-----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, Ux72nqGIWl4f+5OJE4kV+/DU5WybCRd0jBUUUomXRec1s2hsmfW2QySkZOI+l9Ru B+TgLhykP1JrkZsO8R9WRw== 0000927797-05-000071.txt : 20050330 0000927797-05-000071.hdr.sgml : 20050330 20050330150751 ACCESSION NUMBER: 0000927797-05-000071 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050330 DATE AS OF CHANGE: 20050330 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: 05713819 BUSINESS ADDRESS: STREET 1: 825 CENTRAL AVE STREET 2: C/O FIRST FED SAVINGS BANK OF FT DODGE CITY: FORT DODGE STATE: IA ZIP: 50501 BUSINESS PHONE: 5155767531 MAIL ADDRESS: STREET 1: 825 CENTRAL AVENUE CITY: FORT DODGE STATE: IA ZIP: 50501 10-K 1 ncb-10k_123104.txt FORM 10-K 12-31-04 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, 2004 [ ] 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. [ ] 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, 2004 was $55,473,062. As of March 8, 2005, there were issued and outstanding 1,538,230 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Proxy Statement for the Registrant's 2005 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof. 2. Portions of the 2004 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 lending activities have expanded to include an increased emphasis on originations of construction 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, 2004, the Bank had total assets of $463.2 million, total deposits of $317.3 million, and total shareholders' equity of $39.3 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, north central and southeastern parts of the State of Iowa. The Company's market area is influenced by agriculture, manufacturing, 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 2004 for Webster County was 4.6%, for Story County 2.9%, for Dallas County 3.0%, for Polk County 4.0%, for Henry County 5.9% and for Des Moines County 6.5%. These compare to the national rate of 5.4% and the State of Iowa rate of 4.7%. 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, 2004, the Company's total loans receivable totalled $418.8 million, of which $179.3 million, or 42.8%, were one-to four-family residential real estate first mortgage loans, $78.4 million, or 18.7%, were multifamily real estate first mortgage loans, primarily purchased by the Company, $90.9 million, or 21.7%, were commercial real estate first mortgage loans, primarily purchased by the Company, and $14.3 million, or 3.4% were construction real estate loans. Consumer loans, consisting primarily of automobile loans and second mortgage loans, totalled $55.9 million, or 13.4%, 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, 2004, it was the Company's policy to limit loans to one borrower to $4.0 million, with higher limits subject to board approval. These limitations are less than the regulatory guidelines. At December 31, 2004, the Company's largest aggregate outstanding loans to a single borrower or group of related borrowers totaled $3.8 million. The Company had two other lending relationships of $3.0 million as of December 31, 2004. At December 31, 2004, each of these loans 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, - ------------------------------------------------------------------------------------------------------------------------------------ 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) First mortgage loans: One-to four-family residential(1) $179,311 42.81% $171,604 46.71% $148,751 43.17% $161,549 51.81% $176,615 54.78% Multifamily...................... 78,428 18.73 69,963 19.04 70,779 20.54 74,396 23.86 75,858 23.53 Commercial....................... 90,907 21.70 69,609 18.95 71,251 20.68 25,722 8.25 24,127 7.48 Construction..................... 14,308 3.42 2,285 0.62 - - - - - - -------- ------ -------- ------ -------- ------ -------- ----- -------- ----- Total first mortgage loans......... 362,954 86.66 313,461 85.32 290,781 84.39 261,667 83.91 276,600 85.79 -------- ------ -------- ------ -------- ------ -------- ----- -------- ----- Consumer loans: Automobiles...................... 9,052 2.16% 9,801 2.67% 10,115 2.94% 9,406 3.02% 8,803 2.73% Second mortgage(2)............... 39,701 9.48 37,601 10.23 38,239 11.10 35,619 11.42 31,910 9.90 Other(3)......................... 7,134 1.70 6,533 1.78 5,438 1.58 5,134 1.65 5,095 1.58 -------- ------ -------- ------ -------- ------ -------- ----- -------- ----- Total consumer loans........... 55,887 13.34 53,935 14.68 53,792 15.61 50,159 16.09 45,808 14.21 -------- ------ -------- ------ -------- ------ -------- ----- -------- ----- Total loans receivable......... $418,841 100.00% $367,396 100.00% $344,573 100.00% $311,826 100.00% $322,408 100.00% Less: Undisbursed portion of construction loans............. $ 9,114 2.18% 1,855 0.50% $ 929 0.27% 1,055 0.34% 1,493 0.45% Unearned loan (premium) discount (984) (0.24) (696) (0.19) (623) (0.18) (37) (0.01) 69 0.02 Net deferred loan origination fees(costs).................... 160 0.04 113 0.03 3 0.00 (56) (0.02) (23) (0.01) Allowance for loan losses........ 3,235 0.77 3,165 0.86 3,118 0.90 2,883 0.92 2,843 0.88 -------- ------ -------- ------ -------- ------ -------- ----- -------- ----- Total loans receivable, net $407,316 97.25% $362,959 98.80% $341,146 99.01% $307,981 98.77% $318,026 98.64% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
- ----------------------------------- (1) Includes interest-only construction loans that convert to permanent loans, prior to 2003. (2) Second mortgage loans included $ 5.4 million, $4.9 million, $4.0 million, $2.0 million and $1.6 million of nonowner-occupied residential first mortgage loans at December 31, 2004, 2003, 2002, 2001 and 2000, respectively. (3) Other consumer loans included $2.8 million, $2.1 million, $1.9 million, $1.9 million and $1.5 million of commercial mortgage loans at December 31, 2004, 2003, 2002, 2001 and 2000, 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, 2004. 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, 2004 -------------------- 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).. $ 39,118 $ 21,686 $ 61,954 $ 33,497 $ 36,053 $1,311 $ 193,619 Multifamily........................ 18,193 21,833 30,100 7,413 888 - 78,427 Commercial......................... 14,924 16,087 35,739 13,539 10,619 - 90,908 Consumer loans (2)................... 8,075 16,868 20,747 7,794 2,403 - 55,887 --------- ------ -------- -------- -------- ----- --------- Total ............................. $ 80,310 $76,474 $148,540 $ 62,243 $ 49,963 $1,311 $ 418,841 ========= ======= ======== ======== ======== ====== =========
(1) One-to four-family loans include $27.9 million of loans with repricing periods greater than 5 years that have been classified as fixed rate loans. $26.6 million of these loans with repricing periods less than 5 years have been classified as adjustable rate loans. (2) Includes second mortgage loans of $39.7 million at December 31, 2004. The following table sets forth the dollar amounts of all fixed rate and adjustable rate loans in each loan category at December 31, 2004 due after December 31, 2005. Due After December 31, 2005 --------------------------- Fixed Adjustable Total ----- ---------- ----- (In thousands) First mortgage loans: One-to four-family residential(1)... $ 74,263 $ 80,238 $ 154,501 Multifamily......................... 2,114 58,120 60,234 Commercial.......................... 35,610 40,373 75,983 Consumer loans (2)...................... 47,720 93 47,813 --------- --------- --------- Total............................. $ 159,707 $ 178,824 $ 338,531 ========= ========= ========= ________________________ (1) One-to four-family loans include $27.9 million of loans with repricing periods greater than 5 years that have been classified as fixed rate loans. (2) Includes second mortgage loans of $38.2 million at December 31, 2004. 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 2004, 38.7% of the Company's residential real estate loans had fixed rates, and 61.3% had adjustable rates. The Company originates loans for portfolio and sells loans in the secondary mortgage market. However, the Company's one-to four-family, fixed-rate, residential real estate loans originated for portfolio are generally originated and underwritten according to standards that qualify such loans to be included in Federal Home Loan Mortgage Corporation ("FHLMC") and 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, 2004, the Company sold $17.8 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, 2004, the Company offered ARM loans with annual rate caps of 2.00% and maximum life-of-loan caps of 6.00% above the beginning rate. 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. 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 $118.8 million, or 28.4%, of the Company's total loan portfolio at December 31, 2004. 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 2004 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 originates one-to four-family residential mortgage loans with terms up to a maximum of 30-years and with loan-to-value ratios up to 103% of the lesser of the appraised value of the security property or the contract price. The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company's exposure to be at or below the 80% loan-to-value level. 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 $169.3 million, or 40.4%, of the Company's total loan portfolio at December 31, 2004. Of such loans, $143.5 million, or 84.8%, 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 and commercial 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 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 copies of the original loan application, certified rent rolls, the original title insurance policy, the 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. $15.0 million, or 7 10.4%, of out of state multifamily and commercial real estate loans are serviced by the Bank. $128.5 million, or 89.6%, 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 for loans secured by real estate located outside the State of Iowa. A $4.0 million limit on the aggregate size of multifamily and commercial loans to one borrower applies to loans secured by real estate located in Iowa. 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. Construction Lending. The Company makes construction loans to individuals for the construction of their residences as well as to builders for the construction of one- to four- family residences and commercial and multi-family real estate. At December 31, 2004, the Company's construction loan portfolio totaled $14.3, or 3.4% of the Company's total loan portfolio. Construction loans to individuals for their residences are structured to be converted to permanent loans at the end of the construction phase, which typically runs up to twelve months. These construction loans have rates and terms which generally match the one- to four-family ARM loan rates then offered by the Company, except that during the construction phase the borrower pays interest only. Generally, the maximum loan-to-value ratio of owner occupied single family construction loans is 80% of appraised value. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans. Generally, construction loans to builders of one- to four-family residences require the payment of interest only for up to 12 months and have terms of up to 12 months. These loans may provide for the payment of interest and loan fees from loan proceeds and carry adjustable rates of interest. At December 31, 2004, the Company had $13.3 million of one-to four-family construction loans. Construction loans on commercial and multi-family real estate projects may be secured by apartments, small office buildings, strip retail centers, or other property, and are generally structured to be converted to permanent loans at the end of the construction phase, which generally runs up to 12 months. During the construction phase the borrower pays interest only. These loans generally provide for the payment of interest and loan fees from loan proceeds. At December 31, 2004, the Company had approximately $1.0 million of loans for the construction of commercial real estate. Construction loans are obtained principally through continued business from builders who have previously borrowed from the Company and from new or existing customers who are building new facilities. The application process includes a submission to the Company of accurate plans, specifications, and costs of the project to be constructed and projected revenues from the project. These items are also used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of the current appraised value of the property or the cost of construction (land plus building.) Because of the uncertainties inherent in estimating construction costs and the market for the project upon completion, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. Construction loans to borrowers other than owner-occupants also involve many of the same risks discussed above regarding multi-family and commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. Also, the funding of loan fees and interest during the construction phase makes the monitoring of the progress of the project particularly important, as customary early warning signals of project difficulties may not be present. Consumer Loans, Including Second Mortgage Loans. The Company also originates consumer loans, which primarily include second mortgage loans. As of December 31, 2004, consumer loans totalled $55.9 million, of which second mortgage loans totalled $39.7 million, or 9.5%, of the Company's total loan portfolio. The Company's second mortgage loans generally have fixed interest rates 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 8 second mortgage loans, of generally no more than 90%. The average principal amount of the Company's second mortgage loans is approximately $19,000. 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, 2004, automobile loans totalled $9.1 million, or 2.2% 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, 2004, other consumer loans totalled $7.1 million, or 1.7% of the Company's total loan portfolio. Included in the other consumer loans are unsecured consumer loans which totaled $707,000 or 0.17 % 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 $2,300. 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 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, 2004, $296,000, or 0.53%, 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. 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, and 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, 2004, the Company had outstanding commitments to originate $4.0 million of loans. This amount does not include commitments to purchase loans, undisbursed overdraft loan privileges, undisbursed home equity lines of credit or the unfunded portion of loans in process. Purchased or Out of State Originated Loans. The Company's loan portfolio contains $158.1 million of loans secured by out of state properties. These loans represented 37.8% of the Company's total loan portfolio at December 31, 2004. 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, 2004, the Company's multifamily residential and commercial real estate loans had an average balance of $751,780 and the largest loan had a principal balance of $2.97 million. As of December 31, 2004 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, 2004, $14.6 million, or 3.5%, of the Company's total loan portfolio consisted of purchased one-to four-family loans. As of December 31, 2004 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. $23.2 million, or 13.2%, 9 of purchased loans are serviced by the Bank. $152.6 million, or 86.8%, of purchased 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 requires appropriate documentation, and personal inspections of the underlying real estate collateral by an executive officer or director prior to purchase. The Company also limits its out of state loan portfolio concentration within a single state to 10% of the Bank's total assets. Set forth below is a table of the Company's out of state purchased or originated loans by state of origin (including multifamily residential, commercial real estate and one-to four-family first mortgage loans) as of December 31, 2004. Balance as of Percentage as of State December 31, 2004 December 31, 2004 ----- ----------------- ----------------- (In thousands) Arizona $ 3,066 1.9% California 29,621 18.8 Colorado 15,834 10.1 Georgia 4 0.0 Illinois 3,833 2.4 Indiana 3,065 1.9 Kansas 1,875 1.2 Michigan 3,447 2.2 Minnesota 15,647 9.9 Missouri 8,666 5.5 Montana 3 0.0 Nebraska 8,408 5.3 Nevada 1,064 0.7 North Carolina 499 0.3 Ohio 3,745 2.4 Oregon 10,941 6.9 South Dakota 1,785 1.1 Tennessee 35 0.0 Texas 4,114 2.6 Utah 4,154 2.6 Washington 25,426 16.1 Wisconsin 12,859 8.1 ----------- ----- Total $ 158,091 100.0% =========== ===== 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, 2004 2003 2002 ---- ---- ---- (In thousands) Total loans receivable at beginning of period.. $ 367,396 $ 344,574 $ 311,826 --------- --------- --------- Originations: First mortgage loans: One-to four-family residential ............. 64,771 117,916 84,143 Multifamily ................................ 4,720 3,491 - Commercial ................................. 3,924 1,244 264 Consumer loans: Automobile ................................. 6,246 7,288 8,573 Second mortgage ............................ 21,709 25,857 28,577 Other ...................................... 6,115 4,482 4,303 --------- --------- --------- Total originations: ...................... 107,485 160,278 125,860 Loan Purchases: First mortgage one-to four-family .......... 1,769 13,001 5,104 First mortgage multifamily ................. 19,907 20,545 22,891 First mortgage commercial .................. 31,049 11,540 56,434 Loan Sales: First mortgage - one-to four-family ........ (17,805) (48,188) (52,899) Transfer of mortgage loans (to) foreclosed real estate...................... (335) (954) (107) Repayments .................................... (90,625) (133,400) (124,535) --------- --------- --------- Net loan activity ............................. 51,445 22,822 32,748 --------- --------- --------- Total loans receivable at end of period... $ 418,841 $ 367,396 $ 344,574 ========= ========= =========
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, 2004, the Company had $160,000 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 $3.1 million, $2.9 million and $2.4 million for the fiscal years ended December 31, 2004, 2003 and 2002, respectively. Investment Activities At December 31, 2004, 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 Federal Home Loan Mortgage Corporation ("FHLMC") preferred stocks, Federal National Mortgage Association ("FNMA") preferred stock, Federal Home Loan Bank ("FHLB") stock and other common stock. At December 31, 2004, $631,000, or 14.0%, 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 $2.3 million, or 51.8% was scheduled to mature within one to five years. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management's projections as to the short term demand for funds to be used in the Company's loan origination and other activities. In addition, the Company's liquidity levels are affected by the level and source of its borrowed funds. 11 Investment Portfolio. The following table sets forth the carrying value of the Company's investment portfolio at the dates indicated. At December 31, 2004 2003 2002 ---- ---- ---- (In thousands) Investment securities: U.S. Government agencies (1)....... $ - $ - $ - Mortgage-backed securities......... 6,044 9,023 4,026 State and local obligations (1).... 4,497 5,133 6,073 FHLB stock......................... 5,045 4,778 4,478 Mutual funds....................... 1,976 1,989 2,000 Equity securities(2)............... 5,544 6,029 6,257 -------- -------- -------- Total investment securities...... 23,106 26,952 22,834 Interest-earning deposits.......... 4,948 7,125 13,026 -------- -------- -------- Total investments................ $ 28,054 $ 34,077 $ 35,860 ======== ======== ======== _______________________ (1) Certain securities have call features which allow the issuer to call the security prior to maturity date. (2) Certain securities have call features which allow 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, 2004
At December 31, 2004 -------------------- 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..... $ 28 5.77% $ 368 5.90% $ 632 5.80% $ 5,016 3.97% State and local obligations(1). 631 4.50 2,330 4.73 780 5.00 756 6.12 Mutual funds................... - - - - - - - - FHLB stock..................... - - - - - - - - Common stock................... - - - - - - - - Preferred stock-FNMA(2)........ - - - - - - - - Preferred stock-FHLMC(2)....... - - - - - - - - ------- ---- ------- ---- ------- ---- ------- ---- Total securities available for sale................... $ 659 4.55% $ 2,698 4.89% $ 1,412 5.36% $ 5,772 4.25% Interest-bearing deposits......... 4,948 1.56 - - - - - - ------- ---- ------- ---- ------- ---- ------- ---- Total investments............ $ 5,607 1.91% $ 2,698 4.89% $ 1,412 5.36% $ 5,772 4.25% ======= ==== ======= ==== ======= ==== ======= ====
At December 31, 2004 -------------------- Total ----- Annualized Average Weighted Carrying Fair Life in Average Value Value Years Yield ----- ----- ----- ----- (Dollars in thousands) Investment securities: Mortgage-backed securities..... $ 6,044 $ 6,044 2 4.29% State and local obligations(1). 4,497 4,497 3 4.96 Mutual funds................... 1,976 1,976 2.74 FHLB stock..................... 5,045 5,045 2.73 Common stock................... 7 7 - Preferred stock-FNMA(2)........ 960 960 5.81 Preferred stock-FHLMC(2)....... 4,577 4,577 3.77 -------- -------- ---- Total securities available for sale................... $ 23,106 $ 23,106 3.88% Interest-bearing deposits......... 4,948 4,948 1.56 -------- -------- ---- Total investments............ $ 28,054 $ 28,054 3.47 ======== ======== ==== (1) Certain securities have call features which allow the issuer to call the security prior to maturity date. (2) Certain securities have call features which allow 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 2004, 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 $2.4 million at December 31, 2004, a reduction of $0.9 million from December 31, 2003. Beginning fiscal year 2004, the Company's Board approved acceptance of deposits through brokers, through a solicitation of funds, and by offering negotiated rates on certificates of deposit in excess of $100,000. Currently, however, the Company does not have any of these types of deposits. Deposit Portfolio. Deposits with the Company as of December 31, 2004, 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 $ 10,944 3.46% 0.19 None NOW accounts 50 47,282 14.94 0.31 None Savings accounts 25 28,586 9.04 1.69 None Money Market savings 2,500 45,994 14.54 Certificates of Deposit ----------------------- 0.86 1-3 months Fixed term, fixed rate $ 1,000 $ 85 0.03 1.96 4-6 months Fixed term, fixed rate 1,000 4,627 1.46 2.06 7-9 months Fixed term, fixed rate 1,000 10,783 3.41 2.01 10-12 months Fixed term, fixed rate 1,000 15,237 4.82 2.37 13-24 months Fixed term, fixed rate 1,000 51,097 16.15 2.98 25-36 months Fixed term, fixed rate 1,000 24,475 7.74 4.09 37-48 months Fixed term, fixed rate 1,000 3,981 1.26 4.86 49-60 months Fixed term, fixed rate 1,000 70,061 22.14 5.30 61 months or greater Fixed term, fixed rate 1,000 3,182 1.01 -------- ------ Total deposits $316,334 100.00% ======== ======
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 12/31/04 % $ 12/31/03 % $ 12/31/02 -------- ---------- ---------- -------- ---------- ---------- -------- (Dollars in thousands) Noninterest bearing demand... $ 10,944 19.46% $ 1,783 $ 9,161 12.32% $ 1,005 $ 8,156 NOW.......................... 47,282 13.65 5,680 41,602 14.37 5,228 36,374 Savings account ............. 28,586 2.96 821 27,765 8.06 2,072 25,693 Money market savings......... 45,994 78.38 20,209 25,785 8.58 2,037 23,748 Certificates of deposit that mature: within 12 months......... 79,912 (13.76) (12,748) 92,660 36.52 24,788 67,872 within 12-36 months...... 79,555 41.39 23,287 56,268 (24.83) (18,587) 74,855 beyond 36 months......... 24,061 (21.68) (6,662) 30,723 (23.77) (9,579) 40,302 --------- ------ --------- --------- ------ -------- --------- Total.................. $ 316,334 11.40% $ 32,370 $ 283,964 2.51% $ 6,964 $ 277,000 ========= ====== ========= ========= ====== ======== =========
Increase Increase Increase Increase Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance 12/31/02 % $ 12/31/01 % $ 12/31/00 -------- ---------- ---------- -------- ---------- ---------- -------- (Dollars in thousands) Noninterest bearing demand.... $ 8,156 18.82% $ 1,292 $ 6,864 13.06% $ 793 $ 6,071 NOW........................... 36,374 7.72 2,607 33,767 11.72 3,542 30,225 Passbook savings.............. 25,693 17.44 3,815 21,878 0.71 154 21,724 Money market savings.......... 23,748 (15.48) (4,348) 28,096 14.59 3,577 24,519 Certificates of deposit that mature: within 12 months.......... 67,872 (28.33) (26,833) 94,705 1.65 1,533 93,172 within 12-36 months....... 74,855 41.16 21,828 53,027 (14.43) (8,945) 61,972 beyond 36 months.......... 40,302 32.24 9,825 30,477 29.78 6,993 23,484 --------- ------ --------- --------- ------ -------- --------- Total.................. $ 277,000 3.05% $ 8,186 $ 268,814 2.93% $ 7,647 $ 261,167 ========= ====== ========= ========= ====== ======== =========
15 The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated: At December 31, 2004 2003 2002 ---- ---- ---- (In thousands) Rate 1.99% or less..... $ 25,555 $ 24,608 $ 3,360 2.00-2.99%........ 77,070 44,391 27,439 3.00-3.99%........ 27,977 26,627 37,727 4.00-5.99%........ 37,685 66,580 88,840 6.00-7.99%........ 15,241 17,445 25,664 8.00% or greater.. - - - --------- --------- --------- $ 183,528 $ 179,651 $ 183,030 ========= ========= ========= The following table sets forth the amount and maturities of certificates of deposit at December 31, 2004.
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 1.99% or less......... $22,311 $ 2,861 $ 375 $ 8 $ - $ - $ 25,555 2.00-2.99%............ 38,420 27,879 8,502 1,762 507 - 77,070 3.00-3.99%............ 4,259 2,771 2,349 6,507 12,091 - 27,977 4.00-5.99%............ 4,054 12,859 17,586 2,817 369 - 37,685 6.00-7.99%............ 10,868 4,285 88 - - - 15,241 ------- ------- ------- ------- ------ ---- -------- $79,912 $50,655 $28,900 $11,094 $12,967 $ - $183,528 ======= ======= ======= ======= ======= ==== ========
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, 2004. This amount does not include savings accounts of greater than $100,000, which totalled approximately $1.0 million at December 31, 2004. Certificates of Deposit over Remaining Maturity $100,000 - --------------------------------------------------- --------------- (In thousands) Three months or less............................... $ 3,049 Three through six months........................... 3,639 Six through twelve months.......................... 3,453 Over twelve months................................. 9,327 --------- Total............................................ $ 19,468 ========= 16 The following table sets forth the changes in deposits of the Company for the periods indicated:
Year Ended December 31, ----------------------- 2004 2003 2002 ---- ---- ---- (In thousands) Net increase (decrease) before interest credited.............................. $ 26,633 $ 607 $ 335 Interest credited......................... 5,737 6,357 7,851 -------- ------- ------- Net increase in deposits.............. $ 32,370 $ 6,964 $ 8,186 ======== ======= =======
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 Office of Thrift Supervision ("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, ----------------------- 2004 2003 2002 ---- ---- ---- (Dollars in thousands) Weighted average rate paid on: FHLB advances................ 4.51% 4.63% 5.33% FHLB advances: Maximum balance.............. $ 103,979 $ 103,021 $ 89,561 Average balance.............. 97,833 96,904 82,996 Weighted average rate paid on: Other borrowings............. 1.00% 1.00% 4.07% Other borrowings: Maximum balance.............. $ 17 $ 21 $ 275 Average balance.............. 15 19 26 Title Abstract Business A component of the Company's operating strategy to increase non-interest income is through the abstract company business conducted through a wholly owned subsidiary, First Iowa Title Services, Inc. ("First Iowa"). First Iowa currently provides real estate title abstracting services in Webster, Boone and Jasper counties. These services include researching recorded documents at the county courthouse and providing a history of those documents as they pertain to specific parcels of real estate. This information is used to determine who owns specific parcels of real estate and what encumbrances are on those specific parcels. The abstract business performed by First Iowa replaces a significant portion of the function of a title insurance company. Iowa law prohibits Iowa insurance companies or companies authorized to do business in Iowa from issuing title insurance or insurance against loss or damage by reason of defective title, encumbrance or otherwise. Institutions can purchase title insurance, for their own protection or to sell loans on the secondary market, but the cost of this insurance may not be passed on to the borrower. First Iowa had 16 employees as of December 31, 2004. 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, 2004. 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, 2004 are approximately $151,000. The tax credits will continue for an additional two 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, 2004 are approximately $127,000. The tax credits will continue for an additional eight year period. 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, 2004, the Company had 118 full-time and 28 part-time employees (including the 16 employees of First Iowa and the 2 employees at First Federal Investments). None of the Company's employees are 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. 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 Home Owners' Loan Act, as amended, and OTS regulations. 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 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, 2004, 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. 20 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, 2004, 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, 2004: Capital Bank Requirements Excess Capital ---- ------------ -------------- (In thousands) Tangible capital....... $ 33,324 $ 6,868 $ 26,456 Core capital........... 33,324 13,735 19,589 Risk-based capital..... 36,464 24,847 11,617 Capital Distribution. 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 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 21 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. 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 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 22 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, 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 manage 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, 2004, the Bank met the criteria for being considered "well-capitalized." When appropriate, the OTS can require corrective action by a savings association holding company under the "prompt corrective action" provision of federal law. Insurance of Deposit Accounts. The Bank is a member of the SAIF, and the Bank pays its deposit insurance assessments to the SAIF. The FDIC also maintains another insurance fund, the Bank Insurance Fund, which primarily insures the deposits of banks and state chartered savings banks. Under federal law, the FDIC established a risk based assessment system for determining the deposit insurance assessments to be paid by insured depositary institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the quarter ending three months before the beginning of the assessment period. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. 23 In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately 0.0142% 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 $10,000 or 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, 2004 of $5.0 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 Gramm-Leach-Bliley Act (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 $40.6 million. The amount of aggregate transaction accounts in excess of $40.6 million is currently subject to a reserve ratio of 10.0%. The FRB regulations currently exempt $7.0 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. 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. 24 The USA PATRIOT Act The Bank is subject to the USA PATRIOT Act which gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions: o Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program. o Pursuant to Section 326, on 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 which became effective on October 1, 2003, require each financial institution to implement a written customer identification program appropriate for its size, location and type of business that includes certain minimum requirements. 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 through those accounts. o Section 318, which became effective December 25, 2001, prohibits financial institutions 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 requires financial institutions to take reasonable steps to ensure that correspondent accounts provided to foreign banks are not being used to indirectly provide banking services to foreign shell 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. Regulation of Savings and Loan Holding Companies The Holding Company is registered as a 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. HOLA 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 25 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 chartered 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 Sarbanes-Oxley Act As a public company, the Company is subject to the Sarbanes-Oxley Act which 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. The Sarbanes-Oxley Act's principal legislation and the derivative regulation and rule making promulgated by the SEC 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 a requirement that companies establish and maintain a system of internal control over financial reporting and that a company's management provide an annual report regarding its assessment of the effectiveness of such internal control over financial reporting to the company's independent accountants and that such accountants provide an attestation report with respect to management's assessment of the effectiveness of the company's internal control over financial reporting. The Company, as a non-acceleratd filer, is not subject to this provision until the year ending December 31, 2006; 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; 26 o disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; o mandatory disclosure by analysts of potential conflicts of interest; and o a range of enhanced penalties for fraud and other violations. Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. 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. Quotation on Nasdaq. The Company's common stock is quoted on The Nasdaq Stock Market. In order to maintain such quotation, the Company is subject to certain corporate governance requirements, including: o a majority of its board must be composed of independent directors; o it is required to have an audit committee composed of at least three directors, each of whom is an independent director, as such term is defined by both the rules of the National Association of Securities Dealers ("NASD") and by Securities Exchange Act regulations; o its nominating committee and compensation committee must also be composed of entirely of independent directors; o each of its audit committee and nominating committee must have a publicly available written charter. 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, 2004. In addition to the properties listed below, First Federal Investments owned land and an office building in Fort Dodge, Iowa, Northridge Apartments Limited Partnership owned a multifamily apartment building in Fort Dodge, Iowa and Northridge Apartment Limited Partnership II owned a multifamily apartment building in Fort Dodge, Iowa at December 31, 2004. Location Opening Date Lease Expiration Date Main Office: 825 Central Avenue 1973 N/A Fort Dodge, Iowa Branch Offices: 201 South 25th Street 1977 N/A Fort Dodge, Iowa 404 Lincolnway 1977 N/A Nevada, Iowa 316 South Duff 1995 N/A Ames, Iowa 1111-141st Street 1999 N/A Perry, Iowa 321 North Third Street 1953 N/A Burlington, Iowa 1010 North Roosevelt 1975 N/A Burlington, Iowa 102 South Main 1991 N/A Mount Pleasant, Iowa 2110 SE Delaware 2003 N/A Ankeny, Iowa 13150 Hickman Road 2004 N/A Clive, Iowa First Iowa Offices: 628 Central Avenue 1982 N/A Fort Dodge, Iowa 814 8th Street 1996 2008 Boone, Iowa 200 1st Street South 1996 2009 Newton, Iowa _________________________ 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, 2004. 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 64 of the Company's 2004 Annual Report to Shareholders under the heading "Shareholder Information," which section is included in Exhibit 13.1 to this Annual Report. 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 December 31, 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 - ----------------------------------------------------------------------------------------------------------- October 1, 2004 to October 31, 2004 -- -- -- 39,550 November 1, 2004 to November 30, 2004 9,900 $38.53 9,900 29,650 December 1, 2004 to December 31, 2004 11,000 $38.95 11,000 18,650 ------ ------ Total 20,900 20,900
ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated herein by reference to page 4 of the Company's 2004 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 2004 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 2004 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. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated herein by reference to pages 27 through 62 of the Company's 2004 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. 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. ITEM 9B. OTHER INFORMATION None. 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 22, 2005, 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. 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 22, 2005, 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 22, 2005, 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, 2004.
Number of securities remaining available for future issuance Number of securities to be Weighted-average under equity compensation plans issued upon exercise of exercise price of (excluding securities reflected Plan category outstanding options outstanding options in column (a)) ------------- ------------------- ------------------- -------------- (a) (b) (c) Equity compensation plans approved by security holders........................ 108,405 $ 20.51 17,605 Equity compensation plans not approved by security holders............... - - 40,000 (1) Total......................... 108,405 $ 20.51 57,605 (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 22, 2005, 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 22, 2005, which has been filed with the SEC and is incorporated herein by reference. 31 ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Financial Statements, Schedules and Exhibits 1. The consolidated statements of financial condition of North Central Bancshares, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2004, 2003 and 2002, together with the related notes and the report of the independent registered public accounting firm of McGladrey & Pullen, LLP. 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. 32 (b) Exhibits Reference Exhibit No. Description No. - ----------- ----------- --- 3.1 Articles of Incorporation of North Central Bancshares, Inc. (1) 3.2 Bylaws of North Central Bancshares, Inc. (1) 3.3 Bylaws of North Central Bancshares, Inc., as amended (2) 4.1 Federal Stock Charter of First Federal Savings Bank of Iowa (formerly known as First Federal Savings Bank of Fort Dodge) (1) 4.2 Bylaws of First Federal Savings Bank of Iowa (formerly known as First Federal Savings Bank of Fort Dodge). (1) 4.3 Specimen Stock Certificate of North Central Bancshares, Inc. (1) 4.4 Bylaws of First Federal Savings Bank of Iowa, as amended (2) 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) (6) 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 (8) 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 (8) 10.2 ESOP Loan Documents, dated September 3, 1996 (5) 10.3 Employee Retention Agreements between First Federal Savings Bank of Fort Dodge and certain executive officers (3) 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 (1) 10.6 Form of Employment Agreement between North Central Bancshares, Inc. and David M. Bradley (1) 10.8 North Central Bancshares, Inc. 1996 Stock Option Plan (4) 10.9 Amendment No. 1 to the North Central Bancshares, Inc. 1996 Stock Option Plan (6) 10.10 Supplemental Retirement and Deferred Compensation Plan of First Federal Savings Bank of Iowa (8) 10.11 Form of Employment Agreement between First Federal Savings Bank of Iowa and C. Thomas Chalstrom (7) 10.12 Form of Employment Agreement between First Federal Savings Bank of Iowa and Kirk A. Yung (7) 10.13 Tax Allocation Agreement between North Central Bancshares, Inc. and Subsidiaries (2) 13.1 Annual Report to Shareholders 14.1 Code of Ethics for Senior Financial Officers of North Central Bancshares, Inc. (2) 21.1 Subsidiaries of the Registrant (1) 23.1 Consent of McGladrey & Pullen, LLP 31.1 Rule 13a-14(a)/15d-14(a) Certifications 32.1 Section 1350 Certifications 33 (1) 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. (2) Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 22, 2004. (3) Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K of the Registrant for fiscal year 1995, filed with the Commission on March 29, 1996. (4) Incorporated herein by reference to the Amended Schedule 14A of the Registrant filed with the Commission on August 19, 1996. (5) Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 31, 1997. (6) Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 31, 1998. (7) Incorporated by reference to Exhibit 10.3. (8) Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 29, 2002. 34 SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) 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: March 29, 2005 /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, 03/29/05 - -------------------- Director, and Chairman of the Board David M. Bradley (Principal Executive Officer) /s/ David W. Edge Chief Financial Officer, Treasurer 03/29/05 - ----------------- (Principal Accounting and David W. Edge Financial Officer) /s/ Robert H. Singer, Jr. Director 03/29/05 - ------------------------- Robert H. Singer, Jr. /s/ Melvin R. Schroeder Director 03/29/05 - ----------------------- Melvin R. Schroeder /s/ Mark M. Thompson Director 03/29/05 - -------------------- Mark M. Thompson /s/ Randall L. Minear Director 03/29/05 - --------------------- Randall L. Minear /s/ C. Thomas Chalstrom Director 03/29/05 - ----------------------- C. Thomas Chalstrom 35 EX-13 2 ncb10k-exh131_123104.txt EXHIBIT 13.1 ANNUAL REPORT 2004 Exhibit 13.1 Annual Report to Shareholders. NORTH CENTRAL BANCSHARES, INC. Holding Company for First Federal Savings Bank of Iowa 2004 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)..........................60 MANAGEMENT OF THE HOLDING COMPANY AND THE BANK.......................63 SHAREHOLDER INFORMATION..............................................64 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. North Central Bancshares, Inc. Holding Company for First Federal Savings Bank of Iowa 825 Central Avenue Fort Dodge, Iowa 50501 515-576-7531 www.firstfederaliowa.com Branch Locations Fort Dodge, Iowa Fort Dodge, Iowa Ames, Iowa 825 Central Avenue 201 South 25th Street 316 South Duff Fort Dodge, Iowa 50501 Fort Dodge, Iowa Ames, Iowa 50010 515-576-7531 515-576-3177 515-232-4304 Nevada, Iowa Perry, Iowa Ankeny, Iowa 404 Lincoln Highway 1111 - 141st Street 2110 SE Delaware Street Nevada, Iowa 50201 Perry, Iowa 50220 Ankeny, Iowa 50021 515-382-5408 515-465-3187 515-963-4488 Clive, Iowa Burlington, Iowa Burlington, Iowa 13150 Hickman Road 1010 N. Roosevelt 321 North 3rd Street Clive, Iowa 50325 Burlington, Iowa 52601 Burlington, Iowa 52601 515-440-6300 319-754-6521 319-754-7517 Mt. Pleasant, Iowa 102 South Main Mt. Pleasant, Iowa 52641 319-385-8000 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, 2004. North Central Bancshares is the holding company for First Federal Savings Bank of Iowa (the "Bank"). For the year ended December 31, 2004, North Central Bancshares' net income was $5,399,000 or $3.34 diluted earnings per share, as compared to $5,848,000, or $3.48 diluted earnings per share, for the year ended December 31, 2003. Some of our achievements during the past year include: 2004 HIGHLIGHTS * Total assets increased 9.1% to a new high of $462.7 million. * Deposits increased 11.4% to a new high of $316.3 million. * Net loans increased 12.2% to a new high of $407.3 million. * Low cost checking deposits increased 14.8% to $59.2 million. * Increased quarterly dividends in April, 2004 to $0.25 per share, a 19.0% increase. * Repurchased a total of 143,055 shares or 8.9% of outstanding stock during the year ended December 31, 2004. * Moved into a newly constructed 5,000 sq. ft. full service office in Clive, Iowa. This year also saw changes to our board of directors. Sadly, KaRene Egemo lost her brave fight against cancer in February 2004. We continue to miss her counsel and constant smile. Newly elected to the Board of Directors are C. Thomas Chalstrom, President of the Bank and Executive Vice President of the Company, and Randall L. Minear. Also during 2004, Chief Financial Officer David W. Edge joined our senior management team. With the support of our directors, officers, staff and the continuing confidence of our shareholders, we look forward to continued success in the coming year. 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 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, --------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (In thousands) -------------- Selected Consolidated Financial Condition Data: Total assets........................... $ 462,735 $ 424,009 $ 403,872 $ 379,375 $ 388,998 Cash (noninterest-bearing)............. 2,970 2,894 2,143 2,259 2,519 Loans receivable, net:(1) First mortgage loans secured by one-to four-family residences......................... 184,324 171,468 147,479 159,943 174,413 First mortgage loans secured by multifamily properties.......... 77,995 69,507 70,194 73,311 74,644 First mortgage loans secured by commercial properties........... 89,816 68,933 70,502 25,263 23,825 Consumer loans....................... 55,181 53,051 52,971 49,464 45,144 --------- --------- --------- --------- --------- Total loans receivable, net........ 407,316 362,959 341,146 307,981 318,026 Investment securities(2)............... 28,054 34,077 35,859 49,016 49,682 Deposits............................... 316,334 283,964 277,000 268,814 261,167 Borrowed funds......................... 100,975 95,005 85,026 71,413 88,592 Total shareholders' equity............. 41,534 41,592 38,748 35,913 36,398
For the Year Ended December 31, 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (In thousands) -------------- Selected Operating Data: Interest income....................... $ 24,838 $ 25,456 $ 26,965 $ 27,500 $ 27,284 Interest expense...................... 11,367 12,342 13,911 16,514 16,707 ---------- --------- --------- -------- --------- Net interest income before provision for loan losses........ 13,471 13,114 13,054 10,986 10,577 Provision for loan losses............. 240 255 383 210 120 ---------- --------- --------- -------- --------- Net interest income after provision for loan losses........ 13,231 12,859 12,671 10,776 10,457 ---------- --------- --------- -------- --------- Noninterest income: Fees and service charges......... 3,123 2,864 2,375 1,993 1,592 Abstract fees.................... 1,461 1,811 1,686 1,506 1,233 Other income..................... 1,449 1,895 1,668 1,593 1,189 ---------- --------- --------- -------- --------- Total noninterest income....... 6,033 6,570 5,729 5,092 4,014 ---------- --------- --------- -------- --------- Noninterest expense: Salaries and employee benefits... 6,192 5,950 5,223 4,500 4,103 Premises and equipment........... 1,428 1,287 1,192 1,226 1,092 Data processing.................. 567 578 544 470 455 Goodwill......................... - - - 472 472 Other expenses................... 3,182 3,045 2,623 2,378 2,465 ---------- --------- --------- -------- --------- Total noninterest expense...... 11,369 10,860 9,582 9,046 8,587 ---------- --------- --------- -------- --------- Income before income taxes............ 7,895 8,569 8,818 6,822 5,884 Income tax expense.................... 2,496 2,721 2,953 2,347 1,873 ---------- --------- --------- -------- --------- Net income......................... $ 5,399 $ 5,848 $ 5,865 $ 4,475 $ 4,011 ========== ========= ========= ======== =========
4 At or for the Year Ended December 31, ------------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Key Financial Ratios and Other Data: Performance Ratios: (%) Net interest rate spread (difference between average yield on interest-earning assets and average cost of interest- bearing liabilities)................................. 2.95% 3.01% 3.15% 2.68% 2.57% Net interest margin (net interest income as a percentage of average interest- earning assets)...................................... 3.19 3.26 3.44 3.03 2.95 Return on average assets (net income divided by average total assets)..................... 1.21 1.38 1.47 1.17 1.06 Return on average equity (net income divided by average equity)........................... 12.97 14.65 15.57 12.21 11.08 Noninterest income to average assets................... 1.36 1.55 1.43 1.33 1.07 Efficiency ratio(3).................................... 58.29 55.17 51.01 56.26 58.85 Noninterest expense to average assets.................. 2.55 2.56 2.40 2.36 2.28 Net interest income after provision for loan losses to noninterest expenses.................. 116.37 118.40 132.24 119.12 121.78 Financial Condition Ratios: (%) (4) Equity to assets at period end......................... 8.98 9.81 9.59 9.47 9.36 Tangible equity to tangible assets at period end (5) (6).............................. 7.80 8.54 8.25 8.03 7.84 Average shareholders' equity divided by average total assets................................. 9.35 9.40 9.42 9.57 9.61 Average tangible shareholders equity divided by average tangible total assets (5) (6)........... 8.13 8.12 8.06 8.10 8.00 Average interest-earning assets to average interest-bearing liabilities......................... 108.77 108.27 107.91 107.54 108.31 Asset Quality Ratios: (%) (4) Nonaccrual loans to total net loans.................... 0.16 0.17 0.19 0.09 0.33 Nonperforming assets to total assets(7)................ 0.37 0.49 0.35 0.36 0.28 Allowance for loan losses as a percent of total loans receivable at end of period.............. 0.77 0.86 0.90 0.92 0.88 Allowance for loan losses to nonaccrual loans................................................ 513.13 515.02 485.00 1,042.07 274.08 Per Share Data: Book value per share................................... $ 27.14 $ 25.92 $ 23.62 $ 21.12 $ 19.04 Tangible book value per share(5)....................... 23.28 22.24 20.03 17.65 15.71 Basic earnings per share (8)........................... 3.47 3.69 3.58 2.54 2.04 Diluted earnings per share (9)......................... 3.34 3.48 3.37 2.41 2.00 Dividends declared per share........................... 1.00 0.84 0.72 0.60 0.50 Dividend payout ratio.................................. 0.29 0.23 0.20 0.25 0.25
_______________________ (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, 2004, 2003, 2002, 2001 and 2000 was $3.2 million, $3.2 million, $3.1 million, $2.9 million and $2.8 million, respectively. (2) Includes interest-bearing cash. (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, 2004, 2003, 2002, 2001 and 2000 was $5.9 million, $5.9 million, $5.9 million, $5.9 million and $6.4 million, respectively. (6) Tangible assets consist of total assets less goodwill and title plant. Goodwill and title plant at December 31, 2004, 2003, 2002, 2001 and 2000 was $5.9 million, $5.9 million, $5.9 million, $5.9 million, and $6.4 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 2004, 2003, 2002, 2001 and 2000 were 1,554,329, 1,583,568, 1,637,749, 1,762,900 and 1,963,686, 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 2004, 2003, 2002, 2001 and 2000 were 1,616,689, 1,679,046, 1,739,535, 1,856,643 and 2,006,340, 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 borrowed funds in the form of 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 The Holding 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 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 shareholder 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 have increased annually except for 2004 since the Company's inception in 1996. Annual dividends per share have increased from $.25 per share in 1997 to $1.00 per share in 2004. 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 2,734,622 shares at a cost of $52.2 million as of December 31, 2004. o The Bank has opened new offices in market areas where population growth trends are positive. A permanent office was opened in Clive, Iowa in March, 2004 and in Ankeny, Iowa in February 2003. In addition, in January 2005 the Bank purchased a building site in West Des Moines near Jordan Town Center Mall. 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. Noninterest expenses have increased during the years ended December 31, 2004 and 2003 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. 7 o Consistent with the Bank's emphasis on attracting and retaining core deposits, deposit fee growth continued a strong 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. o Our exposure to interest rate risk has increased from the prior year. This is due in part to the increase in money market deposit accounts 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 513.13% at December 31, 2004. Net annualized chargeoffs for 2004 were 0.04% of total loans and have averaged under 0.05% of total loans for the past five years. During 2004, the Company's total loan portfolio increased $44.3 million or 12.2%. This increase primarily consisted of increases in the one- to four-family first mortgage real estate loans and commercial real estate loans. The Company's provision for loan losses in 2004 was $240,000. o The Company has lowered its effective tax rate through the use of federal Low Income Housing Tax Credits (LIHTC). o The Company owns and operates two elderly LIHTC projects in Fort Dodge. These projects generated $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 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. 8 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" as its most recent Community Reinvestment Act rating. Retail Deposit Base. In 2004, the Company had ten offices located in Fort Dodge, Ames, Nevada, Perry, Ankeny, Clive, Burlington and Mount Pleasant, Iowa. At December 31, 2004, 41.9% of the deposit base, or $132.8 million, consisted of core deposits, which included money market accounts, savings accounts, NOW accounts, and noninterest-bearing demand accounts. Core deposits are generally 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, construction or improvement of residential real estate in its market area. At December 31, 2004, 39.8% of the Company's total assets consisted of one-to four-family residential first mortgage loans. To supplement local mortgage loan originations and to diversify its mortgage loan portfolio geographically, the Company has originated or 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, 2004, the Company's portfolio of loans which were either originated or purchased by the Company and secured by out of state properties totaled $158.1 million and consisted of $14.6 million one-to-four family residential mortgage loans, or 3.5%, $69.4 million multifamily real estate loans, or 16.6%, and $74.1 million commercial real estate loans, or 17.7%, of the Company's total loan portfolio. At December 31, 2004, the Company's ratio of nonperforming assets to total assets was 0.37%. 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. 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 has increased noninterest income through emphasizing growth in core deposit accounts. During the year ended December 31, 2004 fees and service charges totaled $3.1 million, an increase of $0.3 million from the prior year. The Company also has increased noninterest income through emphasizing growth in mortgage banking income, annuity and mutual fund sales and insurance sales. In addition, 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 9 performed by First Iowa replaces the function of a title insurance company. The Company believes that First Iowa can continue to be an important source of fee income. Noninterest income from such business for the years ended December 31, 2004 and 2003 was $1.5 and $1.8 million, respectively, offset by noninterest expense attributable to First Iowa. 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, 2004, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $32.3 million, representing an one-year gap to total assets ratio of negative 7.0% as compared to a negative 5.4% at December 31, 2003. 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 such as FHLB advances, 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, 2004, $631,000, or 14.0%, 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 $2.3 million, or 51.8%, was scheduled to mature in one to five years and $1.5 million, or 34.2%, was scheduled to mature in more than five years. Certificates of deposit scheduled to mature in less than one year, at December 31, 2004, totaled $79.9 million. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB, which provide an additional source of funds. The amount of eligible collateral for blanket lien pledges from the FHLB was $161.5 million as of December 31, 2004. 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, 2004, the Company had outstanding loan commitments of $4.0 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 shares of the Holding Company's common stock. During 2004, the Holding Company repurchased 143,055 shares of its common stock. The Holding 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 Holding Company buys stock in the open market whenever the price of the stock is deemed reasonable and the Holding 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 16 to the Consolidated Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS formula-based regulatory restrictions on the payment of dividends to its shareholders, however, it is subject to the requirements of Iowa law. Iowa law generally prohibits the Holding Company from paying a dividend if 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 10 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, 2004, 2003 and 2002, the Company's disbursements for loan originations and purchases totaled $160.2 million, $205.4 million and $210.3 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 (used in) investing activities amounted to $(42.4) million, $(31.1) million and $(27.6) million for the years ended December 31, 2004, 2003 and 2002, respectively. Net cash flows provided by financing activities amounted to $33.2 million, $13.9 million and $18.3 million for the years ended December 31, 2004, 2003 and 2002, 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, 2004 with tangible and leverage capital ratios of 7.3% and a total risk-based capital ratio of 11.7 %. 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, 2004: Capital Excess Amount Requirements Capital ------ ------------ ------- (In thousands) Tangible capital.......... $ 33,324 $ 6,868 $ 26,456 Core capital.............. 33,324 13,735 19,589 Risk-based capital........ 36,464 24,847 11,617 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, 2004, $158.1 million, or 37.8%, of the Company's total loan portfolio was secured by properties outside the State of Iowa, located in twenty-two states. See "Asset Quality." The Bank does not own any trading assets. At December 31, 2004, 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 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. 11 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, 2004, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $32.3 million, representing a one-year gap ratio of negative 7.0%, compared to a one-year gap ratio of negative 5.4% at December 31, 2003. 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, 2004 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, 2004 (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) ........................ $ 74,298 $ 89,031 $ 71,751 $ -- $ -- $ -- $ 235,080 Fixed (2) ............................. 25,394 33,333 30,188 31,520 5,000 145 125,580 Consumer and other loans ................. 20,689 24,089 8,374 2,664 120 -- 55,936 Investment securities(3)(4) .............. 17,392 805 32 781 -- 3,000 22,010 --------- --------- --------- --------- --------- --------- --------- Total interest-earning assets ......... $ 137,773 $ 147,258 $ 110,345 $ 34,965 $ 5,120 $ 3,145 $ 438,606 ========= ========= ========= ========= ========= ========= ========= Rate sensitive liabilities: Savings accounts ........................ $ 4,860 $ 7,381 $ 5,085 $ 6,825 $ 3,747 $ 688 $ 28,586 NOW accounts ............................ 17,494 17,965 7,130 4,227 461 5 47,282 Money market accounts ................... 36,335 9,658 -- -- -- -- 45,993 Certificate accounts .................... 79,903 79,555 24,061 9 -- -- 183,528 Noninterest bearing deposits ............ 10,944 -- -- -- -- -- 10,944 FHLB advances and other liabilities(5) ....................... 20,513 37,500 11,962 31,000 -- -- 100,975 --------- --------- --------- --------- --------- --------- --------- Total interest-bearing liabilities . $ 170,049 $ 152,059 $ 48,238 $ 42,061 $ 4,208 $ 693 $ 417,308 ========= ========= ========= ========= ========= ========= ========= Interest sensitivity gap ................... $ (32,276) $ (4,801) $ 62,107 $ (7,096) $ 912 $ 2,452 Cumulative interest-sensitivity gap ........ $ (32,276) $ (37,077) $ 25,030 $ 17,934 $ 18,846 $ 21,298 Interest sensitivity gap to total assets. (6.98)% (1.04)% 13.42% (1.53)% 0.20% 0.53% Cumulative interest-sensitivity gap to total assets .......................... (6.98) (8.01) 5.41 3.88 4.07 4.60 Ratio of interest-earning assets to interest-bearing liabilities ........... 81.02 96.84 228.75 83.13 121.67 453.82 105.10 Cumulative ratio of interest-earning assets to interest-bearing liabilities . 81.02 88.49 106.76 104.35 104.52 105.10 105.10 Total assets ............................... $ 462,735 $ 462,735 $ 462,735 $ 462,735 $ 462,735 $ 462,735 $ 462,735 Cumulative interest bearing assets ......... $ 137,773 $ 285,031 $ 395,376 $ 430,341 $ 435,461 $ 438,606 $ 438,606 Cumulative interest sensitive liabilities .. $ 170,049 $ 322,108 $ 370,346 $ 412,407 $ 416,615 $ 417,308 $ 417,308
__________________ (1) The following assumptions were used in regard to prepayment speed for loans: (i) fixed rate commercial real estate loans and mortgage backed securities will prepay at 10 percent per year, (ii) one-to four-family loans (both fixed rate and adjustable rate) will prepay at 12 percent per year, (iii) all multifamily loans (both fixed and adjustable rate) will prepay at 15 percent per year, (iv) all second mortgage real estate loans and all other loans will prepay at 20 percent 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 $4.8 million and $1.2 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 $5.0 million and securities available for sale of $11.5 million. (4) Includes $4.5 million of FHLMC preferred stock and $1.0 million of FNMA preferred stock. $2.9 million is fixed rate and $2.6 million is adjustable rate. The adjustable rate preferred stock was included in the appropriate category based upon their repricing date. (5) Includes $101.0 million of advances which have been categorized based upon their maturity date. As of December 31, 2004, the Company has $29.5 million of advances which are callable by the FHLB. These callable advances have been placed in the repricing category that they 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, 2004, 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 38,973 -5,868 -13 8.55 -91bp +200 bp 41,924 -2,917 -7 9.06 -39bp +100 bp 43,448 -1,394 -3 9.26 -19p 0 bp 44,841 - - 9.45 - -100 bp 44,114 -727 -2 9.22 -23bp ______________________ (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, 2004, the Company's foreclosed real estate consisted of 12 properties with an aggregate carrying value of $1.1 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, --------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (Dollars in thousands) Nonaccrual loans and nonperforming assets: First mortgage loans: One-to four-family residential ...... $ 335 $ 414 $ 434 $ 130 $ 237 Multifamily and commercial properties ....................... -- -- 37 37 556 Consumer loans: ........................ 299 201 172 109 244 ------ ------ ------ ------ ------ Total nonaccrual loans .............. 634 615 643 276 1,037 Total foreclosed real estate(1) ........ 1,079 1,453 769 1,074 64 Other nonperforming assets ............. -- -- -- -- -- ------ ------ ------ ------ ------ Total nonperforming assets ......... $1,713 $2,068 $1,412 $1,350 $1,101 ====== ====== ====== ====== ====== Total nonaccrual loans to net loans receivable ......................... 0.16% 0.17% 0.19% 0.09% 0.33% Total nonaccrual loans to total assets.. 0.14 0.15 0.16 0.07 0.27 Total nonperforming assets to total assets ............................ 0.37 0.49 0.35 0.36 0.28
_________________________ (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, --------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (In thousands) Loans past due 60-89 days: First mortgage loans: One-to four-family residential............ $ 1,001 $ 649 $ 830 $ 1,083 $ 590 Multifamily and commercial properties..... 40 463 - - - Consumer loans................................ 238 223 183 153 96 ------- ------- ------- ------- ------ Total past due 60-89 days................. $ 1,279 $ 1,335 $ 1,013 $ 1,236 $ 686 ======= ======= ======= ======= ======
15 The following table sets forth information with respect to the Company's delinquent loans and other problem assets at December 31, 2004. At December 31, 2004 -------------------- Balance Number ------- ------ (Dollars in thousands) One-to four-family first mortgage loans: Loans 60 to 89 days delinquent.................. $1,001 19 Loans 90 days or more delinquent................ 335 7 Multifamily and commercial first mortgage loans: Loans 60 to 89 days delinquent.................. 40 1 Loans 90 days or more delinquent................ - - Consumer Loans: Loans 60 to 89 days delinquent.................. 238 28 Loans 90 days or more delinquent................ 296 18 Foreclosed real estate............................... 1,079 12 Other nonperforming assets........................... - - Loans to facilitate sale of foreclosed real estate... 219 3 Special mention loans................................ 1,755 53 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, 2004, the Company had $1.75 million of special mention loans, consisting of fifteen loans secured by one-to four-family residences, two loans secured by commercial real estate and thirty-six 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, --------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (In thousands) Substandard assets ........... $1,680 $2,046 $1,361 $1,291 $1,048 Doubtful assets .............. -- -- -- -- -- Loss assets .................. 58 22 51 59 53 ------ ------ ------ ------ ------ Total classified assets $1,738 $2,068 $1,412 $1,350 $1,101 ====== ====== ====== ====== ====== 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 2004 the Company's total loan portfolio increased $44.3 million or 12.2%. During the years ended December 31, 2004, 2003 and 2002 the Company's provision for loan losses were $240,000, $255,000 and $383,000, respectively. The 16 Company's allowance for loan losses totaled $3.2 million, $3.2 million and $3.1 million at December 31, 2004, 2003 and 2002, respectively. Management believes that the allowance 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, ------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (Dollars in thousands) Total loans outstanding .................. $418,841 $367,396 $344,574 $311,826 $322,408 Average net loans outstanding ............ 389,190 358,260 337,693 318,197 307,104 Allowance balances (at beginning of period) ............................. 3,165 3,118 2,883 2,843 2,776 -------- -------- -------- -------- -------- Provisions for losses .................... 240 255 383 210 120 Charge-Offs: First mortgage loans ................ 66 36 27 15 15 Consumer loans ...................... 114 265 135 168 41 Recoveries: First mortgage loans ................ 2 -- -- -- -- Consumer loans ...................... 8 93 14 13 3 -------- -------- -------- -------- -------- Net charge-offs ..................... 170 208 148 170 53 -------- -------- -------- -------- -------- Allowance balance (at end of period) ............................. $ 3,235 $ 3,165 $ 3,118 $ 2,883 $ 2,843 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total loans receivable at end of period .............................. 0.77% 0.86% 0.90% 0.92% 0.88% Net loans charged off as a percent of average net loans outstanding ....... 0.04 0.06 0.04 0.05 0.02 Ratio of allowance for loan losses to total nonaccrual loans at end of period .............................. 513.13 515.02 485.00 1,042.07 274.08 Ratio of allowance for loan losses to total nonaccrual loans and foreclosed real estate at end of period ........ 188.86 153.05 220.90 213.48 258.18
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, ---------------------------------------------------------------------------- 2004 2003 2002 ---------------------------------------------------------------------------- % 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 ....................... $ 510 45.99% $ 517 47.33% $ 395 43.17% Multifamily residential mortgage loans . 731 18.73 686 19.04 709 20.54 Commercial mortgage loans .............. 1,240 21.94 978 18.95 1,223 20.68 Consumer loans ......................... 754 13.34 984 14.68 791 15.61 ----- ----- ------ ----- ----- ----- Total allowance for loan losses ...... $3,235 100.00% $3,165 100.00% $3,118 100.00% ====== ====== ====== ====== ====== ====== At December 31, ------------------------------------------------- 2001 2000 ------------------------------------------------- % 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 ....................... $ 608 51.80% $ 731 54.78% Multifamily residential mortgage loans . 1,121 23.86 1,145 23.45 Commercial mortgage loans .............. 459 8.25 303 7.56 Consumer loans ......................... 695 16.09 664 14.21 ------ ----- ------ ----- Total allowance for loan losses ...... $2,883 100.00% $2,843 100.00% ====== ====== ====== ======
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, 2004 2004 ------------------------------------------------------------------ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost ------- ---- ------- -------- ---- (Dollars in thousands) Assets: Interest-earning assets: First mortgage loans(1)............. $ 355,520 5.92% $ 334,676(8) $ 20,026 5.98% Consumer loans(1)................... 55,936 6.70 54,513(8) 3,757 6.89 Investment securities............... 28,054(4) 3.47 33,178(5) 1,055 3.18 --------- ---- ----------- -------- ---- Total interest-earning assets.... $ 439,510 5.86% $ 422,367 $ 24,838 5.88% Noninterest-earning assets............ 23,225 22,872 --------- --------- Total assets..................... $ 462,735 $ 445,239 ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings......................... $ 93,276 0.93% $ 78,865 $ 542 0.69% Passbook savings................... 28,586 0.30 29,217 91 0.31 Certificates of Deposit............ 183,528 3.42 182,368 6,324 3.47 Borrowed funds..................... 100,975 4.43 97,848 4,410 4.51 --------- ---- ----------- -------- ---- Total interest-bearing liabilities. $ 406,365 2.88% $ 388,298 $ 11,367 2.93% Noninterest-bearing liabilities....... 14,836 15,322 --------- --------- Total liabilities................ $ 421,201 $ 403,620 Equity................................ 41,534 41,619 --------- --------- Total liabilities and equity..... $ 462,735 $ 445,239 ========= ========= Net interest income................... $ 13,471 ======== Net interest rate spread(2)........... 2.98% 2.95% ==== ==== Net interest margin (3)............... 3.20 3.19 ==== ==== Ratio of average interest-earning assets to average interest- bearing liabilities............ 108.16 108.77 ====== ======
For the Year Ended Decmber 31, ---------------------------------------------------------------------------------- 2003 2002 ---------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- (Dollars in Thousands) Assets: Interest-earning assets: First mortgage loans(1)............. $ 304,573(8) $ 19,978 6.56% $ 285,065(8) $ 21,108 7.40% Consumer loans(1)................... 53,687(8) 4,146 7.72 52,628(8) 4,449 8.45 Investment securities............... 43,905(6) 1,332 3.03 42,144(7) 1,409 3.34 ----------- -------- ---- ----------- -------- ---- Total interest-earning assets.... $ 402,165 $ 25,456 6.33% $ 379,837 $ 26,966 7.10% Noninterest-earning assets............ 22,402 20,078 --------- --------- Total assets..................... $ 424,567 $ 399,915 ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings......................... $ 65,897 $ 383 0.58% $ 61,677 $ 560 0.91% Passbook savings................... 27,619 149 0.54 24,810 281 1.13 Certificates of Deposit............ 180,983 7,318 4.04 182,496 8,649 4.74 Borrowed funds..................... 96,923 4,492 4.63 83,022 4,421 5.33 ----------- -------- ---- ----------- -------- ---- Total interest-bearing liabilities. $ 371,422 $ 12,342 3.32% $ 352,005 $ 13,911 3.95% Noninterest-bearing liabilities....... 13,236 10,241 --------- --------- Total liabilities................ $ 384,658 $ 362,246 Equity................................ 39,909 37,669 --------- --------- Total liabilities and equity..... $ 424,567 $ 399,915 ========= ========= Net interest income................... $ 13,114 $ 13,055 ======== ======== Net interest rate spread(2)........... 3.01% 3.15% ==== ==== Net interest margin (3)............... 3.26 3.44 ==== ==== Ratio of average interest-earning assets to average interest- bearing liabilities............ 108.28 107.91 ====== ======
___________________ (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 $4,948,000 and securities available for sale of $23,106,000. (5) Includes interest-bearing deposits of $7,681,000 and securities available for sale of $25,497,000. (6) Includes interest-bearing deposits of $14,217,000 and securities available for sale of $29,688,000. (7) Includes interest-bearing deposits of $16,910,000 and securities available for sale of $25,234,000. (8) Includes loan fee (cost) amortization of $(28,000), $64,000 and $(34,000) for the years ended December 31, 2004, 2003 and 2002. 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, 2004 December 31, 2003 Compared to Compared to Year Ended Year Ended December 31, 2003 December 31, 2002 -------------------------------------------------------------------------------------- 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 .................. $ 1,974 $(1,753) $ (173) $ 48 $ 1,445 $(2,409) $ (165) $(1,129) Consumer loans ........................ 64 (446) (7) (389) 90 (384) (9) (303) Investment securities ................. (237) (24) (16) (277) 246 (250) (73) (77) ------- ------- ------- ------- ------- ------- ------- ------- Total interest-earning assets ...... $ 1,801 $(2,223) $ (196) $ (618) $ 1,781 $(3,043) $ (247) $(1,509) ======= ======= ======= ======= ======= ======= ======= ======= Interest expense: NOW and money market savings .......... $ 75 $ 70 $ 14 $ 159 $ 38 $ (200) $ (14) $ (176) Passbook savings ...................... 9 (63) (4) (58) 32 (148) (17) (133) Certificate of deposits ............... 56 (1,042) (8) (994) (72) (1,270) 11 (1,331) Borrowed funds ........................ 43 (124) (1) (82) 740 (573) (96) 71 ------- ------- ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities 183 (1,159) 1 (975) 738 (2,191) (116) (1,569) ------- ------- ------- ------- ------- ------- ------- ------- Net change in net interest income .......... $ 1,618 $(1,064) $ (197) $ 357 $ 1,043 $ (852) $ (131) $ 60 ======= ======= ======= ======= ======= ======= ======= =======
20 Comparison of Financial Condition as of December 31, 2004 and December 31, 2003 Total assets increased $38.7 million, or 9.1%, to $462.7 million at December 31, 2004 from $424.0 million at December 31, 2003. The increase in assets was due primarily to an increase in net loans receivable, offset in part by decreases in securities available-for-sale and cash and cash equivalents. Asset growth was funded by increases in deposits and FHLB advances. Total loans receivable, net, increased by $44.3 million, or 12.2%, to $407.3 million at December 31, 2004 from $363.0 million at December 31, 2003, primarily due to origination of $64.8 million of first mortgage loans secured by one-to four-family residences, originations of $8.6 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 $52.7 million, and originations of $21.7 million of second mortgage loans during the year ended December 31, 2004. These originations and purchases were offset in part by payments and prepayments of $90.6 million and sales of loans of $17.8 million during the year ended December 31, 2004. 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 $3.8 million, or 14.3%, primarily due to 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 $2.2 million, or 30.6%, from $7.1 million at December 31, 2003 to $4.9 million at December 31, 2004 as the Company invested cash in loans and securities. Deposits increased $32.3 million, or 11.4%, to $316.3 million at December 31, 2004 from $284.0 million at December 31, 2003, primarily reflecting increases in checking accounts, money market deposit accounts, savings accounts, and retail certificate of deposit accounts, offset in part by decreases in certain public funds deposits. The increase in deposits is due primarily to the deposit activity associated with the Company's newest offices in Ankeny and Clive, Iowa and management's continued marketing efforts. Borrowings, primarily FHLB advances, increased $6.0 million, to $101.0 million at December 31, 2004 from $95.0 million at December 31, 2003 as the Company utilized borrowings to fund loans. Total shareholders' equity decreased $0.1 million to $41.5 million at December 31, 2004 from $41.6 million at December 31, 2003, primarily due to dividends paid to shareholders, funds used for the repurchase of stock and increased unrealized losses on securities available for sale, offset in part by net income and stock options exercised. 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. 21 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 Results of Operations for the Years Ended December 31, 2004 and 2003 Net Income. Net income decreased by $450,000 to $5.4 million for the year ended December 31, 2004 compared to $5.9 million 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 and an increase in noninterest expense, offset in part by an increase in net interest income and a decrease in income tax expense. Net Interest Income. Net interest income before provision for loan losses increased by $357,000 to $13.5 million for the year ended December 31, 2004 from $13.1 million for the year ended December 31, 2003. 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 2.95% for the year ended December 31, 2004 from 3.01% for the year ended December 31, 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 repricing of interest earning assets and interest bearing liabilities at generally lower current market interest rates. Interest Income. Interest income decreased by $0.7 million to $24.8 million for the year ended December 31, 2004 compared to $25.5 million for the year ended December 31, 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 5.88% for the year ended December 31, 2004 from 6.33% for the year ended December 31, 2003, primarily due to a general decrease in market interest rates compared to their original rates. The average interest earning assets increased $20.2 million to $422.4 million for the year ended December 31, 2004, from $402.2 million for 2003. 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 $64.8 million of first mortgage loans secured by one-to four-family residences, originations of $8.6 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 $52.7 million, which originations and purchases were offset in part by payments and prepayments of $90.6 million and sales of loans of $17.8 million during the year ended December 31, 2004. This reflects the Company's continued emphasis on residential lending. See "Business Strategy." Interest Expense. Interest expense decreased by $0.9 million to $11.4 million for the year ended December 31, 2004 compared to $12.3 million for the year ended December 31, 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 2.93% for the year ended December 31, 2004 from 3.32% for the year ended December 31, 2003, primarily due to a general decrease in market interest rates compared to their original rates. The decrease in interest expense was partially offset by a $16.9 million increase in the average balance of interest bearing liabilities to $388.3 million for the year ended December 31, 2004, from $371.4 million for 2003. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the checking, money market, savings, retail certificates of deposit and borrowed funds, offset by a decrease in certain public funds deposits. The increase in average interest bearing deposits was due to the Company's marketing efforts and the deposit activity associated with the Company's newest branches in Ankeny and Clive, Iowa. The increase in interest bearing liabilities was used to fund asset growth. 22 Provision for Loan Losses. The Company's provision for loan losses was $240,000 and $255,000 for the years ended December 31, 2004 and December 31, 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. During 2004 the Company's total loan portfolio increased $44.3 million or 12.2%. 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 $52.7 million of loans in 2004, as compared to $45.1 million of loans in 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 Company's out of state loans increased by $19.7 million or 14.2% during 2004. The economic conditions in the Bank's primary market areas are currently stable. The net charge offs were $170,000 for the year ended December 31, 2004 as compared to $208,000 for the year ended December 31, 2003. The decrease in charge offs were primarily due to a decrease in the charge offs of automobile and second mortgage loans. The resulting allowance for loan loss was $3.2 million and $3.2 million at December 31, 2004 and December 31, 2003, respectively. The allowance for loan losses as a percentage of total loans receivable decreased to 0.77% at December 31, 2004 from 0.86% at December 31, 2003. The level of nonperforming loans was $631,000 at December 31, 2004 and $615,000 at December 31, 2003. See "Asset Quality". Management believes that the allowance for loan losses is adequate as of December 31, 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 $537,000, or 8.2%, to $6.0 million for the year ended December 31, 2004 from $6.6 million for the year ended December 31, 2003. The decrease is primarily 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 $573,000 due in part to a decrease in loan originations of loans held for sale. Abstract fees decreased $350,000 due to decreased sales volume as a result of a general decrease in real estate activity, such as loan originations, in Webster, Boone and Jasper Counties. Fees and service charges increased $260,000 due primarily to an increase in fees associated with checking accounts, including overdraft fees, offset in part by a decrease in loan prepayment fees. Other income, which primarily includes annuity and mutual fund sales, rent income, insurance sales and income associated with foreclosed real estate increased $127,000 due in part to increases in insurance sales, rental income associated with the opening of a second multifamily apartment building in March, 2003 and annuity and mutual fund sales, offset by a decrease in income associated with foreclosed real estate. Noninterest Expense. Total noninterest expense increased by $0.5 million to $11.4 million for the year ended December 31, 2004 from $10.9 million for the year ended December 31, 2003. The increase is primarily due to an increase in salaries and employee benefits, premises and equipment and other expenses. Salaries and benefits increased $243,000 due primarily to normal salary increases and an increase in the Company's contribution to its retirement plan. Premises and equipment increased $141,000 primarily due to an increase in the costs associated with the Ankeny and Clive offices. Other expenses increased $136,000 due to an increase in losses associated with checking accounts, primarily overdrafts, and an increase in professional fees. The Company's efficiency ratio for the year ended December 31, 2004 and 2003 was 58.29% and 55.17%, respectively. The Company's ratio of noninterest expense to average assets for the year ended December 31, 2004 and 2003 was 2.55% and 2.56%, respectively. Income Taxes. Income taxes decreased by $225,000 to $2.5 million for the year ended December 31, 2004 as compared to $2.7 million for the year ended December 31, 2003. The decrease was primarily due to a decrease in pre-tax earnings for the year ending 2004 as compared to the year ending 2003, an increase in recurring low-income federal income tax credit, offset in part by a one time low-income housing Iowa income tax credit with an effect on net income of approximately $110,000 that was recorded in 2003. 23 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 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 24 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 charges 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 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. 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 25 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) $100,975 $ 20,504 $ 37,509 $ 19,000 $ 23,962 Loan Commitments $ 3,995 $ 3,995 -- -- -- Available home equity and unadvanced lines of credit $ 3,878 $ 3,878 -- -- -- -------- -------- -------- -------- -------- Total $108,848 $ 28,377 $ 37,509 $ 19,000 $ 23,962 ======== ======== ======== ======== ======== (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 Report of Independent Registered Public Accounting Firm To the Board of Directors North Central Bancshares, Inc. Fort Dodge, Iowa We have audited the consolidated statements of financial condition of North Central Bancshares, Inc. and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that 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, 2004 and 2003 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. /s/ McGladrey & Pullen, LLP --------------------------- Des Moines, Iowa February 4, 2005 McGladrey & Pullen, LLP is an independent member firm of RSM International, an affiliation of separate and independent legal entities. 28 North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Financial Condition December 31, 2004 and 2003
2004 2003 - ---------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (Note 2): Interest-bearing $ 4,947,731 $ 7,124,828 Noninterest-bearing 2,970,448 2,893,745 ------------------------------ Total cash and cash equivalents 7,918,179 10,018,573 Securities available-for-sale (Notes 3 and 8) 23,106,271 26,952,157 Loans held for sale 904,127 326,900 Loans receivable, net (Notes 4, 5, 8 and 14) 407,316,318 362,959,238 Accrued interest receivable 1,953,605 1,866,521 Foreclosed real estate 1,079,257 1,453,353 Premises and equipment, net (Note 6) 9,889,737 9,842,477 Rental real estate 2,809,888 2,968,918 Title plant 925,256 925,256 Goodwill (Note 1) 4,970,800 4,970,800 Deferred taxes (Note 9) 1,102,612 757,543 Prepaid expenses and other assets 758,729 967,565 ------------------------------ Total assets $ 462,734,779 $ 424,009,301 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits (Notes 5 and 7) $ 316,333,731 $ 283,963,569 Borrowed funds (Note 8) 100,974,695 95,004,605 Advances from borrowers for taxes and insurance 1,856,249 1,736,755 Dividends payable 382,632 337,907 Accrued expenses and other liabilities 1,653,266 1,374,824 ------------------------------ Total liabilities 421,200,573 382,417,660 ------------------------------ COMMITMENTS AND CONTINGENCIES (Notes 13 and 16) STOCKHOLDERS' EQUITY (Notes 11 and 16) Preferred stock, $.01 par value, authorized 3,000,000 shares; none issued and outstanding -- -- Common stock, $.01 par value, authorized 15,500,000 shares; issued and outstanding 2004 1,530,530 shares; 2003 1,604,780 shares 15,305 16,048 Additional paid-in capital 18,681,041 17,711,322 Retained earnings, substantially restricted (Note 9) 23,438,369 24,103,330 Unearned shares, employee stock ownership plan (Note 10) (81,200) (167,793) Accumulated other comprehensive (loss) (519,309) (71,266) ------------------------------ Total stockholders' equity 41,534,206 41,591,641 ------------------------------ Total liabilities and stockholders' equity $ 462,734,779 $ 424,009,301 ==============================
See Notes to Consolidated Financial Statements. 29 North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002 - ---------------------------------------------------------------------------------------------------- Interest income: Loans receivable: First mortgage loans $ 20,026,428 $ 19,977,961 $ 21,107,541 Consumer loans 3,756,735 4,146,118 4,448,629 Securities and cash deposits 1,054,578 1,331,927 1,409,314 ------------------------------------------ 24,837,741 25,456,006 26,965,484 ------------------------------------------ Interest expense: Deposits (Note 7) 6,956,669 7,849,586 9,489,921 Other borrowed funds 4,410,057 4,492,129 4,420,959 ------------------------------------------ 11,366,726 12,341,715 13,910,880 ------------------------------------------ Net interest income 13,471,015 13,114,291 13,054,604 Provision for loan losses (Note 4) 240,000 255,000 383,000 ------------------------------------------ Net interest income after provision for loan losses 13,231,015 12,859,291 12,671,604 ------------------------------------------ Noninterest income: Fees and service charges 3,123,253 2,863,713 2,375,228 Abstract fees 1,460,952 1,810,924 1,686,271 Mortgage banking income 254,731 828,099 746,983 (Loss) on sale of securities available-for-sale, net -- -- (523) Other income 1,194,169 1,067,401 921,125 ------------------------------------------ Total noninterest income 6,033,105 6,570,137 5,729,084 ------------------------------------------ Noninterest expense: Compensation and employee benefits (Note 10) 6,192,515 5,949,737 5,223,411 Premises and equipment 1,428,534 1,287,229 1,192,153 Data processing 566,932 577,836 544,169 Other expenses (Note 12) 3,181,557 3,045,650 2,622,462 ------------------------------------------ Total noninterest expense 11,369,538 10,860,452 9,582,195 ------------------------------------------ Income before income taxes 7,894,582 8,568,976 8,818,493 Provision for income taxes (Note 9) 2,495,951 2,720,566 2,953,332 ------------------------------------------ Net income $ 5,398,631 $ 5,848,410 $ 5,865,161 ========================================== Basic earnings per common share (Note 17) $ 3.47 $ 3.69 $ 3.58 Earnings per common share - assuming dilution (Note 17) 3.34 3.48 3.37 Dividends declared per common share 1.00 0.84 0.72
See Notes to Consolidated Financial Statements. 30 North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years Ended December 31, 2004, 2003 and 2002
Additional Comprehensive Common Paid-in Retained Income Stock Capital Earnings - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 $ 17,003 $16,780,875 $19,402,706 Comprehensive income: Net income $5,865,161 - - 5,865,161 Other comprehensive (loss), net of tax (Note 3) (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 - Issuance of common stock 731 1,282,634 - -------------------------------------------- Balance, December 31, 2002 16,403 17,011,095 21,862,248 Comprehensive income: Net income $5,848,410 - - 5,848,410 Other comprehensive (loss), net of tax (Note 3) (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 - Issuance of common stock 592 1,247,638 - -------------------------------------------- Balance, December 31, 2003 16,048 17,711,322 24,103,330 Comprehensive income: Net income $5,398,631 - - 5,398,631 Other comprehensive (loss), net of tax (Note 3) (448,043) - - - --------------- Total comprehensive income $4,950,588 =============== Purchase of treasury stock - - - Dividends on common stock - - (1,537,685) Retirement of treasury stock (1,431) (831,969) (4,525,907) Effect of contribution to employee stock ownership plan - 241,466 - Issuance of common stock 688 1,560,222 - -------------------------------------------- Balance, December 31, 2004 $ 15,305 $18,681,041 $23,438,369 ============================================
Unearned Shares, Accumulated Employee Stock Other Total Ownership Comprehensive Treasury Stockholders' Plan Income (Loss) Stock Equity - ------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 $ (477,826) $ 189,991 $ - $ 35,912,749 Comprehensive income: Net income - - - 5,865,161 Other comprehensive (loss), net of tax (Note 3) - (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 159,729 - - 436,984 Issuance of common stock - - - 1,283,365 ---------------------------------------------------------------- Balance, December 31, 2002 (318,097) 176,555 - 38,748,204 Comprehensive income: Net income - - - 5,848,410 Other comprehensive (loss), net of tax (Note 3) - (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 150,304 - - 548,946 Issuance of common stock - - - 1,248,230 ---------------------------------------------------------------- Balance, December 31, 2003 (167,793) (71,266) - 41,591,641 Comprehensive income: Net income - - - 5,398,631 Other comprehensive (loss), net of tax (Note 3) - (448,043) - (448,043) Total comprehensive income Purchase of treasury stock - - (5,359,307) (5,359,307) Dividends on common stock - - - (1,537,685) Retirement of treasury stock - - 5,359,307 - Effect of contribution to employee stock ownership plan 86,593 - - 328,059 Issuance of common stock - - - 1,560,910 ---------------------------------------------------------------- Balance, December 31, 2004 $ (81,200) $ (519,309) $ - $ 41,534,206 ================================================================
See Notes to Consolidated Financial Statements. 31 North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002 - ----------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,398,631 $ 5,848,410 $ 5,865,161 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 240,000 255,000 383,000 Depreciation 860,073 797,117 721,762 Amortization and accretion 578,352 677,301 268,424 Deferred taxes (78,659) (1,475) (114,715) Effect of contribution to employee stock ownership plan 328,059 548,946 436,984 Gain on sale of foreclosed real estate and loans, net (319,650) (873,444) (743,017) Loss on sale of securities available-for-sale, net -- -- 523 Loss on disposal of equipment 4,179 4,916 5,923 Proceeds from sales of loans held for sale 18,059,841 51,061,653 53,645,852 Originations of loans held for sale (18,382,337) (48,188,320) (53,665,293) Change in assets and liabilities: Accrued interest receivable (87,084) 61,757 (14,721) Prepaid expenses and other assets 208,836 1,788,213 (2,123,150) Accrued expenses and other liabilities 278,442 85,231 (100,530) -------------------------------------------- Net cash provided by operating activities 7,088,683 12,065,305 4,566,203 -------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in loans 9,900,281 26,056,456 51,036,816 Purchase of loans (55,175,363) (49,583,830) (84,619,011) Proceeds from sale of securities available-for-sale 1,178,800 702,400 750,227 Purchase of securities available-for-sale (1,720,600) (11,197,958) (322,763) Proceeds from maturities and calls of securities available-for-sale 3,613,903 5,888,849 8,053,186 Purchase of premises, equipment and rental real estate (752,992) (3,344,928) (2,609,603) Proceeds from sale of equipment 510 124,846 1,015 Other 597,996 235,978 95,354 -------------------------------------------- Net cash (used in) investing activities (42,357,465) (31,118,187) (27,614,779) --------------------------------------------
(Continued) 32 North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 32,370,162 $ 6,963,487 $ 8,186,351 Net increase (decrease) in advances from borrowers for taxes and insurance 119,494 224,641 (77,200) Net increase (decrease) in short-term borrowings 4,500,000 1,500,000 (250,000) Proceeds from other borrowed funds 9,000,000 17,500,000 39,500,000 Payments of other borrowed funds (7,529,910) (9,021,833) (25,636,285) Purchase of treasury stock (5,359,307) (3,234,239) (3,569,328) Proceeds from issuance of common stock 1,560,910 1,248,230 1,283,365 Dividends paid (1,492,961) (1,277,432) (1,128,628) --------------------------------------------- Net cash provided by financing activities 33,168,388 13,902,854 18,308,275 --------------------------------------------- Net change in cash and cash equivalents (2,100,394) (5,150,028) (4,740,301) CASH AND CASH EQUIVALENTS Beginning 10,018,573 15,168,601 19,908,902 --------------------------------------------- Ending $ 7,918,179 $ 10,018,573 $ 15,168,601 ============================================= SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors $ 6,909,056 $ 7,872,840 $ 9,782,295 Interest paid on borrowings 4,410,092 4,492,129 4,421,374 Income taxes 1,837,562 2,330,008 2,712,103
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 and 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, valuation of goodwill, unrealized gains and losses on securities available-for-sale 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 held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-then-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 34 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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. Gain or loss on sale is recognized at the settlement date. 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. 35 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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: Under the provisions of SFAS 142, goodwill is not amortized but is subject to an annual impairment test at least annually, or more often if conditions indicate a possible impairment. The Company has completed its annual goodwill impairment test and has determined that there has been no impairment of goodwill. 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. 36 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Stock-option plan: FASB Statement No. 123, Accounting for Stock-Based Compensation, establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from nonemployees. However, the standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. The Company has elected to apply the intrinsic value based method of accounting for stock options issued to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Had compensation cost for the Plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123), the approximate 2004, 2003 and 2002 reported net income and earnings per common share would have been decreased to the pro forma amounts shown below:
2004 2003 2002 ---------------------------------------------------- Net income, as reported $ 5,398,631 $ 5,848,410 $ 5,865,161 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (54,026) (66,773) (110,585) ---------------------------------------------------- Pro forma net income $ 5,344,605 $ 5,781,637 $ 5,754,576 ==================================================== Earnings per common share - basic: As reported $ 3.47 $ 3.69 $ 3.58 Pro forma 3.44 3.65 3.51 Earnings per common share - assuming dilution: As reported $ 3.34 $ 3.48 $ 3.37 Pro forma 3.31 3.44 3.31
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 2004, 2003 and 2002, respectively: dividend rate of 2.67%, 2.3% and 3.5%, price volatility of 14%, 20% and 20%, risk-free interest rates of 3.81%, 3.70% and 4.92% and expected lives of eight years for all years. Recent accounting pronouncements: In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, to be recognized at their fair value. Under the provisions of SOP 03-3, any future excess of cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow compared to the original expected cash flow is recognized as a valuation allowance and expensed immediately. Under SOP 03-3, valuation allowances cannot be created or "carried over" in the initial accounting for impaired loans acquired. SOP 03-3 is effective for impaired loans acquired in fiscal years beginning after December 15, 2004. The Company does not expect adoption to have a material impact on the consolidated financial statements, results of operations or liquidity of the Company. 37 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- In March 2004, the Financial Accounting Standards Board (FASB) reached consensus on the guidance provided by Emerging Issues Task Force Issue 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1). The guidance is applicable to debt and equity securities that are within the scope of FASB Statement of Financial Accounting Standard (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities and certain other investments. EITF 03-1 specifies that an impairment would be considered other-than-temporary unless (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and (b) evidence indicating the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. EITF 03-1 cost method investment and disclosure provisions are effective for reporting periods ending after June 15, 2004. The measurement and recognition provisions relating to debt and equity securities have been delayed until the FASB issues additional guidance. The Company adopted cost method investment and disclosure provisions of EITF 03-1 on June 30, 2004. The adoption did not have a material impact on the consolidated financial statements, results of operations or liquidity of the Company. In December 2004, the FASB issued SFAS No. 123(Revised), Share-Based Payment (SFAS No. 123(R)), establishing accounting standards for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123(R) also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments, or that may be settled by the issuance of those equity instruments. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based stock awards, stock appreciation rights and employee stock purchase plans. SFAS No. 123(R) replaces existing requirements under SFAS No. 123, Accounting for Stock-Based Compensation, and eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. The provisions of SFAS No. 123(R) are effective for the Company on July 1, 2005. The Company is currently assessing the financial statement impact of adopting SFAS No. 123(R). 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. Loans held for sale: Fair values are based on quoted market prices of similar loans sold on the secondary market. 38 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. 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, 2004 and 2003, the carrying amount and fair value of the commitments were not significant. Note 2. Restrictions on Cash and Due from Banks The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $2,610,000 and $2,456,000 at December 31, 2004 and 2003, respectively. 39 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 3. Securities Securities available-for-sale as of December 31, 2004 were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value -------------------------------------------------------------------- Equity securities: Mutual fund $ 2,000,000 $ - $ (24,144) $ 1,975,856 Federal Home Loan Bank stock 5,045,000 - - 5,045,000 FHLMC preferred stock 5,499,000 - (921,500) 4,577,500 FNMA preferred stock 1,000,000 - (40,000) 960,000 Other 2,100 4,650 - 6,750 -------------------------------------------------------------------- 13,546,100 4,650 (985,644) 12,565,106 -------------------------------------------------------------------- Debt securities: State and local obligations 4,333,060 165,205 (1,765) 4,496,500 Mortgage-backed securities 6,055,154 59,131 (69,620) 6,044,665 -------------------------------------------------------------------- 10,388,214 224,336 (71,385) 10,541,165 -------------------------------------------------------------------- $ 23,934,314 $ 228,986 $ (1,057,029) $ 23,106,271 ====================================================================
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 26,675 (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 ====================================================================
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. 40 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Securities available-for-sale with a carrying amount of approximately $316,000 and $516,000 at December 31, 2004 and 2003, respectively, were pledged on deposit accounts. Securities available-for-sale with a carrying amount of approximately $4,765,000 and $6,970,000 at December 31, 2004 and 2003, respectively, were pledged as collateral on Federal Home Loan Bank advances. 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, 2004 and 2003, are summarized as follows:
2004 -------------------------------------------------------------------------------- Less than 12 Months 12 Months or More Total -------------------------- -------------------------- -------------------------- Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses -------------------------------------------------------------------------------- Equity securities: Mutual funds $ - $ - $ 1,975,856 $ (24,144) $ 1,975,856 $ (24,144) FHLMC preferred stock 2,750,000 (250,000) 1,827,500 (671,500) 4,577,500 (921,500) FNMA preferred stock 960,000 (40,000) - - 960,000 (40,000) -------------------------------------------------------------------------------- 3,710,000 (290,000) 3,803,356 (695,644) 7,513,356 (985,644) -------------------------------------------------------------------------------- Debt securities: State and local obligations 268,326 (1,765) - - 268,326 (1,765) Mortgage-backed securities 4,765,057 (69,620) - - 4,765,057 (69,620) -------------------------------------------------------------------------------- 5,033,383 (71,385) - - 5,033,383 (71,385) -------------------------------------------------------------------------------- $ 8,743,383 $ (361,385) $ 3,803,356 $ (695,644) $12,546,739 $(1,057,029) ================================================================================
2003 -------------------------------------------------------------------------------- Less than 12 Months 12 Months or More Total -------------------------- -------------------------- -------------------------- Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair 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. 41 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The amortized cost and fair value of debt securities as of December 31, 2004 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: Debt Securities Available-for-Sale ---------------------------------- Amortized Cost Fair Value ---------------------------------- Due in one year or less $ 633,311 $ 630,585 Due from one to five years 2,271,579 2,330,374 Due from five to ten years 743,656 779,740 Due after ten years 684,514 755,801 Mortgage-backed securities 6,055,154 6,044,665 ---------------------------------- $ 10,388,214 $ 10,541,165 ================================== There were no securities sold during 2004 or 2003 except for FHLB stock. Gross gains of $26,352 were realized on the sale of securities available-for-sale in 2002. Gross losses of $26,875 were realized on the sale of securities available-for-sale in 2002. Included in the interest income on securities and cash deposits was dividend income of $371,519, $424,366 and $550,306 for the years ended December 31, 2004, 2003 and 2002, respectively. The components of other comprehensive income (loss) - net unrealized gains (losses) on available-for-sale securities for the years ended December 31, 2004, 2003 and 2002 were as follows:
2004 2003 2002 ---------------------------------------- Unrealized holding (losses) arising during the period $ (714,453) $ (395,232) $ (22,997) Less reclassification adjustment for net (losses) realized in net income - - (523) ---------------------------------------- Net unrealized (losses) before tax benefit (714,453) (395,232) (22,474) Tax benefit 266,410 147,411 9,038 ---------------------------------------- Other comprehensive (loss) - net unrealized (losses) on securities $ (448,043) $ (247,821) $ (13,436) ========================================
42 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 4. Loans Receivable Loans receivable at December 31, 2004 and 2003 are summarized as follows: 2004 2003 -------------------------------- First mortgage loans: Secured by one-to-four family residences $179,310,983 $171,604,211 Secured by: Multifamily properties 78,427,518 69,962,902 Commercial properties 90,907,328 69,609,086 Construction loans 14,308,167 2,284,390 -------------------------------- Total first mortgage loans 362,953,996 313,460,589 -------------------------------- Consumer loans: Automobile 9,052,114 9,800,805 Second mortgage 39,701,428 37,600,714 Other 7,133,602 6,533,556 -------------------------------- Total consumer loans 55,887,144 53,935,075 -------------------------------- Total loans 418,841,140 367,395,664 Undisbursed portion of construction loans (9,113,451) (1,855,050) Unearned premiums, net 984,151 696,558 Net deferred loan origination (fees) (160,195) (113,077) Allowance for loan losses (3,235,327) (3,164,857) -------------------------------- $407,316,318 $362,959,238 ================================ Activity in the allowance for loan losses is summarized as follows for the years ended December 31: 2004 2003 2002 -------------------------------------------- Balance, beginning $ 3,164,857 $ 3,118,394 $ 2,883,197 Provision charged to income 240,000 255,000 383,000 Loans charged off (180,031) (301,978) (161,842) Recoveries 10,501 93,441 14,039 -------------------------------------------- Balance, ending $ 3,235,327 $ 3,164,857 $ 3,118,394 ============================================ 43 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The following is a summary of information pertaining to impaired loans:
December 31, ---------------------------- 2004 2003 ---------------------------- Impaired loans without a valuation allowance $ - $ - Impaired loans with a valuation allowance 630,944 614,517 ---------------------------- Total impaired loans $ 630,944 $ 614,517 ============================ Valuation allowance related to impaired loans $ 120,513 $ 110,813 ============================ Average investment in impaired loans $ 578,180 $ 538,153 ============================ Total nonaccrual loans $ 634,000 $ 615,000 ============================ Total loans past due 90 days or more and still accruing $ - $ - ============================
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, 2004 and 2003: 2004 2003 ------------------------------- Beginning balance $ 1,847,343 $ 1,927,727 New loans 7,064 130,800 Change in status (1,388,118) - Repayments (173,775) (211,184) ------------------------------- Ending balance $ 292,514 $ 1,847,343 =============================== Note 5. 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, 2004 and 2003 are $46,497,707 and $43,771,993, respectively. Included in deposits are custodial escrow balances maintained in connection with the foregoing loan servicing of $340,094 and $286,580 at December 31, 2004 and 2003, respectively. 44 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 6. Premises and Equipment Premises and equipment consisted of the following at December 31: 2004 2003 ------------------------------ Land $ 2,686,894 $ 2,629,144 Buildings and improvements 8,844,543 7,479,355 Construction in progress - 921,905 Leasehold improvements 35,259 35,259 Furniture, fixtures and equipment 3,462,330 3,418,889 Vehicles 104,129 101,955 ------------------------------ 15,133,155 14,586,507 Less accumulated depreciation 5,243,418 4,744,030 ------------------------------ $ 9,889,737 $ 9,842,477 ============================== Note 7. Deposits Deposits at December 31 were as follows: 2004 2003 ------------------------------- Demand and NOW accounts: Noninterest-bearing $ 10,943,912 $ 9,161,277 Interest-bearing 47,282,051 41,601,765 Savings accounts 28,586,120 27,764,803 Money market savings 45,993,670 25,785,186 Certificates of deposit 183,527,978 179,650,538 ------------------------------- $316,333,731 $283,963,569 =============================== At December 31, 2004, scheduled maturities of certificates of deposit were as follows: Year ending December 31: 2005 $ 79,912,261 2006 50,655,322 2007 28,899,312 2008 11,094,255 2009 12,966,828 ------------ $183,527,978 ============ 45 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Interest expense on deposits consisted of the following: Years Ended December 31, ------------------------------------------------- 2004 2003 2002 ------------------------------------------------- NOW accounts $ 79,732 $ 125,078 $ 210,043 Savings accounts 90,586 148,651 281,171 Money market savings 462,738 258,090 349,875 Certificates of deposit 6,323,613 7,317,767 8,648,832 ------------------------------------------------- $ 6,956,669 $ 7,849,586 $ 9,489,921 ================================================= The aggregate amount of certificates of deposit in excess of $100,000 was $19,468,295 and $18,751,451 as of December 31, 2004 and 2003, respectively. Note 8. Borrowed Funds Borrowed funds at December 31, 2004 included miscellaneous borrowings of $12,801 and borrowings from the Federal Home Loan Bank of Des Moines (FHLB) as follows:
Weighted- Stated Average Maturity Interest Rate Amount Features - ------------------------------------------------------------------------------------------------------------- 2005 3.18% $ 20,500,000 Includes $6.0 million variable rate, renewable daily 2006 4.39 17,000,000 2007 4.03 20,500,000 2008 4.94 15,500,000 Includes $9.0 million callable, various dates in 2005 2009 4.49 3,500,000 2010 5.68 20,500,000 Includes $17.5 million callable, various dates in 2005 2011 4.83 3,000,000 All callable, January, 2005 2018 3.83 461,894 15-year amortizing, repayable 2008 ----------------------------------- 4.42% $100,961,894 ===================================
At December 31, 2004, 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% (4.13% at December 31, 2004) and matures October 1, 2005. There were no borrowings outstanding at December 31, 2004. Borrowed funds at December 31, 2003 included miscellaneous borrowings of $17,065 and borrowings from the FHLB of $94,987,540. Such borrowings carried a weighted-average interest rate of 4.52% with maturities ranging from 2004 through 2018. The FHLB borrowings are collateralized by FHLB stock and qualifying first and second mortgage loans representing various percentages of the total borrowings outstanding. 46 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 9. Income Taxes and Retained Earnings Under previous law, the provisions of the IRS and similar sections of Iowa Law permitted the Bank to deduct from taxable income an allowance for bad debts based on 8% of taxable income before such deduction or actual loss experience. Legislation passed in 1996 eliminated the percentage of taxable income method as an option for computing bad debt deductions for 1996 and in all future years. 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, 2004, 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, --------------------------------------------------- 2004 2003 2002 --------------------------------------------------- Current $ 2,574,610 $ 2,722,041 $ 3,068,047 Deferred (78,659) (1,475) (114,715) --------------------------------------------------- $ 2,495,951 $ 2,720,566 $ 2,953,332 =================================================== 47 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, 2004 and 2003:
2004 2003 -------------------------------- Deferred tax assets: Unearned shares, employee stock ownership plan $ 11,000 $ 17,000 Allowance for loan losses 1,212,000 1,180,000 Unrealized losses on securities available-for-sale 309,000 42,000 Deferred directors fees and compensation 43,000 42,000 Deferred income 109,000 73,000 Accrued expenses 37,000 56,000 Dividends on employee stock ownership plan 58,000 45,000 Other 30,939 39,198 -------------------------------- Total gross deferred tax assets 1,809,939 1,494,198 -------------------------------- Deferred tax liabilities: Federal Home Loan Bank stock dividend 28,000 39,000 Loan costs - 3,000 Premises and equipment 238,000 234,000 Title plant 201,000 181,000 Loans acquired 2,000 22,000 Investments acquired 7,000 11,000 Servicing rights 128,000 137,000 Other 103,327 109,655 -------------------------------- Total gross deferred tax liabilities 707,327 736,655 -------------------------------- Net deferred tax assets $ 1,102,612 $ 757,543 ================================
48 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:
Year Ended December 31, ---------------------------------------------------------------------------------- 2004 2003 2002 ---------------------------------------------------------------------------------- Percent Percent Percent of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income ---------------------------------------------------------------------------------- Income before income taxes $ 2,684,158 34.0% $ 2,913,452 34.0% $ 2,998,288 34.0% Nontaxable income (144,088) (1.8) (149,455) (1.7) (187,175) (2.1) State income tax, net of federal income tax benefit 189,844 2.4 217,337 2.5 212,372 2.4 State tax credit, net of federal income tax benefit - - (109,720) (1.3) - - Low-income housing tax credit (278,468) (3.5) (237,441) (2.8) (153,680) (1.7) Other 44,505 0.5 86,393 1.0 83,527 0.9 ---------------------------------------------------------------------------------- $ 2,495,951 31.6% $ 2,720,566 31.7% $ 2,953,332 33.5% ==================================================================================
Note 10. Employee Benefit Plans Retirement plans: The Bank participates in a multiemployer defined benefit pension plan covering substantially all employees. This is a multiemployer plan, and information as to actuarial valuations and net assets available for benefits by participating institutions is not available. The Bank recognized $404,000, $278,400 and $104,500 pension expense for the years ended December 31, 2004, 2003 and 2002, respectively. 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. 49 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The Bank makes contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. Dividends on unallocated ESOP shares are used to pay debt service. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after five years of credited service. Forfeitures will be reallocated among remaining participating employees, in the same proportion as contributions. Benefits may be payable in the form of stock or cash upon termination of employment. If the 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, 2004 and 2003. 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 $328,075, $548,947 and $436,984 for the years ended December 31, 2004, 2003 and 2002, respectively. Shares of the Company's common stock held by the ESOP at December 31, 2004 and 2003 are as follows: 2004 2003 ------------------------ Allocated shares 159,491 171,021 Unreleased (unearned) shares 8,118 16,916 ------------------------ 167,609 187,937 ======================== Fair market value of unreleased (unearned) shares $ 336,816 $ 623,185 ======================== 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. 50 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Options granted to officers become exercisable in five equal annual installments commencing on the first anniversary of the grant date and continuing on each anniversary date thereafter. The options granted to officers expire ten years from the date of grant unless an earlier expiration date is triggered by death, disability, retirement or termination, as described in the Plan. A person who becomes a director after September 21, 1996 receives an annual grant of options to purchase 2,000 shares of common stock. Options granted to directors are exercisable immediately and expire ten years from the date of grant, unless an earlier expiration date is triggered by removal for cause. The table below reflects option activity for the period indicated: Weighted- Average Exercise Number Price per of Shares Share ----------------------------- Outstanding, December 31, 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 Granted 11,000 36.94 Forfeited (1,400) 20.18 Exercised (68,805) 14.63 ----------------------------- Outstanding, December 31, 2004 108,405 $ 20.51 ============================= Options exercisable 90,405 $ 19.77 ============================= Remaining shares available for grant 57,605 ========== As of December 31, 2004, the 108,405 options outstanding under the Plan have exercise prices between $12.38 and $37.50. The weighted average fair value per option of options granted during the years ended December 31, 2004, 2003 and 2002 were $7.63, $6.90 and $4.20, 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. 51 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 11. Stockholders' Equity Regulatory capital requirements: The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), of Tier I capital (as defined) to average assets (as defined) and tangible capital to adjusted assets. Management believes, as of December 31, 2004, the Bank meets all capital adequacy requirements to which it is subject. The most recent notification from the federal regulatory agency categorizes 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 For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------ ---------------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------------- (000's) (000's) (000's) As of December 31, 2004: Total Capital (to risk- weighted assets) $ 36,464 11.7% $ 24,847 8.0% $ 31,059 10.0% Tier 1 Capital (to risk- weighted assets) 33,324 10.7 12,424 4.0 18,636 6.0 Tier I (Core) Capital (to adjusted assets) 33,324 7.3 13,735 3.0 22,568 5.0 Tangible Capital (to adjusted assets) 33,324 7.3 6,868 1.5 - - 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 - -
52 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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. Note 12. Other Noninterest Expense Other noninterest expense amounts are summarized as follows for the years ended December 31:
2004 2003 2002 --------------------------------------------------- Advertising and promotion $ 449,928 $ 467,759 $ 277,702 Professional fees 230,300 188,093 194,055 Printing, postage, stationery and supplies 417,760 445,609 437,453 Checking account charges 351,474 332,005 335,458 Insurance 153,712 129,875 106,826 OTS general assessment 98,756 93,455 88,799 Telephone 132,844 133,744 140,575 Apartment operating costs 336,910 335,098 172,941 Employee costs 123,440 132,632 164,508 ATM expense 388,872 301,205 283,557 Other 497,561 486,175 420,588 --------------------------------------------------- $ 3,181,557 $ 3,045,650 $ 2,622,462 ===================================================
Note 13. Financial Instruments with Off-Statement of Financial Condition Risk The Bank is a party to financial instruments with off-statement of financial condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-statement of financial condition instruments. The Bank does require collateral, or other security, to support financial instruments with credit risk. 53 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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, ------------------------------ 2004 2003 ------------------------------ Mortgage loans (including one-to-four family, multifamily and commercial loans) $ 3,994,667 $ 10,601,444 Undisbursed overdraft loan privileges and undisbursed home equity lines of credit 3,878,024 2,452,139
At December 31, 2004, the mortgage loan commitments above were comprised of variable-rate commitments carrying a weighted-average interest rate of 5.61% and fixed-rate commitments carrying a weighted-average interest rate of 5.51%. 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 creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but normally includes real estate and personal property. Note 14. Lending Activities and Concentrations of Credit Risk The Bank generally originates single family residential loans within its primary lending area of Webster, Story, Des Moines, Dallas, Polk and Henry counties 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 $158,092,000 of the Bank's first mortgage loan portfolio at December 31, 2004 consisted of loans purchased or originated outside the state of Iowa. Concentrations by state include California with $29,621,000, Washington with $25,426,000 and Colorado with $15,834,000. 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. 54 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 15. Fair Values of Financial Instruments The carrying amount and fair value of the Company's financial instruments as of December 31, 2004 and 2003, were as follows:
2004 2003 -------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------------------------------------------------------------- (nearest 000) (nearest 000) Financial assets: Cash $ 7,918,179 $ 7,918,000 $ 10,018,573 $ 10,019,000 Securities 23,106,271 23,106,000 26,952,157 26,952,000 Loans, net 407,316,318 409,789,000 362,959,238 368,037,000 Loans held for sale 904,127 924,000 326,900 332,000 Accrued interest receivable 1,953,602 1,954,000 1,866,521 1,867,000 Financial liabilities: Deposits 316,333,731 320,991,000 283,963,569 291,575,000 Borrowed funds 100,974,695 103,735,000 95,004,605 99,187,000 Accrued interest payable 154,151 154,000 106,538 107,000
Note 16. 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. 55 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 17. Earnings Per Common Share Presented below is the reconciliation of the numerators and denominators of the computations for earnings per common share and earnings per common share - diluted, for the years ended December 31:
2004 2003 2002 ------------------------------------------------- Numerator, income available to common stockholders $ 5,398,631 $ 5,848,410 $ 5,865,161 ================================================= Denominator: Weighted-average shares outstanding 1,567,232 1,610,209 1,680,679 Less unallocated ESOP shares 12,903 26,641 42,930 ------------------------------------------------- Weighted-average shares outstanding - basic 1,554,329 1,583,568 1,637,749 Dilutive effect of stock options 62,360 95,478 101,786 ------------------------------------------------- Weighted-average shares outstanding - assuming dilution 1,616,689 1,679,046 1,739,535 ================================================= Basic earnings per common share $ 3.47 $ 3.69 $ 3.58 Earnings per common share - assuming dilution 3.34 3.48 3.37
56 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 18. North Central Bancshares, Inc. (Parent Company Only) Condensed Financial Statements Statements of Financial Condition December 31, 2004 and 2003
2004 2003 --------------------------------- ASSETS Cash $ 284,702 $ 185,235 Securities available-for-sale 6,750 3,775 Loans receivable, net 2,305,000 3,836,000 Investment in First Federal Savings Bank of Iowa 39,300,688 37,936,434 Deferred taxes 1,996 3,976 Prepaid and other assets 17,702 - --------------------------------- Total assets $ 41,916,838 $ 41,965,420 ================================= LIABILITIES AND EQUITY LIABILITIES Dividend payable $ 382,632 $ 337,907 Accrued expenses and other liabilities - 35,872 --------------------------------- Total liabilities 382,632 373,779 --------------------------------- EQUITY Common stock 15,305 16,048 Additional paid-in capital 18,681,041 17,711,322 Retained earnings 23,438,369 24,103,330 Unearned shares, employee stock ownership plan (81,200) (167,793) Accumulated other comprehensive (loss) (519,309) (71,266) --------------------------------- Total equity 41,534,206 41,591,641 --------------------------------- Total liabilities and equity $ 41,916,838 $ 41,965,420 =================================
57 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Statements of Income Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002 ---------------------------------------------------- Operating income: Equity in net income of subsidiary $ 5,431,875 $ 5,897,750 $ 5,901,383 Interest income 113,677 63,516 53,759 Gain on sale of securities available-for-sale, net - - 26,352 ---------------------------------------------------- 5,545,552 5,961,266 5,981,494 ---------------------------------------------------- Operating expenses: Interest expense - - 844 Salaries and employee benefits 17,750 19,800 22,150 Other 129,459 122,077 112,759 ---------------------------------------------------- 147,209 141,877 135,753 ---------------------------------------------------- Income before income tax (benefit) 5,398,343 5,819,389 5,845,741 Income tax (benefit) (288) (29,021) (19,420) ---------------------------------------------------- Net income $ 5,398,631 $ 5,848,410 $ 5,865,161 ====================================================
58 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Statements of Cash Flows Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002 ------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,398,631 $ 5,848,410 $ 5,865,161 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of First Federal Savings Bank of Iowa (5,431,875) (5,897,750) (5,901,383) Dividends received from First Federal Savings Bank of Iowa 4,500,000 5,750,000 5,000,000 Gain on sale of securities available-for-sale - - (26,352) Change in deferred income taxes (553,357) (458,243) (375,748) Change in assets and liabilities: Prepaid expenses and other assets (17,702) 108,269 (25,256) Accrued expenses and other liabilities (35,872) 32,370 3,103 ------------------------------------------------------ Net cash provided by operating activities 3,859,825 5,383,056 4,539,525 ------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans receivable 1,531,000 (2,345,000) (920,000) Proceeds from sale of securities available-for-sale - - 277,727 ------------------------------------------------------ Net cash provided by (used in) investing activities 1,531,000 (2,345,000) (642,273) ------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) in short-term borrowings - - (250,000) Purchase of treasury stock (5,359,307) (3,234,239) (3,569,328) Proceeds from issuance of common stock 1,560,910 1,248,230 1,283,365 Dividends paid (1,492,961) (1,277,432) (1,128,628) ------------------------------------------------------ Net cash (used in) financing activities (5,291,358) (3,263,441) (3,664,591) ------------------------------------------------------ Net increase (decrease) in cash 99,467 (225,385) 232,661 CASH Beginning 185,235 410,620 177,959 ------------------------------------------------------ Ending $ 284,702 $ 185,235 $ 410,620 ======================================================
59 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 19. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2004 ------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------------------ (In thousands, except per share amounts) Interest income $ 6,100 $ 6,163 $ 6,255 $ 6,320 Interest expense 2,817 2,803 2,859 2,888 ------------------------------------------------------------------ Net interest income 3,283 3,360 3,396 3,432 Provision for loan losses 60 50 75 55 ------------------------------------------------------------------ Net interest income after provision for loan losses 3,223 3,310 3,321 3,377 ------------------------------------------------------------------ Noninterest income: Fees and service charges 704 826 798 795 Abstract fees 354 411 365 331 Mortgage banking income 54 74 68 59 Other income 320 321 274 279 ------------------------------------------------------------------ Total noninterest income 1,432 1,632 1,505 1,464 ------------------------------------------------------------------ Noninterest expense: Compensation and employee benefits 1,582 1,492 1,521 1,598 Premises and equipment 359 351 348 370 Data processing 140 140 137 150 Other 782 770 789 841 ------------------------------------------------------------------ Total noninterest expense 2,863 2,753 2,795 2,959 ------------------------------------------------------------------ Income before income taxes 1,792 2,189 2,031 1,882 Provision for income taxes 576 708 640 572 ------------------------------------------------------------------ Net income $ 1,216 $ 1,481 $ 1,391 $ 1,310 ================================================================== Basic earnings per share $ 0.77 $ 0.95 $ 0.90 $ 0.85 ================================================================== Diluted earnings per share $ 0.73 $ 0.91 $ 0.87 $ 0.83 ==================================================================
60 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements - --------------------------------------------------------------------------------
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 ============================================================
61 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 ===========================================================
62 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. Randall L. Minear is the Presidesnt of Terrus Real Estate Group, located in Des Moines, Iowa. He formerly served as 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. He was Executive Vice President from 1994 until 2004. Mr. Chalstrom was named Chief Operating Officer of the Bank in December 1998. He became President of the Bank in April 2004. Melvin R. Schroeder was formerly the Vice President of Instruction at Iowa Central Community College in Fort Dodge, Iowa. Mr. Schroeder retired in 2001. Nominees for Election as Directors Mark Thompson is the owner of Mark Thompson, CPA, P.C., in Fort Dodge, Iowa and has been a certified public accountant since 1978. Paul F. Bognanno is a self-employed consultant in Des Moines whose primary client is CitiMortgage, Inc. From 1993 to 2004, he was the President and Chief Executive Officer of Principal Residential Mortgage, a wholly-owned subsidiary 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. David W. Edge, CPA is Chief Financial Officer and Treasurer of the Holding Company and the Bank. Kirk A. Yung is Senior Vice President of the Holding Company and the Bank. 63 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 - ------------- ---- --- --------- 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 2004 - ---- First Quarter............. 38.80 34.90 0.25 Second Quarter............ 38.80 36.66 0.25 Third Quarter............. 38.60 36.33 0.25 Fourth Quarter ........... 41.49 37.00 0.25 The Company's Common Stock was traded at $41.947 as of March 8, 2005. Information Relating to the Company's Common Stock As of March 8, 2005, the Company had 1,240 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 1,538,230 shares of the Common Stock were outstanding. The Company's current quarterly dividend is $0.29 per share. The Board of Directors of the Company plans to maintain a regular quarterly dividend in the future and will continue to review the dividend payment amount in relation to the Company's earnings, financial condition and other relevant factors (such as regulatory requirements). The Bank will not be permitted to pay dividends to the Holding Company on its capital stock if its shareholders' equity would be reduced below the amount required for the liquidation account. For information concerning federal regulations which apply to the Bank in determining the amount of proceeds which may be retained by the Company and regarding a savings institution's ability to make capital distributions including payment of dividends to its holding company, see Note 11 to the Consolidated Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders, although the source of such dividends will be dependent primarily upon the dividends from the Bank. The Holding Company is subject to the requirements of Iowa law, which prohibit the Holding Company from paying a dividend if, after giving it effect, either of the following would result: (a) the Holding Company would not be able to pay its debts as they become due in the usual course of business; or (b) the Holding Company's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Holding Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. 64 Annual Meeting The Annual Meeting of Shareholders of the Company will be held at 10:00 a.m., Central Time, Friday, April 22, 2005 at the Boston Centre, Suite 100, located at 809 Central Avenue, Fort Dodge, Iowa 50501. 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, McGladrey & Pullen, LLP Good & Mulholland, P.C. 400 Locust Street Suite 640 809 Central Avenue Des Moines, Iowa 50309 Fort Dodge, Iowa 50501 Special Counsel Transfer Agent Thacher Proffitt & Wood 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, 2004 will be furnished without charge to shareholders of record as of March 8, 2005 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 or via the Bank's website at www.firstfederaliowa.com. 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 65 EX-23 3 ncb10k-exh231_123104.txt EXHIBIT 23.1 CONSENT OF ACCOUNTING FIRM Exhibit 23.1 Consent of McGladrey & Pullen, LLP Consent of Independent Registered Public Accounting Firm 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 February 4, 2005, appearing in this annual report on Form 10-K of North Central Bancshares, Inc. and subsidiaries for the year ended December 31, 2004. /s/ McGladrey & Pullen, LLP -------------------------- McGladrey & Pullen, LLP Des Moines, Iowa March 29, 2005 EX-31 4 ncb10k-exh311_123104.txt EXHIBIT 31.1 CERTIFICATION 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., (the "Registrant"); 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 fourth fiscal quarter 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 29, 2005 /s/ David M. Bradley -------------------- David M. Bradley President and Chief Executive Officer CERTIFICATIONS I, David W. Edge, certify that: 1. I have reviewed this annual report on Form 10-K of North Central Bancshares, Inc. (the "Registrant"); 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 fourth fiscal quarter 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 29, 2005 /s/ David W. Edge ----------------- David W. Edge Chief Financial Officer and Treasurer EX-32 5 ncb10k-exh321_123104.txt EXHIBIT 32.1 CERFITICATION 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, 2004 (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 29, 2005 /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, David W. Edge, 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, 2004 (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 29, 2005 /s/ David W. Edge - -------------- ----------------- Dated David W. Edge, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----