10-Q/A 1 ncb10qa_09-04.txt FORM 10-Q/A SEPTEMBER 30, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [Mark One] [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ------------- Commission File Number 0-27672 NORTH CENTRAL BANCSHARES, INC. (Exact Name of Registrant as Specified in Its Charter) Iowa 42-1449849 -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I. R. S. Employer Incorporation or Organization) Identification Number) 825 Central Avenue Fort Dodge, Iowa 50501 --------------------------------------------- (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (515) 576-7531 None ---- Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 28, 2004 -------------------------------------------------------------------------------- Common Stock, $.01 par value 1,547,280 NORTH CENTRAL BANCSHARES, INC. INDEX Page Part I. Financial Information Item 1. Consolidated Condensed Financial Statements (Unaudited) 1 to 3 Consolidated Condensed Statements of Financial Condition at September 30, 2004 and December 31, 2003 1 Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2004 and 2003 2 Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 3 Notes to Consolidated Condensed Financial Statements 4 to 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 to 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 15 Part II. Other Information Items 1 through 6 16 Signatures 17 Exhibits PART I. FINANCIAL INFORMATION ITEM 1. NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
September 30, December 31, ASSETS 2004 2003 -------------- -------------- Cash and due from banks: Interest-bearing $ 6,232,214 $ 7,124,828 Noninterest-bearing 3,130,079 2,893,745 Securities available-for-sale 24,116,741 26,952,157 Loans receivable, net 396,035,923 362,959,238 Loans held for sale 417,951 326,900 Accrued interest receivable 1,923,641 1,866,521 Foreclosed real estate 1,144,101 1,453,353 Premises and equipment, net 9,870,835 9,842,477 Rental real estate 2,843,438 2,968,918 Title plant 925,256 925,256 Goodwill 4,970,800 4,970,800 Deferred taxes 941,160 757,543 Prepaid expenses and other assets 897,597 967,565 ------------- ------------- Total assets $ 453,449,736 $ 424,009,301 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits $ 305,866,339 $ 283,963,569 Borrowed funds 102,981,199 95,004,605 Advances from borrowers for taxes and insurance 935,073 1,736,755 Dividends payable 386,820 337,907 Accrued expenses and other liabilities 1,781,948 1,374,824 ------------- ------------- Total liabilities 411,951,379 382,417,660 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock ($.01 par value, authorized 3,000,000 shares; issued and outstanding none) -- -- Common stock ($.01 par value, authorized 15,500,000 shares; issued 2004, 1,547,280; 2003, 1,604,780 shares) 15,473 16,048 Additional paid-in capital 18,561,880 17,711,322 Retained earnings, substantially restricted 23,296,609 24,103,330 Accumulated other comprehensive (loss) (277,342) (71,266) Less cost of treasury stock, 2004, none; 2003, none -- -- Unearned shares, employee stock ownership plan (98,263) (167,793) ------------- ------------- Total stockholders' equity 41,498,357 41,591,641 ------------- ------------- Total liabilities and stockholders' equity $ 453,449,736 $ 424,009,301 ============= =============
See Notes to Consolidated Condensed Financial Statements 1 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Interest income: Loans receivable $ 5,998,978 $ 6,038,079 $17,725,775 $18,270,621 Securities and cash deposits 255,869 304,425 792,808 1,039,161 ----------- ----------- ----------- ----------- 6,254,847 6,342,504 18,518,583 19,309,782 ----------- ----------- ----------- ----------- Interest expense: Deposits 1,740,965 1,913,974 5,185,241 6,002,801 Borrowed funds 1,117,639 1,141,660 3,293,644 3,369,189 ----------- ----------- ----------- ----------- 2,858,604 3,055,634 8,478,885 9,371,990 ----------- ----------- ----------- ----------- Net interest income 3,396,243 3,286,870 10,039,698 9,937,792 Provision for loan losses 75,000 75,000 185,000 195,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 3,321,243 3,211,870 9,854,698 9,742,792 ----------- ----------- ----------- ----------- Noninterest income: Fees and service charges 798,400 681,339 2,328,604 1,871,520 Abstract fees 365,373 520,595 1,130,540 1,449,742 Mortgage banking income 67,854 310,983 195,488 760,712 Other income 273,718 250,698 914,292 773,657 ----------- ----------- ----------- ----------- Total noninterest income 1,505,345 1,763,615 4,568,924 4,855,631 ----------- ----------- ----------- ----------- Noninterest expense: Compensation and employee benefits 1,521,094 1,505,514 4,594,797 4,349,473 Premises and equipment 348,321 320,516 1,058,749 936,698 Data processing 137,219 143,351 416,836 433,849 Other expenses 788,792 790,961 2,340,650 2,252,149 ----------- ----------- ----------- ----------- Total noninterest expense 2,795,426 2,760,342 8,411,032 7,972,169 ----------- ----------- ----------- ----------- Income before income taxes 2,031,162 2,215,143 6,012,590 6,626,254 Provision for income taxes 639,640 720,710 1,923,116 2,101,736 ----------- ----------- ----------- ----------- Net income $ 1,391,522 $ 1,494,433 $ 4,089,474 $ 4,524,518 =========== =========== =========== =========== Basic earnings per common share $ 0.90 $ 0.95 $ 2.62 $ 2.86 =========== =========== =========== =========== Earnings per common share - assuming dilution $ 0.87 $ 0.90 $ 2.51 $ 2.69 =========== =========== =========== =========== Dividends declared per common share $ 0.25 $ 0.21 $ 0.75 $ 0.63 =========== =========== =========== =========== Comprehensive income $ 1,464,558 $ 1,328,923 $ 3,883,398 $ 4,237,228 =========== =========== =========== ===========
See Notes to Consolidated Condensed Financial Statements. 2 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,089,474 $ 4,524,518 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 185,000 195,000 Depreciation 646,403 592,824 Amortization and accretion 458,288 476,942 Deferred taxes (61,151) (153,911) Effect of contribution to employee stock ownership plan 263,191 406,188 (Gain) on sale of foreclosed real estate and loans, net (237,068) (804,865) Loss on disposal of equipment and premises, net 4,179 (724) Proceeds from sales of loans held for sale 13,928,221 47,097,003 Originations of loans held for sale (13,823,784) (44,932,454) Change in assets and liabilities: Accrued interest receivable (57,120) (16,250) Prepaid expenses and other assets 69,968 1,652,967 Income taxes payable -- (32,620) Accrued expenses and other liabilities 407,124 91,047 ------------ ------------ Net cash provided by operating activities 5,872,725 9,095,665 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net decrease in loans 9,661,235 19,067,901 Purchase of loans (43,319,012) (44,832,836) Proceeds from sales of securities available-for-sale 961,700 -- Purchase of securities available-for-sale (1,570,500) (10,998,258) Proceeds from maturities of securities available-for-sale 3,068,175 4,922,174 Purchase of premises and equipment and rental real estate (553,969) (2,545,586) Proceeds from sale of land and equipment 510 124,846 Other 336,135 154,804 ------------ ------------ Net cash (used in) investing activities (31,415,726) (34,106,955) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 21,902,770 5,693,593 Net (Decrease) in advances from borrowers for taxes and insurance (801,682) (641,139) Net change in short-term borrowings 6,500,000 4,000,000 Proceeds from other borrowed funds 5,000,000 17,500,000 Payments on other borrowings (3,523,406) (6,488,765) Purchase of treasury stock (4,549,413) (3,069,494) Dividends paid (1,110,370) (946,580) Issuance of common stock 1,468,822 1,221,846 ------------ ------------ Net cash provided by financing activities 24,886,721 17,269,461 ------------ ------------ Net (decrease) in cash (656,280) (7,741,829) CASH AND DUE FROM BANKS Beginning 10,018,573 15,168,601 ------------ ------------ Ending $ 9,362,293 $ 7,426,772 ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors $ 5,028,389 $ 6,014,869 Interest paid on borrowings 3,293,707 3,369,295 Income taxes 1,277,413 1,836,409
3 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The consolidated condensed financial statements for the three and nine month periods ended September 30, 2004 and 2003 are unaudited. In the opinion of the management of North Central Bancshares, Inc. (the "Company" or the "Registrant") these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results, which may be expected for an entire year. Certain information and footnote disclosure normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the requirements for interim financial statements. The financial statements and notes thereto should be read in conjunction with the Company's 2003 Annual Report on Form 10-K. The consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 2. EARNINGS PER SHARE The earnings per share amounts were computed using the weighted average number of shares outstanding during the periods presented. In accordance with Statement of Position No. 93-6, Employers' Accounting for Employee Stock Ownership Plans, issued by the American Institute of Certified Public Accountants, shares owned by First Federal Savings Bank of Iowa's Employee Stock Ownership Plan that have not been committed to be released are not considered to be outstanding for the purpose of computing earnings per share. For the three-month period ended September 30, 2004, the weighted average number of shares outstanding for basic and diluted earnings per share computation were 1,546,360 and 1,602,573, respectively. For the nine-month period ended September 30, 2004, the weighted average number of shares outstanding for basic and diluted earnings per share computation were 1,561,989 and 1,628,143, respectively. For the three-month period ended September 30, 2003, the weighted average number of shares outstanding for basic and diluted earnings per share computation were 1,580,936 and 1,669,799, respectively. For the nine-month period ended September 30, 2003, the weighted average number of shares outstanding for basic and diluted earnings per share computation were 1,582,228 and 1,679,038, respectively. 3. DIVIDENDS On August 27, 2004, the Company declared a cash dividend on its common stock, payable on October 6, 2004 to stockholders of record as of September 15, 2004, equal to $0.25 per share. 4. GOODWILL As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", that eliminated the amortization and required a goodwill impairment test. The Company completed the goodwill impairment test during the year ended December 31, 2003 and has determined that there has been no impairment of goodwill. As of September 30, 2004 and December 31, 2003, the Company had intangible assets of $4,970,800, all of which has been determined to be goodwill. There was no goodwill impairment loss or amortization related to goodwill during the three and nine months ended September 30, 2004 or September 30, 2003. 5. STOCK OPTION PLAN FASB Statement No. 123, Accounting for Stock-Based Compensation, establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from nonemployees. However, the 4 standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. The Company has elected to apply the intrinsic value based method of accounting for stock options issued to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Had compensation cost for the Plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123), the approximate reported net income and earnings per common share would have been decreased to the pro forma amounts shown below:
Three Months Ended Three Months Ended September 30, 2004 September 30, 2003 ------------------ ------------------ Net income, as reported $ 1,391,522 $ 1,494,433 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (5,757) (8,731) ------------ ------------ Pro forma net income $ 1,385,765 $ 1,485,702 ============ ============ Earnings per common share - basic: As reported $ 0.90 $ 0.95 Pro forma 0.90 0.94 Earnings per common share - assuming dilution: As reported $ 0.87 $ 0.90 Pro forma 0.86 0.89
Nine Months Ended Nine Months Ended September 30, 2004 September 30, 2003 ------------------ ------------------ Net income, as reported $ 4,089,474 $ 4,524,518 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (48,663) (61,725) ------------ ------------ Pro forma net income $ 4,040,811 $ 4,462,793 ============ ============ Earnings per common share - basic: As reported $ 2.62 $ 2.86 Pro forma 2.59 2.82 Earnings per common share - assuming dilution: As reported $ 2.51 $ 2.69 Pro forma 2.48 2.66
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 2004 and 2003, respectively: dividend rates of 2.3% to 2.7% and 2.3%, price volatility of 16% to 20% and 20%, risk-free interest rates of 4.10% to 4.20% and 3.70%, and expected lives of 8 years for all periods. 6. RECENT ACCOUNTING PRONOUNCEMENTS. SEC Staff Accounting Bulletin ("SAB") No. 105, Application of Accounting Principles to Loan Commitments, was released in March 2004. This release summarizes the SEC staff position regarding the application of GAAP to loan commitments accounted for as derivative instruments. The Company accounts for interest rate lock commitments issued on mortgage loans that will be held for sale as derivative instruments. Consistent with SAB No. 105, the Company considers the fair value of these commitments to be zero at the commitment date, with subsequent changes in fair value determined solely on changes in market interest rates. The Company's adoption of this bulletin had no impact on the consolidated financial statements. 5 At the March 17-18, 2004 Emerging Issues Task Force ("EITF") meeting, the Task Force reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. EITF 03-1 provides guidance for determining the meaning of "other-than-temporarily impaired" and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115") and investments accounted for under the cost method. The guidance set forth in the Statement was originally effective for the Company in the September 30, 2004 consolidated financial statements. However, in September 2004, the effective dates of certain parts of the Statement were delayed. Management is currently assessing the impact of Issue 03-1 on the consolidated financial statements. In March 2004, the Financial Accounting Standards Board ("FASB") issued an Exposure Draft, Share-Base Payment - an amendment of Statements No. 123 and 95. This Statement amends SFAS Statement No. 123, Accounting for Stock-Based Compensation, SFAS Statement No. 95, Statement of Cash Flows, and APB Opinion No. 125, Accounting for Stock Issued to Employees. The objective of the amendment to SFAS No. 123 is to recognize in the financial statements the cost of employee services received in exchange for equity instruments and liabilities incurred as the result of such transactions. The grant-date fair value of stock options would be determined using an option-pricing model, and expense would be recognized over the vesting period. In October 2004, the FASB postponed the effective date of the this proposed standard from fiscal years beginning after December 15, 2004 to periods beginning after June 15, 2005. The FASB is expected to issue a final standard by the end of calendar 2004. Management is reviewing the proposed standard to determine the impact on the financial statements. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXPLANATORY NOTE This Quarterly Report on Form 10-Q contains forward-looking statements consisting of estimates with respect to the consolidated financial condition, results of operations and business of the Company and its subsidiaries including First Federal Savings Bank of Iowa (the "Bank") that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include changes in general, economic, market, legislative and regulatory conditions, and the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments. The Company's actual results may differ from the results discussed in the forward-looking statements. The Company disclaims any obligation to publicly announce future events or developments that may affect the forward-looking financial statements contained here within. Executive Overview The Company'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, service charges and sales of noninsured products. 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 quarter: o A key factor in the Company's management of capital 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 September 21, 1996 the Company has repurchased 2,713,722 shares at a cost of $51.4 million as of September 30, 2004. 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, 2003. Both of these locations are in suburbs of Des Moines which is Iowa's largest metropolitan area. The Bank will continue to analyze de novo branch opportunities in the Des Moines metropolitan area. Noninterest expenses have increased during the three and nine months ended September 30, 2004 and 2003 in part due to the Bank'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 and the opening of the offices in Clive and Ankeny, Iowa. This direct mail program is ongoing and is expected to result in a continued growth in core deposits and fee income. 7 o Management believes that the allowance for loan losses is adequate. The allowance for loan losses to nonaccrual loans was 330.17% at September 30, 2004. Net annualized chargeoffs for 2004 were 0.04% of total loans and have averaged 0.04% of total loans for the past five years. During the nine months ended September 30, 2004, the Company's net loan portfolio increased $33.0 million or 9.1%. A significant portion of this increase consisted of increases in the commercial and multifamily real estate loans, which carry a higher level of credit risk than other loans in the portfolio. The Company's provision for loan losses for the three and nine months ended September 30, 2004 was $75,000 and $185,000, respectively. o Purchases and originations of out of state real estate loans remained an integral part of the Company's business 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. FINANCIAL CONDITION Total assets increased $29.4 million, or 6.9%, to $453.4 million at September 30, 2004 from $424.0 million at December 31, 2003. The increase in assets was due primarily to increases in net loans receivable, offset in part by a decrease in securities available for sale. Total loans receivable, net, increased by $33.0 million, or 9.1%, to $396.0 million at September 30, 2004 from $363.0 million at December 31, 2003, primarily due to the origination of $58.3 million of first mortgage loans secured by one-to-four family residences, multifamily and commercial real estate, purchases of first mortgage loans primarily secured by multifamily residences and commercial real estate of $45.7 million, and originations of $16.4 million of second mortgage loans during the nine months ended September 30, 2004. These originations and purchases were offset in part by payments and prepayments of $79.0 million and sales of loans of $13.7 million during the nine months ended September 30, 2004. The Company sells substantially all fixed-rate loans with maturities in excess of 15 years in the secondary mortgage market in order to reduce interest rate risk. The Company has also sold a portion of the fixed-rate loans with 15 year maturities in the secondary market in order to reduce interest rate risk. Securities available for sale decreased $2.8 million, or 10.5%, to $24.1 million at September 30, 2004 from $27.0 million at December 31, 2003 as the Company invested its cash in loans. Deposits increased $21.9 million, or 7.7%, to $305.9 million at September 30, 2004 from $284.0 million at December 31, 2003, primarily reflecting increases in NOW accounts, savings accounts, money market accounts and retail certificate of deposit accounts. The increase in deposits is due primarily to the opening of offices in Clive and Ankeny, Iowa and management's marketing efforts. Borrowings, primarily FHLB advances, increased $8.0 million, to $103.0 million at September 30, 2004 from $95.0 million at December 31, 2003. The Company utilized the increase in deposits and FHLB advances to fund loans. Total shareholders' equity decreased $93,000 to $41.5 million at September 30, 2004 from $41.6 million at December 31, 2003, primarily due to funds used for the repurchase of stock, dividends paid to shareholders and an increase in accumulated other comprehensive loss, offset in part by an increase in net income and increased capital attributable to stock options exercised. 8 The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum tangible, leverage (core) and risk-based capital requirements. As of September 30, 2004, the Bank exceeded all of its regulatory capital requirements. The Bank's required, actual and excess capital levels as of September 30, 2004 were as follows: Amount Percentage of Assets -------- ---------------------- (Dollars in thousands) Tangible capital: Capital level $33,094 7.39% Less Requirement 6,720 1.50% ------- ----- Excess $26,374 5.89% ======= ==== Core capital: Capital level $33,094 7.39% Less Requirement 17,919 4.00% ------- ----- Excess $15,175 3.39% ======= ==== Risk-based capital: Capital level $36,251 11.92% Less Requirement 24,322 8.00% ------- ----- Excess $11,929 3.92% ======= ==== LIQUIDITY The Company's primary sources of funds are cash provided by operating activities (including net income), certain financing activities (including increases in deposits and proceeds from borrowings) and certain investing activities (including principal payments on loans and maturities, calls and proceeds from the sale of securities). During the first nine months of 2004 and 2003, principal payments, repayments and proceeds from sale of loans totaled $92.8 million and $149.2 million, respectively. The net increase in deposits during the first nine months of 2004 and 2003 totaled $21.9 million and $5.7 million, respectively. The proceeds from borrowed funds during the nine months ended September 30, 2004 and 2003 totaled $5.0 million and $17.5 million, respectively. The net increase in short term borrowings during the nine months ended September 30, 2004 and 2003 totaled $6.5 million and $4.0 million, respectively. During the first nine months of 2004 and 2003, the proceeds from the maturities, calls and sales of securities totaled $4.1 million and $4.9 million, respectively. Cash provided from operating activities during the first nine months of 2004 and 2003 totaled $5.9 million and $9.1 million, respectively. The Company's primary use of funds is to originate and purchase loans, purchase securities available for sale, repay borrowed funds and other financing activities. During the first nine months of 2004 and 2003, the Company's gross purchases and origination of loans totaled $129.8 million and $175.0 million, respectively. The purchase of securities available for sale for the nine months ended September 30, 2004 and 2003 totaled $1.6 million and $11.0 million, respectively. The repayment of borrowed funds during the first nine months of 2004 and 2003 totaled $3.5 million and $6.5 million, respectively. For additional information about cash flows from the Company's operating, financing and investing activities, see "Statements of Cash Flows in the Condensed Consolidated Financial Statements." The OTS regulations require the Company to maintain sufficient liquidity to ensure its safe and sound operation. The Company has a line of credit agreement in the amount of $3.0 million with an unaffiliated bank. As of September 30, 2004, there were no borrowings outstanding on this line of credit. The Company may use this line of credit to fund stock repurchases in the future and for general corporate purposes. The Company repurchased 122,155 shares of common stock during the nine months ended September 30, 2004 at an average price of $37.24. On July 6, 2004, the Company paid a quarterly cash dividend of $0.25 per share on common stock outstanding as of the close of business on June 15, 2004, aggregating $391,000. On August 27, 2004, the Company declared a quarterly cash dividend of $0.25 per share payable on October 6, 2004 to shareholders of record as of the close of business on September 15, 2004, aggregating $387,000. 9 RESULTS OF OPERATIONS Net Income. Net income decreased by $102,000 to $1,392,000 for the quarter ended September 30, 2004 compared to $1,494,000 for the same period in 2003. 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 a decrease in noninterest income, offset in part by an increase in net interest income and a decrease in income tax expense. Net income decreased by $435,000 to $4,089,000 for the nine months ended September 30, 2004 compared to $4,524,000 for the same period in 2003. 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 expense and a decrease in noninterest income, offset in part by a decrease in income tax expense and an increase in net interest income. Net Interest Income. Net interest income before provision for loan losses increased by $109,000 to $3,396,000 for the quarter ended September 30, 2004 from $3,287,000 for the quarter ended September 30, 2003. The increase is primarily due to an increase in the average balance of interest earning assets and a 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 2.94% for the quarter ended September 30, 2004 from 3.01% for the quarter ended September 30, 2003. 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 continuing low interest rate environment. Net interest income before provision for loan losses increased by $102,000 to $10,040,000 for the nine months ended September 30, 2004 from $9,938,000 for the nine months ended September 30, 2003. The increase is primarily due to a decrease in the average cost of funds and an increase in the average balance of interest earning assets, 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 2.96% for the nine months ended September 30, 2004 from 3.05% for the nine months ended September 30, 2003. 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 continuing low interest rate environment. Interest Income. Interest income decreased by $88,000 to $6,255,000 for the quarter ended September 30, 2004 compared to $6,343,000 for the quarter ended September 30, 2003. 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 5.82% for the quarter ended September 30, 2004 from 6.25% for the quarter ended September 30, 2003, primarily due to the continuing low interest rate environment. The average balance of interest earning assets increased $24.1 million to $429.2 million for the quarter ended September 30, 2004, from $405.1 million for 2003. The increase in the average balance of interest earning assets primarily reflects increases in the average balances of first mortgage loans, offset in part by decreases in interest bearing cash and due from banks and securities available for sale. The increase in the average balances of first mortgage loans were primarily derived from originations of first mortgage loans secured by one-to-four family and multifamily residences and commercial real estate, purchases of first mortgage loans secured by multifamily residences and commercial real estate, which originations and purchases were offset in part by payments and prepayments and sales of loans during the twelve months ended September 30, 2004. This reflects the Company's continued emphasis on real estate lending. The decrease in the average balance of securities available for sale were derived from payments and calls of securities, offset in part by purchases during the twelve months ended September 30, 2004. See "Financial Condition." Interest income decreased by $791,000 to $18,519,000 for the nine months ended September 30, 2004 compared to $19,310,000 for the nine months ended September 30, 2003. 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 10 RESULTS OF OPERATIONS (Continued) average balance of interest earning assets. The average yield on interest earning assets decreased to 5.90% for the nine months ended September 30, 2004 from 6.42% for the nine months ended September 30, 2003, primarily due to the continuing low interest rate environment. The average balance of interest earning assets increased $17.3 million to $418.5 million for the nine months ended September 30, 2004, from $401.2 million for 2003. The increase in the average balance of interest earning assets primarily reflects increases in the average balances of first mortgage loans, offset in part by decreases in interest bearing cash and due from banks and securities available for sale. The increase in the average balances of first mortgage loans were primarily derived from originations of first mortgage loans secured by one-to-four family and multifamily residences and commercial real estate, purchases of first mortgage loans secured by multifamily residences and commercial real estate, which originations and purchases were offset in part by payments and prepayments and sales of loans during the twelve months ended September 30, 2004. This reflects the Company's continued emphasis on real estate lending. The decrease in the average balance of securities available for sale were derived from payments and calls of securities, offset in part by purchases during the twelve months ended September 30, 2004. See "Financial Condition." Interest Expense. Interest expense decreased by $197,000 to $2,859,000 for the quarter ended September 30, 2004 compared to $3,056,000 for the quarter ended September 30, 2003. 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 2.88% for the quarter ended September 30, 2004 from 3.24% for the quarter ended September 30, 2003, primarily due to the continuing low interest rate environment. The decrease in interest expense was partially offset by a $20.0 million increase in the average balance of interest-bearing liabilities to $394.2 million for the quarter ended September 30, 2004, from $374.2 million for the same period in 2003. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the average balances of NOW, money market, savings accounts, certificates of deposits, and borrowed funds. The increase in average interest bearing deposits was primarily due to the branches in Clive and Ankeny, Iowa, which were opened in 2004 and 2003, respectively, and the Company's marketing efforts. The increase in interest bearing liabilities was primarily used to fund loans. Interest expense decreased by $893,000 to $8,479,000 for the nine months ended September 30, 2004 compared to $9,372,000 for the nine months ended September 30, 2003. 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 2.94% for the nine months ended September 30, 2004 from 3.37% for the nine months ended September 30, 2003, primarily due to the continuing low interest rate environment. The decrease in interest expense was partially offset by a $13.6 million increase in the average balance of interest-bearing liabilities to $384.8 million for the nine months ended September 30, 2004, from $371.2 million for the same period in 2003. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the average balance of NOW, money market and savings accounts and borrowed funds. The increase in average interest bearing deposits was primarily due to the branches in Clive and Ankeny, Iowa, which were opened in 2004 and 2003, respectively, and the Company's marketing efforts. The increase in interest bearing liabilities was primarily used to fund loans. 11 RESULTS OF OPERATIONS (Continued) The following table sets forth certain information relating to the Company's average balance sheets and reflects the average yield on assets and average cost of liabilities for the three and nine month periods ended September 30, 2004 and 2003, respectively.
For the Three Months Ended September 30, ---------------------------------------------------------------------------------- 2004 2003 ---------------------------------------------------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Assets: Interest-earning assets: Loans $ 397,102 $ 5,999 6.04% $ 363,015 $ 6,038 6.64% Securities available-for-sale 24,803 232 3.74 29,572 269 3.64 Interest bearing cash 7,265 24 1.31 12,493 36 1.13 --------- -------- ------ --------- -------- ------ Total interest-earning assets 429,170 6,255 5.82% 405,080 6,343 6.25% Noninterest-earning assets 22,493 -------- ------ 23,636 -------- ------ --------- --------- Total assets $ 451,663 $ 428,716 ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings $ 81,567 $ 149 0.73% $ 67,561 $ 83 0.48% Passbook savings 29,495 23 0.31 28,303 31 0.44 Certificates of deposit 184,536 1,569 3.38 180,668 1,800 3.95 Borrowed funds 98,602 1,118 4.51 97,620 1,142 4.64 --------- -------- ------ --------- -------- ------ Total interest-bearing liabilities 394,200 $ 2,859 2.88% 374,152 $ 3,056 3.24% -------- ------ -------- ------ Noninterest-bearing liabilities 15,922 14,261 --------- --------- Total liabilities 410,122 388,413 Equity 41,541 40,303 --------- --------- Total liabilities and equity $ 451,663 $ 428,716 ========= ========= Net interest income $ 3,396 $ 3,287 ======= ======= Net interest rate spread 2.94% 3.01% ==== ==== Net interest margin 3.16% 3.25% ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities 108.87% 108.26% ====== ======
For the Nine Months Ended September 30, ----------------------------------------------------------------------------------- 2004 2003 ----------------------------------------------------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Assets: Interest-earning assets: Loans $ 384,678 $ 17,726 6.14% $ 354,680 $ 18,271 6.87% Securities available for sale 25,922 722 3.71 30,255 926 4.08 Interest bearing cash 7,916 71 1.19 16,256 113 0.93 --------- --------- ------ --------- --------- ------ Total interest-earning assets 418,516 $ 18,519 5.90% 401,191 $ 19,310 6.42% Noninterest-earning assets 23,038 --------- ----- 22,515 --------- ------ --------- --------- Total assets $ 441,554 $ 423,706 ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings $ 76,058 $ 352 0.62% $ 65,834 $ 303 0.61% Passbook savings 29,342 68 0.31 27,523 120 0.58 Certificates of deposit 181,773 4,765 3.50 181,404 5,580 4.11 Borrowed funds 97,636 3,294 4.51 96,487 3,369 4.67 --------- --------- ------ --------- --------- ------ Total interest-bearing liabilities 384,809 $ 8,479 2.94% 371,248 $ 9,372 3.37% --------- ------ --------- ------ Noninterest-bearing liabilities 15,133 13,008 --------- --------- Total liabilities 399,942 384,256 Equity 41,612 39,450 --------- --------- Total liabilities and equity $ 441,554 $ 423,706 ========= ========= Net interest income $ 10,040 $ 9,938 ========= ======== Net interest rate spread 2.96% 3.05% ====== ====== Net interest margin 3.20% 3.30% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 108.76% 108.06% ====== ======
12 RESULTS OF OPERATIONS (Continued) Provision for Loan Losses. The Company's provision for loan losses was $75,000 for the quarters ended both September 30, 2004 and 2003. The Company's provision for loan losses was $185,000 and $195,000 for the nine months ended September 30, 2004 and 2003, respectively. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, which includes a significant amount of multifamily and commercial real estate loans, substantially all of which are purchased and are secured by properties located out of state, and other factors related to the collectibility of the Company's loan portfolio. The Company's total loan portfolio increased $34.7 million, or 9.4%, from September 30, 2004 as compared to September 30, 2003. This increase primarily consisted of increases in the one-to-four family, commercial and multifamily real estate loans. The Company's out of state loans increased $10.2 million, or 7.1%, from September 30, 2004, as compared to September 30, 2003. 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 economic conditions in the Bank's primary market areas are currently stable to improving. The net charge-offs were $119,000 for the nine months ended September 30, 2004 as compared to $143,000 for the nine months ended September 30, 2003. The resulting allowance for loan loss was $3.2 million and $3.2 million at September 30, 2004 and September 30, 2003, respectively. The allowance for loan losses as a percentage of total loans receivable decreased to 0.80% at September 30, 2004 from 0.86% at September 30, 2003. The level of loans 30 to 89 days past due as of September 30, 2004 and 2003 was $3,990,000 and $3,152,000, respectively. The level of nonperforming loans was $972,000 at September 30, 2004 and $456,000 at September 30, 2003. Management believes that the allowance for loan losses is adequate as of September 30, 2004. 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 decreased by $258,000, or 14.6%, to $1,505,000 for the quarter ended September 30, 2004 from $1,763,000 for the quarter ended September 30, 2003. The decrease is due to decreases in mortgage banking income (gain on the sale of loans) and abstract fees offset in part by increases in fees and service charges and other income. Mortgage banking income decreased $243,000 due primarily to a decrease in originations of loans held for sale. Abstract fees decreased $155,000 due to decreased sales volume as a result of a general decrease in real estate activity, such as loan originations and refinances. Fees and service charges increased $117,000 due to an increase in fees associated with checking accounts, including overdraft fees and increases in loan servicing income. Other income, which primarily includes annuity and mutual fund sales, rent income, insurance sales and income associated with foreclosed real estate, increased $23,000 due to an increase in income from annuity sales, offset in part by decreases in income associated with foreclosed real estate. Total noninterest income decreased by $286,000, or 5.9%, to $4,569,000 for the nine months ended September 30, 2004 from $4,855,000 for the nine months ended September 30, 2003. The decrease is due to decreases in mortgage banking income (gain on sale of loans) and abstract fees, offset in part by increases in fees and service charges and other income. Mortgage banking income decreased $565,000 due primarily to a decrease in originations of loans held for sale. Abstract fees decreased $319,000 due to decreased sales volume as a result of a general decrease in real estate activity, such as loan originations and refinances. Fees and service charges increased $457,000 due to an increase in fees associated with checking accounts, including overdraft fees and increases in loan servicing income. Other income, which primarily includes annuity and mutual fund sales, rent income, insurance sales and income associated with foreclosed real estate, increased $141,000 due to increases in annuity sales, increased rental income associated with the opening of a second multifamily apartment building in March, 2003, and an increase in income associated with foreclosed real estate. 13 RESULTS OF OPERATIONS (Continued) Noninterest Expense. Total noninterest expense increased by $35,000, or 1.3%, to $2,795,000 for the quarter ended September 30, 2004 from $2,760,000 for the quarter ended September 30, 2003. The increase is primarily due to an increase in premises and equipment and compensation and employee benefits, offset in part by a decrease in data processing expenses. Premises and equipment increased $28,000 primarily due to an increase in the costs associated with the opening of the Clive and Ankeny offices and normal cost increases. Compensation and benefits increased $16,000 due to an increase in personnel at the Clive office, increases in the Company's contribution to the retirement plan and normal salary increases, offset in part by a decrease in the costs associated with the Company's employee stock ownership plan. Data processing decreased $6,000 primarily due to contractually lower data processing costs and reduced consulting costs. The Company's efficiency ratio for the quarter ended September 30, 2004 and 2003 was 57.03% and 54.65%, respectively. The Company's ratio of noninterest expense to average assets for the quarters ended September 30, 2004 and 2003 were 2.48% and 2.58%, respectively. Total noninterest expense increased by $439,000, or 5.5%, to $8,411,000 for the nine months ended September 30, 2004 from $7,972,000 for the nine months ended September 30, 2003. The increase is primarily due to an increase in compensation and employee benefits, premises and equipment and other expenses, offset by a decrease is data processing expenses. Compensation and benefits increased $245,000 due to an increase in personnel at the opening of the Clive office, increases in the Company's contribution to the retirement plan and normal salary increases, offset in part by a decrease in the costs associated with the Company's employee stock ownership plan. Premises and equipment increased $122,000 primarily due to an increase in the costs associated with the Clive and Ankeny offices and normal cost increases. Other expenses increased $89,000 primarily due to increases in costs associated with checking accounts, including write-offs of overdrafts, increases in personnel related costs, increases in apartment operating costs associated primarily from the opening of a second multifamily apartment building in March, 2003, and increases in professional fees, offset in part by decreases in costs associated with the abstract company ("First Iowa Title Services, Inc."). Data processing decreased $17,000 primarily due to contractually lower data processing costs and reduced consulting costs. The Company's efficiency ratio for the nine months ended September 30, 2004 and 2003 was 57.58% and 53.89%, respectively. The Company's ratio of noninterest expense to average assets for the nine months ended September 30, 2004 and 2003 were 2.54% and 2.51%, respectively. Income Taxes. Income taxes decreased by $81,000 to $640,000 for the quarter ended September 30, 2004 as compared to $721,000 for the quarter ended September 30, 2003. The decrease was principally due to a decrease in pre-tax earnings during the 2004 period as compared to the 2003 period and an increase in recurring federal income tax credits from Northridge Apartment Limited Partnership II. Income taxes decreased by $179,000 to $1,923,000 for the nine months ended September 30, 2004 as compared to $2,102,000 for the nine months ended September 30, 2003. The decrease was principally due to a decrease in pre-tax earnings during the 2004 period as compared to the 2003 period, an increase in recurring federal income tax credits from Northridge Apartment Limited Partnership II, offset in part by a one time state tax credit from Northridge Apartment Limited Partnership II, which decreased income tax expense by approximately $110,000 in 2003. 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. 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. 14 RESULTS OF OPERATIONS (Continued) 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 accounting policies are described in the "Notes to Consolidated Financial Statements". Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified its most critical accounting policy to be that related to the allowance for loan losses, and asset impairment judgments, including the recoverability of goodwill. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio including timely identification of potential problem credits. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include the general economic environment in the Company's market area and the expected trend of those economic conditions. To the extent actual results differ from forecasts and management's judgment, the allowance for loan losses may be greater or less 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In management's opinion, there has not been a material change in market risk since December 31, 2003. ITEM 4. 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 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. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information with respect to purchases made by or on behalf of the Company or any "affiliated purchases" (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common stock during the three months ended September 30, 2004.
Total Number of Maximum Number of Shares Purchased as Shares that May Yet Total Number of Average Price Paid Part of Publicly Be Purchased Under Period Shares Purchased Per Share Announced Plans The Plan ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- July 1, 2004 to July 31, 2004 -- -- -- 76,000 August 1, 2004 to August 31, 2004 21,050 $37.06 21,050 54,950 September 1, 2004 to September 30, 2004 15,400 $38.10 15,400 39,550 ------ ------ Total 36,450 36,450
Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits Exhibits Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certifications Exhibit 32.1 Section 1350 Certifications 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTH CENTRAL BANCSHARES, INC. DATE: November 12, 2004 BY: /s/ David M. Bradley -------------------- David M. Bradley, Chairman, President and Chief Executive Officer DATE: November 12, 2004 BY: /s/ David W. Edge ----------------- David W. Edge, Chief Financial Officer and Treasurer 17