fees, service charges (such as overdraft fees), and other income that consist primarily of deposit transaction account service charges and late charges. The Company recognized fees and service charges of $2.4 million, $2.0 million and $1.6 million for the fiscal years ended December 31, 2002, 2001 and 2000, respectively. Investment Activities At December 31, 2002, the Company's investment portfolio is comprised of State and Local Obligations, mortgage- backed securities, mutual funds, interest-bearing deposits and equity securities consisting of FHLMC preferred stocks, FNMA preferred stock, FHLB stock and other common stock. At December 31, 2002, $538,000, or 8.9%, of the Company's investment portfolio, excluding mortgage-backed securities, mutual funds and equity securities, was scheduled to mature in one year or less, and $1.6 million, or 26.8% was scheduled to mature within one to five years. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management's projections as to the short term demand for funds to be used in the Company's loan origination and other activities. In addition, the Company's liquidity levels are affected by the level and source of its borrowed funds. -11- Investment Portfolio. The following table sets forth the carrying value of the Company's investment portfolio at the dates indicated.
At December 31, 2002 2001 2000 -------- --------- --------- (In thousands) Investment securities: U.S. Government agencies (1)........ $ - $ 1,003 $ 17,278 Mortgage-backed securities.......... 4,026 6,331 8,183 State and Local Obligations (1)..... 6,073 5,952 4,473 FHLB stock.......................... 4,478 4,429 4,429 Mutual Fund......................... 2,000 2,002 - Equity securities(2)................ 6,257 11,649 8,989 -------- -------- -------- Total investment securities....... 22,834 31,366 43,352 Interest-earning deposits........... 13,026 17,650 6,331 -------- -------- -------- Total investments................. $ 35,860 $ 49,016 $ 49,683 ======== ======== ========
(1) Certain securities have call features which allows the issuer to call the security prior to maturity date. (2) Certain securities have call features which allows the issuer to call the security. -12- Investment Portfolio Maturities. The following table sets forth the scheduled maturities, carrying values, market values and weighted average yields for the Company's investment portfolio at December 31, 2002.
At December 31, 2002 -------------------------------------------------------------------------------------------- One Year or Less One to Five Years Five to Ten Years Over Ten Years --------------------- -------------------- -------------------- -------------------- Annualized Annualized Annualized Annualized Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield (Dollars in thousands) Investment securities: Mortgage-backed securities $ 83 4.95% $ 405 5.44% $ 2,297 5.71% $ 1,241 5.99% State and Local Obligations(1) 538 4.40 1,630 4.49 3,038 4.68 868 6.14 Mutual Fund................... - - - - - - - - FHLB Stock.................... - - - - - - - - Common and Preferred Stock - - - - - - - - Preferred Stock-FNMA(2) - - - - - - - - Preferred Stock-FHLMC(2).. - - - - - - - - -------- ---- ------- ---- ------- ---- ------- ---- Total securities available for sale............... $ 621 4.47% $ 2,035 4.68% $ 5,335 5.12% $ 2,109 6.05% Interest-bearing deposits at the FHLB................... 13,026 0.72 - - - - - - -------- ---- ------- ---- ------- ---- ------- ---- Total investments........... $ 13,647 0.89% $ 2,035 4.68% $ 5,335 5.12% $ 2,109 6.05% ======== ==== ======= ==== ======= ==== ======= ====
At December 31, 2002 ------------------------------------------ Total ------------------------------------------ Annualized Average Weighted Carrying Fair Life in Average Value Value Years Yield (Dollars in thousands) Investment securities: Mortgage-backed securities $ 4,026 $ 4,026 2 5.75% State and Local Obligations(1) 6,074 6,074 4 4.81 Mutual Fund................... 2,000 2,000 2.50 FHLB Stock.................... 4,478 4,478 3.00 Common and Preferred Stock 3 3 - Preferred Stock-FNMA(2) 1,023 1,023 5.81 Preferred Stock-FHLMC(2).. 5,230 5,230 4.64 Total securities available for sale............... $ 22,834 $ 22,834 4.40% Interest-bearing deposits at the FHLB................... 13,026 13,026 0.72 -------- -------- ---- Total investments........... $ 35,860 $ 35,860 3.05% ======== ======== ==== (1) Certain securities have call features which allows the issuer to call the security prior to maturity date. (2) Certain securities have call features which allows the issuer to call the security. -13- Sources of Funds General. Deposits are the major source of the Company's funds for lending and other investment purposes. In addition to deposits, the Company derives funds from FHLB advances, the amortization and prepayment of loans, the maturity of investment securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. The Company uses short-term borrowings to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes. Deposits. During 2002, 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. Deposit account terms vary according to the minimum balance required, the period of time during which the funds must remain on deposit, and the interest rate, among other factors. The maximum rate of interest which the Company may pay is not established by regulatory authority. The Company regularly evaluates its internal cost of funds, surveys rates offered by competing institutions, reviews the Company's cash flow requirements for lending and liquidity, and executes rate changes when deemed appropriate. Public fund deposits totalled $1.3 million at December 31, 2002, a reduction of $6.8 million from December 31, 2001. 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, 2002, 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 $ 8,156 2.94% 0.45 None NOW accounts 50 36,374 13.13 0.93 None Savings accounts 25 25,693 9.28 1.29 None Money Market savings 2,500 23,748 8.57 Certificates of Deposit 1.59 1-3 months Fixed term, fixed rate $ 1,000 $ 613 0.22 2.08 4-6 months Fixed term, fixed rate 1,000 2,984 1.08 2.10 7-9 months Fixed term, fixed rate 1,000 1,059 0.38 2.79 10-12 months Fixed term, fixed rate 1,000 22,146 7.99 3.77 13-24 months Fixed term, fixed rate 1,000 49,517 17.88 4.60 25-36 months Fixed term, fixed rate 1,000 28,957 10.45 5.24 37-48 months Fixed term, fixed rate 1,000 6,248 2.26 5.48 49-60 months Fixed term, fixed rate 1,000 67,806 24.48 5.31 61 months or greater Fixed term, fixed rate 1,000 3,454 1.25 2.00 Various Variable rate 100 245 0.09 ------- ------ Total deposits $277,000 100.00% ======== ======
-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 12/31/02 % $ 12/31/01 % $ 12/31/00 ---------------------------------------------------------------------------------------- (Dollars in thousands) ---------------------------------------------------------------------------------------- Noninterest bearing demand. $ 8,156 18.82% $ 1,292 $ 6,864 13.06% $ 793 $ 6,071 NOW........................ 36,374 7.72 2,607 33,767 11.72 3,542 30,225 Savings account ........... 25,693 17.44 3,815 21,878 0.71 154 21,724 Money market savings....... 23,748 (15.48) (4,348) 28,096 14.59 3,577 24,519 Certificates of deposit that mature: within 12 months....... 67,872 (28.33) (26,833) 94,705 1.65 1,533 93,172 within 12-36 months.... 74,855 41.16 21,828 53,027 (14.43) (8,945) 61,972 beyond 36 months....... 40,302 32.24 9,825 30,477 29.78 6,993 23,484 --------- ------ --------- --------- ------ -------- --------- Total................ $ 277,000 3.05% $ 8,186 $ 268,814 2.93% $ 7,647 $ 261,167 ========= ====== ========= ========= ====== ======== =========
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 Passbook savings........... 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 ========= ===== ========= ========= ==== ========= =========
-15- The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated: At December 31, 2002 2001 2000 --------- --------- --------- (In thousands) Rate 3.99% or less............ $ 68,526 $ 23,765 $ 24 4.00-5.99%............... 88,840 95,618 78,138 6.00-7.99%............... 25,664 58,814 100,455 8.00% or greater......... - 12 11 --------- --------- --------- $ 183,030 $ 178,209 $ 178,628 ========= ========= ========= The following table sets forth the amount and maturities of certificates of deposit at December 31, 2002.
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........... $ 36,774 $ 24,535 $ 4,545 $ 1,101 $ 1,571 $ - $ 68,526 4.00-5.99%.............. 22,382 28,875 4,040 12,902 17,813 2,828 88,840 6.00-7.99%.............. 8,716 2,474 10,386 4,004 84 - 25,664 -------- -------- -------- -------- -------- ------- --------- $ 67,872 $ 55,884 $ 18,971 $ 18,007 $ 19,468 $ 2,828 $ 183,030 ======== ======== ======== ======== ======== ======= =========
The following table indicates the amount of the Company's certificates of deposit greater than $100,000 by time remaining until maturity at December 31, 2002. This amount does not include savings accounts of greater than $100,000, which totalled approximately $1.0 million at December 31, 2002. Certificates of Deposit over Remaining Maturity $100,000 ------------------ --------------- (In thousands) Three months or less................................. $ 3,455 Three through six months............................. 889 Six through twelve months............................ 2,486 Over twelve months................................... 8,966 --------- Total.............................................. $ 15,796 ========= -16- The following table sets forth the changes in deposits of the Company for the periods indicated:
Year Ended December 31, --------------------------------------------------- 2002 2001 2000 ------- -------- --------- (In thousands) Net increase (decrease) before interest credited.............................. $ 335 $ (1,626) $ (18,730) Interest credited......................... 7,851 9,273 8,866 ------- -------- --------- Net increase (decrease) in deposits... $ 8,186 $ 7,647 $ (9,864) ======= ======== =========
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. For the Year Ended December 31, ----------------------------------------- 2002 2001 2000 -------- --------- --------- (Dollars in thousands) Weighted average rate paid on: FHLB advances................ 5.33% 6.01% 6.20% FHLB advances: Maximum balance.............. $ 89,561 $ 88,563 $ 88,572 Average balance.............. 82,996 75,827 71,570 Weighted average rate paid on: Other borrowings............. 4.07% 2.39% 1.00% Other borrowings: Maximum balance.............. $ 275 $ 275 $ 34 Average balance.............. 26 27 32 - ---------- Title Abstract Business A component of the Company's operating strategy to increase non-interest income is through the abstract company business conducted through a wholly owned subsidiary, First Iowa Title Services Inc. ("First Iowa"). First Iowa currently provides real estate title abstracting services in Webster, Boone and Jasper counties. These services include researching recorded documents at the county courthouse and providing a history of those documents as they pertain to specific parcels of real estate. This information is used to determine who owns specific parcels of real estate and what encumbrances are on those specific parcels. The abstract business performed by First Iowa replaces a significant portion of the function of a title insurance company. Iowa law prohibits Iowa insurance companies or companies authorized to do business in Iowa from issuing title insurance or insurance against loss or damage by reason of defective title, encumbrance or otherwise. Institutions can purchase title insurance, for their own protection or to sell loans on the secondary market, but the cost of this insurance may not be passed on to the borrower. First Iowa had 16 employees as of December 31, 2002. Insurance and Annuity Business Another component of the Company's operating strategy to increase non-interest income is through First Federal Investment Services, Inc. ( "First Federal Investments"), a wholly owned subsidiary of the Bank. First Federal Investments activities include the sale of life insurance on mortgage loans, and credit life and accident and health insurance on consumer -17- loans made by the Company. In addition, First Federal Investments sells life insurance annuity products, mutual funds and other noninsured products. First Federal Investments had two employees as of December 31, 2002. Mortgage Company Business First Iowa Mortgage, Inc. is a wholly-owned subsidiary of the Bank. First Iowa Mortgage, Inc. originated first mortgage loans and subsequently sold these loans and the mortgage servicing rights to investors. First Iowa Mortgage, Inc. currently is inactive and these services are provided by the Bank. Multifamily Apartment Buildings On July 13, 1995, the Company formed the Northridge Apartments Limited Partnership 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, 2002 are approximately $154,000. The tax credits will continue for an additional four- year period. On October 24, 1996, the Company formed the Northridge Apartments Limited Partnership II to acquire, develop and manage low-and moderate-income housing for residents of the Fort Dodge area. Northridge Partnership II was awarded low income housing tax credits in 2002 by the Iowa Finance Authority. These credits were awarded to construct a 23 unit apartment building in Fort Dodge, Iowa. Completion of construction of this building is scheduled for March 31, 2003. Estimated federal tax credits in future years will be approximately $125,000 annually for a ten year period. Tax credits for 2003 will be prorated from the date of occupancy by tenants. In addition, this building is located in an area designated as a state enterprise zone. A State of Iowa one time tax credit of approximately $150,000 will be awarded upon completion of construction. Personnel At December 31, 2002, the Company had 117 full-time and 27 part-time employees (including the 16 employees of First Iowa and the 2 employees at First Federal Investments). 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 discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company. For federal income tax purposes, the 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 are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts, discussed below. The Company and the Bank are not currently under audit by the IRS and has not been audited for the past five years. Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an adjusted tax basis of $500 million or less) is permitted to maintain a reserve for bad debts with respect to loans and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Bank's taxable income. Pursuant to the Small Business Job Protection Act of 1996, the Bank 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 Bank makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Bank's "base year reserve", i.e. its reserve as of December 31, 1987, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute nondividend distributions and, therefore, will not be included in the Bank's income. The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, in some situations, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. We do not intend to pay distributions that would result in the recapture of any portion of our bad debt reserves. Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by AMTI minimum tax net operating loss carryovers, of which there is none. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. The Company does not expect to be subject to the AMT. Dividends-Received Deduction. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. State and Local Taxation Iowa and Colorado Taxation. The Holding Company and the Bank's subsidiaries file Iowa corporation tax returns and the Bank files an Iowa franchise and Colorado income tax return. The State of Iowa imposes a tax on the Iowa franchise taxable income of thrift institutions at the rate of 5%. Iowa franchise taxable income is generally similar to federal taxable income except that interest from state and municipal obligations is taxable, and no deduction is allowed for state franchise taxes. The net operating loss carryback and carryforward rules are similar to the federal rules. The state corporation income tax rate ranges from 6% to 12% depending upon Iowa corporation taxable income. Interest from federal securities is not taxable for purposes of the Iowa corporation income tax. -19- REGULATION General 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 conducts 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, SEC 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. The USA PATRIOT Act In response to the events of September 11, 2001, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions: o Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program. o Pursuant to Section 326 on July 23, 2003, the Secretary of the Department of Treasury, in conjunction with other bank regulators issued a proposed rule that provides for minimum standards with respect to customer identification and verification. At this time, a final rule is pending. -20- o Section 312 requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. o Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks. o Bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. The Sarbanes-Oxley Act On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes- Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate wrongdoing that occurred in Enron, WorldCom and similar companies. The Sarbanes-Oxley Act's principal legislation includes: o the creation of an independent accounting oversight board; o auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients; o additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements; o the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; o an increase the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company's independent auditors; o requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer; o requirement that companies disclose whether at least one member of the committee is a "financial expert" (as such term will be defined by the Securities and Exchange Commission) and if not, why not; o expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; o a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions; o disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; o mandatory disclosure by analysts of potential conflicts of interest; and o a range of enhanced penalties for fraud and other violations. Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes- Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. -21- Regulation of Savings and Loan Holding Companies The Holding Company is registered as an unitary savings and loan holding company and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the 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. Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the FRB. 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 control (as defined under HOLA) of another savings institution (or a holding company parent) without prior OTS approval. In addition, a savings and loan holding company is prohibited from directly or indirectly acquiring (i) through mergers, consolidation or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company) without prior OTS approval; and (ii) control of any depository institution not insured by the FDIC (except through a merger with and into the holding company's savings institution subsidiary that is approved by the OTS). A savings and loan holding company may not acquire as a separate subsidiary as insured institution that has a principal office outside of the state where the principal office of its subsidiary institution in located, except, (i) in the case of certain emergency acquisitions approved by the FDIC; (ii) if such holding company controls a savings institution subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or (iii) if the laws of the state in which the savings institution to be acquired is located specifically authorize a savings institution charted by that state to be acquired by a savings institution chartered by the state where the acquiring savings institution or savings and loan holding company is located or by a holding company that controls such a state chartered association. As a 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. 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." See "-- Regulation of Federal Savings Associations -- Limitation on Capital Distributions." -22- 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. The Bank's authority to invest in certain types of loans or other investments is limited by federal law. Loans to One Borrower. The Bank is generally subject to the same limits on loans to one borrower as a national bank. With specified exceptions, the Bank's total loans or extensions of credit to a single borrower cannot exceed 15% of the Bank's unimpaired capital and surplus which does not include accumulated other comprehensive income. The Bank may lend additional amounts up to 10% of its unimpaired capital and surplus which does not include accumulated other comprehensive income, if the loans or extensions of credit are fully-secured by readily-marketable collateral. The Bank currently complies with applicable loans-to-one borrower limitations. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." QTL Test. Under federal law, the Bank must comply with the qualified thrift lender, "QTL" test. Under the QTL test, the Bank is required to maintain at least 65% of its"portfolio assets" in certain "qualified thrift investments" in at least nine months of the most recent 12-moth period. "Portfolio assets" means, in general, the Bank's total assets less the sum of : o specified liquid assets up to 20% of total assets: o goodwill and other intangible assets; and o the value of property used to conduct the Bank's business. The Bank may also satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code of 1986. The Bank met the QTL test at December 31, 2002, and in each of the prior 12 months, and, therefore, qualified as a thrift lender. If the Bank fails the QTL test it 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 debt securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. The allowance -23- 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, 2002, the Bank was not required to maintain any additional risk-based capital under this regulation. At December 31, 2002, 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, 2002: Capital Bank Requirements Excess Capital --------- ------------ -------------- (In thousands) Tangible capital....... $ 30,803 $ 5,959 $ 24,844 Core capital........... 30,803 11,917 18,886 Risk-based capital..... 33,870 21,805 12,065 A reconciliation between regulatory capital and GAAP capital at December 31, 2002 in the accompanying financial statements is presented below:
Tangible Capital Core Capital Risk-based Capital ---------------- ------------ ------------------ (In thousands) GAAP capital.................................. $ 37,030 $ 37,030 $ 37,030 Intangible assets............................. (5,896) (5,896) (5,896) Unrealized gain on certain available for sale assets...................................... (331) (331) (331) Allowance for loan losses includable in supplementary capital.................... - - 3,067 -------- -------- -------- Regulatory capital............................ $ 30,803 $ 30,803 $ 33,870 ======== ======== ========
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." 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. -24- 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 (the "FRA"). In general, these transactions must be on terms which are as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the Bank's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the Bank. In addition, the OTS regulations prohibit a savings association from lending to any of its affiliates that is engages in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. The Bank's authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than those prevailing from comparable transactions with unaffiliated persons and that do not involve more that the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank's capital. The regulations allow small discounts on fees on residential mortgages for directors, officers and employees. In addition, extensions for credit in excess of certain limits must be approved by the Bank's Board of Directors. Enforcement. The OTS has primary enforcement responsibility over savings associations, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices. Standards for Safety and Soundness. Under federal law, the OTS has adopted a set of guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings standards, and compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and mange the risks and exposures specified in the guidelines. In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given notice that it is not satisfying these safety -25- and soundness standards to submit a compliance plan. If, after being notified, an institution fails to submit an acceptable plan or fails in any material respect to implement an accepted plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action"provisions of federal law. If an institution fails to comply with such an order, the OTS may seek to enforce 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. Prompt Corrective Regulatory Action. Under the OTS prompt corrective action regulations, the OTS is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings associations would be placed in one of the following four categories based on the association's capital: o well capitalized; o adequately capitalized; o undercapitalized; and o critically undercapitalized. At December 31, 2002, the Bank met the criteria for being considered "well-capitalized." When appropriate, the OTS can require corrective action by a savings association holding company under the "prompt corrective action" provision of federal law. Insurance of Deposit Accounts. The Bank is a member of the 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 0.0168% 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 -26- Moines stock at December 31, 2002 of $4.5 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. 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 $41.3 million. The amount of aggregate transaction accounts in excess of $41.3 million are currently subject to a reserve ratio of 10.0%, which ratio the FRB may adjust between 8.0% and 14%. The FRB regulations currently exempt $6.0 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. Privacy Regulations. Pursuant to the GLB Act, the OTS has published final regulations implementing the privacy protection provisions of the GLB Act. 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 is 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 believes that such policies are in 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 eight full-service offices located in Fort Dodge, Nevada, Ames, Perry, Ankeny, Burlington and Mount Pleasant, Iowa. The following table sets forth certain information concerning the main office and each branch office of the Company and the offices of First Iowa Title Services at December 31, 2002. In addition to the properties listed below, First Federal Investments owns land and an office building in Fort Dodge, Iowa and equipment with a net book value of $203,000, Northridge Apartments Limited Partnership owns a multifamily apartment building with a net book value of $1.6 million and Northridge Apartment Limited Partnership II owns a building under construction with a book value of $617,000 at December 31, 2002. The aggregate net book value of the Company's premises and equipment, on a consolidated basis was $8.2 million at December 31, 2002. Lease Location Opening Date Expiration Date Net Book Value Main Office: 825 Central Avenue 1973 N/A $ 1,011,853 Fort Dodge, Iowa Branch Offices: 201 South 25th Street 1977 N/A $ 212,973 Fort Dodge, Iowa 404 Lincolnway 1977 N/A $ 460,928 Nevada, Iowa 316 South Duff 1995 N/A $ 1,962,025 Ames, Iowa 1st Avenue and Hwy 141 1999 N/A $ 820,437 Perry, Iowa 321 North Third Street 1953 N/A $ 551,470 Burlington, Iowa 1010 North Roosevelt 1975 N/A $ 1,026,040 Burlington, Iowa 102 South Main 1991 N/A $ 275,946 Mount Pleasant, Iowa 1802 SE Delaware (2) 2001 2003 $ 47,414 Ankeny, Iowa 2110 SE Delaware 2003 N/A $ 1,573,968 Ankeny, Iowa First Iowa Offices: 628 Central Avenue 1982 N/A $ 26,267 Fort Dodge, Iowa 814 8th Street 1996 2003 (1) $ 12,853 Boone, Iowa 200 1st Street South 1996 2003 (1) $ 10,721 Newton, Iowa (1) Does not include option to renew for an additional 5 years. (2) Leased office space for the temporary location of the Ankeny office. -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, 2002. 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 58 of the Company's 2002 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 2002 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 24 of the Company's 2002 Annual Report to Shareholders under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," which section is included in Exhibit 13.1 to this Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is incorporated herein by reference to pages 11 through 13 of the Company's 2002 Annual Report to Shareholders under the heading "Discussion of Market Risk--Interest Rate Sensitivity Analysis," which section is included in Exhibit 13.1 to this Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated herein by reference to pages 26 through 56 of the Company's 2002 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 Annual 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 25, 2003, 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 25, 2003, 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 25, 2003, which has been filed with the SEC and is incorporated herein by reference. The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2002.
Number of securities remaining available for Number of securities future issuance under equity to be issued upon Weighted-average compensation plans exercise of exercise price of excluding securities Plan category outstanding options outstanding options reflected in column (a)) - ------------------------- --------------------- ------------------------ ----------------------------- (a) (b) (c) Equity compensation plans approved by security holders......... 221,810 $ 15.67 34,605 Equity compensation plans not approved by security holders......... - - - - 40,000 1 Total.................... 221,810 $ 15.67 74,605 2
- ---------- (1) The equity compensation plan not approved by shareholders is that portion of the 1996 Stock Option Plan which grants nonqualified options to directors out of a pool of 40,000 shares reserved to the plan without shareholder approval. (2) Reflects 40,000 shares reserved for future grant under the 1996 Stock Option Plan. -30- 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 25, 2003, which has been filed with the SEC and is incorporated herein by reference. PART IV ITEM 14. CONTROLS AND PROCEDURES During the 90-day period prior to the filing date of this report, management, including the Company's President, Chief Executive Officer and Treasurer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon, and as of the date of that evaluation, the President, Chief Executive Officer and Treasurer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. There were no significant deficiencies or material weaknesses identified in the evaluation and therefore, no corrective actions were taken. ITEM 15 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, 2002 and 2001, and the related consolidated statements of income, equity and cash flows for the years ended December 31, 2002, 2001 and 2000, 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 2002 None. -31- (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) 10.1A Amendment #1 to Employee Stock Ownership Plan of First ******* Federal Savings Bank of Iowa (formerly known as First Federal Savings Bank of Fort Dodge) and ESOP Trust Agreement 10.1B Amendment #2 to Employee Stock Ownership Plan of First ******* Federal Savings Bank of Iowa (formerly known as First Federal Savings Bank of Fort Dodge) and ESOP Trust Agreement 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 10.6 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 10.10 Supplemental Retirement and Deferred Compensation Plan of ******* First Federal Savings Bank of Iowa 10.11 Form of Employment Agreement between First Federal Savings ****** Bank of Iowa and C. Thomas Chalstrom 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 November 22, 2002 99.2 Press Release dated January 28, 2003 -32- * 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. ****** Incorporated by reference to Exhibit 10.3. ******* Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 29, 2002. (d) No financial schedules required by Regulation S-X are filed, and as such are excluded from the Annual Report as provided by Exchange Act Rule 14a-3(b)(i). -33- 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 27, 2003 /s/ David M. Bradley -------------------- By: David M. Bradley Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/ David M. Bradley President, Chief Executive Officer, 03/27/03 - -------------------- Director, and Chairman of the Board David M. Bradley (principal executive officer) /s/ John L. Pierschbacher Treasurer 03/27/03 - ------------------------- (principal accounting and John L. Pierschbacher financial officer) /s/ Robert H. Singer, Jr. Director 03/27/03 - ------------------------- Robert H. Singer, Jr. /s/ KaRene Egemo Director 03/27/03 - ---------------- KaRene Egemo /s/ Melvin R. Schroeder Director 03/27/03 - ----------------------- Melvin R. Schroeder /s/ Mark M. Thompson Director 03/27/03 - -------------------- Mark M. Thompson /s/ Craig R. Barnes Director 03/27/03 - ------------------- Craig R. Barnes -34- SARBANES-OXLEY ACT - SECTION 302 CERTIFICATIONS I, David M. Bradley, certify that: 1. I have reviewed this annual report on Form 10-K of North Central Bancshares, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ David M. Bradley -------------------- David M. Bradley President and Chief Executive Officer -37- SARBANES-OXLEY ACT - SECTION 302 CERTIFICATIONS I, John L. Pierschbacher, certify that: 1. I have reviewed this annual report on Form 10-K of North Central Bancshares, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ John L. Pierschbacher ------------------------- John L. Pierschbacher Treasurer EX-13 3 ncbexhibit131annrpt_12-02.txt EXHIBIT 13.1 2002 ANNUAL REPORT Exhibit 13.1 2002 Annual Report to Security Holders NORTH CENTRAL BANCSHARES, INC. Holding Company for First Federal Savings Bank of Iowa 2002 ANNUAL REPORT TABLE OF CONTENTS MESSAGE OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER............... 3 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA............................... 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 7 INDEX TO FINANCIAL STATEMENTS.................................................25 QUARTERLY RESULTS OF OPERATIONS (Unaudited)...................................55 MANAGEMENT OF THE HOLDING COMPANY AND THE BANK............................... 57 SHAREHOLDER INFORMATION...................................................... 58 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. The Company does not undertake to update any forward looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. 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, 2002. North Central Bancshares is the holding company for First Federal Savings Bank of Iowa (the "Bank). For the year ended December 31, 2002, North Central Bancshares' net income was $5.9 million, or $3.37 diluted earnings per share, as compared to $4.5 million, or $2.41 diluted earnings per share, for the year ended December 31, 2001. Some of our achievements during the past year include: 2002 HIGHLIGHTS o Total net income, earnings per share, assets and loans reached new Company highs. o Total net income reached $5.9 million, a 31.1% increase over the prior year. o Earnings per share reached a high of $3.37, a 39.8% increase over the prior year. o Total assets reached a new high of $403.9 million. o Total net loans increased by 10.8% or $33.2 million. o Repurchased a total of 133,100 shares or 7.8% of outstanding stock during the year ended December 31, 2002. o Increased quarterly dividends in April, 2002 to $0.18 per share, a 20% increase. o Opened a new office in Ankeny, Iowa and began construction on a permanent 5,000 sf full service facility. o Began construction on a $1.8 million 23 unit Low Income Housing Tax Credit elderly apartment building in Fort Dodge. I want to thank our outstanding staff who helped make 2002 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, -------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (In thousands) Selected Consolidated Financial Condition Data: Total assets............................ $ 403,872 $ 379,375 $ 388,998 $ 367,433 $ 336,690 Cash (noninterest bearing).............. 2,143 2,259 2,519 8,542 2,435 Loans receivable, net:(1) First mortgage loans secured by one-to four-family residences.......................... 147,479 159,943 174,413 161,547 145,967 First mortgage loans secured by multifamily properties........... 70,194 73,311 74,644 71,503 63,285 First mortgage loans secured by commercial properties............ 70,502 25,263 23,825 17,470 11,168 Consumer loans........................ 52,971 49,464 45,144 36,239 33,612 ---------- ---------- ---------- ---------- ---------- Total loans receivable, net......... 341,146 307,981 318,026 286,759 254,032 Investment securities(2)................ 35,859 49,016 49,682 53,820 63,084 Deposits................................ 277,000 268,814 261,167 271,031 246,690 Borrowed funds.......................... 85,026 71,413 88,592 55,715 38,832 Total shareholders' equity.............. 38,748 35,913 36,398 38,127 48,207
For the Year Ended December 31, 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- (In thousands) Selected Operating Data: Interest income......................... $ 26,965 $ 27,500 $ 27,284 $ 24,556 $ 23,602 Interest expense........................ 13,911 16,514 16,707 13,604 12,869 ---------- ---------- ---------- ---------- ---------- Net interest income before provision for loan losses.......... 13,054 10,986 10,577 10,952 10,733 Provision for loan losses............... 383 210 120 120 210 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses.......... 12,671 10,776 10,457 10,832 10,523 ---------- ---------- ---------- ---------- ---------- Noninterest income: Fees and service charges........... 2,375 1,993 1,592 1,485 1,243 Abstract fees...................... 1,686 1,506 1,233 1,421 1,584 Other income....................... 1,668 1,593 1,189 1,157 1,088 ---------- ---------- ---------- ---------- ---------- Total noninterest income......... 5,729 5,092 4,014 4,063 3,915 ---------- ---------- ---------- ---------- ---------- Noninterest expense: Salaries and employee benefits..... 5,223 4,500 4,103 4,026 3,482 Premises and equipment............. 1,192 1,226 1,092 931 812 Data processing.................... 544 470 455 522 553 SAIF deposit insurance premiums......................... 47 50 55 147 143 Goodwill........................... - 472 472 472 436 Other expenses..................... 2,576 2,328 2,410 2,356 2,146 ---------- ---------- ---------- ---------- ---------- Total noninterest expense........ 9,582 9,046 8,587 8,454 7,572 ---------- ---------- ---------- ---------- ---------- Income before income taxes.............. 8,818 6,822 5,884 6,441 6,866 Income tax expense...................... 2,953 2,347 1,873 2,241 2,481 ---------- ---------- ---------- ---------- ---------- Net income........................... $ 5,865 $ 4,475 $ 4,011 $ 4,200 $ 4,385 ========== ========== ========== ========== ==========
4
At or for the Year Ended December 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- --------- 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)...................... 3.15% 2.68% 2.57% 2.86% 2.81% Net interest margin (net interest income as a percentage of average interest- earning assets)........................... 3.44 3.03 2.95 3.35 3.50 Return on average assets (net income divided by average total assets).......... 1.47 1.17 1.06 1.21 1.35 Return on average equity (net income divided by average equity)................ 15.57 12.21 11.08 9.51 8.73 Noninterest income to average assets........ 1.43 1.33 1.07 1.21 1.21 Efficiency ratio(3)......................... 51.01 56.26 58.85 56.30 51.69 Noninterest expense to average assets....... 2.40 2.36 2.28 2.45 2.34 Net interest income after provision for loan losses to noninterest expenses....... 132.24 119.12 121.78 128.13 138.97 Financial Condition Ratios: (%) (4) Equity to assets at period end.............. 9.59 9.47 9.36 10.38 14.32 Tangible equity to tangible assets at period end (5) (6)..................... 8.25 8.03 7.84 8.68 12.42 Average shareholders' equity divided by average total assets...................... 9.42 9.57 9.61 12.77 15.52 Average tangible shareholders equity divided by average tangible total assets (5) (6).. 8.06 8.10 8.00 10.94 13.71 Average interest-earning assets to average interest-bearing liabilities.............. 107.91 107.54 108.31 112.05 116.28 Asset Quality Ratios: (%) (4) Nonaccrual loans to total net loans......... 0.19 0.09 0.33 0.07 0.38 Nonperforming assets to total assets(7)..... 0.35 0.36 0.28 0.20 0.34 Allowance for loan losses as a percent of total loans receivable at end of period... 0.90 0.92 0.88 0.95 1.03 Allowance for loan losses to nonaccrual loans..................................... 485.00 1,042.07 274.08 1,301.13 279.72 Per Share Data: Book value per share........................ $23.62 $21.12 $19.04 $16.86 $16.26 Tangible book value per share(5)............ 20.03 17.65 15.71 13.83 13.79 Basic earnings per share (8)................ 3.58 2.54 2.04 1.64 1.44 Diluted earnings per share (9).............. 3.37 2.41 2.00 1.60 1.40 Dividends declared per share................ 0.72 0.60 0.50 0.40 0.32 Dividend payout ratio....................... 0.20 0.25 0.25 0.24 0.22
_______________________ (Notes on following page) 5 (1) Loans receivable, net represents total loans less discounts, loans in process, net deferred loan fees and allowance for loan losses. The allowance for loan losses at December 31, 2002, 2001, 2000, 1999 and 1998 was $3.1 million. $2.9 million, $2.8 million, $2.8 million and $2.7 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, 2002, 2001, 2000, 1999 and 1998 was $5.9 million, $5.9 million, $6.4 million, $6.8 million and $7.3 million, respectively. (6) Tangible assets consists of total assets less goodwill and title plant. Goodwill and title plant at December 31, 2002, 2001, 2000, 1999 and 1998 was $5.9 million, $5.9 million, $6.4 million, $6.8 million and $7.3 million, respectively. (7) Nonperforming assets consists of nonaccrual loans and foreclosed real estate. (8) Basic earnings per share information is calculated by dividing net income by the weighted average number of shares outstanding. The weighted average number of shares outstanding for basic earnings per share computation for 2002, 2001, 2000, 1999 and 1998 were 1,637,749, 1,762,900, 1,963,686, 2,562,940 and 3,048,148, 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 2002, 2001, 2000, 1999 and 1998 were 1,739,535, 1,856,643, 2,006,340, 2,621,542 and 3,132,833, respectively. 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 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, abstract fees, mortgage banking income and other income, 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. Critical Accounting Policies The "Management's Discussion and Analysis of Financial Condition and Results of Operations and disclosures included within this report, are based on the Company's audited consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on approximate measures of the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company's significant account policies are described in the "Notes to Consolidated Financial Statements". Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policy to be that related to the allowance for loan losses, and asset impairment judgments, including the recoverability of goodwill. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio including timely identification of potential problem credits. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company's market area and the expected trend of those economic conditions. To the extent actual results differ from forecasts and management's judgment, the allowance for loan losses may be greater or less that future charge-offs. Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired in a purchase acquisition. Goodwill is tested for impairment at least annually. 7 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, multifamily and commercial real estate loans, consumer 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 and mortgage banking income. 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 2002, the Company had a relatively strong and stable retail deposit base drawn from its offices located in Fort Dodge, Ames, Nevada, Perry, Ankeny, Burlington and Mount Pleasant, Iowa. At December 31, 2002, 33.9% of the deposit base, or $94.0 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. The Company expects to continue its commitment to financing the purchase or improvement of residential real estate in its market area. At December 31, 2002, 36.0% 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, 2002, the Company's portfolio of loans which were either originated or purchased by the Company and secured by out of state properties consisted of $11.0 million of one-to four-family residential mortgage loans, or 3.2% of the Company's total loan portfolio, and $65.2 million of multifamily real estate loans, or 18.9% of the Company's total loan portfolio and $61.3 million of commercial real estate loans, or 17.8% of the Company's total loan portfolio. At December 31, 2002, the Company's ratio of nonperforming assets to total assets was 0.35%. The Company also invests in State and Local Obligations, mortgage-backed securities, interest-earning deposits, equity securities and FHLB stock. Generally, the yield on mortgage loans originated and purchased by the Company is greater than that of securities purchased by the Company. Future economic conditions and continued strong banking competition could result in diminished lending opportunities. The Company may increase its investment in securities and in purchased mortgage loans outside its market area. 8 Capital Strength and Controlled Internal Growth. Total equity decreased from $48.2 million at December 31, 1998 to $38.7 million at December 31, 2002, a decrease of 19.6%, a decrease primarily attributable to funds used for repurchases of common stock and dividends paid to shareholders in excess of net income and stock options exercised. Total assets have increased by $67.2 million, or 20.0%, since December 31, 1998. As a result, the ratio of total equity to total assets has decreased from 14.3% at December 31, 1998 to 9.6% at December 31, 2002. The Company's growth can be attributed to the 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 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. 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, 2002 was $1.7 million, offset by noninterest expense attributable to First Iowa. Mortgage banking income generated by the Bank was $747,000 for the year ended December 31, 2002, offset by noninterest expense attributable to mortgage banking operations. 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, 2002, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same period by $16.1 million, representing a one-year gap to total assets ratio of positive 4.0% as compared to a negative 9.2% at December 31, 2001. 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 mortgage-backed securities, municipal securities and equity 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". Liquidity and Capital Resources The Company's primary sources of funds are deposits, amortization and prepayment of loans, other borrowings, 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 interest-earning assets, which provide liquidity to meet lending requirements. At December 31, 2002, $538,000, or 8.9%, of the Company's investment portfolio, excluding equity and mortgage backed securities and mutual funds, was scheduled to mature in one year or less and $1.6 million, or 26.8%, was scheduled to mature in one to five years and $3.9 million, or 64.3%, was scheduled to mature in more than five years. Certificates of deposit scheduled to mature in less than one year, at December 31, 2002, totaled $67.9 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 $124.9 million as of December 31, 2002. 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. 9 At December 31, 2002, the Company had outstanding loan commitments of $8.2 million. This amount does not include undisbursed overdraft loan privileges and the undisbursed home equity lines of credit. The Company monitors its liquidity position and expects to have sufficient funds to meet its current funding commitments. The main sources of liquidity for the 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 2002, the Holding Company repurchased 133,100 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 Note 16 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, 2002, 2001 and 2000, the Company's disbursements for loan originations and purchases totaled $210.3 million, $150.4 million and $99.8 million, respectively. These activities were funded primarily by net deposit inflows, principal repayments on loans, proceeds from the sale of loans, proceeds from the maturity and sale of securities and FHLB advances. Net cash flows provided by (used in) investing activities amounted to $(27.6) million, $20.5 million and $(25.4) million for the years ended December 31, 2002, 2001 and 2000, respectively. Net cash flows provided by (used in) financing activities amounted to $18.3 million, $(15.0) million and $16.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. The OTS regulations require savings associations, such as the Bank, to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations; a leverage ratio requirement of 3% of core capital to such adjusted total assets; and a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-based assets. The Bank satisfied these minimum capital standards at December 31, 2002 with tangible and leverage capital ratios of 7.8% and a total risk-based capital ratio of 12.4%. 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, 2002: Capital Excess Amount Requirements Capital ----------- ---------------- ------------ (In thousands) Tangible capital....... $ 30,803 $ 5,959 $ 24,844 Core capital........... 30,803 11,917 18,886 Risk-based capital..... 33,870 21,805 12,065 10 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, 2002, 39.9% of the Company's total loan portfolio was secured by properties outside the State of Iowa, located in twenty-three states. See "Asset Quality." The Bank does not own any trading assets. At December 31, 2002, 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 short term consumer loans, and maintaining a level of liquidity by investing in short-term interest-earning deposits and equity securities. 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, 2002, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same period by $16.1 million, representing a one-year gap ratio of positive 4.0%, compared to a one-year gap ratio of negative 9.2% at December 31, 2001. 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 short term consumer loans 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, 2002 which are expected to reprice or mature, based upon certain assumptions, in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the earlier of term of repricing or the contractual terms of the asset or liability. Certain assumptions used in preparing the table are set 11 forth in the following table. Management believes that these assumptions approximate actual experience and considers them appropriate and reasonable.
At December 31, 2002 (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) .................... $ 65,727 $ 78,296 $ 31,600 $ -- $ -- $ -- $ 175,623 Fixed (2) ......................... 27,505 42,562 23,456 22,795 2,568 20 118,906 Consumer and other loans ............. 21,524 22,016 9,208 969 45 -- 53,762 Investment securities(3)(4) .......... 22,881 3,732 1,996 3,224 -- -- 31,833 -- -- --------- --------- --------- --------- --------- --------- --------- Total interest-earning assets ..... $ 137,637 $ 146,606 $ 66,260 $ 26,988 $ 2,613 $ 20 $ 380,124 ========= ========= ========= ========= ========= ========= ========= Rate sensitive liabilities: Savings accounts ..................... $ 4,368 $ 6,634 $ 4,571 $ 6,134 $ 3,368 $ 617 $ 25,692 NOW accounts ......................... 13,458 13,820 5,485 3,252 355 4 36,374 Money market accounts ................ 18,761 4,987 -- -- -- -- 23,748 Certificate accounts ................. 67,826 74,855 37,521 2,828 -- -- 183,030 Noninterest bearing deposits ......... 8,156 -- -- -- -- -- 8,156 FHLB advances and other liabilities(5) 9,007 13,004 23,004 40,011 -- -- 85,026 --------- --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities $ 121,576 $ 113,300 $ 70,581 $ 52,225 $ 3,723 $ 621 $ 362,026 ========= ========= ========= ========= ========= ========= ========= Interest sensitivity gap ................ $ 16,061 $ 33,306 $ (4,321) $ (25,237) $ (1,110) $ (601) Cumulative interest-sensitivity gap ..... $ 16,061 $ 49,367 $ 45,046 $ 19,809 $ 18,699 $ 18,098 Interest sensitivity gap to total assets 3.98% 8.25% (1.07)% (6.25)% (0.27)% (0.15)% Cumulative interest-sensitivity gap to total assets ......................... 3.98 12.22 11.15 4.90 4.63 4.48 Ratio of interest-earning assets to interest-bearing liabilities ......... 113.21 129.40 93.88 51.68 70.19 3.22 105.00 Cumulative ratio of interest-earning .... 113.21 assets to interest-bearing liabilities 121.02 114.75 105.54 105.17 105.00 105.00 Total assets ............................ $ 403,872 $ 403,872 $ 403,872 $ 403,872 $ 403,872 $ 403,872 $ 403,872 Cumulative interest bearing assets ...... $ 137,637 $ 284,243 $ 350,503 $ 377,491 $ 380,104 $ 380,124 $ 380,124 Cumulative interest sensitive liabilitie $ 121,576 $ 234,876 $ 305,457 $ 357,682 $ 361,405 $ 362,026 $ 362,026
- ---------- (1) The following assumptions were used in regard to prepayment speed for loans: (i) all multifamily loans (both fixed and adjustable rate) and all commercial real estate loans (both fixed and adjustable rate) will prepay at 10 percent per year, (ii) one-to four-family fixed rate loans will prepay at 20 percent per year, (iii) one-to four-family adjustable rate loans, mortgage backed securities and all other loans will prepay at 25 percent per year. Besides prepayment assumptions, the chart above also includes normal principal payments based upon the loan contractual agreements. Savings accounts are assumed to be withdrawn at an annual rate of 17 percent. NOW accounts are assumed to be withdrawn at an annual rate of 37 percent, Money Market accounts are assumed to be withdrawn at 79 percent during the first year with the balance being withdrawn within the one-to-three year category. These assumptions are annual percentages based on remaining balances and should not be regarded as indicative of the actual prepayments and withdrawals that may be experienced by the Company. Certain shortcomings are inherent in the analysis presented by the foregoing table. (2) Includes $223,000 and $3.8 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 $13.0 million and securities available for sale of $12.6 million. (4) Includes $5.2 million of FHLMC preferred stock and $1.0 million of FNMA preferred stock, which are included in the appropriate repricing category based upon their call dates. (5) Includes $29.5 million of advances which are callable by the FHLB. These callable advances have been in the category in which the advances mature. 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. 12 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 NPV which would hypothetically occur if interest rates rapidly rise or fall along the yield curve. Projected values of NPV at both higher and lower regulatory defined rate scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates. Presented below, as of December 31, 2002, is an analysis of the Company's interest rate risk ("IRR") as measured by changes in NPV for instantaneous and sustained parallel shifts of 100 basis points in market interest rates. Such limits have been established with consideration of the impact of various rate changes and the Company's current capital position. Interest Rate Sensitivity of Net Portfolio Value (NPV)(1) Net Portfolio Value NPV as % of PV of Assets -------------------------------- ------------------------ Change in Rates $ Amount $ Change % Change NPV Ratio Change - --------------- -------- -------- -------- ----------- -------- (Dollars in thousands) +300 bp 33,912 574 2 8.50 47bp +200 bp 34,500 1,163 3 8.53 49bp +100 bp 34,399 1,062 3 8.39 36bp 0 bp 33,338 - - 8.03 - -100 bp 31,086 -2,251 -7 7.41 -62bp - ---------- (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. 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 13 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. 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, 2002, the Company's foreclosed real estate consisted of 9 properties with an aggregate value of $769,000. 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 and did not have any loans that were ninety days past due and still accruing interest.
At December 31, ----------------------------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- -------- --------- -------- (Dollars in thousands) Nonaccrual loans and nonperforming assets: First mortgage loans: One-to four-family residential....... $ 434 $ 130 $ 237 $ 111 $ 403 Multifamily and commercial properties ........................ 37 37 556 - 423 Consumer loans:......................... 172 109 244 102 130 -------- -------- -------- -------- -------- Total nonaccrual loans............... 643 276 1,037 213 956 Total foreclosed real estate(1)......... 769 1,074 64 503 187 Other nonperforming assets.............. - - - - 1 -------- -------- -------- -------- -------- Total nonperforming assets........... $ 1,412 $ 1,350 $ 1,101 $ 716 $ 1,144 ======== ======== ======== ======== ======== Total nonaccrual loans to net loans receivable........................... 0.19% 0.09% 0.33% 0.07% 0.38% Total nonaccrual loans to total assets.. 0.16 0.07 0.27 0.06 0.28 Total nonperforming assets to total 0.35 0.36 0.28 0.19 assets.............................. 0.34
- ---------- (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. 14 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, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ------- -------- ------- ------- ------- (In thousands) Loans past due 60-89 days: First mortgage loans: One-to four-family residential................ $ 830 $ 1,083 $ 590 $ 521 $ 1,070 Multifamily and commercial properties......... - - - 491 22 Consumer loans................................... 183 153 96 198 270 ------- ------- ------- ------- ------- Total past due 60-89 days................... $ 1,013 $ 1,236 $ 686 $ 1,210 $ 1,362 ======= ======= ======= ======= =======
The following table sets forth information with respect to the Company's delinquent loans and other problem assets at December 31, 2002. At December 31, 2002 ------------------------- Balance Number -------- ------ (Dollars in thousands) One-to four-family first mortgage loans: Loans 60 to 89 days delinquent................... $ 830 23 Loans 90 days or more delinquent................. 434 11 Multifamily and commercial first mortgage loans: Loans 60 to 89 days delinquent................... - - Loans 90 days or more delinquent................. 37 1 Consumer Loans: Loans 60 to 89 days delinquent................... 183 19 Loans 90 days or more delinquent................. 172 27 Foreclosed real estate............................. 769 9 Other nonperforming assets......................... - - Loans to facilitate sale of foreclosed real estate. 158 2 Special mention loans.............................. 1,058 42 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, 2002, the Company had $1.1 million of special mention loans, consisting of eighteen loans secured by one-to four-family residences and twenty four consumer loans. The following table sets forth the aggregate amount of the Company's classified assets, which include nonperforming loans and foreclosed real estate, at the dates indicated.
At December 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ------- ------- ------- ------ ------ (In thousands) Substandard assets............. $ 1,360 $ 1,291 $ 1,087 $ 689 $ 745 Doubtful assets................ - - - - - Loss assets.................... 51 59 53 60 35 ------- ------- ------- ------ ------ Total classified assets...... $ 1,411 $ 1,350 $ 1,140 $ 749 $ 780 ======= ======= ======= ====== ======
15 Allowance for Loan Losses. It is management's policy to provide an allowance for probable losses on the Company's loan portfolio based on management's evaluation of the prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, which includes a significant amount of multifamily loans, substantially all of which are purchased and are collateralized by properties located outside of the Company's market area, and other factors related to the collectibility of the Company's loan portfolio. The Company regularly reviews its loan portfolio, including problem loans, to determine whether any loans require classification or the establishment of appropriate allowances for losses. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral. During the years ended December 31, 2002, 2001 and 2000 the Company's provision for loan losses were $383,000, $210,000 and $120,000, respectively. The increase in the provision for loan loss is primarily due to the increase in the loan portfolio, nonperforming loans and general economic conditions. The Company's allowance for loan losses totaled $3.1 million, $2.9 million and $2.8 million at December 31, 2002, 2001 and 2000, respectively. Management believes that the allowances for losses on loans is adequate. While management uses available information to recognize losses on loans, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for loan losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Analysis of the Allowance for Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
For the Year Ended December 31, ---------------------------------------------------------------------------- 2002 2001 2000 1999 1998 --------- --------- --------- -------- -------- (Dollars in thousands) Total loans outstanding................ $ 344,574 $ 311,826 $ 322,408 $ 291,760 $ 259,360 Average net loans outstanding.......... 337,693 318,197 307,104 265,553 246,510 Allowance balances (at beginning of period)............................. 2,883 2,843 2,776 2,676 2,151 --------- --------- --------- --------- --------- Provisions for losses.................. 383 210 120 120 210 Effect of- Business combination............... - - - - 343 Charge-Offs: First mortgage loans................. 27 15 15 5 6 Consumer loans....................... 135 168 41 23 23 Recoveries: First mortgage loans................. - - - - - Consumer loans....................... 14 13 3 8 1 --------- --------- --------- --------- --------- Net charge-offs...................... 148 170 53 20 28 --------- --------- --------- --------- --------- Allowance balance (at end of period)... $ 3,118 $ 2,883 $ 2,843 $ 2,776 $ 2,676 ========= ========= ========= ========= ========= Allowance for loan losses as a percent of total loans receivable at end of period............................... 0.90% 0.92% 0.88% 0.95% 1.03% Net loans charged off as a percent of average net loans outstanding........ 0.04 0.05 0.02 0.01 0.01 Ratio of allowance for loan losses to total nonaccrual loans at end of period............................... 485.00 1,042.07 274.08 1,301.13 279.72 Ratio of allowance for loan losses to total nonaccrual loans and foreclosed real estate at end of period......... 220.90 213.48 258.18 387.78 233.95
16 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, ---------------------------------------------------------------------------- 2002 2001 2000 ------------------------ ----------------------- ----------------------- % 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 ..................... $ 395 43.17% $ 608 51.80% $ 731 54.78% Multifamily residential mortgage loans 709 20.54 1,121 23.86 1,145 23.45 Commercial mortgage loans ............ 1,223 20.68 459 8.25 303 7.56 Consumer loans ....................... 791 15.61 695 16.09 664 14.21 Total allowance for loan losses .... $3,118 100.00% $2,883 100.00% $2,843 100.00%
At December 31, ------------------------------------------------ 1999 1998 ---------------------- ---------------------- % 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 ..................... $ 726 56.23% $ 684 57.45% Multifamily residential mortgage loans 1,332 25.16 1,298 25.02 Commercial mortgage loans ............ 252 6.07 228 4.39 Consumer loans ....................... 466 12.53 466 13.14 Total allowance for loan losses .... $2,776 100.00%$ 2,676 100.00%
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. 17
For the Year Ended December 31, ---------------------------------------------------------------------- At December 31, 2002 2002 2001 ----------------------- ---------------------------------- ---------------------------------- Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost ------------ ------- ------------ --------- -------- ----------- -------- ------- (Dollars in thousands) Assets: Interest-earning assets: First mortgage loans(1)........ $ 290,377 7.11% $ 285,065(8) $ 21,108 7.40% $ 269,274(8) $ 20,902 7.76% Consumer loans(1).............. 53,888 8.12 52,628(8) 4,449 8.45 48,923(8) 4,369 8.93 Investment securities.......... 35,578(4) 3.05 42,144(5) 1,409 3.34 44,739(6) 2,229 4.98 --------- ---- --------- -------- ---- --------- -------- ---- Total interest-earning asset. $ 379,843 6.87% $ 379,837 $ 26,966 7.10% $ 362,936 $ 27,500 7.58% Noninterest-earning assets....... 24,029 20,078 20,217 --------- --------- --------- Total assets................. $ 403,872 $ 399,915 $ 383,153 ========= ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings...................... $ 60,122 0.90% $ 61,677 $ 560 0.91% $ 58,891 $ 1,224 2.08% Passbook savings............... 25,693 0.93 24,810 281 1.13% 21,713 362 1.67 Certificates of Deposit........ 183,029 4.43 182,496 8,649 4.74 180,796 10,368 5.73 Borrowed funds................. 85,026 5.04 83,022 4,421 5.33 75,854 4,560 6.01 --------- ---- --------- -------- ---- --------- -------- ---- Total interest-bearing liabilities................ $ 353,870 3.72% $ 352,005 $ 13,911 3.95% 337,254 $ 16,514 4.90% Noninterest-bearing liabilities.. 11,254 10,241 9,246 --------- --------- --------- Total liabilities............ $ 365,124 $ 362,246 $ 346,500 Equity............................ 38,748 37,669 36,653 --------- --------- --------- Total liabilities and equity. $ 403,872 $ 399,915 $ 383,153 ========= ========= ========= Net interest income.............. $ 13,055 $ 10,986 ======== ======== Net interest rate spread(2)...... 3.15% 3.15% 2.68% ==== ==== ==== Net interest margin (3).......... 3.41 3.44 3.03 ==== ==== ==== Ratio of average interest-earning assets to average interest- bearing liabilities............ 107.34 107.91 107.54 ====== ====== ======
For the Year Ended December 31, ---------------------------------------- 2000 ---------------------------------------- Average Average Yield/ Balance Interest Cost -------------- ----------- ------ (Dollars in thousands) Assets: Interest-earning assets: First mortgage loans(1)........ $ 265,557 $ 20,586(8) 7.75% Consumer loans(1).............. 41,547 3,677(8) 8.85 Investment securities.......... 51,097(7) 3,020 5.91 --------- -------- ---- Total interest-earning asset. 358,201 $ 27,283 7.62% Noninterest-earning assets....... 18,470 --------- Total assets................. $ 376,671 ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings...................... $ 48,262 $ 1,185 2.46% Passbook savings............... 24,571 485 1.97 Certificates of Deposit........ 186,292 10,599 5.69 Borrowed funds................. 71,602 4,438 6.20 --------- -------- ---- Total interest-bearing liabilities................ $ 330,727 $ 16,707 5.05% Noninterest-bearing liabilities.. 9,739 --------- Total liabilities............ $ 340,466 Equity............................ 36,205 --------- Total liabilities and equity. $ 376,671 ========= Net interest income.............. $ 10,576 ======== Net interest rate spread(2)...... 2.57% ==== Net interest margin (3).......... 2.95 Ratio of average interest-earning assets to average interest- bearing liabilities............ 108.31 - ---------- (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 $13,026,000 and securities available for sale of $22,552.000. (5) Includes interest-bearing deposits of $16,910,000 and securities available for sale of $25,234,000. (6) Includes interest-bearing deposits of $9,984,000 and securities available for sale of $34,755,000. (7) Includes interest-bearing deposits of $4,392,000 and securities available for sale of $46,705,000. (8) Includes loan fee amortization of $34,000, $54,000 and $60,000 for the years ended December 31, 2002, 2001 and 2000. Rate/Volume Analysis 18 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, 2002 December 31, 2001 Compared to Compared to Year Ended Year Ended December 31, 2001 December 31, 2000 -------------------------------------------- ----------------------------------------- Increase/(Decrease) Increase/(Decrease) Due to Due to ------------------------------- Total ----------------------------- Total Rate/ Increase Rate/ Increase Volume Rate Volume (Decrease) Volume Rate Volume (Decrease) -------- -------- ------- ---------- ------- -------- ------ ---------- (In thousands) Interest income: First mortgage loans.................. $ 1,227 $ (964) $ (57) $ 206 $ 288 $ 28 $ 0 $ 316 Consumer loans........................ 332 (234) (18) 80 653 34 6 693 Investment securities................. (277) (459) (84) (820) (376) (344) (73) (793) ------- ------- ------ ------- ------ ------ ----- ------ Total interest-earning assets...... $ 1,282 $(1,657) $ (159) $ (534) $ 565 $ (282) $ (67) $ 216 ======= ======= ====== ======= ====== ====== ===== ====== Interest expense: NOW and money market savings.......... $ 58 $ (689) $ (33) $ (664) $ 261 $ (182) $ (40) $ 39 Passbook savings...................... 52 (116) (17) (81) (56) (75) 9 (122) Certificate of deposits............... 97 (1,799) (17) (1,719) (314) 84 (2) (232) Borrowed funds........................ 431 (521) (49) (139) 264 (134) (8) 122 ------- ------- ------ ------- ------ ------ ----- ------ Total interest-bearing liabilities. 638 (3,125) (116) (2,603) 155 (307) (41) (193) ------- ------- ------ ------- ------ ------ ----- ------ Net change in net interest income......... $ 644 $ 1,468 $ (43) $ 2,069 $ 321 $ 140 $ (52) $ 409 ======= ======= ====== ======= ====== ====== ===== ======
19 Comparison of Financial Condition as of December 31, 2002, December 31, 2001 and December 31, 2000 Total assets increased $24.5 million, or 6.5%, to $403.9 million at December 31, 2002 from $379.4 million at December 31, 2001. Interest bearing cash decreased $4.6 million, or 26.2%, from $17.7 million at December 31, 2001 to $13.0 million at December 31, 2002. Securities available for sale decreased $8.5 million, or 27.2%, primarily due to the calls, payments, maturities and sales of U.S. Government agencies, mortgage-backed securities and equity securities, partially offset by the purchase municipal securities. Proceeds of such calls, payments and sales were used to fund asset growth. Total loans receivable, net, increased by $33.2 million, or 10.8%, to $341.1 million at December 31, 2002 from $308.0 million at December 31, 2001, primarily due to origination of $84.1 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 of $84.4 million, and originations of $28.6 million of second mortgage loans during the year ended December 31, 2002. These originations and purchases were offset in part by payments, prepayments and sales of loans during the year ended December 31, 2002. Deposits increased $8.2 million, or 3.0%, to $277.0 million at December 31, 2002 from $268.8 million at December 31, 2001, primarily reflecting increases in NOW accounts, savings accounts and retail certificates of deposit accounts, offset in part by decreases in money market accounts and certain public funds deposits. Other borrowings, primarily FHLB advances, increased $13.6 million, to $85.0 million at December 31, 2002 from $71.4 million at December 31, 2001. Total shareholders' equity increased $2.8 million to $38.7 million at December 31, 2002 from $35.9 million at December 31, 2001, primarily due to net income and stock options exercised, offset in part by dividends paid to shareholders, funds used for the repurchase of stock and decreased unrealized gains on securities available for sale. Total assets decreased $9.6 million, or 2.5%, from $389.0 million at December 31, 2000 to $379.4 million at December 31, 2001. Interest bearing cash increased $11.3 million, or 178.8%, from $6.3 million at December 31, 2000 to $17.7 million at December 31, 2001. Securities available for sale decreased $12.0 million, or 27.6%, primarily due to the calls, payments and maturities on U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of preferred stock, a mutual fund and municipal securities. Total loans receivable, net, decreased by $10.0 million, or 3.2%, from $318.0 million at December 31, 2000 to $308.0 million at December 31, 2001, primarily due to payments, prepayments and sales of loans during the year ended December 31, 2001. These payments, prepayments and sales of loans were offset in part by the origination of $83.3 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 of $27.8 million, and originations of $27.0 million of second mortgage loans. Deposits increased $7.6 million, or 2.8%, from $261.2 million at December 31, 2000 to $268.8 million at December 31, 2001, primarily reflecting increases in NOW accounts, money market accounts and retail certificates of deposit accounts, offset in part by a decrease of $9.1 million in certain public funds deposits. Other borrowings, primarily FHLB advances, decreased $17.2 million, from $88.6 million at December 31, 2000 to $71.4 million at December 31, 2001. Total shareholders' equity decreased $485,000 from $36.4 million at December 31, 2000 to $35.9 million at December 31, 2001, primarily due to dividends paid to shareholders and funds used for repurchases of Common Stock offset in part by net income and decreased unrealized losses and increased unrealized gains. Comparison of Results of Operations for the Years Ended December 31, 2002 and 2001 Interest Income. Interest income decreased by $534,000 to $27.0 million for the year ended December 31, 2002 compared to $27.5 million for the year ended December 31, 2001. The decrease in interest income was primarily due to a decrease in the average yield on interest earning assets, offset in part by an increase in the average balance of interest earning assets. The average yield on interest earning assets decreased to 7.10% for the year ended December 31, 2002 from 7.58% for the year ended December 31, 2001, primarily due to a general decrease in market interest rates. The average interest earning assets increased $16.9 million to $379.8 million for the year ended December 31, 2002, from $362.9 million for 2001. The increase in the average balances of interest earning assets primarily reflects increases in the average balances of first mortgage loans, offset in part aby a decrease in the average balance of investment securities. The increases in first mortgage loans were primarily derived from originations of $84.1 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 of $84.4 million and originations of $28.6 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, 2002. This reflects the Company's continued emphasis on residential lending. See "-Business Strategy." The decrease in investment securities were primarily from the calls, payments, maturities and sales of investments, partially offset by purchases. 20 Interest Expense. Interest expense decreased by $2.6 million to $13.9 million for the year ended December 31, 2002 compared to $16.5 million for the year ended December 31, 2001. The decrease in interest expense was primarily to a decrease in the average cost of funds, offset in part by an increase in the average balances of interest bearing liabilities. The average cost of funds decreased to 3.95% for the year ended December 31, 2002 from 4.90% for the year ended December 31, 2001, primarily due to a general decrease in market interest rates. The decrease in interest expense was partially offset by a $14.8 million increase in the average balance of interest-bearing liabilities to $352.0 million for the year ended December 31, 2002, from $337.3 million for 2001. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the NOW, savings, retail certificates of deposits and borrowed funds, offset by a decrease in certain public funds certificates of deposit. The increase in average interest bearing liabilities was used in part to fund asset growth. Net Interest Income. Net interest income before provision for loan losses increased by $2.1 million to $13.1 million for the year ended December 31, 2002 from $11.0 million for the year ended December 31, 2001. The increase in primarily due to an increase in the average balance of interest earning assets and the decrease in the average cost of funds, offset in part by a decrease in the yield on interest earning assets and an increase in the average balance of interest bearing liabilities. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) increased to 3.15% for the year ended December 31, 2002 from 2.68% for the year ended December 31, 2001. The increase in the spread reflects the general decrease in the overall costs on interest bearing liabilities offset in part by a decrease in the yield on interest earning assets. Provision for Loan Losses. The Company's provision for loan losses was $383,000 and $210,000 for the years ended December 31, 2002 and December 31, 2001, respectively. The increase in the provision for loan loss is primarily due to the increase in nonperforming loans, increases in the loan portfolio and general economic conditions. 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 $148,000 for the year ended December 31, 2002 as compared to $170,000 for the year ended December 31, 2001. The resulting allowance for loan loss was $3.1 million and $2.9 million at December 31, 2002 and December 31, 2001, respectively. The allowance for loan losses as a percentage of total loans receivable decreased to 0.90% at December 31, 2002 from 0.92% at December 31, 2001. The level of nonperforming loans was $643,000 at December 31, 2002 and $276,000 at December 31, 2001. See "Asset Quality". Management believes that the allowance for loan losses is adequate as of December 31, 2002. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans, and other factors, both within and outside of management's control. Noninterest income. Total noninterest income increased by $636,000, or 12.5%, to $5.7 million for the year ended December 31, 2002 from $5.1 million for the year ended December 31, 2001. The increase is due to increases in fees and service charges, abstract fees and other income. Fees and service increased $382,000 due to an increase in loan prepayment fees. Abstract fees increased $180,000 due to increased sales volume as a result of a general increase in real estate activity. Other income increased $105,000 due to an increase in annuity and mutual fund sales, offset by a decrease in insurance sales. Noninterest Expense. Total non-interest expense increased by $536,000 to $9.6 million for the year ended December 31, 2002 from $9.0 million for the year ended December 31, 2001. The increase is primarily due to an increase in salaries and employee benefits, data processing and other expenses, partially offset by a decrease in goodwill amortization. The increase in salaries and benefits was primarily due to normal salary increases, the opening of the Ankeny office, increases in the Company's contribution to the retirement plan, increases as a result of the employee stock ownership plan, increases in salaries due to mortgage loan volume, increases in salaries due to annuity and mutual fund sales and increases in health insurance costs. The increase in data processing costs was primarily due to normal 21 data processing cost increases, Internet banking costs and an increase in consulting costs. The increase in other expenses was primarily due to the opening of the Ankeny office, marketing expenses, expenses in connection with loan purchases, costs associated with First Iowa and Northridge Apartments Limited Partnership I, office supplies and losses associated with checking accounts, offset in part by a decrease in the costs associated with ATM and debit cards . The Company's efficiency ratio for the year ended December 31, 2002 and 2001 were 51.01% and 56.26%, respectively. The Company's ratio of noninterest expense to average assets for the year ended December 31, 2002 and 2001 were 2.40% and 2.36%, respectively. Income Taxes. Income taxes increased by $606,000 to $3.0 million for the year ended December 31, 2002 as compared to $2.3 million for the year ended December 31, 2001. The increase was principally due to an increase in pre-tax earnings during the 2002 period as compared to the 2001 period, partially offset by a decrease in nondeductible amortization as a result of the Company's adoption of SFAS 142, a reduction in nontaxable interest income and an increase in taxable deductions due to a change in the Company's retirement plan. Net Income. Net income totaled $5.9 million for the year ended December 31, 2002 compared to $4.5 million for the same period in 2001, primarily due to increases in net interest income and noninterest income, offset in part by increases in noninterest expense and income taxes. Comparison of Results of Operations for the Years Ended December 31, 2001 and 2000 Interest Income. Interest income increased by $216,000 to $27.5 million for the year ended December 31, 2001 compared to $27.3 million for the year ended December 31, 2000. The increase in interest income was primarily due to a $4.7 million increase in average interest earning assets to $362.9 million for the year ended December 31, 2001, from $358.2 million for 2000. The increase in the average balances of interest earning assets primarily reflects increases in the average balances of first and second mortgage loans and interest bearing cash, partially offset by decreases in securities available for sale. The increases in first and second mortgage loans were primarily derived from originations of $83.3 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 of $27.8 million and originations of $27.0 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, 2001. This reflects the Company's continued emphasis on residential lending. See "-Business Strategy." The increase in interest bearing cash was primarily due to increased liquidity due to the generally lower market interest rate environment. The decreases in available for sale securities were primarily due to the calls, payments and maturities on U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of preferred stock, mutual funds and municipal securities. The average yield on interest earning assets decreased to 7.58% for the year ended December 31, 2001 from 7.62% for the year ended December 31, 2000, primarily due to a general decrease in market interest rates. Interest Expense. Interest expense decreased by $193,000 to $16.5 million for the year ended December 31, 2001 compared to $16.7 million for the year ended December 31, 2000. The decrease in interest expense was primarily to a decrease in the average cost of funds from 5.05% for the year ended December 31, 2000 to 4.90% for the year ended December 31, 2001. The decrease in the average cost of funds was due to a decrease in the average cost of funds in Now, money market, savings and borrowed funds. This decrease is primarily due to a general decrease in market interest rates. The decrease in interest expense was partially offset by a $6.5 million increase in the average balance of interest-bearing liabilities to $337.3 million for the year ended December 31, 2001, from $330.7 million for 2000. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the money market and borrowed funds, offset by decreases in savings accounts and certificates of deposit. The increase in money market was due to the offering of a premium money market account during the year ended December 31, 2000. The increase in borrowed funds was due to the borrowing of funds in part to fund the corresponding asset growth. The decreases in certificates of deposits is primarily due to a decrease in the average balance of deposits of certain public funds, offset in part by an increase in retail certificates of deposit. Net Interest Income. Net interest income before provision for loan losses increased by $409,000 to $11.0 million for the year ended December 31, 2001 from $10.6 million for the year ended December 31, 2000. The increase in primarily due to an increase in the average balance of interest earning assets and the decrease in the cost of the average interest-bearing liabilities. The interest rate spread (i.e., the difference in the average yield on assets and 22 average cost of liabilities) increased to 2.68% for the year ended December 31, 2001 from 2.57% for the year ended December 31, 2000. The increase in the spread reflects the general decrease in the overall costs on interest bearing liabilities offset in part by a decrease in the yield on interest bearing assets. Provision for Loan Losses. The Company's provision for loan losses was $210,000 and $120,000 for the years ended December 31, 2001 and December 31, 2000, respectively. The increase in the provision for loan loss is primarily due to the increase in nonperforming assets, increases in net charge-offs and general economic conditions. 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 $170,000 for the year ended December 31, 2001 as compared to $53,000 for the year ended December 31, 2000. The resulting allowance for loan loss was $2.9 million and $2.8 million at December 31, 2001 and December 31, 2000, respectively. The allowance for loan losses as a percentage of total loans receivable increased to 0.92% at December 31, 2001 from 0.88% at December 31, 2000. The level of nonperforming assets has increased to $1.4 million at December 31, 2001 from $1.1 million at December 31, 2000. See "Asset Quality". Management believes that the allowance for loan losses is adequate as of December 31, 2001. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans, and other factors, both within and outside of management's control. Noninterest income. Total noninterest income increased by $1.1 million, or 26.9%, to $5.1 million for the year ended December 31, 2001 from $4.0 million for the year ended December 31, 2000. The increase is due to increases in fees and service charges, abstract fees and mortgage banking fees, partially offset by an decrease in other income. Fees and service increased $401,000 due to increases in overdraft fees on NOW accounts and loan prepayment fees. Abstract fees increased $273,000 due to increased sales volume as a result of a general increase in real estate activity. Mortgage banking fees increased $548,000 due in part to lower interest rates during the year ended December 31, 2001. Other income decreased $142,000 due to decreases in annuity sales, mutual fund sales and gain on the sale of foreclosed real estate, offset in part by an increase in insurance sales. Other income for the year ended December 31, 2000 also reflects interest income on a disputed income tax item and there was no such item for the year ended December 31, 2001. Noninterest Expense. Total non-interest expense increased by $460,000 to $9.0 million for the year ended December 31, 2001 from $8.6 million for the year ended December 31, 2000. The increase is primarily due to an increase in salaries and employee benefits and premises and equipment. The increase in salaries and benefits was primarily due to normal salary increases, increases in the number of employees and increases as a result of the employee stock ownership plan. The increase in premises and equipment was primarily due to an increase in depreciation expense relating to office remodeling, increases in property taxes and normal cost increases. The Company's efficiency ratio for the year ended December 31, 2001 and 2000 were 56.26% and 58.85%, respectively. The Company's ratio of noninterest expense to average assets for the year ended December 31, 2001 and 2000 were 2.36% and 2.28%, respectively. Income Taxes. Income taxes increased by $474,000 to $2.3 million for the year ended December 31, 2001 as compared to $1.9 million for the year ended December 31, 2000. The increase was principally due to an increase in pre-tax earnings during the 2001 period as compared to the 2000 period and an income tax benefit of $100,000 received for the year ended December 31, 2000 due to a state franchise tax refund related to an issue that had been under dispute for several years. Net Income. Net income totaled $4.5 million for the year ended December 31, 2001 compared to $4.0 million for the same period in 2000, primarily due to increases in net interest income and noninterest income, offset in part by increases in noninterest expense and income taxes. 23 Impact of Inflation and Changing Prices The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all the assets and liabilities are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. 24 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS INDEPENDENT AUDITOR'S REPORT................................................26 FINANCIAL STATEMENTS Consolidated statements of financial condition.............................27 Consolidated statements of income..........................................28 Consolidated statements of shareholders' equity............................29 Consolidated statements of cash flows......................................30 Notes to consolidated financial statements.................................32 25 [GRAPHIC OMITTED] 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, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2002, 2001, and 2000. 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 auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for the years ended December 31, 2002, 2001, and 2000, in conformity with accounting principles generally accepted in the United States of America. /s/McGladrey & Pullen, LLP Des Moines, Iowa January 30, 2003 McGladrey & Pullen, LLP is an independent member firm of RSM International, an affiliation of independent accounting and consulting firms. 26 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2002 and 2001
ASSETS 2002 2001 - ----------------------------------------------------------------------------------------------------------- Cash and due from banks (Note 20): Interest-bearing $ 13,025,657 $ 17,650,064 Noninterest-bearing 2,142,944 2,258,838 ------------- ------------- Total cash and cash equivalents 15,168,601 19,908,902 Securities available-for-sale (Notes 2 and 8) 22,833,742 31,365,731 Loans receivable, net (Notes 3, 4, 8, and 14) 341,146,364 307,981,424 Loans held for sale 2,372,134 1,605,710 Accrued interest receivable (Note 5) 1,928,278 1,913,557 Foreclosed real estate 768,726 1,073,873 Premises and equipment, net (Note 6) 8,195,963 6,797,505 Rental real estate 2,197,382 1,681,337 Title plant 925,256 925,256 Goodwill (Note 1) 4,970,800 4,970,800 Deferred taxes (Note 9) 608,657 484,904 Prepaid expenses and other assets 2,755,778 666,228 -------------------------------------- Total assets $ 403,871,681 $ 379,375,227 ====================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits (Note 7) $ 277,000,082 $ 268,813,731 Borrowed funds (Note 8) 85,026,438 71,412,723 Advances from borrowers for taxes and insurance (Note 4) 1,512,114 1,589,314 Dividends payable 295,250 256,587 Income taxes payable 63,553 78,711 Accrued expenses and other liabilities 1,226,040 1,311,412 -------------------------------------- Total liabilities 365,123,477 343,462,478 -------------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 13 and 16) STOCKHOLDERS' EQUITY (Notes 11 and 16) Common stock, $.01 par value, authorized 15,500,000 shares; issued and outstanding 2002 1,640,280 shares; 2001 1,700,280 shares 16,403 17,003 Preferred stock, $.01 par value, authorized 3,000,000 shares; none issued and outstanding - - Additional paid-in capital 17,011,095 16,780,875 Retained earnings, substantially restricted (Note 9) 21,862,248 19,402,706 Unearned shares, employee stock ownership plan (Note 10) (318,097) (477,826) Accumulated other comprehensive income 176,555 189,991 -------------------------------------- Total stockholders' equity 38,748,204 35,912,749 -------------------------------------- Total liabilities and stockholders' equity $ 403,871,681 $ 379,375,227 ======================================
See Notes to Consolidated Financial Statements. 27 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000 - ------------------------------------------------------------------------------------------------------------- Interest income: Loans receivable: First mortgage loans $ 21,107,541 $ 20,902,405 $ 20,585,997 Consumer loans 4,448,629 4,369,468 3,676,669 Securities and cash deposits (Note 2) 1,409,314 2,227,695 3,020,781 ------------------------------------------------- 26,965,484 27,499,568 27,283,447 ------------------------------------------------- Interest expense: Deposits (Note 7) 9,489,921 11,953,966 12,268,726 Other borrowed funds 4,420,959 4,559,807 4,437,894 ------------------------------------------------- 13,910,880 16,513,773 16,706,620 ------------------------------------------------- Net interest income 13,054,604 10,985,795 10,576,827 Provision for loan losses (Note 3) 383,000 210,000 120,000 ------------------------------------------------- Net interest income after provision for loan losses 12,671,604 10,775,795 10,456,827 ------------------------------------------------- Noninterest income: Fees and service charges 2,375,228 1,992,794 1,591,780 Abstract fees 1,686,271 1,506,099 1,233,091 Mortgage banking income 746,983 778,923 231,170 Gain (loss) on sale of securities available-for-sale, net (523) (933) 42 Other income 921,125 815,733 957,935 ------------------------------------------------- Total noninterest income 5,729,084 5,092,616 4,014,018 ------------------------------------------------- Noninterest expense: Salaries and employee benefits (Note 10) 5,223,411 4,500,178 4,103,419 Premises and equipment 1,192,153 1,226,056 1,091,653 Data processing 544,169 470,147 455,389 SAIF deposit insurance premiums 47,443 50,393 55,332 Goodwill amortization (Note 1) - 472,290 472,290 Other expenses (Note 12) 2,575,019 2,327,073 2,408,276 ------------------------------------------------- Total noninterest expense 9,582,195 9,046,137 8,586,359 ------------------------------------------------- Income before income taxes 8,818,493 6,822,274 5,884,486 Provision for income taxes (Note 9) 2,953,332 2,347,411 1,873,369 ------------------------------------------------- Net income $ 5,865,161 $ 4,474,863 $ 4,011,117 ================================================= Basic earnings per common share (Note 17) $ 3.58 $ 2.54 $ 2.04 Earnings per common share - assuming dilution (Note 17) 3.37 2.41 2.00 Dividends declared per common share 0.72 0.60 0.50
See Notes to Consolidated Financial Statements. 28 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2002, 2001, and 2000
Unearned Shares, Additional Employee Stock Comprehensive Common Paid-in Retained Ownership Income Stock Capital Earnings Plan - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $40,111 $38,278,872 $30,290,488 $(825,484) Comprehensive income: Net income $4,011,117 - - 4,011,117 - Other comprehensive income, net of tax (Note 2) 673,798 - - - - --------------- Total comprehensive income $4,684,915 =============== Purchase of treasury stock - - - - Dividends on common stock - - (955,753) - Effect of contribution to employee stock ownership plan - 108,723 - 178,572 Issuance of treasury stock - (9,280) - - ---------------------------------------------------------- Balance, December 31, 2000 40,111 38,378,315 33,345,852 (646,912) Comprehensive income: Net income $4,474,863 - - 4,474,863 - Other comprehensive income, net of tax (Note 2) 437,331 - - - - --------------- Total comprehensive income $4,912,194 =============== Purchase of treasury stock - - - - Dividends on common stock - - (1,044,562) - Retirement of treasury stock (23,460) (22,355,549) (17,373,447) - Effect of contribution to employee stock ownership plan - 200,821 - 169,086 Issuance of common stock 352 557,288 - - ---------------------------------------------------------- Balance, December 31, 2001 17,003 16,780,875 19,402,706 (477,826) Comprehensive income: Net income $5,865,161 - - 5,865,161 - Other comprehensive (loss), net of tax (Note 2) (13,436) - - - - --------------- Total comprehensive income $5,851,725 =============== Purchase of treasury stock - - - - Dividends on common stock - - (1,167,291) - Retirement of treasury stock (1,331) (1,329,669) (2,238,328) - Effect of contribution to employee stock ownership plan - 277,255 - 159,729 Issuance of common stock 731 1,282,634 - - ---------------------------------------------------------- Balance, December 31, 2002 $16,403 $17,011,095 $21,862,248 $(318,097) ==========================================================
Accumulted Other Total Comprehensive Treasury Stockholders' Income (Loss) Stock Equity - ------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 $(921,138) $(28,735,925) $ 38,126,924 Comprehensive income: Net income - - 4,011,117 Other comprehensive income, net of tax (Note 2) 673,798 - 673,798 Total comprehensive income Purchase of treasury stock - (5,799,736) (5,799,736) Dividends on common stock - - (955,753) Effect of contribution to employee stock ownership plan - - 287,295 Issuance of treasury stock - 63,750 54,470 ---------------------------------------------- Balance, December 31, 2000 (247,340) (34,471,911) 36,398,115 Comprehensive income: Net income - - 4,474,863 Other comprehensive income, net of tax (Note 2) 437,331 - 437,331 Total comprehensive income Purchase of treasury stock - (5,280,545) (5,280,545) Dividends on common stock - - (1,044,562) Retirement of treasury stock - 39,752,456 - Effect of contribution to employee stock ownership plan - - 369,907 Issuance of common stock - - 557,640 ---------------------------------------------- Balance, December 31, 2001 189,991 - 35,912,749 Comprehensive income: Net income - - 5,865,161 Other comprehensive (loss), net of tax (Note 2) (13,436) - (13,436) Total comprehensive income Purchase of treasury stock - (3,569,328) (3,569,328) Dividends on common stock - (1,167,291) Retirement of treasury stock - 3,569,328 - Effect of contribution to employee stock ownership plan - - 436,984 Issuance of common stock - - 1,283,365 ---------------------------------------------- Balance, December 31, 2002 $ 176,555 $ - $ 38,748,204 ==============================================
See Notes to Consolidated Financial Statements. 29 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,865,161 $ 4,474,863 $ 4,011,117 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 383,000 210,000 120,000 Depreciation 721,762 743,796 668,945 Amortization and accretion 268,424 639,003 488,021 Deferred taxes (114,715) (193,638) (38,062) Effect of contribution to employee stock ownership plan 436,984 369,907 287,295 Gain on sale of foreclosed real estate and loans, net (743,017) (776,179) (66,744) (Gain) loss on sale of securities available-for-sale, net 523 933 (42) Loss on disposal of equipment 5,923 11,396 28,297 Proceeds from sales of loans held for sale 53,645,852 50,087,483 13,261,815 Originations of loans held for sale (53,665,293) (50,415,883) (13,424,638) Change in assets and liabilities: Accrued interest receivable (14,721) 343,596 (174,555) Income taxes receivable - 209,995 (209,995) Prepaid expenses and other assets (2,123,150) (268,258) 28,802 Income taxes payable (15,158) 78,711 (74,214) Accrued expenses and other liabilities (85,372) 28,917 227,267 --------------------------------------------------------- Net cash provided by operating activities 4,566,203 5,544,642 5,133,309 --------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in originated loans 51,036,816 36,679,436 (11,278,698) Purchase of loans (84,619,011) (27,784,114) (19,625,170) Proceeds from sale of securities available-for-sale 750,227 220,125 224,792 Purchase of securities available-for-sale (322,763) (7,293,386) (1,594,100) Proceeds from maturities and calls of securities available-for-sale 8,053,186 19,714,516 8,712,985 Purchase of premises, equipment, and rental real estate (2,609,603) (834,613) (2,171,097) Proceeds from sale of equipment 1,015 18,376 258,289 Other 95,354 (193,518) 80,860 --------------------------------------------------------- Net cash provided by (used in) investing activities (27,614,779) 20,526,822 (25,392,139) ---------------------------------------------------------
(Continued) 30 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits $ 8,186,351 $ 7,647,085 $ (9,864,145) Net increase (decrease) in advances from borrowers for taxes and insurance (77,200) 271,245 114,044 Net (decrease) in short-term borrowings (250,000) (4,750,000) (9,000,000) Proceeds from other borrowed funds 39,500,000 11,000,000 64,000,000 Payments of other borrowed funds (25,636,285) (23,429,503) (22,123,063) Purchase of treasury stock (3,569,328) (5,280,545) (5,799,736) Proceeds from issuance of common stock 1,283,365 557,640 54,470 Dividends paid (1,128,628) (1,028,210) (941,692) --------------------------------------------------------- Net cash provided by (used in) financing activities 18,308,275 (15,012,288) 16,439,878 --------------------------------------------------------- Net change in cash and cash equivalents (4,740,301) 11,059,176 (3,818,952) CASH AND CASH EQUIVALENTS Beginning 19,908,902 8,849,726 12,668,678 --------------------------------------------------------- Ending $ 15,168,601 $ 19,908,902 $ 8,849,726 ========================================================= SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors $ 9,782,295 $ 12,081,559 $ 12,075,178 Interest paid on borrowings 4,421,374 4,610,964 4,461,883 Income taxes 2,712,103 2,127,615 2,195,640
See Notes to Consolidated Financial Statements. 31 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 eight branch offices located in Fort Dodge, Nevada, Ames, Perry, Ankeny, Burlington, and Mt. Pleasant, Iowa. Principles of consolidation: The consolidated financial statements, as described above, include the accounts of the Company and its wholly-owned subsidiary, the Bank and the Bank's wholly-owned subsidiaries, First Federal Investment Services, Inc. (which sells insurance, annuity products, and mutual funds), First Iowa Title Services, Inc. (which provides real estate abstracting services), Northridge Apartments Limited Partnership and Northridge Apartments Limited Partnership II (which own multifamily apartment buildings). All significant intercompany balances and transactions have been eliminated in consolidation. Accounting estimates and assumptions: The preparation of financial statements in conformity with 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. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, deferred tax assets, and fair value of financial instruments. Revenue recognition: Interest income and expense is recognized on the accrual method based on the respective outstanding balances. Other revenue is recognized at the time the service is rendered. Cash, cash equivalents and cash flows: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks. Cash flows from loans and deposits are reported net. Securities available-for-sale: Securities classified as available-for-sale are those debt and equity securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available-for-sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income (loss), net of the related deferred tax effect. The amortization of premiums and accretion of discounts is computed by the interest method over their contractual lives, are recognized in interest income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. 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. 32 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Loans receivable: Loans receivable are stated at unpaid principal balances, adjusted for the allowance for loan losses, net deferred loan origination costs (fees), and net unearned premiums (discounts). Interest is accrued daily on the outstanding principal balance. The allowance for loan losses is increased by provisions charged to income and reduced by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. Uncollectible interest on loans that are contractually past due is charged-off or an allowance is established based on management's periodic evaluation, generally when loans become 90 days past due. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is no longer in doubt, in which case the loan is returned to accrual status. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on the Bank's historical prepayment experience. Premiums (discounts) on first mortgage loans purchased are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Foreclosed real estate: Real estate properties acquired through loan foreclosure are initially recorded at the lower of cost or fair value less selling costs at the date of foreclosure. Costs relating to development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed. Valuations are periodically performed by management, and an allowance for losses is established by a charge to income if the carrying value of a property exceeds its fair value less estimated selling costs. 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 low-income housing, multifamily apartment buildings and equipment, which is stated at cost, net of accumulated depreciation. Depreciation is computed primarily by the straight-line and double-declining balance methods over the estimated useful lives of the assets. 33 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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: Prior to January 1, 2002, goodwill had been amortized over 10-15 years using the straight-line method. As of January 1, 2002, the Company adopted SFAS 142 that eliminated the amortization and required a goodwill impairment test. The Company completed the goodwill impairment test and has determined that there has been no impairment of goodwill. Had provisions of SFAS 142 been applied in fiscal years 2001 and 2000, the Company's net income and net income per share would have been as follows:
Year Ended December 31, 2001 Year Ended December 31, 2000 ----------------------------------------------------------------------------------- Basic Diluted Basic Diluted Net Earnings Earnings Net Earnings Earnings Income Per Share Per Share Income Per Share Per Share ----------------------------------------------------------------------------------- Net Income: As reported $ 4,474,863 $ 2.54 $ 2.41 $ 4,011,117 $ 2.04 $ 2.00 Add: Goodwill amortization 472,290 0.27 0.25 472,290 0.24 0.23 ----------- ------- ------- ----------- ------- ------- Pro forma net income $ 4,947,153 $ 2.81 $ 2.66 $ 4,483,407 $ 2.28 $ 2.23 =========== ======= ======= =========== ======= =======
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. Gains and losses on available-for-sale securities are reclassified to net income as the gains or losses are realized upon sale of the securities. Other-than-temporary impairment charges are reclassified to net income at the time of the charge. Earnings per share: Basic earnings per common share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the periods presented. The earnings per common share amounts - - assuming dilution were computed using the weighted average number of shares outstanding during the periods presented, adjusted for the effect of dilutive potential common shares outstanding, which consists of stock options granted. In accordance with Statement of Position 93-6, shares owned by the ESOP that have not been committed to be released are not considered to be outstanding for the purpose of computing earnings per share. 34 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Operating segments: The Company uses the "management approach" for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the "management approach" model, the Company has determined that its business is comprised of a single operating segment. Stock-option plan: FASB Statement No. 123, Accounting for Stock-Based Compensation, establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from nonemployees. However, the standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. The Company has elected to apply the intrinsic value based method of accounting for stock options issued to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Had compensation cost for the Plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123), the approximate 2002, 2001, and 2000, reported net income and earnings per common share would have been decreased to the pro forma amounts shown below:
2002 2001 2000 -------------------------------------------------- Net income, as reported: $ 5,865,161 $ 4,474,863 $ 4,011,117 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (110,585) (183,477) (199,956) -------------------------------------------------- Pro forma net income 5,754,576 4,291,386 3,811,161 ================================================== Earnings per common share - basic: As reported 3.58 2.54 2.04 Pro forma 3.51 2.43 1.94 Earnings per common share - assuming dilution: As reported 3.37 2.41 2.00 Pro forma 3.31 2.31 1.90
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 2002, 2001, and 2000, respectively: dividend rate of 3.5%, 3.2% and 3.2%, price volatility of 20%, 22% and 21%, risk-free interest rates of 4.92%, 4.93% and 6.49%, and expected lives of eight years for all years. 35 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Fair value of financial instruments: The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a 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. FASB Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash and due from banks: The carrying amount of cash and due from banks represents the fair value. Securities: Fair values for all securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. 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. Loans held for sale: Fair values are based on quoted market prices of similar loans sold on the secondary market. 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, 2002 and 2001, the carrying amount and fair value of the commitments were not significant. 36 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 2. Securities Securities available-for-sale as of December 31, 2002 were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ------------------------------------------------------------------ Equity securities: Mutual fund $ 2,000,000 $ - $ - $ 2,000,000 Federal Home Loan Bank stock 4,478,100 - - 4,478,100 FHLMC preferred stock 5,499,000 50,000 (319,000) 5,230,000 FNMA preferred stock 1,000,000 22,500 - 1,022,500 Other 2,100 1,298 - 3,398 ------------------------------------------------------------------ 12,979,200 73,798 (319,000) 12,733,998 ------------------------------------------------------------------ Debt securities: State and local obligations 5,736,867 336,652 (81) 6,073,438 Mortgage-backed securities 3,836,033 190,273 - 4,026,306 ------------------------------------------------------------------ 9,572,900 526,925 (81) 10,099,744 ------------------------------------------------------------------ $ 22,552,100 $ 600,723 $ (319,081) $ 22,833,742 ==================================================================
Securities available-for-sale as of December 31, 2001, were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ------------------------------------------------------------------ Equity securities: Mutual fund $ 2,000,000 $ 2,012 $ - $ 2,002,012 Federal Home Loan Bank stock 4,428,700 - - 4,428,700 FHLMC preferred stock 5,998,375 11,000 (58,375) 5,951,000 FNMA preferred stock 5,384,375 34,405 - 5,418,780 Other 253,475 27,148 (1,605) 279,018 ------------------------------------------------------------------- 18,064,925 74,565 (59,980) 18,079,510 ------------------------------------------------------------------ Debt securities: U.S. Government agencies 998,019 5,369 - 1,003,388 State and local obligations 5,784,610 167,909 (911) 5,951,608 Mortgage-backed securities 6,214,062 117,163 - 6,331,225 ------------------------------------------------------------------- 12,996,691 290,441 (911) 13,286,221 ------------------------------------------------------------------ $ 31,061,616 $ 365,006 $ (60,891) $ 31,365,731 ==================================================================
No ready market exists for Federal Home Loan Bank stock, and it has no quoted market value. For disclosure purposes, such stock is assumed to have a fair value which is equal to cost. Securities available-for-sale with a carrying amount of approximately $522,000 and $705,000 at December 31, 2002 and 2001, respectively, were pledged on deposit accounts. 37 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The amortized cost and fair value of debt securities as of December 31, 2002, 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 $ 531,616 $ 537,605 Due from one to five years 1,567,710 1,629,488 Due from five to ten years 2,860,999 3,038,140 Due after ten years 776,542 868,205 Mortgage-backed securities 3,836,033 4,026,306 --------------------------------------- $ 9,572,900 $ 10,099,744 ======================================= Gross gains of $26,352, $800 and $42 were realized on the sale of securities available-for-sale in 2002, 2001, and 2000, respectively. Gross losses of $26,875 and $1,733 were realized on the sale of securities available-for-sale in 2002 and 2001, respectively. There were no gross losses on the sale of securities available-for-sale in 2000. Included in the interest income on securities and cash deposits was dividend income of $550,306, $827,994 and $812,366 for the years ended December 31, 2002, 2001 and 2000, respectively. The components of other comprehensive income (loss) - net unrealized gains (losses) on available-for-sale securities for the years ended December 31, 2002, 2001, and 2000, were as follows:
2002 2001 2000 --------------------------------------------------- Unrealized holding gains (losses) arising during the period $ (22,997) $ 702,045 $1,076,046 Less reclassification adjustment for net gains (losses) realized in net income (523) (933) 42 --------------------------------------------------- Net unrealized gains (losses) before tax (expense) benefit (22,474) 702,978 1,076,004 Tax (expense) benefit 9,038 (265,647) (402,206) --------------------------------------------------- Other comprehensive income (loss) - net unrealized gains (losses) on securities $ (13,436) $ 437,331 $ 673,798 ===================================================
38 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 3. Loans Receivable Loans receivable at December 31, 2002 and 2001, are summarized as follows:
2002 2001 ------------------------------------- First mortgage loans: Secured by one-to four-family residences $ 146,457,845 $ 158,058,698 Secured by: Multifamily properties 70,778,861 74,396,461 Commercial properties 71,251,023 25,722,206 Construction loans 2,293,998 3,489,674 ------------------------------------- Total first mortgage loans 290,781,727 261,667,039 ------------------------------------- Consumer loans: Automobile 10,114,605 9,405,642 Second mortgage 38,239,932 35,619,272 Other 5,437,535 5,134,395 ------------------------------------- Total consumer loans 53,792,072 50,159,309 ------------------------------------- Total loans 344,573,799 311,826,348 Undisbursed portion of construction loans (928,855) (1,054,645) Unearned premiums, net 623,051 37,291 Net deferred loan origination (fees) costs, net (3,237) 55,627 Allowance for loan losses (3,118,394) (2,883,197) ------------------------------------- $ 341,146,364 $ 307,981,424 =====================================
Activity in the allowance for loan losses is summarized as follows for the years ended December 31:
2002 2001 2000 ------------------------------------------------------ Balance, beginning $ 2,883,197 $ 2,843,149 $ 2,776,539 Provision charged to income 383,000 210,000 120,000 Loans charged-off (161,842) (182,954) (55,923) Recoveries 14,039 13,002 2,533 ------------------------------------------------------ Balance, ending $ 3,118,394 $ 2,883,197 $ 2,843,149 ======================================================
39 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following is a summary of information pertaining to impaired loans and nonaccrual loans: December 31, ---------------------------------- 2002 2001 ---------------------------------- Impaired loans without a valuation allowance $ - $ - Impaired loans with a valuation allowance 642,967 276,680 ---------------------------------- Total impaired loans $ 642,967 $ 276,680 ================================== Valuation allowance related to impaired loans $ 121,737 $ 58,074 ================================== Average investment in impaired loans $ 579,763 $ 960,037 ================================== Nonaccrual loans $ 642,967 $ 276,680 ================================== Interest income recognized on impaired loans is insig The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, executive officers and their immediate families (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Activity in loans receivable from certain executive officers and directors of the Company consisted of the following for the years ended December 31, 2002 and 2001: 2002 2001 -------------------------------- Beginning balance $ 1,998,872 $ 1,914,673 New loans 653,000 752,336 Change in status (37,971) (378,491) Repayments (686,174) (289,646) -------------------------------- Ending balance $ 1,927,727 $ 1,998,872 ================================ Note 4. Loan Servicing Mortgage loans serviced for FHLMC and other banks are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at December 31, 2002 and 2001 are $31,859,427 and $15,788,607, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were $217,884 and $123,746 at December 31, 2002 and 2001, respectively. 40 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 5. Accrued Interest Receivable Accrued interest receivable at December 31 is summarized as follows: 2002 2001 ------------------------------- Securities $ 78,117 $ 135,802 Loans receivable 2,024,127 1,890,812 ------------------------------- 2,102,244 2,026,614 Less allowance for uncollectible interest 173,966 113,057 ------------------------------- $ 1,928,278 $ 1,913,557 =============================== Note 6. Premises and Equipment Premises and equipment consisted of the following at December 31: 2002 2001 -------------------------------- Land $ 2,268,985 $ 1,626,371 Buildings and improvements 6,042,167 5,936,486 Construction in progress 871,865 - Leasehold improvements 35,259 35,259 Furniture, fixtures and equipment 3,150,595 2,534,375 Vehicles 96,990 89,341 -------------------------------- 12,465,861 10,221,832 Less accumulated depreciation 4,269,898 3,424,327 -------------------------------- $ 8,195,963 $ 6,797,505 ================================ Note 7. Deposits Deposits at December 31 were as follows: 2002 2001 -------------------------------- Demand and NOW accounts: Noninterest bearing $ 8,156,198 $ 6,864,090 Interest-bearing 36,373,805 33,766,629 Savings accounts 25,692,683 21,878,031 Money market savings 23,747,823 28,096,329 Certificates of deposit 183,029,573 178,208,652 -------------------------------- $ 277,000,082 $ 268,813,731 ================================ 41 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- At December 31, 2002, scheduled maturities of certificates of deposit were as follows: 2003 $ 67,871,551 2004 55,883,789 2005 18,971,107 2006 18,007,100 2007 19,467,665 Thereafter 2,828,361 -------------- $ 183,029,573 ============== Interest expense on deposits consisted of the following: Years ended December 31, ------------------------------------------------------ 2002 2001 2000 ------------------------------------------------------ NOW accounts $ 210,043 $ 295,684 $ 345,100 Savings accounts 281,171 362,320 484,774 Money market savings 349,875 928,631 839,957 Certificates of deposit 8,648,832 10,367,331 10,598,895 ------------------------------------------------------ $ 9,489,921 $ 11,953,966 $ 12,268,726 ====================================================== The aggregate amount of certificates of deposit each with a minimum denomination of $100,000 was $15,795,853 and $18,505,711 as of December 31, 2002 and 2001, respectively. Note 8. Borrowed Funds Borrowed funds at December 31, 2002, included miscellaneous borrowings of $21,287 and borrowings from Federal Home Loan Bank of Des Moines (FHLB) as follows:
Weighted- Stated Average Maturity Interest Rate Amount Features - ---------------------------------------------------------------------------------------- 2003 4.97% $ 7,000,000 2004 4.10 5,000,000 2005 4.31 8,000,000 2006 4.74 13,000,000 2007 4.52 12,000,000 2008 5.12 14,000,000 $9.0 million callable, various dates 2003 2009 4.74 2,500,000 2010 5.86 18,500,000 $17.5 million callable, various dates 2003 2011 4.83 3,000,000 All callable, various dates 2003 to 2004 2013 5.25 2,005,151 15-year amortizing, repayable 2003 ---- ------------ 4.97% $ 85,005,151
At December 31, 2002, the Company had an unsecured $3,000,000 line of credit agreement with a Bank. The line of credit bears interest at LIBOR plus 1.85% (3.23% at December 31, 2002) and matures October 1, 2003. There were no borrowings outstanding at December 31, 2002. 42 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Borrowed funds at December 31, 2001, included miscellaneous borrowings of $275,466 and borrowings from the FHLB of $71,137,257. Such borrowings carried a weighted-average interest rate of 5.76% with maturities ranging from 2002 through 2013. The FHLB borrowings are collateralized by the FHLB stock and qualifying first mortgage loans representing 120% of the total borrowings outstanding. Note 9. Income Taxes and Retained Earnings Under previous law, the provisions of the IRS and similar sections of Iowa Law permitted the Bank to deduct from taxable income an allowance for bad debts based on 8% of taxable income before such deduction or actual loss experience. Legislation passed in 1996 eliminated the percentage of taxable income method as an option for computing bad debt deductions for 1996, and in all future years. The Bank is recapturing, for income tax purposes, its tax bad debt reserves, which had 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 tax assets are being established for the taxes paid 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, 2002, 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, --------------------------------------------------- 2002 2001 2000 --------------------------------------------------- Current $ 3,068,047 $ 2,541,049 $ 1,911,431 Deferred (114,715) (193,638) (38,062) --------------------------------------------------- $ 2,953,332 $ 2,347,411 $ 1,873,369 =================================================== 43 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, 2002 and 2001:
2002 2001 ------------------------------ Deferred tax assets: Unearned shares, employee stock ownership plan $ 28,000 $ 36,000 Allowance for loan losses 1,075,000 899,000 Deferred directors fees and compensation 42,000 44,000 Accrued expenses 46,000 24,000 Other 94,049 49,960 ------------------------------ Total gross deferred tax assets 1,285,049 1,052,960 ------------------------------ Deferred tax liabilities: Federal Home Loan Bank stock dividend 45,000 45,000 Loan costs 17,000 30,000 Premises and equipment 108,000 74,000 Title plant 160,000 140,000 Loans acquired 42,000 64,000 Investments acquired 16,000 26,000 Servicing rights 107,000 37,000 Unrealized gains on securities available-for-sale 105,000 114,000 Other 76,392 38,056 ------------------------------ Total gross deferred tax liabilities 676,392 568,056 ------------------------------ Net deferred tax assets $ 608,657 $ 484,904 ==============================
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, ------------------------------------------------------------------------------------ 2002 2001 2000 ------------------------------------------------------------------------------------ Percent Percent Percent of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income ------------------------------------------------------------------------------------ Income before income taxes $2,998,288 34.0% $2,319,573 34.0% $2,000,725 34.0% Nontaxable income (187,175) (2.1) (235,557) (3.4) (196,568) (3.3) State income tax, net of federal income tax benefit 212,372 2.4 187,403 2.8 165,680 2.7 State income tax refund, net of federal income tax benefit - - - - (66,233) (1.1) Low income housing tax credit (153,680) (1.7) (153,680) (2.3) (153,680) (2.6) Goodwill amortization - - 145,547 2.1 145,547 2.5 Other 83,527 0.9 84,125 1.2 (22,102) (0.4) ------------------------------------------------------------------------------------ $2,953,332 33.5% $2,347,411 34.4% $1,873,369 31.8% ====================================================================================
44 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 10. 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. The Bank recognized $104,500 pension expense for the year ended December 31, 2002, which relates to the first six months of the pension plan's fiscal year ended June 30, 2003. There was no pension expense for the years ended December 31, 2001 and 2000. 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. The Bank makes contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. Dividends on unallocated ESOP shares are used to pay debt service. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after five years of credited service. Forfeitures will be reallocated among remaining participating employees, in the same proportion as contributions. Benefits may be payable in the form of stock or cash upon termination of employment. If the Company's stock is not traded on an established market at the time of an ESOP participant's termination, the terminated ESOP participant has the right to require the Bank to purchase the stock at its current fair market value. Bank management believes there is an established market for the Company's stock and therefore the Bank believes there is no potential repurchase obligation at December 31, 2002 and 2001. 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 $436,984, $369,907 and $287,295 for the years ended December 31, 2002, 2001, and 2000, respectively. Shares of the Company's common stock held by the ESOP, at December 31, 2002 and 2001, are as follows: 2002 2001 -------------------------- Allocated shares 154,212 135,848 Unreleased (unearned) shares 32,588 49,246 -------------------------- 186,800 185,094 ========================== Fair market value of unreleased (unearned) shares $ 1,010,228 $ 1,013,975 ========================== 45 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Stock option plan: In 1996, the stockholders of the Company ratified the 1996 Incentive Option Plan (the Plan). The Plan provides for the grant of options at an exercise price equal to the fair market value on the date of grant. The Plan is intended to promote stock ownership by directors and selected officers and employees of the Company to increase their proprietary interest in the success of the Company and to encourage them to remain in the employment of the Company or its subsidiaries. Awards granted under the Plan may include incentive stock options, nonqualified stock options and limited rights, which are exercisable only upon a change in control of the Bank or the Company. All awards to date are nonqualified stock options. The Plan was modified in 2001 when the Company authorized the granting of 40,000 additional shares of common stock. The Plan authorizes the granting of stock options for a total of 441,105 shares of common stock. All options are granted at an exercise price, which is the market price of the common stock on the grant date. Options granted to officers become exercisable in five equal annual installments commencing on the first anniversary of the grant date and continuing on each anniversary date thereafter. The options granted to officers expire ten years from the date of grant unless an earlier expiration date is triggered by death, disability, retirement or termination, as described in the Plan. A person who becomes a director after September 21, 1996, receives an annual grant of options to purchase 2,000 shares of common stock. Options granted to directors are exercisable immediately and expire ten years from the date of grant, unless an earlier expiration date is triggered by removal for cause. The table below reflects option activity for the period indicated: Weighted- Average Exercise Number Price per of Shares Share --------------------------------- Outstanding, December 31, 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 Granted 28,000 19.21 Forfeited (3,800) 19.12 Exercised (38,000) 12.94 --------------------------------- Outstanding, December 31, 2001 284,910 14.67 Granted 11,000 20.59 Forfeited (1,000) 16.95 Exercised (73,100) 12.48 --------------------------------- Outstanding, December 31, 2002 221,810 $ 15.67 ================================= Options exercisable 180,710 $ 14.94 ================================= Remaining shares available for grant 74,605 =============== As of December 31, 2002, the 221,810 options outstanding under the Plan have exercise prices between $12.38 and $22.52. The weighted average fair value per option of options granted during the years ended December 31, 2002, 2001, and 2000, were $4.20, $4.48 and $3.88, respectively. 46 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. Note 11. Stockholders' Equity Regulatory capital requirements: The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), of Tier I capital (as defined) to average assets (as defined) and tangible capital to adjusted assets. Management believes, as of December 31, 2002, the Bank meets all capital adequacy requirements to which it is subject. The most recent notification from the federal regulatory agency categorize the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since those notifications that management believes have changed the category. 47 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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, 2002: Total Capital (to risk weighted assets) $ 33,870 12.4% $ 21,805 8.0% $ 27,256 10.0% Tier 1 Capital (to risk weighted assets) 30,803 11.3 10,902 4.0 16,354 6.0 Tier I (Core) Capital (to adjusted assets) 30,803 7.8 11,917 3.0 19,862 5.0 Tangible Capital (to adjusted assets) 30,803 7.8 5,959 1.5 - - As of December 31, 2001: Total Capital (to risk weighted assets) $ 32,048 14.3% $ 17,982 8.0% $ 22,478 10.0% Tier 1 Capital (to risk weighted assets) 29,239 13.0 8,991 4.0 13,487 6.0 Tier I (Core) Capital (to adjusted assets) 29,239 7.8 11,191 3.0 18,652 5.0 Tangible Capital (to adjusted assets) 29,239 7.8 5,596 1.5 - -
Limitations on Dividends and Other Capital Distributions: Office of Thrift Supervision (OTS) imposes limitations upon all capital distributions by savings institutions, including cash dividends. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution (Tier 1 Association) and has not been advised by the OTS that it is in need of more than normal supervision could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year provided the total amount of capital distributions (including the proposed capital distribution) for the applicable calendar year does not exceed the institution's year-to-date net income plus retained net income for the preceding two years. Any additional capital distributions would require prior regulatory approval. 48 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 12. Other Noninterest Expense Other noninterest expense amounts are summarized as follows for the years ended December 31:
2002 2001 2000 -------------------------------------------------- Advertising and promotion $ 277,702 $ 211,221 $ 237,482 Professional fees 194,055 180,155 152,648 Printing, postage, stationery and supplies 437,453 382,832 364,308 Checking account charges 335,458 338,521 329,821 Insurance 106,826 83,602 84,058 OTS general assessment 88,799 84,138 77,831 Telephone 140,575 123,867 120,302 ATM costs 56,796 105,156 106,821 Employee costs 164,508 133,380 132,981 Other 772,847 684,201 802,024 ----------------------------------------------- $ 2,575,019 $ 2,327,073 $ 2,408,276 ===============================================
Note 13. Financial Instruments With Off-Statement of Financial Condition Risk The Bank is a party to financial instruments with off-statement of financial condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-statement of financial condition instruments. 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 financial condition risk for commitments to extend credit is as follows:
Contract or Notional Amount ------------------------------- December 31, ------------------------------- 2002 2001 ------------------------------- Mortgage loans (including one-to four-family and multifamily loans) $ 8,191,023 $ 11,039,666 Undisbursed overdraft loan privileges and undisbursed home equity lines of credit 2,094,819 1,767,665
At December 31, 2002, the mortgage loan commitments above were comprised of variable-rate commitments carrying a weighted-average interest rate of 6.44% and fixed-rate commitments carrying a weighted-average interest rate of 5.48%. 49 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 14. Lending Activities and Concentrations of Credit Risk The Bank generally originates single-family residential loans within its primary lending area of Webster, Story, Des Moines, Dallas, Polk and Henry counties. 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 $135,590,000 of the Bank's first mortgage loan portfolio at December 31, 2002, consisted of loans purchased or originated outside the state of Iowa. Concentrations by state include California with $33,880,000, Colorado with $20,964,000, and Wisconsin with $14,273,000. These are generally multifamily residential and commercial real estate loans secured by the underlying properties. The loans are subject to the same underwriting guidelines as loans originated locally. The Bank is also active in originating secured consumer loans to its customers, primarily automobile and second mortgage loans. Collateral for substantially all consumer loans are security agreements and/or Uniform Commercial Code filings on the purchased asset. The Company has interest bearing deposits of approximately $13,026,000, on deposit at the FHLB at December 31, 2002. In the opinion of management, no material risk of loss exists due to the financial condition of the FHLB. Note 15. Fair Values of Financial Instruments The carrying amount and fair value of the Company's financial instruments as of December 31, 2002 and 2001, were as follows:
2002 2001 ------------------------------------ --------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------------- (nearest 000) (nearest 000) Financial assets: Cash $ 15,168,601 $ 15,169,000 $ 19,908,902 $ 19,909,000 Securities 22,833,742 22,834,000 31,365,731 31,366,000 Loans, net 341,146,364 347,684,000 307,981,424 308,913,000 Loans held for sale 2,372,134 2,408,000 1,605,710 1,625,000 Accrued interest receivable 1,928,278 1,928,000 1,913,557 1,914,000 Financial liabilities: Deposits 277,000,082 284,278,000 268,813,731 274,166,000 Borrowed funds 85,026,438 90,971,000 71,412,723 70,735,000 Accrued interest payable 129,899 130,000 422,686 423,000
50 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 16. Reorganization and Conversion to Stock Ownership In 1996, the Company completed a Plan of Conversion and Reorganization, whereby the Company became a publicly traded Iowa corporation and the previous mutual organization ceased to exist. The Plan provided that when the conversion was completed, a "Liquidation Account" would be established in an amount equal to the amount of any dividends waived by the previous mutual holding company (totaling approximately $1,897,000), plus 65.5% of the Bank's total stockholders' equity, as reflected in its latest statement of financial condition in the final prospectus utilized in the conversion. The Liquidation Account is established to provide a limited priority claim to the assets of the Bank to qualifying depositors as of specified dates (Eligible Account Holders and Supplemental Eligible Account Holders) who continue to maintain deposits in the Bank after the conversion. In the unlikely event of a complete liquidation of the Bank, and only in such an event, Eligible Account Holders and Supplemental Eligible Account Holders would receive from the Liquidation Account a liquidation distribution based on their proportionate share of the then total remaining qualifying deposits. Note 17. Earnings Per Common Share Presented below is the reconciliation of the numerators and denominators of the computations for earnings per common share and earnings per common share - -diluted, for the years ended December 31:
2002 2001 2000 ----------------------------------------------- Numerator, income available to common stockholders $ 5,865,161 $ 4,474,863 $ 4,011,117 =============================================== Denominator: Weighted-average shares outstanding 1,680,679 1,823,100 2,042,140 Less unallocated ESOP 42,930 60,200 78,454 ----------------------------------------------- Weighted-average shares outstanding-basic 1,637,749 1,762,900 1,963,686 Dilutive effect of stock options 101,786 93,743 42,654 ----------------------------------------------- Weighted-average shares outstanding- assuming dilution 1,739,535 1,856,643 2,006,340 =============================================== Basic earnings per common share $ 3.58 $ 2.54 $ 2.04 Earnings per common share-assuming dilution 3.37 2.41 2.00
51 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 18. North Central Bancshares, Inc. (Parent Company Only) Financial Statements STATEMENTS OF FINANCIAL CONDITION December 31, 2002 and 2001
2002 2001 --------------------------------------- ASSETS Cash $ 410,620 $ 177,959 Securities available-for-sale 3,398 279,018 Loan receivables, net 1,491,000 571,000 Investment in First Federal Savings Bank of Iowa 37,029,542 35,318,962 Income taxes receivable 108,269 83,013 Deferred taxes 4,127 - -------------------------------------- Total assets $ 39,046,956 $ 36,429,952 ====================================== LIABILITIES AND EQUITY LIABILITIES Borrowed funds $ - $ 250,000 Dividend payable 295,250 256,587 Accrued expenses and other liabilities 3,502 399 Deferred taxes - 10,217 -------------------------------------- Total liabilities 298,752 517,203 -------------------------------------- EQUITY Common stock 16,403 17,003 Additional paid-in capital 17,011,095 16,780,875 Retained earnings 21,862,248 19,402,706 Unearned shares, employee stock ownership plan (318,097) (477,826) Accumulated other comprehensive income 176,555 189,991 -------------------------------------- Total equity 38,748,204 35,912,749 -------------------------------------- Total liabilities and equity $ 39,046,956 $ 36,429,952 ======================================
52 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STATEMENTS OF INCOME Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000 --------------------------------------------------- Operating income: Equity in net income of subsidiary $ 5,901,383 $ 4,525,221 $ 4,050,607 Interest income 53,759 69,842 118,392 Gain (loss) on sale of securities available-for-sale, net 26,352 (933) 42 --------------------------------------------------- 5,981,494 4,594,130 4,169,041 --------------------------------------------------- Operating expenses: Interest expense 844 394 - Salaries and employee benefits 22,150 33,250 47,400 Other 112,759 118,804 145,921 --------------------------------------------------- 135,753 152,448 193,321 --------------------------------------------------- Income before income taxes 5,845,741 4,441,682 3,975,720 Provision for income taxes (benefits) (19,420) (33,181) (35,397) --------------------------------------------------- Net income $ 5,865,161 $ 4,474,863 $ 4,011,117 ===================================================
53 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000 ----------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,865,161 $ 4,474,863 $ 4,011,117 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of First Federal Savings Bank of Iowa (5,901,383) (4,525,221) (4,050,607) Dividends received from First Federal Savings Bank of Iowa 5,000,000 4,750,000 7,100,000 (Gain) loss on sale of securities available-for-sale (26,352) 933 (42) Change in deferred income taxes (375,748) (107,233) (29,906) Change in assets and liabilities: Income taxes receivable (25,256) (11,384) (40,820) Prepaid expenses and other assets - - 11,549 Accrued expenses and other liabilities 3,103 399 (32,639) ----------------------------------------------- Net cash provided by operating activities 4,539,525 4,582,357 6,968,652 ----------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loan receivables (920,000) 530,000 (150,000) Proceeds from sale of securities available-for-sale 277,727 220,125 24,792 ----------------------------------------------- Net cash provided by (used in) investing activities (642,273) 750,125 (125,208) ----------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings (250,000) 250,000 - Purchase of treasury stock (3,569,328) (5,280,545) (5,799,736) Proceeds from issuance of treasury stock 1,283,365 557,640 54,470 Dividends paid (1,128,628) (1,028,210) (941,692) ----------------------------------------------- Net cash (used in) financing activities (3,664,591) (5,501,115) (6,686,958) ----------------------------------------------- Net increase (decrease) in cash 232,661 (168,633) 156,486 CASH Beginning 177,959 346,592 190,106 ----------------------------------------------- Ending $ 410,620 $ 177,959 $ 346,592 ===============================================
54 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 19. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2002 ----------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------- (In thousands, except per share amounts) Interest income $ 6,531 $ 6,760 $ 6,937 $ 6,737 Interest expense 3,493 3,498 3,533 3,387 ----------------------------------------------------------- Net interest income 3,038 3,262 3,404 3,350 Provision for loan losses 180 90 56 57 ----------------------------------------------------------- Net interest income after provision for loan losses 2,858 3,172 3,348 3,293 ----------------------------------------------------------- Noninterest income: Fees and service charges 589 596 662 528 Abstract fees 397 402 436 451 Other income 329 388 411 540 ----------------------------------------------------------- Total noninterest income 1,315 1,386 1,509 1,519 ----------------------------------------------------------- Noninterest expense: Salaries and employee benefits 1,266 1,324 1,261 1,372 Premises and equipment 309 302 261 320 Data processing 129 132 131 152 SAIF deposit insurance premiums 12 12 12 11 Other 650 635 616 675 ----------------------------------------------------------- Total noninterest expense 2,366 2,405 2,281 2,530 ----------------------------------------------------------- Income before income taxes 1,807 2,153 2,576 2,282 Provision for income tax expense 576 729 868 780 ----------------------------------------------------------- Net income $ 1,231 $ 1,424 $ 1,708 $ 1,502 =========================================================== Basic earnings per share $ 0.75 $ 0.87 $ 1.04 $ 0.92 =========================================================== Diluted earnings per share $ 0.71 $ 0.81 $ 0.98 $ 0.87 ===========================================================
55 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Year Ended December 31, 2001 ----------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------- (In thousands, except per share amounts) Interest income $ 7,040 $ 6,922 $ 6,894 $ 6,644 Interest expense 4,381 4,255 4,105 3,773 ----------------------------------------------------------- Net interest income 2,659 2,667 2,789 2,871 Provision for loan losses 30 60 60 60 ----------------------------------------------------------- Net interest income after provision for loan losses 2,629 2,607 2,729 2,811 ----------------------------------------------------------- Noninterest income: Fees and service charges 409 471 503 610 Abstract fees 302 378 388 438 Other income 328 386 377 502 ----------------------------------------------------------- Total noninterest income 1,039 1,235 1,268 1,550 ----------------------------------------------------------- Noninterest expense: Salaries and employee benefits 1,100 1,048 1,127 1,225 Premises and equipment 297 289 290 350 Data processing 106 117 117 130 SAIF deposit insurance premiums 13 13 13 11 Goodwill 118 118 118 118 Other 540 599 570 619 ----------------------------------------------------------- Total noninterest expense 2,174 2,184 2,235 2,453 ----------------------------------------------------------- Income before income taxes 1,494 1,658 1,762 1,908 Provision for income tax expense 513 548 608 678 ----------------------------------------------------------- Net income $ 981 $ 1,110 $ 1,154 $ 1,230 =========================================================== Basic earnings per share $ 0.53 $ 0.62 $ 0.66 $ 0.73 =========================================================== Diluted earnings per share $ 0.51 $ 0.59 $ 0.62 $ 0.69 ===========================================================
Note 20. Restrictions on Cash and Due From Banks The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $1,785,000 and $1,220,000 at December 31, 2002 and 2001, respectively. 56 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 six 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. Melvin R. Schroeder was formerly the Vice President of Instruction at Iowa Central Community College in Fort Dodge, Iowa. Mr. Schroeder retired in 2001. KaRene Egemo is the owner of Egemo Realty, Inc. in Fort Dodge, Iowa. Robert H. Singer, Jr. is the executive director of the Fort Dodge Area Chamber of Commerce. Mr. Singer was formerly the co-owner of Calvert, Singer & Kelley Insurance Services, Inc., an insurance agency, in Fort Dodge, Iowa. 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 a Senior Vice President for Commercial Capital Markets for Washington Mutual. Mr. Barnes was formerly the Executive Director of International Products for Principal Capital Management, a member of the Principal Financial Group. 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 Chief Financial Officer of the Bank and Treasurer of the Holding Company and the Bank. Kirk A. Yung is Senior Vice President of the Holding Company and the Bank. 57 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 - ----------------------------- ------ ------ ------------------ 2001 First Quarter............ 20.375 17.250 0.15 Second Quarter........... 21.000 19.563 0.15 Third Quarter............ 23.260 20.950 0.15 Fourth Quarter........... 22.350 19.730 0.15 2002 First Quarter............ 23.880 20.000 0.18 Second Quarter........... 29.400 23.350 0.18 Third Quarter............ 28.989 23.000 0.18 Fourth Quarter .......... 31.000 27.100 0.18 - ---------- The Company's Common Stock was traded at $33.94 as of March 10, 2003. Information Relating to the Company's Common Stock As of March 10, 2003, the Company had 1,482 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 1,613,380 shares of the Common Stock were outstanding. The Company's current quarterly dividend is $0.21 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 primarily upon the 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. 58 Annual Meeting The Annual Meeting of Shareholders of the Company will be held at 10:00 a.m., Central Time, Friday, April 25, 2003 at the Trolley Center, located at 900 Central Avenue, Fort Dodge, Iowa. Stockholders and General Inquiries David M. Bradley Stock Exchange North Central Bancshares, Inc. c/o First Federal Savings Bank of Iowa The Company's Common Shares are listed 825 Central Avenue under the symbol "FFFD" on NASDAQ. 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 Transfer Agent Special Counsel Computershare Investor Services Thacher Proffitt & Wood 350 Indiana Street Suite 800 1700 Pennsylvania Avenue, N.W., Golden, Colorado 80401 Suite 800 (303) 262-0600 or 800-962-4284 Washington, D.C. 20006 e-mail: inquire@computershare.com www.computershare.com Publications - Annual Report on Form 10-K A copy of the Company's Form 10-K (without exhibits) for the fiscal year ended December 31, 2002 will be furnished without charge to shareholders as of March 10, 2003 upon written request to Jean L. Lake, Corporate Secretary, North Central Bancshares, Inc., c/o First Federal Savings Bank of Iowa, 825 Central Avenue, Fort Dodge, Iowa 50501. The Form 10-K report is available online through the SEC Electronic Data Gathering, Analysis and Retrieval (EDGAR) filings. Dividend Reinvestment and Stock Purchase Plan This plan provides shareholders with the ability to reinvest automatically their cash dividends in additional shares of North Central Bancshares, Inc. common stock. This plan also provides shareholders the opportunity to make quarterly cash purchases of additional shares of the Company's common stock. For more information, contact Computershare Investor Services (see address above) or visit Computershare's Web site at www.computershare.com. 59 EX-23 4 ncbexhibit231_12-02.txt EXHIBIT 23.1 CONSENT OF MCGLADREY & PULLEN 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.,(Registration #333-33089) as filed with the Commission on August 7, 1998 and the Registration Statement on Form S-8 (Registration #333-82490) as filed with the Commission on February 11, 2002, of our report dated February 7, 2003, which appears in the annual report on Form 10-K of North Central Bancshares, Inc. and subsidiaries for the year ended December 31, 2002. /s/ McGladrey & Pullen, LLP ---------------------------- McGladrey & Pullen, LLP Des Moines, Iowa March 27, 2003 EX-99 5 ncbexhibit991_12-02.txt EXHIBIT 99.1 PRESS RELEASE NOVEMBER 22, 2002 Exhibit 99.1 Press Release PRESS RELEASE November 22, 2002 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. DECLARES 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 $0.18 per share on the Company's common stock for the fiscal quarter ended December 31, 2002. The dividend will be payable to all stockholders of record as of December 16, 2002 and will be paid on January 7, 2003. North Central Bancshares, Inc. serves north central and southeastern Iowa at 9 full service locations in Fort Dodge, Nevada, Ames, Burlington, Mount Pleasant, Perry and Ankeny, 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 6 ncbexhibit992_12-02.txt EXHIBIT 99.2 PRESS RELEASE JANUARY 27, 2003 Exhibit 99.2 Press Release PRESS RELEASE January 27, 2003 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 FOR YEAR ENDED DECEMBER 31, 2002 Fort Dodge, Iowa -- North Central Bancshares, Inc. (the "Company") (Nasdaq: FFFD), the holding company for First Federal Savings Bank of Iowa (the "Bank"), announced today that the Company earned a record $3.37 diluted earnings per share for the year ended December 31, 2002, compared to diluted earnings per share of $2.41 for the year ended December 31, 2001, an increase in diluted earnings per share of 39.8%. In dollars, the Company's net income was a record $5.9 million for the year ended December 31, 2002, as compared to $4.5 million for the year ended December 31, 2001, an increase of 31.1%. The Company's net income was $1.5 million, or diluted earnings per share of $0.87, for the quarter ended December 31, 2002, compared to $1.2 million, or diluted earnings per share of $0.69, for the quarter ended December 31, 2001, an increase in net income of 22.2% and in diluted earnings per share of 26.1%. Total assets at December 31, 2002 were $403.9 million as compared to $379.4 million at December 31, 2001. The increase in assets resulted primarily from an increase in loans, offset by a decrease in interest-bearing cash and securities available-for-sale. Loans increased by $33.2 million, or 10.8%, to $341.1 million at December 31, 2002 from $308.0 million at December 31, 2001. The increase in loans was funded in part by increases in deposits and borrowings and decreases in interest-bearing cash and securities available-for-sale. At December 31, 2002, net loans consisted of $147.5 million of one-to four-family loans, $70.2 million of multifamily real estate loans, $70.5 million of commercial real estate loans and $53.0 million of consumer loans. The increase in loans was primarily due to the purchase of $79.3 million of multifamily and commercial real estate loans. Securities available-for-sale decreased $8.5 million, or 27.2%, from $31.4 million at December 31, 2001 to $22.8 million at December 31, 2002. The decrease in securities available-for- sale was primarily due to calls, maturities and sales during the year ended December 31, 2002. Deposits increased $8.2 million, or 3.0%, to $277.0 million at December 31, 2002 from $268.8 million at December 31, 2001. Other borrowed funds increased $13.6 million, or 19.1%, to $85.0 million at December 31, 2002 from $71.4 million at December 31, 2001. The increase in the deposits and borrowed funds were used in part to fund asset growth. Nonperforming assets were 0.34% of total assets as of December 31, 2002 compared to 0.36% of total assets as of December 31, 2001. The allowance for loan losses was $3.1 million, or 0.90% of total loans, at December 31, 2002, compared to $2.9 million, or 0.92% of total loans, at December 31, 2001. - MORE- The net interest spread of 3.15% for the year ended December 31, 2002 represented an increase from the net interest spread of 2.68% for the year ended December 31, 2001. The net interest margin of 3.44% for the year ended December 31, 2002 represented an increase from the net interest margin of 3.03% for the year ended December 31, 2001. Net interest income for the year ended December 31, 2002 was $13.1 million, compared to net interest income of $11.0 million for the year ended December 31, 2001. The Company's provision for loan losses was $383,000 and $210,000 for the years ended December 31, 2002 and 2001, respectively. The increase in the provision for loan losses was due primarily to increases in the loan portfolio for the year ended December 31, 2002. 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. The Company's noninterest income was $5.7 million and $5.1 million for the years ended December 31, 2002 and 2001, respectively. The increase in noninterest income was due in part to increases in loan prepayment fees, abstract fees and sales of annuity and mutual funds, offset in part by a decrease in insurance sales. The Company's noninterest expense was $9.6 million and $9.0 million for the years ended December 31, 2002 and 2001, respectively. The increase in noninterest expense was due in part to increases in salaries and employee benefits, data processing and other expenses, offset in part by a decrease in goodwill amortization. During the six months ended December 31, 2002, the Company recorded a pension contribution expense that totaled $105,000. The Company is a participant in the Financial Institutions Retirement Fund ("FIRF") and has been notified that a contribution will be required for the plan year ended June 30, 2003. The FIRF has been fully funded since July 1988 and no pension expense was recorded for the years ended December 31, 1989 until December 31, 2001. Stockholders' equity was $38.7 million at December 31, 2002, compared to $35.9 million at December 31, 2001. Stockholders' equity increased by $2.8 million primarily due to earnings and the exercise of stock options, offset in part by stock repurchases and declared dividends. Book value, or stockholders' equity per share, at December 31, 2002 was $23.62 compared to $21.12 at December 31, 2001. The ratio of stockholders' equity to total assets was 9.6% at December 31, 2002, as compared to 9.5% at December 31, 2001. All stockholders of record on December 16, 2002, received a quarterly cash dividend of $0.18 per share on January 7, 2003. On September 27, 2002, the Company commenced a new stock repurchase program for 100,000 shares, of which 77,600 shares remain to be repurchased. The Company has 1,640,280 shares of common stock currently outstanding. During the year ended December 31, 2002, the Company repurchased a total of 133,100 shares or approximately 7.8% of its outstanding shares of common stock as of December 31, 2001 at prevailing market prices averaging $26.82 per share. Since its formation in 1996, the Company has invested a total of $43.6 million in the repurchase of 2,496,867 shares of its outstanding stock. North Central Bancshares, Inc. serves north central and southeastern Iowa at nine full service locations in Fort Dodge, Nevada, Ames, Perry, Ankeny, Burlington and Mount Pleasant, Iowa through its wholly owned subsidiary, First Federal Savings Bank of Iowa, headquartered in Fort Dodge, Iowa. Construction has begun on a new 5,000 square foot facility in Ankeny, Iowa. The Bank's Ankeny office will relocate to this new office when completed, sometime during the first quarter of 2003. - MORE - The Bank's deposits are insured by the Federal Deposit Insurance Corporation under the full extent permitted by law. The Company's stock is traded on The Nasdaq National Market under the symbol "FFFD". Statements contained in this news release, which are not historical facts, contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risk and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. 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. For more information contact: David M. Bradley, President and Chief Executive Officer, 515-576-7531 FINANCIAL HIGHLIGHTS OF NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Financial Condition (Unaudited) (Dollars in Thousands, except per share and share data)
December 31, 2002 December 31, 2001 ------------------------------------------ Assets Cash and cash equivalents $ 15,169 $ 19,909 Securities available for sale 22,834 31,366 Loans (net of allowance of loan loss of $3,118 341,146 and $2,883, respectively) 4,971 307,981 Goodwill 19,752 4,971 ---------- ---------- Other assets 15,148 Total Assets $ 403,872 $ 379,375 ========== ========== Liabilities Deposits $ 277,000 $ 268,814 Other borrowed funds 85,026 71,413 Other liabilities 3,098 3,235 ---------- ---------- Total Liabilities 365,124 343,462 Stockholders' Equity 38,748 35,913 ---------- ---------- Total Liabilities and Stockholders' Equity $ 403,872 $ 379,375 ========== ========== Stockholders' equity to total assets 9.61% 9.47% ========== ========== Book value per share $ 23.62 $ 21.12 ========== ========== Total shares outstanding 1,640,280 1,700,280 ========== ==========
Condensed Consolidated Statements of Income (Unaudited) (Dollars in Thousands, except per share data)
For the Three Months For the Years Ended December 31, Ended December 31, 2002 2001 2002 2001 ------------------------------------------------------- Interest income $ 6,737 $ 6,644 $ 26,965 $ 27,500 Interest expense 3,387 3,773 13,911 16,514 ------- ------- -------- -------- Net interest income 3,350 2,871 13,054 10,986 Provision for loan loss 57 60 383 210 ------- ------- -------- -------- Net interest income after provision for loan loss 3,293 2,811 12,671 10,776 Noninterest income 1,519 1,550 5,729 5,092 Noninterest expense 2,530 2,453 9,582 9,046 ------- ------- -------- -------- Income before income taxes 2,282 1,908 8,818 6,822 Income taxes 780 678 2,953 2,347 ------- ------- -------- -------- Net income $ 1,502 $ 1,230 $ 5,865 $ 4,475 ======= ======= ======== ======== Basic earnings per share $ 0.92 $ 0.73 $ 3.58 $ 2.54 ======= ======= ======== ======== Diluted earnings per share $ 0.87 $ 0.69 $ 3.37 $ 2.41 ======= ======= ======== ========
Selected Financial Ratios
For the Three Months For the Years Ended December 31, Ended December 31, 2002 2001 2002 2001 ----------------------------------------------------------- Performance ratios Net interest spread 3.22% 2.96% 3.15% 2.68% Net interest margin 3.48% 3.24% 3.44% 3.03% Return on average assets 1.48% 1.30% 1.47% 1.17% Return on average equity 15.45% 13.59% 15.57% 12.21% Efficiency ratio (noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income) 51.95% 55.48% 51.01% 56.26%
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