-----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, MNktZRLtGpWAOHoZpmAgvvcIHMV75hHwhTTq5WLyshZqbPOm18+Da1KcFZyJ8gup lCZdg+f18FMyiRMJ388wJw== 0000927797-04-000093.txt : 20040329 0000927797-04-000093.hdr.sgml : 20040329 20040329132542 ACCESSION NUMBER: 0000927797-04-000093 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040329 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: 04695443 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 ncb10k_12-03.txt FORM 10-K FOR YEAR ENDED 12-31-03 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2003 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 such 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2). 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, 2003 was $50,907,908. As of March 8, 2004, there were issued and outstanding 1,588,280 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Proxy Statement for the Registrant's 2004 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof. 2. Portions of the 2003 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 of Iowa 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 owns 100% of the outstanding stock of the Bank. The Holding Company's stock is quoted on the National Market System of the Nasdaq Stock Market under the symbol "FFFD". 2 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 the Bank. The Holding Company's executive offices are located at the home office of the Company at 825 Central Avenue, Fort Dodge, Iowa. The Holding Company's telephone number is (515) 576-7531. First Federal Savings Bank of Iowa The Bank is a federally chartered savings bank that conducts its operations from its main office located in Fort Dodge, Iowa and nine branch offices located in Iowa. Seven of the Bank's branches are located in north central and central Iowa, in the cities of Fort Dodge, Nevada, Ames, Perry, Ankeny and Clive. Three of the Bank's offices are located 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, 2003, the Bank had total assets of $424.3 million, total deposits of $284.7 million, and total shareholders' equity of $37.9 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. The Bank's website address is www.firstfederaliowa.com. 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 for the month of December 2003 for Webster County was 4.2%, for Story County 2.8%, for Dallas County 2.9%, for Polk County 3.6%, for Henry County 6.2% and for Des Moines County 5.5%. These compare to the national rate of 5.7% and the State of Iowa rate of 4.4%. Due to the type of 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 one-to-four family, 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 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 3 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 primarily 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 real estate loans. At December 31, 2003, the Company's total loans receivable totalled $367.4 million, of which $173.9 million, or 47.4%, were one-to four-family residential real estate first mortgage loans, $70.0 million, or 19.0%, were multifamily real estate first mortgage loans, primarily purchased by the Company and $69.6 million, or 18.9%, were commercial real estate first mortgage loans, primarily purchased by the Company. Consumer loans, consisting primarily of automobile loans and second mortgage loans, totalled $53.9 million, or 14.7%, of the Company's loan portfolio. Savings banks, 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, 2003, it was the Company's policy to limit loans to one borrower to $3.0 million, with higher limits subject to board approval. These limitations are less than the regulatory guidelines. At December 31, 2003, the Company's largest aggregate outstanding loans to one borrower was $3.3 million and the second largest borrower had an aggregate balance of $3.1 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, --------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- 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 four-family residential(1) . $173,889 47.33% $ 148,751 43.17% $161,549 51.81% $176,615 54.78% $164,057 56.23% Multifamily .................... 69,963 19.04 70,779 20.54 74,396 23.86 75,858 23.53 73,417 25.16 Commercial .................... 69,609 18.95 71,251 20.68 25,722 8.25 24,127 7.48 17,723 6.07 -------- ------ --------- ------ -------- ----- -------- ------ -------- ------ Total first mortgage loans .. 313,461 85.32 290,781 84.39 261,667 83.91 276,600 85.79 255,197 87.47 -------- ------ --------- ------ -------- ----- -------- ------ -------- ------ Consumer loans: Automobiles ................. 9,801 2.67% 10,115 2.94% 9,406 3.02% 8,803 2.73% 8,003 2.74% Second mortgage(2) .......... 37,601 10.23 38,239 11.10 35,619 11.42 31,910 9.90 23,604 8.09 Other(3) .................... 6,533 1.78 5,438 1.58 5,134 1.65 5,095 1.58 4,956 1.70 -------- ------ --------- ------ -------- ----- -------- ------ -------- ------ Total consumer loans ........ 53,935 14.68 53,792 15.61 50,159 16.09 45,808 14.21 36,563 12.53 -------- ------ --------- ------ -------- ----- -------- ------ -------- ------ Total loans receivable ...... $367,396 100.00% $ 344,573 100.00% $311,826 100.00% $322,408 100.00% $291,760 100.00% Less: Undisbursed portion of construction loans .......... $ 1,855 0.50% $ 929 0.27% $ 1,055 0.34% 1,493 0.45% $ 1,982 0.68% Unearned loan (premium) discount (696) (0.19) (623) (0.18) (37) (0.01) 69 0.02 136 0.05 Net deferred loan origination fees(costs) ................. 113 0.03 3 0.00 (56) (0.02) (23) (0.01) 106 0.04 Allowance for loan losses ...... 3,165 0.86 3,118 0.90 2,883 0.92 2,843 0.88 2,777 0.95 -------- ------ --------- ------ -------- ----- -------- ------ -------- ------ Total loans receivable, net . $362,959 98.80% $ 341,146 99.01% $307,981 98.77% $318,026 98.64% $286,759 98.29% ======== ===== ========= ====== ======== ===== ======== ===== ======== =====
- ----------------------------------- (1) Includes interest-only construction loans that convert to permanent loans. (2) Second mortgage loans included $4.9 million, $4.0 million, $2.0 million, $1.6 million and $1.5 million of nonowner-occupied residential first mortgage loans at December 31, 2003, 2002, 2001, 2000 and 1999, respectively. (3) Other consumer loans included $2.1 million, $1.9 million, $1.9 million, $1.5 million and $1.6 million of commercial mortgage loans at December 31, 2003, 2002, 2001, 2000 and 1999, 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, 2003. 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, 2003 -------------------- 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) . $ 29,564 $ 14,622 $ 51,996 $ 40,425 $ 36,716 $ 566 $173,889 Multifamily ....... 12,951 20,449 25,645 10,074 844 -- 69,963 Commercial ........ 6,409 15,143 23,531 13,446 11,080 -- 69,609 Consumer loans (2) .. 5,511 14,292 22,719 8,813 2,600 -- 53,935 -------- -------- -------- -------- -------- ------ -------- Total .......... $ 54,435 $ 64,506 $123,891 $ 72,758 $ 51,240 $ 566 $367,396 ======== ======== ======== ======== ======== ====== ========
(1) One-to four-family loans include $34.2 million of loans with repricing periods greater than 5 years that have been classified as fixed rate loans. $27.3 million of these loans with repricing periods less than 5 years have been classified as adjustable rate loans. (2) Includes second mortgage loans of $37.6 million at December 31, 2003. The following table sets forth the dollar amounts of all fixed rate and adjustable rate loans in each loan category at December 31, 2003 due after December 31, 2004. Due After December 31, 2004 --------------------------- Fixed Adjustable Total ----- ---------- ----- (In thousands) First mortgage loans: One-to four-family residential(1) ...... $ 79,972 $ 64,353 $144,325 Multifamily ............................ 2,542 54,470 57,012 Commercial ............................. 40,436 22,764 63,200 Consumer loans (2) ......................... 48,298 126 48,424 -------- -------- -------- Total $171,248 $141,713 $312,961 ======== ======== ======== ________________________ (1) One-to four-family loans include $34.2 million of loans with repricing periods greater than 5 years have been classified as fixed rate loans. (2) Includes second mortgage loans of $34.8 million at December 31, 2003. 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 2003, 46.1% of the Company's residential real estate loans had fixed rates, and 53.9% 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 in excess of 15 years in the secondary mortgage market. For the year ended December 31, 2003, the Company sold $50.2 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. 6 Originations of one-to-four family fixed-rate first mortgage loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, the Company's interest rate gap position, and loan products offered by the Company's competitors. The Company's one-to four-family fixed-rate first mortgage loans amortize on a monthly basis with principal and interest due each month. The Company also offers one-to-four family adjustable-rate first mortgage loans that convert to adjustable-rate loans that adjust on an annual basis after the initial fixed rate term. The initial fixed term of these loans are primarily 5 and 7 years and 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. At December 31, 2003, the Company offered 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 $93.7 million, or 25.4%, of the Company's total loan portfolio at December 31, 2003. 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 2003 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 97%; 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 $139.6 million, or 38.0%, of the Company's total loan portfolio at December 31, 2003. Of such loans, $121.5 million, or 87.1%, were purchased or originated by the Company and were secured by properties outside the State of Iowa (the "out of state" properties). 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 $1.0 million 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 $1.0 million are approved by the Chief Executive Officer and Chief Operating Officer and ratified by the Board of Directors and are subject to the same underwriting standards as loans originated by the Company. Before a loan is purchased, the Company obtains a copy of the original loan application, certified rent rolls, the original title insurance policy an original appraisal 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. $15.4 million, or 12.7%, of out of 7 state multifamily and commercial real estate loans are serviced by the Bank. $106.1 million, or 87.3%, 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 is 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, 2003, consumer loans totalled $53.9 million, of which second mortgage loans totalled $37.6 million, or 10.2%, 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 generally 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 90%. 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 up to 90% 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, 2003, automobile loans totalled $9.8 million, or 2.7% of the Company's total loan portfolio. In addition, the Company also makes other types of consumer loans, including unsecured signature loans for various purposes. At December 31, 2003, other consumer loans totalled $6.5 million, or 1.8% of the Company's total loan portfolio. Included in the other consumer loans are unsecured consumer loans which totaled $523,000, or 0.1% of the Company's total loan portfolio. The minimum loan amount for unsecured signature loans is $2,000, the maximum loan amount for such loans is generally $7,500, and the average balance of such loans is approximately $2,000. The Company originates a limited number of commercial business loans, which the Company includes with its consumer loan portfolio for reporting purposes. Such loans are generally secured and are originated for any business purpose, such as for the purchase of business equipment. The maximum loan amount for such loans is approximately $7,500. The Company's business plan calls for an increase in consumer lending for the foreseeable future, particularly second mortgage lending. The Company 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, 2003, $201,000, or 0.40%, 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 reviews the loan application file for accuracy and completeness, and verifies the information provided. Pursuant to the Company's written loan policies, two members of management, including at least one member of 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. 8 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, 2003, the Company had outstanding commitments to originate $1.3 million of loans. This amount does not include commitments to purchase, undisbursed overdraft loan privileges, undisbursed home equity line of credit or the unfunded portion of loans in process. Purchased or Out of State Originated Loans. The Company's loan portfolio contains $138.4 million of loans secured by out of state properties. These loans represented 37.7% of the Company's total loan portfolio at December 31, 2003. 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, 2003, the Company's multifamily residential and commercial real estate loans had an average balance of $655,000 and the largest loan had a principal balance of $2.4 million. As of December 31, 2003 there were no multifamily or commercial real estate loans that were more than 90 days past due. To supplement its origination of one-to four-family first mortgage loans, the Company also purchases first mortgage loans secured by one-to four-family residences out of state. At December 31, 2003, $16.9 million, or 4.6%, of the Company's total loan portfolio consisted of purchased one-to four-family loans. As of December 31, 2003 there were no purchased one-to four-family first mortgage loans that were more than 90 days past due. 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. $16.4 million, or 11.9%, of out of state loans are serviced by the Bank. $121.9 million, or 88.1%, of the out of state loans are serviced by the originating financial institution or mortgage company. Although the Company reviews each purchased loan using the Company's underwriting criteria for originations and a Company officer or director performs an on-site inspection of each purchased loan, the Company is dependent on the servicer of the loan for ongoing collection efforts and collateral review. In addition, the Company purchases loans with a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates that may differ from those offered at the time by the Company in connection with loans the Company originates. Finally, the market areas in which the properties which secure the purchased loans are located are subject to economic and real estate market conditions that may significantly differ from those experienced in the Company's market areas. If economic conditions continue to limit the Company's opportunities to originate loans in its market areas, the Company may increase its investment in out of state mortgage loans. There can be no assurance, however, that economic conditions in these out of state areas will not deteriorate in the future resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas. 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, 2003. State Balance as of Percentage as of ----- December 31, 2003 December 31, 2003 ----------------- ----------------- (In thousands) Arizona $ 3,110 2.2% California 36,703 26.5 Colorado 16,710 12.1 Georgia 7 0.0 Illinois 4,357 3.1 Indiana 3,474 2.5 Kansas 723 0.5 Michigan 3,011 2.2 Minnesota 12,121 8.8 Missouri 8,983 6.5 Montana 7 0.0 Nebraska 5,780 4.2 Nevada 1,667 1.2 North Carolina 546 0.4 Ohio 1,023 0.7 Oregon 8,799 6.4 South Dakota 1,705 1.2 Tennessee 60 0.0 Texas 5,468 4.0 Utah 4,237 3.1 Virginia 3 0.0 Washington 5,273 3.8 Wisconsin 14,629 10.6 --------- ----- Total $ 138,396 100.0% ========= ===== 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, 2003 2002 2001 ---- ---- ---- (In thousands) Total loans receivable at beginning of period $ 344,574 $ 311,826 $ 322,408 --------- --------- --------- Originations: First mortgage loans: One-to four-family residential ........... 117,916 84,143 83,270 Multifamily .............................. 3,491 -- -- Commercial ............................... 1,244 264 -- Consumer loans: Automobile ............................... 7,288 8,573 8,003 Second mortgage .......................... 25,857 28,577 27,033 Other .................................... 4,482 4,303 4,339 -------- -------- -------- Total originations: .................... 160,278 125,860 122,645 Loan Purchases: First mortgage one-to four-family ........ 13,001 5,104 1,865 First mortgage multifamily ............... 20,545 22,891 20,876 First mortgage commercial ................ 11,540 56,434 5,043 Loan Sales: First mortgage-- one-to four-family ...... (48,188) (52,899) (49,309) Transfer of mortgage loans (to) ............. (954) (107) (889) foreclosed real estate Repayments .................................. (133,400) (124,535) (110,813) -------- -------- -------- Net loan activity ........................... 22,822 32,748 (10,582) -------- -------- -------- Total loans receivable at end of period $ 367,396 $ 344,574 $ 311,826 ========= ========= =========
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, 2003, the Company had $113,000 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 and loan prepayment fees. The Company recognized fees and service charges of $2.9 million, $2.4 million and $2.0 million for the fiscal years ended December 31, 2003, 2002 and 2001, respectively. Investment Activities At December 31, 2003, 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, 2003, $237,000, or 4.6%, 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 $2.4 million, or 47.4% 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, 2003 2002 2001 ---- ---- ---- (In thousands) Investment securities: U.S. Government agencies (1) .. $ -- $ -- $ 1,003 Mortgage-backed securities .... 9,023 4,026 6,331 State and Local Obligations (1) 5,133 6,073 5,952 FHLB stock .................... 4,778 4,478 4,429 Mutual Fund ................... 1,989 2,000 2,002 Equity securities(2) .......... 6,029 6,257 11,649 ------- ------- ------- Total investment securities . 26,952 22,834 31,366 Interest-earning deposits ..... 7,125 13,026 17,650 ------- ------- ------- Total investments ........... $34,077 $35,860 $49,016 ======= ======= ======= ______________________________________ (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, 2003.
At December 31, 2003 -------------------- 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 $ - -% $ 94 5.60% $1,570 5.80% $7,358 4.66% State and Local Obligations(1) 237 4.23 2,431 4.62 1,759 4.97 706 6.27 Mutual Fund............ - - - - - - - - FHLB Stock............. - - - - - - - - Common Stock........... - - - - - - - - Preferred Stock-FNMA(2) - - - - - - - - Preferred Stock-FHLMC(2) - - - - - - - - ------ ---- ------ ---- ------ ---- ------ ---- Total securities available for sale............... . $ 237 4.23% $2,525 4.66% $3,329 5.36% $8,064 4.80% Interest-bearing deposits. 7,125 1.11 - - - - - - ------ ---- ------ ---- ------ ---- ------ ---- Total investments.... $7,362 1.21% $2,525 4.66% $3,329 5.36% $8,064 4.80% ====== ==== ====== ==== ====== ==== ====== ====
Total ----- Annualized Average Weighted Carrying Fair Life in Average Value Value Years Yield ----- ----- ----- ----- (Dollars in thousands) Investment securities: Mortgage-backed securities $ 9,022 $ 9,022 2 4.87% State and Local Obligations(1) 5,133 5,133 3 4.94 Mutual Fund............ 1,990 1,990 2.18 FHLB Stock............. 4,778 4,778 3.00 Common Stock........... 4 4 - Preferred Stock-FNMA(2) 1,010 1,010 5.81 Preferred Stock-FHLMC(2) 5,015 5,015 3.75 ------- ------- ---- Total securities available for sale............... . $26,952 $26,952 4.18% Interest-bearing deposits. 7,125 7,125 1.11 ------- ------- ---- Total investments.... $34,077 $34,077 3.53 ======= ======= ====
(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 and calls 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 2003, 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 noninterst-bearing demand accounts, 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 $3.3 million at December 31, 2003, a reduction of $2.0 million from December 31, 2002. Historically, 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. Beginning fiscal year 2004, the Company's Board approved acceptance of deposits by these methods. Currently, however, the Company does not have any of these types of deposits. Deposit Portfolio. Deposits with the Company as of December 31, 2003, 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 $ 9,161 3.23% 0.17 None NOW accounts 50 41,602 14.65 0.30 None Savings accounts 25 27,765 9.78 0.88 None Money Market savings 2,500 25,785 9.08 Certificates of Deposit ----------------------- 0.79 1-3 months Fixed term, fixed rate $ 1,000 $ 237 0.08 1.11 4-6 months Fixed term, fixed rate 1,000 1,998 0.70 1.56 7-9 months Fixed term, fixed rate 1,000 805 0.28 1.77 10-12 months Fixed term, fixed rate 1,000 20,389 7.18 2.89 13-24 months Fixed term, fixed rate 1,000 56,159 19.79 3.84 25-36 months Fixed term, fixed rate 1,000 25,541 8.99 4.23 37-48 months Fixed term, fixed rate 1,000 5,054 1.78 5.16 49-60 months Fixed term, fixed rate 1,000 65,945 23.22 5.72 61 months or greater Fixed term, fixed rate 1,000 3,346 1.18 1.00 Various Variable rate 100 177 0.06 -------- ------ Total deposits $283,964 100.00% ======== ======
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 12/31/03 % $ 12/31/02 % $ 12/31/01 ------- ---------- ---------- ------- ---------- ---------- ------- (Dollars in thousands) Noninterest bearing demand $ 9,161 12.32% $ 1,005 $ 8,156 18.82% $ 1,292 $ 6,864 NOW ...................... 41,602 14.37 5,228 36,374 7.72 2,607 33,767 Savings account .......... 27,765 8.06 2,072 25,693 17.44 3,815 21,878 Money market savings ..... 25,785 8.58 2,037 23,748 (15.48) (4,348) 28,096 Certificates of deposit that mature: within 12 months ..... 92,660 36.52 24,788 67,872 (28.33) (26,833) 94,705 within 12-36 months .. 56,268 (24.83) (18,587) 74,855 41.16 21,828 53,027 beyond 36 months ..... 30,723 (23.77) (9,579) 40,302 32.24 9,825 30,477 -------- ------ -------- -------- ------ -------- -------- Total .............. $283,964 2.51% $ 6,964 $277,000 3.05% $ 8,186 $268,814 ======== ==== ======== ======== ==== ======== ========
Increase Increase Increase Increase Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance 12/31/01 % $ 12/31/00 % $ 12/31/99 -------- ---------- ---------- -------- ---------- ---------- -------- (Dollars in thousands) Noninterest bearing demand $ 6,864 13.06% $ 793 $ 6,071 (5.32)% $ (341) $ 6,412 NOW ...................... 33,767 11.72 3,542 30,225 0.43 129 30,096 Passbook savings ......... 21,878 0.71 154 21,724 (15.90) (4,106) 25,830 Money market savings ..... 28,096 14.59 3,577 24,519 40.40 7,055 17,464 Certificates of deposit that mature: within 12 months ..... 94,705 1.65 1,533 93,172 (20.71) (24,343) 117,515 within 12-36 months .. 53,027 (14.43) (8,945) 61,972 17.58 9,265 52,707 beyond 36 months ..... 30,477 29.78 6,993 23,484 11.78 2,477 21,007 -------- ------ -------- -------- ------ -------- -------- Total ............. $268,814 2.93% $ 7,647 $261,167 (3.64)% $ (9,864) $271,031 ======== ==== ======== ======== ===== ======== ========
15 The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated: At December 31, 2003 2002 2001 ---- ---- ---- (In thousands) Rate 3.99% or less.............. $ 95,626 $ 68,526 $ 23,765 4.00-5.99%................. 66,580 88,840 95,618 6.00-7.99%................. 17,445 25,664 58,814 8.00% or greater........... - - 12 --------- --------- --------- $ 179,651 $ 183,030 $ 178,209 ========= ========= ========= The following table sets forth the amount and maturities of certificates of deposit at December 31, 2003.
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......... $60,997 $19,637 $ 4,919 $ 1,691 $ 8,382 $ - $ 95,626 4.00-5.99%............ 29,079 4,011 12,926 17,736 2,828 - 66,580 6.00-7.99%............ 2,584 10,621 4,154 86 - - 17,445 ------- ------- ------- ------- ------- ----- -------- $92,660 $34,269 $21,999 $19,513 $11,210 $ - $179,651 ======= ======= ======= ======= ======= ===== ========
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, 2003. This amount does not include savings accounts of greater than $100,000, which totalled approximately $1.2 million at December 31, 2003. Certificates of Deposit over Remaining Maturity $100,000 ------------------ -------- (In thousands) Three months or less............................... $ 2,848 Three through six months........................... 4,818 Six through twelve months.......................... 3,689 Over twelve months................................. 7,396 --------- Total............................................ $ 18,751 ========= 16 The following table sets forth the changes in deposits of the Company for the periods indicated: Year Ended December 31, 2003 2002 2001 ---- ---- ---- (In thousands) Net increase (decrease) before interest credited .......................... $ 607 $ 335 $(1,626) Interest credited ..................... 6,357 7,851 9,273 ------- ------- ------- Net increase in deposits .......... $ 6,964 $ 8,186 $ 7,647 ======= ======= ======= 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, ----------------------- 2003 2002 2001 ---- ---- ---- (Dollars in thousands) Weighted average rate paid on: FHLB advances ........... 4.63% 5.33% 6.01% FHLB advances: Maximum balance ......... $103,021 $ 89,561 $ 88,563 Average balance ......... 96,904 82,996 75,827 Weighted average rate paid on: Other borrowings ........ 1.00% 4.07% 2.39% Other borrowings: Maximum balance ......... $ 21 $ 275 $ 275 Average balance ......... 19 26 27 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 17 employees as of December 31, 2003. 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 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, 2003. 17 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, 2003 are approximately $151,000. The tax credits will continue for an additional three-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. A 23-unit apartment complex was completed on March 31, 2003. The tax credits for the year ended December 31, 2003 are approximately $86,000. Tax credits for 2003 were prorated from the date of occupancy by tenants. The tax credits will continue for an additional nine year period and will be approximately $127,000 annually. In addition, this building is located in an area designated as a state enterprise zone. A State of Iowa one time income tax credit of approximately $166,000 was awarded for the year ended December 31, 2003. Personnel At December 31, 2003, the Company had 118 full-time and 24 part-time employees (including the 17 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 Holding Company. For federal income tax purposes, the Holding Company, the Bank and the Bank's subsidiaries 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 Holding Company and the Bank are not currently under audit by the IRS and have 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 has now recaptured (and taken 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 Holding 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 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. Regulation of Federal Savings Associations Business Activities. The Bank derives its lending and investment powers from the HOLA, as amended, and the regulations of the OTS. 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. 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-month 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 20 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, 2003, 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: (1) a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations, (2) 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 (3) 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 and other preferred stock, mandatory convertible debt securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. In addition, up to 45% of unrealized gains on available-for-sale equity securities with a readily determinable fair value may be included in tier 2 capital. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. On May 10, 2002, the OTS adopted an amendment to its capital regulations which eliminated the interest rate risk component of the risk-based capital requirement. At December 31, 2003, 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, 2003: Capital Bank Requirements Excess Capital ---- ------------ -------------- (In thousands) Tangible capital........ $ 31,816 $ 6,270 $ 25,546 Core capital............ 31,816 12,541 19,275 Risk-based capital...... 34,958 22,554 12,404 The OTS imposes various restrictions or requirements on the Company's ability to make capital distributions, including cash dividends. A savings institution that is the subsidiary of a savings and loan holding company must file a notice with the OTS at least 30 days before making a capital distribution. The Company must file an application for prior approval if the total amount of its capital distributions, including the proposed distribution, for the applicable calendar year would exceed an amount equal to the Company's net income for that year plus the Company's retained net income for the previous two years. The OTS may disapprove of a notice of application if: o The Company would be undercapitalized following the distribution. o the proposed capital distribution raises safety and soundness concerns; or 21 o the capital distribution would violate a prohibition contained in any statute, regulation or agreement. 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 benefiting 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 engage in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded its interpretations of Sections 23A and 23B of the FRA and replaced these interpretations with Regulation W. In addition, Regulation W makes various changes to existing law regarding Sections 23A and 23B, including expanding the definition of what constitutes an affiliate subject to Sections 23A and 23B and exempting certain subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B. Under Regulation W, all transactions entered into on or before December 12, 2002, which either became subject to Sections 23A and 23B solely because of Regulation W, and all transactions covered by Sections 23A and 23B, the treatment of which will change solely because of Regulation W, became subject to Regulation W on July 1, 2003. All other covered affiliate transactions become subject to Regulation W on April 1, 2003. The Federal Reserve Board expects each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W. We do not expect that the changes made by Regulation W will have a material adverse effect on our business. 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 O 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 for 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 22 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. Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as the Bank, that are subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act. 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 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 association 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, 2003, 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. 23 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 0.12% of the total assets of the Bank. The Bank is also required to own activity based stock, which is based on 4.45% of the Bank's outstanding advances. These percentages are subject to change by the FHLB. The Bank was in compliance with this requirement with an investment in FHLB of Des Moines stock at December 31, 2003 of $4.8 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 $42.1 million. The amount of aggregate transaction accounts in excess of $42.1 million are currently subject to a reserve ratio of 10.0%. 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. 24 Prohibitions Against Tying Arrangements. Federal savings banks are subject to the prohibitions of 12 U.S.C. ss. 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution. 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 an 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. 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." The USA PATRIOT Act In response to the events of September 11th, 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. 25 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 May 9, 2003, the Secretary of the Department of Treasury, in conjunction with other bank regulators issued Joint Final Rules that provide for minimum standards with respect to customer identification and verification. These rules became effective on October 1, 2003. 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 in 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 is 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; 26 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. 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. 27 ITEM 2. PROPERTIES The Company conducts its business through its main office located in Fort Dodge, Iowa and nine full-service offices located in Fort Dodge, Nevada, Ames, Perry, Ankeny, Clive, 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, 2003. 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 $195,000, 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 multifamily apartment building with a book value of $1.4 million at December 31, 2003. The aggregate net book value of the Company's premises and equipment, on a consolidated basis was $9.8 million at December 31, 2003. Lease Location Opening Date Expiration Date Net Book Value Main Office: 825 Central Avenue 1973 N/A $ 1,320,192 Fort Dodge, Iowa Branch Offices: 201 South 25th Street 1977 N/A $ 191,244 Fort Dodge, Iowa 404 Lincolnway 1977 N/A $ 435,814 Nevada, Iowa 316 South Duff 1995 N/A $ 1,897,537 Ames, Iowa 1111-141st Street 1999 N/A $ 783,192 Perry, Iowa 321 North Third Street 1953 N/A $ 536,703 Burlington, Iowa 1010 North Roosevelt 1975 N/A $ 956,245 Burlington, Iowa 102 South Main 1991 N/A $ 243,489 Mount Pleasant, Iowa 2204 Woodlands Parkway 2003 2004(3) $ - Clive, Iowa 13150 Hickman Road 2003 N/A $ 1,393,760 Clive, Iowa 2110 SE Delaware 2003 N/A $ 1,842,159 Ankeny, Iowa First Iowa Offices: 628 Central Avenue 1982 N/A $ 21,896 Fort Dodge, Iowa 814 8th Street 1996 (1) $ 8,827 Boone, Iowa 200 1st Street South 1996 2003 (2) $ 12,992 Newton, Iowa _______________________ (1) Month to month lease. (2) New lease effective January, 2004 for a five year term. (3) Leased office space for the temporary location of the Clive 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, 2003. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The information required by this Item is incorporated herein by reference to page 62 of the Company's 2003 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 2003 Annual Report to Shareholders under the heading "Selected Financial Data," which section is included in Exhibit 13.1 to this Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated herein by reference to pages 7 through 26 of the Company's 2003 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 14 of the Company's 2003 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 27 through 60 of the Company's 2003 Annual Report to Shareholders under the headings "Independent Auditor's Report," "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements," which sections 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 ITEM 9A CONTROLS AND PROCEDURES Management, including the Company's President and Chief Executive Officer and Chief Financial Officer and Treasurer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company's President and Chief Executive Officer and Chief Financial 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. 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 23, 2004, which has been filed with the SEC and is incorporated herein by reference. The Company and the Bank have adopted a Code of Conduct and Ethics which applies to all employees, officers and directors of the Company. The Company has also adopted a Code of Ethics for Senior Financial Officers of North Central Bancshares, Inc., which applies to the Company's principal executive officer, principal financial officer, principal accounting officer or controller or person performing similar functions for the Company. The Code of Ethics for Senior Financial Officers of the Company meets the requirements of a "code of ethics" as defined by Item 406 of Regulation S-K. In accordance with Item 406 of Regulation S-K, the Code of Ethics for Senior Financial Officers is filed herewith as Exhibit 14.1 to this Annual Report on Form 10-K. 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 23, 2004, which has been filed with the SEC and is incorporated herein by reference. 30 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 23, 2004, 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, 2003.
Number of securities remaining available for future issuance Plan category Number of securities to be Weighted-average under equity compensation plans ------------- issued upon exercise of exercise price of (excluding securities reflected outstanding options outstanding options in column (a)) ------------------- ------------------- -------------- (a) (b) (c) Equity compensation plans approved by security holders.................... 167,610 $ 17.02 28,605 Equity compensation plans not approved by security holders........... - - - - 40,000 1 Total..................... 167,610 $ 17.02 68,605 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. 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 23, 2004, which has been filed with the SEC and is incorporated herein by reference. PART IV ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding the aggregate fees billed for each of the last two fiscal years by the Company's principal accountant is included under the heading "Principal Accountant Fees and Services" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 23, 2004, which has been filed with the SEC and is incorporated herein by reference. 31 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, 2003 and 2002, and the related consolidated statements of income, stockholders'equity and cash flows for the years ended December 31, 2003, 2002 and 2001, 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 2003. The Company filed a Form 8-K on October 27, 2003 furnishing to the Commission a press release announcing the Company's earnings for the period ended September 30, 2003. 32 (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 Bylaws of North Central Bancshares, Inc., as amended 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 Bylaws of First Federal Savings Bank of Iowa, as amended 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 ****** 10.12 Form of Employment Agreement between First Federal Savings Bank of Iowa and Kirk A. Yung ****** 10.13 Tax Allocation Agreement between North Central Bancshares, Inc. and Subsidiaries 13.1 Annual Report to security holders 14.1 Code of Ethics for Senior Financial Officers of North Central Bancshares, Inc. 21.1 Subsidiaries of the Registrant * 23.1 Consent of McGladrey & Pullen, LLP 31.1 Rule 13a-14(a)/15d-14(a) Certifications 32.1 Section 1350 Certifications 33 * 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)(1). 34 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 22, 2004 /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, 03/22/04 - -------------------- Director, and Chairman of the Board David M. Bradley (principal executive officer) /s/ John L. Pierschbacher Treasurer 03/22/04 - ------------------------- (principal accounting and John L. Pierschbacher financial officer) /s/ Robert H. Singer, Jr. Director 03/22/04 - ------------------------- Robert H. Singer, Jr. /s/ Melvin R. Schroeder Director 03/22/04 - ----------------------- Melvin R. Schroeder /s/ Mark M. Thompson Director 03/22/04 - -------------------- Mark M. Thompson /s/ Craig R. Barnes Director 03/22/04 - ------------------- Craig R. Barnes 35 EX-3 3 ncb10kexhibit33_12-03.txt EXHIBIT 3.3 BYLAWS OF NCB Exhibit 3.3 Bylaws of North Central Bancshares, Inc. as amended. BYLAWS OF NORTH CENTRAL BANCSHARES, INC. TABLE OF CONTENTS ARTICLE I OFFICES................................ 1 Section 1. Registered Office............................................ 1 Section 2. Additional Offices........................................... 1 ARTICLE II SHAREHOLDERS............................. 1 Section 1. Place of Meetings............................................ 1 Section 2. Annual Meetings.............................................. 1 Section 3. Special Meetings............................................. 1 Section 4. Notice of Meetings........................................... 2 Section 5. Waiver of Notice............................................. 2 Section 6. Fixing of Record Date........................................ 2 Section 7. Quorum....................................................... 3 Section 8. Conduct of Meetings.......................................... 3 Section 9. Voting; Proxies.............................................. 3 Section 10. Inspectors of Election....................................... 4 Section 11. Procedure for Nominations.................................... 4 Section 12. Substitution of Nominees..................................... 6 Section 13. New Business................................................. 6 ARTICLE III CAPITAL STOCK............................. 7 Section 1. Certificates of Stock........................................ 7 Section 2. Transfer Agent and Registrar................................. 7 Section 3. Registration and Transfer of Shares.......................... 7 Section 4. Lost, Destroyed and Mutilated Certificates................... 8 Section 5. Holder of Record............................................. 8 ARTICLE IV BOARD OF DIRECTORS........................... 8 Section 1. Responsibilities; Number of Directors........................ 8 Section 2. Qualifications............................................... 8 Section 3. Mandatory Retirement......................................... 8 Section 4. Regular and Annual Meetings.................................. 9 Section 5. Special Meetings............................................. 9 i Section 6. Notice of Meetings; Waiver of Notice......................... 9 Section 7. Conduct of Meetings.......................................... 9 Section 8. Quorum and Voting Requirements............................... 10 Section 9. Informal Action by Directors................................. 10 Section 10. Resignation.................................................. 10 Section 11. Vacancies.................................................... 10 Section 12. Compensation................................................. 10 Section 13. Amendments Concerning the Board.............................. 10 ARTICLE V COMMITTEES.............................. 11 Section 1. Standing Committees.......................................... 11 Section 2. Executive Committee.......................................... 11 Section 3. Examining and Audit Committee................................ 12 Section 4. Compensation Committee....................................... 12 Section 5. Nominating Committee......................................... 13 Section 6. Other Committees............................................. 13 ARTICLE VI OFFICERS............................... 13 Section 1. Number....................................................... 13 Section 2. Term of Office and Removal................................... 13 Section 3. Retirement................................................... 14 Section 4. Chairman of the Board........................................ 14 Section 5. President.................................................... 14 Section 6. Vice Presidents.............................................. 14 Section 7. Secretary.................................................... 14 Section 8. Other Officers and Employees................................. 15 Section 9. Compensation of Officers and Others.......................... 15 ARTICLE VII DIVIDENDS............................... 15 ARTICLE VIII AMENDMENTS.............................. 15 ii BYLAWS OF NORTH CENTRAL BANCSHARES, INC. ARTICLE I OFFICES Section 1. Registered Office. The registered office of North Central Bancshares, Inc. (the "Corporation") in the City of Fort Dodge, Iowa. Section 2. Additional Offices. The Corporation may also have offices and places of business at such other places, within or without the State of Iowa, as the Board of Directors (the "Board") may from time to time designate or the business of the Corporation may require. ARTICLE II SHAREHOLDERS Section 1. Place of Meetings. Meetings of shareholders of the Corporation shall be held at such place, within or without the State of Iowa, as may be fixed by the Board and designated in the notice of meeting. If no place is so fixed, they shall be held at the principal administrative office of the Corporation. Section 2. Annual Meetings. The annual meeting of shareholders of the Corporation for the election of directors and the transaction of any other business which may properly come before such meeting shall be held each year on a date and at a time to be designated by the Board. Section 3. Special Meetings. Special meetings of shareholders, for any purpose, may be called at any time only by the Board of Directors, the Chairman of the Board, the President, by resolution of at least three-fourths of the Directors of the Corporation then in office, or as otherwise provided by law. At a special meeting, no business shall be transacted and no corporate action shall be taken other than that stated in the notice of meeting prescribed by the Bylaws of the Corporation. Special meetings shall be held on the date and at the time and place as may be designated by the Board. At a special meeting, no business shall be transacted and no corporate action shall be taken other than that stated in the notice of meeting. Section 4. Notice of Meetings. Except as otherwise required by law, written notice stating the place, date and hour of any meeting of shareholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered to each shareholder of record entitled to vote at such meeting, either personally or by mail not less than ten (10) nor more than sixty (60) days before the date of such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the U.S. mail, with postage thereon prepaid, addressed to the shareholder at his or her address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6 of this Article 11, or at such other address as the shareholder shall have furnished in writing to the Secretary. Notice of any special meeting shall indicate that the notice is being issued by or at the direction of the person or persons calling such meeting. When any meeting of shareholders, either annual or special, is adjourned to another time or place, no notice of the adjourned meeting need be given, other than an announcement at the meeting at which such adjournment is taken giving the time and place to which the meeting is adjourned; provided, however, that if the adjournment is for more than thirty (30) days, or if after adjournment, the Board fixes a new record date for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 5. Waiver of Notice. Notice of any annual or special meeting need not be given to any shareholder who submits a signed waiver of notice of any meeting, in person or by proxy or by his or her duly authorized attorney-in-fact, whether before or after the meeting. A shareholder's attendance at a meeting: a. Waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting or promptly upon the shareholder's arrival objects to holding the meeting or transacting business at the meeting. b. Waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or in order to make a determination of shareholders for any other proper purpose, the Board shall fix a date as the record date for any such determination of shareholders, which date shall not precede the date upon which the resolution fixing the record date is adopted by the Board. Such date in any Case shall be not more than sixty (60) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 6, such determination shall, unless otherwise provided by the Board, also apply to any adjournment thereof. If no record date is fixed, (a) the record date for determining shareholders entitled to notice of or vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which the notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and (b) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 7. Quorum. The holders of record of a majority of the total number of votes eligible to be cast by the holders of the outstanding shares of the capital stock of the Corporation entitled to vote thereat, represented in person or by proxy, shall constitute a quorum for the transaction of business at a meeting of shareholders, except as otherwise provided by law, these Bylaws or the Articles of Incorporation. If less than a majority of such total number of votes are represented at a meeting, a majority of the number of votes so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called. When a quorum is once present to organize a meeting of shareholders, such quorum is not broken by the subsequent withdrawal of any shareholders. Section 8. Conduct of Meetings. The Chairman of the Board shall serve as chairman at all meetings of the shareholders or, if the Chairman of the Board is absent or otherwise unable to so serve, the President shall serve as chairman. If both the Chairman of the Board and the President are absent or otherwise unable to so serve, such other person as shall be appointed by a majority of the entire Board of Directors shall serve as chairman at any meeting of shareholders held in such absence. The Secretary or, in his or her absence, such other person as the chairman of the meeting shall appoint, shall serve as secretary of the meeting. The chairman of the meeting shall conduct all meetings of the shareholders in accordance with the best interests of the Corporation and shall have the authority and discretion to establish reasonable procedural rules for the conduct of such meetings, including such regulation of the manner of voting and the conduct of discussion as he or she shall deem appropriate. Section 9. Voting; Proxies. Each shareholder entitled to vote at any meeting may vote either in person or by proxy. Unless otherwise specified in the Articles of Incorporation or in a resolution, or resolutions, of the Board providing for the issuance of preferred stock, each shareholder entitled to vote shall be entitled to one vote for each share of capital stock registered in his or her name on the transfer books or records of the Corporation. Each shareholder entitled to vote may authorize another person or persons to act for him or her by proxy. All proxies shall be in writing, signed by the shareholder or by his or her duly authorized attorney-in-fact, and shall be filed with the Secretary before being voted. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy. The attendance at any meeting by a shareholder who shall have previously given a proxy applicable thereto shall not, as such, have the effect of revoking the proxy. The Corporation may treat any duly executed proxy as not revoked and in full force and effect until it receives a duly executed instrument revoking it, or a duly executed proxy bearing a later date. If ownership of a share of voting stock of the Corporation stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, any one or more of such shareholders may cast all votes to which such ownership is entitled. If an attempt is made to cast conflicting votes by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such stock and present at such meeting. If such conflicting votes are evenly split on any particular matter, each faction may vote the securities in question proportionally, or any person voting the shares, or a beneficiary, if any, may apply to any court as may have jurisdiction to appoint an additional person to act with the persons so voting the shares, which shall then be voted as determined by a majority of such persons and the person appointed by the court. Except for the election of directors or as otherwise provided by law, the Articles of Incorporation or these Bylaws, at all meetings of shareholders, all matters shall be determined by a vote of the holders of a majority of the number of votes eligible to be cast by the holders of the outstanding shares of capital stock of the Corporation present and entitled to vote thereat. Directors shall, except as otherwise required by law, these Bylaws or the Articles of Incorporation, be elected by a plurality of the votes cast by each class of shares entitled to vote at a meeting of shareholders, present and entitled to vote in the election. Section 10. Inspectors of Election. In advance of any meeting of shareholders, the Board shall appoint one or more persons, other than officers, directors or nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. Such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the meeting shall make such appointment at the meeting. If any person appointed as inspector fails to appear or fails or refuses to act at the meeting, the vacancy so created may be filled by appointment by the Board in advance of the meeting or at the meeting by the chairman of the meeting. The duties of the inspectors of election shall include determining the number of shares outstanding and the voting power of each, the shares represented at the Meeting, the existence of a quorum, the validity and effect of proxies, receiving votes, ballots or consents, hearing and deciding all challenges and questions arising in connection with the right to vote, counting and tabulating all votes, ballots or consents, determining the results, and doing such acts as are proper to the conduct of the election or the vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing, of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated and of the vote as certified by them. Each inspector shall be entitled to a reasonable compensation for his or her services, to be paid by the Corporation. Section 11. Procedure for Nominations. The Nominating Committee of the Board shall select nominees for election as directors. Except in the case of a nominee substituted as a result of the death, incapacity, withdrawal or other inability to serve of a nominee, the Nominating Committee shall deliver written nominations to the Secretary at least sixty (60) days prior to the date of the annual meeting. Provided the Nominating Committee makes such nominations, no nominations for directors except those made by the Nominating Committee shall be voted upon at the annual meeting of shareholders unless other nominations by shareholders are made in accordance with the provisions of this Section 11. Nominations of individuals for election to the Board at an annual meeting of shareholders may be made by any shareholder of record of the Corporation entitled to vote for the election of directors at such meeting who provides timely notice in writing to the Secretary as set forth in this Section 11. To be timely, a shareholder's notice must be delivered to or received by the Secretary not later than the following dates: (i) with respect to an election of directors to be held at an annual meeting of shareholders, sixty (60) days in advance of such meeting if such meeting is to be held on a day which is within thirty (30) days preceding the anniversary of the previous year's annual meeting, or ninety (90) days in advance of such meeting if such meeting is to be held on or after the anniversary of the previous year's annual meeting; and (ii) with respect to an election to be held at an annual meeting of shareholders held at a time other than within the time periods set forth in the immediately preceding clause (i), or at a special meeting of shareholders for the election of directors, the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to shareholders. For purposes of this Section 11, notice shall be deemed to first be given to shareholders when disclosure of such date of the meeting of shareholders is first made in a press release reported to Dow Jones News Services, Associated Press or comparable national news service, or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) such person's written consent to serve as a director, if elected, and (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission (whether or not the Corporation is then subject to such rules); and (b) as to the shareholder giving the notice (i) the name and address of such shareholder, (ii) the class and number of shares of the Corporation which are owned of record by such shareholder and the dates upon which he or she acquired such shares, (iii) a description of all arrangements or understandings between the shareholder and nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the shareholder, and (iv) the identification of any person employed, retained, or to be compensated by the shareholder submitting the nomination or by the person nominated, or any person acting on his or her behalf to make solicitations or recommendations to shareholders for the purpose of assisting in the election of such director, and a brief description of the terms of such employment, retainer or arrangement for compensation. At the request of the Board, any person nominated by the Board for election as a director shall furnish to the Secretary that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee together with the required written consent. No person shall be elected as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 11. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not properly brought before the meeting in accordance with the provisions hereof and, if he should so determine, he shall declare to the meeting that such nomination was not properly brought before the meeting and shall not be considered. Section 12. Substitution of Nominees. In the event that a person is validly designated as a nominee in accordance with Section 11 of this Article II and shall thereafter become unwilling or unable to stand for election to the Board, the Nominating Committee may designate a substitute nominee upon delivery, not fewer than five (5) days prior to the date of the meeting for the election of such nominee, of a written notice to the Secretary setting forth such information regarding such substitute nominee as would have been required to be delivered to the Secretary pursuant to Section 11 of this Article II had such substitute nominee been initially proposed as a nominee. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such substituted nominee. Section 13. New Business. Any new business to be taken up at the annual meeting at the request of the Chairman of the Board, the President or by resolution of at least three-fourths of the entire Board shall be stated in writing and filed with the Secretary at least fifteen (15) days before the date of the annual meeting, and all business so stated, proposed and filed shall be considered at the annual meeting, but, except as provided in this Section 13, no other proposal shall be acted upon at the annual meeting. Any proposal offered by any shareholder may be made at the annual meeting and the same may be discussed and considered, but unless properly brought before the meeting such proposal shall not be acted upon at the meeting. For a proposal to be properly brought before an annual meeting by a shareholder, the shareholder must be a shareholder of record and have given timely notice thereof in writing to the Secretary. To be timely, a shareholder's notice must be delivered to or received by the Secretary not later than the following dates: (i) with respect to an annual meeting of shareholders, sixty (60) days in advance of such meeting if such meeting is to be held on a day which is within thirty (30) days preceding the anniversary of the previous year's annual meeting, or ninety (90) days in advance of such meeting if such meeting is to be held on or after the anniversary of the previous year's annual meeting; and (ii) with respect to an annual meeting of shareholders held at a time other than within the time periods set forth in the immediately preceding clause (i), the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to shareholders. For purposes of this Section 13, notice shall be deemed to first be given to shareholders when disclosure of such date of the meeting of shareholders is first made in a press release reported to Dow Jones News Services, Associated Press or comparable national news service, or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. A shareholder's notice to the Secretary shall set forth as to the matter the shareholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to brought before the annual meeting; (b) the name and address of the shareholder proposing such business; (c) the class and number of shares of the Corporation which are owned of record by the shareholder and the dates upon which he or she acquired such shares; (d) the identification of any person employed, retained, or to be compensated by the shareholder submitting the proposal, or any person acting on his or her behalf, to make solicitations or recommendations to shareholders for the purpose of assisting in the passage of such proposal, and a brief description of the terms of such employment, retainer or arrangement for compensation; and (e) such other information regarding such proposal as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission or required to be delivered to the Corporation pursuant to the proxy rules of the Securities and Exchange Commission (whether or not the Corporation is then subject to such rules). This provision shall not prevent the consideration and approval or disapproval at an annual meeting of reports of officers, directors and committees of the Board or the management of the Corporation, but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. This provision shall not constitute a waiver of any right of the Corporation under the proxy rules of the Securities and Exchange Commission or any other rule or regulation to omit a shareholder's proposal from the Corporation's proxy materials. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that any new business was not properly brought before the meeting in accordance with the provisions hereof and, if he should so determine, he shall declare to the meeting that such new business was not properly brought before the meeting and shall not be considered. ARTICLE III CAPITAL STOCK Section 1. Certificates of Stock. Certificates representing shares of stock shall be in such form as shall be determined by the Board. Each certificate shall state that the Corporation will furnish to any shareholder upon request and without charge a statement of the powers, designations, preferences and relative, participating, optional or other special rights of the shares of each class or series of stock and the qualifications or restrictions of such preferences and/or rights, or shall set forth such statement on the certificate itself. The certificates shall be numbered in the order of their issue and entered in the books of the Corporation or its transfer agent or agents as they are issued. Each certificate shall state the registered holder's name and the number and class of shares, and shall be signed by the Chairman of the Board or the President, and the Secretary or any Assistant Secretary, and may, but need not, bear the seal of the Corporation or a facsimile thereof. Any or all of the signatures on the certificates may be facsimiles. In case any officer who shall have signed any such certificate shall cease to be such officer of the Corporation, whether because of death, resignation or otherwise, before such certificate shall have been delivered by the Corporation, such certificate may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates had not ceased to be such officer or officers of the Corporation. Section 2. Transfer Agent and Registrar. The Board shall have the power to appoint one or more Transfer Agents and Registrars for the transfer and registration of certificates of stock of any class, and may require that stock certificates be countersigned and registered by one or more of such Transfer Agents and Registrars. Section 3. Registration and Transfer of Shares. Subject to the provisions of the Articles of Incorporation of the Corporation, the name of each person owning a share of the capital stock of the Corporation shall be entered on the books of the Corporation together with the number of shares held by him or her, the numbers of the certificates covering such shares and the dates of issue of such certificates. Subject to the provisions of the Articles of Incorporation, the shares of stock of the Corporation shall be transferable on the books of the Corporation by the holders thereof in person, or by their duly authorized attorneys or legal representatives, on surrender and cancellation of certificates for a like number of shares, accompanied by an assignment or power of transfer endorsed thereon or attached thereto, duly executed, with such guarantee or proof of the authenticity of the signature as the Corporation or its agents may reasonably require and with proper evidence of payment of any applicable transfer taxes. Subject to the provisions of the Articles of Incorporation of the Corporation, a record shall be made of each transfer. Section 4. Lost, Destroyed and Mutilated Certificates. The holder of any shares of stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of the certificates therefor. The Corporation may issue, or cause to be issued, a new certificate of stock in the place of any certificate theretofore issued by it alleged to have been, lost, stolen or destroyed upon evidence satisfactory to the Corporation of the loss, theft or destruction of the certificate, and in the case of mutilation, the surrender of the mutilated certificate. The Corporation may, in its discretion, require the owner of the lost, stolen or destroyed certificate, or his or her legal representatives, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft, destruction or mutilation of any such certificate and the issuance of such new certificate, or may refer such owner to such remedy or remedies as he or she may have under the laws of the State of Iowa. Section 5. Holder of Record. Subject to the provisions of the Articles of Incorporation of the Corporation, the Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law. ARTICLE IV BOARD OF DIRECTORS Section 1. Responsibilities; Number of Directors. The business and Affairs of the Corporation shall be under the direction of the Board. The Board shall consist of seven (7) directors. No more than two (2) shall be Officers or employees of the Corporation or its subsidiaries. Section 2. Qualifications. Each director shall be at least eighteen (18) years of age. Section 3. Mandatory Retirement. No director shall serve beyond the end of the annual meeting of the Corporation coincident with or immediately following the date on which his or her 75th birthday occurs. Section 4. Regular and Annual Meetings. An annual meeting of the Board for the election of officers shall be held, without notice other than these Bylaws, immediately after, and at the same place as, the annual meeting of the shareholders, or, with notice, at such other time or place as the Board may fix by resolution. The Board may provide, by resolution, the time and place, within or without the State of Iowa, for the holding of regular meetings of the Board without notice other than such resolution. Section 5. Special Meetings. Special meetings of the Board may be called for any purpose at any time by or at the request of the Chairman of the Board or the President. Special meetings of the Board shall also be called by the Secretary upon the written request, stating the purpose or purposes of the meeting, of at least sixty percent (60%) of the directors then in office. The persons authorized to call special meetings of the Board shall give notice of such meetings in the manner prescribed by these Bylaws and may fix any place, within or without the Corporation's regular business area, as the place for holding any special meeting of the Board called by such persons. No business shalt be conducted at a special meeting other than that specified in the notice of meeting. Section 6. Notice of Meetings; Waiver of Notice. Except as otherwise provided in Section 4 of this Article IV, at least two (2) days notice of meetings shall be given to each director if given in person or by telephone, telegraph, telex, facsimile or other electronic transmission and at least five (5) days notice of meetings shall be given if given in writing and delivered by courier or by postage prepaid mail. The purpose of any special meeting shall be stated in the notice. Such notice shall be deemed given when sent or given to any mail or courier service or company providing electronic transmission service. Any director may waive notice of any meeting by submitting a signed waiver of notice with the Secretary, whether before or after the meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting or promptly upon the director's arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 7. Conduct of Meetings. Meetings of the Board shall be presided over by the Chairman of the Board or such other director or officer as the Chairman of the Board shall designate, and in the absence or the incapacity of the Chairman of the Board, by the President or such other director or officer as the President shall designate. If both the Chairman of the Board and the President are absent from any meeting of the Board, the presiding officer shall be the then senior member of the Board in terms of length of service on the Board (which length of service shall include length of service on the Board of Directors of First Federal Savings Bank of Fort Dodge, FSB, and any predecessors thereto.) The Secretary or, in his absence, a person appointed by the Chairman of the Board (or other presiding person), shall act as secretary of the meeting. The Chairman of the Board (or other person presiding) shall conduct all meetings of the Board in accordance with the best interests of the Corporation and shall have the authority and discretion to establish reasonable procedural rules for the conduct of Board meetings. Directors may participate in a meeting by means of a conference telephone or similar communications device through which all persons participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes. Section 8. Quorum and Voting Requirements. A quorum at any meeting of the Board shall consist of not less than a majority of the directors then in office or such greater number as shall be required by law, these Bylaws or the Articles of Incorporation. If less than a required quorum is present, the majority of those directors present shall adjourn the meeting to another time and place without further notice. At such adjourned meeting at which a quorum shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed. Except as otherwise provided by law, the Articles of Incorporation or these Bylaws, a majority vote of the directors present at a meeting if a quorum is present at the time of such vote, shall constitute an act of the Board. Section 9. Informal Action by Directors. Unless otherwise restricted by the Articles of Incorporation or these Bylaws, any action required of permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee. Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the principal office of the Corporation addressed to the Chairman of the Board or the President. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof. Section 11. Vacancies. To the extent not inconsistent with the Articles of Incorporation and subject to the limitations prescribed by law and the rights of holders of Preferred Stock, vacancies in the office of director, including vacancies created by newly created directorships resulting from an increase in the number of directors, shall be filled only by a vote of a majority of the directors then holding office, whether or not a quorum, at any regular or special meeting of the Board called for that purpose. Subject to the rights of holders of Preferred Stock, no person shall be so elected a director unless nominated by the Nominating Committee. Subject to the rights of holders of Preferred Stock, any director so elected shall serve for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until hit or her successor shall be elected and qualified. Section 12. Compensation. From time to time, as the Board deems necessary, the Board shall fix the compensation of directors, and officers of the Corporation in such one or more forms as the Board may determine. Section 13. Amendments Concerning the Board. The number, retirement age, and other restrictions and qualifications for directors of the Corporation as set forth in these Bylaws may be altered only by a vote, in addition to any vote required by law, of two-thirds of the entire Board or by the affirmative vote of the holders of record of not less than eighty percent (80%) of the total votes eligible to be cast by holders of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors at a meeting of the shareholders called for that purpose. ARTICLE V COMMITTEES Section 1. Standing Committees. At each annual meeting of the Board, the directors shall designate from their own number, by resolution adopted by a majority of the entire Board, the following committees: (a) Executive Committee (b) Examining and Audit Committee (c) Personnel and Compensation Committee (d) Nominating Committee which shall be standing committees of the Board. The Board shall appoint a director to fill any vacancy on any committee of the Board. The members of the committees shall serve at the pleasure of the Board. Section 2. Executive Committee. There shall be an Executive Committee of the Board, consisting of at least four (4) members, as shall be appointed by Board resolution or these Bylaws. The President shall be an ex-officio member of the Executive Committee, with power to vote on all matters so long as the President is also director of the Corporation. Three (3) members of the Executive Committee, at least two (2) of whom must be non-officer directors, or such other number of members as the Board of Directors may establish by resolution, shall constitute a quorum for the transaction of business. The vote of a majority of members present at any meeting including the presiding member, who shall be eligible to vote, shall constitute the action of the Executive Committee. The Chairman of the Board or such other director or officer as the Chairman of the Board shall designate shall serve as chairman of the Executive Committee or, if the office of the Chairman of the board is vacant, the President shall serve as chairman of the Executive Committee. In the absence of the chairman of the Executive Committee, the committee shall designate, from among its membership present, a person to preside at any meeting held in such absence. The Executive Committee shall designate, from its membership or otherwise, a secretary who shall report to the Board at its next regular meeting all proceedings and actions taken by the Executive Committee. The Executive Committee shall meet as necessary at the call of the Chairman of the Board, the President or at the call of a majority of the members of the Executive Committee. The Executive Committee shall, to the extent not inconsistent with law, these Bylaws or the Articles of Incorporation, exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation in the intervals between the meetings of the Board. The Executive Committee shall also consider proposals from management in relation to the election of officers and shall make recommendations in relation to those nominated to officer positions to the Board. Section 3. Examining and Audit Committee. The Examining and Audit Committee shall consist of at least three (3) members whose background and experience are financial and/or business management related, none of whom shall be an officer or salaried employee of the Corporation or its subsidiaries, an attorney who receives a fee or other compensation for legal services rendered to the Corporation or any other individual having a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. At any regular meeting of the Board, any director who is otherwise eligible to serve on the Examining and Audit Committee may be elected to fill a vacancy that has occurred on the Examining, and Audit Committee. The Board shall designate one member of the committee to serve as chairman of the committee. The Examining and Audit Committee shall meet annually, at the call of the chairman of the committee and may hold such additional meetings as the chairman of the committee may deem necessary, to examine, or cause to be examined, the records and affairs of the Corporation to determine its true financial condition, and shall present a report of examination to the Board at the Board's next regular meeting following the meeting of the Examining and Audit Committee. The committee shall appoint, from its membership or otherwise, a secretary who shall cause to be kept written minutes of all meetings of the committee. The Examining and Audit Committee shall make, or cause to be made, such other examinations as it may deem advisable or whenever so directed by the Board and shall report thereon in writing at a regular meeting of the Board. The Examining and Audit Committee shall make recommendations to the Board in relation to the employment of accountants and independent auditors and arrange for such other assistance as it may deem necessary or desirable. The Examining and Audit Committee shall review and evaluate the procedures and performance of the Corporation's internal auditing staff. A quorum shall consist of at least a majority of the voting members of the committee. Section 4. Personnel and Compensation Committee. The Personnel and Compensation Committee shall consist of at least three (3) members, none of whom shall be an officer or salaried employee of the Corporation or its subsidiaries as shall be appointed by Board resolution or these Bylaws. In addition, the President shall be an ex-officio member of the Personnel and Compensation Committee without any power to vote. The Board shall designate one member of the committee to serve as chairman of the Personnel and Compensation Committee, who shall have the authority to adopt and establish procedural rules for the conduct of all meetings of the committee. The committee shall meet annually at the call of the chairman of the committee, and may hold such additional meetings as the Chairman of the Board or the President may deem necessary. A quorum shall consist of at least a majority of the voting members of the committee. The vote of a majority of the voting members present at any meeting, including the chairman of the committee who shall be eligible to vote, shall constitute the action of the Personnel and Compensation Committee. The committee shall appoint, from its membership or otherwise, a secretary who shall cause to be kept written minutes of all meetings of the committee. The Compensation Committee shall be responsible for monitoring the financial condition of the Corporation and overseeing the development, implementation and conduct of the Corporation's employment and personnel policies, notices and procedures, including the administration of, the Corporation's compensation and benefit programs. Section 5. Nominating Committee. The Nominating Committee shall consist of at least three (3) members none of whom shall be an officer or a salaried employee of the Corporation or its subsidiaries. In addition, the President shall be an ex-officio member of the Nominating Committee, with power to vote so long as the President is also a director of the Corporation. Notwithstanding the foregoing, no director shall serve on the Nominating Committee in any capacity in any year during which such director's term as a director is scheduled to expire. The Nominating Committee shall review qualifications of and interview the candidates for the Board and shall make nominations for the election of Board members in accordance with the provisions of these Bylaws in relation to those suggestions to the Board. A quorum shall consist of at least a majority of the voting members of the committee. Section 6. Other Committees. The Board may by resolution adopted by a majority of the entire Board at any meeting authorize such other committees as from time to time it may deem necessary or appropriate for the conduct of the business of the Corporation. The members of each committee so authorized shall be appointed by the Board from members of the Board and/or employees of the Corporation. In addition, the President shall be an ex-officio member of each such committee. Each such committee shall exercise such powers as may be assigned by the Board to the extent not inconsistent with law, these Bylaws or the Articles of Incorporation. ARTICLE VI OFFICERS Section 1. Number. The Board shall, at each annual meeting, elect a Chairman of the Board, a Chief Executive Officer, a President, a Secretary and such other officers as the Board from time to time may deem necessary or the business of the Corporation may require. Any number of offices may be held by the same person except that no person may simultaneously hold the offices of President and Secretary. The election of all officers shall be by a majority of the Board. If such election is not held at the meeting held annually for the election of officers, such officers may be so elected at any subsequent regular meeting or at a special meeting called for that purpose, in the same manner above provided. Each person elected shall have such authority, bear such title and perform such duties as provided in these Bylaws and as the Board may prescribe from time to time. All officers elected or appointed by the Board shall assume their duties immediately upon their election and shall hold office at the pleasure of the Board. Whenever a vacancy occurs among the officers, it may be filled at any regular or special meeting called for that purpose, in the same manner as above provided. Section 2. Term of Office and Removal. Each officer shall serve until his or her successor is elected and duly qualified the office is abolished, or he or she is removed. Except for the Chairman of the Board, the Chief Executive Officer or the President, any officer may be removed at any regular meeting of the Board with or without cause by an affirmative vote of a majority of the entire Board. The Board may remove the Chairman of the Board, the Chief Executive Officer or the President at any time, with or without cause, only by a vote of two-thirds of the non-officer directors then holding office at any regular or special meeting of the Board called for that purpose. Section 3. Retirement. No officer of the Corporation who is described in Section 12(c) of the Age Discrimination in Employment Act of 1967, as amended, shall continue to serve as an officer of the Corporation beyond the end of the month in which his or her 70th birthday occurs; provided, however, that any such officer shall, to the extent specifically authorized by contract approved by, or a resolution of a majority of the entire Board, be eligible to continue to serve as an officer of the Corporation on a year to year basis. Section 4. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders; preside at all meetings of the Board and of the Executive Committee; make recommendations to the Board regarding appointments to all committees; and sign instruments in the name of the Corporation. In the absence or disability of the Chairman of the Board and the Vice Chairman of the Board, the Board shall designate a person who shall exercise the powers and perform the duties which otherwise would fall upon the Chairman of the Board. Section 5. President. The President shall be the Chief Executive Officer of the Corporation and shall, subject to the direction of the Board, oversee all the major activities of the Corporation and its subsidiaries and be responsible for assuring that the policy decisions of the Board are implemented as formulated. The President shall be responsible, in consultation with such Officers and members of the Board as he deems appropriate, for planning the growth of the Corporation. The President shall be responsible for shareholder relations and relations with investment bankers or other similar financial institutions, and shall be empowered to designate officers of the Corporation and its subsidiaries to assist in such activities. The President shall be principally responsible for exploring and reporting to the Board all opportunities for mergers, acquisitions and new business. The President, under authority given to him, sign instruments in the name of the Corporation. The President shall have general supervision and direction of all of the Corporation's officers and personnel, subject to and consistent with policies enunciated by the Board. The President shall have such other powers as may be assigned to him by the Board or its committees. Section 6. Vice Presidents. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents may be appointed by the Board of Directors to perform such duties as may be prescribed by these Bylaws, the Board or the President as permitted by the Board. Section 7. Secretary. The Secretary shall attend all meetings of the Board and of the shareholders, and shall record, or cause to be recorded, all votes and minutes of all proceedings of the Board and of the shareholders in a book or books to be kept for that purpose. The Secretary shall perform such executive and administrative duties as may be assigned by the Board, the Chairman of the Board or the President. The Secretary shall have charge of the seal of the Corporation, shall submit such reports and statements as may be required by law or by the Board, shall conduct all correspondence relating to the Board and its proceedings and shall have such other powers and duties as are generally incident to the office of Secretary and as may be assigned to him or her by the Board, the Chairman of the Board or the President. Section 8. Other Officers and Employees. Other officers and employees appointed by the Board shall have such authority and shall perform such duties as may be assigned to them, from time to time, by the Board or the President. Section 9. Compensation of Officers and Others. The compensation of all officers and employees shall be fixed from time to time by the Board, the Compensation Committee, or by any committee or officer authorized by the Board to do so, upon the recommendation and report by the Compensation Committee. The compensation of agents shall be fixed by the Board, or by any committee or officer authorized by the Board to do so, upon the recommendation and report of the Compensation Committee. ARTICLE VII DIVIDENDS The Board shall have the power, subject to the provisions of law and the requirements of the Articles of Incorporation, to declare and pay dividends to the shareholders provided that no distribution may be made if, after giving it effect, either of the following would result: a. The Corporation would not be able to pay its debts as they become due in the usual course of business; b. The Corporation's total assets would be less than the sum of its total liabilities plus, unless the Articles of Incorporation permit otherwise, the amount that would be needed, if the Corporation 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. The Board shall have the power to pay such dividends to the shareholders in cash, in property, or in shares of the capital stock of the Corporation, and to fix the date or dates for the payment of such dividends. ARTICLE VIII AMENDMENTS These Bylaws, except as provided by applicable law or the Articles of Incorporation, or as otherwise set forth in these Bylaws, may be amended or repealed at any regular meeting of the entire Board by the vote of two-thirds of the Board; provided, however, that (a) a notice specifying the change or amendment shall have been given at a previous regular meeting and entered in the minutes of the Board; (b) a written statement describing the change or amendment shall be made in the notice mailed to the directors of the meeting at which the change or amendment shall be acted upon; and (c) any Bylaw made by the Board may be altered, amended, rescinded, or repealed by the holders of shares of capital stock entitled to vote thereon at any annual meeting or at any special meeting called for that purpose in accordance with the percentage requirements set forth in the Articles of Incorporation and/or these Bylaws. Notwithstanding the foregoing, any provision of these Bylaws that contains a supermajority voting requirement shall only be altered, amended, rescinded, or repealed by a vote of the Board or holders of capital stock entitled to vote thereon that is not less than the supermajority specified in such provision. EX-4 4 ncb10kexhibit44_12-03.txt EXHIBIT 4.4 BYLAWS FIRST FEDERAL SAVINGS Exhibit 4.4 Bylaws of First Federal Savings Bank of Iowa, as amended. BYLAWS FIRST FEDERAL SAVINGS BANK OF FORT DODGE ARTICLE I - Home Office The home office of First Federal Savings Bank of Fort Dodge (the "Bank") shall be located in the County of Webster, in the State of Iowa. ARTICLE II - Shareholders Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the home office of the Bank or at such other place in the State in which the principal place of business of the Bank is located as the board of directors may determine. Section 2. Annual Meeting. A meeting of the shareholders of the Bank for the election of directors and for the transaction of any other business of the Bank shall be held annually within 120 days after the end of the Bank's fiscal year, on the fourth Friday in April, if not a legal holiday, and if a legal holiday, then on the next day following which is not a legal holiday, at 10:30 a.m., or at such other date and time within such 120-day period as the board of directors may determine. Section 3. Special Meetings. Subject to the limitations set forth in Section 8 of the Bank's Charter, special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Office of Thrift Supervision (the "Office"), may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon"the written request of the holders of not less than one-tenth of all of the outstanding capital stock of the Bank entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the Bank addressed to the chairman of the board, the president, or the secretary. Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with the most current edition of Roberts Rules of Order unless otherwise prescribed by the Office or these bylaws. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings. Section 5. Notice of Meetings. Written notice stating the place, day, and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 10 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, or the secretary, or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Bank as of the record date prescribed in Section 6 of this Article II with postage prepaid. When any shareholders meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken. Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment. Section 7. Voting List. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the Bank shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment, arranged in alphabetical order, with the address and the number of shares held by each. 'Mis list of shareholders shall be kept on file at the home office of the Bank and shall be subject to inspection by any shareholder at any time during usual business hours for a period of 20 days prior to such meeting. Such list also shall be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures described in ss. 552.6(d) of the Office's regulations as now or hereafter in effect. Section 8. Quorum. A majority of the outstanding shares of the Bank entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to constitute less than a quorum. Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with in interest. Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Bank to the contrary, at any meeting of the shareholders of the Bank, any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. Section 11. Voting of Shares of Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Bank nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Bank, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. Section 12. Cumulative Voting. Every shareholder entitled to vote at an election for directors shall have the right to vote, in person or by proxy, the number of shares owned by the shareholder for as many persons as there are directors to be elected and for whose election the shareholder has a right to vote, or to cumulate the votes by giving one candidate as many votes as the number of such directors to be elected multiplied by the number of shares shall equal or by distributing such votes on the same principle among any number of candidates. Section 13. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any person other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by regulations of the Office, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. Section 14. Nominating Committee. The board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Bank. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Bank at least five days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Bank. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon. Section 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Bank at least five days prior to the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special or annual meeting of the shareholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors, and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. Section 16. Informal Action by Shareholders. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter. ARTICLE III - Board of Directors Section 1. General Powers. The business and affairs of the Bank shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board and a president from among its members and shall designate, when present, either the chairman of the board or the president to preside at its meetings. Section 2. Number and Term. The board of directors shall consist of seven members, and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, within the Bank's normal lending territory, for the holding of additional regular meetings without other notice than such resolution. Directors may participate in a meeting by means of a conference telephone or similar communications device through which all persons participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes. Section 4. Qualification. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the Bank unless the Bank is a wholly owned subsidiary of a holding company. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president, or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within the Bank's normal lending territory, as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person for all purposes. Section 6. Notice. Written notice of any special meeting shall be given to each director at least two days prior thereto when delivered personally or by telegram or at least five days prior thereto when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if mailed or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice of waiver of notice of such meeting. Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors; but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 5 of this Article III. Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the Office or by these bylaws. Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Bank addressed to the chairman of the board or the president. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board or the president. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors. Section 11. Vacancies. Any vacancy occurring on the board of directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders. Section 12. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. Section 13. Presumption of Assent. A director of the Bank who is present at a meeting of the board of directors at which action on any Bank matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Bank within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. Section 14. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. If less than the entire board is to be removed, no one of the directors may be removed if the votes cast against the removal would be sufficient to elect a director if then cumulatively voted at an election of the class of directors of which such director is a part. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole. ARTICLE IV - Executive And Other Committees Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chief executive officer and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation. Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board of directors with reference to: the declaration of dividends; the amendment of the charter or bylaws of the Bank, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all or substantially all of the property and assets of the Bank otherwise than in the usual and regular course of its business; a voluntary dissolution of the Bank; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest. Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee. Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one days notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting. Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee. Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors. Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the Bank. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred. Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committee composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Bank and may prescribe the duties, constitution, and procedures thereof. ARTICLE V - Officers Section 1. Positions. The officers of the Bank shall be a president, one or more vice presidents, a secretary, and a treasurer, each of whom: shall be elected by the board of directors. The board of directors also may designate the chairman of the board as an officer. The president shall be the chief executive officer, unless the board of directors designates the chairman of the board as chief executive officer. The president shall be a director of the Bank. The offices of the secretary and treasurer may be held by the same person and a vice president also may be either the secretary or the treasurer. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors also may elect or authorize the appointment of such other officers as the business of the Bank may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. Section 2. Election and Term of Office. The officers of the Bank shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officers death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer. employee, or agent shall not of itself create contractual rights. The board of directors may authorize the Bank to enter into an employment contract with any officer in accordance with regulations of the Office; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the Bank will be served thereby, but such removal, other than for cause, shall be without prejudice to any contractual rights of the person so removed. Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the board of directors for the unexpired portion of the term. Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors. ARTICLE VI - Contracts, Loans, Checks, and Deposits Section 1. Contracts. To the extent permitted by regulations of the Office, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee or agent of the Bank to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Bank. Such authority may be general or confined to specific instances. Section 2. Loans. No loans shall be contracted on behalf of the Bank and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Bank shall be signed by one or more officers, employees, or agents of the Bank in such manner as shall from time to time be determined by the board of directors. Section 4. Deposits. All funds of the Bank not otherwise employed shall be deposited from time to time to the credit of the Bank in any duly authorized depositories as the board of directors may select. ARTICLE VII - Certificates for Shares and Their Transfer Section 1. Certificates for Shares. Certificates representing shares of capital stock of the Bank shall be in such form as shall be determined by the board of directors and approved by the Office. Such certificates shall be signed by the chief executive officer or by any other officer of the Bank authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signature of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the bank itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Bank. All certificates surrendered to the Bank for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and cancelled, except that in the case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Bank as the board of directors may prescribe. Section 2. Transfer of Shares. Transfer of shares of capital stock of the Bank shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney authorized by a duly executed power of attorney and filed with the Bank. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Bank shall be deemed by the Bank to be the owner for all purposes. ARTICLE VIII - Fiscal Year; Annual Audit The fiscal year of the Bank shall end on the last day of December of each year. The Bank shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors. The appointment of such accountants shall be subject to annual ratification by the shareholders. ARTICLE IX - Dividends Subject only to the terms of the Bank's charter and the regulations and orders of the Office, the board of directors may, from time to time, declare, and the Bank may pay, dividends on its outstanding shares of capital stock. ARTICLE X - Corporate Seal The board of directors shall provide a Bank seal which shall be two concentric circles between which shall be the name of the Bank. The year of incorporation or an emblem may appear in the center. ARTICLE XI - Amendments These bylaws may be amended in a manner consistent with regulations of the Office at any time by a majority vote of the full board of directors or by a majority vote of the votes cast by the shareholders of the Bank at any legal meeting. ARTICLE XII - Age limitations a. DIRECTORS. No person 75 or above years of age shall be eligible for election, reelection, appointment, or reappointment to the board of the Bank. No director shall serve as such beyond the annual meeting of the Bank immediately following the director becoming age 75. This age limitation does not apply to a director emeritus. b. OFFICERS. No person 70 or above years of age shall be eligible for election, reelection, appointment, or reappointment as an officer of the Bank. No officer shall serve beyond the annual meeting of the Bank immediately following the officer becoming 70. ARTICLE XIII - Preparedness emergency bylaws a. EMERGENCY OPERATIONS BY SURVIVING STAFF. In the event of an emergency declared by the President of the United States or the person performing his or her functions, the officers and employees of this Bank will continue to conduct the affairs of the Bank under such guidance from the directors as may be available except as to matters which by statute require specific approval of the board of directors and subject to conformance with any governmental directives during the emergency. b. EMERGENCY OPERATIONS BY DIRECTORS OR MEMBERS OF EXECUTIVE COMMITTEE. The board of directors shall have the power, in the absence or disability of any officer, or upon the refusal of any officer to act, to delegate and prescribe such officer's powers and duties to any other officer, or to any director, for the time being. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of this Bank by its directors and officers as contemplated by these bylaws, any two or more available members of the then incumbent executive committee shall constitute a quorum of that committee for the full conduct and management of the affairs and business of the Bank in accordance with the provisions of Article III of these bylaws. In the event of the unavailability, at such time, of a minimum of two members of the then incumbent executive committee, any three available directors shall constitute the executive committee for the full conduct and management of the affairs and business of the Bank in accordance with the foregoing provisions of this section. This bylaw shall be subject to implementation by resolutions of the board of directors passed from time to time for that purpose, and any provisions of these bylaws (other than this section) and any resolutions which are contrary to the provisions of this section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim executive committee acting under this section that it shall be to the advantage of this Bank to resume the conduct and management of its affairs and business under all of the other provisions of these bylaws. c. OFFICER SUCCESSION. If consequent upon war or warlike damage or disaster, the president of this Bank cannot be located by the then acting home office or is unable to assume or to continue normal executive duties, then the authority and duties of the president shall, without further action of the board of directors, be automatically assumed by one of the following persons in the order designated: (List of names in order of succession is shown in the official minutes of the Bank and in the certified copies which are under seal in various depositories.) Any one of the above persons who in accordance with this resolution assumes the authority and duties of the president shall continue to serve until he or she resigns or until five-sixths of the other officers who are attached to the then acting home office decide in writing he or she is unable to perform said duties or until the elected president of this Bank, or a person higher on the above list, shall become available to perform the duties of president of the Bank. If consequent upon war or warlike damage or disaster, the treasurer of this Bank cannot be located by the then acting home office or is unable to assume or to continue normal executive duties, then the authority and duties of the treasurer shall, without further action by the board of directors, be automatically assumed by one of the following persons in the order designated. (List of names in order of succession is shown in the official minutes of the Bank and in the certified copies which are under seal in various depositories.) The person assuming the authority and duties of treasurer in accordance with this section shall serve until: (1) the elected treasurer or person whose name is higher on the above list shall be able to function as treasurer, or (2) until he or she resigns or is unable as determined by the acting president to perform the duties of his or her office. In the case of paragraph (c)(2) of this section, the next eligible and available person on the above list shall assume the authority and duties of the treasurer. Anyone dealing with this Bank may accept a certification by any three officers that a specified individual is acting as president or that a specified individual is acting as treasurer in accordance with this section, and that anyone accepting such certification may continue to consider it in force until notified in writing of a change, said notice of change to carry the signatures of three officers of the Bank. d. PROVIDING FOR ALTERNATE LOCATIONS. The offices of the Bank at which its business shall be conducted shall be the home office thereof located at 825 Central Avenue, Fort Dodge, Iowa, Crossroads branch, 201 South 25th Street, Fort Dodge, Iowa, and Nevada branch, 404 Lincoln Highway, Nevada, Iowa, and any other legally authorized location which may be leased or acquired by this Bank to carry on its business. During an emergency resulting in any authorized place of business of this Bank being able to function, the business ordinarily conducted at such location shall be relocated elsewhere in suitable quarters, in addition to or in lieu of the locations heretofore mentioned, as may be designated by the board of directors or by the executive committee or by such persons as are then, in accordance with resolutions adopted from time to time by the board of directors dealing with the exercise of authority in the time of such emergency, conducting the affairs of this Bank. Any temporarily relocated place of business of this Bank shall be returned to its legally authorized locations as soon as practicable and such temporary place of business shall then be discontinued. e. PROVIDING FOR ACTING HOME OFFICES. In case of, and provided that, because of war or warlike damage or disaster, the Home Office of this Bank is unable temporarily to continue its functions, the Crossroads Branch, located at 201 South 25th Street, Fort Dodge, Iowa, shall automatically and without further action of this board of directors, become the "Acting Home Office of this Bank;" that if by reason of said war or warlike damage or disaster, both the Home Office of this Bank and the said Branch of this Bank are unable to carry on their functions, then and in such case, the Nevada Branch of this Bank, located at 404 Lincoln Highway, Nevada, Iowa, shall, without further action of this board of directors, become the "Acting Home Office of this Bank." The Home Office shall resume its functions at its legally authorized location as soon as practicable. ARTICLE XIV - Indemnification The Bank shall indemnify its directors, officers and employees to the fullest extent permitted under 12 C.F.R. ss. 545.121, as such law may be amended from time to time by the Office of Thrift Supervision. Such indemnification shall be in accordance with the following requirements: Section 1. Definitions and Rules of Construction. (a) The following definitions apply for purposes of this Article XIV: (i) Action. The term "action" means any judicial or administrative proceeding, or threatened proceeding, whether civil, criminal or otherwise, including any appeal or other proceeding for review; (ii) Court. The term "court" includes, without limitation, any court to which or in which any appeal or any proceeding for review is brought. (iii) Final judgment. The term "final judgment" means a judgment, decree or order that is not appealable or as to which the period for appeal has expired with no appeal taken. (iv) Settlement. The term "settlement" includes entry of a judgment by consent or confession or a plea of guilty or nolo contendere. (b) References in this Article XIV to any individual or other person, including any savings bank, shall include legal representatives, successors and assigns thereof. Section 2. Indemnification. Subject to Sections 3 and 7 of this Article XIV, the Bank shall indemnify any person against whom an action is brought or threatened because that person is or was a director, officer or employee of the Bank for: (a) Any amount for which that person becomes liable under a judgment in such action; and (b) Reasonable costs and expenses, including reasonable attorney's fees, actually paid or incurred by that person in defending or settling such action, or in enforcing his or her rights under this Article XIV if he or she attains a favorable judgment in such enforcement action. Section 3. Requirements for Indemnification. Indemnification shall be made to such person under Section 2 of this Article XIV only if: (a) Final judgment on the merits is in his or her favor; or (b) In case of: (i) settlement; (ii) final judgment against him or her; or (iii) final judgment in his or her favor, other than on the merits, if a majority of the disinterested directors of the Bank determines that he or she was acting in good faith within the scope of his or her employment or authority as he or she could have reasonably perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in the best interests of the Bank or its shareholders. However, no indemnification shall be made unless the Bank gives the Office at least 60 days notice of its intention to make such indemnification. Such notice shall state the facts on which the action arose, the terms of any settlement and any disposition of the matter by a court. Such notice, a copy thereof and a certified copy of the resolution containing the required determination by the Board of Directors shall be sent to the District Director of the Office, who shall promptly acknowledge receipt thereof. The notice period shall run from the date of such receipt. No such indemnification shall be made if the Director of the Office advises the Bank in writing, within such notice period, of his or her objection thereto. Section 4. Insurance. The Bank may obtain insurance to protect it and its directors, officers, and employees from potential losses arising from claims against any of them for alleged wrongful acts, or wrongful acts, committed in their capacity as directors, officers, or employees. However, the Bank may not obtain insurance which provides for payment of losses of any person incurred as a consequence of his or her willful or criminal misconduct. Section 5. Payment of expenses. If a majority of the directors of the Bank concludes that, in connection with an action, any person ultimately may become entitled to indemnification under this Article XIV, the directors may authorize payment of reasonable costs and expenses, including reasonable attorneys' fees, arising from the defense or settlement of such action. Nothing in this Section 5 shall prevent the directors of the Bank from imposing such conditions on a payment of expenses as they deem warranted and in the interests of the Bank. Before making advance payment of expenses under this Section 5, the Bank shall obtain an agreement that the Bank will be repaid if the person on whose behalf payment is made is later determined not to be entitled to such indemnification. Section 6. Exclusiveness of provisions. The Bank shall not indemnify any person referred to in Section 2 of this Article XIV or obtain insurance referred to in Section 4 of this Article XIV, other than in accordance with this Article. Indemnification of personnel of the Bank shall be governed solely by this Article XIV, except that the authority to obtain insurance shall be governed by Section 4 of this Article XIV. Section 7. Subject to 12 U.S.C. 1821(k). The indemnification provided for in Section 2 of this Article is subject to and qualified by 12 U.S.C. 1821(k). EX-10 5 ncb10kexhibit1013_12-03.txt EXHIBIT 10.13 TAX ALLOCATION AGREEMENT Exhibit 10.13 Tax Allocation Agreement between North Central Bancshares, Inc and Subsidiaries NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES TAX ALLOCATION AGREEMENT This agreement is entered into as of November 21, 2003 among and between the following parties: North Central Bancshares, Inc., First Federal Investment Services, Inc., First Iowa Title Services, Inc., First Iowa Mortgage, Inc., NC Properties, LLC, Iowa corporations; and First Federal Savings Bank of Iowa, a federal savings bank. The parties are members ("Members") of an affiliated group (the "Affiliated Group") within the meaning of Section 1504 of the Internal Revenue Code (the "Code") and file a consolidated return for federal income tax purposes. North Central Bancshares, Inc. is the common parent of the Affiliated Group. The parties desire to provide for the allocation of tax liabilities among the Members and to provide for reimbursing Members whose tax losses or credits reduce the consolidated taxable income. References herein to "regulations" shall be to the Treasury Regulations. References herein to "tax liabilities" are to current tax liabilities, and not deferred tax liabilities. In addition, references herein to "tax liabilities" do not include accrued income tax liabilities, including portions thereof subject to deferral due to use by any Members of different methods of reporting for financial statement and tax return purposes. The parties hereto agree as follows: 1. The parties agree to continue to file consolidated federal income tax returns in accordance with the provisions of Sections 1502 and 1504 of the Code and the regulations thereunder. 2. The parties agree to allocate total federal income tax liability based on the ratio that each member's separate return tax liability to the total federal income tax liability. Moreover, the parties agree to reimburse any Member which has tax losses or credits in an amount equal to 100% of the tax benefits realized by the Affiliated Group as a result of the utilization of such Member's tax losses or credits. Accordingly, the parties agree to allocate tax liability of the Affiliated Group in accordance with Section 1.1552-1(a)(2) and 1.1502-33(d)(2)(ii) of the Regulations, and for this purpose the percentage referred to in Section 1.1502-33(d)(2)(ii)(b) shall be 100%. 3. Under Treasury Regulations Section 1.1502-77(a), North Central Bancshares, Inc. is the agent for all the Members and is required to act for the Affiliated Group in connection with matters relating to the consolidated tax liability of the Affiliated Group. In particular, North Central Bancshares, Inc. shall be responsible for filing returns with the Internal Revenue Service, making elections, receiving all correspondence, filing claims for refund, contesting proposed adjustments and performing such other acts and deeds as North Central Bancshares, Inc. may deem necessary and desirable in connection with the foregoing. The parties hereto agree to provide North Central Bancshares, Inc. with such information as First Federal Savings Bank of Iowa, First Federal Investment Services, Inc., First Iowa Mortgage, Inc., First Iowa Title Services, Inc. and NC Properties, LLC may request in order to permit North Central Bancshares, Inc. to carry out its responsibilities described in this paragraph. 4. The parties agree that North Central Bancshares, Inc. shall be responsible for making tax payments to the Internal Revenue Service. Each Member shall pay to North Central Bancshares, Inc. an amount, including any interest thereon paid to the Internal Revenue Service, equal to its share of their tax liability as determined under paragraph 2. Any overpayment of tax of the Affiliated Group shall be paid or credited by the Internal Revenue Service to North Central Bancshares, Inc. and North Central Bancshares, Inc. shall pay such amount, including any interest thereon paid by the Internal Revenue Service, to the appropriate Member immediately upon receipt. North Central Bancshares, Inc. shall immediately pay or credit to the appropriate Member any portion of such overpayment and any interest thereon paid by the Internal Revenue Service to which such Member is entitled. Any adjustment by the Internal Revenue Service which affects either the consolidated tax liability or the relative tax liabilities of members shall be made among the Members immediately after the amount of the adjustment is determined. If there are any penalties (including penalty for failure to pay estimated taxes) with respect to the filing of any consolidated return, the penalty shall be shared appropriately among those parties whose action or inaction (such as understating taxable income) contributed to the penalty. 5. Under the provisions of paragraph 2, a Member who has a tax liability for the taxable year shall be entitled to a payment for the use by the Affiliated Group of its tax losses or credits. The amount of such payment shall be determined on the basis of the utilization of such Member's losses and credits in making estimated tax payments and the final reconciliation shall be made when the consolidated return is filed, subject to adjustments and redeterminations as otherwise provided herein. 6. In the event of any adjustment of tax returns of the Members as filed by reason of filing an amended return or claim for refund, or arising out of an audit by the Internal Revenue Service, the liability of the Members to each other and to the Internal Revenue Service for any period covered by this Agreement shall be redetermined after fully giving effect to any such adjustments as if such adjustments had been made as part of original computations. Payments or credits between the Members shall be made at the time of any payment of tax or receipt of refund or credit from the Internal Revenue Service with respect to such adjustments, and such payments, refunds or credits shall include any interest attributable to such adjustments. 7. The parties acknowledge that the Bank files a separate tax return for Iowa franchise tax purposes. All other parties file a consolidated income tax return for Iowa tax purposes. 8. The parties agree that it is their express intent that this Agreement shall at all times be construed in a manner consistent with any law or regulation applicable to any Member as now or hereafter in effect relating to savings and loan associations or the insurance of their accounts. Anything to the contrary herein notwithstanding, (1) North Central Bancshares, Inc. shall not pay to Members an amount greater than the tax which First Federal Savings Bank of Iowa, First Iowa Title Services, Inc., First Iowa Mortgage, Inc. , First Federal Investment Services, Inc. or NC Properties, LLC would have been required to pay had they filed a separate tax return, taking maximum advantage of available reductions in taxable income; (2) any payments made pursuant to this Agreement shall be made monthly at the time their liabilities are determined under paragraph 2, it being understood that First Federal Savings Bank of Iowa, First Iowa Title Services, Inc., First Iowa Mortgage, Inc., First Federal Investment Services, Inc. and NC Properties, LLC shall at no time make advance payments with respect to the foregoing to any Member; (3) any funds (i) received by North Central Bancshares, Inc. from any Member for the payment by North Central Bancshares, Inc. of taxes or (ii) received by North Central Bancshares, Inc. from any taxing authority by reason of any refund, credit or overpayment and properly allocable to another Member, shall at all times be held by North Central Bancshares, Inc. in a segregated account solely as agent for such Member and shall at no time be commingled with any other funds held by North Central Bancshares, Inc.; and (4) appropriate refunds from North Central Bancshares, Inc. to First Federal Savings Bank of Iowa, First Iowa Title Services, Inc., First Iowa Mortgage, Inc., First Federal Investment Services, Inc. or NC Properties, LLC shall be made in the event that a loss by North Central Bancshares, Inc., First Federal Savings Bank of Iowa, First Federal Investment Services, Inc., First Iowa Mortgage, Inc. , First Iowa Title Services, Inc. or NC Properties, LLC would have resulted in a refund from taxing authorities if North Central Bancshares, Inc., First Federal Savings Bank of Iowa, First Iowa Title Services, Inc., First Iowa Mortgage, Inc. , First Federal Investment Services, Inc. and NC Properties, LLC had filed on a separate entity basis. 9. The Members which will be reimbursed for tax losses and credits and the Members making such reimbursement may change from time to time, depending upon the relationship of each member's tax liability and tax losses and credits to those of the Affiliated Group. Except as Section 8 hereof may otherwise require, each Member shall be treated in a manner identical to each other Member. 10. This Agreement is governed by the laws of the State of Iowa. 11. This Agreement shall be binding on and inure to the benefit of any successors to any of the parties hereto. 12. In the event any corporation subsequently becomes an includible corporation of the Affiliated Group, the parties agree to use their best efforts to cause such corporation to become a party to this Agreement and to be subject to all the terms and conditions hereof. 13. This Agreement shall remain in effect with respect to any party hereto for any taxable year or part thereof for which consolidated returns are filed by North Central Bancshares, Inc. as a common parent corporation and such party is an includible corporation in such consolidated return. 14. If North Central Bancshares, Inc., First Federal Savings Bank of Iowa, First Federal Investment Services, Inc., First Iowa Mortgage, Inc., First Iowa Title Services, Inc. or NC Properties, LLC were ever to leave the Affiliated Group as a result of their acquisition by an unaffiliated party, the exiting institution(s) shall receive payment from the Affiliated Group in an amount equal to the tax benefits resulting from net operating losses, if any, that accrued to the Affiliated Group as a result of the inclusion of the exiting institution(s) in the Affiliated Group from the date hereof. 15. If North Central Bancshares, Inc., First Federal Savings Bank of Iowa, First Federal Investment Services, Inc., First Iowa Mortgage, Inc., First Iowa Title Services, Inc. or NC Properties were ever to leave the Affiliated Group as a result of their acquisition by an unaffiliated party, the exiting institution(s) shall pay the Affiliated Group an amount equal to the tax liability, if any, that accrued to the Affiliated Group as a result of the inclusion of the exiting institution(s) in the affiliated Group from the date hereof. 16. Any alternative minimum tax computation on behalf of the Affiliated Group shall be determined on a consolidated basis, except that any such computation for Iowa franchise tax purposes shall be determined on a separate basis. IN WITNESS HEREOF, the parties hereto have executed this Agreement as of the date first above written. /s/ David M. Bradley Date: November 24, 2003 - -------------------- ----- ----------------- By: David M. Bradley, President For: First Federal Savings Bank of Iowa /s/ C. Thomas Chalstrom Date: November 24, 2003 - ----------------------- ------------------------ By: C. Thomas Chalstrom, President For: First Federal Investment Services, Inc. /s/ David M. Bradley Date: November 24, 2003 - -------------------- ------------------------ By: David M. Bradley, President For: First Iowa Title Services, Inc. /s/ C. Thomas Chalstrom Date: November 24, 2003 - ----------------------- ------------------------ By: C. Thomas Chalstrom, President For: First Iowa Mortgage, Inc. /s/ David M. Bradley Date: November 24, 2003 - -------------------- ------------------------ By: David M. Bradley, President For: North Central Bancshares, Inc. /s/ David M. Bradley Date: November 24, 2003 - -------------------- ------------------------ By: David M. Bradley, President For: NC Properties, LLC EX-13 6 ncb10kexhibit131_12-03.txt EXHIBIT 13.1 ANNUAL REPORT Exhibit 13.1 Annual Report to Shareholders NORTH CENTRAL BANCSHARES, INC. Holding Company for First Federal Savings Bank of Iowa 2003 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.................................................27 QUARTERLY RESULTS OF OPERATIONS (Unaudited)...................................58 MANAGEMENT OF THE HOLDING COMPANY AND THE BANK................................61 SHAREHOLDER INFORMATION.......................................................62 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 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 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, 2003. North Central Bancshares is the holding company for First Federal Savings Bank of Iowa (the "Bank). For the year ended December 31, 2003, North Central Bancshares' net income was $5,848,000 or $3.48 diluted earnings per share, as compared to $5,865,000, or $3.37 diluted earnings per share, for the year ended December 31, 2002. Some of our achievements during the past year include: 2003 HIGHLIGHTS * Total earnings per share, assets and loans reached new Company highs. o Diluted earnings per share reached a new high of $3.48. o Total assets grew to a new high of $424.0 million. o Total net loans increased $21.8 million. * Repurchased a total of 94,700 shares or 5.8% of outstanding stock during the year ended December 31, 2003. * Increased quarterly dividends in April, 2003 to $0.21 per share, a 16.7% increase. * Moved into a newly constructed 5,000 sq. ft. full service office in Ankeny, Iowa. * Opened a new office in Clive, Iowa and began construction on a permanent 5,000 sq. ft. full service facility. * Completed construction on a $1.6 million 23 unit Low Income Housing Tax Credit elderly apartment building in Fort Dodge and achieved 100% leaseup. * Originated a record $118 million of Single Family Mortgage Loans. Sadly, on another note, Director KaRene Egemo lost her valiant battle against cancer on February 18, 2004. During KaRene's 11 year tenure as a director she was an important part of the evolution of the Company from a mutual savings and loan to a fully stock savings bank holding company. We will sorely miss her wise counsel and positive attitude. KaRene was a very special person and we extend our condolences to her family. I want to thank our outstanding staff who helped make 2003 another successful year for the Company. The directors, officers and staff of North Central Bancshares, 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, CPA 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, --------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (In thousands) -------------- Selected Consolidated Financial Condition Data: Total assets .................. $424,009 $403,872 $379,375 $388,998 $367,433 Cash (noninterest-bearing) .... 2,894 2,143 2,259 2,519 8,542 Loans receivable, net:(1) First mortgage loans secured by one-to four-family residences ................ 171,468 147,479 159,943 174,413 161,547 First mortgage loans secured by multifamily properties . 69,507 70,194 73,311 74,644 71,503 First mortgage loans secured by commercial properties .. 68,933 70,502 25,263 23,825 17,470 Consumer loans .............. 53,051 52,971 49,464 45,144 36,239 ------- ------- ------- -------- ------- Total loans receivable, net 362,959 341,146 307,981 318,026 286,759 Investment securities(2) ...... 34,077 35,859 49,016 49,682 53,820 Deposits ...................... 283,964 277,000 268,814 261,167 271,031 Borrowed funds ................ 95,005 85,026 71,413 88,592 55,715 Total shareholders' equity .... 41,592 38,748 35,913 36,398 38,127
For the Year Ended December 31, ------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (In thousands) -------------- Selected Operating Data: Interest income ................... $25,456 $26,965 $27,500 $27,284 $24,556 Interest expense .................. 12,342 13,911 16,514 16,707 13,604 ------- ------- ------- ------- ------- Net interest income before provision for loan losses .... 13,114 13,054 10,986 10,577 10,952 Provision for loan losses ......... 255 383 210 120 120 ------- ------- ------- ------- ------- Net interest income after provision for loan losses .... 12,859 12,671 10,776 10,457 10,832 ------- ------- ------- ------- ------- Noninterest income: Fees and service charges ..... 2,864 2,375 1,993 1,592 1,485 Abstract fees ................ 1,811 1,686 1,506 1,233 1,421 Other income ................. 1,895 1,668 1,593 1,189 1,157 ------- ------- ------- ------- ------- Total noninterest income ... 6,570 5,729 5,092 4,014 4,063 ------- ------- ------- ------- ------- Noninterest expense: Salaries and employee benefits 5,950 5,223 4,500 4,103 4,026 Premises and equipment ....... 1,287 1,192 1,226 1,092 931 Data processing .............. 578 544 470 455 522 Goodwill ..................... -- -- 472 472 472 Other expenses ............... 3,045 2,623 2,378 2,465 2,503 ------- ------- ------- ------- ------- Total noninterest expense .. 10,860 9,582 9,046 8,587 8,454 ------- ------- ------- ------- ------- Income before income taxes ........ 8,569 8,818 6,822 5,884 6,441 Income tax expense ................ 2,721 2,953 2,347 1,873 2,241 ------- ------- ------- ------- ------- Net income ..................... $ 5,848 $ 5,865 $ 4,475 $ 4,011 $ 4,200 ======= ======= ======= ======= =======
4
At or for the Year Ended December 31, ------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- 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) ..................... 3.01% 3.15% 2.68% 2.57% 2.86% Net interest margin (net interest income as a percentage of average interest- earning assets) .......................... 3.26 3.44 3.03 2.95 3.35 Return on average assets (net income divided by average total assets) ......... 1.38 1.47 1.17 1.06 1.21 Return on average equity (net income divided by average equity) ............... 14.65 15.57 12.21 11.08 9.51 Noninterest income to average assets ....... 1.55 1.43 1.33 1.07 1.21 Efficiency ratio(3) ........................ 55.17 51.01 56.26 58.85 56.30 Noninterest expense to average assets ...... 2.56 2.40 2.36 2.28 2.45 Net interest income after provision for loan losses to noninterest expenses ...... 118.40 132.24 119.12 121.78 128.13 Financial Condition Ratios: (%) (4) Equity to assets at period end ............. 9.81 9.59 9.47 9.36 10.38 Tangible equity to tangible assets at period end (5) (6) .................. 8.54 8.25 8.03 7.84 8.68 Average shareholders' equity divided by average total assets ..................... 9.40 9.42 9.57 9.61 12.77 Average tangible shareholders equity divided by average tangible total assets (5) (6) 8.12 8.06 8.10 8.00 10.94 Average interest-earning assets to average interest-bearing liabilities ............. 108.27 107.91 107.54 108.31 112.05 Asset Quality Ratios: (%) (4) Nonaccrual loans to total net loans ........ 0.17 0.19 0.09 0.33 0.07 Nonperforming assets to total assets(7) .... 0.49 0.35 0.36 0.28 0.20 Allowance for loan losses as a percent of total loans receivable at end of period .. 0.86 0.90 0.92 0.88 0.95 Allowance for loan losses to nonaccrual loans .................................... 515.02 485.00 1,042.07 274.08 1,301.13 Per Share Data: Book value per share ....................... $ 25.92 $ 23.62 $ 21.12 $ 19.04 $ 16.86 Tangible book value per share(5) ........... 22.24 20.03 17.65 15.71 13.83 Basic earnings per share (8) ............... 3.69 3.58 2.54 2.04 1.64 Diluted earnings per share (9) ............. 3.48 3.37 2.41 2.00 1.60 Dividends declared per share ............... 0.84 0.72 0.60 0.50 0.40 Dividend payout ratio ...................... 0.23 0.20 0.25 0.25 0.24
_______________________ (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, plus premiums. The allowance for loan losses at December 31, 2003, 2002, 2001, 2000 and 1999 was $3.2 million, $3.1 million, $2.9 million, $2.8 million and $2.8 million, respectively. (2) Includes interest-bearing deposits. (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, 2003, 2002, 2001, 2000 and 1999 was $5.9 million, $5.9 million, $5.9 million, $6.4 million and $6.8 million, respectively. (6) Tangible assets consist of total assets less goodwill and title plant. Goodwill and title plant at December 31, 2003, 2002, 2001, 2000 and 1999 was $5.9 million, $5.9 million, $5.9 million, $6.4 million, and $6.8 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 2003, 2002, 2001, 2000 and 1999 were 1,583,568, 1,637,749, 1,762,900, 1,963,686 and 2,562,940, 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 2003, 2002, 2001, 2000 and 1999 were 1,679,046, 1,739,535, 1,856,643, 2,006,340 and 2,621,542, 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 Federal Home Loan Bank of Des Moines (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, data processing and other expenses. 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. Executive Overview North Central Bancshares, Inc.'s business strategy is to operate the Bank as a well-capitalized, profitable and independent community oriented savings bank. Specifically, the Company's business strategy incorporates the following elements: (1) operating as a community oriented financial institution; (2) increasing loan and deposit balances in existing branch offices as well as by establishing de novo branch offices in markets where population growth trends are positive such as the Des Moines, Iowa metropolitan area; (3) maintaining high asset quality by emphasizing investment in residential mortgage, multifamily and commercial real estate loans and consumer loans; (4) emphasizing growth in core deposits, which includes demand deposit, NOW, money market and savings accounts; (5) maintaining capital in excess of regulatory requirements; (6) controlling noninterest expense; (7) managing interest rate risk exposure; and (8) increasing noninterest income through increases in fees and service charges. The purpose of this summary is to provide an overview of the items management focuses on when evaluating the condition of the Company and our success in implementing our stockholder value strategy. Our stockholder value strategy has three major themes: (1) enhancing our shareholders' value; (2) making our retail banking franchise more valuable; and (3) efficiently utilizing our capital. Management believes the following points were the most important to that analysis this year: o Earnings per share and dividends per share have increased each year since the Company's inception in 1996. A key factor in these increases is the Company's stock repurchase programs. An active stock repurchase program has consistently been used by the Company to manage capital and increase earnings per share. Since the Company's inception it has repurchased 2,591,567 shares at a cost of $46.8 million as of December 31, 2003. o The Bank continues to open new offices in market areas where population growth trends are positive. A temporary office was opened in Clive, Iowa in October, 2003. The Clive office's permanent location opened in March, 2004. The Bank opened a permanent office in Ankeny, Iowa in February, 2004. Both of these locations are in suburbs of Des Moines which is Iowa's largest metropolitan area. The Company will continue to analyze de novo branch opportunities in the Des Moines metropolitan area. 7 Noninterest expenses have increased during the years ended December 31, 2003 and 2002 in part due to the Company's strategy of opening de novo branch offices. We believe that this strategy will result in loan and deposit growth for the Company but will negatively impact net earnings until each de novo branch achieves profitability. o Consistent with the Bank's emphasis on attracting and retaining core deposits, deposit fee growth continued a strongly positive trend. The growth in core deposits is due in part to a new direct mail marketing program implemented in early 2003 emphasizing checking accounts. This direct mail program is ongoing and is expected to result in a continued growth in core deposits and fee income. Marketing expenses are expected to remain at 2003 levels for 2004. o Our exposure to interest rate risk has increased from the prior year. This is due in part to the increase in the one year repricing of certificates of deposit and the decrease in the speed in which customers prepaid their loans. Also, beginning in 2002, the Company began to retain a portion of the 15 year fixed rate one- to four-family real estate loans it originates. o Management believes that the allowance for loan losses is adequate. The allowance for loan losses to nonaccrual loans was 515.02% at December 31, 2003. Net annualized chargeoffs for 2003 were .06% of total loans and have averaged under .04% of total loans for the past five years. During 2003, the Company's total loan portfolio increased $22.8 million or 6.6%. This increase primarily consisted of increases in the one- to four-family first mortgage real estate loans, which carry a lower level of credit risk than other loans in the portfolio. The Company's provision for loan losses in 2003 was $255,000. o The Company lowered its effective tax rate through the use of federal Low Income Housing Tax Credits (LIHTC). The Company owns and operates two elderly LIHTC projects in Fort Dodge. These projects will generate $278,000 in federal income tax credits in 2004. o Purchases and originations of out of state real estate loans remained an integral part of the Company's business o plan. The Company has purchased and originated out of state real estate loans to supplement local mortgage loan originations and to diversify its mortgage loan portfolio geographically. 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 8 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 than 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. Business Strategy The Company's current business strategy is to operate the Bank as a well-capitalized, profitable and independent community-oriented savings bank. 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 real estate 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 dedicated service to the individual consumer; (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, State and Local Obligations and mortgage-backed securities; (3) emphasizing growth in core deposits, which include demand deposit, NOW, money market and savings accounts; (4) maintaining capital in excess of regulatory requirements; (5) controlling noninterest expenses; (6) managing interest rate risk exposure while achieving desirable levels of profitability; and (7) increasing noninterest income through other increases in fees and service charges. Highlights of the Company's business strategy are as follows: Community-Oriented Institution. The Company is committed to meeting the financial needs of the communities in which it operates. Based in part on its participation in several different programs designed to facilitate residential lending to low- and moderate-income households, the Bank has received an "Outstanding" Community Reinvestment Act rating. Retail Deposit Base. In 2003, the Company had ten offices located in Fort Dodge, Ames, Nevada, Perry, Ankeny, Clive, Burlington and Mount Pleasant, Iowa. At December 31, 2003, 36.7% of the deposit base, or $104.3 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 growth in core deposits. 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, 2003, 40.5% 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, 2003, the Company's portfolio of loans which were either originated or purchased by the Company and secured by out of state properties consisted of $16.9 million of one-to four-family residential mortgage loans, or 4.6% of the Company's total loan portfolio, and $61.0 million of multifamily real estate loans, or 16.6% of the Company's total loan portfolio and $60.5 million of commercial real estate loans, or 16.5% of the Company's total loan portfolio. At December 31, 2003, the Company's ratio of nonperforming assets to total assets was 0.49%. 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. 9 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, 2003 was $1.8 million, offset by noninterest expense attributable to First Iowa. In addition, the Company has attempted to increase noninterest income through emphasizing growth in core deposit accounts, mortgage banking income, annuity and mutual fund sales and insurance sales. 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, 2003, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $23.0 million, representing a one-year gap to total assets ratio of negative 5.4% as compared to a positive 4.0% at December 31, 2002. To manage the Company's interest rate exposure, the Company emphasizes 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. In addition, the Company generally sells all fixed rate one-to-four family residential loans with maturities in excess of fifteen years. 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, 2003, $237,000, or 4.6%, 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 $2.4 million, or 47.4%, was scheduled to mature in one to five years and $2.5 million, or 48.0%, was scheduled to mature in more than five years. Certificates of deposit scheduled to mature in less than one year, at December 31, 2003, totaled $92.7 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 $170.0 million as of December 31, 2003. For additional information about cash flows from the Company's operating, financing and investing activities, see the Statements of Cash Flows included in the Consolidated Financial Statements. At December 31, 2003, the Company had outstanding loan commitments of $10.6 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 and the proceeds from the exercise of stock options. The main cash outflows are payments of dividends to shareholders and funds used to repurchase the Common Stock. During 2003, the Holding Company repurchased 94,700 shares of its Common Stock. The Company has determined that a share buyback is appropriate to enhance shareholder value as such repurchases generally increase earnings per share, return on average assets and on average equity, three performance benchmarks against which bank and thrift holding companies are often measured. The Company buys stock in the open market whenever the price of the stock is deemed reasonable and the Company has funds available for the purchase. 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 15 to the Consolidated Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment 10 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, 2003, 2002 and 2001, the Company's disbursements for loan originations and purchases totaled $205.4 million, $210.3 million and $150.4 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 call of securities and FHLB advances. Net cash flows provided by (used in) investing activities amounted to $(31.1) million, $(27.6) million and $20.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. Net cash flows provided by (used in) financing activities amounted to $13.9 million, $18.3 million and $(15.0) million for the years ended December 31, 2003, 2002 and 2001, 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, 2003 with tangible and leverage capital ratios of 7.6% 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 shareholders' 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, 2003: Capital Excess Amount Requirements Capital ------ ------------ ------- (In thousands) Tangible capital....... $ 31,816 $ 6,270 $ 25,546 Core capital........... 31,816 12,541 19,275 Risk-based capital..... 34,958 22,554 12,404 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, 2003, 37.7% 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, 2003, 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 rate 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 11 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. In addition, the Company generally sells all fixed rate one-to-four family residential loans with maturities in excess of fifteen years. At December 31, 2003, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $23.0 million, representing a one-year gap ratio of negative 5.4%, compared to a one-year gap ratio of positive 4.0% at December 31, 2002. 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, 2003 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 forth in the following table. Management believes that these assumptions approximate actual experience and considers them appropriate and reasonable. 12
At December 31, 2003 (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) ...................... $ 70,509 $ 69,298 $ 51,730 $ -- $ -- $ -- $ 191,537 Fixed (2) ........................... 20,503 39,829 27,421 33,535 7,310 977 129,575 Consumer and other loans ............... 19,816 22,864 9,027 2,180 148 -- 54,035 Investment securities(3)(4) ............ 17,495 4,021 506 3,032 -- -- 25,054 --------- --------- --------- --------- --------- --------- --------- Total interest-earning assets ....... $ 128,323 $ 136,012 $ 88,684 $ 38,747 $ 7,458 $ 977 $ 400,201 ========= ========= ========= ========= ========= ========= ========= Rate sensitive liabilities: Savings accounts ...................... $ 4,720 $ 7,169 $ 4,939 $ 6,629 $ 3,640 $ 668 $ 27,765 NOW accounts .......................... 15,393 15,807 6,273 3,719 406 4 41,602 Money market accounts ................. 20,370 5,415 -- -- -- -- 25,785 Certificate accounts .................. 92,660 56,268 30,722 -- -- -- 179,650 Noninterest bearing deposits .......... 9,161 -- -- -- -- -- 9,161 FHLB advances and other ............... 9,002 27,503 27,491 31,009 -- -- 95,005 --------- --------- --------- --------- --------- --------- --------- liabilities(5)...................... Total interest-bearing liabilities $ 151,306 $ 112,162 $ 69,425 $ 41,357 $ 4,046 $ 672 $ 378,968 ========= ========= ========= ========= ========= ========= ========= Interest sensitivity gap ................. $ (22,983) $ 23,850 $ 19,259 $ (2,610) $ 3,412 $ 305 Cumulative interest-sensitivity gap ...... $ (22,983) $ 867 $ 20,126 $ 17,516 $ 20,928 $ 21,233 Interest sensitivity gap to total ..... (5.42)% 5.62% 4.54% (0.62)% 0.80% 0.07% Cumulative interest-sensitivity gap to ... (5.42) 0.20 4.75 4.13 4.94 5.01 total assets Ratio of interest-earning assets to ...... 84.81 121.26 127.74 93.69 184.33 145.39 105.60 interest-bearing liabilities Cumulative ratio of interest-earning ..... 84.81 100.33 106.05 104.68 105.53 105.60 105.60 assets to interest-bearing liabilities Total assets ............................. $ 424,009 $ 424,009 $ 424,009 $ 424,009 $ 424,009 $ 424,009 $ 424,009 Cumulative interest bearing assets ....... $ 128,323 $ 264,335 $ 353,019 $ 391,766 $ 399,224 $ 400,201 $ 400,201 Cumulative interest sensitive liabilities $ 151,306 $ 263,468 $ 332,893 $ 374,250 $ 378,296 $ 378,968 $ 378,968
(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 12 percent per year, (iii) one-to four-family adjustable rate loans, mortgage backed securities and all other loans will prepay at 15 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 $7.1 million and $1.9 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 $7.1 million and securities available for sale of $12.0 million. (4) Includes $5.0 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. 13 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. Net Portfolio Value 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, 2003, 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 34,164 -5,548 -14 8.20 -90bp +200 bp 37,029 -2,683 -7 8.74 -36bp +100 bp 38,822 -890 -2 9.02 -8bp 0 bp 39,712 - - 9.10 - -100 bp 38,855 -857 -2 8.80 -29bp _________________________________ (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. Nonperforming Assets. Loans are reviewed on a regular basis and are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful. Mortgage loans and consumer loans are placed on nonaccrual status generally when either principal or interest is 90 days or more 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. 14 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, 2003, the Company's foreclosed real estate consisted of 16 properties with an aggregate carrying value of $1.5 million. 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, --------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (Dollars in thousands) Nonaccrual loans and nonperforming assets: First mortgage loans: One-to four-family residential .... $ 414 $ 434 $ 130 $ 237 $ 111 Multifamily and commercial properties ..................... -- 37 37 556 -- Consumer loans: ...................... 201 172 109 244 102 ------ ------ ------ ------ ------ Total nonaccrual loans ............ 615 643 276 1,037 213 Total foreclosed real estate(1) ...... 1,453 769 1,074 64 503 Other nonperforming assets ........... -- -- -- -- -- ------ ------ ------ ------ ------ Total nonperforming assets ....... $2,068 $1,412 $1,350 $1,101 $ 716 ====== ====== ====== ====== ====== Total nonaccrual loans to net loans receivable ....................... 0.17% 0.19% 0.09% 0.33% 0.07% Total nonaccrual loans to total assets 0.15 0.16 0.07 0.27 0.06 Total nonperforming assets to total assets .......................... 0.49 0.35 0.36 0.28 0.19
___________________________ (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. 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, --------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (In thousands) Loans past due 60-89 days: First mortgage loans: One-to four-family residential ...... $ 649 $ 830 $1,083 $ 590 $ 521 Multifamily and commercial properties 463 -- -- -- 491 Consumer loans .......................... 223 183 153 96 198 ------ ------ ------ ------ ------ Total past due 60-89 days ........... $1,335 $1,013 $1,236 $ 686 $1,210 ====== ====== ====== ====== ======
15 The following table sets forth information with respect to the Company's delinquent loans and other problem assets at December 31, 2003. At December 31, 2003 -------------------- Balance Number ------- ------ (Dollars in thousands) One-to four-family first mortgage loans: Loans 60 to 89 days delinquent .............. $ 649 15 Loans 90 days or more delinquent ............ 414 9 Multifamily and commercial first mortgage loans: Loans 60 to 89 days delinquent .............. 463 1 Loans 90 days or more delinquent ............ -- -- Consumer Loans: Loans 60 to 89 days delinquent .............. 223 23 Loans 90 days or more delinquent ............ 201 24 Foreclosed real estate ........................... 1,453 16 Other nonperforming assets ....................... -- -- Loans to facilitate sale of foreclosed real estate 107 1 Special mention loans ............................ 1,409 47 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, 2003, the Company had $1.4 million of special mention loans, consisting of fourteen loans secured by one-to four-family residences, one loan secured by commercial real estate and thirty-two 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, --------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (In thousands) Substandard assets ........... $2,046 $1,361 $1,291 $1,048 $ 656 Doubtful assets .............. -- -- -- -- -- Loss assets .................. 22 51 59 53 60 ------ ------ ------ ------ ------ Total classified assets $2,068 $1,412 $1,350 $1,101 $ 716 ====== ====== ====== ====== ====== Allowance for Loan Losses. It is management's policy to provide an allowance and provision 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 and commercial 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 2003 the Company's total loan portfolio increased $22.8 million or 6.6%. This increase primarily consisted of increases in the one-to-four family first mortgage real estate loans, which carries a lower level of risk than other loans in the portfolio. During the years ended December 31, 2003, 2002 and 2001 the Company's provision for loan losses were 16 $255,000, $383,000 and $210,000, respectively. The Company's allowance for loan losses totaled $3.2 million, $3.1 million and $2.9 million at December 31, 2003, 2002 and 2001, 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, ------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (Dollars in thousands) Total loans outstanding .................. $367,396 $344,574 $311,826 $322,408 $291,760 Average net loans outstanding ............ 358,260 337,693 318,197 307,104 265,553 Allowance balances (at beginning of ..... 3,118 2,883 2,843 2,776 2,676 -------- -------- -------- -------- -------- period).............................. Provisions for losses .................... 255 383 210 120 120 Charge-Offs: First mortgage loans ................ 36 27 15 15 5 Consumer loans ...................... 265 135 168 41 23 Recoveries: First mortgage loans ................ -- -- -- -- -- Consumer loans ...................... 93 14 13 3 8 -------- -------- -------- -------- -------- Net charge-offs ..................... 208 148 170 53 20 -------- -------- -------- -------- -------- Allowance balance (at end of.............. period).............................. $ 3,165 $ 3,118 $ 2,883 $ 2,843 $ 2,776 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total loans receivable at end of period .............................. 0.86% 0.90% 0.92% 0.88% 0.95% Net loans charged off as a percent of average net loans outstanding ....... 0.06 0.04 0.05 0.02 0.01 Ratio of allowance for loan losses to total nonaccrual loans at end of period .............................. 515.02 485.00 1,042.07 274.08 1,301.13 Ratio of allowance for loan losses to total nonaccrual loans and foreclosed real estate at end of period ........ 153.05 220.90 213.48 258.18 387.78
17 Allocation of Allowance for Loan Losses. The following table sets forth the allocation for loan losses by loan category for the periods indicated:
At December 31, --------------------------------------------------------------------------- 2003 2002 2001 --------------------------------------------------------------------------- % 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 ..................... $ 517 47.33% $ 395 43.17% $ 608 51.80% Multifamily residential mortgage loans 686 19.04 709 20.54 1,121 23.86 Commercial mortgage loans ............ 978 18.95 1,223 20.68 459 8.25 Consumer loans ....................... 984 14.68 791 15.61 695 16.09 ------ ------ ------ ------ ------ ------ Total allowance for loan losses .... $3,165 100.00% $3,118 100.00% $2,883 100.00% ====== ====== ====== ====== ====== ======
At December 31, --------------------------------------------------- 2000 1999 --------------------------------------------------- % of Loans % of Loans In Each In Each Category to Category to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (Dollars in thousands) Balance at end of period applicable to: One-to four-family residential mortgage loans ..................... $ 731 54.78% $ 726 56.23% Multifamily residential mortgage loans 1,145 23.45 1,332 25.16 Commercial mortgage loans ............ 303 7.56 252 6.07 Consumer loans ....................... 664 14.21 466 12.53 ------ ------ ------ ------ Total allowance for loan losses .... $2,843 100.00% $2,776 100.00% ====== ====== ====== ======
Average Balance Sheet The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances were computed on a monthly basis. 18
For the Year Ended December 31, ------------------------------------------------------------------------------------------------ At December 31, 2003 2003 2002 ------------------------------------------------------------------------------------------------ Average Average Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost ------- ---- ------- -------- ---- ------- -------- ---- (Dollars in thousands) Assets: Interest-earning assets: First mortgage loans(1).... $ 312,416 6.22% $ 304,573(8) $ 19,978 6.56 $ 285,065(8) $ 21,108 7.40% Consumer loans(1).......... 54,035 7.22 53,687(8) 4,146 7.72 52,628(8) 4,449 8.45 Investment securities...... 34,144(4) 3.53 43,905(5) 1,332 3.03 42,144(6) 1,409 3.34 --------- ---- --------- -------- ---- --------- -------- ---- Total interest-earning assets................ $ 400,595 6.12% $ 402,165 $ 25,456 6.33% $ 379,837 $ 26,966 7.10% Noninterest-earning assets....... 23,414 22,402 20,078 --------- --------- --------- Total assets................ $ 424,009 $ 424,567 $ 399,915 ========= ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings.................. $ 67,387 0.44% $ 65,897 $ 383 0.58% $ 61,677 $ 560 0.91% Passbook savings............ 27,765 0.30 27,619 149 0.54 24,810 281 1.13 Certificates of Deposit..... 179,651 3.77 180,983 7,318 4.04 182,496 8,649 4.74 Borrowed funds.............. 95,005 4.59% 96,923 4,492 4.63 83,022 4,421 5.33 --------- ---- --------- -------- ---- --------- -------- ---- Total interest-bearing liabilities.............. $ 369,808 3.11% $ 371,422 $ 12,342 3.32% $ 352,005 $ 13,911 3.95% Noninterest-bearing liabilities.. 12,609 13,236 10,241 --------- --------- --------- Total liabilities........... $ 382,417 $ 384,658 $ 362,246 Equity........................... 41,592 39,909 37,669 --------- --------- --------- Total liabilities and equity $ 424,009 $ 424,567 $ 399,915 ========= ========= ========= Net interest income.............. $ 13,114 $ 13,055 ======== ======== Net interest rate spread(2)...... 3.01% 3.01% 3.15% ==== ==== ==== Net interest margin (3).......... 3.25 3.26 3.44% ==== ==== ==== Ratio of average interest-earning assets to average interest- bearing liabilities....... 108.25 108.28 107.91% ====== ====== ======
For the Year Ended December 31, -------------------------------------- 2001 -------------------------------------- Average Average Yield/ Balance Interest Cost ------- -------- ---- Assets: Interest-earning assets: First mortgage loans(1).... $ 269,274(8) $ 20,902 7.76% Consumer loans(1).......... 48,923(8) 4,369 8.93 Investment securities...... 44,739(7) 2,229 4.98 ---------- -------- ---- Total interest-earning assets................ $ 362,936 $ 27,500 7.58% Noninterest-earning assets....... 20,217 --------- Total assets................ $ 383,153 ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings.................. $ 58,891 $ 1,224 2.08% Passbook savings............ 21,713 362 1.67 Certificates of Deposit..... 180,796 10,368 5.73 Borrowed funds.............. 75,854 4,560 6.01 --------- -------- ---- Total interest-bearing $ 337,254 $ 16,514 4.90% liabilities...................... Noninterest-bearing liabilities.. 9,246 --------- Total liabilities........... $ 346,500 Equity........................... 36,653 --------- Total liabilities and equity $ 383,153 ========= Net interest income.............. $ 10,986 ======== Net interest rate spread(2)...... 2.68% ==== Net interest margin (3).......... 3.03 ==== Ratio of average interest-earning assets to average interest- bearing liabilities....... 107.54 ======
___________________ (1) Balance is net of deferred loan fees, loan premiums 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 $7,079,000 and securities available for sale of $27,065,000. (5) Includes interest-bearing deposits of $14,217,000 and securities available for sale of $29,688,000. (6) Includes interest-bearing deposits of $16,910,000 and securities available for sale of $25,234,000. (7) Includes interest-bearing deposits of $9,984,000 and securities available for sale of $34,755,000. (8) Includes loan fee (cost) amortization of $64,000, $(34,000) and $(54,000) for the years ended December 31, 2003, 2002 and 2001. 19 Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in average volume (changes in average volume multiplied by old rate); (ii) changes in rates (changes in rate multiplied by old average volume); (iii) changes in rate-volume (changes in rate multiplied by the changes in average volume); and (iv) the net change.
Year Ended Year Ended December 31, 2003 December 31, 2002 Compared to Compared to Year Ended Year Ended December 31, 2002 December 31, 2001 -------------------------------------------------------------------------------------- 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................... $1,445 $(2,409) $(165) $(1,129) $1,227 $ (964) $ (57) $ 206 Consumer loans......................... 90 (384) (9) (303) 332 (234) (18) 80 Investment securities.................. 246 (250) (73) (77) (277) (459) (84) (820) ------ ------- ----- ------- ------ ------- ----- ------- Total interest-earning assets....... $1,781 $(3,043) $(247) $(1,509) $1,282 $(1,657) $(159) $ (534) ====== ======= ===== ======= ====== ======= ===== ======= Interest expense: NOW and money market savings........... $ 38 $ (200) $ (14) $ (176) $ 58 $ (689) $ (33) $ (664) Passbook savings....................... 32 (148) (17) (133) 52 (116) (17) (81) Certificate of deposits................ (72) (1,270) 11 (1,331) 97 (1,799) (17) (1,719) Borrowed funds......................... 740 (573) (96) 71 431 (521) (49) (139) ------ ------- ----- ------- ------ ------- ----- ------- Total interest-bearing liabilities. 738 (2,191) (116) (1,569) 638 (3,125) (116) (2,603) ------ ------- ----- ------- ------ ------- ----- ------- Net change in net interest income........... $1,043 $ (852) $(131) $ 60 $ 644 $ 1,468 $ (43) $ 2,069 ====== ======= ===== ======= ====== ======= ===== =======
20 Comparison of Financial Condition as of December 31, 2003 and December 31, 2002 Total assets increased $20.1 million, or 5.0%, to $424.0 million at December 31, 2003 from $403.9 million at December 31, 2002. The increase in assets was due primarily to increases in net loans receivable and to a lesser extent securities available for sale, offset in part by a decrease in interest bearing cash. Asset growth was funded by increases in FHLB advances and deposits. Total loans receivable, net, increased by $21.8 million, or 6.4%, to $363.0 million at December 31, 2003 from $341.1 million at December 31, 2002, primarily due to origination of $117.9 million of first mortgage loans secured by one-to four-family residences, originations of $4.7 million of first mortgage loans secured by multifamily residences and commercial real estate loans, purchases of first mortgage loans primarily secured by one-to four-family residences, multifamily residences and commercial real estate loans of $45.1 million, and originations of $25.9 million of second mortgage loans during the year ended December 31, 2003. These originations and purchases were offset in part by payments and prepayments of $133.4 million and sales of loans of $48.2 million during the year ended December 31, 2003. Also contributing to the Company's increase in loans receivable was a $9.6 million increase in the loans receivable at the Company's two new offices in Ankeny and Clive, Iowa. The increases in loan originations and repayments were due primarily to the ongoing low interest rate environment in 2003. The Company sells substantially all fixed-rate loans primarily with maturities in excess of 15 years in the secondary mortgage market in order to reduce interest rate risk. Securities available for sale increased $4.1 million, or 18.0%, primarily due to the increase in the mortgage backed security investments, partially offset by calls, payments and maturities of mortgage-backed securities and municipal securities. Proceeds of such calls, payments and maturities were used to fund loan growth. Interest bearing cash decreased $5.9 million, or 45.3%, from $13.0 million at December 31, 2002 to $7.1 million at December 31, 2003 as the Company invested cash in loans and securities. Borrowings, primarily FHLB advances, increased $10.0 million, to $95.0 million at December 31, 2003 from $85.0 million at December 31, 2002 as the Company utilized borrowings to fund loans and securities. Deposits increased $7.0 million, or 2.5%, to $284.0 million at December 31, 2003 from $277.0 million at December 31, 2002, primarily reflecting increases in NOW accounts, savings accounts, money market accounts and certain public funds deposits, offset in part by decreases in retail certificate of deposit accounts. The increase in deposits is due primarily to the opening of two new offices in Ankeny and Clive, Iowa and management's marketing efforts. Total shareholders' equity increased $2.8 million to $41.6 million at December 31, 2003 from $38.7 million at December 31, 2002, 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. Comparison of Financial Condition as of December 31, 2002 and December 31, 2001 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. The increase in assets was due primarily to increases in net loans receivable, offset in part by decreases in securities available for sale and interest bearing cash. Asset growth was funded by increases in FHLB advances and deposits. 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 the 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. The increases in loan originations and repayments were due primarily to the ongoing low interest rate environment in 2002. The Company sells substantially all fixed-rate loans primarily with maturities in excess of 15 years in the secondary mortgage market in order to reduce interest rate risk. 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 21 securities and equity securities, partially offset by the purchase of municipal securities. Proceeds of such calls, payments and sales were used to fund asset growth. 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 as the Company invested cash in loans. Borrowings, primarily FHLB advances, increased $13.6 million, to $85.0 million at December 31, 2002 from $71.4 million at December 31, 2001 as the Company utilized borrowings to fund loans. 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 as the Company utilized deposits to fund loans. 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. Comparison of Results of Operations for the Years Ended December 31, 2003 and 2002 Net Income. Net income decreased by $17,000 to $5.9 million for the year ended December 31, 2003 compared to $5.9 million for the same period in 2002. Net income is primarily dependent on net interest income, noninterest income, noninterest expense and income tax expense. The decrease in net income was primarily due to increases in noninterest expenses, offset in part by increases in noninterest income and decreases in income tax expense. Net Interest Income. Net interest income before provision for loan losses increased by $60,000 to $13.1 million for the year ended December 31, 2003 from $13.1 million for the year ended December 31, 2002. The increase is 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) decreased to 3.01% for the year ended December 31, 2003 from 3.15% for the year ended December 31, 2002. The decrease in interest rate spread reflects the general decrease in the yield on interest earning assets offset in part by the decrease in the overall cost of interest bearing liabilities. The decrease in the yield on interest earning assets and the cost of interest bearing liabilities reflects a general decrease in market interest rates. Interest Income. Interest income decreased by $1.5 million to $25.5 million for the year ended December 31, 2003 compared to $27.0 million for the year ended December 31, 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 balance of interest earning assets. The average yield on interest earning assets decreased to 6.33% for the year ended December 31, 2003 from 7.10% for the year ended December 31, 2002, primarily due to a general decrease in market interest rates. The average interest earning assets increased $22.3 million to $402.2 million for the year ended December 31, 2003, from $379.8 million for 2002. The increase in the average balances of interest earning assets primarily reflects increases in the average balances of first mortgage loans. The increases in first mortgage loans were primarily derived from originations of $117.9 million of first mortgage loans secured by one-to four-family residences, originations of $4.7 million of first mortgage loans secured by multifamily residences and commercial real estate loans, purchases of first mortgage loans secured by one-to four-family residences and multifamily residences and commercial real estate of $45.1 million, which originations and purchases were offset in part by payments and prepayments of $133.4 million and sales of loans of $48.2 million during the year ended December 31, 2003. This reflects the Company's continued emphasis on residential lending. See "-Business Strategy." Interest Expense. Interest expense decreased by $1.6 million to $12.3 million for the year ended December 31, 2003 compared to $13.9 million for the year ended December 31, 2002. The decrease in interest expense was primarily due 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 3.32% for the year ended December 31, 2003 from 3.95% for the year ended December 31, 2002, primarily due to a general decrease in market interest 22 rates. The decrease in interest expense was partially offset by a $19.4 million increase in the average balance of interest-bearing liabilities to $371.4 million for the year ended December 31, 2003, from $352.0 million for 2002. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the NOW, money market, savings and borrowed funds, offset by a decrease in certificates of deposit. The increase in average interest bearing deposits was due to the Company's marketing efforts and the opening of two new branches in Ankeny and Clive, Iowa. The increase in interest bearing liabilities was used to fund asset growth. Provision for Loan Losses. The Company's provision for loan losses was $255,000 and $383,000 for the years ended December 31, 2003 and December 31, 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 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. During 2003 the Company's total loan portfolio increased $22.8 million or 6.6%. This increase primarily consisted of increases in the one-to-four family first mortgage real estate loans, which carries a lower level of risk than other loans in the portfolio. The Company purchased $45.1 million of loans in 2003, as compared to $84.4 million of loans in 2002. The properties securing the loans purchased are primarily out of state and constitute a higher rate of risk than originated loans due to the size, locations and type of collateral securing such loans. The Company's out of state loans increased by $2.8 million or 2.1% during 2003. The economic conditions in the Bank's primary market areas are currently stable. The net charge offs were $208,000 for the year ended December 31, 2003 as compared to $148,000 for the year ended December 31, 2002. The increase in charge offs were primarily due to an increase in the charge offs of automobile and second mortgage loans. The resulting allowance for loan loss was $3.2 million and $3.1 million at December 31, 2003 and December 31, 2002, respectively. The allowance for loan losses as a percentage of total loans receivable decreased to 0.86% at December 31, 2003 from 0.90% at December 31, 2002. The level of nonperforming loans was $615,000 at December 31, 2003 and $643,000 at December 31, 2002. See "Asset Quality". Management believes that the allowance for loan losses is adequate as of December 31, 2003. 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 $841,000, or 14.7%, to $6.6 million for the year ended December 31, 2003 from $5.7 million for the year ended December 31, 2002. The increase is due to increases in fees and service charges, other income, abstract fees and mortgage banking income (gain on sale of loans). Fees and service increased $488,000 due to an increase in loan prepayment fees and fees associated with checking accounts, including overdraft fees. Other income, which primarily includes annuity and mutual fund sales, rent income, insurance sales and income associated with foreclosed real estate increased $146,000 due to an increase in annuity and mutual fund sales, increased rental income associated with the opening of a second multifamily apartment building in March, 2003 and income associated with foreclosed real estate, offset by a decrease in insurance sales. Abstract fees increased $125,000 due to increased sales volume as a result of a general increase in real estate activity, such as loan originations. Mortgage banking income increased $81,000 due in part to increased pricing, offset by a decrease in loan originations of loans held for sale. Noninterest Expense. Total noninterest expense increased by $1.3 million to $10.9 million for the year ended December 31, 2003 from $9.6 million for the year ended December 31, 2002. The increase is primarily due to an increase in salaries and employee benefits, other expenses, premises and equipment and data processing. Salaries and benefits increased $726,000 due to an increase in the Company's contribution to the retirement plan, increases as a result of the employee stock ownership plan, an increase in personnel at the Ankeny and Clive offices, normal salary increases and increases in other 23 employee benefits. Other expenses increased $423,000 primarily due to increases in marketing costs in conjunction with a direct mail checking account promotion, increased apartment operating costs associated primarily from the opening of a second multifamily apartment building in March, 2003, increases in write-offs of overdrafts and an increase in costs associated with the Ankeny and Clive offices. Premises and equipment increased $95,000 primarily due to an increase in the costs associated with the Ankeny and Clive offices. Data processing increased $34,000 primarily due to normal data processing cost increases and increases in conjunction with internet banking costs. The Company's efficiency ratio for the year ended December 31, 2003 and 2002 was 55.17% and 51.01%, respectively. The Company's ratio of noninterest expense to average assets for the year ended December 31, 2003 and 2002 was 2.56% and 2.40%, respectively. Income Taxes. Income taxes decreased by $233,000 to $2.7 million for the year ended December 31, 2003 as compared to $3.0 million for the year ended December 31, 2002. The decrease was principally due to a decrease in pre-tax earnings during the 2003 period as compared to the 2002 period, a new recurring federal income tax credit from Northridge Apartment Limited Partnership II and a one time state tax credit from Northridge Apartment Limited Partnership II, which decreased income tax expense by approximately $110,000, partially offset by a decrease in nontaxable income. Comparison of Results of Operations for the Years Ended December 31, 2002 and 2001 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. Net income is primarily dependent on net interest income, noninterest income, noninterest expense and income tax expense. The increase in net income was primarily due to increases in net interest income and noninterest income, offset in part by increases in noninterest expense and income taxes. 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. The decrease in the yield on interest earning assets and the cost of interest bearing liabilities reflects a general decrease in market interest rates. 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 by 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. 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 24 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 borrowed funds, NOW, savings and retail certificates of deposits, 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. 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, such as loan originations. Other income, which primarily includes annuity and mutual fund sales, insurance sales, rent income and income associated with foreclosed real estate, 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, other expenses and data processing, partially offset by a decrease in goodwill amortization. Salaries and benefits increase $723,000 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. Other expenses increased $245,000 primarily due to the opening of the Ankeny office, marketing expenses, expenses in connection with loan purchases, costs associated with First Iowa, apartment operating costs, office supplies and losses associated with checking accounts, offset in part by a decrease in the costs associated with ATM and debit cards. Data processing costs increased $74,000 primarily due to normal data processing cost increases, Internet banking costs and an increase in consulting costs. The Company's efficiency ratio for the year ended December 31, 2002 and 2001 was 51.01% and 56.26%, respectively. The Company's ratio of 25 noninterest expense to average assets for the year ended December 31, 2002 and 2001 was 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. 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. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Contractual Obligations (Dollars in thousands)
Contractual obligations Payments due by period ----------- ---------------------- Less than More than Total 1 year 1-3 years 3-5 years 5 years ----- ------ --------- --------- ------- Borrowings (1) $ 94,988 $ 9,002 $ 27,503 $ 16,502 $ 41,981 Loan Commitments $ 10,601 $ 10,601 -- Available home equity and unadvanced lines of credit $ 2,452 $ 2,452 -- -- -- -------- -------- -------- -------- -------- Total $108,041 $ 22,055 $ 27,503 $ 16,502 $ 41,981 ======== ======== ======== ======== ========
(1) Callable advances are included in the category in which the advances mature 26 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS ---------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT........................................28 ---------------------------------------------------------------------- FINANCIAL STATEMENTS Consolidated statements of financial condition.....................29 Consolidated statements of income..................................30 Consolidated statements of stockholders' equity....................31 Consolidated statements of cash flows..............................32 Notes to consolidated financial statements.........................34 ------------------------------------------- 27 McGladrey & Pullen Certified Public Accountants 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, 2003 and 2002 and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2003, 2002 and 2001. 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, 2003 and 2002 and the results of their operations and their cash flows for the years ended December 31, 2003, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America. /s/McGladrey & Pullen, LLP Des Moines, Iowa January 30, 2004 McGladrey & Pullen, LLP is an independent member firm of RSM International, an affiliation of independent accounting and consulting firms. 28 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2003 and 2002
ASSETS 2003 2002 - ------------------------------------------------------------------------------------------------- Cash and due from banks (Note 19): Interest-bearing $ 7,124,828 $ 13,025,657 Noninterest-bearing 2,893,745 2,142,944 ------------- ------------- Total cash and cash equivalents 10,018,573 15,168,601 Securities available-for-sale (Notes 2 and 7) 26,952,157 22,833,742 Loans receivable, net (Notes 3, 4, 7 and 13) 362,959,238 341,146,364 Loans held for sale 326,900 2,372,134 Accrued interest receivable 1,866,521 1,928,278 Foreclosed real estate 1,453,353 768,726 Premises and equipment, net (Note 5) 9,842,477 8,195,963 Rental real estate 2,968,918 2,197,382 Title plant 925,256 925,256 Goodwill (Note 1) 4,970,800 4,970,800 Deferred taxes (Note 8) 757,543 608,657 Prepaid expenses and other assets 967,565 2,755,778 ------------- ------------- Total assets $ 424,009,301 $ 403,871,681 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits (Note 6) $ 283,963,569 $ 277,000,082 Borrowed funds (Note 7) 95,004,605 85,026,438 Advances from borrowers for taxes and insurance (Note 4) 1,736,755 1,512,114 Dividends payable 337,907 295,250 Accrued expenses and other liabilities 1,374,824 1,289,593 ------------- ------------- Total liabilities 382,417,660 365,123,477 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Notes 12 and 15) STOCKHOLDERS' EQUITY (Notes 10 and 15) Common stock, $.01 par value, authorized 15,500,000 shares; issued and outstanding 2003 1,604,780 shares; 2002 1,640,280 shares 16,048 16,403 Preferred stock, $.01 par value, authorized 3,000,000 shares; none issued and outstanding -- -- Additional paid-in capital 17,711,322 17,011,095 Retained earnings, substantially restricted (Note 8) 24,103,330 21,862,248 Unearned shares, employee stock ownership plan (Note 9) (167,793) (318,097) Accumulated other comprehensive income (loss) (71,266) 176,555 ------------- ------------- Total stockholders' equity 41,591,641 38,748,204 ------------- ------------- Total liabilities and stockholders' equity $ 424,009,301 $ 403,871,681 ============= =============
See Notes to Consolidated Financial Statements. 29 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001 - ----------------------------------------------------------------------------------------------------- Interest income: Loans receivable: First mortgage loans $ 19,977,961 $ 21,107,541 $ 20,902,405 Consumer loans 4,146,118 4,448,629 4,369,468 Securities and cash deposits 1,331,927 1,409,314 2,227,695 ------------ ------------ ------------ 25,456,006 26,965,484 27,499,568 ------------ ------------ ------------ Interest expense: Deposits (Note 6) 7,849,586 9,489,921 11,953,966 Other borrowed funds 4,492,129 4,420,959 4,559,807 ------------ ------------ ------------ 12,341,715 13,910,880 16,513,773 ------------ ------------ ------------ Net interest income 13,114,291 13,054,604 10,985,795 Provision for loan losses (Note 3) 255,000 383,000 210,000 ------------ ------------ ------------ Net interest income after provision for loan losses 12,859,291 12,671,604 10,775,795 ------------ ------------ ------------ Noninterest income: Fees and service charges 2,863,713 2,375,228 1,992,794 Abstract fees 1,810,924 1,686,271 1,506,099 Mortgage banking income 828,099 746,983 778,923 (Loss) on sale of securities available-for-sale, net -- (523) (933) Other income 1,067,401 921,125 815,733 ------------ ------------ ------------ Total noninterest income 6,570,137 5,729,084 5,092,616 ------------ ------------ ------------ Noninterest expense: Compensation and employee benefits (Note 9) 5,949,737 5,223,411 4,500,178 Premises and equipment 1,287,229 1,192,153 1,226,056 Data processing 577,836 544,169 470,147 Goodwill amortization (Note 1) -- -- 472,290 Other expenses (Note 11) 3,045,650 2,622,462 2,377,466 ------------ ------------ ------------ Total noninterest expense 10,860,452 9,582,195 9,046,137 ------------ ------------ ------------ Income before income taxes 8,568,976 8,818,493 6,822,274 Provision for income taxes (Note 8) 2,720,566 2,953,332 2,347,411 ------------ ------------ ------------ Net income $ 5,848,410 $ 5,865,161 $ 4,474,863 ============ ============ ============ Basic earnings per common share (Note 16) $ 3.69 $ 3.58 $ 2.54 Earnings per common share - assuming dilution (Note 16) 3.48 3.37 2.41 Dividends declared per common share 0.84 0.72 0.60
See Notes to Consolidated Financial Statements. 30 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2003, 2002, and 2001
Unearned Shares, Additional Employee Stock Comprehensive Common Paid-in Retained Ownership Income Stock Capital Earnings Plan - -------------------------------------------------------- --------------- ------------ -------------- -------------- ---------------- 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) Comprehensive income: Net income $5,848,410 - - 5,848,410 - Other comprehensive (loss), net of tax (Note 2) (247,821) - - - - ---------- Total comprehensive income $5,600,589 ========== Purchase of treasury stock - - - - Dividends on common stock - - (1,320,089) - Retirement of treasury stock (947) (946,053) (2,287,239) - Effect of contribution to employee stock ownership plan - 398,642 - 150,304 Issuance of common stock 592 1,247,638 - - --------------------------------------------------------- Balance, December 31, 2003 $16,048 $17,711,322 $24,103,330 $ (167,793) =========================================================
Accumulated Other Total Comprehensive Treasury Stockholders' Income (Loss) Stock Equity - ---------------------------------------------------------------------------------------------------------- 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 Comprehensive income: Net income - - 5,848,410 Other comprehensive (loss), net of tax (Note 2) (247,821) - (247,821) Total comprehensive income Purchase of treasury stock - (3,234,239) (3,234,239) Dividends on common stock - - (1,320,089) Retirement of treasury stock - 3,234,239 - Effect of contribution to employee stock ownership plan - - 548,946 Issuance of common stock - - 1,248,230 -------------------------------------------- Balance, December 31, 2003 $ (71,266) $ - $ 41,591,641 ============================================
31 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,848,410 $ 5,865,161 $ 4,474,863 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 255,000 383,000 210,000 Depreciation 797,117 721,762 743,796 Amortization and accretion 677,301 268,424 639,003 Deferred taxes (1,475) (114,715) (193,638) Effect of contribution to employee stock ownership plan 548,946 436,984 369,907 Gain on sale of foreclosed real estate and loans, net (873,444) (743,017) (776,179) Loss on sale of securities available-for-sale, net -- 523 933 Loss on disposal of equipment 4,916 5,923 11,396 Proceeds from sales of loans held for sale 51,061,653 53,645,852 50,087,483 Originations of loans held for sale (48,188,320) (53,665,293) (50,415,883) Change in assets and liabilities: Accrued interest receivable 61,757 (14,721) 343,596 Prepaid expenses and other assets 1,788,213 (2,123,150) (58,263) Accrued expenses and other liabilities 85,231 (100,530) 107,628 ------------ ------------ ------------ Net cash provided by operating activities 12,065,305 4,566,203 5,544,642 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net change in loans 26,056,456 51,036,816 36,679,436 Purchase of loans (49,583,830) (84,619,011) (27,784,114) Proceeds from sale of securities available-for-sale 702,400 750,227 220,125 Purchase of securities available-for-sale (11,197,958) (322,763) (7,293,386) Proceeds from maturities and calls of securities available-for-sale 5,888,849 8,053,186 19,714,516 Purchase of premises, equipment, and rental real estate (3,344,928) (2,609,603) (834,613) Proceeds from sale of equipment 124,846 1,015 18,376 Other 235,978 95,354 (193,518) ------------ ------------ ------------ Net cash provided by (used in) investing activities (31,118,187) (27,614,779) 20,526,822 ------------ ------------ ------------
(Continued) 32 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 2003, 2002, and 2001
2003 2002 2001 - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 6,963,487 $ 8,186,351 $ 7,647,085 Net increase (decrease) in advances from borrowers for taxes and insurance 224,641 (77,200) 271,245 Net increase (decrease) in short-term borrowings 1,500,000 (250,000) (4,750,000) Proceeds from other borrowed funds 17,500,000 39,500,000 11,000,000 Payments of other borrowed funds (9,021,833) (25,636,285) (23,429,503) Purchase of treasury stock (3,234,239) (3,569,328) (5,280,545) Proceeds from issuance of common stock 1,248,230 1,283,365 557,640 Dividends paid (1,277,432) (1,128,628) (1,028,210) ------------ ------------ ------------ Net cash provided by (used in) financing activities 13,902,854 18,308,275 (15,012,288) ------------ ------------ ------------ Net change in cash and cash equivalents (5,150,028) (4,740,301) 11,059,176 CASH AND CASH EQUIVALENTS Beginning 15,168,601 19,908,902 8,849,726 ------------ ------------ ------------ Ending $ 10,018,573 $ 15,168,601 $ 19,908,902 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors $ 7,872,840 $ 9,782,295 $ 12,081,559 Interest paid on borrowings 4,492,129 4,421,374 4,610,964 Income taxes 2,330,008 2,712,103 2,127,615
See Notes to Consolidated Financial Statements. 33 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Note 1. Significant Accounting Policies Organization, nature of business and basis of presentation: North Central Bancshares, Inc., (the Company), an Iowa corporation, is a unitary savings and loan holding company that owns 100% of the outstanding stock of First Federal Savings Bank of Iowa (the Bank), which is a federally chartered stock savings bank that conducts its operations from its main office located in Fort Dodge, Iowa, and nine branch offices located in Fort Dodge, Nevada, Ames, Perry, Ankeny, Clive, 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) and 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 generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 and 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, deposits and short-term borrowing 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, 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. Declines in the fair value of individual available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. The related write-downs would be included in earnings as realized losses. 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. 34 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 balances. 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 two 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. 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 which eliminated the amortization and required a goodwill impairment test. The Company annually completes a goodwill impairment test and has determined that there has been no impairment of goodwill. 35 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Had provisions of SFAS 142 been applied in fiscal year 2001, the Company's net income and net income per share would have been as follows: Year Ended December 31, 2001 --------------------------------------- Basic Diluted Net Earnings Earnings Income Per Share Per Share ------------- ------------ ------------ Net income: As reported $ 4,474,863 $ 2.54 $ 2.41 Add: Goodwill amortization 472,290 0.27 0.25 ------------- ------------ ------------ Pro forma net income $ 4,947,153 $ 2.81 $ 2.66 ============= ============ ============ 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 or loss. 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. 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 36 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- 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 2003, 2002 and 2001, reported net income and earnings per common share would have been decreased to the pro forma amounts shown below:
2003 2002 2001 ------------------ ----------------- ------------------ Net income, as reported $ 5,848,410 $ 5,865,161 $ 4,474,863 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (66,773) (110,585) (183,477) ------------------ ----------------- ------------------ Pro forma net income $ 5,781,637 $ 5,754,576 $ 4,291,386 ================== ================= ================== Earnings per common share - basic: As reported $ 3.69 $ 3.58 $ 2.54 Pro forma 3.65 3.51 2.43 Earnings per common share - assuming dilution: As reported $ 3.48 $ 3.37 $ 2.41 Pro forma 3.44 3.31 2.31
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, 2002 and 2001, respectively: dividend rate of 2.3%, 3.5% and 3.2%, price volatility of 20%, 20% and 22%, risk-free interest rates of 3.70%, 4.92% and 4.93% and expected lives of eight years for all years. 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 forced 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. 37 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- 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, 2003 and 2002, the carrying amount and fair value of the commitments were not significant. 38 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Note 2. Securities Securities available-for-sale as of December 31, 2003, were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ------------------------------------------------------------ Equity securities: Mutual fund $ 2,000,000 $ -- $ (10,060) $ 1,989,940 Federal Home Loan Bank stock 4,778,200 -- -- 4,778,200 FHLMC preferred stock 5,499,000 15,000 (499,000) 5,015,000 FNMA preferred stock 1,000,000 10,000 -- 1,010,000 Other 2,100 1,675 -- 3,775 ------------ ------------ ------------ ------------ 13,279,300 6,675 (509,060) 12,796,915 ------------ ------------ ------------ ------------ Debt securities: State and local obligations 4,864,375 268,512 (260) 5,132,627 Mortgage-backed securities 8,922,072 104,434 (3,891) 9,022,615 ------------ ------------ ------------ ------------ 13,786,447 372,946 (4,151) 14,155,242 ------------ ------------ ------------ ------------ $ 27,065,747 $ 399,621 $ (513,211) $ 26,952,157 ============ ============ ============ ============
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 ============ ============ ============ ============
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. 39 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Securities available-for-sale with a carrying amount of approximately $516,000 and $522,000 at December 31, 2003 and 2002, respectively, were pledged on deposit accounts. Securities available-for-sale with a carrying amount of approximately $6,970,000 at December 31, 2003, were pledged as collateral on Federal Home Loan Bank advances. There were no securities available-for-sale pledged as collateral for Federal Home Loan Bank advances at December 31, 2002. Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2003 are summarized as follows:
Less than 12 Months 12 Months or More Total ---------------------------- ---------------------------- ---------------------------- Unrealized Unrealized Fair Fair Fair Value Losses Value Losses Value Losses -------------------------------------------------------------------------------------------- Equity securities: Mutual funds $ 1,989,940 $ (10,060) $ -- $ -- $ 1,989,940 $ (10,060) FHLMC preferred stock -- -- 2,000,000 (499,000) 2,000,000 (499,000) -------------------------------------------------------------------------------------------- 1,989,940 (10,060) 2,000,000 (499,000) 3,989,940 (509,060) -------------------------------------------------------------------------------------------- Debt securities: State and local obligations 259,740 (260) -- -- 259,740 (260) Mortgage-backed securities 6,969,791 (3,891) -- -- 6,969,791 (3,891) -------------------------------------------------------------------------------------------- 7,229,531 (4,151) -- -- 7,229,531 (4,151) -------------------------------------------------------------------------------------------- $ 9,219,471 $ (14,211) $ 2,000,000 $ (499,000) $ 11,219,471 $ (513,211) ============================================================================================
For all of the above investment securities, the unrealized losses are generally due to changes in interest rates and, as such, are considered to be temporary, by the Company. The amortized cost and fair value of debt securities as of December 31, 2003, 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 $ 235,288 $ 236,693 Due from one to five years 2,325,032 2,430,705 Due from five to ten years 1,668,498 1,759,327 Due after ten years 635,557 705,902 Mortgage-backed securities 8,922,072 9,022,615 ---------------- ---------------- $ 13,786,447 $ 14,155,242 ================ ================ 40 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- There were no securities sold during 2003. Gross gains of $26,352 and $800 were realized on the sale of securities available-for-sale in 2002 and 2001, respectively. Gross losses of $26,875 and $1,733 were realized on the sale of securities available-for-sale in 2002 and 2001, respectively. Included in the interest income on securities and cash deposits was dividend income of $424,366, $550,306 and $827,994 for the years ended December 31, 2003, 2002 and 2001, respectively. The components of other comprehensive income (loss) - net unrealized gains (losses) on available-for-sale securities for the years ended December 31, 2003, 2002 and 2001, were as follows:
2003 2002 2001 ----------------------------------------- Unrealized holding gains (losses) arising during the period $ (395,232) $ (22,997) $ 702,045 Less reclassification adjustment for net (losses) realized in net income - (523) (933) ----------------------------------------- Net unrealized gains (losses) before tax (expense) benefit (395,232) (22,474) 702,978 Tax (expense) benefit 147,411 9,038 (265,647) ----------------------------------------- Other comprehensive income (loss) - net unrealized gains (losses) on securities $ (247,821) $ (13,436) $ 437,331 =========================================
41 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Note 3. Loans Receivable Loans receivable at December 31, 2003 and 2002, are summarized as follows: 2003 2002 ------------------------------ First mortgage loans: Secured by one-to-four family residences $ 171,604,211 $ 146,457,845 Secured by: Multifamily properties 69,962,902 70,778,861 Commercial properties 69,609,086 71,251,023 Construction loans 2,284,390 2,293,998 ------------------------------ Total first mortgage loans 313,460,589 290,781,727 ------------------------------ Consumer loans: Automobile 9,800,805 10,114,605 Second mortgage 37,600,714 38,239,932 Other 6,533,556 5,437,535 ------------------------------ Total consumer loans 53,935,075 53,792,072 ------------------------------ Total loans 367,395,664 344,573,799 Undisbursed portion of construction loans (1,855,050) (928,855) Unearned premiums, net 696,558 623,051 Net deferred loan origination (fees) (113,077) (3,237) Allowance for loan losses (3,164,857) (3,118,394) ------------------------------ $ 362,959,238 $ 341,146,364 ============================== Activity in the allowance for loan losses is summarized as follows for the years ended December 31: 2003 2002 2001 ------------------------------------------ Balance, beginning $ 3,118,394 $ 2,883,197 $ 2,843,149 Provision charged to income 255,000 383,000 210,000 Loans charged-off (301,978) (161,842) (182,954) Recoveries 93,441 14,039 13,002 ------------------------------------------ Balance, ending $ 3,164,857 $ 3,118,394 $ 2,883,197 ========================================== 42 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- The following is a summary of information pertaining to impaired loans: December 31, ------------------ 2003 2002 ------------------- Impaired loans without a valuation allowance $ -- $ -- Impaired loans with a valuation allowance 614,517 642,967 ------------------- Total impaired loans $614,517 $642,967 =================== Valuation allowance related to impaired loans $110,813 $121,737 =================== Average investment in impaired loans $538,153 $579,763 ==================== Interest income recognized on impaired loans is insignificant. The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, executive officers and their immediate families (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Activity in loans receivable from certain executive officers and directors of the Company consisted of the following for the years ended December 31, 2003 and 2002: 2003 2002 -------------------------- Beginning balance $ 1,927,727 $ 1,998,872 New loans 130,800 653,000 Change in status -- (37,971) Repayments (211,184) (686,174) -------------------------- Ending balance $ 1,847,343 $ 1,927,727 ========================== 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, 2003 and 2002, are $43,771,993 and $31,859,427, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were $286,580 and $217,884 at December 31, 2003 and 2002, respectively. 43 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Note 5. Premises and Equipment Premises and equipment consisted of the following at December 31: 2003 2002 --------------------------- Land $ 2,629,144 $ 2,268,985 Buildings and improvements 7,479,355 6,042,167 Construction in progress 921,905 871,865 Leasehold improvements 35,259 35,259 Furniture, fixtures and equipment 3,418,889 3,150,595 Vehicles 101,955 96,990 --------------------------- 14,586,507 12,465,861 Less accumulated depreciation 4,744,030 4,269,898 --------------------------- $ 9,842,477 $ 8,195,963 =========================== Note 6. Deposits Deposits at December 31 were as follows: 2003 2002 --------------------------- Demand and NOW accounts: Noninterest bearing $ 9,161,277 $ 8,156,198 Interest-bearing 41,601,765 36,373,805 Savings accounts 27,764,803 25,692,683 Money market savings 25,785,186 23,747,823 Certificates of deposit 179,650,538 183,029,573 --------------------------- $283,963,569 $277,000,082 =========================== At December 31, 2003, scheduled maturities of certificates of deposit were as follows: Year ending December 31: 2004 $ 92,659,900 2005 34,269,210 2006 21,998,670 2007 19,513,073 2008 11,209,685 ------------- $ 179,650,538 ============= 44 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Interest expense on deposits consisted of the following: Years ended December 31, --------------------------------------- 2003 2002 2001 --------------------------------------- NOW accounts $ 125,078 $ 210,043 $ 295,684 Savings accounts 148,651 281,171 362,320 Money market savings 258,090 349,875 928,631 Certificates of deposit 7,317,767 8,648,832 10,367,331 --------------------------------------- $ 7,849,586 $ 9,489,921 $11,953,966 ======================================= The aggregate amount of certificates of deposit in excess of $100,000 was $18,751,451 and $15,795,853 as of December 31, 2003 and 2002, respectively. Note 7. Borrowed Funds Borrowed funds at December 31, 2003, included miscellaneous borrowings of $17,065 and borrowings from the Federal Home Loan Bank of Des Moines (FHLB) as follows:
Weighted- Stated Average Maturity Interest Rate Amount Features - ------------------------------------------------------------------------------------------------------------------- 2004 3.04% $ 9,000,000 Includes $1.5 million variable rate, renewable daily 2005 3.51 13,500,000 2006 4.64 14,000,000 2007 4.14 16,500,000 2008 5.05 14,500,000 Includes $9.0 million callable, various dates in 2004 2009 4.49 3,500,000 2010 5.68 20,500,000 Includes $17.5 million callable, various dates in 2004 2011 4.83 3,000,000 All callable, January , 2004 2018 3.83 487,540 15-year amortizing, repayable 2008 --------------------------------- 4.52% $ 94,987,540 =================================
At December 31, 2003, 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% (2.97% at December 31, 2003) and matures October 1, 2004. There were no borrowings outstanding at December 31, 2003. Borrowed funds at December 31, 2002, included miscellaneous borrowings of $21,287 and borrowings from the FHLB of $85,005,151. Such borrowings carried a weighted-average interest rate of 4.97% with maturities ranging from 2003 through 2013. The FHLB borrowings are collateralized by FHLB stock and qualifying first and second mortgage loans representing various percentages of the total borrowings outstanding. 45 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Note 8. 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. 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, 2003, 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, ------------------------------------------- 2003 2002 2001 ------------------------------------------- Current $ 2,722,041 $ 3,068,047 $ 2,541,049 Deferred (1,475) (114,715) (193,638) ------------------------------------------- $ 2,720,566 $ 2,953,332 $ 2,347,411 =========================================== 46 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Deferred tax assets and liabilities consisted of the following components as of December 31, 2003 and 2002: 2003 2002 ----------------------- Deferred tax assets: Unearned shares, employee stock ownership plan $ 17,000 $ 28,000 Allowance for loan losses 1,180,000 1,075,000 Unrealized losses on securities available-for-sale 42,000 -- Deferred directors fees and compensation 42,000 42,000 Deferred income 73,000 8,000 Accrued expenses 56,000 46,000 Dividends on employee stock ownership plan 45,000 34,000 Other 39,198 52,049 ----------------------- Total gross deferred tax assets 1,494,198 1,285,049 ----------------------- Deferred tax liabilities: Federal Home Loan Bank stock dividend 39,000 45,000 Loan costs 3,000 17,000 Premises and equipment 234,000 108,000 Title plant 181,000 160,000 Loans acquired 22,000 42,000 Investments acquired 11,000 16,000 Servicing rights 137,000 107,000 Unrealized gains on securities available-for-sale -- 105,000 Other 109,655 76,392 ----------------------- Total gross deferred tax liabilities 736,655 676,392 ----------------------- Net deferred tax assets $ 757,543 $ 608,657 ======================= 47 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rates of 34% to income before income taxes as a result of the following:
Years Ended December 31, ---------------------------------------------------------------------------- 2003 2002 2001 ------------------------- ------------------------ ------------------------ Percent Percent Percent of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income ------------------------------------------------------------------------------- Income before income taxes $ 2,913,452 34.0% $ 2,998,288 34.0% $ 2,319,573 34.0% Nontaxable income (149,455) (1.7) (187,175) (2.1) (235,557) (3.4) State income tax, net of federal income tax benefit 217,337 2.5 212,372 2.4 187,403 2.8 State tax credit, net of federal income tax benefit (109,720) (1.3) -- -- -- -- Low income housing tax credit (237,441) (2.8) (153,680) (1.7) (153,680) (2.3) Goodwill amortization -- -- -- -- 145,547 2.1 Other 86,393 1.0 83,527 0.9 84,125 1.2 ------------------------------------------------------------------------------- $ 2,720,566 31.7% $ 2,953,332 33.5% $ 2,347,411 34.4% ===============================================================================
Note 9. 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 $278,400 and $104,500 pension expense for the years ended December 31, 2003 and 2002, respectively. There was no pension expense for the year ended December 31, 2001. 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, 2003 and 2002. 48 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- 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 $548,947, $436,984 and $369,907 for the years ended December 31, 2003, 2002 and 2001, respectively. Shares of the Company's common stock held by the ESOP, at December 31, 2003 and 2002, are as follows: 2003 2002 -------------------------- Allocated shares 171,021 154,212 Unreleased (unearned) shares 16,916 32,588 -------------------------- 187,937 186,800 ========================== Fair market value of unreleased (unearned) shares $ 623,185 $ 1,010,228 ========================== 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. 49 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- The table below reflects option activity for the period indicated: Weighted- Average Exercise Number of Price per Shares Share Outstanding, December 31, 2000 298,710 $ 14.01 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 Granted 6,000 31.00 Forfeited (1,000) 19.51 Exercised (59,200) 13.34 ------------------------- Outstanding, December 31, 2003 167,610 $ 17.02 ========================= Options exercisable 146,210 $ 16.75 ========================= Remaining shares available for grant 68,605 ========= As of December 31, 2003, the 167,610 options outstanding under the Plan have exercise prices between $12.38 and $31.00. The weighted average fair value per option of options granted during the years ended December 31, 2003, 2002 and 2001, were $6.90, $4.20 and $4.48, respectively. 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 10. 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. 50 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- 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, 2003, 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. 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, 2003: Total Capital (to risk weighted assets) $ 34,958 12.4% $ 22,554 8.0% $ 28,192 10.0% Tier 1 Capital (to risk weighted assets) 31,816 11.3 11,277 4.0 16,915 6.0 Tier I (Core) Capital (to adjusted assets) 31,816 7.6 12,541 3.0 20,901 5.0 Tangible Capital (to adjusted assets) 31,816 7.6 6,270 1.5 - - 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 - -
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. 51 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Note 11. Other Noninterest Expense Other noninterest expense amounts are summarized as follows for the years ended December 31: 2003 2002 2001 ------------------------------------ Advertising and promotion $ 467,759 $ 277,702 $ 211,221 Professional fees 188,093 194,055 180,155 Printing, postage, stationery and supplies 445,609 437,453 382,832 Checking account charges 332,005 335,458 338,521 Insurance 129,875 106,826 83,602 OTS general assessment 93,455 88,799 84,138 Telephone 133,744 140,575 123,867 Apartment operating costs 335,098 172,941 143,730 Employee costs 132,632 164,508 133,380 Other 787,380 704,145 696,020 ------------------------------------ $3,045,650 $2,622,462 $2,377,466 ==================================== Note 12. 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, --------------------------- 2003 2002 --------------------------- Mortgage loans (including one-to-four family, multifamily and commercial loans) $10,601,444 $ 8,191,023 Undisbursed overdraft loan privileges and undisbursed home equity lines of credit 2,452,139 2,094,819
52 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- At December 31, 2003, the mortgage loan commitments above were comprised of variable-rate commitments carrying a weighted-average interest rate of 6.16% and fixed-rate commitments carrying a weighted-average interest rate of 8.26%. 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 13. 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 in Iowa. 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 $138,396,000 of the Bank's first mortgage loan portfolio at December 31, 2003, consisted of loans purchased or originated outside the state of Iowa. Concentrations by state include California with $36,703,000, Colorado with $16,710,000 and Wisconsin with $14,629,000. These are generally one-to-four family, 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. Note 14. Fair Values of Financial Instruments The carrying amount and fair value of the Company's financial instruments as of December 31, 2003 and 2002, were as follows:
2003 2002 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------------------------------------------------------- (nearest 000) (nearest 000) Finacial assets: Cash $ 10,018,573 $ 10,019,000 $ 15,168,601 $ 15,169,000 Securities 26,952,157 26,952,000 22,833,742 22,834,000 Loans, net 362,959,238 368,037,000 341,146,364 347,684,000 Loans held for sale 326,900 332,000 2,372,134 2,408,000 Accrued interest receivable 1,866,521 1,867,000 1,928,278 1,928,000 Financial liabilities: Deposits 283,963,569 291,575,000 277,000,082 284,278,000 Borrowed funds 95,004,605 99,187,000 85,026,438 90,971,000 Accrued interest payable 106,538 107,000 129,899 130,000
53 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Note 15. Restriction on Stockholders' Equity 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 16. 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:
2003 2002 2001 ------------------------------------ Numerator, income available to common stockholders $5,848,410 $5,865,161 $4,474,863 ==================================== Denominator: Weighted-average shares outstanding 1,610,209 1,680,679 1,823,100 Less unallocated ESOP shares 26,641 42,930 60,200 ------------------------------------ Weighted-average shares outstanding-basic 1,583,568 1,637,749 1,762,900 Dilutive effect of stock options 95,478 101,786 93,743 ------------------------------------ Weighted-average shares outstanding- assuming dilution 1,679,046 1,739,535 1,856,643 ==================================== Basic earnings per common share $ 3.69 $ 3.58 $ 2.54 Earnings per common share-assuming dilution 3.48 3.37 2.41
54 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Note 17. North Central Bancshares, Inc. (Parent Company Only) Condensed Financial Statements STATEMENTS OF FINANCIAL CONDITION December 31, 2003 and 2002 2003 2002 ---------------------------- ASSETS Cash $ 185,235 $ 410,620 Securities available-for-sale 3,775 3,398 Loans receivable, net 3,836,000 1,491,000 Investment in First Federal Savings Bank of Iowa 37,936,434 37,029,542 Deferred taxes 3,976 4,127 Prepaid and other assets -- 108,269 ---------------------------- Total assets $ 41,965,420 $ 39,046,956 ============================ LIABILITIES AND EQUITY LIABILITIES Dividend payable $ 337,907 $ 295,250 Accrued expenses and other liabilities 35,872 3,502 --------------- ------------ Total liabilities 373,779 298,752 ---------------------------- EQUITY Common stock 16,048 16,403 Additional paid-in capital 17,711,322 17,011,095 Retained earnings 24,103,330 21,862,248 Unearned shares, employee stock ownership plan (167,793) (318,097) Accumulated other comprehensive income (loss) (71,266) 176,555 ---------------------------- Total equity 41,591,641 38,748,204 ---------------------------- Total liabilities and equity $ 41,965,420 $ 39,046,956 ============================ 55 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- STATEMENTS OF INCOME Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001 ----------------------------------------- Operating income: Equity in net income of subsidiary $ 5,897,750 $ 5,901,383 $ 4,525,221 Interest income 63,516 53,759 69,842 Gain (loss) on sale of securities available-for-sale, net -- 26,352 (933) ----------------------------------------- 5,961,266 5,981,494 4,594,130 ----------------------------------------- Operating expenses: Interest expense -- 844 394 Salaries and employee benefits 19,800 22,150 33,250 Other 122,077 112,759 118,804 ----------------------------------------- 141,877 135,753 152,448 ----------------------------------------- Income before income tax (benefit) 5,819,389 5,845,741 4,441,682 Provision for income taxes (benefit) (29,021) (19,420) (33,181) ----------------------------------------- Net income $ 5,848,410 $ 5,865,161 $ 4,474,863 =========================================
56 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- STATEMENTS OF CASH FLOWS Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001 ----------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,848,410 $ 5,865,161 $ 4,474,863 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of First Federal Savings Bank of Iowa (5,897,750) (5,901,383) (4,525,221) Dividends received from First Federal Savings Bank of Iowa 5,750,000 5,000,000 4,750,000 (Gain) loss on sale of securities available-for-sale -- (26,352) 933 Change in deferred income taxes (458,243) (375,748) (107,233) Change in assets and liabilities: Prepaid expenses and other assets 108,269 (25,256) (11,384) Accrued expenses and other liabilities 32,370 3,103 399 ----------------------------------------- Net cash provided by operating activities 5,383,056 4,539,525 4,582,357 ----------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans receivable (2,345,000) (920,000) 530,000 Proceeds from sale of securities available-for-sale -- 277,727 220,125 ----------------------------------------- Net cash provided by (used in) investing activities (2,345,000) (642,273) 750,125 ----------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings -- (250,000) 250,000 Purchase of treasury stock (3,234,239) (3,569,328) (5,280,545) Proceeds from issuance of common stock 1,248,230 1,283,365 557,640 Dividends paid (1,277,432) (1,128,628) (1,028,210) ----------------------------------------- Net cash (used in) financing activities (3,263,441) (3,664,591) (5,501,115) ----------------------------------------- Net increase (decrease) in cash (225,385) 232,661 (168,633) CASH Beginning 410,620 177,959 346,592 ----------------------------------------- Ending $ 185,235 $ 410,620 $ 177,959 =========================================
57 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- Note 18. Quarterly Results of Operations (Unaudited) Year Ended December 31, 2003 -------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter -------------------------------------- (In thousands, except per share amounts) Interest income $6,526 $6,441 $6,343 $6,146 Interest expense 3,180 3,137 3,056 2,969 ------ ------ ------ ------ Net interest income 3,346 3,304 3,287 3,177 Provision for loan losses 60 60 75 60 ------ ------ ------ ------ Net interest income after provision for loan losses 3,286 3,244 3,212 3,117 ------ ------ ------ ------ Noninterest income: Fees and service charges 564 627 681 992 Abstract fees 434 495 521 361 Mortgage banking income 174 275 311 68 Other income 221 302 251 293 ------ ------ ------ ------ Total noninterest income 1,393 1,699 1,764 1,714 ------ ------ ------ ------ Noninterest expense: Compensation and employee benefits 1,432 1,412 1,506 1,600 Premises and equipment 309 307 321 350 Data processing 134 156 143 145 Other 682 779 791 793 ------ ------ ------ ------ Total noninterest expense 2,557 2,654 2,761 2,888 ------ ------ ------ ------ Income before income taxes 2,122 2,289 2,215 1,943 Provision for income taxes 620 761 721 619 ------ ------ ------ ------ Net income $1,502 $1,528 $1,494 $1,324 ====== ====== ====== ====== Basic earnings per share $ 0.94 $ 0.97 $ 0.95 $ 0.83 ====== ====== ====== ====== Diluted earnings per share $ 0.88 $ 0.92 $ 0.90 $ 0.78 ====== ====== ====== ====== 58 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------- 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 Mortgage banking fees 108 107 167 365 Gain (loss) on sale of securities available-for-sale (1) -- 1 -- Other income 222 281 243 175 ------- ------- ------- ------- Total noninterest income 1,315 1,386 1,509 1,519 ------- ------- ------- ------- Noninterest expense: Compensation and employee benefits 1,266 1,324 1,261 1,372 Premises and equipment 309 302 261 320 Data processing 129 132 131 152 Other 662 647 628 686 ------- ------- ------- ------- 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 taxes 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 ======= ======= ======= ======= 59 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: Compensation and employee benefits 1,100 1,048 1,127 1,225 Premises and equipment 297 289 290 350 Data processing 106 117 117 130 Goodwill amortization 118 118 118 118 Other expenses 553 612 583 630 ------ ------ ------ ------ 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 taxes 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 ====== ====== ====== ====== 60 MANAGEMENT OF THE HOLDING COMPANY AND THE BANK The Board of Directors of the Holding Company is divided into three classes, each of which contains approximately one-third of the Board. The Bylaws of the Holding Company currently authorize seven directors. Currently, all directors of the Holding Company are also directors of the Bank. Continuing Directors David M. Bradley, CPA is Chairman of the Board, President and Chief Executive Officer. 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. Nominees for Election as Directors Melvin R. Schroeder was formerly the Vice President of Instruction at Iowa Central Community College in Fort Dodge, Iowa. Mr. Schroeder retired in 2001. Randall L. Minear is the President of Terrus Real Estate Group, located in Des Moines, Iowa. He formerly served at the Director of Corporate Real Estate for The Principal Financial Group and as President of Principal Real Estate Services, a subsidiary of The Principal Financial Group. C. Thomas Chalstrom has been employed with the Bank since 1985, was named Executive Vice President in December 1994. Mr. Chalstrom was named Chief Operating Officer of the Bank in December 1998. Noncontinuing Directors KaRene Egemo was the owner of Egemo Realty, Inc. in Fort Dodge, Iowa. Mrs. Egemo passed away February 18, 2004. 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 or Nominees 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. 61 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 - ------------- ---- --- --------- 2002 First Quarter......... 23.88 20.00 0.18 Second Quarter........ 29.40 23.35 0.18 Third Quarter......... 28.99 23.00 0.18 Fourth Quarter........ 31.00 27.10 0.18 2003 First Quarter......... 36.10 31.60 0.21 Second Quarter........ 35.87 31.30 0.21 Third Quarter......... 36.71 33.64 0.21 Fourth Quarter ....... 38.68 35.58 0.21 The Company's Common Stock was traded at $38.80 as of March 8, 2004. Information Relating to the Company's Common Stock As of March 8, 2004, the Company had 1,262 shareholders of record, which includes the number of persons or entities who hold their Common Stock in nominee or "street" name through various brokerage firms. As of such date 1,588,280 shares of the Common Stock were outstanding. The Company's current quarterly dividend is $0.25 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 10 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. 62 Annual Meeting The Annual Meeting of Shareholders of the Company will be held at 10:00 a.m., Central Time, Friday, April 23, 2004 at the Trolley Center, located at 900 Central Avenue, Fort Dodge, Iowa. Stockholders and General Inquiries Stock Exchange David M. Bradley The Company's Common Shares are North Central Bancshares, Inc. listed under the symbol "FFFD" c/o First Federal Savings Bank of Iowa on NASDAQ 825 Central Avenue Fort Dodge, Iowa 50501 (515) 576-7531 www.firstfederaliowa.com General Counsel Independent Auditor Johnson, Erb, Bice, Kramer, Good & McGladrey & Pullen, LLP Mulholland, P.C. 400 Locust Street Suite 640 809 Central Avenue Des Moines, Iowa 50309 Fort Dodge, Iowa 50501 Special Counsel Transfer Agent Thacher Proffitt & Wood LLP Computershare Investor Services 1700 Pennsylvania Avenue, N.W., Suite 800 350 Indiana Street Suite 800 Washington, D.C. 20006 Golden, Colorado 80401 (303) 262-0600 or 800-962-4284 e-mail: inquire@computershare.com www.computershare.com Publications - Annual Report on Form 10-K A copy of the Company's Annual Report Form 10-K (without exhibits) for the fiscal year ended December 31, 2003 will be furnished without charge to shareholders of record as of March 8, 2004 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 Annual Report Form 10-K report is available online through the SEC Electronic Data Gathering, Analysis and Retrieval (EDGAR) filings at www.sec.gov. 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 website at www.computershare.com 63 EX-14 7 ncb10kexhibit141_12-03.txt EXHIBIT 14.1 CODE OF ETHICS Exhibit 14.1 Code of Ethics for Senior Financial Officers of North Central Bancshares, Inc. CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS OF NORTH CENTRAL BANCSHARES, INC. Policy Statement - ---------------- It is the policy of North Central Bancshares, Inc. that the Senior Financial Officers of North Central Bancshares, Inc. and First Federal Savings Bank of Iowa adhere to and advocate certain professional and ethical conduct in the fulfillment of their responsibilities. This professional and ethical conduct includes the promotion of professional conduct in the practice of financial management for the financial services industry, publicly traded companies and otherwise, as well as the deterrence of wrongdoing. Senior Financial Officers hold an important and elevated role in corporate governance in that they are uniquely capable and empowered to ensure that all stockholders' interests are appropriately balanced, protected and preserved. Purpose - ------- This purpose of this Code of Ethics for Senior Financial Officers of North Central Bancshares, Inc. ("Code") is to provide principles to which Senior Financial Officers of each of North Central Bancshares, Inc. and First Federal Savings Bank of Iowa (hereinafter sometimes collectively referred to as "NCB" or the "Company") are expected to adhere and advocate. They embody rules regarding individual and peer responsibilities, as well as responsibilities to other employees, the public and other stakeholders. It is expected that Senior Financial Officers will not violate the specific guidelines nor conduct themselves in any manner which violates the spirit of the Code. Senior Financial Officer - ------------------------ The term "Senior Financial Officer" shall include the Company's principal executive officer, principal operating officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Board of Directors of the Company shall, by resolution, designate the Senior Executive Officers who shall be subject to this Code, which designations shall be updated from time to time, as appropriate. Statement of Ethics - ------------------- All Senior Financial Officers of the Company shall: 1. Act ethically, with honesty and integrity, including ethically handling actual or apparent conflicts of interest between personal and professional relationships. 2. Perform responsibilities with a view to causing reports and documents filed with, or submitted to the Securities and Exchange Commission ("SEC") and in other public communications made by the Company, to contain disclosure of information which is full, fair, accurate, timely and understandable. 1 3. Comply with laws of federal, state and local governments applicable to Company, and the rules and regulations of private and public regulatory agencies having jurisdiction over the Company. 4. Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting or omitting material facts or allowing independent judgment to be compromised. 5. Encourage and reward professional integrity in all aspects of the Company's finance and accounting departments, by eliminating inhibitions and barriers to responsible behavior, such as coercion, fear or reprisal, or alienation from the Company itself. 6. Provide a mechanism for members of the finance and accounting departments to inform senior management of deviations in practice from policies and procedures governing honest and ethical behavior. 7. Respect the confidentiality of information acquired in the course of the performance of his or her responsibilities except when authorized or otherwise legally obligated to disclose, and not use confidential information acquired in the course of the performance of his or her responsibilities for personal advantage. 8. Proactively promote ethical behavior among subordinates and peers. 9. Use corporate assets and resources employed or entrusted to them in responsible manner. 10. Not use corporate information, corporate assets, corporate opportunities or one's positions with the Company for personal gain, and not compete directly or indirectly with the Company. 11. Comply in all respects with the Company's Code of Ethics, Statement of Company Policy Regarding Confidential Information and Stock and Securities trading by Directors, Officers and Employees, and Statement of Company Policy Regarding Disclosure of Material Information. 12. Advance the Company's legitimate interests when the opportunity arises. Compliance and Compliance Monitoring - ------------------------------------ 1. All Senior Financial Officers of each of North Central Bancshares, Inc. and First Federal Savings Bank of Iowa will be required to annually certify their compliance with the Code and file such certification with the Audit Committee of the Board of Directors. 2. Any violations of this Code may result in disciplinary action, up to and including immediate termination. 2 3. The Audit Committee shall have the power to monitor, make determinations, and recommend action to the Board of Directors with respect to violations of the Code. 4. The Audit Committee shall annually review with management the implementation of this Code, and shall assure that the Board of Directors of the Company receives an objective and adequate flow of information as to the matters that lie within the scope of the Code. 5. Any alleged violations of this Code shall be promptly reported to the Chairman of the Audit Committee. 6. If an employee would feel more comfortable submitting his or her inquiry or reporting a concern on an anonymous basis, the employee may do so by writing or faxing the same to the Chairman of the Audit Committee. 7. Any waivers of any provision of this Code shall be approved and documented by the Board of Directors and shall be disclosed on a timely basis, in accordance with applicable law. Waivers will not be granted except under extraordinary or special circumstances. Amendments to Code - ------------------ Any amendments made to this Code shall be approved by the Board of Directors of the Company and shall be disclosed on a timely basis, in accordance with applicable law. 3 CERTIFICATION OF COMPLIANCE --------------------------- WITH CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS OF ---------------------------------------------------- NORTH CENTRAL BANCSHARES, INC. ------------------------------ I hereby certify to the Audit Committee of North Central Bancshares, Inc. that: 1. I have read the Code of Ethics For Senior Financial Officers of North Central Bancshares, Inc. ("Code") at least once during the past 12 months and understand my responsibility to comply with the principles and policies contained in the Code. I recognize that my failure to comply with such principles and policies will be cause for severe disciplinary action or termination of my employment. 2. Except as stated in paragraph 3, immediately below: (a) To the best of my knowledge, I and members of my immediate family, do not have any interest which might be deemed to be a conflict of interest under the Code; (b) To my knowledge, I have not violated any federal, state, local or foreign law in connection with the Company's business; and (c) I am not aware of any Company activities which violate the Code. 3. Exceptions to the above should be noted below: I hereby certify that the above statements are, to the best of my knowledge and belief, true and accurate. - ----------------------------------- Date (Signature of Employee) ----------------------- - ----------------------------------- (Please Print your full name above) - ----------------------------------- (Title) 4 EX-23 8 ncb10kexhibit231_12-03.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 (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 January 30, 2004, which appears in the annual report on Form 10-K of North Central Bancshares, Inc. and subsidiaries for the year ended December 31, 2003. /s/ McGladrey & Pullen, LLP McGladrey & Pullen, LLP Des Moines, Iowa March 22, 2004 EX-31 9 ncb10kexhibit311_12-03.txt EXHIBIT 31.1 CERTIFCATIONS SECTION 302 Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certifications 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 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 report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this 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 report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; Date: March 22, 2004 /s/ David M. Bradley ------------------------------------- David M. Bradley President and Chief Executive Officer 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 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 report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this 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 report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting; Date: March 22, 2004 /s/ John L. Pierschbacher ------------------------- John L. Pierschbacher Treasurer EX-32 10 ncb10kexhibit321_12-03.txt EXHIBIT 32.1 CERTIFICATIONS SECTION 906 Exhibit 32.1 Section 1350 Certifications STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, David M. Bradley, is the President and Chief Executive Officer of North Central Bancshares, Inc. (the Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. March 22, 2004 /s/ David M. Bradley - --------------- -------------------- Dated David M. Bradley, President and CEO STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, John L. Pierschbacher, is the Chief Financial Officer and Treasurer of North Central Bancshares, Inc. (the Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. March 22, 2004 /s/ John L. Pierschbacher - -------------- ------------------------- Dated John L. Pierschbacher, Treasurer -----END PRIVACY-ENHANCED MESSAGE-----