10-Q 1 northcentral10q_09-03.txt SEPTEMBER 30, 2003 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [Mark One] [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________________to________________ Commission File Number 0-27672 NORTH CENTRAL BANCSHARES, INC. (Exact Name of Registrant as Specified in Its Charter) Iowa 42-1449849 -------------------------------------------------------------------- (State or Other Jurisdiction of (I. R. S. Employer Incorporation or Organization) Identification Number) 825 Central Avenue Fort Dodge, Iowa 50501 ----------------------------------------- (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code:(515) 576-7531 None ---- Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark whether the Registrant is an accelerated Filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 2003 -------------------------------------------------------------------------------- Common Stock, $.01 par value 1,608,080 NORTH CENTRAL BANCSHARES, INC. INDEX Page Part I. Financial Information Item 1. Consolidated Condensed Financial Statements (Unaudited) 1 to 3 Consolidated Condensed Statements of Financial Condition at September 30, 2003 and December 31, 2002 1 Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2003 and 2002 2 Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 3 Notes to Consolidated Condensed Financial Statements 4 & 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 to 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Item 4. Controls and Procedures 13 Part II. Other Information Items 1 through 6 14 Signatures 15 Exhibits PART I. FINANCIAL INFORMATION ITEM 1. NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
September 30, December 31, ASSETS 2003 2002 ------------ ----------- Cash and due from banks: Interest-bearing $ 5,173,277 $ 13,025,657 Noninterest-bearing 2,253,495 2,142,944 Securities available-for-sale 28,380,893 22,833,742 Loans receivable, net 365,511,516 341,146,364 Loans held for sale 968,297 2,372,134 Accrued interest receivable 1,944,528 1,928,278 Foreclosed real estate 1,456,669 768,726 Premises and equipment, net 9,277,654 8,195,963 Rental real estate 2,944,331 2,197,382 Title plant 925,256 925,256 Goodwill 4,970,800 4,970,800 Deferred taxes 933,459 608,657 Prepaid expenses and other assets 1,102,811 2,755,778 ------------- ------------- Total assets $ 425,842,986 $ 403,871,681 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits $ 282,693,675 $ 277,000,082 Borrowed funds 100,037,673 85,026,438 Advances from borrowers for taxes and insurance 870,975 1,512,114 Dividends payable 337,697 295,250 Income taxes payable 30,933 63,553 Accrued expenses and other liabilities 1,317,087 1,226,040 ------------- ------------- Total liabilities 385,288,040 365,123,477 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock ($.01 par value, authorized 3,000,000 shares; issued and outstanding none) -- -- Common stock ($.01 par value, authorized 15,500,000 shares; issued 2003, 1,608,080; 2002, 1,640,280 shares) 16,081 16,403 Additional paid-in capital 17,621,895 17,011,095 Retained earnings, substantially restricted 23,232,246 21,862,248 Accumulated other comprehensive income (loss) (110,735) 176,555 Unearned shares, employee stock ownership plan (204,541) (318,097) ------------- ------------- Total stockholders' equity 40,554,946 38,748,204 ------------- ------------- Total liabilities and stockholders' equity $ 425,842,986 $ 403,871,681 ============= =============
See Notes to Consolidated Condensed Financial Statements 1 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Interest income: Loans receivable $ 6,038,079 $ 6,619,709 $ 18,270,621 $ 19,119,533 Securities and cash deposits 304,425 317,198 1,039,161 1,108,613 ------------ ------------ ------------ ------------ 6,342,504 6,936,907 19,309,782 20,228,146 ------------ ------------ ------------ ------------ Interest expense: Deposits 1,913,974 2,394,364 6,002,801 7,197,948 Borrowed funds 1,141,660 1,138,206 3,369,189 3,326,469 ------------ ------------ ------------ ------------ 3,055,634 3,532,570 9,371,990 10,524,417 ------------ ------------ ------------ ------------ Net Interest Income 3,286,870 3,404,337 9,937,792 9,703,729 Provision for loan losses 75,000 56,000 195,000 326,000 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 3,211,870 3,348,337 9,742,792 9,377,729 ------------ ------------ ------------ ------------ Noninterest income: Fees and service charges 681,339 661,825 1,871,520 1,846,679 Abstract fees 520,595 435,998 1,449,742 1,234,829 Mortgage banking fees 310,983 167,323 760,712 382,495 Gain (loss) on sale of securities available for sale, net -- 842 -- (523) Other income 250,698 242,932 773,657 745,792 ------------ ------------ ------------ ------------ Total noninterest income 1,763,615 1,508,920 4,855,631 4,209,272 ------------ ------------ ------------ ------------ Noninterest expense: Salaries and employee benefits 1,505,514 1,260,754 4,349,473 3,851,098 Premises and equipment 320,516 261,179 936,698 871,631 Data processing 143,351 130,896 433,849 392,008 SAIF deposit insurance premiums 11,188 11,623 33,980 35,575 Other expenses 779,773 616,851 2,218,169 1,901,421 ------------ ------------ ------------ ------------ Total noninterest expense 2,760,342 2,281,303 7,972,169 7,051,733 ------------ ------------ ------------ ------------ Income before income taxes 2,215,143 2,575,954 6,626,254 6,535,268 Provision for income taxes 720,710 867,956 2,101,736 2,172,686 ------------ ------------ ------------ ------------ Net Income $ 1,494,433 $ 1,707,998 $ 4,524,518 $ 4,362,582 ============ ============ ============ ============ Basic earnings per common share $ 0.95 $ 1.04 $ 2.86 $ 2.65 ============ ============ ============ ============ Earnings per common share- assuming dilution $ 0.90 $ 0.98 $ 2.69 $ 2.50 ============ ============ ============ ============ Dividends declared per common share $ 0.21 $ 0.18 $ 0.63 $ 0.54 ============ ============ ============ ============ Comprehensive income $ 1,328,923 $ 1,859,212 $ 4,237,228 $ 4,521,596 ============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements. 2 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 2003 2002 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,524,518 $ 4,362,582 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 195,000 326,000 Depreciation 592,824 531,622 Amortization and accretion 476,942 169,452 Deferred taxes (153,911) (127,021) Effect of contribution to employee stock ownership plan 406,188 318,224 (Gain) on sale of foreclosed real estate and loans, net (804,865) (379,688) Loss on sale of securities available for sale -- 523 (Gain) loss on disposal of equipment and premises, net (724) 5,923 Proceeds from sales of loans held for sale 47,097,003 29,647,050 Originations of loans held for sale (44,932,454) (30,814,807) Change in assets and liabilities: Accrued interest receivable (16,250) (78,439) Prepaid expenses and other assets 1,652,967 (89,232) Income taxes payable (32,620) 201,585 Accrued expenses and other liabilities 91,047 (120,745) ------------ ------------ Net cash provided by operating activities 9,095,665 3,953,029 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net decrease in loans 19,067,901 34,306,299 Purchase of loans (44,832,836) (63,607,175) Proceeds from sales of securities available-for-sale -- 750,227 Purchase of securities available-for-sale (10,998,258) (322,763) Proceeds from maturities of securities available-for-sale 4,922,174 7,341,398 Purchase of premises and equipment and rental real estate (2,545,586) (1,627,708) Proceeds from sale of land and equipment 124,846 1,015 Other 154,804 1,131 ------------ ------------ Net cash (used in) investing activities (34,106,955) (23,157,576) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 5,693,593 11,005,573 (Decrease) in advances from borrowers for taxes and insurance (641,139) (813,737) Net change in short-term borrowings 4,000,000 (250,000) Proceeds from other borrowed funds 17,500,000 34,000,000 Payments on other borrowings (6,488,765) (20,602,608) Purchase of treasury stock (3,069,494) (2,902,048) Dividends paid (946,580) (836,500) Issuance of common stock 1,221,846 1,231,681 ------------ ------------ Net cash provided by financing activities 17,269,461 20,832,361 ------------ ------------ Net increase (decrease) in cash (7,741,829) 1,627,814 CASH Beginning 15,168,601 19,908,902 ------------ ------------ Ending $ 7,426,772 $ 21,536,716 ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors $ 6,014,869 $ 7,462,117 Interest paid on borrowings 3,369,295 3,326,937 Income taxes 1,836,409 1,744,053
See Notes to Consolidated Condensed Financial Statements 3 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The consolidated condensed financial statements for the three and nine month periods ended September 30, 2003 and 2002 are unaudited. In the opinion of the management of North Central Bancshares, Inc. (the "Company" or the "Registrant") these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results, which may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the requirements for interim financial statements. The financial statements and notes thereto should be read in conjunction with the Company's 2002 Annual Report on Form 10-K. The consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 2. EARNINGS PER SHARE The earnings per share amounts were computed using the weighted average number of shares outstanding during the periods presented. In accordance with Statement of Position No. 93-6, Employers' Accounting for Employee Stock Ownership Plans, issued by the American Institute of Certified Public Accountants, shares owned by First Federal Savings Bank of Iowa's Employee Stock Ownership Plan that have not been committed to be released are not considered to be outstanding for the purpose of computing earnings per share. For the three-month period ended September 30, 2003, the weighted average number of shares outstanding for basic and diluted earnings per share computation were 1,580,936 and 1,669,799, respectively. For the nine-month period ended September 30, 2003, the weighted average number of shares outstanding for basic and diluted earnings per share computation were 1,582,228 and 1,679,038, respectively. For the three-month period ended September 30, 2002, the weighted average number of shares outstanding for basic and diluted earnings per share computation were 1,648,583 and 1,747,428, respectively. For the nine-month period ended September 30, 2002, the weighted average number of shares outstanding for basic and diluted earnings per share computation were 1,644,583 and 1,745,906, respectively. 3. DIVIDENDS On August 29, 2003, the Company declared a cash dividend on its common stock, payable on October 7, 2003 to stockholders of record as of September 16, 2003, equal to $0.21 per share. 4. GOODWILL As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" that eliminated the amortization and required a goodwill impairment test. The Company completed the goodwill impairment test during the year ended December 31, 2002 and has determined that there has been no impairment of goodwill. As of September 30, 2003 and December 31, 2002, the Company had intangible assets of $4,970,800, all of which has been determined to be goodwill. There was no goodwill impairment loss or amortization related to goodwill during the three and nine months ended September 30, 2003 or September 30, 2002. 5. 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 4 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 reported net income and earnings per common share would have been decreased to the pro forma amounts shown below:
Three Months Ended Three Months Ended September 30, 2003 September 30, 2002 ------------------ ------------------ Net income, as reported $ 1,494,433 $ 1,707,998 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (8,731) (27,315) ----------- ----------- Pro forma net income $ 1,485,702 $ 1,680,683 =========== =========== Earnings per common share - basic: As reported $ 0.95 $ 1.04 Pro forma 0.94 1.02 Earnings per common share - assuming dilution: As reported $ 0.90 $ 0.98 Pro forma 0.89 0.96
Nine Months Ended Nine Months Ended September 30, 2003 September 30, 2002 ------------------ ------------------ Net income, as reported $ 4,524,518 $ 4,362,582 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (61,725) (83,202) ----------- ----------- Pro forma net income $ 4,462,793 $ 4,279,380 =========== =========== Earnings per common share - basic: As reported $ 2.86 $ 2.65 Pro forma 2.82 2.60 Earnings per common share - assuming dilution: As reported $ 2.69 $ 2.50 Pro forma 2.66 2.45
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 2003 and 2002, respectively: dividend rate of 2.3% and 3.5%, price volatility of 20% and 20%, risk-free interest rate of 3.70% and 4.92%, and expected lives of 8 years for all periods. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXPLANATORY NOTE This Quarterly Report on Form 10-Q contains forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include changes in general, economic, market, legislative and regulatory conditions, and the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments. The Company's actual results may differ from the results discussed in the forward-looking statements. The Company disclaims any obligation to publicly announce future events or developments that may affect the forward-looking financial statements contained herein. FINANCIAL CONDITION Total assets increased $22.0 million, or 5.4%, to $425.8 million at September 30, 2003 compared to $403.9 million at December 31, 2002. Interest-bearing cash decreased $7.9 million, or 60.3%, to $5.2 million at September 30, 2003 from $13.0 million at December 31, 2002. Securities available for sale increased $5.5 million, or 24.3%, to $28.4 million at September 30, 2003 from $22.8 million at December 31, 2002, primarily invested in mortgage backed securities. Total loans receivable, net, increased by $24.4 million to $365.5 million at September 30, 2003 from $341.1 million at December 31, 2002, due primarily to originations of $57.3 million of first mortgage loans secured primarily by one-to four-family residences, purchases of $44.8 million of first mortgage loans secured primarily by one to four family, multifamily and commercial real estate and originations of $20.6 million of second mortgage loans secured primarily by one-to-four-family residences. These originations and purchases were offset in part by payments and prepayments of loans of approximately $102.7 million. Foreclosed real estate increased $688,000, or 89.5% to $1.5 million at September 30, 2003 from $769,000 at December 31, 2002. At September 30, 2003, foreclosed real estate consisted of sixteen one-to-four family properties and one commercial real estate property in the state of Washington. Total deposits increased $5.7 million, or 2.1%, to $282.7 million at September 30, 2003 from $277.0 million at December 31, 2002, reflecting increases primarily in checking, savings accounts, money market accounts and public fund certificates of deposits, offset by a decrease in retail certificates of deposit accounts. The increase in the Bank's deposits was primarily due to an increase in the deposits at the Bank's Ankeny office, which moved to a permanent location in the first quarter of 2003. Other borrowings, primarily Federal Home Loan Bank ("FHLB") advances, increased by $15.0 million to $100.0 million at September 30, 2003 from $85.0 million at December 31, 2002, as management elected to increase borrowings to fund asset growth. Total stockholders' equity increased $1.8 million, to $40.6 million at September 30, 2003 from $38.7 million at December 31, 2002. See "Capital." CAPITAL The Company's total stockholders' equity increased by $1.8 million to $40.6 million at September 30, 2003 from $38.7 million at December 31, 2002, primarily due to earnings and stock issued in connection with stock options exercised, which were offset in part by stock repurchases and dividends declared. The changes in stockholders' equity were also due to a decrease in the unearned shares from First Federal Savings Bank of Iowa's Employee Stock Ownership Plan (the "ESOP") to $205,000 at September 30, 2003 from $318,000 at December 31, 2002. The decrease in unearned shares resulted from the release of shares within the ESOP to employees of First Federal Savings Bank of Iowa (the "Bank"). 6 The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum tangible, leverage (core) and risk-based capital requirements. As of September 30, 2003, the Bank exceeded all of its regulatory capital requirements. The Bank's required, actual and excess capital levels as of September 30, 2003 were as follows: (dollars in thousands) Tangible capital: Capital level $ 31,836 7.56% Less Requirement 6,314 1.50% -------- ----- Excess $ 25,522 6.06% ======== ===== Core capital: Capital level $ 31,836 7.56% Less Requirement 16,837 4.00% -------- ----- Excess $ 14,999 3.56% ======== ===== Risk-based capital: Capital level $ 34,978 12.31% Less Requirement 22,735 8.00% -------- ----- Excess $ 12,243 4.31% ======== ===== LIQUIDITY The Company's primary sources of funds are cash provided by operating activities (including net income), certain financing activities (including increases in deposits and proceeds from borrowings) and certain investing activities (including principal payments on loans and maturities, calls and proceeds from the sale of securities). During the first nine months of 2003 and 2002, principal payments, repayments and proceeds from sale of loans totaled $149.2 million and $116.3 million, respectively. The net increase in deposits during the first nine months of 2003 and 2002 totaled $5.7 million and $11.0 million, respectively. The proceeds from borrowed funds during the nine months ended September 30, 2003 and 2002 totaled $17.5 million and $34.0 million, respectively. The net increase in short term borrowings for the nine months ended September 30, 2003 totaled $4.0 million. During the first nine months of 2003 and 2002, the proceeds from the maturities, calls and sales of securities totaled $4.9 million and $8.1 million, respectively. Cash provided from operating activities during the first nine months of 2003 and 2002 totaled $9.1 million and $4.0 million, respectively. The Company's primary use of funds is cash used to originate and purchase loans, purchase of securities available for sale, repayment of borrowed funds and other financing activities. During the first nine months of 2003 and 2002, the Company's gross purchases and origination of loans totaled $175.0 million and $145.7 million, respectively. The purchase of securities available for sale for the nine months ended September 30, 2003 and 2002 totaled $11.0 million and $323,000, respectively. The repayment of borrowed funds during the first nine months of 2003 and 2002 totaled $6.5 million and $20.6 million, respectively. The net decrease in short term borrowings during the nine months ended September 30, 2002 totaled $250,000. For additional information about cash flows from the Company's operating, financing and investing activities, see "Statements of Cash Flows in the Condensed Consolidated Financial Statements." The OTS regulations require the Company to maintain sufficient liquidity to ensure its safe and sound operation. The Company has a line of credit agreement in the amount of $3.0 million with an unaffiliated bank. As of September 30, 2003, there were no borrowings outstanding on this line of credit. The Company may use this line of credit to fund stock repurchases in the future and for general corporate purposes. Stockholders' equity totaled $40.6 million at September 30, 2003 compared to $38.7 million at December 31, 2002, reflecting the Company's earnings, stock issued, stock repurchases, the amortization of the unallocated portion of shares held by the ESOP, dividends declared on common stock and the change in the accumulated other comprehensive income (loss). The Company repurchased 90,400 shares of common stock during the nine months ended September 30, 2003 at an average price of $33.95. On July 7, 2003, the Company paid a quarterly cash dividend of $0.21 per share on common stock outstanding as of the close of business on June 16, 2003, aggregating $335,000. On August 29, 2003, the Company declared a quarterly cash dividend of $0.21 per share payable on October 7, 2003 to shareholders of record as of the close of business on September 16, 2003, aggregating $338,000. 7 RESULTS OF OPERATIONS Interest Income. Interest income decreased by $594,000 to $6.3 million for the three months ended September 30, 2003 compared to $6.9 million for the three months ended September 30, 2002. 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 interest bearing assets. The yield on interest earning assets decreased to 6.25% for the three months ended September 30, 2003 from 7.14% for the three months ended September 30, 2002. The decrease in average yields was due primarily to a decrease in the average yield on loans, securities available for sale and interest-bearing cash. The average yield on loans decreased to 6.64% for the three months ended September 30, 2003 from 7.56% for the three months ended September 30, 2002. The average yield on securities available for sale decreased to 3.64% for the three months ended September 30, 2003 from 4.51% for the three months ended September 30, 2002. The average yield on interest bearing cash decreased to 1.13% for the three months ended September 30, 2003 from 1.32% for the three months ended September 30, 2002. The decrease in the average yields on assets was primarily due to decreases in market interest rates. The average balance of interest earning assets increased $17.4 million to $405.1 million for the three months ended September 30, 2003 from $387.6 million for the three months ended September 30, 2002. This increase was primarily due to higher levels of loans and securities available for sale, offset in part by a decrease in interest bearing cash. The increase in the average balance of loans generally reflects originations over the past twelve months of first mortgage loans, second mortgage loans and purchases of first mortgage loans secured primarily by one-to four-family residential, multifamily and commercial real estate loans, offset in part by payments, sales and prepayments of loans. The increase in the average balance of securities available for sale generally reflects purchases over the past twelve months, offset in part by proceeds from the maturity of securities available for sale. See "Financial Condition." Interest income decreased by $918,000 to $19.3 million for the nine months ended September 30, 2003 compared to $20.2 million for the nine months ended September 30, 2002. 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 interest bearing assets. The yield on interest earning assets decreased to 6.42% for the nine months ended September 30, 2003 from 7.14% for the nine months ended September 30, 2002. The decrease in average yields was due primarily to a decrease in the average yield on loans, securities available for sale and interest-bearing cash. The average yield on loans decreased to 6.87% for the nine months ended September 30, 2003 from 7.62% for the nine months ended September 30, 2002. The average yield on securities available for sale decreased to 4.08% for the nine months ended September 30, 2003 from 4.76% for the nine months ended September 30, 2002. The average yield on interest bearing cash decreased to 0.93% for the nine months ended September 30, 2003 from 1.37% for the nine months ended September 30, 2002. The decrease in the average yields on assets was primarily due to decreases in market interest rates. The average balance of interest earning assets increased $23.2 million to $401.2 million for the nine months ended September 30, 2003 from $378.0 million for the nine months ended September 30, 2002. This increase was primarily due to higher levels of loans and securities available for sale. The increase in the average balance of loans generally reflects originations over the past twelve months of first mortgage loans, second mortgage loans and purchases of first mortgage loans secured primarily by one-to four-family residential, multifamily and commercial real estate loans, offset in part by payments, sales and prepayments of loans. The increase in the average balance of securities available for sale generally reflects purchases over the past twelve months, offset in part by proceeds from the maturity and sale of securities available for sale. See "Financial Condition." Interest Expense. Interest expense decreased by $477,000 to $3.1 million for the three months ended September 30, 2003 compared to $3.5 million for the three months ended September 30, 2002. The decrease in interest expense was primarily due to a decrease in the average cost of interest bearing liabilities, offset in part by an increase in the average balances of interest bearing liabilities. The average cost of interest bearing liabilities decreased to 3.24% for the three months ended September 30, 2003 from 3.90% for the three months ended September 30, 2002. The decrease in the average cost of interest bearing liabilities was due primarily to decreases in all categories of interest bearing liabilities. The average cost of NOW and money market accounts decreased to 0.48% for the three months ended September 30, 2003 from 0.87% for the three months ended September 30, 2002. The average cost of savings accounts decreased to 0.44% for the three months ended September 30, 2003 from 1.08% for the three months ended September 30, 2002. The average cost of certificates of deposit decreased to 3.95% for the three months ended September 30, 2003 from 4.65% for the three months ended September 30, 2002. The average cost of borrowed funds decreased to 4.64% for the three months ended September 30, 2003 from 8 RESULTS OF OPERATIONS (Continued) 5.26% for the three months ended September 30, 2002. The decrease in the average cost of funds was primarily due to decreases in market interest rates. The average balance of interest bearing liabilities increased $14.9 million to $374.2 million for the three months ended September 30, 2003 from $359.2 million for the three months ended September 30, 2002. This increase was due primarily to an increase in NOW accounts, money market accounts, savings accounts and borrowed funds, offset in part by a decrease in certificates of deposits. Interest expense decreased by $1.2 million to $9.4 million for the nine months ended September 30, 2003 compared to $10.5 million for the nine months ended September 30, 2002. The decrease in interest expense was primarily due to a decrease in the average cost of interest bearing liabilities, offset in part by an increase in the average balances of interest bearing liabilities. The average cost of interest bearing liabilities decreased to 3.37% for the nine months ended September 30, 2003 from 4.02% for the nine months ended September 30, 2002. The decrease in the average cost of interest bearing liabilities was due primarily to decreases in all categories of interest bearing liabilities. The average cost of NOW and money market accounts decreased to 0.61% for the nine months ended September 30, 2003 from 0.95% for the nine months ended September 30, 2002. The average cost of savings accounts decreased to 0.58% for the nine months ended September 30, 2003 from 1.20% for the nine months ended September 30, 2002. The average cost of certificates of deposit decreased to 4.11% for the nine months ended September 30, 2003 from 4.81% for the nine months ended September 30, 2002. The average cost of borrowed funds decreased to 4.67% for the nine months ended September 30, 2003 from 5.41% for the nine months ended September 30, 2002. The decrease in the average cost of funds was primarily due to decreases in market interest rates. The average balance of interest bearing liabilities increased $20.8 million to $371.2 million for the nine months ended September 30, 2003 from $350.4 million for the nine months ended September 30, 2002. This increase was due primarily to an increase in NOW accounts, money market accounts, savings accounts and borrowed funds. Net Interest Income. Net interest income before the provision for loan losses decreased by $117,000 to $3.3 million for the three months ended September 30, 2003 from $3.4 million for the three months ended September 30, 2002. The decrease is due primarily to a narrowing interest rate spread, offset in part by an increase in the average balance of interest earning assets. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) decreased to 3.01% for the three months ended September 30, 2003 from 3.24% for the three months ended September 30, 2002. Net interest income before the provision for loan losses increased by $234,000 to $9.9 million for the nine months ended September 30, 2003 from $9.7 million for the nine months ended September 30, 2002. The increase is due primarily to an increase in the average balance of interest earning assets, offset in part by a decrease in the interest rate spread. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) decreased to 3.05% for the nine months ended September 30, 2003 from 3.12% for the nine months ended September 30, 2002. 9 RESULTS OF OPERATIONS (Continued) The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the three and nine month periods ended September 30, 2003 and 2002, respectively.
For the Three Months Ended September 30, ------------------------------------------------------------------------------- 2003 2002 ------------------------------------------------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Assets: Interest-earning assets: Loans $ 363,015 $ 6,038 6.64% $ 349,615 $ 6,620 7.56% Securities available for sale 29,572 269 3.64 23,973 270 4.51 Interest bearing cash 12,493 36 1.13 14,055 47 1.32 --------- --------- ------ --------- ------- ------ Total interest-earning assets 405,080 6,343 6.25% 387,643 $ 6,937 7.14% Noninterest-earning assets 23,636 --------- ------ 20,531 ------- ------ --------- --------- Total assets $ 428,716 $ 408,174 ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings $ 67,561 $ 83 0.48% $ 61,375 $ 135 0.87% Passbook savings 28,303 31 0.44 25,286 69 1.08 Certificates of deposit 180,668 1,800 3.95 186,772 2,191 4.65 Borrowed funds 97,620 1,142 4.64 85,783 1,138 5.26 --------- --------- ------ --------- ------- ------ Total interest-bearing liabilities 374,152 $ 3,056 3.24% 359,216 $ 3,533 3.90% --------- ------ ------- ------ Noninterest-bearing liabilities 14,261 10,473 --------- --------- Total liabilities 388,413 369,689 Equity 40,303 38,485 --------- --------- Total liabilities and equity $ 428,716 $ 408,174 ========= ========= Net interest income $ 3,287 $ 3,404 ======== ======= Net interest rate spread 3.01% 3.24% ====== ====== Net interest margin 3.25% 3.51% Ratio of average interest-earning assets to ====== ====== average interest-bearing liabilities 108.26% 107.91% ====== ======
For the Nine Months Ended September 30, -------------------------------------------------------------------------------- 2003 2002 -------------------------------------------------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Assets: Interest-earning assets: Loans $ 354,680 $ 18,271 6.87% $ 334,658 $ 19,119 7.62% Securities available for sale 30,255 926 4.08 26,054 931 4.76 Interest bearing cash 16,256 113 0.93 17,318 178 1.37 --------- --------- ------ --------- --------- ------ Total interest-earning assets 401,191 $ 19,310 6.42% 378,030 $ 20,228 7.14% Noninterest-earning assets 22,515 --------- ------ 19,836 --------- ------ --------- --------- Total assets $ 423,706 $ 397,866 ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings $ 65,834 $ 303 0.61% $ 61,892 $ 441 0.95% Passbook savings 27,523 120 0.58 24,593 220 1.20 Certificates of deposit 181,404 5,580 4.11 181,705 6,537 4.81 Borrowed funds 96,487 3,369 4.67 82,223 3,326 5.41 --------- --------- ------ --------- --------- ------ Total interest-bearing liabilities 371,248 $ 9,372 3.37% 350,413 $ 10,524 4.02% --------- ------ --------- ------ Noninterest-bearing liabilities 13,008 10,196 --------- --------- Total liabilities 384,256 360,609 Equity 39,450 37,257 --------- --------- Total liabilities and equity $ 423,706 $ 397,866 ========= ========= Net interest income $ 9,938 $ 9,704 ========= ========= Net interest rate spread 3.05% 3.12% ====== ====== Net interest margin 3.30% 3.42% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 108.06% 107.88% ====== ======
10 RESULTS OF OPERATIONS (Continued) Provision for Loan Losses. The Company's provision for loan losses was $75,000 and $56,000 for the three months ended September 30, 2003 and 2002, respectively. The Company's provision for loan losses was $195,000 and $326,000 for the nine months ended September 30, 2003 and 2002, respectively. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level, which is deemed to be appropriate, based upon an assessment of a number of factors. These factors include prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Bank's portfolio, which includes a significant amount of multi-family and commercial real estate loans, substantially all of which are purchased and are collateralized by properties located outside of the Bank's market area, and other factors related to the collectibility of the Bank's loan portfolio. The net charge offs were $143,000 for the nine months ended September 30, 2003 as compared to net charge offs of $89,000 for the nine months ended September 30, 2002. The resulting allowance for loan losses was $3.2 million, $3.1 million and $3.1 million at September 30, 2003, December 31, 2002 and September 30, 2002, respectively. The allowance for loan losses as a percentage of total loans receivable was 0.86%, 0.90% and 0.91% at September 30, 2003, December 31, 2002 and September 30, 2002, respectively. The level of nonperforming loans was $456,000 at September 30, 2003, $643,000 at December 31, 2002 and $599,000 at September 30, 2002. The allowance for loan losses is management's best estimates of probable losses inherent in the loan portfolio as of the balance sheet date. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, identification of additional problem loans, and other factors, both within and outside of management's control. Noninterest Income. Total noninterest income increased by $255,000 to $1.8 million for the three months ended September 30, 2003 from $1.5 million for the three months ended September 30, 2002. The increase is due to increases in fees and service charges, abstract fees and mortgage banking income. Fees and service charges increased $20,000, primarily due to fees associated with checking accounts, including overdraft fees, offset in part by a decrease in loan prepayment fees. Abstract fees increased $85,000, primarily due to increased sales volume. Sales volume increased in part due to a general increase in real estate activity. Mortgage banking income increased $144,000 due in part to an increase in loan originations resulting from lower interest rates and increased pricing. Total noninterest income increased by $646,000 to $4.9 million for the nine months ended September 30, 2003 from $4.2 million for the nine months ended September 30, 2002. The increase is due to increases in fees and service charges, abstract fees and mortgage banking income. Fees and service charges increased $25,000, primarily due to fees associated with checking accounts, including overdraft fees, offset in part by a decrease in loan prepayment fees. Abstract fees increased $215,000, primarily due to increased sales volume. Sales volume increased in part due to a general increase in real estate activity. Mortgage banking income increased $378,000 due in part to an increase in loan originations resulting from lower interest rates and increased pricing. Noninterest Expense. Total noninterest expense increased by $479,000 to $2.8 million for the three months ended September 30, 2003 from $2.3 million for the three months ended September 30, 2002. The increase is due primarily to increases in salaries and employee benefits, premises and equipment, data processing and other expenses. The increase in salaries and employee benefits was due in part to increases in defined benefit plan costs, employee stock ownership plan costs, an increase in personnel in the Ankeny and Clive, Iowa offices and ordinary salary increases. The increase in premises and equipment was due in part to increased costs associated with the Ankeny and Clive, Iowa offices. The increase in data processing costs was due in part to increases in internet banking costs, consulting costs and ordinary cost increases. The increase in other expenses were due in part to increases in marketing costs in conjunction with a direct mail checking account promotion, increased property taxes associated with Northridge Apartments Limited Partnership due to the completion of a property tax abatement program and increased costs associated with the opening of a second multifamily apartment building in March, 2003. Other increases in noninterest expense were partially due to the Bank relocating its temporary Ankeny office to a newly constructed 5,000 square foot branch office in February, 2003 and the opening of a temporary office in Clive, Iowa 11 RESULTS OF OPERATIONS (Continued) in August, 2003. The Company's efficiency ratio for the three months ended September 30, 2003 and 2002 was 54.65% and 46.43%, respectively. The Company's ratio of noninterest expense to average assets for the three months ended September 30, 2003 and 2002 was 2.58% and 2.24%, respectively. Total noninterest expense increased by $920,000 to $8.0 million for the nine months ended September 30, 2003 from $7.1 million for the nine months ended September 30, 2002. The increase is due primarily to increases in salaries and employee benefits, premises and equipment, data processing and other expenses. The increase in salaries and employee benefits was due in part to increases in defined benefit plan costs, employee stock ownership plan costs, an increase in personnel in the Ankeny, Iowa and Clive, Iowa offices and ordinary salary increases. The increase in premises and equipment was due in part to increased costs associated with the Ankeny and Clive, Iowa offices. The increase in data processing was due in part to increases in internet banking costs, consulting costs and ordinary cost increases. The increase in other expenses was due in part to increases in marketing costs in conjunction with a direct mail checking account promotion, increased property taxes associated with Northridge Apartments Limited Partnership due to the completion of a property tax abatement program and increased costs associated with the opening of a second multifamily apartment building in March, 2003. Other increases in noninterest expense were partially due to the Bank relocating its temporary Ankeny office to a newly constructed 5,000 square foot branch office in February, 2003 and the opening of a temporary office in Clive, Iowa in August, 2003. The Company's efficiency ratio for the nine months ended September 30, 2003 and 2002 was 53.89% and 50.68%, respectively. The Company's ratio of noninterest expense to average assets for the nine months ended September 30, 2003 and 2002 was 2.51% and 2.36%, respectively. Income Taxes. Income taxes decreased by $147,000 to $721,000 for the three months ended September 30, 2003 as compared to $868,000 for the three months ended September 30, 2002, primarily due to a decrease in net income before income taxes, and federal income tax credits from Northridge Apartments Limited Partnership II. Income taxes decreased by $71,000 to $2.1 million for the nine months ended September 30, 2003 as compared to $2.2 million for the nine months ended September 30, 2002, primarily due to federal income tax credits from Northridge Apartments Limited Partnership II and a one time state tax credit which decreased income tax expense by approximately $100,000, partially offset by an increase in net income before income taxes and a decrease in nontaxable income. Net Income. Net income decreased by $214,000 to $1.5 million for the three months ended September 30, 2003, as compared to $1.7 million for the same period in 2002. Net income increased by $162,000 to $4.5 million for the nine months ended September 30, 2003, as compared to $4.4 million for the same period in 2002. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In management's opinion, there has not been a material change in market risk from December 31, 2002 as reported in Item 7A of the Annual Report on Form 10-K. ITEM 4. CONTROLS AND PROCEDURES Management, including the Company's Chief Executive Officer and Treasurer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the 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 changes in the Company's internal control over financial reporting identified in connection with the evaluation that occurred during the Company's last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company's internal control over financial reporting. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2003 Exhibit 32.1 Certification pursuant to Section 906 of the Sarbanes Oxley Act of 2003 Exhibit 99.1 Press Release, dated July 25, 2003 (regarding 2nd quarter earnings) Exhibit 99.2 Press Release, dated August 29, 2003 (regarding declaration of dividend) (b) Reports on Form 8-K The Company filed a Form 8-K on July 25, 2003 furnishing to the Commission a press release announcing the Company's earnings for the period ended June 30, 2003. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTH CENTRAL BANCSHARES, INC. DATE: November 13, 2003 BY: /s/ David M. Bradley -------------------- David M. Bradley, Chairman, President and Chief Executive Officer DATE: November 13, 2003 BY: /s/ John L. Pierschbacher ------------------------- John L. Pierschbacher Principal Financial Officer 15