EX-13 4 ncb-10kexh131_123105.txt EXHIBIT 13.1 ANNUAL RPT TO SHAREHOLDERS Exhibit 13.1 Annual Report to Shareholders. NORTH CENTRAL BANCSHARES, INC. Holding Company for First Federal Savings Bank of Iowa 2005 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........................62 SHAREHOLDER INFORMATION...............................................63 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 North Central Bancshares, Inc. (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 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 New Branch Opening in 2006 120 South 68th Street Jordan Creek Town Center, West Des Moines, Iowa 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 for the year ended December 31, 2005. North Central Bancshares is the holding company for First Federal Savings Bank of Iowa. For the year ended December 31, 2005, North Central Bancshares' net income was $5,015,000 or $3.20 diluted earnings per share. Total shareholder return was impacted favorably by a 16% increase in quarterly dividends effective April 2005. Some of our achievements during the past year include: 2005 HIGHLIGHTS * Total assets increased 4.9% to a new high of $485.2 million. * Deposits increased 5.7% to a new high of $334.3 million. * Net loans increased 5.6% to a new high of $430.3 million. * Increased quarterly dividends in April, 2005 to $0.29 per share, a 16.0% increase. * We repurchased a total of 50,932 shares, or 3.3%, of outstanding stock during the year ended December 31, 2005. * We began construction of a new 6,000 sq. ft. full service office in West Des Moines, Iowa. * Paul F. Bognanno was newly elected to the Board of Directors at the 2005 annual meeting 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, 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (In thousands) Selected Consolidated Financial Condition Data: Total assets........................... $ 485,191 $ 462,735 $ 424,009 $ 403,872 $ 379,375 Cash (noninterest-bearing)............. 8,087 7,315 8,674 2,143 2,259 Loans receivable, net: (1) First mortgage loans secured by one- to four-family residences......................... 210,793 184,324 171,468 147,479 159,943 First mortgage loans secured by multifamily properties.......... 73,453 77,995 69,507 70,194 73,311 First mortgage loans secured by commercial properties........... 85,794 89,816 68,933 70,502 25,263 Consumer loans....................... 60,238 55,181 53,051 52,971 49,464 ---------- ---------- ---------- ---------- ---------- Total loans receivable, net........ 430,278 407,316 362,959 341,146 307,981 Investment securities (2).............. 21,260 23,710 28,297 35,859 49,016 Deposits............................... 334,338 316,334 283,964 277,000 268,814 Borrowed funds......................... 102,444 100,975 95,005 85,026 71,413 Total shareholders' equity............. 44,279 41,534 41,592 38,748 35,913
For the Year Ended December 31, 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (In thousands) Selected Operating Data: Interest income....................... $ 26,272 $ 24,757 $ 25,412 $ 26,965 $ 27,500 Interest expense...................... 12,607 11,367 12,342 13,911 16,514 ------------ ------------ ------------ ------------ ------------ Net interest income before provision for loan losses........ 13,665 13,390 13,070 13,054 10,986 Provision for loan losses............. 260 240 255 383 210 ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses........ 13,405 13,150 12,815 12,671 10,776 ------------ ------------ ------------ ------------ ------------ Noninterest income: Fees and service charges......... 4,483 3,123 2,864 2,375 1,993 Abstract fees.................... 1,289 1,461 1,811 1,686 1,506 Other income..................... 776 1,476 1,910 1,668 1,593 ------------ ------------ ------------ ------------ ------------ Total noninterest income....... 6,548 6,060 6,585 5,729 5,092 ------------ ------------ ------------ ------------ ------------ Noninterest expense: Salaries and employee benefits... 6,660 6,192 5,950 5,223 4,500 Premises and equipment........... 1,452 1,429 1,287 1,192 1,226 Data processing.................. 597 567 578 544 470 Goodwill......................... - - - - 472 Other expenses................... 3,730 3,127 3,016 2,623 2,378 ------------ ------------ ------------ ------------ ------------ Total noninterest expense...... 12,439 11,315 10,831 9,582 9,046 ------------ ------------ ------------ ------------ ------------ Income before income taxes............ 7,514 7,895 8,569 8,818 6,822 Income tax expense.................... 2,499 2,496 2,721 2,953 2,347 ------------ ------------ ------------ ------------ ------------ Net income......................... $ 5,015 $ 5,399 $ 5,848 $ 5,865 $ 4,475 ============ ============ ============ ============ ============
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At or For the Year Ended December 31, ------------------------------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- 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)......................................... 2.83% 3.02% 3.03% 3.15% 2.68% Net interest margin (net interest income as a percentage of average interest- earning assets)...................................... 3.05 3.22 3.27 3.44 3.03 Return on average assets (net income divided by average total assets)..................... 1.05 1.21 1.38 1.47 1.17 Return on average equity (net income divided by average equity)........................... 11.57 12.97 14.65 15.57 12.21 Noninterest income to average assets................... 1.37 1.36 1.55 1.43 1.33 Efficiency ratio (3)................................... 61.54 58.18 55.11 51.01 56.26 Noninterest expense to average assets.................. 2.61 2.54 2.55 2.40 2.36 Net interest income after provision for loan losses to noninterest expenses.................. 107.76 116.22 118.32 132.24 119.12 Financial Condition Ratios: (%) (4) Equity to assets at period end......................... 9.13 8.98 9.81 9.59 9.47 Tangible equity to tangible assets at period end (5) (6).............................. 8.01 7.80 8.54 8.25 8.03 Average shareholders' equity divided by average total assets................................. 9.09 9.35 9.40 9.42 9.57 Average tangible shareholders equity divided by average tangible total assets (5) (6)........... 7.95 8.13 8.12 8.06 8.10 Average interest-earning assets to average interest-bearing liabilities......................... 107.62 107.24 107.63 107.91 107.54 Asset Quality Ratios: (%) (4) Nonaccrual loans to total net loans.................... 0.14 0.16 0.17 0.19 0.09 Nonperforming assets to total assets (7)............... 0.36 0.37 0.49 0.35 0.36 Allowance for loan losses as a percent of total loans receivable at end of period.............. 0.76 0.77 0.86 0.90 0.92 Allowance for loan losses to nonaccrual loans................................................ 567.98 513.13 515.02 485.00 1,042.07 Per Share Data: Book value per share................................... $ 29.37 $ 27.14 $ 25.92 $ 23.62 $ 21.12 Tangible book value per share (5)...................... 25.46 23.28 22.24 20.03 17.65 Basic earnings per share (8)........................... 3.29 3.47 3.69 3.58 2.54 Diluted earnings per share (9)......................... 3.20 3.34 3.48 3.37 2.41 Dividends declared per share........................... 1.16 1.00 0.84 0.72 0.60 Dividend payout ratio.................................. 0.35 0.29 0.23 0.20 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, 2005, 2004, 2003, 2002 and 2001 was $3.3 million, $3.2 million, $3.2 million, $3.1 million and $2.9 million, respectively. (2) Includes interest-bearing cash and Federal Home Loan Bank stock. (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 was $5.9 million for each of the years ended December 31, 2005, 2004, 2003, 2002 and 2001. (6) Tangible assets consist of total assets less goodwill and title plant. Goodwill and title plant was $5.9 million for each of the years ended December 31, 2005, 2004, 2003, 2002 and 2001. (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 2005, 2004, 2003, 2002 and 2001 were 1,524,056, 1,554,329, 1,583,568, 1,637,749 and 1,762,900, 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 2005, 2004, 2003, 2002 and 2001 were 1,566,848, 1,616,689, 1,679,046, 1,739,535 and 1,856,643, respectively. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General North Central Bancshares, Inc. (the "Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Iowa (the "Bank"), a federally chartered savings bank. The principal business of the 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 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 the Bank 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 shareholder 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 The Company has effectively managed its capital since the Company's inception in 1996. Annual dividends per share have increased from $.25 per share in 1997 to $1.16 per share in 2005. In addition, 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 2,785,554 shares at a cost of $54.1 million as of December 31, 2005. o The Bank has opened new offices in market areas where population growth trends are positive. New offices were opened in Ankeny, Iowa in February 2003 and in Clive, Iowa in March, 2004. In October 2005, the Bank began construction of a new branch office in West Des Moines, Iowa near Jordan Town Center Mall. These locations are in suburbs of Des Moines, Iowa, 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, 2005, 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 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 The Company's exposure to interest rate risk has increased from the prior year. This is due in part to a shift of certificates of deposit to shorter term maturities and a decrease in the speed in which customers prepaid their loans. The Company has also retained a portion of the 15 year fixed rate one- to four-family real estate loans it originated. o Noninterest income for the year ended December 31, 2005, included $1.0 million in loan prepayment fees, compared to $0.4 million for the year ended December 31, 2004. This increase in noninterest income for the year was offset in part by a provision for impairment of available-for-sale securities, as described below. o During the year ended December 31, 2005, the Company recognized an other-than-temporary impairment of $680,000 on three Freddie Mac adjustable rate, perpetual preferred stocks that had declined in value. The securities are investment grade securities that are held in the Company's available-for-sale portfolio. The Company recognized an other-than-temporary impairment on the securities based on the facts and circumstances surrounding each of the securities at the time, including the duration and amount of the unrealized loss, as well as the prospect for the recovery of market value within a reasonable period of time. o Management believes that the allowance for loan losses is adequate. The allowance for loan losses to nonaccrual loans was 567.98% at December 31, 2005. Net annualized charge-offs for 2005 were 0.04% of total loans and have averaged under 0.05% of total loans for the past five years. During 2005, the Company's total loan portfolio increased $19.8 million, or 4.7%. This increase primarily consisted of increases in the one- to four-family first and second mortgage real estate loans. The Company's provision for loan losses in 2005 was $260,000. o The Company has lowered its effective tax rate through the use of federal Low Income Housing Tax Credits (LIHTC). The Company owns and operates two LIHTC projects in Fort Dodge. These projects generated $278,000 in federal income tax credits in 2005. o Purchases and originations of out of state real estate loans remained an integral part of the Company's business plan. The Company has purchased and originated out of state real estate loans to supplement local mortgage loan originations and to diversify its mortgage loan portfolio geographically. Critical Accounting Policies The "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the 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 critical 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 policies 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 8 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 that actual results differ from forecasts and management's judgment, the allowance for loan losses may be greater or less than future charge-offs. Asset impairment judgments include evaluating the decline in fair value of held-to-maturity and available-for-sale securities below their cost. Declines in 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-than-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. Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired in a purchase acquisition. Goodwill is tested for impairment at least annually. Business Strategy The Company's current business strategy is to operate the Bank as a well-capitalized, profitable and independent community-oriented savings bank. Generally, the Company has sought to implement this strategy primarily by using deposits, including brokered certificates of deposit, 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, multifamily 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 the Bank 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 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 2005, the Company had ten offices located in Fort Dodge, Ames, Nevada, Perry, Ankeny, Clive, Burlington and Mount Pleasant, Iowa. At December 31, 2005, 39.9% of the deposit base, or $133.3 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. The Company's lending activities have expanded to include an increased emphasis on originations of construction loans. At December 31, 2005, 43.5% of the Company's total assets consisted of one- to four-family residential first mortgage loans. To supplement local mortgage loan originations and to diversify its mortgage loan portfolio geographically, the Company has 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, 2005, the Company's portfolio of loans which were either originated or purchased by the Company and secured by out of state properties totaled $143.1 9 million and consisted of $15.1 million one- to four-family residential mortgage loans, or 3.5%, $65.4 million multifamily real estate loans, or 14.9%, and $62.6 million commercial real estate loans, or 14.3%, of the Company's total loan portfolio. At December 31, 2005, the Company's ratio of nonperforming assets to total assets was 0.36%. 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, 2005, fees and service charges totaled $4.5 million, an increase of $1.36 million from the prior year. This increase was primarily due to an increase in loan prepayment fees of $644,000 and fees associated with checking accounts, including overdraft fees, of $328,000. The Company has also 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 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 First Iowa's business for the years ended December 31, 2005 and 2004 was $1.3 and $1.5 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, 2005, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $59.7 million, representing a one-year gap to total assets ratio of -12.3%, compared to a -7.0% at December 31, 2004. To manage the Company's interest rate exposure, the Company emphasizes the origination of five and seven year fixed rate mortgage loans that convert to adjustable rates at the conclusion of their initial terms and have overall maturities of up to 30 years, and the origination of adjustable rate home equity lines of credit and short-term consumer loans. The Company also manages its interest rate risk and liquidity by investing in mortgage-backed, municipal and equity securities. 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, borrowings such as FHLB advances, brokered certificates of deposit, 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 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, 2005, $610,000, or 18.1%, of the Company's investment portfolio, excluding equity and mortgage-backed securities and mutual funds, was scheduled to mature in one year or less and $1.7 million, or 50.5%, was scheduled to mature in one to five years and $1.1 million, or 31.4%, was scheduled to mature in more than five years. At December 31, 2005, certificates of deposit scheduled to mature in less than one year totaled $106.7 million. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB, which provide an additional source of funds. The amount of eligible collateral for blanket lien pledges from the FHLB was $172.1 million as of December 31, 2005. The Company may also use brokered certificates of deposit as an additional source of funds. 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. 10 At December 31, 2005, the Company had outstanding loan commitments of $2.5 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 Company are proceeds from dividends and loan repayments from the Bank and the proceeds from stock options exercised. The main cash outflows are dividend payments to shareholders and funds used to repurchase shares of the Company's common stock. During 2005, the Company repurchased 50,932 shares of its common stock. The Company has determined that a share repurchase program is appropriate to enhance shareholder value. Share repurchases generally increase earnings per share, return on average assets, and return on average equity, three performance benchmarks against which the Company and thrift holding companies are often measured. The Company buys stock in the open market whenever the price of the stock is deemed reasonable and the Company has funds available for the purchase. The 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 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 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 Company from paying a dividend if either of the following would result: (a) the Company would not be able to pay its debts as they become due in the usual course of business; or (b) the Company's total assets would be less than the sum of its total liabilities, plus the amount that would be needed, if the Company were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. The primary investing activities of the Company are the origination and purchase of mortgage and other loans and the purchase of securities. During the years ended December 31, 2005, 2004 and 2003, the Company's disbursements for loan originations and purchases totaled $143.1 million, $160.2 million and $205.4 million, respectively. These activities were funded primarily by net deposit inflows, principal repayments on loans, proceeds from the sale of loans, proceeds from the maturity and call of securities, brokered certificates of deposit, and FHLB advances. Net cash flows (used in) investing activities were $(23.1) million, $(42.4) million and $(31.1) million for the years ended December 31, 2005, 2004 and 2003, respectively. Net cash flows provided by financing activities were $16.5 million, $33.2 million and $13.9 million for the years ended December 31, 2005, 2004 and 2003, 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, 2005 with tangible and leverage capital ratios of 7.3% and a total risk-based capital ratio of 11.9 %. 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 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, 2005: Capital Excess Amount Requirements Capital ------ ------------ ------- (In thousands) Tangible capital...... $ 35,084 $ 7,210 $ 27,874 Core capital.......... 35,084 14,419 20,665 Risk-based capital.... 38,361 25,882 12,479 11 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, 2005, $143.1 million, or 32.6%, 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, 2005, 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. 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 same 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. 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, 2005, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $59.7 million, representing a one-year gap ratio of -12.3%, compared to a one-year gap ratio of -7.0% at December 31, 2004. The chief executive officer meets regularly with the Bank's senior executive officers to review trends in deposits as well as mortgage and consumer lending activities. The chief executive officer reports quarterly to the board of directors on interest rate risks and trends, as well as liquidity and capital ratio requirements. Gap Table. The following table (the "Gap Table") sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2005, 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 the terms 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, 2005 (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).................. $ 81,588 $ 114,259 $ 56,007 $ - $ - $ - $ 251,854 Fixed (2)....................... 22,858 38,562 25,071 34,863 3,495 90 124,939 Consumer and other loans........... 22,956 25,070 9,967 2,961 110 2 61,066 Investment securities (3)(4)....... 11,077 1,296 3,599 1,033 - - 17,005 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total interest-earning assets... $ 138,479 $ 179,187 $ 94,644 $ 38,857 $ 3,605 $ 92 $ 454,864 ========== ========== ========== ========== ========== ========== ========== Rate sensitive liabilities: Savings accounts.................. $ 4,598 $ 6,984 $ 4,811 $ 6,458 $ 3,546 $ 651 $ 27,048 NOW accounts...................... 18,219 18,710 7,426 4,402 480 5 49,242 Money market accounts............. 35,425 9,416 - - - - 44,841 Certificate accounts.............. 106,717 71,972 22,288 43 - - 201,020 Noninterest bearing deposits...... 12,186 - - - - - 12,186 FHLB advances and other liabilities (5)................ 21,009 53,435 25,000 3,000 - - 102,444 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities................ $ 198,154 $ 160,517 $ 59,525 $ 13,903 $ 4,026 $ 656 $ 436,781 ========== ============ ========== ========== ========== ========== ========== Interest sensitivity gap............. $ (59,675) $ 18,670 $ 35,119 $ 24,954 $ (421) $ (564) Cumulative interest-sensitivity gap.. $ (59,675) $ (41,005) $ (5,886) $ 19,068 $ 18,647 $ 18,083 Interest sensitivity gap to total assets.......................... (12.30)% 3.85% 7.24% 5.14% (0.09)% (0.12)% Cumulative interest-sensitivity gap to total assets.................... (12.30) (8.45) (1.21) 3.93 3.84 3.73 Ratio of interest-earning assets to interest-bearing liabilities..... 69.88 111.63 159.00 279.49 89.54 14.02 104.14% Cumulative ratio of interest-earning assets to interest-bearing liabilities...................... 69.88 88.57 98.59 104.41 104.28 104.14 104.14 Total assets......................... $ 485,191 $ 485,191 $ 485,191 $ 485,191 $ 485,191 $ 485,191 $ 485,191 Cumulative interest-earning assets... $ 138,479 $ 317,666 $ 412,310 $ 451,167 $ 454,772 $ 454,864 $ 454,864 Cumulative interest-bearing liabilities $ 198,154 $ 358,671 $ 418,196 $ 432,099 $ 436,125 $ 436,781 $ 436,781
---------------------------------------- (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 $3.5 million and $0.7 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 $0.6 million and securities available-for-sale of $11.2 million. (4) Includes $4.9 million of FHLMC preferred stock and $1.0 million of FNMA preferred stock. $3.0 million is fixed rate and $2.9 million is adjustable rate. The fixed rate preferred stock was included in the appropriate category based upon their call date. The adjustable rate preferred stock was included in the appropriate category based upon their repricing date. (5) Includes $102.4 million of advances which have been categorized based upon their maturity date. As of December 31, 2005, 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 above 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 "net portfolio value" ("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, 2005, 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 40,649 (8,764) (18) 8.60 (142) bp +200 bp 44,395 (5,017) (10) 9.25 (77) bp +100 bp 47,430 (1,983) (4) 9.74 (28) bp 0 bp 49,412 - - 10.02 - -100 bp 50,035 622 1 10.04 2 bp -200 bp 49,164 (249) (1) 9.79 (23) bp
--------------------------------- (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 above 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, 2005, the Company's foreclosed real estate consisted of 15 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, --------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (Dollars in thousands) Nonaccrual loans and nonperforming assets: First mortgage loans: One- to four-family residential..... $ 389 $ 335 $ 414 $ 434 $ 130 Multifamily and commercial properties ...................... - - - 37 37 Consumer loans:........................ 196 299 201 172 109 ----------- ----------- ----------- ----------- ----------- Total nonaccrual loans.............. 585 634 615 643 276 Total foreclosed real estate (1)....... 1,143 1,079 1,453 769 1,074 Other nonperforming assets............. - - - - - ----------- ----------- ----------- ----------- ----------- Total nonperforming assets......... $ 1,728 $ 1,713 $ 2,068 $ 1,412 $ 1,350 =========== =========== =========== =========== =========== Total nonaccrual loans to net loans receivable......................... 0.14% 0.16% 0.17% 0.19% 0.09% Total nonaccrual loans to total assets.. 0.12 0.14 0.15 0.16 0.07 Total nonperforming assets to total assets............................ 0.36 0.37 0.49 0.35 0.36
-------------------------------------- (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, --------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (In thousands) Loans past due 60-89 days: First mortgage loans: One- to four-family residential........... $ 1,106 $ 1,001 $ 649 $ 830 $ 1,083 Multifamily and commercial properties..... - 40 463 - - Consumer loans................................ 214 238 223 183 153 --------- --------- --------- --------- --------- Total past due............................ $ 1,320 $ 1,279 $ 1,335 $ 1,013 $ 1,236 ========= ========= ========= ========= =========
15 The following table sets forth information with respect to the Company's delinquent loans and other problem assets at December 31, 2005.
At December 31, 2005 -------------------- Balance Number ------- ------ (Dollars in thousands) One- to four-family first mortgage loans: Loans 60 to 89 days delinquent.................... $ 1,106 32 Loans 90 days or more delinquent.................. 389 7 Multifamily and commercial first mortgage loans: Loans 60 to 89 days delinquent.................... - - Loans 90 days or more delinquent.................. - - Consumer Loans: Loans 60 to 89 days delinquent.................... 214 24 Loans 90 days or more delinquent.................. 196 22 Foreclosed real estate................................. 1,143 15 Other nonperforming assets............................. - - Loans to facilitate sale of foreclosed real estate..... 241 4 Special mention loans.................................. 1,972 44
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, 2005, the Company had $1.97 million of special mention loans, consisting of seventeen loans secured by one- to four-family residences, two loans secured by commercial real estate and twenty-five 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, --------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (In thousands) Substandard assets.............. $ 1,670 $ 1,680 $ 2,046 $ 1,361 $ 1,291 Doubtful assets................. - - - - - Loss assets..................... 58 58 22 51 59 ---------- ---------- ---------- ------------ ---------- Total classified assets.. $ 1,728 $ 1,738 $ 2,068 $ 1,412 $ 1,350 ========== ========== ========== ========== ==========
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 2005 the Company's total loan portfolio increased $19.8 million or 4.7%. During the years ended December 31, 2005, 2004 and 2003 the Company's provision for loan losses were $260,000, $240,000 and $255,000, respectively. The 16 Company's allowance for loan losses totaled $3.3 million, $3.2 million and $3.2 million at December 31, 2005, 2004 and 2003, 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, ------------------------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (Dollars in thousands) Total loans outstanding............ $ 438,650 $ 418,841 $ 367,396 $ 344,574 $ 311,826 Average net loans outstanding...... 424,633 389,190 358,260 337,693 318,197 Allowance balances (at beginning of period)....................... 3,235 3,165 3,118 2,883 2,843 ----------- ----------- ----------- ----------- ---------- Provisions for losses.............. 260 240 255 383 210 Charge-Offs: First mortgage loans.......... 5 66 36 27 15 Consumer loans................ 182 114 265 135 168 Recoveries: First mortgage loans.......... 3 2 - - - Consumer loans................ 15 8 93 14 13 ----------- ----------- ----------- --------- ---------- Net charge-offs............... 169 170 208 148 170 ----------- ----------- ----------- --------- ---------- Allowance balance (at end of period)....................... $ 3,326 $ 3,235 $ 3,165 $ 3,118 $ 2,883 =========== =========== =========== ========= ========== Allowance for loan losses as a percent of total loans receivable at end of period........................ 0.76% 0.77% 0.86% 0.90% 0.92% Net loans charged off as a percent of average net loans outstanding. 0.04 0.04 0.06 0.04 0.05 Ratio of allowance for loan losses to total nonaccrual loans at end of period......................... 567.98 513.13 515.02 485.00 1,042.07 Ratio of allowance for loan losses to total nonaccrual loans and foreclosed real estate at end of period.. 192.41 188.86 153.05 220.90 213.48
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, --------------------------------------------------------------------------- 2005 2004 2003 --------------------------------------------------------------------------- % 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.................... $ 593 49.47% $ 510 45.99% $ 517 47.33% Multifamily residential mortgage loans 704 16.86 731 18.73 686 19.04 Commercial mortgage loans........... 1,201 19.76 1,240 21.94 978 18.95 Consumer loans...................... 828 13.91 754 13.34 984 14.68 ------- ---------- ------- ---------- ------- ---------- Total allowance for loan losses... $ 3,326 100.00% $ 3,235 100.00% $ 3,165 100.00% ======= ========== ======= ========== ======= ========== At December 31, ---------------------------------------------------- 2002 2001 ---------------------------------------------------- % 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.................... $ 395 43.17% $ 608 51.80% Multifamily residential mortgage loans 709 20.54 1,121 23.86 Commercial mortgage loans........... 1,223 20.68 459 8.25 Consumer loans...................... 791 15.61 695 16.09 ------- ---------- ------- ---------- Total allowance for loan losses... $ 3,118 100.00% $ 2,883 100.00% ======= ========== ======= ==========
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, -------------------------------------------------------------------------------------------------- 2005 2004 2003 -------------------------------------------------------------------------------------------------- Average Average Average Average Interest Yield/ Average Yield/ Average Yield/ Balance Cost Cost Balance Interest Cost Balance Interest Cost ------- ------- ------- ------- -------- ------- -------- --------- ------- (Dollars in thousands) Assets: Interest-earning assets: First mortgage loans(1)....... $ 365,647 $ 21,391 5.85% $ 334,676 $ 20,027 5.98% $ 304,573 $ 19,978 6.56% Consumer loans(1)............. 58,986 3,933 6.67 54,513 3,757 6.89 53,687 4,146 7.72 Investment securities......... 23,738(4) 948 3.99 27,232(5) 973 3.57 41,486(6) 1,288 3.11 --------- -------- ----- --------- -------- ------ --------- -------- ------ Total interest-earning assets..................... $ 448,371 $ 26,272 5.86% $ 416,421 $ 24,757 5.95% $ 399,746 $ 25,412 6.35% Noninterest-earning assets...... 28,724 28,818 24,821 --------- --------- --------- Total assets.................. $ 477,095 $ 445,239 $ 424,567 ========= ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings..................... $ 95,781 $ 1,061 1.11% $ 78,865 $ 542 0.69% $ 65,897 $ 383 0.58% Passbook savings.............. 28,710 91 0.32 29,217 91 0.31 27,619 149 0.54 Certificates of Deposit....... 189,900 6,743 3.55 182,368 6,324 3.47 180,983 7,318 4.04 Borrowed funds................ 102,234 4,712 4.61 97,848 4,410 4.51 96,923 4,492 4.63 --------- -------- ----- --------- -------- ----- --------- -------- ------ Total interest-bearing liabilities................... $ 416,625 $ 12,607 3.03% $ 388,298 $ 11,367 2.93% $ 371,422 $ 12,342 3.32% Noninterest-bearing liabilities.. 17,110 15,322 13,236 --------- --------- --------- Total liabilities..............$ 433,735 $ 403,620 $ 384,658 Equity........................... 43,360 41,619 39,909 --------- --------- --------- Total liabilities and equity...$ 477,095 $ 445,239 $ 424,567 ========= ========= ========= Net interest income.............. $ 13,665 $ 13,390 $ 13,070 ======== ======== ======== Net interest rate spread(2)...... 2.83% 3.02% 3.03% ====== ====== ====== Net interest margin (3).......... 3.05 3.22 3.27 ====== ====== ====== Ratio of average interest- earning assets to average interest-bearing liabilities... 107.62 107.24 107.63 ====== ====== ======
------------------- (1) Balance is net of deferred loan fees, deferred loan costs, 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 $1,150,000, Federal Home Loan Bank stock of $5,212,000, and securities available-for-sale of $17,376,000. (5) Includes interest-bearing deposits of $1,735,000, Federal Home Loan Bank stock of $4,993,000, and securities available-for-sale of $20,504,000. (6) Includes interest-bearing deposits of $11,798,000, Federal Home Loan Bank stock of $4,931,000, and securities available-for-sale of $24,757,000. 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, 2005 December 31, 2004 Compared to Compared to Year Ended Year Ended December 31, 2004 December 31, 2003 ------------------------------------------------------------------------------------------- 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................. $ 1,853 $ (447) $ (41) $ 1,365 $ 1,974 $ (1,753) $ (173) $ 48 Consumer loans....................... 308 (122) (10) 176 64 (446) (7) (389) Investment securities................ (125) 113 (13) (25) (252) (55) (7) (314) -------- ------- ------ ------- -------- -------- ------ ------ Total interest-earning assets...... $ 2,036 $ (456) $ (64) $ 1,516 $ 1,786 $ (2,254) $ (187) $ (655) ======= ======= ====== ======= ======= ======== ====== ====== Interest expense: NOW and money market savings......... $ 117 $ 331 $ 71 $ 519 $ 75 $ 70 $ 14 $ 159 Passbook savings..................... (2) 2 - - 9 (63) (4) (58) Certificate of deposits.............. 261 152 6 419 56 (1,042) (8) (994) Borrowed funds....................... 199 100 4 303 43 (124) (1) (82) ------- ------- ------ ------- ------- -------- ------ ------- Total interest-bearing liabilities. 575 585 81 1,241 183 (1,159) 1 (975) ------- ------- ------ ------- ------- -------- ------ ------ Net change in net interest income...... $ 1,461 $(1,041) $ (145) $ 275 $ 1,603 $ (1,095) $ (188) $ 320 ======= ======== ====== ======= ======= ========= ====== ======
20 Comparison of Financial Condition as of December 31, 2005 and December 31, 2004 Total assets increased $22.5 million, or 4.9%, to $485.2 million at December 31, 2005 from $462.7 million at December 31, 2004. The increase in assets was primarily due to increases in net loans receivable, premises and equipment, and cash and cash equivalents, offset in part by a decrease in securities available-for-sale. Asset growth was funded by increases in deposits and FHLB advances. Total loans receivable, net, increased by $23.0 million, or 5.6%, to $430.3 million at December 31, 2005 from $407.3 million at December 31, 2004, primarily due to the origination of $74.6 million of first mortgage loans secured by one- to four-family residences, originations of $8.5 million of first mortgage loans secured by commercial real estate, purchases of first mortgage loans primarily secured by one- to four-family residences, multifamily residences and commercial real estate of $24.0 million, and originations of $24.8 million of second mortgage loans during the year ended December 31, 2005. These originations and purchases were offset in part by payments and prepayments of $103.0 million and sales of loans of $19.5 million during the year ended December 31, 2005. The Company sells substantially all fixed-rate loans with maturities in excess of 15 years in the secondary mortgage market in order to reduce interest rate risk. Premises and equipment, net, increased by $1.1 million, or 10.8%, to $11.0 million at December 31, 2005 from $9.9 million at December 31, 2004. The increase in premises and equipment was primarily due to the initial construction costs associated with the construction of a new branch office located at the Jordan Creek Town Center in West Des Moines, Iowa and the expansion of the Crossroads branch in Fort Dodge, Iowa. Cash and cash equivalents increased $721,000, or 9.1%, to $8.6 million at December 31, 2005 from $7.9 million at December 31, 2004. Securities available-for-sale decreased $2.6 million, or 14.4%, to $15.5 million at December 31, 2005 from $18.1 million at December 31, 2004, primarily due to calls, payments and maturities of mortgage-backed and municipal securities. Proceeds of such calls, payments and maturities were used to fund loan growth. Deposits increased $18.0 million, or 5.7%, to $334.3 million at December 31, 2005 from $316.3 million at December 31, 2004, primarily reflecting increases in checking accounts, NOW accounts, and certificates of deposit, offset in part by decreases in savings accounts and money market accounts. The increase in deposits is due primarily to management's pricing strategies, continued marketing efforts, and the utilization of brokered certificates of deposit. In 2005, the Company began issuing brokered certificates of deposit. At December 31, 2005, the Company had $4.0 million of brokered certificates of deposit. Borrowed funds, primarily FHLB advances, increased $1.5 million, or 1.5%, to $102.4 million at December 31, 2005 from $101.0 million at December 31, 2004. The increases in the deposits and borrowed funds were used to fund loan growth. Total shareholders' equity increased $2.8 million, or 6.6%, to $44.3 million at December 31, 2005 from $41.5 million at December 31, 2004, primarily due to earnings, the exercise of stock options, and a decrease in unrealized loss on securities available-for-sale, offset in part by stock repurchases and declared dividends. 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 the 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, purchases of first mortgage loans primarily secured by one- to four-family residences, multifamily residences and commercial real estate 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. Securities available-for-sale decreased $4.1 million, or 18.6%, 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. Cash and cash equivalents decreased $2.1 million, or 21.0%, to $7.9 million at December 31, 2004 from $10.0 million at December 31, 2003 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 21 accounts, and retail certificate of deposit accounts, offset in part by decreases in certain public funds deposits. The increase in deposits was due primarily to the deposit activity associated with the opening of 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 $57,000 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 Results of Operations for the Years Ended December 31, 2005 and 2004 Net Income. Net income decreased by $384,000, or 7.1%, to $5.0 million for the year ended December 31, 2005 compared to $5.4 million for the year ended December 31, 2004. 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 an increase in noninterest expense, offset in part by increases in net interest income and noninterest income. Net Interest Income. Net interest income before provision for loan losses increased by $275,000, or 2.1%, to $13.7 million for the year ended December 31, 2005 from $13.4 million for the year ended December 31, 2004. The increase is primarily due to an increase in the average balance of interest-earning assets, offset in part by a decrease in the yield on interest-earning assets, an increase in the average balance of interest-bearing liabilities, and an increase in the average cost of funds. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) decreased to 2.83% for the year ended December 31, 2005 from 3.02% for the year ended December 31, 2004. The decrease in interest rate spread reflects the general decrease in the yield on interest-earning assets and the increase in the overall cost of interest-bearing liabilities. The decrease in the yield on interest-earning assets primarily reflects loan growth at rates generally lower than portfolio rates. The increase in the cost of interest-bearing liabilities reflects repricing of interest-bearing liabilities at generally higher current market interest rates. Interest Income. Interest income increased by $1.5 million, or 6.1%, to $26.3 million for the year ended December 31, 2005 compared to $24.8 million for the year ended December 31, 2004. The increase in interest income was primarily due to an increase in the average balance of interest-earning assets, offset in part by a decrease in the average yield on interest-earning assets. The average balance of interest-earning assets increased $32.0 million, or 7.7%, to $448.4 million for the year ended December 31, 2005, from $416.4 million for 2004. The increase in the average balances of interest-earning assets primarily reflects increases in the average balances of first mortgage loans and consumer loans. The increases in first mortgage loans were primarily derived from originations of $74.6 million of first mortgage loans secured by one- to four-family residences, originations of $8.5 million of first mortgage loans secured by commercial real estate, purchases of first mortgage loans secured by one- to four-family residences, multifamily residences and commercial real estate of $24.0 million, and originations of $24.8 million of second mortgage loans, which originations and purchases were offset in part by payments and prepayments of $103.0 million and sales of loans of $19.5 million during the year ended December 31, 2005. This reflects the Company's continued emphasis on residential lending. See "Business Strategy." The average yield on interest-earning assets decreased to 5.86% for the year ended December 31, 2005 from 5.95% for the year ended December 31, 2004, primarily due to loan growth at rates generally lower than portfolio rates. Interest Expense. Interest expense increased by $1.2 million, or 10.9%, to $12.6 million for the year ended December 31, 2005, compared to $11.4 million for the year ended December 31, 2004. The increase in interest expense was primarily due to increases in the average cost of funds and in the average balance of interest-bearing liabilities. The average cost of funds increased to 3.03% for the year ended December 31, 2005 from 2.93% for the year ended December 31, 2004, primarily due to a general increase in market interest rates. The average balance of interest-bearing liabilities increased $28.3 million, or 7.3%, to $416.6 million for the year ended December 31, 2005 from $388.3 million for 2004. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the average balances of checking and money market accounts, certificates of deposit and borrowed funds, offset in part by a decrease in the average balance of savings accounts. The increase in average interest-bearing deposits was primarily due to the Company's pricing strategies and continued marketing efforts. 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 $260,000 and $240,000 for the years ended December 31, 2005 and December 31, 2004, 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 2005, the Company's total loan portfolio increased $19.8 million, or 4.7%. 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 $24.0 million of loans in 2005, compared to $52.7 million of loans in 2004. 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 decreased by $15.0 million, or 9.5% during 2005. The economic conditions in the Bank's primary market areas remain generally stable. The net charge-offs were $170,000 for both of the years ended December 31, 2005 and 2004. The charge-offs were primarily due to losses on automobile and second mortgage loans. The resulting allowance for loan loss was $3.3 million and $3.2 million at December 31, 2005 and December 31, 2004, respectively. The allowance for loan losses as a percentage of total loans receivable decreased to 0.76% at December 31, 2005 from 0.77% at December 31, 2004. The level of nonperforming loans was $585,000 at December 31, 2005 and $634,000 at December 31, 2004. See "Asset Quality." Management believes that the allowance for loan losses is adequate as of December 31, 2005. 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 $489,000, or 8.1%, to $6.5 million for the year ended December 31, 2005 from $6.0 million for the year ended December 31, 2004. The increase is primarily due to increases in fees and service charges and mortgage banking income (gain on sale of loans), offset in part by a provision for impairment on securities available-for-sale and decreases in abstract fees and other income. Fees and service charges increased $1.36 million due primarily to an increase in loan prepayment fees of $644,000 and fees associated with checking accounts, including overdraft fees, of $328,000. Mortgage banking income increased $34,000 due in part to an increase in loan originations of loans held for sale. During 2005, the Company recognized an other-than-temporary impairment of $680,000 on three Freddie Mac adjustable rate, perpetual preferred stocks that had declined in value, reducing noninterest income for the year. The securities are investment grade securities that are held in the Company's available-for-sale portfolio. The Company recognized an other-than-temporary impairment on the securities based on the facts and circumstances surrounding each of the securities at the time, including the duration and amount of the unrealized loss, as well as the prospect for the recovery of market value within a reasonable period of time. Abstract fees decreased $171,000 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. Other income, which primarily includes insurance, annuity, and mutual fund sales, rent income, and income associated with foreclosed real estate decreased $54,000 due in part to decreases in annuity sales. Noninterest Expense. Total noninterest expense increased by $1.1 million, or 9.9%, to $12.4 million for the year ended December 31, 2005 from $11.3 million for the year ended December 31, 2004. The increase is primarily due to an increase in salaries and employee benefits and other expenses. Salaries and employee benefits increased $467,000 primarily due to normal salary increases, additions to staff, and an increase in the Company's contribution to its defined benefit retirement plan. Other expenses increased $603,000 due primarily to the write-down of other real estate owned and an increase in professional fees. The Company's efficiency ratio for the years ended December 31, 2005 and 2004 was 61.54% and 58.18%, respectively. The Company's ratio of noninterest expense to average assets for the years ended December 31, 2005 and 2004 was 2.61% and 2.54%, respectively. Income Taxes. The Company's provision for income taxes was $2.5 million for both of the years ended December 31, 2005 and 2004. The provision for income taxes remained steady primarily due to the decrease in income before income taxes, offset in part by the limited deductibility of the other-than-temporary impairment of securities available-for-sale. 23 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. 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 $319,000 to $13.4 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 3.02% for the year ended December 31, 2004 from 3.03% 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 $656,000 to $24.8 million for the year ended December 31, 2004 compared to $25.4 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 5.95% for the year ended December 31, 2004 from 6.36% for the year ended December 31, 2003, primarily due to a general decrease in market interest rates compared to their original rates. The average balance of interest-earning assets increased $16.7 million to $416.4 million for the year ended December 31, 2004, from $399.7 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 $975,000 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 balance 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 the year ended December 31, 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 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 $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, 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 24 14.2%, during 2004. The net charge-offs were $170,000 for the year ended December 31, 2004, 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 $634,000 at December 31, 2004 and $615,000 at December 31, 2003. See "Asset Quality." Management believes that the allowance for loan losses was adequate as of December 31, 2004. Noninterest income. Total noninterest income decreased by $525,000, or 8.0%, 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 $138,000 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 $483,000 to $11.3 million for the year ended December 31, 2004 from $10.8 million for the year ended December 31, 2003. The increase was 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 $110,000 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 58.18% and 55.11%, respectively. The Company's ratio of noninterest expense to average assets for the year ended December 31, 2004 and 2003 was 2.54% and 2.55%, respectively. Income Taxes. Income taxes decreased by $225,000 to $2.5 million for the year ended December 31, 2004, 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 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. Impact of Inflation and Changing Prices The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all the assets and liabilities are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 25 Contractual Obligations
Payments due by period ---------------------- Less than More than Total 1 year 1-3 years 3-5 years 5 years ----- ------ --------- --------- ------- (In thousands) Borrowings (1).............. $ 102,444 $ 21,005 $ 53,004 $ 25,000 $ 3,435 Loan commitments............ $ 2,537 $ 2,537 - - - Construction contracts...... $ 1,737 $ 1,737 - - - Available home equity and unadvanced lines of credit.. $ 5,518 $ 5,518 - - - --------- --------- --------- -------- ------- Total $ 112,236 $ 30,797 $ 53,004 $ 25,000 $ 3,435 ========= ======== ========= ======== =======
(1) Callable advances are included in the category in which the advances mature 26 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS --------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..................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 Assountants 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, 2005 and 2004 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005. 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, 2005 and 2004 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. /s/McGladrey & Pullen, LLP -------------------------- Des Moines, Iowa February 3, 2006 LLP is an independent member firm of RSM International, an affiliation of separate and independent legal entities.
North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Financial Condition December 31, 2005 and 2004 2005 2004 ---------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (Note 2): Interest-bearing $ 552,456 $ 603,257 Noninterest-bearing 8,087,216 7,314,922 ------------- ------------- Total cash and cash equivalents 8,639,672 7,918,179 Securities available-for-sale (Note 3) 15,457,942 18,061,271 Federal Home Loan Bank stock, at cost (Note 8) 5,250,100 5,045,000 Loans held for sale 737,838 904,127 Loans receivable, net (Notes 4, 5, 8 and 14) 430,278,191 407,316,318 Accrued interest receivable 2,146,102 1,953,605 Foreclosed real estate 1,142,901 1,079,257 Premises and equipment, net (Note 6) 10,962,248 9,889,737 Rental real estate 2,684,484 2,809,888 Title plant 925,256 925,256 Goodwill 4,970,800 4,970,800 Deferred taxes (Note 9) 953,676 1,102,612 Prepaid expenses and other assets 1,041,915 758,729 ------------- ------------- Total assets $ 485,191,125 $ 462,734,779 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits (Notes 5 and 7) $ 334,337,583 $ 316,333,731 Borrowed funds (Note 8) 102,443,743 100,974,695 Advances from borrowers for taxes and insurance 1,897,511 1,856,249 Dividends payable 438,684 382,632 Accrued expenses and other liabilities 1,795,104 1,653,266 ------------- ------------- Total liabilities 440,912,625 421,200,573 ------------- ------------- 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 2005 1,507,703 shares; 2004 1,530,530 shares 15,077 15,305 Additional paid-in capital 18,447,059 18,681,041 Retained earnings, substantially restricted (Note 9) 25,847,345 23,438,369 Unearned shares, employee stock ownership plan (Note 10) (15,697) (81,200) Accumulated other comprehensive (loss) (15,284) (519,309) ------------- ------------- Total stockholders' equity 44,278,500 41,534,206 ------------- ------------- Total liabilities and stockholders' equity $ 485,191,125 $ 462,734,779 ============= =============
See Notes to Consolidated Financial Statements. 29
North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2005, 2004 and 2003 2005 2004 2003 -------------------------------------------------------------------------------------------------------------------- Interest income: Loans receivable: First mortgage loans $ 21,391,426 $ 20,026,428 $ 19,977,961 Consumer loans 3,932,736 3,756,735 4,146,118 Securities and cash deposits 948,256 973,237 1,288,236 ------------------------------------------------- 26,272,418 24,756,400 25,412,315 ------------------------------------------------- Interest expense: Deposits (Note 7) 7,894,920 6,956,669 7,849,586 Other borrowed funds 4,712,535 4,410,057 4,492,129 ------------------------------------------------- 12,607,455 11,366,726 12,341,715 ------------------------------------------------- Net interest income 13,664,963 13,389,674 13,070,600 Provision for loan losses (Note 4) 260,000 240,000 255,000 ------------------------------------------------- Net interest income after provision for loan losses 13,404,963 13,149,674 12,815,600 ------------------------------------------------- Noninterest income: Fees and service charges 4,482,923 3,123,253 2,863,713 Abstract fees 1,289,624 1,460,952 1,810,924 Mortgage banking income 289,042 254,731 828,099 Provision for impairment of securities available-for-sale (679,500) - - Other income 1,166,280 1,220,672 1,082,226 ------------------------------------------------- Total noninterest income 6,548,369 6,059,608 6,584,962 ------------------------------------------------- Noninterest expense: Compensation and employee benefits (Note 10) 6,659,922 6,192,515 5,949,737 Premises and equipment 1,452,136 1,428,534 1,287,229 Data processing 597,127 566,932 577,836 Other expenses (Note 12) 3,729,921 3,126,719 3,016,784 ------------------------------------------------- Total noninterest expense 12,439,106 11,314,700 10,831,586 ------------------------------------------------- Income before income taxes 7,514,226 7,894,582 8,568,976 Provision for income taxes (Note 9) 2,499,500 2,495,951 2,720,566 ------------------------------------------------- Net income $ 5,014,726 $ 5,398,631 $ 5,848,410 ================================================= Basic earnings per common share (Note 17) $ 3.29 $ 3.47 $ 3.69 Earnings per common share - assuming dilution (Note 17) 3.20 3.34 3.48 Dividends declared per common share 1.16 1.00 0.84
See Notes to Consolidated Financial Statements. 30
North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity Years Ended December 31, 2005, 2004 and 2003 Unearned Shares, Additional Employee Stock Comprehensive Common Paid-in Retained Ownership Income Stock Capital Earnings Plan ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2002 $ 16,403 $17,011,095 $21,862,248 $ (318,097) Comprehensive income: Net income $5,848,410 - - 5,848,410 - Other comprehensive (loss), net of tax (Note 3) (247,821) - - - - --------------- Total comprehensive income $5,600,589 =============== Purchase of 94,700 shares of treasury stock - - - - Dividends on common stock - - (1,320,089) - Retirement of 94,700 shares of treasury stock (947) (946,053) (2,287,239) - Effect of contribution to employee stock ownership plan - 398,642 - 150,304 Issuance of 59,200 shares of common stock 592 1,247,638 - - ----------------------------------------------------------- Balance, December 31, 2003 16,048 17,711,322 24,103,330 (167,793) 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 143,055 shares of treasury stock - - - - Dividends on common stock - - (1,537,685) - Retirement of 143,055 shares of treasury stock (1,431) (831,969) (4,525,907) - Effect of contribution to employee stock ownership plan - 241,466 - 86,593 Issuance of 68,805 shares of common stock 688 1,560,222 - - ------------------------------------------------------------- Balance, December 31, 2004 15,305 18,681,041 23,438,369 (81,200) Comprehensive income: Net income $5,014,726 - - 5,014,726 - Other comprehensive income, net of reclassification adjustment and tax (Note 3) 504,025 - - - - --------------- Total comprehensive income $5,518,751 =============== Purchase of 50,932 shares of treasury stock - - - - Dividends on common stock - - (1,765,053) - Retirement of 50,932 shares of treasury stock (509) (1,105,961) (840,697) - Effect of contribution to employee stock ownership plan - 189,875 - 65,503 Issuance of 28,105 shares of common stock 281 682,104 - - ----------------------------------------------------------- Balance, December 31, 2005 $ 15,077 $18,447,059 $25,847,345 $ (15,697) ===========================================================
Accumulated Other Total Comprehensive Treasury Stockholders' Income (Loss) Stock Equity ---------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 $ 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 94,700 shares of treasury stock - (3,234,239) (3,234,239) Dividends on common stock - - (1,320,089) Retirement of 94,700 shares of treasury stock - 3,234,239 - Effect of contribution to employee stock ownership plan - - 548,946 Issuance of 59,200 shares of common stock - - 1,248,230 ------------------------------------------------ Balance, December 31, 2003 (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 143,055 shares of treasury stock - (5,359,307) (5,359,307) Dividends on common stock - - (1,537,685) Retirement of 143,055 shares of treasury stock - 5,359,307 - Effect of contribution to employee stock ownership plan - - 328,059 Issuance of 68,805 shares of common stock - - 1,560,910 ---------------------------------------------- Balance, December 31, 2004 (519,309) - 41,534,206 Comprehensive income: Net income - - 5,014,726 Other comprehensive income, net of reclassification adjustment and tax (Note 3) 504,025 - 504,025 Total comprehensive income Purchase of 50,932 shares of treasury stock - (1,947,167) (1,947,167) Dividends on common stock - - (1,765,053) Retirement of 50,932 shares of treasury stock - 1,947,167 - Effect of contribution to employee stock ownership plan - - 255,378 Issuance of 28,105 shares of common stock - - 682,385 ------------------------------------------------ Balance, December 31, 2005 $ (15,284) $ - $ 44,278,500 ================================================
See Notes to Consolidated Financial Statements. 31
North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2005, 2004 and 2003 2005 2004 2003 ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,014,726 $ 5,398,631 $ 5,848,410 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 260,000 240,000 255,000 Depreciation 813,829 860,073 797,117 Amortization and accretion 409,436 578,352 677,301 Deferred taxes (151,064) (78,659) (1,475) Effect of contribution to employee stock ownership plan 255,378 328,059 548,946 Gain on sale of foreclosed real estate and loans, net (336,012) (319,650) (873,444) Provision for impairment of securities available-for-sale 679,500 - - Write-down of other real estate owned 181,900 - - Loss on disposal of equipment 26,796 4,179 4,916 Proceeds from sales of loans held for sale 19,776,886 18,059,841 51,061,653 Originations of loans held for sale (19,321,555) (18,382,337) (48,188,320) Change in assets and liabilities: Accrued interest receivable (192,497) (87,084) 61,757 Prepaid expenses and other assets (283,053) 208,836 1,788,213 Accrued expenses and other liabilities 141,838 278,442 85,231 ----------------------------------------------------- Net cash provided by operating activities 7,276,108 7,088,683 12,065,305 ----------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in loans (405,303) 9,900,281 26,056,456 Purchase of loans (24,024,223) (55,175,363) (49,583,830) Proceeds from sale of securities available-for-sale 1,082,600 1,178,800 702,400 Purchase of securities available-for-sale (1,932,700) (1,720,600) (11,197,958) Proceeds from maturities and calls of securities available-for-sale 3,330,724 3,613,903 5,888,849 Purchase of premises, equipment and rental real estate (1,796,814) (752,992) (3,344,928) Proceeds from sale of equipment 9,082 510 124,846 Other 641,641 597,996 235,978 ----------------------------------------------------- Net cash (used in) investing activities (23,094,993) (42,357,465) (31,118,187) -----------------------------------------------------
(Continued) 32
North Central Bancshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 2005, 2004 and 2003 2005 2004 2003 ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 18,003,852 $ 32,370,162 $ 6,963,487 Net increase in advances from borrowers for taxes and insurance 41,262 119,494 224,641 Net increase (decrease) in short-term borrowings (5,000,000) 4,500,000 1,500,000 Proceeds from other borrowed funds 21,000,000 9,000,000 17,500,000 Payments of other borrowed funds (14,530,952) (7,529,910) (9,021,833) Purchase of treasury stock (1,947,167) (5,359,307) (3,234,239) Proceeds from issuance of common stock 682,385 1,560,910 1,248,230 Dividends paid (1,709,002) (1,492,961) (1,277,432) ---------------------------------------------------- Net cash provided by financing activities 16,540,378 33,168,388 13,902,854 ---------------------------------------------------- Net change in cash and cash equivalents 721,493 (2,100,394) (5,150,028) CASH AND CASH EQUIVALENTS Beginning 7,918,179 10,018,573 15,168,601 ---------------------------------------------------- Ending $ 8,639,672 $ 7,918,179 $ 10,018,573 ==================================================== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors $ 7,829,434 $ 6,909,056 $ 7,872,840 Interest paid on borrowings 4,712,564 4,410,092 4,492,129 Income taxes 2,651,490 1,837,562 2,330,008
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 includes cash and balances due from banks. Cash flows from loans, deposits and short-term borrowings 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-than-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: Residential real estate loans, which are originated and intended for resale in the secondary market in the foreseeable future, are classified as held-for-sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows. Loans receivable: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance for estimated losses on loans, net unearned premiums (discounts) and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred bank loan origination fees and/or costs are amortized as an adjustment of the related loan's yield. As assets held for and used in the production of services, the origination and collection of these loans is classified as an investing activity in the statement of cash flows. 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. 35 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- 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 following estimated useful lives: Years ----- Building and improvements 10-40 Automobiles, furniture and equipment 3-20 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. Useful lives are the same as used for premises and equipment. 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, 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 basis. 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. 36 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements ------------------------------------------------------------------------------- Operating segments: The Company uses the "management approach" for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the "management approach" model, the Company has determined that its business is comprised of a single operating segment. Stock-option plan: FASB Statement No. 123, Accounting for Stock-Based Compensation, establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from nonemployees. However, the standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. The Company has elected to apply the intrinsic value based method of accounting for stock options issued to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Had compensation cost for the Plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123), the approximate 2005, 2004 and 2003 reported net income and earnings per common share would have been decreased to the pro forma amounts shown below:
2005 2004 2003 ----------------------------------------------------- Net income, as reported $ 5,014,726 $ 5,398,631 $ 5,848,410 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (40,513) (54,026) (66,773) -------------------------------------------------------- Pro forma net income $ 4,974,213 $ 5,344,605 $ 5,781,637 ======================================================== Earnings per common share - basic: As reported $ 3.29 $ 3.47 $ 3.69 Pro forma 3.26 3.44 3.65 Earnings per common share - assuming dilution: As reported $ 3.20 $ 3.34 $ 3.48 Pro forma 3.17 3.31 3.44
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 2005, 2004 and 2003, respectively: dividend rates of 2.87%, 2.67% and 2.3%, price volatilities of 15%, 14% and 20%, risk-free interest rates of 4.08%, 3.81% and 3.70% and expected lives of eight years for all years. 37 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- Recent accounting pronouncements: In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123R, Share-Based Payment. This Statement revises SFAS Statement No. 123, Accounting for Stock-Based Compensation, amends SFAS Statement No. 95, Statement of Cash Flows, and supersedes APB Opinion No. 125, Accounting for Stock Issued to Employees. 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. It requires that all stock-based compensation now be measured at fair value and recognized as expense in the income statement. This Statement also clarifies and expands guidance on measuring fair value of stock compensation, requires estimation of forfeitures when determining expense, and requires that excess tax benefits be shown as financing cash inflows versus a reduction of taxes paid in the statement of cash flows. Various other changes are also required. This Statement is effective beginning January 1, 2006, for the Company as a result of recent SEC actions. Management believes the impact on the financial statements will be similar to the disclosures made by footnote to the financial statements, showing the pro forma effect on earnings and earnings per share of expensing the value of stock options granted. Reclassification: Certain items on the consolidated statement of financial condition as of December 31, 2004 and the consolidated statements of income as of December 31, 2004 and 2003 were reclassified with no effect on net income or stockholders' equity, to be consistent with the classifications used in the December 31, 2005 statements. Fair value of financial instruments: The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a 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. Federal Home Loan Bank stock: The fair value of this untraded stock is estimated at its carrying value because the Company is able to redeem the stock with the Federal Home Loan Bank at par value. Loans held for sale: Fair values are based on quoted market prices of similar loans sold on the secondary market. 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. 38 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- 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, 2005 and 2004, 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 $2,220,000 and $2,610,000 at December 31, 2005 and 2004, respectively. 39 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- Note 3. Securities Securities available-for-sale as of December 31, 2005 were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ------------------------------------------------------------------ Equity securities: Mutual fund $ 2,000,000 $ - $ (50,300) $ 1,949,700 FHLMC preferred stock 4,819,500 94,000 (33,500) 4,880,000 FNMA preferred stock 1,000,000 - - 1,000,000 Other 2,100 5,219 - 7,319 ------------------------------------------------------------------ 7,821,600 99,219 (83,800) 7,837,019 ------------------------------------------------------------------ Debt securities: State and local obligations 3,320,475 71,280 (25,826) 3,365,929 Mortgage-backed securities 4,340,018 15,536 (100,560) 4,254,994 ------------------------------------------------------------------ 7,660,493 86,816 (126,386) 7,620,923 ------------------------------------------------------------------ $ 15,482,093 $ 186,035 $ (210,186) $ 15,457,942 ==================================================================
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 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 ------------------------------------------------------------------ 8,501,100 4,650 (985,644) 7,520,106 ------------------------------------------------------------------ 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 ------------------------------------------------------------------ $ 18,889,314 $ 228,986 $ (1,057,029) $ 18,061,271 ==================================================================
North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- Securities available-for-sale with a carrying amount of approximately $205,000 and $316,000 at December 31, 2005 and 2004, respectively, were pledged on deposit accounts. Securities available-for-sale with a carrying amount of approximately $3,452,000 and $4,765,000 at December 31, 2005 and 2004, 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, 2005 and 2004, are summarized as follows:
2005 -------------------------------------------------------------------------------- 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 $ - $ - $ 1,949,700 $ (50,300) $ 1,949,700 $ (50,300) FHLMC preferred stock 1,137,000 (33,500) - - 1,137,000 (33,500) -------------------------------------------------------------------------------- 1,137,000 (33,500) 1,949,700 (50,300) 3,086,700 (83,800) -------------------------------------------------------------------------------- Debt securities: State and local obligations 1,186,566 (19,232) 218,406 (6,594) 1,404,972 (25,826) Mortgage-backed securities 25,228 (33) 3,451,534 (100,527) 3,476,762 (100,560) -------------------------------------------------------------------------------- 1,211,794 (19,265) 3,669,940 (107,121) 4,881,734 (126,386) -------------------------------------------------------------------------------- $ 2,348,794 $ (52,765) $ 5,619,640 $ (157,421) $ 7,968,434 $ (210,186) ================================================================================
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) ================================================================================
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. In addition, the Company has the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery. During 2005, the Company determined that the unrealized losses related to these FHLMC preferred stock issues were other-than-temporary. Accordingly, an impairment loss of $679,500 was recorded and the cost basis of the securities was reduced by the same amount. 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, 2005 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 $ 610,028 $ 610,456 Due from one to five years 1,702,040 1,699,060 Due from five to ten years 554,998 572,002 Due after ten years 453,409 484,411 Mortgage-backed securities 4,340,018 4,254,994 ---------------------------------- $ 7,660,493 $ 7,620,923 ================================== There were no securities sold during 2005, 2004 or 2003 except for FHLB stock. Included in the interest income on securities and cash deposits was dividend income of $434,251, $371,519 and $424,366 for the years ended December 31, 2005, 2004 and 2003, respectively. The components of other comprehensive income (loss) - net unrealized gains (losses) on available-for-sale securities for the years ended December 31, 2005, 2004 and 2003 were as follows:
2005 2004 2003 ------------------------------------------------- Unrealized holding gains (losses) arising during the period $ 124,392 $ (714,453) $ (395,232) Less reclassification adjustment for impairment of securities available-for-sale (losses) realized in net income (679,500) - - ------------------------------------------------- Net unrealized gains (losses) before tax benefit 803,892 (714,453) (395,232) Tax effect (299,867) 266,410 147,411 ------------------------------------------------- Other comprehensive income (loss) - net unrealized gains (losses) on securities $ 504,025 $ (448,043) $ (247,821) =================================================
42 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- Note 4. Loans Receivable Loans receivable at December 31, 2005 and 2004 are summarized as follows: 2005 2004 ------------------------------- First mortgage loans: Secured by one-to four-family residences $201,242,429 $179,310,983 Secured by: Multifamily properties 73,945,443 78,427,518 Commercial properties 81,254,835 90,907,328 Construction loans 21,191,735 14,308,167 ------------------------------- Total first mortgage loans 377,634,442 362,953,996 ------------------------------- Consumer loans: Automobile 9,251,553 9,052,114 Second mortgage 44,218,229 39,701,428 Other 7,545,532 7,133,602 ------------------------------- Total consumer loans 61,015,314 55,887,144 ------------------------------- Total loans 438,649,756 418,841,140 Undisbursed portion of construction loans (5,665,533) (9,113,451) Unearned premiums, net 768,545 984,151 Net deferred loan origination (fees) (148,946) (160,195) Allowance for loan losses (3,325,631) (3,235,327) ------------------------------- $430,278,191 $407,316,318 =============================== Activity in the allowance for loan losses is summarized as follows for the years ended December 31: 2005 2004 2003 ------------------------------------------------- Balance, beginning $ 3,235,327 $ 3,164,857 $ 3,118,394 Provision charged to income 260,000 240,000 255,000 Loans charged off (187,108) (180,031) (301,978) Recoveries 17,412 10,501 93,441 ------------------------------------------------- Balance, ending $ 3,325,631 $ 3,235,327 $ 3,164,857 ================================================= 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, ---------------------- 2005 2004 ---------------------- Impaired loans without a valuation allowance $ - $ - Impaired loans with a valuation allowance 585,522 630,944 ---------------------- Total impaired loans $ 585,522 $ 630,944 ====================== Valuation allowance related to impaired loans $ 136,919 $ 120,513 ====================== Average investment in impaired loans $ 589,756 $ 578,180 ====================== Total nonaccrual loans $ 586,000 $ 634,000 ====================== 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, 2005 and 2004: 2005 2004 -------------------------- Beginning balance $ 292,514 $ 1,847,343 New loans 547,313 7,064 Change in status - (1,388,118) Repayments (489,837) (173,775) -------------------------- Ending balance $ 349,990 $ 292,514 ========================== 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, 2005 and 2004 are $45,422,224 and $46,497,707, respectively. Included in deposits are custodial escrow balances maintained in connection with the foregoing loan servicing of $373,477 and $340,094 at December 31, 2005 and 2004, 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: 2005 2004 ------------------------------- Land $ 3,640,741 $ 2,686,894 Buildings and improvements 9,004,276 8,844,543 Construction in progress 355,319 - Leasehold improvements 35,259 35,259 Furniture, fixtures and equipment 3,665,659 3,462,330 Vehicles 111,202 104,129 ------------------------------- 16,812,456 15,133,155 Less accumulated depreciation 5,850,208 5,243,418 ------------------------------- $ 10,962,248 $ 9,889,737 =============================== The Company has entered into contracts for the construction of a new banking office and the remodeling of an existing office in the approximate amount of $2,000,000. Of that amount, $272,000 has been paid and is in construction in progress at year-end. Note 7. Deposits Deposits at December 31 were as follows: 2005 2004 ------------------------------ Demand and NOW accounts: Noninterest-bearing $ 12,185,910 $ 10,943,912 Interest-bearing 49,241,951 47,282,051 Savings accounts 27,047,780 28,586,120 Money market savings 44,841,368 45,993,670 Certificates of deposit 201,020,574 183,527,978 ------------------------------ $334,337,583 $316,333,731 ============================== At December 31, 2005, scheduled maturities of certificates of deposit were as follows: Year ending December 31: 2006 $106,716,993 2007 57,729,061 2008 14,243,480 2009 12,550,220 2010 9,780,820 -------------- $201,020,574 ============== 45 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- Interest expense on deposits consisted of the following: Years Ended December 31, --------------------------------------------------- 2005 2004 2003 --------------------------------------------------- NOW accounts $ 88,167 $ 79,732 $ 125,078 Savings accounts 90,916 90,586 148,651 Money market savings 972,667 462,738 258,090 Certificates of deposit 6,743,170 6,323,613 7,317,767 --------------------------------------------------- $ 7,894,920 $ 6,956,669 $ 7,849,586 =================================================== The aggregate amounts of certificates of deposit in excess of $100,000 were $28,247,725 and $19,468,295 as of December 31, 2005 and 2004, respectively. Note 8. Borrowed Funds Borrowed funds at December 31, 2005 included miscellaneous borrowings of $8,495 and borrowings from the Federal Home Loan Bank of Des Moines (FHLB) as follows:
Weighted- Stated Average Maturity Interest Rate Amount Features ----------------------------------------------------------------------------------------------------- 2006 4.36 21,000,000 Includes $1.0 million variable rate, renewable daily 2007 4.09 26,500,000 2008 4.63 26,500,000 Includes $9.0 million callable, various dates in 2006 2009 4.49 3,500,000 2010 5.61 21,500,000 Includes $17.5 million callable, various dates in 2006 2011 4.83 3,000,000 All callable, January, 2006 2018 3.83 435,248 15-year amortizing, repayable 2008 --------------------------------- 4.64 $102,435,248 =================================
At December 31, 2005, 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% (6.14% at December 31, 2005) and matures October 1, 2006. There were no borrowings outstanding at December 31, 2005. Borrowed funds at December 31, 2004 included miscellaneous borrowings of $12,801 and borrowings from the FHLB of $100,961,894. Such borrowings carried a weighted-average interest rate of 4.42% with maturities ranging from 2005 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, 2005, retained earnings contains 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, --------------------------------------------------- 2005 2004 2003 --------------------------------------------------- Current $ 2,650,564 $ 2,574,610 $ 2,722,041 Deferred (151,064) (78,659) (1,475) --------------------------------------------------- $ 2,499,500 $ 2,495,951 $ 2,720,566 =================================================== 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, 2005 and 2004: 2005 2004 -------------------------- Deferred tax assets: Unearned shares, employee stock ownership plan $ 2,000 $ 11,000 Allowance for loan losses 1,240,000 1,212,000 Unrealized losses on securities available-for-sale 9,000 309,000 Impairment of real estate owned 66,000 - Deferred directors fees and compensation 44,000 43,000 Deferred income 111,000 109,000 Accrued expenses 40,000 37,000 Dividends on employee stock ownership plan 66,000 58,000 Other 23,000 30,939 Impairment on available-for-sale securities 253,000 - -------------------------- Total gross deferred tax assets 1,854,000 1,809,939 Valuation allowance (231,000) - -------------------------- Net deferred tax assets 1,623,000 1,809,939 -------------------------- Deferred tax liabilities: Federal Home Loan Bank stock dividend 22,000 28,000 Premises and equipment 211,000 238,000 Title plant 222,000 201,000 Loans acquired - 2,000 Investments acquired 3,000 7,000 Servicing rights 110,000 128,000 Other 101,324 103,327 ------------------------- Total gross deferred tax liabilities 669,324 707,327 ------------------------- Net deferred tax assets $ 953,676 $ 1,102,612 ========================== The valuation allowance for deferred tax assets at December 31, 2005 was $231,000. The net change in the valuation allowance for the year ended December 31, 2005 was an increase of $231,000. 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, -------------------------------------------------------------------------------- 2005 2004 2003 ------------------------- --------------------------- -------------------------- Percent Percent Percent of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income ------------------------------------------------------------------------------- Income before income taxes $ 2,554,837 34.0% $ 2,684,158 34.0% $ 2,913,452 34.0% Nontaxable income (142,790) (1.9) (144,088) (1.8) (149,455) (1.7) State income tax, net of federal income tax benefit 146,322 2.0 189,844 2.4 217,337 2.5 State tax credit, net of federal income tax benefit - - - - (109,720) (1.3) Low-income housing tax credit (278,468) (3.7) (278,468) (3.5) (237,441) (2.8) Increase to valuation allowance 231,000 3.1 - - - - Other (11,401) (0.2) 44,505 0.5 86,393 1.0 ------------------------------------------------------------------------------- $ 2,499,500 33.3% $ 2,495,951 31.6% $ 2,720,566 31.7% ===============================================================================
Note 10. Employee Benefit Plans Retirement plans: The Bank participates in a multiemployer defined benefit pension plan covering substantially all full-time 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 $566,000, $404,000 and $278,400 pension expense for the years ended December 31, 2005, 2004 and 2003, 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, 2005 and 2004. 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 $254,711, $328,075 and $548,947 for the years ended December 31, 2005, 2004 and 2003, respectively. Shares of the Company's common stock held by the ESOP at December 31, 2005 and 2004 are as follows: 2005 2004 ------------------------- Allocated shares 166,159 159,491 Unreleased (unearned) shares 1,570 8,118 ------------------------- 167,729 167,609 ========================= Fair market value of unreleased (unearned) shares $ 59,754 $ 336,816 ========================= 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 is scheduled to expire in 2006. 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, 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 Granted 22,500 39.01 Forfeited (200) 22.52 Exercised (28,105) 15.63 ---------------------------- Outstanding, December 31, 2005 102,600 $ 25.90 ============================ Options exercisable 76,100 $ 23.15 ============================ Remaining shares available for grant 35,105 ========== As of December 31, 2005, the 102,600 options outstanding under the Plan have exercise prices between $12.38 and $41.49. The weighted average fair value per option of options granted during the years ended December 31, 2005, 2004 and 2003 were $6.55, $7.63 and $6.90, respectively. Employment agreements: The Company and the Bank have entered into employment agreements with key officers. Under the terms of the agreements, the officers are 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, 2005, 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 I risk-based and Tier I 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, 2005: Total Capital (to risk- weighted assets) $ 38,361 11.9% $ 25,882 8.0% $ 32,353 10.0% Tier I Capital (to risk- weighted assets) 35,084 10.8 12,942 4.0 19,412 6.0 Tier I (Core) Capital (to adjusted assets) 35,084 7.3 14,419 3.0 24,031 5.0 Tangible Capital (to adjusted assets) 35,084 7.3 7,210 1.5 - - As of December 31, 2004: Total Capital (to risk- weighted assets) $ 36,464 11.7% $ 24,847 8.0% $ 31,059 10.0% Tier I 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 - -
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:
2005 2004 2003 ---------------------------------------------- Advertising and promotion $ 433,631 $ 449,928 $ 467,759 Professional fees 424,418 230,300 188,093 Printing, postage, stationery and supplies 411,657 417,760 445,609 Checking account charges 275,001 296,636 303,139 Insurance 172,987 153,712 129,875 OTS general assessment 106,105 98,756 93,455 Telephone 132,932 132,844 133,744 Apartment operating costs 325,913 336,910 335,098 Employee costs 113,897 123,440 132,632 ATM expense 396,755 388,872 301,205 Other 936,625 497,561 486,175 ---------------------------------------------- $ 3,729,921 $ 3,126,719 $ 3,016,784 ==============================================
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 of financial condition risk for commitments to extend credit is as follows:
Contract or Notional Amount -------------------------------- December 31, -------------------------------- 2005 2004 -------------------------------- Mortgage loans (including one- to four-family, multifamily and commercial loans) $ 2,537,014 $ 3,994,667 Undisbursed overdraft loan privileges and undisbursed home equity lines of credit 5,518,248 3,878,024
At December 31, 2005, the mortgage loan commitments above were comprised of variable-rate commitments carrying a weighted-average interest rate of 6.38% and fixed-rate commitments carrying a weighted-average interest rate of 6.19%. 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 $143,101,000 of the Bank's first mortgage loan portfolio at December 31, 2005 consisted of loans purchased or originated outside the state of Iowa. Concentrations by state include California with $23,960,000, Washington with $22,107,000 and Wisconsin with $15,272,000. 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, 2005 and 2004 were as follows:
2005 2004 --------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------------------------------------------------------------------- (nearest 000) (nearest 000) Financial assets: Cash $ 8,639,672 $ 8,640,000 $ 7,918,179 $ 7,918,000 Securities 15,457,942 15,458,000 18,061,721 18,062,000 FHLB stock 5,250,100 5,250,100 5,045,000 5,045,000 Loans, net 430,278,191 427,343,000 407,316,318 409,789,000 Loans held for sale 737,838 738,000 904,127 924,000 Accrued interest receivable 2,146,102 2,146,000 1,953,602 1,954,000 Financial liabilities: Deposits 334,337,583 335,902,000 316,333,731 320,991,000 Borrowed funds 102,443,743 102,762,000 100,974,695 103,735,000 Accrued interest payable 219,637 220,000 154,151 154,000
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:
2005 2004 2003 -------------------------------------------------- Numerator, income available to common stockholders $ 5,014,726 $ 5,398,631 $ 5,848,410 ================================================== Denominator: Weighted-average shares outstanding 1,529,683 1,567,232 1,610,209 Less unallocated ESOP shares 5,627 12,903 26,641 ------------------------------------------------- Weighted-average shares outstanding - basic 1,524,056 1,554,329 1,583,568 Dilutive effect of stock options 42,792 62,360 95,478 ------------------------------------------------- Weighted-average shares outstanding - assuming dilution 1,566,848 1,616,689 1,679,046 ================================================== Basic earnings per common share $ 3.29 $ 3.47 $ 3.69 Earnings per common share-assuming dilution 3.20 3.34 3.48
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, 2005 and 2004 2005 2004 ---------------------------- ASSETS Cash $ 272,291 $ 284,702 Securities available-for-sale 7,319 6,750 Loans receivable, net 3,476,513 2,305,000 Investment in First Federal Savings Bank of Iowa 40,961,967 39,300,688 Deferred taxes 1,311 1,996 Prepaid and other assets -- 17,702 ------------ ------------ Total assets $ 44,719,401 $ 41,916,838 ============ ============ LIABILITIES AND EQUITY LIABILITIES Dividend payable $ 438,684 $ 382,632 Accrued expenses and other liabilities 2,217 -- ------------ ------------ Total liabilities 440,901 382,632 ------------ ------------ EQUITY Common stock 15,077 15,305 Additional paid-in capital 18,447,059 18,681,041 Retained earnings 25,847,345 23,438,369 Unearned shares, employee stock ownership plan (15,697) (81,200) Accumulated other comprehensive (loss) (15,284) (519,309) ------------ ------------ Total equity 44,278,500 41,534,206 ------------ ------------ Total liabilities and equity $ 44,719,401 $ 41,916,838 ============ ============ 57 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- Statements of Income Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003 --------------------------------------------------- Operating income: Equity in net income of subsidiary $ 5,033,977 $ 5,431,875 $ 5,897,750 Interest income 197,934 113,677 63,516 --------------------------------------------------- 5,231,911 5,545,552 5,961,266 --------------------------------------------------- Operating expenses: Salaries and employee benefits 17,100 17,750 19,800 Other 218,085 129,459 122,077 --------------------------------------------------- 235,185 147,209 141,877 --------------------------------------------------- Income before income tax (benefit) 4,996,726 5,398,343 5,819,389 Income tax (benefit) (18,000) (288) (29,021) --------------------------------------------------- Net income $ 5,014,726 $ 5,398,631 $ 5,848,410 ===================================================
58 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- Statements of Cash Flows Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003 ------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,014,726 $ 5,398,631 $ 5,848,410 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of First Federal Savings Bank of Iowa (5,033,977) (5,431,875) (5,897,750) Dividends received from First Federal Savings Bank of Iowa 4,375,000 4,500,000 5,750,000 Change in deferred income taxes (242,782) (553,357) (458,243) Change in assets and liabilities: Prepaid expenses and other assets 17,702 (17,702) 108,269 Accrued expenses and other liabilities 2,217 (35,872) 32,370 ------------------------------------------------ Net cash provided by operating activities 4,132,886 3,859,825 5,383,056 ------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES, net (increase) decrease in loans receivable (1,171,513) 1,531,000 (2,345,000) ------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury stock (1,947,168) (5,359,307) (3,234,239) Proceeds from issuance of common stock 682,385 1,560,910 1,248,230 Dividends paid (1,709,001) (1,492,961) (1,277,432) ------------------------------------------------ Net cash (used in) financing activities (2,973,784) (5,291,358) (3,263,441) ------------------------------------------------ Net increase (decrease) in cash (12,411) 99,467 (225,385) CASH Beginning 284,702 185,235 410,620 ------------------------------------------------ Ending $ 272,291 $ 284,702 $ 185,235 ================================================
59 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements -------------------------------------------------------------------------------- Note 19. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2005 ----------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------- (In thousands, except per share amounts) Interest income $ 6,308 $ 6,588 $ 6,624 $ 6,752 Interest expense 2,896 3,082 3,261 3,368 ----------------------------------------------------------- Net interest income 3,412 3,506 3,363 3,384 Provision for loan losses 50 70 60 80 ----------------------------------------------------------- Net interest income after provision for loan losses 3,362 3,436 3,303 3,304 ----------------------------------------------------------- Noninterest income: Fees and service charges 831 990 1,629 1,033 Abstract fees 276 341 375 298 Provision for impairment of securities available-for-sale (255) (425) - - Mortgage banking income 41 76 94 78 Other income 296 312 320 238 ----------------------------------------------------------- Total noninterest income 1,189 1,294 2,418 1,647 ----------------------------------------------------------- Noninterest expense: Compensation and employee benefits 1,579 1,607 1,711 1,763 Premises and equipment 350 354 366 382 Data processing 142 146 163 146 Other 851 920 895 1,064 ----------------------------------------------------------- Total noninterest expense 2,922 3,027 3,135 3,355 ----------------------------------------------------------- Income before income taxes 1,629 1,703 2,586 1,596 Provision for income taxes 553 671 839 436 ----------------------------------------------------------- Net income $ 1,076 $ 1,032 $ 1,747 $ 1,160 =========================================================== Basic earnings per common share $ 0.70 $ 0.67 $ 1.14 $ 0.77 =========================================================== Diluted earnings per common share $ 0.68 $ 0.65 $ 1.11 $ 0.75 ===========================================================
60 North Central Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements --------------------------------------------------------------------------------
Year Ended December 31, 2004 ----------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------- (In thousands, except per share amounts) Interest income $ 6,080 $ 6,145 $ 6,234 $ 6,298 Interest expense 2,817 2,803 2,859 2,888 ----------------------------------------------------------- Net interest income 3,263 3,342 3,375 3,410 Provision for loan losses 60 50 75 55 ----------------------------------------------------------- Net interest income after provision for loan losses 3,203 3,292 3,300 3,355 ----------------------------------------------------------- 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 325 326 281 288 ----------------------------------------------------------- Total noninterest income 1,437 1,637 1,512 1,473 ----------------------------------------------------------- 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 767 757 775 828 ----------------------------------------------------------- Total noninterest expense 2,848 2,740 2,781 2,946 ----------------------------------------------------------- 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 common share $ 0.77 $ 0.95 $ 0.90 $ 0.85 =========================================================== Diluted earnings per common share $ 0.73 $ 0.91 $ 0.87 $ 0.83 ===========================================================
61 MANAGEMENT OF THE HOLDING COMPANY AND THE BANK The Board of Directors of the Company is divided into three classes, each of which contains approximately one-third of the Board. The Bylaws of the Company currently authorize seven directors. Currently, all directors of the Company are also directors of the Bank. Continuing Directors Randall L. Minear is the President 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. 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, Iowa. From 1993 to 2004, he was the President and Chief Executive Officer of Principal Residential Mortgage, Inc., a wholly-owned subsidiary of The Principal Financial Group. Nominees for Election as Directors David M. Bradley, CPA is Chairman of the Board, President and Chief Executive Officer. Robert H. Singer, Jr. is 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. Executive Officers Who are Not Directors or Nominees Jean L. Lake is Secretary of the Company and the Bank. David W. Edge, CPA is Chief Financial Officer and Treasurer of the Company and the Bank. Kirk A. Yung is Senior Vice President of the Company and the Bank. 62 SHAREHOLDER INFORMATION Price Range of the Company's Common Stock The Company's common stock trades on The NASDAQ National Market 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 ------------- ---- --- --------- 2005 ---- First Quarter........ 41.98 38.93 0.29 Second Quarter....... 40.95 37.30 0.29 Third Quarter........ 39.50 37.60 0.29 Fourth Quarter....... 39.12 37.70 0.29 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 $38.90 as of March 6, 2006. Information Relating to the Company's Common Stock As of March 6, 2006, the Company had 1,236 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 1,445,053 shares of the Common Stock were outstanding. The Company's current quarterly dividend is $0.33 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 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 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 Company is subject to the requirements of Iowa law, which prohibit the Company from paying a dividend if, after giving it effect, either of the following would result: (a) the Company would not be able to pay its debts as they become due in the usual course of business; or (b) the Company's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the 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. 63 Annual Meeting The Annual Meeting of Shareholders of the Company will be held at 10:00 a.m., Central Time, Friday, April 28, 2006 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 c/o First Federal Savings Bank of Iowa symbol "FFFD" on The NASDAQ 825 Central Avenue National Market Fort Dodge, Iowa 50501 (515) 576-7531 www.firstfederaliowa.com General Counsel Independent Auditor Johnson, Erb, Bice, Kramer, Good & McGladrey & Pullen, LLP Mulholland, P.C. 400 Locust Street, Suite 640 809 Central Avenue Des Moines, Iowa 50309 Fort Dodge, Iowa 50501 Special Counsel Transfer Agent Thacher Proffitt & Wood LLP Computershare Investor Services 1700 Pennsylvania Avenue, N.W., Suite 800 350 Indiana Street, Suite 800 Washington, D.C. 20006 Golden, Colorado 80401 www.tpw.com (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, 2005 will be furnished without charge to shareholders of record as of March 6, 2006 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 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. 64