-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O+U6If7rt/p2yTP/mivGyQqHuSHjYK6RPX90GdF18m5B0Ga5DttziYsH4kt/FRuA /yax72YCsLWKZ+s0jH5xFQ== 0000950131-97-002274.txt : 19970401 0000950131-97-002274.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950131-97-002274 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH CENTRAL BANCSHARES INC CENTRAL INDEX KEY: 0001005188 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 421449849 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-27672 FILM NUMBER: 97570135 BUSINESS ADDRESS: STREET 1: 825 CENTRAL AVE STREET 2: C/O FIRST FED SAVINGS BANK OF FT DODGE CITY: FORT DODGE STATE: I0 ZIP: 50501 BUSINESS PHONE: 5155767531 MAIL ADDRESS: STREET 1: 825 CENTRAL AVENUE CITY: FORT DODGE STATE: IA ZIP: 50501 10-K405 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to COMMISSION FILE NO. 0-27672 NORTH CENTRAL BANCSHARES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) IOWA 421449849 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER) C/OFIRST FEDERAL SAVINGS BANK OF FORT DODGE 825 CENTRAL AVENUE, FORT DODGE, IOWA 50501 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) (515) 576-7531 (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] As of March 20, 1997, there were issued and outstanding 3,429,455 shares of the Registrant's Common Stock. The aggregate value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of the Common Stock as of February 28, 1997 $48,693,235. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL North Central Bancshares, Inc. (the "Holding Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Fort Dodge (the "Bank"), a federally chartered savings bank. Collectively, the Holding Company and the Bank are referred to herein as the "Company." The Holding Company was organized on December 5, 1995 at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock to be issued by the Bank in connection with the conversion and reorganization of the Bank and North Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding company structure (these transactions are collectively referred to as the "Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding Company issued an aggregate of 4,011,057 shares of its Common Stock, par value $0.01 per share, of which 1,385,590 shares were issued in exchange for all of the Bank's issued and outstanding shares, except for shares owned by the MHC which were cancelled, and 2,625,467 shares of which were sold in Subscription and Community Offerings at a price of $10.00 per share, with gross proceeds amounting to $26,254,670. At this time, the Holding Company conducts business as a unitary savings and loan holding company and the principal business of the Holding Company consists of the operation of its wholly-owned subsidiary, the Bank. The Holding Company's executive offices are located at the home office of the Company at 825 Central Avenue, Fort Dodge, Iowa. The Holding Company's telephone number is (515) 576-7531. FIRST FEDERAL SAVINGS BANK OF FORT DODGE The Bank is a federally chartered savings bank that conducts its operations from its main office located in Fort Dodge, Iowa and three branch offices located in Fort Dodge, Nevada and Ames, Iowa. The Bank is the successor to First Federal Savings and Loan Association of Fort Dodge, which was chartered originally in 1954, and on May 7, 1987 became a federally chartered savings bank. The Bank is a community-oriented savings institution that is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such deposits in one- to four-family residential real estate mortgages and multifamily mortgages and, to a lesser extent, secured and unsecured consumer loans, with emphasis on second mortgage loans. The Bank's deposits are insured by the FDIC under the SAIF. The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1954. At December 31, 1996, the Bank had total assets of $203.1 million, total deposits of $129.7 million, and total shareholders' equity of $49.2 million. The Bank's principal executive office is located at 825 Central Avenue, Fort Dodge, Iowa and its telephone number at that address is (515) 576-7531. MARKET AREA AND COMPETITION The Company is an independent savings institution serving its primary market area of Webster and Story Counties, which are located in the central and north central part of the State of Iowa. The Company's market area is influenced by agriculture as well as gypsum mining, retail sales, professional services and public education. The Company is headquartered in Fort Dodge, the Webster County seat, where it operates two Company locations. The Company's Nevada branch operates in the city of Nevada, Iowa, the county seat for Story County. Nevada is located close to Ames, the location of Iowa State University, and is also located 35 miles from Des Moines, the state capital. The Company's Ames branch operates in the city of Ames, Iowa and is also located 30 miles from Des Moines. Fort Dodge has become a strong retail center for North Central Iowa and Nevada and Ames are significantly influenced by the proximity of Iowa State University and certain Iowa state government agencies. Major employers and industries within the Company's market area include Trinity Regional Hospital, Iowa Central Community College, Iowa State University, Iowa Department of Transportation, Fort Dodge Animal Health, Celotex, U.S. Gypsum and Goldbond (gypsum mining companies), Decker Trucking Company, Smithway Trucking Company, and Donnelley Marketing Company. Construction is underway on a 750 bed prison which will employ approximate 300 people in Fort Dodge, Iowa. In the early- to mid-1980s, Fort Dodge lost a substantial number of jobs when certain major employers in the area closed or reduced operations and staff. In addition, the Iowa economy generally suffered as commodities prices declined. Urban and rural real estate prices declined and farm-related bankruptcies and foreclosures increased. The population of Webster County and Fort Dodge declined during the period as well. The cities of Nevada and Ames, and Story County generally, were less affected during this period due to the stability of Iowa State University and the status of Nevada as the county seat for Story County. The population of Story County actually increased during the 1980s while the population of the State of Iowa decreased as a whole. Since approximately 1988, rural land prices and residential real estate prices in Fort Dodge have increased as the overall economy has recovered and Fort Dodge's economic base became more diversified. The unemployment rate for Webster County as of December 1996 was 3.7%, compared to the national rate of 5.3% and the State of Iowa rate of 3.6%. The unemployment rate for Story County was 2.5%. The Nevada, Iowa and Ames, Iowa markets have been a source of loan and depositor growth for the Company in recent periods, and the Company expects to continue to pursue lending and deposit growth opportunities in these markets. However, due to the reduced loan demand in the Company's overall market area, increased competition, and the Company's decision to diversify its loan portfolio, the Company has originated and purchased loans (primarily multifamily loans) from out of state. The Company intends to continue such originations and purchases pursuant to its underwriting standards for Company- originated loans. The Company encounters strong competition both in attracting deposits and in originating real estate and other loans. Its most direct competition for deposits has historically come from commercial and savings banks, other savings associations, and credit unions in its market area. Competition for loans comes from such financial institutions as well as mortgage banking companies. The Company expects continued strong competition in the foreseeable future. Many such institutions have greater financial and marketing resources available to them than does the Company. The Company competes for savings deposits by offering depositors a high level of personal service and a wide range of competitively priced financial products. In recent years, additional strong competition has come from stock and bond dealers and brokers and in particular, mutual funds. The Company competes for real estate loans primarily through the interest rates and loan fees it charges and advertising, as well as by offering high levels of personal service. LENDING ACTIVITIES Loan Portfolio Composition. The principal components of the Company's loan portfolio are fixed- and adjustable-rate first mortgage loans secured by one- to-four family owner-occupied residential real estate, fixed- and adjustable- rate first mortgage loans secured by multifamily residential real estate and, to a lesser extent, secured and unsecured consumer loans, with emphasis on second mortgage loans. At December 31, 1996, the Company's net loans receivable totalled $165.8 million, of which $106.0 million, or 64.0% were one-to-four family residential real estate first mortgage loans, and $38.1 million, or 22.9%, were other first mortgage loans, primarily purchased multifamily and commercial real estate loans. Consumer loans, consisting primarily of automobile loans and second mortgage loans, totalled $21.7 million, or 13.1% of the Company's net loan portfolio. Savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, in the aggregate not exceeding 10% of unimpaired capital and surplus, if any such loan or extension of credit is fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. For the year ended December 31, 1996, it was the Company's policy to limit loans to one borrower to $1.25 million. Subsequent to fiscal year end 1996, this limit was increased to $1.5 million. Any exceptions to this policy are made on a case by case basis and only with approval of the Company's Board of Directors. At December 31, 1996, the Company's largest aggregate amount of loans to one borrower was $1.25 million and the second largest borrower had an aggregate balance of $999,000, both of which were first mortgage multifamily residential real estate loans and both were performing as of that date. 2 Analysis of Loan Portfolio. Set forth below are selected data relating to the composition of the Company's loan portfolio by type of loan as of the dates indicated:
AT DECEMBER 31, ----------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------------- ----------------- ----------------- ----------------- ----------------- PERCENT PERCENT PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) First mortgage loans: One-to-four family residential(1)........ $107,168 64.62% $ 94,876 64.16% $ 84,203 67.48% $ 76,843 65.70% $ 72,151 65.38% Multifamily............ 34,488 20.80 31,622 21.38 21,474 17.21 22,490 19.23 22,372 20.27 Commercial............. 5,225 3.15 5,825 3.94 6,163 4.94 6,472 5.53 6,212 5.63 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total first mortgage loans................. 146,881 88.57% 132,323 89.48% 111,840 89.63% 105,805 90.46% 100,735 91.28% -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Consumer loans: Automobiles............ 4,155 2.51% 2,967 2.01% 2,889 2.31% 1,993 1.70% 1,810 1.64% Second mortgage(2)..... 15,303 9.23 13,284 8.98 10,735 8.60 8,481 7.25 6,862 6.22 Other(3)............... 2,582 1.56 2,736 1.85 3,127 2.51 3,818 3.26 4,010 3.63 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total consumer loans... 22,040 13.30 18,987 12.84 16,751 13.42 14,292 12.22 12,682 11.49 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans receivable. 168,921 101.87% 151,310 102.32% 128,591 103.05% 120,097 102.68% 113,417 102.77% Less: Undisbursed portion of construction loans.... 371 0.22% 782 0.53% 1,048 0.84 309 0.26 277 0.25 Unearned loan discount. 525 0.32% 682 0.46% 1,013 0.81 1,368 1.17 1,639 1.49 Net deferred loan origination fee....... 241 0.15% 238 0.16% 203 0.16 148 0.13 64 0.06 Allowance for loan losses................ 1,953 1.18% 1,736 1.17% 1,543 1.24 1,305 1.12 1,077 0.98 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans receivable, net................... $165,831 100.00% $147,872 100.00% $124,784 100.00% $116,967 100.00% $110,360 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
- -------- (1) Includes interest-only construction loans that convert to permanent loans. (2) Second mortgage loans included $862,000, $724,000, $403,000, $362,000 and $294,000 (in actual dollars) of nonowner-occupied residential first mortgage loans at December 31, 1996, 1995, 1994, 1993 and 1992 respectively. (3) Other consumer loans included $213,000, $299,000, $499,000, $770,000 and $933,000 (in actual dollars) of commercial mortgage loans at December 31, 1996, 1995, 1994, 1993 and 1992 respectively. Loan Maturity Schedule. The following table sets forth the maturity or period of repricing of the Company's loan portfolio at December 31, 1996. Overdraft lines of credit and overdrafts are reported as due in one year or less. Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than in which they contractually mature, and fixed rate loans are included in the period in which the final contractual repayment is due.
AT DECEMBER 31, 1996 ---------------------------------------------------------- WITHIN 1-3 3-5 5-10 10-20 BEYOND 20 1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL ------- ------- ------- ------- ------- --------- -------- (IN THOUSANDS) First mortgage loans: One-to-four family residential(1)........ $21,435 $ 8,603 $21,953 $42,185 $12,206 $786 $107,168 Multifamily............ 13,872 3,217 7,971 7,980 1,448 -- 34,488 Commercial............. 2,802 639 771 518 495 -- 5,225 Consumer loans(2)....... 2,154 6,893 12,359 620 14 -- 22,040 ------- ------- ------- ------- ------- ---- -------- Total................ $40,263 $19,352 $43,054 $51,303 $14,163 $786 $168,921 ======= ======= ======= ======= ======= ==== ========
- -------- (1) One-to-four family loans include $64.2 million of 7 year fixed rate loans that convert to adjustable rates at the beginning of the eighth year and are annually adjustable thereafter. $38.8 million of these loans have been classified as fixed rate loans and $25.4 million have been classified as adjustable rate loans. (2) Includes second mortgage loans of $15.2 million at December 31, 1996. 3 The following table sets forth the dollar amounts of all fixed rate and adjustable rate loans in each loan category at December 31, 1996 due after December 31, 1997.
DUE AFTER DECEMBER 31, 1997 --------------------------- FIXED ADJUSTABLE TOTAL ------- ---------- -------- (IN THOUSANDS) First mortgage loans: One-to-four family residential(1)................ $55,704 $30,029 $ 85,733 Multifamily...................................... 8,245 12,371 20,616 Commercial....................................... 793 1,630 2,423 Consumer loans(2).................................. 19,886 -- 19,886 ------- ------- -------- Total.......................................... $84,628 $44,030 $128,658 ======= ======= ========
- -------- (1) One-to-four family loans include $64.2 million of 7 year fixed rate loans that convert to adjustable rates at the beginning of the eighth year and are annually adjustable thereafter. $38.8 million of these loans have been classified as fixed rate loans and $25.4 million have been classified as adjustable rate loans. (2) Includes second mortgage loans of $15.2 million at December 31, 1996. One-to-Four Family Residential Real Estate Loans. The Company's primary lending activity consists of the origination of fixed- and adjustable-rate one-to-four family owner-occupied residential first mortgage loans, substantially all of which are collateralized by properties located in the Company's market area. The Company also originates one-to-four family, interest only construction loans that convert to permanent loans after an initial construction period that generally does not exceed nine months. At December 1996, 52.0% of the Company's residential real estate loans had fixed rates, and 48.0% had adjustable rates. The Company is a portfolio lender and generally does not sell loans in the secondary mortgage market. However, the Company's one-to-four family, fixed- rate, residential real estate loans generally are originated and underwritten according to standards that qualify such loans to be included in Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") purchase and guarantee programs and that otherwise permit resale in the secondary mortgage market. By action of the Board of Directors, on a case- by-case basis, the Company has sold fixed-rate loans with maturities equal to or in excess of 15 years, servicing retained, in the secondary mortgage market. For the year ended December 31, 1996, no one-to-four family loans were sold. One-to-four family loans are underwritten and originated according to policies approved by the Board of Directors. Originations of one-to-four family fixed-rate first mortgage loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, the Company's interest rate gap position, and loan products offered by the Company's competitors. The Company's one-to-four family fixed-rate first mortgage loans amortize on a monthly basis with principal and interest due each month. To make the Company's fixed-rate loan portfolio more interest rate sensitive, the Company currently emphasizes the origination of fixed-rate loans with terms of 15 years or less. The Company also offers 7-year fixed-rate first mortgage loans that convert to adjustable- rate loans that adjust on an annual basis after the initial fixed rate term. The overall maturity of these loans may be up to 30 years. The Company determines whether a customer qualifies for these loans based upon the initial fixed interest rate. The Company's adjustable rate mortgage, or "ARM loans," are generally originated for terms of up to 30 years, with interest rates that adjust annually. The Company establishes various annual and life-of-the-loan caps on ARM loan interest rate adjustments. Currently, the Company offers ARM loans with annual rate caps of 1.5% and maximum life-of-loan caps of 11.95%. Prior to 1995, the Company's ARM loans originated for retention in its portfolio generally were based on the 11th District Cost of Funds Index, a lagging market index. The interest rate on its ARM loans is calculated by using the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year. The Company currently offers one-year ARM loans with initially discounted rates, often known as "teaser rates." The Company determines whether a borrower qualifies for an 4 ARM loan based on the fully indexed rate of the ARM loan at the time the loan is originated, rather than the introductory or "teaser" rate or the maximum life-of-the rate to which the loan could adjust. In addition, the Company establishes floors for each loan originated below which the loan may not adjust. One-to- four family residential ARM loans totalled $51.4 million, or 31.0%, of the Company's total net loan portfolio at December 31, 1996. The primary purpose of offering ARM loans is to make the Company's loan portfolio more interest rate sensitive. ARM loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase. It is possible, therefore, that during periods of rising interest rates, the risk of default on ARM loans may increase due to the upward adjustment of interest costs to the borrower. Management believes that the Company's credit risk associated with its ARM loans is reduced because of the annual and lifetime interest rate adjustment limitations on such loans, although such limitations do create an element of interest rate risk. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset and Liability Management--Interest Rate Sensitivity Analysis." The Company's one-to-four family residential first mortgage loans customarily include due-on-sale clauses, which are provisions giving the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan. Due-on-sale clauses are an important means of adjusting the rates on the Company's fixed rate mortgage loan portfolio, and the Company has generally exercised its rights under these clauses. Regulations limit the amount that a savings institution may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal at the time of loan origination. Such regulations permit a maximum loan-to-value ratio of 100% for residential property and 90% for all other real estate loans. The Company's lending policies limit the maximum loan-to- value ratio on mortgage loans without private mortgage insurance to 80% of the lesser of the appraised value or the purchase price of the property to serve as collateral for the loan. The Company generally makes one-to-four family first real estate loans with loan-to-value ratios of up to 90%; however, for one-to-four family real estate loans with loan-to-value ratios greater than 80%, the Company requires the loan amount to be covered by private mortgage insurance. The Company requires fire and casualty insurance, flood insurance, where applicable, an abstract of title, and a title opinion on all properties securing real estate loans originated by the Company. Multifamily Residential and Commercial Real Estate Loans. The Company's loan portfolio contains loans secured by multifamily residential and commercial real estate. Such loans constituted approximately $39.7 million, or 23.9%, of the Company's total net loan portfolio at December 31, 1996. Of such loans, $37.4 million, or 94.0%, were purchased or originated by the Company and were secured by properties outside the State of Iowa (the "out of state" properties). There were no multifamily residential or commercial real estate loans greater than 30 days past due at December 31, 1996. These loans are primarily secured by multi-family residences, such as apartment buildings and by commercial facilities such as office buildings and retail buildings. Multifamily residential real estate loans are offered with fixed and adjustable rates and are structured in a number of different ways depending upon the circumstances of the borrower and the type of multifamily project. Fixed rate loans generally amortize over 15 to 30 years, and generally contain call provisions permitting the Company to require that the entire principal balance be repaid at the end of five to fifteen years. Such loans are priced as five to fifteen year loans with loan-to-value ratios of no more than 80%. See "--Purchased or Out of State Originated Loans." All purchased or out of state originated loans in excess of $200,000 are approved by the Chief Executive Officer and the Board of Directors and are subject to the same underwriting standards as for loans originated by the Company. All purchased or out of state originated loans less than $200,000 are approved by the Chief Executive Officer and are subject to the same underwriting standards as loans originated by the Company. Before a loan is purchased, the Company obtains a copy of the original loan application, certified rent rolls, the original title insurance policy and personal financial statements of any guarantors of the loan. An executive officer or director of the Company also makes a personal inspection of the property securing the loan. Such purchases are 5 made without recourse. Generally, the originating financial institution or mortgage banker continues to service the loans, remitting principal and interest to the Company. The Company generally imposes a $1.25 million limit on the aggregate size of multifamily and commercial loans to any one borrower. This limit has been increased to $1.5 million as of February 28, 1997. Any exceptions to the limit must be specifically approved by the Board of Directors on a loan-by-loan basis within the Company's legal lending limit. See "Regulation--Regulation of Federal Savings Associations--Loans to One Borrower." Loans secured by multifamily and commercial real estate generally involve a greater degree of credit risk than single-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multifamily and commercial real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from such real estate projects are reduced, the borrower's ability to repay the loan may be impaired. Consumer Loans, Including Second Mortgage Loans. The Company also originates consumer loans, including second mortgage loans. As of December 31, 1996, second mortgage loans totalled $15.3 million, or 9.2%, of the Company's net total loan portfolio. The Company's second mortgage loans have fixed interest rates and are generally for terms of 3 to 5 years. The Company's second mortgage loans are secured by the borrower's principal residence generally with a maximum loan-to-value ratio, including the principal balances of both the first and second mortgage loans, of no more than 80%. The average principal amount of the Company's second mortgage loans is approximately $11,176. To a lesser extent, the Company also originates loans secured by automobiles, with fixed rates generally on a 80% loan-to-value basis for new cars. All of the Company's automobile loans were originated by the Company, and generally have terms up to five years. The Company also makes other types of consumer loans, primarily unsecured signature loans for various purposes. The minimum loan amount for such loans is $1,000, the maximum loan amount for such loans is $7,500, and the average balance of such loans is approximately $1,934. The Company originates a limited number of commercial business loans, which the Company includes with its consumer loan portfolio for reporting purposes. Such loans may be unsecured and are originated for any business purpose, such as for the purchase of computers and business equipment. The maximum loan amount for such unsecured loans is $7,500. The Company's business plan calls for an increase in consumer lending for the foreseeable future, particularly second mortgage lending. The Company generally expects consumer loan demand will come from its mortgage loan customers. Consumer loans generally provide for shorter terms and higher yields as compared to residential first mortgage loans, but generally carry higher risks of default. At December 31, 1996, however, only $35,000, or 0.16%, of the Company's consumer loan portfolio was on non-accrual status. Loan Originations, Solicitation, Processing, and Commitments. Loan originations are derived from a number of sources such as real estate agent referrals, existing customers, borrowers, builders, attorneys, and walk-in customers. Upon receiving a loan application, the Company obtains a credit report and employment verification to verify specific information relating to the applicant's employment, income, and credit standing. In the case of a real estate loan, an appraiser approved by the Company appraises the real estate intended to collateralize the proposed loan. An underwriter in the Company's loan department checks the loan application file for accuracy and completeness, and verifies the information provided. Pursuant to the Company's written loan policies, all first mortgage loans are approved by the Chief Executive Officer. After the loan is approved, a loan commitment letter is promptly issued to the borrower. The Loan Committee of the Board of Directors meets monthly to review a sampling of all loans originated in the month. 6 If the loan is approved, the commitment letter specifies the terms and conditions of the proposed loan including the amount of the loan, interest rate, amortization term, a brief description of the required collateral, and required insurance coverage. Commitments are typically issued for 60-day periods in the case of loans to refinance, loans to purchase existing real estate, and construction loans. The borrower must provide proof of fire and casualty insurance on the property serving as collateral, which insurance must be maintained during the full term of the loan. An abstract of title along with an attorney's title opinion is required on all first mortgage loans secured by real property in Iowa. At December 31, 1996, the Company had outstanding commitments to originate and purchase $3.1 million of loans. This amount does not include the undisbursed overdraft loan privileges or the unfunded portion of loans in process. Purchased or Out of State Originated Loans. The Company's loan portfolio contains $45.2 million of loan secured by out of state properties. These loans represents 26.8% of the Company's total loan portfolio at December 31, 1996. Substantially all of the multifamily residential and commercial real estate loans in the Company's loan portfolio are purchased or originated out of state by the Company without recourse. At December 31, 1996, approximately $16.2 million of these purchased loans represent loans secured by real estate in the west coast states of California, Oregon and Washington. At that date, the Company's investment in properties located in California totalled $8.8 million and was distributed among two dozen cities. Concentrations of California real estate loans exist in three areas, Los Angeles, Lodi/Stockton and San Diego. Most of these loans were originated from 1973 through 1987 and were purchased by the Company from 1982 to 1988 generally under a 75% loan-to-value guideline. The Company's loans in California were purchased prior to December 31, 1988, and the Company has no plans to purchase or originate loans in the State of California in the immediate future. The downturn in California real estate markets has not adversely impacted the Company. The remainder of the Company's purchased or out of state originated loans are distributed in various states. At December 31, 1996, the Company's multifamily residential and commercial real estate loans had an average balance of $222,000 and the largest loan had a principal balance of $1.25 million. As of December 31, 1996 there were no purchased loans that were on nonaccrual status. To supplement its origination of one-to-four family first mortgage loans, the Company also purchases loans secured by one-to-four family residences out of state. At December 31, 1996, $7.8 million or 4.6% of the Company's total loan portfolio consisted of purchased one-to-four family loans, of which $1.3 million were secured by properties located in California and $3.9 million were secured by properties in Missouri. Loans purchased by the Company entail certain risks not necessarily associated with loans the Company originates. The Company's purchased loans are generally acquired without recourse with servicing retained by the seller or originator of the loans. Although the Company reviews each purchased loan using the Company's underwriting criteria for originations and a Company officer or director performs an on-site inspection of each purchased loan, the Company is dependent on the seller or originator of the loan for ongoing collection efforts and collateral review. In addition, the Company purchases loans with a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates that may differ from those offered at the time by the Company in connection with loans the Company originates. Finally, the market areas in which the properties which secure the purchased loans are located are subject to economic and real estate market conditions that may significantly differ from those experienced in the Company's market area. If economic conditions continue to limit the Company's opportunities to originate loans in its market area, the Company may increase its investment in out of state mortgage loans. There can be no assurance, however, that economic conditions in these out of state areas will not deteriorate in the future resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas. In an effort to reduce the risk of loss on out of state purchased loans, the Company only purchases loans that meet the underwriting policies for loans originated by the Company although specific rates and terms may differ from the rates and terms offered by the Company. The Company also requires appropriate documentation, and personal inspections of the underlying real estate collateral by an executive officer or director prior to purchase. The servicers of the loans conduct annual inspections of the underlying real estate collateral and copies of the reports of such inspections are provided to the Company. Of the total purchased loans in the Company's portfolio as of December 31, 1996, $17.4 million were originated prior to January 1, 1990. 7 Set forth below is a table of the Company's purchased or out of state originated loans by state of origin (including multifamily residential, commercial real estate and one-to-four family first mortgage loans) as of December 31, 1996.
BALANCE AS OF STATE DECEMBER 31, 1996 ----- ----------------- (IN THOUSANDS) California................................ $10,145 Colorado.................................. 10,339 Georgia................................... 227 Illinois.................................. 109 Indiana................................... 779 Kansas.................................... 1,099 Minnesota................................. 723 Missouri.................................. 5,353 Montana................................... 235 Nebraska.................................. 805 Oregon.................................... 6,964 Texas..................................... 561 Utah...................................... 238 Virginia.................................. 144 Washington................................ 873 Wisconsin................................. 6,435 Other..................................... 140 ------- Total................................. $45,169 =======
Origination, Purchase and Sale of Loans. The table below shows the Company's originations, purchases and sales of loans for the periods indicated.
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Total loans receivable at beginning of period....... $151,310 $128,591 $120,097 -------- -------- -------- ORIGINATIONS: First mortgage loans: One-to-four family residential.................... 24,178 19,714 19,014 Multifamily....................................... 3,410 -- 225 Commercial........................................ 235 88 470 Consumer loans: Automobile........................................ 3,962 2,248 2,824 Second mortgage................................... 10,060 9,411 7,620 Other............................................. 2,247 2,199 2,375 -------- -------- -------- Total originations:............................. 44,092 33,660 32,528 LOAN PURCHASES: First mortgage--one-to-four family.................. 3,133 1,848 -- First mortgage--multifamily......................... 4,813 12,655 2,054 LOAN SALES: First mortgage--one-to-four family.................. -- 105 404 First mortgage--multifamily......................... 380 -- -- Consumer loan....................................... 67 -- -- Transfer of mortgage loans to foreclosed real estate............................................. 148 288 7 Repayments.......................................... 33,832 25,051 25,677 -------- -------- -------- Net loan activity................................... 17,611 22,719 8,494 -------- -------- -------- Total loans receivable at end of period............. $168,921 $151,310 $128,591 ======== ======== ========
8 Loan Origination Fees and Other Income. In addition to interest earned on loans, the Company generally receives fees in connection with loan originations. Such loan origination fees, net of costs to originate, are deferred and amortized using an interest method over the contractual life of the loan. Fees deferred are recognized into income immediately upon prepayment of the related loan. At December 31, 1996, the Company had $241,000 of deferred loan origination fees, net. Such fees vary with the type of loans and commitments made. The Company typically charges an origination fee on fixed- and adjustable-rate first mortgage loans. In addition to loan origination fees, the Company also receives other fees, service charges (such as overdraft fees), and other income that consist primarily of deposit transaction account service charges and late charges. The Company recognized fees and service charges of $580,000, $445,000 and $430,000 for the fiscal years ended December 31, 1996, 1995 and 1994 respectively. DELINQUENCIES AND CLASSIFIED ASSETS Delinquencies. The Company's collection procedures provide that when a loan is 15 days past due, a computer-generated late charge notice is sent to the borrower requesting payment, plus a late charge for mortgage loans. If delinquency continues, on the 20th day past due, a telephone call is made to the borrower seeking payment. If the loan is 30 days past due, a delinquent notice is mailed along with a letter advising that the mortgagors are in violation of the terms of their mortgage contract. If a loan becomes 60 days past due, the loan becomes subject to possible legal action. After 90 days, if no satisfactory payment terms are agreed with the borrower, foreclosure proceedings are initiated. To the extent required by the Department of Housing and Urban Development (the "HUD") regulations, generally within 45 days of delinquency, a Section 160 HUD notice is given to the borrower which provides access to consumer counseling services. It is sometimes necessary and desirable to arrange special repayment schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The mortgagors are required to submit a written repayment schedule which is closely monitored for compliance. Under these terms, the account is brought to date, usually within a few months. Nonperforming Assets. Loans are reviewed on a regular basis and are placed on a 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 more than 90 days 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. In general, the Company considers collateral for a loan to be in substance foreclosed if: (i) the borrower has little or no equity in the collateral; (ii) proceeds for repayment of the loan can be expected to come only from the operation or sale of the collateral; and (iii) the borrower has either formally or effectively abandoned control of the collateral to the Company, or retained control of the collateral but is unlikely to be able to rebuild equity in the collateral or otherwise repay the loan in the foreseeable future. Cash flow attributable to in-substance foreclosures is used to reduce the carrying value of the collateral. 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, 1996, the Company's foreclosed real estate consisted of five properties with an aggregate value of $128,000. 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. As of the dates indicated, the Company did not have any material restructured loans within the meaning of SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, and did not have any loans that were ninety days past due and still accruing interest. 9
AT DECEMBER 31, ---------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) NONACCRUAL LOANS AND NONPERFORMING ASSETS: First mortgage loans: One-to-four family residential.................. $149 $137 $299 $ 91 $ 65 Multifamily and commercial properties........... -- -- -- 7 114 Consumer loans.................................... 35 44 25 4 7 ---- ---- ---- ---- ---- Total nonaccrual loans........................ 184 181 324 102 186 Total foreclosed real estate(1)................... 128 128 -- 15 34 Other nonperforming assets........................ 2 109 -- -- -- ---- ---- ---- ---- ---- Total nonperforming assets.................... $314 $418 $324 $117 $220 ==== ==== ==== ==== ==== Total nonaccrual loans to net loans receivable.... 0.11% 0.12% 0.26% 0.09% 0.17% Total nonaccrual loans to total assets............ 0.09 0.10 0.21 0.07 0.13 Total nonperforming assets to total assets........ 0.15 0.23 0.21 0.08 0.15
- -------- (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, ------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (IN THOUSANDS) LOANS PAST DUE 60-89 DAYS: First mortgage loans: One-to-four family residential...................... $323 $311 $288 $522 $308 Multifamily and commercial properties............... -- -- -- -- -- Consumer loans........................................ 51 28 62 1 17 ---- ---- ---- ---- ---- Total past due 60-89 days......................... $374 $339 $350 $523 $325 ==== ==== ==== ==== ====
The following table sets forth information with respect to the Company's delinquent loans and other problem assets at December 31, 1996.
AT DECEMBER 31, 1996 -------------- BALANCE NUMBER ------- ------ (DOLLARS IN THOUSANDS) One-to-four family first mortgage loans: Loans 60 to 89 days delinquent................................. $323 9 Loans 90 days or more delinquent............................... 149 7 Multifamily and commercial first mortgage loans: Loans 60 to 89 days delinquent................................. -- -- Loans 90 days or more delinquent............................... -- -- Consumer loans 60 to 89 days delinquent.......................... 51 11 Consumer loans 90 days or more delinquent........................ 35 8 Foreclosed real estate........................................... 128 5 Other nonperforming assets....................................... 2 1 Loans to facilitate sale of foreclosed real estate............... 218 7 Special mention loans............................................ 439 26
10 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, 1996, the Company had $439,000 of special mention loans, consisting of twelve loans secured by one-to-four family residences and fourteen consumer loans. The following table sets forth the aggregate amount of the Company's classified assets at the dates indicated.
AT DECEMBER 31, ----------------------------- 1996 1995 1994 1993 1992 ---- ------ ---- ---- ---- (IN THOUSANDS) Substandard assets............................... $311 $1,134(1) $357 $143 $244 Doubtful assets.................................. -- -- -- -- -- Loss assets...................................... 9 -- 10 5 2 ---- ------ ---- ---- ---- Total classified assets...................... $320 $1,134 $367 $148 $246 ==== ====== ==== ==== ====
- -------- (1) Includes one purchased loan which was secured by a multifamily property that was 30 days past due in the amount of $791,000 (in actual dollars). This loan was repaid in January 1997. Allowance for Loan Losses. It is management's policy to provide an allowance for estimated 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 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 reserves or 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 the years ended December 31, 1996, 1995 and 1994 the Company's provision for loan losses were $240,000, $250,000 and $242,000, respectively. The Company's allowance for loan losses totalled $2.0 million, $1.7 million and $1.5 million at December 31, 1996, 1995 and 1994, respectively. Management believes that the allowances for losses on loans and foreclosed real estate are adequate. While management uses available information to recognize losses on loans and foreclosed real estate, 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 Company's allowances for loan losses. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. 11 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, -------------------------------------------------- 1996 1995 1994 1993 1992 --------- -------- -------- --------- -------- (DOLLARS IN THOUSANDS) Total loans outstanding... $ 168,921 $151,310 $128,951 $ 120,097 $113,417 Average net loans outstanding.............. 156,708 137,068 118,997 114,163 111,855 Allowance balances (at beginning of period)..... 1,736 1,543 1,306 1,077 853 Provisions for losses: First mortgage loans.... 150 200 165 200 180 Consumer loans.......... 90 50 77 48 82 Charge-Offs: First mortgage loans.... 5 2 -- 7 5 Consumer loans.......... 19 56 7 13 37 Recoveries: First mortgage loans.... -- -- -- -- -- Consumer loans.......... 1 1 2 1 4 Allowance balance (at end of period)............... 1,953 1,736 1,543 1,306 1,077 Allowance for loan losses as a percent of total loans receivable at end of period................ 1.16% 1.15% 1.20% 1.09% 0.95% Net loans charged off as a percent of average net loans outstanding........ 0.01 0.04 -- 0.02 0.03 Ratio of allowance for loan losses to total nonaccrual loans at end of period................ 1,059.35 960.20 476.23 1,279.41 579.03 Ratio of allowance for loan losses to total nonaccrual loans and foreclosed real estate at end of period............ 621.31 562.15 476.23 1,115.38 489.55
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, ---------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------ ------------------ ------------------ ------------------ ------------------ % OF LOANS % OF LOANS % OF LOANS % OF LOANS % OF LOANS IN EACH IN EACH IN EACH IN EACH IN EACH CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS 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................ $ 503 63.44% $ 418 62.70% $ 429 65.48% $ 272 63.98% $ 261 63.62% Multifamily residential mortgage loans................ 948 20.42 870 20.90 646 16.70 646 18.73 512 19.72 Commercial mortgage loans................ 157 3.09 175 3.85 189 4.79 181 5.39 135 5.48 Consumer loans........ 345 13.05 273 12.55 279 13.03 207 11.90 169 11.18 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total allowance for loan losses.......... $1,953 100.00% $1,736 100.00% $1,543 100.00% $1,306 100.00% $1,077 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
12 INVESTMENT ACTIVITIES At December 31, 1996, the Company's investment portfolio is comprised of United States Treasury securities, virtually all of which were purchased with 2-year maturities, equity securities consisting of FHLMC preferred stocks, FNMA preferred stock, FHLB stock, other common and preferred stocks and interest- earning deposits. At December 31, 1996, $7.0 million, or 42.3%, of the Company's investment portfolio, excluding equity securities, was scheduled to mature in one year or less, and $9.5 million, or 57.7% was scheduled to mature in from one to five years. The Company is required under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short term securities and certain other investments. The Company generally has maintained a portfolio of liquid assets that exceeds regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management's projections as to the short term demand for funds to be used in the Company's loan origination and other activities. In addition, the Company's liquidity levels are affected by the level and composition of its borrowed funds. Investment Portfolio. The following table sets forth the carrying value of the Company's investment portfolio at the dates indicated.
AT DECEMBER 31, ----------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Investment securities: U.S. Treasury securities............................. $16,518 $19,561 $19,492 FHLB stock........................................... 1,374 1,160 1,001 Equity securities.................................... 8,711 3,073 3,638 ------- ------- ------- Total investment securities........................ 26,603 23,794 24,131 Interest-earning deposits.............................. 2,973 2,362 4,258 ------- ------- ------- Total investments.................................. $29,576 $26,156 $28,389 ======= ======= =======
Investment Portfolio Maturities. The following table sets forth the scheduled maturities, carrying values, market values and weighted average yields for the Company's investment portfolio at December 31, 1996.
AT DECEMBER 31, 1996 --------------------------------------------------------------------------- ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL ------------------- ------------------- ----------------------------------- ANNUALIZED ANNUALIZED ANNUALIZED WEIGHTED WEIGHTED AVERAGE WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET LIFE IN AVERAGE VALUE YIELD VALUE YIELD VALUE VALUE YEARS YIELD -------- ---------- -------- ---------- -------- ------- ------- ---------- (DOLLARS IN THOUSANDS) Investment securities: U.S. Treasury securities............ $6,993 6.25% $9,525 6.04% $16,518 $16,525 2 6.13% FHLB Stock............. -- -- -- -- 1,374 1,374 7.00 Common Stock........... -- -- -- -- 253 253 2.41 Preferred Stock--other. -- -- -- -- 256 256 7.00 Preferred Stock--FNMA.. -- -- -- -- 5,269 5,269 6.49 Preferred Stock--FHLMC. -- -- -- -- 2,933 2,933 7.25 ------ ---- ------ ---- ------- ------- ---- ---- Total.................. 6,993 6.25% 9,525 6.04% 26,603 26,610 6.34% Interest-bearing deposits at the FHLB............ 2,973 5.08% -- -- % 2,973 2,973 5.08% ------ ---- ------ ---- ------- ------- ---- Total investments...... $9,966 5.90% $9,525 6.04% $29,576 $29,583 6.22% ====== ==== ====== ==== ======= ======= ====
13 SOURCES OF FUNDS General. Deposits are the major source of the Company's funds for lending and other investment purposes. In addition to deposits, the Company derives funds from FHLB advances, the amortization and prepayment of loans, the maturity of investment securities, and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes. Deposits. Consumer and commercial deposits are attracted principally from within the Company's market area through the offering of a broad selection of deposit instruments including NOW accounts, passbook savings, statement savings, money market savings, certificates of deposit and individual retirement accounts. Deposit account terms vary according to the minimum balance required, the period of time during which the funds must remain on deposit, and the interest rate, among other factors. The maximum rate of interest which the Company must pay is not established by regulatory authority. The Company regularly evaluates its internal cost of funds, surveys rates offered by competing institutions, reviews the Company's cash flow requirements for lending and liquidity, and executes rate changes when deemed appropriate. The Company has sought to decrease the risk associated with changes in interest rates by offering competitive rates on deposit accounts and by pricing certificates of deposit to provide customers with incentives to choose certificates of deposit with longer terms. The Company does not obtain funds through brokers through a solicitation of funds outside its market area, nor by offering negotiated rates on certificates of deposit in excess of $100,000. Deposit Portfolio. Deposits in the Company as of December 31, 1996, were represented by the various types of deposit programs described below.
WEIGHTED PERCENTAGE AVERAGE CHECKING AND MINIMUM OF TOTAL INTEREST RATE ORIGINAL TERM SAVINGS DEPOSITS BALANCE BALANCES DEPOSITS - ------------- ------------- ---------------- ------- -------- ---------- (DOLLARS IN THOUSANDS) 0.00% None Noninterest-bearing demand $ 50 $ 2,275 1.75% 2.00% None NOW accounts 50 11,824 9.11 2.25% None Passbook savings 25 17,756 13.69 4.33% None Money market savings 2,500 7,280 5.62 CERTIFICATES OF DEPOSIT 3.03% 1-3 months Fixed term, fixed rate $1,000 $ 33 0.03% 4.07% 4-6 months Fixed term, fixed rate 1,000 1,301 1.00 4.06% 7-9 months Fixed term, fixed rate 1,000 525 0.40 4.92% 10-12 months Fixed term, fixed rate 1,000 6,028 4.65 5.88% 13-24 months Fixed term, fixed rate 1,000 24,564 18.94 5.68% 25-36 months Fixed term, fixed rate 1,000 11,822 9.11 6.26% 37-48 months Fixed term, fixed rate 1,000 531 0.41 6.22% 49-60 months Fixed term, fixed rate 1,000 45,519 35.09 6.57% 61 months or greater Fixed term, fixed rate 1,000 159 0.12 3.50% Various Variable rate 100 105 0.08 -------- ------ $129,722 100.00% ======== ======
14 The following table sets forth the change in dollar amount of deposits in the various types of deposit accounts offered by the Company between the dates indicated.
BALANCE DEPOSIT INCR. BALANCE DEPOSIT INCR. BALANCE 12/31/96 % (DECR) 12/31/95 % (DECR) 12/31/94 -------- ------- ------- --------- ------- ------- --------- (DOLLARS IN THOUSANDS) Noninterest bearing demand................. $ 2,275 0.04% $ 8 $ 2,267 1.93% $ 43 $ 2,224 NOW..................... 11,824 3.39 388 11,436 6.20 668 10,768 Passbook savings........ 17,756 (5.85) (1,104) 18,860 (14.17) (3,114) 21,974 Money market savings.... 7,280 29.38 1,653 5,627 169.62 3,540 2,087 Certificates of deposit that mature: within 12 months...... 36,972 22.37 6,759 30,213 (21.32) (8,185) 38,398 within 12-36 months.... 31,826 (6.77) (2,311) 34,137 19.54 5,580 28,557 beyond 36 months....... 21,789 (9.71) (2,343) 24,132 19.58 3,951 20,181 -------- ------- --------- ------- --------- Total................ $129,722 2.41% $ 3,050 $ 126,672 2.00% $ 2,483 $ 124,189 ======== ======= ========= ======= ========= BALANCE DEPOSIT INCR. BALANCE DEPOSIT INCR. BALANCE 12/31/94 % (DECR) 12/31/93 % (DECR) 12/31/92 -------- ------- ------- --------- ------- ------- --------- (DOLLARS IN THOUSANDS) Noninterest bearing demand................. $ 2,224 (8.14)% $ (197) $ 2,421 (3.16)% $ (79) $ 2,500 NOW..................... 10,768 6.25 633 10,135 20.30 1,710 8,425 Passbook savings........ 21,974 (11.67) (2,903) 24,877 (0.26) (64) 24,941 Money market savings.... 2,087 (14.85) (364) 2,451 (12.18) (340) 2,791 Certificates of deposit that mature: within 12 months...... 38,398 (16.56) (7,620) 46,018 1.90 857 45,161 within 12-36 months.... 28,557 (8.22) (2,557) 31,114 (16.46) (6,131) 37,245 beyond 36 months....... 20,181 42.83 6,052 14,129 24.41 2,772 11,357 -------- ------- --------- ------- --------- Total................ $124,189 (5.30)% $(6,956) $ 131,145 (0.96)% $(1,275) $ 132,420 ======== ======= ========= ======= =========
The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated:
AT DECEMBER 31, ----------------------- RATE 1996 1995 1994 - ---- ------- ------- ------- (IN THOUSANDS) 3.99% or less........................................... $ 140 $ 1,028 $11,954 4.00-5.99%.............................................. 45,481 35,172 33,930 6.00-7.99%.............................................. 44,913 51,212 25,960 8.00-9.99%.............................................. 53 1,070 15,045 10.00% or greater....................................... -- -- 247 ------- ------- ------- $90,587 $88,482 $87,136 ======= ======= =======
The following table sets forth the amount and maturities of certificates of deposit at December 31, 1996.
AMOUNT DUE ------------------------------------------------------- LESS THAN 1 1-2 2-3 3-4 4-5 AFTER 5 RATE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL - ---- -------- ------- ------- ------- ------ ------- ------- (IN THOUSANDS) 3.99% or less.......... $ 140 $ -- $ -- $ -- $ -- $-- $ 140 4.00-5.99%............. 20,624 16,332 4,620 1,542 2,363 -- 45,481 6.00-7.99%............. 16,156 2,766 8,107 12,349 5,488 47 44,913 8.00% or greater....... 51 -- 2 -- -- -- 53 -------- ------- ------- ------- ------ ---- ------- $ 36,971 $19,098 $12,729 $13,891 $7,851 $ 47 $90,587 ======== ======= ======= ======= ====== ==== =======
15 The following table indicates the amount of the Company's certificates of deposit of $100,000 or more by time remaining until maturity at December 31, 1996. This amount does not include passbook savings accounts of greater than $100,000, which totalled approximately $852,000 at December 31, 1996.
CERTIFICATES OF DEPOSIT OVER REMAINING MATURITY $100,000 ------------------ --------------- (IN THOUSANDS) Three months or less...................................... $ 482 Three through six months.................................. 252 Six through twelve months................................. 215 Over twelve months........................................ 1,483 ------ Total................................................. $2,432 ======
The following table sets forth the savings activities of the Company for the periods indicated:
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------- ------- -------- (IN THOUSANDS) Net (decrease) before interest credited............ $(1,751) $(2,502) $(11,836) Interest credited.................................. 4,801 4,985 4,880 ------- ------- -------- Net increase (decrease) in deposits............ $ 3,050 $ 2,483 $ (6,956) ======= ======= ========
BORROWINGS Deposits are the Company's primary source of funds. The Company may also obtain funds from the FHLB. FHLB advances are collateralized by selected assets of the Company. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Company, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the OTS and the FHLB. The maximum amount of FHLB advances to a member institution generally is reduced by borrowings from any other source. In conjunction with the Bank's conversion from mutual to stock form in 1994, the Bank established an Employee Stock Ownership Plan (the "ESOP") for eligible employees. The ESOP borrowed $960,000 from an unrelated third party lender to finance the purchase of 96,000 shares of the Bank's common stock. Collateral for such loan consisted of the common stock held by the ESOP, as well as $100,000 in cash pledged by North Central Bancshares, MHC. The term of the loan was 10 years. The ESOP also borrowed funds in the amount of $840,000 from the Holding Company to purchase 84,000 shares of common stock issued in the reorganization of the Bank and the MHC to the stock holding company form in 1996. In September 1996, these two loans were consolidated into a single loan from the Holding Company to the ESOP.
FOR THE YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ------- ------- ------ (DOLLARS IN THOUSANDS) Weighted average rate paid on: (1) FHLB advances....................................... 5.76% 5.63% 6.01% FHLB advances: Maximum balance..................................... $24,300 $21,000 $5,000 Average balance..................................... 11,503 12,734 67 Weighted average rate paid on: ESOP advances....................................... 8.03% 8.70% 7.88% ESOP advances: Maximum balance..................................... $ 790 $ 886 $ 960 Average balance..................................... 513 850 314 Weighted average rate paid on: Other borrowings.................................... 7.00% 7.00% N/A Other borrowings: Maximum balance..................................... $ 130 $ 150 N/A Average balance..................................... $ 98 $ 150 N/A
- -------- (1) Calculated using monthly weighted average interest rates. 16 TITLE ABSTRACT BUSINESS A component of the Company's operating strategy is to increase non-interest income, primarily through the expansion of the abstract company business conducted through a wholly owned subsidiary, First Iowa Title Services Inc. ("First Iowa"). The Company purchased First Iowa in November 1982. In 1995, First Iowa purchased the assets of two abstract companies located in Jasper and Boone Counties in Iowa. On December 28, 1996, First Iowa purchased the assets of two abstract companies located in Webster and Calhoun Counties in Iowa. First Iowa provides real estate title abstracting services in Webster, Boone, Jasper and Calhoun counties. These services include researching recorded documents at the county courthouse and providing a history of those documents as they pertain to specific parcels of real estate. This information is used to determine who owns specific parcels of real estate and what encumbrances are on those specific parcels. The abstract business performed by First Iowa replaces a significant portion of the function of a title insurance company. Iowa law prohibits Iowa insurance companies or companies authorized to do business in Iowa from issuing title insurance or insurance against loss or damage by reason of defective title, encumbrance or otherwise. Institutions can purchase title insurance, for their own protection or to sell loans on the secondary market, but the cost of this insurance may not be passed on to the borrower. First Iowa had 18 employees as of December 31, 1996. INSURANCE AND ANNUITY BUSINESS The Company has another wholly-owned subsidiary, First Financial Service Corporation ("First Financial"), which it began in 1971. First Financial's activities included the sale of life insurance on mortgage loans, and credit life and accident and health insurance on consumer loans made by the Company. In addition, First Financial sells life insurance annuity products. First Financial also originates leases for equipment such as computers, office equipment, light industrial equipment and commercial cleaning equipment. First Financial has no employees. The subsidiary has executed a management agreement with the Company which provides its management and staff. MULTIFAMILY APARTMENT BUILDING On July 13, 1995, the Company formed the Northridge Partnership with the Fort Dodge Housing Corporation ("FDHC"), a non-profit Iowa corporation formed to acquire, develop and manage low- and moderate-income housing for residents of the Fort Dodge area. The FDHC is controlled by the Fort Dodge Municipal Housing Agency, an agency chartered by the city of Fort Dodge. The Northridge Partnership is a low-income housing tax credit project for certain federal tax purposes. A 44-unit apartment complex was completed on February 1, 1997. Management anticipates the tax credit will amount to approximately $150,000 for each year during the ten-year period commencing with the year the property is placed into service. Management expects the full tax credits to be realized in 1998. PERSONNEL As of December 31, 1996, the Company had 66 full-time and 17 part-time employees (including the 18 employees of First Iowa). None of the Company's employees is represented by a collective bargaining group. The Company believes its relationship with its employees to be good. FEDERAL AND STATE TAXATION FEDERAL TAXATION General. The following is a general discussion of material tax matters and does not purport to be a comprehensive description of the tax rules applicable to the Holding Company or the Bank. The Bank was last audited for its taxable year ended December 31, 1985. For federal income tax purposes, the Holding Company and the Bank will be eligible to file consolidated income tax returns and report their income on a calendar year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts, discussed below. 17 Recent Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996 (the "Small Business Act"), for federal income tax purposes, thrift institutions such as the Bank, which met certain definitional tests primarily relating to their assets and the nature of their business, were permitted to establish tax reserves for bad debts and to make annual additions thereto, which additions could, within specified limitations, be deducted in arriving at their taxable income. The Company's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, could be computed using an amount based on a six-year moving average of the Company's actual loss experience (the "Experience Method"), or a percentage equal to 8.0% of the Company's taxable income (the "PTI Method"), computed without regard to this deduction and with additional modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. Under the Small Business Act, the PTI Method was repealed and the Bank, as a "small bank" (one with assets having an adjusted basis of $500 million or less) will be required to use the Experience Method of computing additions to its bad debt reserve for taxable years beginning with the Company's taxable year beginning January 1, 1996. In addition, the Company will be required to recapture (i.e., take into taxable income) over a six-year period, beginning with the Company's taxable year beginning January 1, 1996, the excess of the balance of its bad debt reserves (other than the supplemental reserve) as of December 31, 1995 over the greater of (a) the balance of its "base year reserve," i.e., its reserves as of December 31, 1987 or (b) an amount that would have been the balance of such reserves as of December 31, 1995 had the Company always computed the additions to its reserves using the Experience Method. However, under the Small Business Act such recapture requirements will be suspended for each of the two successive taxable years beginning January 1, 1996 in which the Company originates a minimum amount of certain residential loans during such years that is not less than the average of the principal amounts of such loans made by the Company during its six taxable years preceding January 1, 1996. Distributions. To the extent that the Company makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Company's base year reserve to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Company's taxable income. Nondividend distributions include distributions in excess of the Company's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Company's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute nondividend distributions and, therefore, will not be included in the Company's income. The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Corporate Alternative Maximum Tax. The Internal Revenue Code (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating losses. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Company, whether or not an Alternative Maximum Tax ("AMT") is paid. Under President Clinton's fiscal year 1998 budget proposal, as submitted to Congress on February 6, 1997 ("President Clinton's Proposal"), the corporate environmental income tax would be reinstated for taxable years beginning after December 31, 1996 and before January 1, 2008. The Company does not expect to be subject to the AMT, but would be subject to the environmental tax liability. 18 Dividends-Received Deduction. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Holding Company and the Bank will not file a consolidated tax return, except that if the Holding Company or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. Under President Clinton's Proposal, the 70% dividends-received deduction would be reduced to 50% with respect to dividends paid after enactment of any such legislation. STATE AND LOCAL TAXATION Iowa Taxation. The Holding Company and the Bank's subsidiaries will file Iowa corporation tax returns and the Bank will file an Iowa franchise tax return. The Bank currently files an Iowa franchise tax return, and the Holding Company and the Bank's subsidiaries file an Iowa corporation tax return, on a calendar year basis. The State of Iowa imposes a tax on the Iowa franchise taxable income of thrift institutions at the rate of 5%. Iowa franchise taxable income is generally similar to federal taxable income except that interest from state and municipal obligations is taxable, and no deduction is allowed for state franchise taxes. The net operating loss carryback and carryforward rules are similar to the federal rules. The state corporation income tax rate ranges from 6% to 12% depending upon Iowa corporation taxable income. Interest from federal securities is not deductible for purposes of the Iowa corporation income tax. REGULATION GENERAL The Bank is a federal savings bank subject to the regulation, examination and supervision by the OTS and is subject to the examination and supervision of the Federal Deposit Insurance Corporation ("FDIC") as its deposit insurer. The Bank is a member of the SAIF, and its deposit accounts are insured up to applicable limits by the FDIC. All of the deposit premiums paid by the Bank to the FDIC for deposit insurance are currently paid to the SAIF. The Bank is also a member of the FHLB of Des Moines, which is one of the 12 regional FHLBs. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The Holding Company, as a savings and loan holding company, files certain reports with, and otherwise complies with, the rules and regulations of the OTS and of the Commission under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank, and the operations of both. Legislative proposals to restructure the organization and regulation of the financial services industry have been submitted to Congress in recent years. In addition, the Deposit Insurance Funds Act of 1996 (the "1996 Funds Act") requires the Secretary of the Treasury to conduct a study of the relevant factors with respect to the development of a common charter for all insured depository institutions and to the abolition of separate charters for banks and thrifts, and the Secretary of the Treasury is to report his conclusions and findings to the Congress on or before March 31, 1997. Several bills have been introduced in Congress to remove various statutory restrictions on the operations and activities of financial institutions, and two of these bills include proposed 19 amendments to eliminate the federal thrift charter. One bill would require a federal thrift to convert to a bank charter and the other bill would give the federal thrift the option to convert to a national or state chartered bank or to a state savings and loan association. Existing thrift holding companies, such as the Holding Company, would be grandfathered and continue to be able, in the absence of certain events, to engage in the same activities as were permissible for it before the enactment of the new law. Other proposed statutory changes would permit (a) depository institutions to engage in a wider range of securities and insurance activities and (b) affiliations between depository institutions and insurance, securities and other financial companies. The outcome of these efforts to eliminate the thrift charter and to change the regulation of depository institutions and their holding companies is uncertain. Therefore, the Company is unable to determine the extent to which any such legislation, if enacted, would affect the Company's business. The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations and their holding companies, and it does not purport to be a comprehensive description of all such statutes and regulations. REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES The Holding Company is a savings and loan holding company is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Holding Company and any of its non-savings association subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings association. The Home Owner and Loan Act ("HOLA"), as amended, prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings association or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5.0% of a non-subsidiary savings association, a non-subsidiary holding company or a non-subsidiary company engaged in activities other than those permitted by HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application by a holding company to acquire a savings association, the OTS must consider the financial and managerial resources and future prospects of the company and savings association involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. As a unitary savings and loan holding company, the Holding Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to satisfy the QTL test. See "--Regulation of Federal Savings Associations--QTL Test" for a discussion of the QTL requirements. Upon any nonsupervisory acquisition by the Company of another savings association or savings bank that meets the QTL test and is deemed to be a savings association by the OTS and that will be held as a separate subsidiary, the Holding Company would become a multiple savings and loan holding company and would be subject to limitations on the types of business activities in which it could engage. HOLA limits the activities of a multiple savings and loan holding company and its non-insured association subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act (the "BHC Act"), subject to the prior approval of the OTS, and to other activities authorized by OTS regulation. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state, subject to two exceptions: an acquisition of a savings association in another state (i) in a supervisory transaction, and (ii) pursuant to authority under the laws of the state of the association to be acquired that specifically permit such acquisitions. The conditions imposed upon interstate acquisitions by those states that have enacted authorizing legislation vary. Some states impose conditions of reciprocity, which have the effect of requiring that the laws of both the state in which the acquiring holding company is located (as determined by the location of its subsidiary savings association) and the state in which the association to be acquired is located, have each enacted legislation allowing its savings associations to be acquired by out-of-state holding companies on the condition that the laws 20 of the other state authorize such transactions on terms no more restrictive than those imposed on the acquiror by the state of the target association. Some of these states also impose regional limitations, which restrict such acquisitions to states within a defined geographic region. Other states allow full nationwide banking without any condition of reciprocity. Some states do not authorize interstate acquisitions of savings associations. Transactions between the Bank and the Holding Company and its other subsidiaries would be subject to various conditions and limitations. See "-- Regulation of Federal Savings Associations--Transactions with Related Parties." The Bank would have to give 30-days written notice to the OTS prior to any declaration of the payment of any dividends or other capital distributions to the Holding Company. See "--Regulation of Federal Savings Associations-- Limitation on Capital Distributions." REGULATION OF FEDERAL SAVINGS ASSOCIATIONS Business Activities. The Bank derives its lending and investment powers from the HOLA and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including: (i) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (ii) a limit of 400% of an association's capital on the aggregate amount of loans secured by nonresidential real estate property; (iii) a limit of 10% of an association's assets on commercial loans; (iv) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (v) a limit of 5.0% of assets on non- conforming loans (loans in excess of the specific limitations of HOLA); and (vi) a limit of the greater of 5.0% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. Loans to One Borrower. Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, in the aggregate not exceeding 10% of unimpaired capital and surplus, if any such loan or extension of credit is fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. For the year ended December 31, 1996, the Bank generally imposed a $1.25 million limit on the aggregate size of loans to any one borrower. Subsequent to fiscal year end 1996, this limit was increased to $1.5 million. Any exception to the limit must be specifically approved by the Board of Directors on a loan-by-loan basis within the Bank's legal lending limit. At December 31, 1996, the Bank's largest aggregate amount of loans to one borrower was $1.25 million, and the second largest borrower had an aggregate balance of $999,000. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." QTL Test. HOLA requires a savings association to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least 9 months of the most recent 12-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (i) specified liquid assets up to 20% of total assets, (ii) certain intangibles, including goodwill and purchased credit card relationships, and (iii) the value of property used to conduct the association's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and consumer loans up to 10% of the association's portfolio assets. At December 31, 1996, the Bank maintained 92.9% of its portfolio assets in qualified thrift investments, and it had more than 65% of its portfolio assets in qualified thrift investments in the requisite number of the prior 12 months. 21 A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The initial restrictions include prohibitions against (i) engaging in any new activity not permissible for a national bank, (ii) paying dividends not permissible under national bank regulations, (iii) obtaining new advances from any FHLB, and (iv) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, within one year of the date a savings association ceases to meet the QTL test, any company controlling the association would have to register under, and become subject to the requirements of, the BHC Act. If the savings association does not requalify under the QTL test within the three-year period after it failed the QTL test, it would be required to terminate any activity and to dispose of any investment not permissible for a national bank and would have to repay as promptly as possible any outstanding advances from an FHLB. A savings association that has failed the QTL test may requalify under the QTL test and be free of such limitations, but it may do so only once. Capital Requirements. The OTS regulations require savings associations 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 3.0% of core capital to such adjusted total assets, and a risk- based capital ratio requirement of 8.0% of core and supplementary capital to total risk-based assets. The 3.0% core capital requirement has been effectively superseded by the OTS' prompt corrective action regulations, which impose a 4.0% core capital requirement for "adequately capitalized" thrifts and a 5.0% core capital requirement for "well capitalized" thrifts. See "--Prompt Corrective Regulatory Action." In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks found by the OTS to be inherent in the type of asset. Tangible capital is defined, generally, as common stockholder's equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. When determining its compliance with the risk-based-capital requirement, a savings association with "above normal" interest rate risk is required to deduct a portion of its capital from its total capital to account for the "above normal" interest rate risk. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) resulting from a hypothetical 2.0% increase or decrease in market rates of interest, divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. At the times when the 3-month Treasury bond equivalent yield falls below 4.0%, an association may compute its interest rate risk on the basis of a decrease equal to one-half of that Treasury rate rather than on the basis of 2.0%. A savings association whose measured interest rate risk exposure exceeds 2.0% would be considered to have "above normal" risk. The interest rate risk component is an amount equal to one-half of the difference between the association's measured interest rate risk and 2.0%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Any required deduction for interest rate risk becomes effective on the last day of the third quarter following the reporting date of the association's financial data on which the interest rate risk was computed. The regulations authorize the Director of the OTS to waive or defer an association's interest rate risk component on a case-by-case basis. The 22 OTS has not implemented the regulatory requirement for savings associations to deduct an interest-rate-risk component in calculating their risk-based capital. At December 31, 1996, the Bank was not required to maintain any additional risk-based capital under this regulation. At December 31, 1996, the Bank met each of its capital requirements, in each case on a fully phased-in basis. The table below presents the Bank's regulatory capital as compared to the OTS regulatory capital requirements at December 31, 1996:
CAPITAL EXCESS BANK REQUIREMENTS CAPITAL ------- ------------ ------- (IN THOUSANDS) Tangible capital................................... $43,861 $3,023 $40,838 Core capital....................................... 43,861 6,045 37,816 Risk-based capital................................. 45,255 8,880 36,375
A reconciliation between regulatory capital and GAAP capital at December 31, 1996 in the accompanying financial statements is presented below:
RISK- TANGIBLE CORE BASED CAPITAL CAPITAL CAPITAL -------- ------- ------- (IN THOUSANDS) GAAP capital........................................ $44,952 $44,952 $44,952 Intangible assets................................... (1,063) (1,063) (1,063) Unrealized (gain) on certain available for sale assets............................................. (28) (28) (28) Allowance for loan losses includable in supplementary capital.............................. -- -- 1,394 ------- ------- ------- Regulatory capital.................................. $43,861 $43,861 $45,255 ======= ======= =======
Limitation on Capital Distributions. OTS regulations currently impose limitations upon capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger, and other distributions charged against capital. At least 30-days written notice must be given to the OTS of a proposed capital distribution by a savings association, and capital distributions in excess of specified earnings or by certain institutions are subject to approval by the OTS. An association that has capital in excess of all fully phased-in regulatory capital requirements before and after a proposed capital distribution and that is not otherwise restricted in making capital distributions, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described above. See "--Prompt Corrective Regulatory Action." The OTS has proposed regulations that would simplify the existing procedures governing capital distributions by savings associations. Under the proposed regulations, the approval of the OTS would be required only for an association that is deemed to be in troubled condition or that is undercapitalized or would be undercapitalized after the capital distribution. A savings association would be able to make a capital distribution without notice to or approval of the OTS if it is not held by a savings and loan holding company, is not deemed to be in troubled condition, has received either of the two highest composite supervisory ratings and would 23 continue to be adequately capitalized after such distribution. Notice would have to be given to the OTS by any association that is held by a savings and loan holding company or that had received a composite supervisory rating below the highest two composite supervisory ratings. An association's capital rating would be determined under the prompt corrective action regulations. See "-- Prompt Corrective Regulatory Action." Liquidity. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4.0% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 5.0%. OTS regulations also require each savings association to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1.0%) of the total of its net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. At December 31, 1996, the Bank's liquidity position was $13.1 million or 9.11% of liquid assets, compared to $9.8 million or 6.85% at December 31, 1995. The increase of $3.3 million was primarily due to the reduction in pledged U.S. Treasury Notes as collateral for a portion of the Bank's borrowings from the FHLB of Des Moines. At December 31, 1996, the Bank's short-term liquidity position was $4.1 million or 2.84% of short term liquid assets, compared to $3.3 million or 2.31% at December 31, 1996. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semi-annual basis, is computed upon the savings association's total assets, including consolidated subsidiaries, as reported in the association's latest quarterly Thrift Financial Report. Branching. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (i) in states that expressly authorize branches of savings associations located in another state and (ii) to an association that qualifies as a "domestic building and loan association" under the Code, which imposes qualification requirements similar to those for a "qualified thrift lender" under HOLA. See "--QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an "Outstanding" CRA rating in its most recent examination. In April 1995, the OTS and the other federal banking agencies adopted amendments revising their CRA regulations. Among other things, the amended CRA regulations substitute for the prior process-based assessment factors a new evaluation system that would rate an institution based on its actual performance in meeting community needs. In particular, the proposed system would focus on three tests: (i) a lending test, to evaluate the institution's record of making loans in its service areas; (ii) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution's delivery of 24 services through its branches, ATMs and other offices. Small savings associations are to be assessed pursuant to a streamlined approach focusing on a lesser range of information and performance standards. The term "small savings association" is defined as including associations with less than $250 million in assets or an affiliate of a holding company with banking and thrift assets of less than $1.0 billion, which would include the Bank. The amended CRA regulations also clarify how an institution's CRA performance would be considered in the application process. Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Bank's subsidiaries other than those that are insured depository institutions. The OTS regulations prohibit a savings association (i) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the BHC Act and (ii) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank's authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board (the "FRB") thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of credit in excess of certain limits must be approved by the association's board of directors. Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution-affiliated parties," including any controlling stockholder or any stockholder, attorney, appraiser and accountant who knowingly or recklessly participates in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause a more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide range of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders and certain written agreements and conditions continue, up to $1,000,000 per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $10 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. 25 Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Riegle Community Development and Regulatory Improvement Act of 1994 (the "Community Development Act"), the OTS and the federal bank regulatory agencies adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. See "--Prompt Corrective Regulatory Action." If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. Real Estate Lending Standards. The OTS and the other federal banking agencies adopted regulations to prescribe standards for extensions of credit that (i) are secured by real estate or (ii) are made for the purpose of financing the construction of improvements on real estate. The OTS regulations require each savings association to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the different types of real estate loans. Associations are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified. Prompt Corrective Regulatory Action. Under the OTS prompt corrective action regulations, the OTS is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association would be placed in one of five categories based on the association's capital. Generally, a savings association is treated as "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10.0%, its ratio of Tier 1 (core) capital to risk-weighted assets is at least 6.0%, its ratio of Tier 1 (core) capital to total assets is at least 5.0%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings association will be treated as "adequately capitalized" if its ratio of total capital to risk-weighted assets is at least 8.0%, its ratio of Tier 1 (core) capital to risk-weighted assets is at least 4.0%, and its ratio of Tier 1 (core) capital to total assets is at least 4.0% (3.0% if the association receives the highest rating on the CAMEL financial institutions rating system). A savings association that has a total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 (core) capital ratio that is less than 4.0% (3.0% leverage ratio if the association receives the highest rating on the CAMEL financial institutions rating system) is considered to be "undercapitalized." A savings association that has a total risk-based capital of less than 6.0% or a Tier 1 (core) risk-based capital ratio or a leverage ratio of less than 3.0% is considered to be "significantly undercapitalized." A savings association that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." The elements of an association's capital for purposes of the prompt corrective action regulations are defined generally as they are under the regulations for minimum capital requirements. See "--Capital Requirements." The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as an association's capital deteriorates within the three undercapitalized categories. All associations are prohibited from paying dividends or other capital distributions or paying management fees to any controlling 26 person if, following such distribution, the association would be undercapitalized. An undercapitalized association is required to file a capital restoration plan within 45 days of the date the association receives notice that it is within any of the three undercapitalized categories. The OTS is required to monitor closely the condition of an undercapitalized association and to restrict the asset growth, acquisitions, branching and new lines of business of such an association. Significantly undercapitalized associations are subject to restrictions on compensation of senior executive officers; such an association may not, without OTS consent, pay any bonus or provide compensation to any senior executive officer at a rate exceeding the officer's average rate of compensation (excluding bonuses, stock options and profit- sharing) during the 12 months preceding the month when the association became undercapitalized. A significantly undercapitalized association may also be subject, among other things, to mandated changes in the composition of its board of directors or senior management, additional restrictions on transactions with affiliates, restrictions on acceptance of deposits from correspondent associations, further restrictions on asset growth, restrictions on rates paid on deposits, forced termination or reduction of activities deemed risky and any further operational restrictions deemed necessary by the OTS. If one or more grounds exist for appointing a conservator or receiver for an association, the OTS may require the association to issue additional debt or stock, sell assets, be acquired by a depository association holding company or combine with another depository association. The OTS and the FDIC have a broad range of grounds under which they may appoint a receiver or conservator for an insured depositary association. Under FDICIA, the OTS is required to appoint a receiver (or with the concurrence of the FDIC, a conservator) for a critically undercapitalized association within 90 days after the association becomes critically undercapitalized or, with the concurrence of the FDIC, to take such other action that would better achieve the purposes of the prompt corrective action provisions. Such alternative action can be renewed for successive 90-day periods. However, if the association continues to be critically undercapitalized on average during the quarter that begins 270 days after it first became critically undercapitalized, a receiver must be appointed, unless the OTS makes certain findings with which the FDIC concurs and the Director of the OTS and the Chairman of the FDIC certify that the association is viable. In addition, an association that is critically undercapitalized is subject to more severe restrictions on its activities, and is prohibited, without prior approval of the FDIC from, among other things, entering into certain material transactions or paying interest on new or renewed liabilities at a rate that would significantly increase the association's weighted average cost of funds. Where appropriate, the OTS can impose corrective action by a savings and loan holding company under the "prompt corrective action" provisions of FDICIA. Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established a new risk-based assessment system for determining the deposit insurance assessments to be paid by insured depositary institutions. Under the new assessment system, which began in 1993, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the reporting period ending seven months before the assessment period. The three capital categories consist of (i) well capitalized, (ii) adequately capitalized, or (iii) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Prior to June, 1995, assessment rates ranged from 0.23% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.31% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDI Act requires that the SAIF and BIF funds each be recapitalized until its reserves are at least 1.25% of the deposits insured by that fund. Upon reaching the 1.25% reserve ratio, the assessment rates for that fund could be reduced. During 1995, the BIF reached the required reserve ratio, and the FDIC reduced the BIF assessment rates. Effective January 1, 1996, the BIF assessment rate for "well capitalized" institutions without 27 any significant supervisory concerns was set at the statutory minimum of $2,000 annually, and the rates for other BIF-insured institutions ranged from 0.03% to 0.27% of deposits. The SAIF remained undercapitalized, and it was not then expected to be recapitalized until 2001. SAIF reserves had not grown as quickly as the BIF reserves due to a number of factors, including the fact that a significant portion of SAIF assessments had been used to make payments on bonds (the "FICO bonds") issued in the late 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Accordingly, SAIF-insured institutions continued to pay assessments at rates that ranged from 0.23% of deposits to 0.31% of deposits. On September 30, 1996, the 1996 Funds Act was enacted into law. The 1996 Funds Act amended the FDI Act in several ways to recapitalize the SAIF and reduce the disparity in the assessment rates for BIF and the SAIF. The 1996 Funds Act authorized the FDIC to impose a special assessment on all institutions with SAIF-assessable deposits in the amount necessary to recapitalize the SAIF. As implemented by the FDIC, the special assessment was fixed, subject to adjustment, at 0.657% of an institution's SAIF-assessable deposits, and the special assessment was paid on November 27, 1996. The special assessment was based on the amount of SAIF-assessable deposits held at March 31, 1995, as adjusted under the 1996 Funds Act. For the Association, the special assessment on the deposits held on March 31, 1995, was $[817,000] (before giving effect to any tax benefits). The 1996 Funds Act also provides that the FDIC cannot assess regular insurance assessments for an insurance fund unless required to maintain or to achieve the designated reserve ratio of 1.25%, except on those of its member institutions that are not classified as "well capitalized" or that have been found to have "moderately severe" or "unsatisfactory" financial, operational or compliance weaknesses. The Association has not been so classified by the FDIC or the OTS. As a result of the 1996 Funds Act and the recapitalization of the SAIF in the last quarter of 1996, the FDIC reduced the assessment rates for the SAIF. For the semi-annual period beginning January 1, 1997, the SAIF assessment rates range from 0 to 27 basis points, which is the same as the schedule of assessment rates for the BIF. In addition, the 1996 Funds Act expanded the assessment base for the payments on the FICO bonds. Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured institutions were assessed for the payments on the FICO bonds. Until December 31, 1999, or such earlier date on which the last savings association ceases to exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual rate of assessments for the payments on the FICO bonds for the semi-annual period beginning on January 1, 1997 was set at 0.0130% for BIF- assessable deposits and 0.0648% for SAIF-assessable deposits. The 1996 Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999, with such merger being conditioned upon the prior elimination of the thrift charter. See "--Legislative Developments." Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB of Des Moines, is required to acquire and hold shares of capital stock in the FHLB of Des Moines in an amount at least equal to the greater of 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 1/20 of its advances (borrowings) from the FHLB of Des Moines. The Bank was in compliance with this requirement with an investment in FHLB of Des Moines stock at December 31, 1996, of $1.4 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance. 28 The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would likely also be reduced. Federal Reserve System. The Bank is subject to provisions of the FRA and the FRB's regulations pursuant to which depositary institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts up to $49.3 million. The amount of aggregate transaction accounts in excess of $49.3 million are currently subject to a reserve ratio of 10.0%, which ratio the FRB may adjust between 8.0% and 12%. The FRB regulations currently exempt $4.4 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the FRB at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve discount window, but FRB regulations require such institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. EXECUTIVE OFFICERS OF THE HOLDING COMPANY The name, age, position, term of office as officer and period during which he or she has served as an officer is provided below for each executive officer of the Holding Company. David M. Bradley, Jean L. Lake and John L. Pierschbacher are executive officers of the Holding Company and the Bank. C. Thomas Chalstrom and Kirk A. Yung are executive officers of the Bank, and as such, are deemed to be executive officers of the Holding Company pursuant to SEC regulations. David M. Bradley, CPA has been President of the Bank since 1990, Chief Executive Officer of the Bank since 1992 and was named Chairman of the Board in January 1997. He has been affiliated with the Bank for 14 years. Mr. Bradley is 44 years of age. Jean L. Lake has been employed with the Bank since 1972 and was named Secretary in 1987. Ms. Lake serves as Board Secretary and is in charge of marketing. Ms. Lake is 54 years of age. John L. Pierschbacher, CPA has been employed with the Bank since 1992. Mr. Pierschbacher was named Treasurer in January 1994. He is the Bank's chief financial officer and is in charge of the accounting functions of the Bank. Mr. Pierschbacher was employed in public accounting for nine years at the public accounting firm of McGladrey & Pullen, LLP prior to joining the Bank. Mr. Pierschbacher is 37 years of age. C. Thomas Chalstrom has been employed with the Bank since 1985, was named Executive Vice President of the Bank in January 1995, and is in charge of real estate mortgage lending. Mr. Chalstrom is 32 years of age. Kirk A. Yung has been employed with the Bank since 1990, was named Senior Vice President in January 1995, and is in charge of consumer lending. Mr. Yung had five years of prior experience in various positions in financial institutions before joining the Bank. Mr. Yung is 34 years of age. ITEM 2. PROPERTIES The Company conducts its business through its main office located in Fort Dodge, Iowa and three full-service offices located in Fort Dodge, Nevada and Ames, Iowa. The following table sets forth certain information concerning the main office and each branch office of the Company and the offices of First Iowa at December 31, 29 1996. All of the offices of the Company, except Ames, are owned. Construction of a new building is underway in Ames, Iowa and will be completed in April, 1997. In addition to the properties listed below, First Financial owns land in Fort Dodge, Iowa with a net book value of $79,000 and Northridge Apartments Limited Partnership owns land and a partially constructed multifamily apartment building with a net book value of $1.8 million at December 31, 1996. The aggregate net book value of the Company's premises and equipment, on a consolidated basis was $1.8 million at December 31, 1996.
LEASE LOCATION OPENING DATE EXPIRATION DATE NET BOOK VALUE -------- ------------ --------------- -------------- MAIN OFFICE: 825 Central Avenue............ 1973 N/A $727,422 Fort Dodge, Iowa BRANCH OFFICES: 201 South 25th Street......... 1977 N/A $244,442 Fort Dodge, Iowa 404 Lincolnway................ 1977 N/A $609,578 Nevada, Iowa 1608 South Duff............... 1995 1997 $ 9,532(1) Ames, Iowa 107 Main Street............... 1997 N/A $112,196(2) Ames, Iowa FIRST IOWA OFFICES: 805 Central Avenue............ 1982 1998(3) $ 10,508 Fort Dodge, Iowa 814 8th Street................ 1995 1998 $ 13,660 Boone, Iowa 200 1st Street South.......... 1995 1998(4) $ 17,954 Newton, Iowa 325 Court..................... 1996 N/A $ 35,100 Rockwell City, Iowa
- -------- (1) Lease expires in 1997 and the office is expected to be moved to a newly constructed office at 107 Main Street, Ames Iowa. (2) Includes land for future expansion. (3) Does not include option to renew for an additional 3 years. (4) Does not include option to renew for an additional 5 years. ITEM 3. LEGAL PROCEEDINGS The Registrant is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Registrant's financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1996. 30 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS PRICE RANGE OF THE COMPANY'S COMMON STOCK The Company's common stock trades on The Nasdaq National Market System under the symbol "FFFD." The following table shows the high and low per share sales prices of the Bank 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.
DIVIDENDS PRICE RANGE DECLARED -------------- PER QUARTER ENDED(1) LOW SHARE(2) - ---------------- HIGH ------ --------- 1994 Third Quarter........................................ $10.146 $9.224 $0.0277 Fourth Quarter....................................... 9.685 7.610 0.0922 1995 First Quarter........................................ 9.109 8.417 0.0922 Second Quarter....................................... 9.685 8.302 0.3228 Third Quarter........................................ 10.377 9.224 0.0922 Fourth Quarter....................................... 12.683 10.377 0.0922 1996 First Quarter........................................ 11.293 10.625 0.0922 Second Quarter....................................... 11.375 10.000 0.0625 Third Quarter........................................ 12.750 10.125 0.0625 Fourth Quarter....................................... 14.125 12.375 0.0625
- -------- (1) From August 31, 1994 to March 20, 1996, the prices indicated have been adjusted for the retroactive effect of the Conversion. (2) The MHC waived receipt of all dividends declared by the Bank except for the $0.0922 (9.22 cents) dividend declared in the first quarter of 1995. INFORMATION RELATING TO THE COMPANY'S COMMON STOCK As of March 12, 1997, the Company had 778 shareholders of record, which does not reflect the number of persons or entities who hold their common stock in nominee or "street" name through various brokerage firms. As of such date 3,429,455 shares of the Common Stock were outstanding. The Bank will not be permitted to pay dividends to the Holding Company on its capital stock if its shareholders' equity would be reduced below the amount required for the liquidation account. For information concerning federal regulations which apply to the Bank in determining the amount of proceeds which may be retained by the Company and regarding a savings institution's ability to make capital distributions including payment of dividends to its holding company, see Note 11 to the Consolidated Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders, although the source of such dividends will be dependent on the net proceeds retained by the Holding Company and earnings thereon and may be dependent, in part, upon dividends from the Bank. The Holding Company is subject to the requirements of Iowa law, which prohibit the Holding Company from paying a dividend if, after giving it effect, either of the following would result: (a) the Holding Company would not be able to pay its debts as they become due in the usual course of business; or (b) the Holding Company's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Holding Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. 31 The Holding Company, however, was subject to the terms of a certification made to the OTS, in connection with the application to the OTS for approval of the Conversion, that prohibited the Holding Company from taking any actions to further any payments to its shareholders through a return of excess capital for a period of one year following the Conversion (i.e., until March 20, 1997). The certification expressly did not apply to taxable dividend payments made by the Holding Company or to dividend payments made by the Bank to the Holding Company. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual Report.
AT DECEMBER 31, -------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (IN THOUSANDS) SELECTED CONSOLIDATED FINANCIAL CONDITION DATA: Total assets...................... $203,093 $179,930 $157,153 $147,130 $146,275 Cash (noninterest bearing)........ 963 709 719 602 700 Loans receivable, net(1): First mortgage loans secured by one-to-four family residences.. 106,053 93,438 82,523 76,112 71,549 First mortgage loans secured by multifamily properties......... 33,015 30,070 19,815 20,476 20,221 First mortgage loans secured by commercial properties.......... 5,068 5,650 5,974 6,291 6,077 Consumer loans.................. 21,695 18,714 16,472 14,088 12,513 -------- -------- -------- -------- -------- Total loans receivable, net... 165,831 147,872 124,784 116,967 110,360 Investment securities(2).......... 29,577 26,156 28,389 26,830 32,441 Deposits.......................... 129,722 126,672 124,189 131,145 132,420 Borrowed funds.................... 22,335 21,940 3,886 -- -- Total shareholders' equity........ 49,235 29,900 27,813 14,761 12,521
32
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (IN THOUSANDS) SELECTED OPERATING DATA: Interest income........................ $15,090 $13,148 $11,592 $11,668 $12,578 Interest expense....................... 6,929 7,079 6,048 6,614 7,960 ------- ------- ------- ------- ------- Net interest income before provision for loan losses..................... 8,161 6,069 5,544 5,054 4,618 Provision for loan losses.............. 240 250 242 248 262 ------- ------- ------- ------- ------- Net interest income after provision for loan losses..................... 7,921 5,819 5,302 4,806 4,356 ------- ------- ------- ------- ------- Noninterest income: Fees and service charges............. 580 445 430 461 462 Abstract fees........................ 931 794 332 365 340 Other income......................... 382 463 286 232 195 ------- ------- ------- ------- ------- Total noninterest income........... 1,893 1,702 1,048 1,058 997 ------- ------- ------- ------- ------- Noninterest expense: Salaries and employee benefits....... 2,004 1,681 1,282 1,103 1,174 Premises and equipment............... 421 382 326 321 333 Data processing...................... 244 236 248 284 250 One-time SAIF special assessment..... 817 -- -- -- -- SAIF deposit insurance premiums...... 279 287 306 248 291 Other expenses....................... 1,173 1,072 761 618 578 ------- ------- ------- ------- ------- Total noninterest expense.......... 4,938 3,658 2,923 2,574 2,626 ------- ------- ------- ------- ------- Income before income taxes............. 4,876 3,863 3,427 3,290 2,727 Income tax expense..................... 1,744 1,403 1,247 1,223 1,017 ------- ------- ------- ------- ------- Income before cumulative effect of change in accounting principle........ 3,132 2,460 2,180 2,067 1,710 Change in accounting principle......... -- -- -- 135 -- ------- ------- ------- ------- ------- Net income......................... $ 3,132 $ 2,460 $ 2,180 $ 2,202 $ 1,710 ======= ======= ======= ======= =======
33
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 1993 1992 -------- ------ ------ -------- ------ KEY FINANCIAL RATIOS AND OTHER DATA: PERFORMANCE RATIOS: (%) Net interest rate spread (difference between average yield on interest-earning assets and average cost of interest-bearing liabilities)...................... 3.01% 2.75% 3.02% 2.94% 2.64% Net interest margin (net interest income as a percentage of average interest-earning assets).......... 4.33 3.66 3.70 3.50 3.20 Return on average assets (net income divided by average total assets)........................... 1.62 1.45 1.43 1.50 1.16 Return on average equity (net income divided by average equity). 6.30 8.54 11.19 16.06 14.64 Noninterest income to average assets............................ 0.98 1.00 0.69 0.72 0.68 Efficiency ratio(3)................ 49.11 47.07 44.35 42.11 46.77 Noninterest expense to average assets............................ 2.56 2.16 1.92 1.76 1.79 Net interest income after provision for loan losses to noninterest expenses.......................... 160.40 159.07 181.41 186.71 165.88 FINANCIAL CONDITION RATIOS:(4) (%) Equity to assets at period end..... 24.24 16.62 17.70 10.02 8.56 Average shareholders' equity divided by average total assets... 25.73 16.99 12.82 9.37 7.96 Average interest-earning assets to average interest-bearing liabilities....................... 136.02 121.37 116.87 112.23 110.11 ASSET QUALITY RATIOS:(4) (%) Nonaccrual loans to total net loans............................. 0.11 0.12 0.26 0.09 0.17 Nonperforming assets to total assets(5)......................... 0.15 0.23 0.21 0.08 0.15 Allowance for loan losses as a percent of total loans receivable at end of period.................. 1.16 1.15 1.20 1.09 0.95 Allowance for loan losses to nonaccrual loans.................. 1,059.35 960.20 476.23 1,279.41 579.03 PER SHARE DATA: Book value per share............... 14.36 8.72 8.11 N/A N/A Earnings per share(6).............. 0.82 0.63 0.21 N/A N/A Dividends declared per share....... 0.28 0.60 0.12 N/A N/A Dividend payout ratio.............. 0.34 0.95 0.57 N/A N/A KEY FINANCIAL RATIOS EXCLUDING SAIF ASSESSMENT: (7) (%) Return on average assets (net income divided by average total assets)........................... 1.89 1.45 1.43 1.50 1.16 Return on average equity (net income divided by average equity). 7.34 8.54 11.19 16.06 14.64 Efficiency ratio(3)................ 40.99 47.07 44.35 42.11 46.77 Noninterest expense to average assets............................ 2.13 2.16 1.92 1.76 1.79 Net interest income after provision for loan losses to noninterest expenses.......................... 192.21 159.07 181.41 186.71 165.88
- -------- (1) Loans receivable, net represents total loans less discounts, loans in process, net deferred loan fees and allowance for loan losses. The allowance for loan losses at December 31, 1996, 1995, 1994, 1993 and 1992 was $2.0 million, $1.7 million, $1.5 million, $1.3 million and $1.1 million, respectively. (2) Includes interest-bearing deposits with the Federal Home Loan Bank of Des Moines (the "FHLB"). The Company has classified its securities as "held- to-maturity" or "available-for-sale" since January 1, 1994, when it adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 34 (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) Nonperforming assets consists of nonaccrual loans, foreclosed real estate and other nonperforming assets. (6) Earnings per share information for the years ended December 31, 1995 and 1994 are calculated by dividing net income subsequent to the conversion of the Bank from mutual to stock form in 1994 by the weighted average number of shares outstanding. The weighted average number of shares outstanding for 1996, 1995 and 1994 were 3,818,273, 3,919,488 and 3,906,980, respectively. Net income subsequent to such conversion was $810,000 for the period ended December 31, 1994. (7) For 1996, excludes the one-time $817,000 (pre-tax) special assessment for the recapitalization of the Savings Association Insurance Fund. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL North Central Bancshares, Inc. (the "Holding Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Fort Dodge (the "Bank"), a federally chartered savings bank. Collectively, the Holding Company and the Bank are referred to herein as the "Company." The Holding Company was organized on December 5, 1995 at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock to be issued by the Bank in connection with the conversion and reorganization of the Bank and North Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding company structure (these transactions are collectively referred to as the "Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding Company issued an aggregate of 4,011,057 shares of its Common Stock, par value $0.01 per share, of which 1,385,590 shares were issued in exchange for all of the Bank's issued and outstanding shares, except for shares owned by the MHC which were cancelled, and 2,625,467 shares of which were sold in Subscription and Community Offerings at a price of $10.00 per share, with gross proceeds amounting to $26,254,670. At this time, the Holding Company conducts business as a unitary savings and loan holding company and the principal business of the Holding Company consists of the operation of 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 have consisted primarily of deposits and advances from 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 including primarily service fees and charges and abstract fees, and noninterest expense, including primarily compensation and employee benefits, premises and equipment, data processing and SAIF deposit insurance premiums. 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. SAIF RECAPITALIZATION In response to the disparity in deposit insurance assessment rates that existed between banks insured by the Bank Insurance Fund ("BIF") and thrifts insured by the SAIF, the Deposits Funds Insurance Act of 1996 (the "Funds Act") was enacted on September 30, 1996. The Funds Act authorized the Federal Deposit Insurance Corporation ("FDIC") to impose a special assessment on all institutions with SAIF-assessable deposits in the 35 amount necessary to recapitalize the SAIF. The Company's special SAIF assessment of $817,000 before taxes (and $512,000 net of taxes) was charged against income in the third quarter of 1996 and paid in November 1996 (the "SAIF Assessment"). In view of the recapitalization of the SAIF, the FDIC reduced the assessment rates for SAIF-assessable deposits. Beginning on October 1, 1996, the Company expects to incur approximately $85,000 of assessments (based on the Bank's December 31, 1996 deposit insurance assessment base) for the year ending December 31, 1997 for deposit insurance and for the interest payments on the FICO bonds issued by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. As a result of the lower assessment rates, the expected 1997 expense would be $194,000 lower than the expense incurred in 1996. See "Impact of New Legislation--Deposit Insurance--SAIF Recapitalization" for further discussion. BUSINESS STRATEGY The Company's current business strategy is to operate the Bank as a well- capitalized, profitable and independent community-oriented savings bank dedicated to providing quality customer service. Generally, the Company has sought to implement this strategy by primarily using deposits and advances from the FHLB, as its source of funds and maintaining a substantial part of its assets in loans secured by one- to four-family residential real estate located in the Company's market area, multifamily loans, consumer and other loans and in other liquid investment securities. Specifically, the Company's business strategy incorporates the following elements: (1) operating as a community- oriented financial institution, maintaining a strong core customer base by providing quality service and offering customers the access to senior management and services that a locally-headquartered institution can offer; (2) maintaining high asset quality by emphasizing investment in residential mortgage loans (including the purchase of qualifying multifamily loans) and securities issued or guaranteed by the United States Government or agencies thereof; (3) maintaining capital in excess of regulatory requirements and growing only to the extent that adequate capital levels can be maintained; (4) controlling noninterest expenses; (5) managing interest rate risk exposure while achieving desirable levels of profitability; and (6) increasing noninterest income, primarily through the expansion of the abstract company business conducted through a wholly owned subsidiary. Highlights of the Company's business strategy are as follows: Community-Oriented Institution. The Company is committed to meeting the financial needs of the community in which it operates. Based in part on its participation in several different programs designed to facilitate residential lending to low- and moderate-income households, the Bank has received an "Outstanding" Community Reinvestment Act rating. The Company believes it is large enough to provide a full range of personal and business financial services and yet is small enough to be able to provide such services on a personalized and efficient basis. Management believes that the Company can be more effective in servicing its customers than many of its competitors which are not headquartered locally, because senior management of the Bank quickly and personally responds to customer needs and inquiries. Strong Retail Deposit Base. The Company has had a relatively strong and stable retail deposit base drawn from its offices located in Fort Dodge, Ames and Nevada, Iowa. In recent years, the stability of the Company's deposit base has been enhanced by the Company's offering of 5-year certificates of deposit (which comprises $45.5 million, or 35.1%, of total deposits at December 31, 1996) at attractive interest rates, and programs tying low-cost checking account services to the maintenance of specified certificate of deposit balances or loan balances. At December 31, 1996, 30.2% of the deposit base or $39.1 million consisted of core deposits, which included money market accounts, passbook savings accounts, NOW accounts, and noninterest-bearing demand accounts. Core deposits are considered to be a more stable and lower cost source of funds than certificates of deposit or outside borrowings. The Company will continue to emphasize retail deposits by providing quality customer service, offering competitive rates on deposit accounts, and providing depositors with a full range of accounts. Asset Quality and Emphasis on Residential Mortgage Lending. The Company has historically emphasized residential real estate financing, and has been primarily a portfolio lender. The Company expects to continue its commitment to financing the purchase or improvement of residential real estate in its market area. To supplement local mortgage loan originations and to diversify its mortgage loan portfolio geographically, the Company has 36 purchased loans in the secondary mortgage market, with an emphasis on adjustable-rate multifamily loans secured by properties outside the State of Iowa (the "out of state properties"). At December 31, 1996, the Company's portfolio of loans which were either originated or purchased by the Company and secured by out of state properties consisted of $7.8 million of one-to- four family residential mortgage loans, or 4.6% of the Company's total loan portfolio, and $37.3 million of multifamily and commercial loans, or 22.1% of the Company's total loan portfolio. The Company also invests in United States Treasury securities, interest-earning deposits, equity securities and FHLB stock. At December 31, 1996, 52.2% of the Company's total assets consisted of one-to-four family residential first mortgage loans and 8.1% of the Company's total assets consisted of United States Treasury notes. At December 31, 1996, the Company's ratio of nonperforming assets to total assets was 0.15%. Generally, the yield on mortgage loans originated and purchased by the Company is greater than that of securities purchased by the Company. There can be no assurance that the local economy will continue to improve. Future economic conditions and continued strong banking competition could result in diminished lending opportunities. If new loan originations are reduced in the future, the Company may increase its investment in securities and in purchased mortgage loans outside its market area. Capital Strength and Controlled Growth. Total equity increased from $12.5 million at December 31, 1992, to $49.2 million at December 31, 1996, an increase of 293.2%. Total assets have increased by $56.8 million, or 38.8%, since December 31, 1992. As a result, the ratio of total equity to total assets has improved from 8.6% at December 31, 1992 to 24.2% at December 31, 1996. The Company's growth has been produced from its emphasis on the origination of residential mortgage loans and purchases of primarily multifamily mortgage loans. The Company's growth has been funded through the use of proceeds from the stock offerings held in 1994 and 1996 and in 1995, through the use of FHLB advances. The Company intends to maintain strong levels of total equity and capital ratios by growing only to the extent that adequate capital levels can be maintained. From time to time, the Company has undertaken to evaluate the possibility of acquiring branch offices and other financial institutions, including the execution of confidentiality agreements and conducting due diligence, and intends to continue to do so in the future as the opportunity may arise. Such evaluations by the Company provide no indication of the likelihood that the Company will enter into any agreement to engage in an acquisition transaction, as in many instances such transactions are subject to competitive bidding and in every instance are subject to extensive arm's length negotiations once such evaluation by the Company is complete. Controlled Noninterest Expense. The Company has managed to control noninterest expense by limiting the overall number of its employees, and managing operating expenses. Noninterest expense (excluding the SAIF Assessment) as a percentage of average total assets did not exceed 2.16% for any year from the fiscal year ended December 31, 1992 through December 31, 1996. The Company's efficiency ratio (excluding the SAIF Assessment) did not exceed 48% for any year from the fiscal year ended December 31, 1992 through December 31, 1996. 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. In 1982, the Company purchased First Iowa Title Services, Inc. ("First Iowa"). On January 1, 1995, First Iowa purchased the assets of two abstract companies located in Jasper and Boone County, Iowa. On December 28, 1996, First Iowa purchased the assets of two abstract companies located in Webster and Calhoun County, Iowa. The abstract business performed by First Iowa replaces the function of a title insurance company. The Company believes that First Iowa can continue to be an excellent source of fee income. Noninterest income from such business for the year ended December 31, 1996 was $931,000, offset by a corresponding substantial 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, 1996, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $8.9 million, representing a one-year gap to total assets ratio of negative 4.36% as compared to a positive 2.90% at 37 December 31, 1995. To reduce the potential volatility of the Company's earnings in a changing interest rate environment, the Company has emphasized the origination of 7-year fixed rate mortgage loans that convert to adjustable rates at the conclusion of their initial terms and have overall maturities of up to 30 years, adjustable-rate loans, investment in 2-year United States Government securities and has sought to lengthen the terms of its deposits through its pricing strategies with respect to longer term certificates of deposit. See "--Asset and Liability Management--Interest Rate Sensitivity Analysis". COMPARISON OF FINANCIAL CONDITION AS OF DECEMBER 31, 1996, DECEMBER 31, 1995 AND DECEMBER 31, 1994 Total assets increased $23.2 million, or 12.9%, from $179.9 million at December 31, 1995 to $203.1 million at December 31, 1996, reflecting the use of proceeds from the Conversion. Total loans receivable, net, increased by $18.0 million, or 12.1%, from $147.9 million at December 31, 1995 to $165.8 million at December 31, 1996, due to the origination of $24.2 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans secured by one-to-four family and multifamily residences located out of state of $11.4 million, and originations of $10.1 million of second mortgage loans. These originations and purchases were offset in part by payments, prepayments and sales of loans during the year ended December 31, 1996. Deposits increased $3.0 million, or 2.4%, from $126.7 million at December 31, 1995 to $129.7 million at December 31, 1996. Other borrowings, primarily FHLB advances, increased $395,000, to $22.3 million at December 31, 1996 from $21.9 million at December 31, 1995. A portion of the proceeds from the Conversion was used to repay then outstanding FHLB advances. Subsequently, borrowings were increased primarily to fund loan growth. Total shareholders' equity increased $19.3 million from $29.9 million at December 31, 1995 to $49.2 million at December 31, 1996, primarily due to the issuance of stock in connection with the Conversion, less dividends paid to shareholders and stock repurchases. Total assets increased by $22.8 million, or 14.5%, from $157.2 million at December 31, 1994 to $179.9 million at December 31, 1995. Total loans receivable, net, increased by $23.0 million, or 18.5%, due to originations of $19.7 million of first mortgage loans secured by one-to-four family residences, purchases of $14.5 million of first mortgage loans secured by one-to-four family and multi-family residences and originations of $9.4 million of second mortgage loans, which originations and purchases were offset in part by payments and prepayments of loans during the year ended December 31, 1995. Title plant, which consists of the books and records of the chain of ownership of property in a certain geographical area, increased by $699,000, or 441.1%, due to the purchase of the assets of two abstract companies by First Iowa in 1995. Deposits increased $2.5 million, or 2.0%, from $124.2 million at December 31, 1994 to $126.7 million at December 31, 1995. Other borrowings, primarily FHLB advances, increased by $18.1 million, from $3.9 million at December 31, 1994 to $21.9 million at December 31, 1995. The Company increased its borrowings during the year ended December 31, 1995 in order to fund the net increases in loan receivables. Total shareholders' equity increased $2.1 million, from $27.8 million at December 31, 1994 to $29.9 million at December 31, 1995, primarily due to net income, less dividends paid to shareholders. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Interest Income. Interest income increased by $1.9 million to $15.1 million for the year ended December 31, 1996 compared to $13.1 million for the year ended December 31, 1995. The increase in interest income was primarily due to a $22.7 million increase in average interest earning assets (consisting primarily first and second mortgage loans) to $188.4 million for the year ended December 31, 1996, from $165.7 million for the comparable 1995 period. The increase in the average balances of interest-bearing assets primarily reflects increases in the average balances of first and second mortgage loans. These increases generally reflect an increase in originations of $24.2 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans secured by one-to-four family and multifamily residences located outside of the State of Iowa of $11.4 million and originations of $10.1 million of second mortgage loans, which originations and purchases were offset in part by payments, prepayments and sales of loans during the year ended December 31, 1996. The increase in average interest- earning assets reflects the use of proceeds from the Conversion and the Company's emphasis on residential lending. See "--Business Strategy." The increase in interest income was also due to an increase in the average yield on investment securities to 6.40% from 6.00% for the year ended December 31, 1996 and 1995, respectively, reflecting the purchase of certain higher yielding equity securities 38 during the year ended December 31, 1996. The average yield on interest earning assets increased to 8.01% for the year ended December 31, 1996 from 7.93% for the year ended December 31, 1995. Interest Expense. Interest expense decreased by $150,000 to $6.9 million for the year ended December 31, 1996 compared to $7.1 million for the year ended December 31, 1995. The decrease in interest expense was due to the decrease in the average cost of deposits from 5.11% for the year ended December 31, 1995 to 4.92% for the year ended December 31, 1996. The decline in the average cost of deposits was primarily due to a decline in the Company's average cost of passbook accounts reflecting a general decline in market interest rates, as well as a net increase of $3.7 million in the average balance of NOW and money market savings accounts, which accounts bear interest at lower rates than the Company's average cost of funds. The decrease in interest expense was also due to a decrease in the average balance of borrowed funds from $13.7 million for the year ended December 31, 1995, to $12.1 million for the 1996 comparable period, as the Company used a portion of the proceeds of the Conversion to repay FHLB advances. The decrease was offset in part by an increase of $3.5 million in the average interest-bearing deposits from $122.9 million for the year ended December 31, 1995 to $126.4 million for the year ended December 31, 1996, due to the Company's offering of favorable rates on certain types of deposit accounts. The average cost of interest bearing liabilities decreased to 5.00% for the year ended December 31, 1996 from 5.18% for the year ended December 31, 1995. Net Interest Income. Net interest income before provision for loan losses increased by $2.1 million to $8.2 million for the year ended December 31, 1996 from $6.1 million for the year ended December 31, 1995. The increase is primarily due to the increase in the excess of average interest earning assets over average interest bearing liabilities and an increase in the Company's interest rate spread (i.e., the difference between the average yield on assets and the average cost of liabilities) from 2.75% for the year ended December 31, 1995 to 3.01% for the year ended December 31, 1996. Provision for Loan Losses. The Company's provision for loan losses decreased by $10,000 to $240,000 for year ended December 31, 1996 from $250,000 for the same period of the prior year. 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 loans, substantially all of which are purchased and are secured by properties located out of state, and other factors related to the collectibility of the Company's loan portfolio. The net charge offs were $23,000 for the year ended December 31, 1996 as compared to $57,000 for the year ended December 31, 1995. The resulting allowance for loan loss was $2.0 million at December 31, 1996 as compared to $1.7 million at December 31, 1995. The increase in the allowance is primarily due to the increase in total loans from $151.3 million at December 31, 1995 to $168.9 million at December 31, 1996. The allowance for loan losses as a percentage of total loans receivable increased to 1.16% at December 31, 1996 from 1.15% at December 31, 1995. The level of nonperforming loans has increased slightly to $184,000 at December 31, 1996 from $181,000 at December 31, 1995. See "Asset Quality". Management believes that the allowance for loan losses is adequate. 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 no 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 $191,000, or 11.2%, to $1.9 million for the year ended December 31, 1996 from $1.7 million for the year ended December 31, 1995. The increase is primarily due to a $136,000 increase in abstract fees, attributable to increased sales volume, a $111,000 increase in checking account charges and a $82,000 increase in annuity commissions, which commissions are generated by the annuity sales activities of First Financial Service Corporation, a wholly owned subsidiary of the Bank. This increase, over fiscal year 1995, was offset in part by a $182,000 gain on the sale of securities available for sale for the year ended December 31, 1995. See "--Business Strategy--Increase Noninterest Income". 39 Noninterest Expense. Total non-interest expense increased by $1.3 million to $4.9 million for the year ended December 31, 1996 from $3.7 million for the year ended December 31, 1995, primarily due to the $817,000 one-time SAIF Assessment. Absent the SAIF Assessment, the increase reflects a $322,000 increase in salaries and benefits, a $39,000 increase in premises and equipment and $101,000 increase in other expenses. The increase in salaries and benefits was primarily a result of a one-time adoption of a retirement plan for the benefit of the former Chairman of the Board, the increased costs associated with the Company's Employee Stock Option Plan ("ESOP") and normal salary increases. The increase in premises and equipment is primarily a result of increased depreciation expense due to expenditures in the Company's Nevada office and equipment in the abstract companies. The increase in other expenses is primarily a result of increased professional fees, checking account costs and costs incurred for a Special Meeting of Shareholders in September, 1996. Income Taxes. Income taxes increased by $340,000 to $1.7 million for the year ended December 31, 1996 as compared to $1.4 million for the year ended December 31, 1995. The increase was principally due to an increase in pre-tax earnings during the 1996 period as compared to the 1995 period. On July 13, 1995, the Bank formed the Northridge Partnership with the Fort Dodge Housing Corporation ("FDHC"), a non-profit Iowa corporation formed to acquire, develop and manage low- and moderate-income housing for residents of the Fort Dodge area. The FDHC is controlled by the Fort Dodge Municipal Housing Agency, an agency chartered by the city of Fort Dodge. The Northridge Partnership is a low-income housing tax credit project for certain federal tax purposes. Management anticipates the tax credit will amount to approximately $150,000 for each year during the ten-year period commencing with the year the property is placed into service. To date, the Company has not realized any tax credits from the Northridge Partnership. Net Income. Net income totalled $3.1 million for the year ended December 31, 1996 compared to $2.5 million for the same period in 1995. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Interest Income. Interest income increased by $1.6 million to $13.1 million for the year ended December 31, 1995 compared to $11.6 million for the year ended December 31, 1994. The increase in interest income was due to a $15.8 million increase in the average interest earning assets to $165.8 million for the year ended December 31, 1995, from $150.0 million for the comparable 1994 period, reflecting an increase primarily attributable to originations of $19.7 million of new first mortgage loans secured by one-to-four family residences, purchases of $14.5 million of first mortgage loans secured by one-to-four family and multi-family residences and originations of $9.4 million of second mortgage loans, which originations and purchases were offset in part by payments and prepayments of loans during the year ended December 31, 1995. The resulting net increase in average interest-earning assets reflects the Company's strategy for controlled growth. See "--Business Strategy--Capital Strength and Controlled Growth". The increase in interest income was also due to an increase in the average yield on investment securities to 6.00% from 4.92% for the year ended December 31, 1995 and 1994, respectively, reflecting a general increase in the average rates paid on investments, which was partially offset by the decrease in the average yield on first mortgage loans from 8.26% for the year ended December 31, 1994 to 8.13% for the year ended December 31, 1995, reflecting a downward adjustment of rates on the Company's adjustable-rate mortgage loan portfolio partially offset by an increase in the amortization of the unearned discount due to unscheduled repayments and prepayments of certain loans. The average yield on interest earning assets increased to 7.93% for the year ended December 31, 1995 from 7.73% for the year ended December 31, 1994. Interest Expense. Interest expense increased by $1.0 million to $7.1 million for the year ended December 31, 1995 compared to $6.0 million for the year ended December 31, 1994. The increase in interest expense was due to the increase in the average cost of deposits from 4.70% for the year ended December 31, 1994 to 5.11% for the year ended December 31, 1995, reflecting a general increase in the average rate paid on deposits, the increase in the average balance of FHLB advances, which bear interest at a rate higher than the rates paid on the Company's interest bearing deposits, from $381,000 to $13.7 million for the year ended December 31, 1994 and 1995, respectively. These effects of the increase in interest expense were partially offset by a $5.0 million decrease in the average balance of deposits from $128.0 million for the year ended December 31, 1994, to $123.0 million for the 1995 comparable period. The decline in the average balance of deposits was due to the temporary 40 inclusion of the funds deposited with stock orders pending completion of the Company's conversion from mutual to stock form in 1994. The average cost of interest bearing liabilities increased to 5.18% for the year ended December 31, 1995 from 4.71% for the year ended December 31, 1994. Net Interest Income. Net interest income before provision for loan losses increased by $525,000 to $6.1 million for the year ended December 31, 1995 from $5.5 million for the year ended December 31, 1994. The increase is primarily due to the increase in the excess of average interest earning assets over average interest bearing liabilities, which was partially offset by the decrease in the Company's interest rate spread from 3.01% for the year ended December 31, 1994 to 2.75% for the year ended December 31, 1995. Provision for Loan Losses. The Company's provision for loan losses increased $8,000, to $250,000, for the year ended December 31, 1995 from $242,000 for the same period of the prior year. 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 loans, substantially all of which are purchased and are secured by properties located outside of the Company's market area, and other factors related to the collectibility of the Company's loan portfolio. The allowance for loan loss was $1.7 million at December 31, 1995 as compared to $1.5 million at December 31, 1994. Although the level of nonperforming loans decreased from $324,000 at December 31, 1994 to $181,000 at December 31, 1995, management determined to increase the provision slightly during 1995 in order to continue the steady increase in the allowance for loan losses. This increase in the allowance is primarily due to the increase in total loans from $128.6 million at December 31, 1994 to $151.3 million at December 31, 1995. The allowance for loan losses as a percentage of total loans receivable decreased to 1.15% at December 31, 1995 from 1.20% at December 31, 1994. See "Asset Quality." Management believes that the allowance for loan losses is adequate. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, identification of additional problem loans, and other factors, both within and outside of management's control. Noninterest Income. Total noninterest income increased by $655,000 to $1.7 million for the year ended December 31, 1995 from $1.0 million for the year ended December 31, 1994. The increase is primarily due to a $463,000 increase in abstract fees due to the purchase of the assets of two abstract companies in 1995 and a $182,000 gain on the sale of securities available for sale. See "--Business Strategy--Increasing Noninterest Income." Noninterest Expense. Total noninterest expense increased by $735,000 to $3.7 million for the year ended December 31, 1995 from $2.9 million for the year ended December 31, 1994. The increase is primarily due to a $400,000 increase in salaries and benefits, a $56,000 increase in premises and equipment and a $311,000 increase in other expenses. The increase in salaries and benefits was primarily a result of the increased personnel associated with the purchase of the assets of the two abstract companies, normal salary increases and the cost of the ESOP. The increase in premises and equipment was primarily a result of costs associated with operating the Ames branch, higher depreciation expense and the costs associated with the purchase of the assets of the two abstract companies. The increase in other expenses was primarily a result of higher costs associated with being a public company, advertising costs, printing, postage, stationery and supply costs and costs associated with the purchase of the assets of the two abstract companies. Income Taxes. Income taxes increased by $156,000 to $1.4 million for the year ended December 31, 1995 as compared to $1.2 million for the year ended December 31, 1994. The increase was primarily due to an increase in pre-tax earnings during the 1995 period as compared to the 1994 period. Net Income. Net income totalled $2.5 million for the year ended December 31,1995 compared to $2.2 million for the same period in 1994. 41 AVERAGE BALANCE SHEET The following tables 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 these tables, average balances were computed on a monthly basis.
FOR THE YEAR ENDED DECEMBER 31, AT DECEMBER 31, ------------------------------------------------------------------------------------------- 1996 1996 1995 1994 ----------------- ----------------------------- ----------------------------- ----------------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST -------- ------ -------- -------- ------- -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: First mortgage loans(1)........ $145,745 8.11% $137,668 $11,174(9) 8.12% $120,825 $ 9,818(9) 8.13% $105,108 $ 8,682(9) 8.26% Consumer loans(1)........ 22,039 9.60 20,900 2,007 9.60 17,865 1,703 9.53 15,321 1,454 9.49 Investment securities(2)... 29,459(5) 6.22 29,827(6) 1,909 6.40 27,128(7) 1,627 6.00 29,606(8) 1,456 4.92 -------- -------- ------- -------- ------- -------- ------- Total interest- earning assets. $197,243 7.99 $188,395 $15,090 8.01 $165,818 $13,148 7.93 $150,035 $11,592 7.73% ======= ======= ======= Noninterest- earning assets... 5,850 4,721 3,722 2,227 -------- -------- -------- -------- Total assets.... $203,093 $193,116 $169,540 $152,262 ======== ======== ======== ======== LIABILITIES AND EQUITY: Interest-bearing liabilities: NOW and money market savings.. $ 19,104 2.89% 18,704 530 2.83% 15,000 426 2.84% $ 12,588 $ 261 2.07% Passbook savings. 17,756 2.25 18,997 432 2.27 19,777 571 2.89 27,782 764 2.75 Certificates of Deposit......... 90,587 5.92 88,688 5,256 5.93 88,107 5,281 5.99 87,624 4,994 5.70 Borrowed funds... 22,335 5.79 12,114 711 5.87 13,734 801 5.84 381 29 7.76 -------- -------- ------- -------- ------- -------- ------- Total interest- bearing liabilities.... $149,782 5.08% $138,503 $ 6,929 5.00% $136,618 $ 7,079 5.18% $128,375 $ 6,048 4.71% ======= ======= ======= Noninterest- bearing liabilities...... 4,076 4,920 4,111 4,370 -------- -------- -------- -------- Total liabilities.... $153,858 143,423 140,729 $132,745 Equity............ 49,235 49,693 28,811 19,517 -------- -------- -------- -------- Total liabilities and equity......... $203,093 $193,116 $169,540 $152,262 ======== ======== ======== ======== Net interest income........... $ 8,161 $ 6,069 $ 5,544 ======= ======= ======= Net interest rate spread(3)........ 2.91% 3.01% 2.75% 3.02% Net interest margin(4)........ 4.13% 4.33% 3.66% 3.70% Ratio of average interest-earning assets to average interest-bearing liabilities...... 131.69% 136.02% 121.37% 116.87%
- ------- (1) Balance is net of deferred loan fees, loan discounts and loans in process. Nonaccrual loans are included in the balances. (2) Balance represents amortized cost on held to maturity assets and fair value on available for sale assets for the year ended December 31, 1994. Yields on available for sale securities were calculated using the market value of those securities for the year ended December 31, 1994. The computed yields are not materially different from yields calculated using the historical cost basis of the securities. (3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets. (5) Includes interest-bearing deposits of $2,973,000, securities available for sale of $22,986,000 and securities held to maturity of $3,500,000. (6) Includes interest-bearing deposits of $3,323,000, securities available for sale of $16,298,000 and securities held to maturity of $10,206,000. (7) Includes interest-bearing deposits of $2,251,000, securities available for sale of $5,846,000 and securities held to maturity of $19,031,000. (8) Includes interest-bearing deposits of $6,585,000, securities available for sale of $6,404,000 and securities held to maturity of $16,617,000. (9) Includes loan fee amortization of $(33,000), $(57,000) and $(51,000) for the years ended December 31, 1996, 1995 and 1994. 42 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, 1996 DECEMBER 31, 1995 COMPARED TO COMPARED TO YEAR ENDED YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1994 ------------------------------- -------------------------------- 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.... $1,369 $ (11) $ (2) $1,356 $1,299 $(142) $ (21) $1,136 Consumer loans.......... 289 13 2 304 242 6 1 249 Investment securities... 183 153 (54) 282 (128) 327 (28) 167 ------ ----- ---- ------ ------ ----- ----- ------ Total interest-earning assets................ $1,841 $ 155 $(54) $1,942 $1,413 $ 191 $ (48) $1,556 ====== ===== ==== ====== ====== ===== ===== ====== INTEREST EXPENSE: NOW and money market savings................ $ 105 $ (1) $-- $ 104) $ (237) $ 516 $ (20) $ 259 Passbook savings........ (23) (122) 5 (140) -- -- -- -- Certificate of deposits. 35 (59) -- (24) -- -- -- -- Borrowed funds.......... (94) 5 (1) (90) 1,036 (7) (257) 772 ------ ----- ---- ------ ------ ----- ----- ------ Total interest-bearing liabilities........... $ 23 $(177) $ 4 $ (150) $ 799 $ 509 $(277) $1,031 ====== ===== ==== ====== ====== ===== ===== ====== Net change in net interest income........ $1,818 $ 332 $(58) $2,092 $ 614 $(318) $ 229 $ 525 ====== ===== ==== ====== ====== ===== ===== ======
ASSET AND LIABILITY MANAGEMENT--INTEREST RATE SENSITIVITY ANALYSIS The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The "interest rate sensitivity gap" is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rate, 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 is recent years has been to manage its exposure to interest rate risk generally by the maturities of its interest rate sensitive assets and by emphasizing adjustable-rate mortgage loans, and maintaining a level of liquidity by investing in two-year United States Government securities and short-term interest-earning deposits. The Company generally offers competitive rates on deposit accounts had prices certificates of deposit to provide customers with incentives to choose certificates of deposit with longer terms. At December 31, 1996, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-ending assets maturing or repricing in the same period by $8.9 million, representing a one-year gap ratio of negative 4.4%, compared to a one-year gap ratio of positive 2.9% at December 31, 1995. To manage the potential volatility of the Company's earnings in a changing interest rate environment, the Company has 43 emphasized the origination of 7-year fixed rate mortgage loans that convert to adjustable rates at the conclusion of their initial terms and have overall maturities of up to 30 years, adjustable-rate loans, investment in 2-year United States Government securities and has sought to lengthen the terms of its deposits through its pricing strategies with respect to longer term certificates of deposit. The Chief Executive Officer regularly meets with the Bank's senior executive officers to review trends in deposits as well as mortgage and consumer lending. The Chief Executive Officer also regularly meets with the Treasurer to review the investment portfolio. The Chief Executive Officer reports quarterly to the Board of Directors on interest rate risks and trends, as well as liquidity and capital ratios and requirements. Gap Table. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1996, which are expected to reprice or mature, based upon certain assumptions, in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the earlier of term of repricing or the contractual terms of the asset or liability. Certain assumptions used in preparing the table are set forth in the following table. Management believes that these assumptions approximate actual experience and considers them appropriate and reasonable.
AT DECEMBER 31, 1996 (1) -------------------------------------------------------------------- WITHIN 1-3 3-5 5-10 10-20 OVER 20 1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) INTEREST-EARNINGS ASSETS: First mortgage loans Adjustable............. $ 43,428 $ 23,018 $ 15,640 $ -- $ -- $ -- $ 82,086 Fixed (2).............. 10,935 18,290 12,120 21,131 2,319 -- 64,795 Consumer and other loans.................. 7,877 12,181 1,915 65 2 -- 22,040 Investment securities(3).......... 20,052 9,002 523 -- -- -- 29,577 -------- -------- -------- -------- -------- -------- -------- Total interest-earning assets................ $ 82,292 $ 62,491 $ 30,198 $ 21,196 $ 2,321 $ -- $198,498 ======== ======== ======== ======== ======== ======== ======== RATE SENSITIVE LIABILITIES: Passbook and statement savings accounts....... $ 17,756 $ -- $ -- $ -- $ -- $ -- $ 17,756 NOW accounts............ 11,824 -- -- -- -- -- 11,824 Money market accounts... 7,280 -- -- -- -- -- 7,280 Certificate accounts.... 36,971 31,827 21,742 47 -- -- 90,587 Non-interest-bearing deposits............... 2,275 -- -- -- -- -- 2,275 FHLB advances and other liabilities............ 15,035 -- 7,300 -- -- -- 22,335 -------- -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities........... $91,141 $ 31,827 $ 29,042 $ 47 $ -- $ -- $152,057 ======== ======== ======== ======== ======== ======== ======== Interest sensitivity gap.................... $ (8,849) $ 30,664 $1,156 $ 21,149 $ 2,321 $ -- Cumulative interest- sensitivity gap........ $ (8,849) $ 21,815 $ 22,971 $ 44,120 $ 46,441 $ 46,441 Interest sensitivity gap to total assets........ -4.36% 15.10% 0.57% 10.41% 1.14% -- Cumulative interest- sensitivity gap to total assets........... -4.36% 10.74% 11.31% 21.72% 22.87% 22.87% Ratio of interest- earnings assets to interest-bearing liabilities............ 90.29% 196.35% 103.98% 100.00% 100.00% -- 103.54% Cumulative ratio of interest-earning assets to interest-bearing liabilities............ 90.29% 117.74% 115.11% 129.02% 130.54% 130.54% 130.54% Total assets............ $203,093 $203,093 $203,093 $203,093 $203,093 $203,093 $203,093 Cumulative interest bearing assets......... $ 82,292 $144,783 $174,981 $196,177 $198,498 $198,498 $198,498 Cumulative interest sensitive liabilities.. $ 91,141 $122,968 $152,010 $152,057 $152,057 $152,057 $152,057
- -------- (1) The Company prepared the above table using December 31, 1996 composite interest rate sensitivity assumptions of the Eighth District of the FHLB where such assumptions were available. Where such information was not available, the assumptions wee made based on December 1996 OTS assumptions or the Company's actual experience. These assumptions are as follows: (i) fixed-rate first mortgage loans one-to-four family residential properties with interest rates less than 8%, 8% to 9%, 9% to 10%, 10% to 11%, and 11% and over, and the remaining terms to maturity of over 15 years will prepay annually at 6%, 9%, 17%, 16% and 14%, respectively; (ii) adjustable-rate first mortgage loans on one-to-four family residential properties will prepay at 8% to 9% per year; (iii) fixed- and adjustable-rate mortgage loans on multifamily and commercial properties will repay at 8% per year; (iv) second mortgage consumer loans will prepay at 44 9% per year; (v) fixed-rate deposits will not be withdrawn prior to maturity; and (vi) passbook savings accounts, NOW accounts, money market accounts and noninterest-bearing deposit accounts are assumed to reprice within on year due to the possibility that such deposits will reprice in the event of significant changes in the overall level of interest rates. 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) Fixed rate first mortgage loans include $38.8 million of one-to-four family seven year fixed rate loans than convert to adjustable rates at the beginning of the eighth year and are adjustable thereafter. (3) Includes FHLMC preferred stock, FNMA preferred stock, 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 $3.0 million, securities available for sale of $23.1 million and securities held to maturity of $3.5 million. Certain shortcomings are inherent in the method of analysis presented in the Gap Table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of changes interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating he table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase. NPV Analysis. As part of its efforts to maximize net interest income and manage the risks associated with changing interest rates, management uses the "market value of portfolio equity" ("NPV") methodology which the OTS has adopted as part of its capital regulations. Under this methodology, interest rate risk exposure is assessed by reviewing the estimated changes in Net Interest Income ("NII") and NPV which would hypothetically occur if interest rates rapidly rise or fall all along the yield curve. Projected values of NII and 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, 1996, is an analysis of the Bank's interest rate risk ("IRR") as measured by changes in NPV and NII 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 Bank's current capital position. INTEREST RATE SENSITIVITY OF NET PORTFOLIO (NPV)(1)
NPV AS % OF PV OF NET PORTFOLIO VALUE ASSETS ------------------------------------ ------------------------ CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIOS CHANGE - --------------- -------- -------- -------- ---------- ------- (DOLLARS IN THOUSANDS) +400 bp $39,721 -8,019 -17% 20.89% -238 bp +300 bp 41,932 -5,809 -12 21.61 -165 bp +200 bp 44,093 -3,647 -8 22.28 -98 bp +100 bp 46,090 -1,651 -3 22.85 -41 bp 0 bp 47,741 -- -- 23.27 -- - -100 bp 48,751 1,010 +2 23.42 +15 bp - -200 bp 48,902 1,161 +2 23.25 -2 bp - -300 bp 49,309 1,568 +3 23.16 -10 bp - -400 bp 50,157 2,416 +5 23.23 -4 bp
- -------- (1) Denotes rate shock used to compute interest risk capital component. 45 As is the case with the Gap Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV Table presented assumes that the composition of the Bank'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 Bank'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 Bank's net interest income and will differ from actual results. LIQUIDITY AND CAPITAL RESOURCES OTS regulations require that thrift institutions such as the Bank maintain an average daily balance of liquid assets (cash, certain time deposits, banker's acceptances and specified United States Government state or federal agency obligations) equal to a monthly average of not less than 5% of its net withdrawal deposits plus short-term borrowings. At December 31, 1996, the amount of the Bank's liquid assets were $13.1 million, resulting in a liquidity ratio of 9.11%. OTS regulations also require that thrift institutions such as the Bank maintain an average daily balance of short term liquid assets (cash, certain time deposits, banker's acceptances and specified United States government, state or federal agency obligations) equal to a monthly average of not less than 1% of their net withdrawable deposits, plus short term borrowings. At December 31, 1996, the Bank's short term liquidity position was $4.1 million or 2.84% of short term liquid assets, compared to $3.3 million of 2.31% at December 31, 1995. The Company's primary sources of funds are deposits, amortization and prepayment of loans, 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 payments are greatly influenced by general interest rates, economic conditions, and competition. The Company manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Company invests in short-term interest-earnings assets, which provide liquidity to meet lending requirements. At December 31, 1996, $7.0 million, or 42.3%, of the Company's investment portfolio, excluding equity securities, was scheduled to mature in one year or less and $9.5 million, or 57.7%, was scheduled to mature in one to five years. Certificates of deposits scheduled to mature in less than one year, at December 31, 1996, totalled $37.0 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 is $98.2 million as of December 31, 1996. For additional information about cash flows from the Company's operating, financing and investing activities, see Statement of Cash Flows included in the Consolidated Financial Statements. At December 31, 1996, the Company had outstanding loan commitments of $3.1 million. This amount does not include undisbursed overdraft loan privileges and the unfunded portion of loans in process. The main sources of liquidity for the Holding Company are net proceeds from the sale of stock and dividends and loan payments from the bank. The main cash outflows are payments of dividends to shareholders and any repurchases of the Holding Company's common stock. During 1996, the Holding Company repurchased 581,062 shares of its Common Stock, pursuant to repurchase programs which were approved by the OTS. The Holding Company's ability to pay dividends to shareholders depends substantially on dividends and loan payments received from the Bank. The Bank may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital requirements or the amount required to be maintained for the liquidation account. Unlike the bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders, however, 46 it is subject to the requirements of Iowa law. Iowa law generally prohibits the Holding Company from paying a dividend if, after giving it effect, either of the following would result: (a) the Holding Company would not be able to pay its debts as they become due in the usual of business; or (b) the Holding Company's total assets would be less than the sum of its total liabilities, plus the amount that would be needed, if the Holding Company were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. The primary investing activities of the Company are the origination and purchase of mortgage and other loans and the purchase of securities. During the years ended December 31, 1996, 1995 and 1994, the Company's disbursements for the loan originations and purchases totaled $52.0 million, $48.2 million and $34.6 million, respectively. These activities were funded primarily by Conversion proceeds, net deposit inflows, principal repayments on loans, securities and FHLB advances. Net cash flows used in investing activities amounted to $21.3 million, $23.3 million and $9.6 million for the years ended December 31, 1996, 1995 and 1994, respectively. Net cash flows provided by financing activities amounted to $19.8 million, $19.8 million and $8.1 million for the years ended December 31, 1996, 1995 and 1994, 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, 1996 with tangible and leverage capital ratios of 21.8% and a total risk-based capital ratio of 40.7%. In determining the amount of risk- weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulations. These capital requirements, which are applicable to the Bank only, do not consider additional capital held at the Holding Company level, and require certain adjustments to shareholder's 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, 1996:
CAPITAL EXCESS AMOUNT REQUIREMENTS CAPITAL ------- ------------ ------- (IN THOUSANDS) Tangible capital............................. $43,861 $3,023 $40,838 Core capital................................. 43,861 6,045 37,816 Risk-based capital........................... 45,255 8,880 36,375
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 generally accepted accounting principles, 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. IMPACT OF NEW ACCOUNTING STANDARD In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which 47 supersedes FASB Statements No. 76 "Extinguishments of Debt," and No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." This statement amends FASB Statement No. 115, "Accounting for Certain investments in Debt and Equity Securities," and amends and extends to all servicing assets and liabilities, the accounting standards for mortgage servicing rights now set forth in SFAS No. 65, and supersedes SFAS No. 122. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. After a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. SFAS No. 125 further requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values on the date of the transfer. SFAS No. 125 also requires that servicing assets and liabilities be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income or loss and (b) assessment or increased obligation based on their fair values. SFAS No. 125 requires that debtors reclassify financial assets pledged as collateral and that secured parties recognize those assets and their obligation to return them to certain circumstances in which the secured party has taken control of those assets. SFAS No. 125 requires that a liability be derecognized if and only if either (i) the debtor pays the credit and is relieved of its obligation for the liability or (ii) the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor. Therefore, a liability is not considered extinguished by an in-substance defeasance. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Management of the Company does not expect the adoption of SFAS No. 125 to have a material effect on the Company's financial condition or results of operations. 48 ITEM 8. FINANCIAL STATEMENTS NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS INDEPENDENT AUDITOR'S REPORT................................................ 50 FINANCIAL STATEMENTS Consolidated statements of financial condition............................ 51 Consolidated statements of income......................................... 52 Consolidated statements of shareholders' equity........................... 53 Consolidated statements of cash flows..................................... 54 Notes to consolidated financial statements................................ 55
49 INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENTS To the Board of Directors North Central Bancshares, Inc. Fort Dodge, Iowa We have audited the accompanying consolidated statements of financial condition of North Central Bancshares, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, equity, and cash flows for the three years then ended December 31, 1996, 1995 and 1994. 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 generally accepted auditing standards. 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, 1996 and 1995, and the results of their operations and their cash flows for the three years then ended December 31, 1996, 1995 and 1994 in conformity with generally accepted accounting principles. McGladrey J. Pullen, LLP Des Moines, Iowa January 30, 1997 50 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995 ------ ------------ ------------ Cash: Interest-bearing................................. $ 2,973,490 $ 2,362,244 Noninterest-bearing.............................. 963,325 709,398 Securities available for sale (Notes 2 and 8)...... 23,103,614 7,799,445 Securities held to maturity (Notes 2 and 8)........ 3,499,528 15,994,521 Loans receivable, net (Notes 3, 4, 8 and 14)....... 165,831,040 147,871,666 Accrued interest receivable (Note 5)............... 1,327,733 1,415,111 Foreclosed real estate............................. 128,471 127,989 Premises and equipment, net (Note 6)............... 1,780,392 1,621,734 Title plant........................................ 968,747 857,800 Income taxes receivable............................ -- 31,766 Deferred taxes (Note 9)............................ 198,000 67,626 Prepaid expenses and other assets.................. 2,318,195 1,070,396 ------------ ------------ Total assets................................... $203,092,535 $179,929,696 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities Deposits (Note 7)................................ $129,722,044 $126,672,313 Borrowed funds (Note 8).......................... 22,335,000 21,940,000 Advances from borrowers for taxes and insurance (Note 4)........................................ 845,488 781,545 Dividend payable................................. 230,344 127,829 Income taxes payable............................. 182,826 -- Accrued expenses and other liabilities........... 542,026 507,681 ------------ ------------ Total liabilities.............................. 153,857,728 150,029,368 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 13, 16 and 18) STOCKHOLDERS' EQUITY (Notes 11, 17 and 18) Common stock, $.01 par value, authorized 15,500,000 shares; issued and outstanding 1996 4,011,057 shares and 1995 3,700,000 shares...... 40,111 37,000 Preferred stock, $.01 par value, authorized 3,000,000 shares; issued and outstanding 1996 and 1995 none................................... -- -- Additional paid-in capital....................... 37,796,611 12,350,840 Retained earnings, substantially restricted (Note 9).............................................. 20,531,604 18,220,626 Unearned shares, employee stock ownership plan (Note 10)....................................... (1,416,955) (768,790) Unrealized gain on securities available for sale, net of income taxes............................. 73,097 60,652 Less cost of treasury stock, 1996 581,602 shares, 1995 none....................................... (7,789,661) -- ------------ ------------ Total stockholders' equity..................... 49,234,807 29,900,328 ------------ ------------ Total liabilities and equity................... $203,092,535 $179,929,696 ============ ============
See Notes to Consolidated Financial Statements. 51 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ----------- ---------- ---------- Interest income: Loans receivable: First mortgage loans..................... $11,173,567 $9,817,876 $8,682,361 Consumer loans........................... 2,007,185 1,702,971 1,454,281 Securities and cash deposits............... 1,909,267 1,627,516 1,455,632 ----------- ---------- ---------- 15,090,019 13,148,363 11,592,274 ----------- ---------- ---------- Interest expense: Deposits (Note 7).......................... 6,217,234 6,277,578 6,018,517 Other borrowed funds....................... 711,418 801,448 29,531 ----------- ---------- ---------- 6,928,652 7,079,026 6,048,048 ----------- ---------- ---------- Net interest income.................... 8,161,367 6,069,337 5,544,226 Provision for loan losses (Note 3)........... 240,000 250,000 241,500 ----------- ---------- ---------- Net interest income after provision for loan losses........................... 7,921,367 5,819,337 5,302,726 ----------- ---------- ---------- Noninterest income: Fees and service charges................... 579,999 444,916 429,654 Abstract fees.............................. 931,031 794,732 331,486 Gain on sale of securities available for sale, net................................. 13,774 181,871 -- Other income............................... 368,691 281,286 286,198 ----------- ---------- ---------- Total noninterest income............... 1,893,495 1,702,805 1,047,338 ----------- ---------- ---------- Noninterest expense: Salaries and employee benefits (Note 10)... 2,003,701 1,681,290 1,281,678 Premises and equipment..................... 420,633 381,771 325,432 Data processing............................ 243,762 235,626 248,029 SAIF special assessment.................... 817,275 -- -- SAIF deposit insurance premiums............ 278,563 286,593 306,421 Other expenses (Note 12)................... 1,174,450 1,072,968 761,483 ----------- ---------- ---------- Total noninterest expense.............. 4,938,384 3,658,248 2,923,043 ----------- ---------- ---------- Income before income taxes............. 4,876,478 3,863,894 3,427,021 Provision for income taxes (Note 9).......... 1,743,557 1,403,262 1,246,847 ----------- ---------- ---------- Net income............................. $ 3,132,921 $2,460,632 2,180,174 =========== ========== ========== Earnings per common share (subsequent to conversion for 1994)........................ $ .82 $ .63 $ .21 Dividends declared per common share (Note 11)......................................... $ .28 $ .60 $ .12
See Notes to Consolidated Financial Statements. 52 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
GAIN (LOSS) ON SECURITIES EMPLOYEE AVAILABLE ADDITIONAL STOCK FOR SALE, TOTAL COMMON PAID-IN RETAINED OWNERSHIP NET OF TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS PLAN INCOME TAXES STOCK EQUITY ------- ----------- ----------- ----------- ------------ ----------- ------------- Balance, December 31, 1993................... $ -- $ -- $14,761,518 $ -- $ (830) $ -- $14,760,688 Net income............. -- -- 2,180,174 -- -- -- 2,180,174 Issuance of common stock................. 37,000 12,988,061 (242,171) -- -- -- 12,782,890 Expenses incurred relating to conversion to stock form......... -- (644,252) -- -- -- -- (644,252) Unearned ESOP shares... -- -- -- (960,000) -- -- (960,000) Dividends on common stock................. -- -- (157,638) -- -- -- (157,638) Effect of contribution to employee stock ownership plan........ -- 192 -- 74,000 -- -- 74,192 Net change in unrealized loss on securities available for sale, net......... -- -- -- -- (223,025) -- (223,025) ------- ----------- ----------- ----------- --------- ----------- ----------- Balance, December 31, 1994................... 37,000 12,344,001 16,541,883 (886,000) (223,855) -- 27,813,029 Net income............. -- -- 2,460,632 -- -- -- 2,460,632 Dividends on common stock................. -- -- (781,889) -- -- -- (781,889) Effect of contribution to employee stock ownership plan........ -- 6,839 -- 117,210 -- -- 124,049 Reclassification of security to available for sale (Note 2)..... -- -- -- -- 27,766 -- 27,766 Net change in unrealized loss on securities available for sale, net......... -- -- -- -- 256,741 -- 256,741 ------- ----------- ----------- ----------- --------- ----------- ----------- Balance, December 31, 1995................... 37,000 12,350,840 18,220,626 (768,790) 60,652 -- 29,900,328 Net income............. -- -- 3,132,921 -- -- -- 3,132,921 Reorganization and conversion to stock form and proceeds from issuance of common stock in connection therewith............. 3,111 26,249,048 -- -- -- -- 26,252,159 Expenses incurred relating to conversion to stock form......... -- (844,469) -- -- -- -- (844,469) Purchase of treasury stock................. -- -- -- -- -- (7,789,661) (7,789,661) Unearned ESOP shares... -- -- -- (840,000) -- -- (840,000) Dividends on common stock................. -- -- (821,943) -- -- -- (821,943) Effect of contribution to employee stock ownership plan........ -- 41,192 -- 191,835 -- -- 233,027 Net change in unrealized loss on securities available for sale, net......... -- -- -- -- 12,445 -- 12,445 ------- ----------- ----------- ----------- --------- ----------- ----------- Balance, December 31, 1996 $40,111 $37,796,611 $20,531,604 $(1,416,955) $ 73,097 $(7,789,661) $49,234,807 ======= =========== =========== =========== ========= =========== ===========
See Notes to Consolidated Financial Statements. 53 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,132,921 $ 2,460,632 $ 2,180,174 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses........... 240,000 250,000 241,500 Depreciation........................ 202,911 170,445 140,090 Amortization and accretion.......... (163,796) (306,421) (308,758) Deferred taxes...................... (143,069) 41,946 (9,722) Effect of contribution to employee stock ownership plan............... 185,027 28,049 192 (Gain) on sale of foreclosed real estate and loans, net.............. (16,924) (11,675) (3,070) (Gain) on sale of securities available for sale................. (13,774) (181,871) -- (Gain) loss on disposal of equipment.......................... 19,781 -- (157) Stock dividend on Federal Home Loan Bank stock......................... -- (22,900) -- Change in assets and liabilities: (Increase) decrease in accrued interest receivable............... 87,378 (236,323) (155,771) (Increase) decrease in income taxes receivable.................. 31,766 (31,766) -- (Increase) in prepaid expenses and other assets...................... (1,449,942) (587,546) (174,043) Increase (decrease) in income taxes payable..................... 182,826 (57,646) 7,447 Increase (decrease) in accrued expenses and other liabilities.... 34,345 74,195 (4,966) ------------ ------------ ------------ Net cash provided by operating activities....................... 2,329,450 1,589,119 1,912,916 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) in loans............. (10,546,067) (8,537,826) (5,703,071) Purchase of loans................... (7,499,489) (14,503,589) (2,054,250) Proceeds from sale of securities available for sale................. 53,891 1,165,856 5,977,541 Purchase of securities available for sale............................... (15,314,175) (3,172,234) (3,618,380) Proceeds from maturities of securities held to maturity........ 12,500,000 8,000,000 8,000,000 Purchase of securities held to maturity........................... -- (4,992,057) (11,991,494) Purchase of premises and equipment.. (381,450) (424,827) (213,735) Proceeds from sale of equipment..... 100 500 600 Purchase of title plant............. (110,947) (699,270) -- Other............................... 16,442 (116,314) 17,903 ------------ ------------ ------------ Net cash (used in) investing activities....................... (21,281,695) (23,279,761) (9,584,886) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits. $ 3,049,731 $ 2,483,023 $ (6,955,500) Increase in advances from borrowers for taxes and insurance............ 63,943 7,740 38,167 Net change in short-term borrowings. (7,965,000) 15,000,000 3,000,000 Proceeds from other borrowed funds.. 9,300,000 3,150,000 -- Payments of other borrowings........ (892,000) -- -- Proceeds from conversion to stock form............................... 25,412,159 -- 12,782,890 Payments for expenses incurred relating to conversion to stock form............................... (642,326) -- (644,252) Deferred conversion costs........... -- (202,143) -- Purchase of treasury stock.......... (7,789,661) -- -- Dividends paid...................... (719,428) (654,060) (157,638) ------------ ------------ ------------ Net cash provided by financing activities....................... 19,817,418 19,784,560 8,063,667 ------------ ------------ ------------ Net increase (decrease) in cash... 865,173 (1,906,082) 391,697 CASH Beginning........................... 3,071,642 4,977,724 4,586,027 ------------ ------------ ------------ Ending.............................. $ 3,936,815 $ 3,071,642 $4,977,724 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors......... $ 6,236,351 $ 6,320,563 $ 5,963,599 Interest paid on borrowings......... 684,894 767,995 27,693 Income taxes........................ 1,656,411 1,450,728 1,248,629
See Notes to Consolidated Financial Statements. 54 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Organization and 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 Fort Dodge (the Bank) which is a federally chartered stock savings bank that conducts its operations from its main office located in Fort Dodge, Iowa and three branch offices located in Fort Dodge, Nevada and Ames, Iowa. The Company was created as part of a reorganization and conversion effected by the Bank and North Central Bancshares, M.H.C. (the MHC) which became effective on March 20, 1996. See Note 17 for a more complete description of the reorganization and conversion. Prior to March 20, 1996, the MHC owned approximately 65% of the Bank with the remaining 35% owned by members of the general public (including directors and officers of the Bank). The MHC became effective on August 31, 1994 when First Federal Savings Bank of Fort Dodge (the mutual savings bank) converted to a federal mutual holding company and concurrently formed a new federally chartered stock savings bank subsidiary (the Bank). See Note 16 for a more complete description. The financial statements presented for the Company include, since March 20, 1996, the consolidated statements of the Company and the Bank and, for periods prior to the March 20, 1996 conversion, the consolidated statements of the MHC and the Bank as if the MHC owned 100% of the Bank, and for periods prior to the August 31, 1994 conversion, the consolidated statements of the mutual savings bank. These financial statements were prepared as if the pooling-of- interests method of accounting were applied to the conversions. 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 Financial Service Corporation (which sells insurance and annuity products and originates equipment leases), First Iowa Title Services, Inc. (which provides real estate abstracting services), and Northridge Apartments Limited Partnership (which owns a multifamily apartment). 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. Securities held to maturity: Debt securities for which the Company has both the positive intent and ability to hold to maturity are classified as held-to- maturity and reported at amortized cost. Amortization of premiums and accretion of discounts is computed by the interest method over their contractual lives. Securities available for sale: Securities classified as available for sale are those debt and equity securities that the Bank 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 Bank'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 stockholders' equity, net of the related deferred tax effect. The amortization of premiums and accretion of discounts is computed by the interest method over their contractual lives. 55 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Loans receivable: Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, net deferred loan origination fees, and unearned discounts. Discounts on first mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. 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. Loan origination fees and related costs: 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. 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 market value less estimated selling costs. Premises and equipment: Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed primarily by straight-line and double declining-balance methods over the estimated useful lives of the assets. 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. Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their income tax bases. Income taxes are allocated to the Bank 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. 56 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Earnings per share: The earnings per share amounts were computed using the weighted average number of shares outstanding during the periods presented. In accordance with Statement of Position 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. Earnings per share information for the years ended December 31, 1996, 1995 and 1994 is calculated by dividing net income (subsequent to the mutual to stock conversion for 1994) by the weighted average number of shares outstanding (3,818,273; 3,919,488 and 3,907,231 shares, respectively). Net income subsequent to the conversion was $809,586 for the period ended December 31, 1994. Earnings per share for 1995 and 1994 have been restated to account for the effect of the stock conversion ratio in the 1996 conversion. Stock-option plan: In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which 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 non-employees. However, the new 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. Fair value of financial instruments: Financial Accounting Standards Board (FASB) Statement No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. 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. 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: The fair value of cash approximates the carrying amount. Securities: Fair values for all securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and that have experienced no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Deposits: Fair values disclosed for demand, NOW, passbook 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. 57 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Accrued interest receivable and payable: The fair values of both accrued interest receivable and payable approximate 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 credit worthiness of the counterparties. At December 31, 1996 and 1995, the carrying amount and fair value of the commitments were not significant. NOTE 2. SECURITIES Securities available for sale as of December 31, 1996 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS (LOSSES) FAIR VALUE ----------- ---------- ---------- ----------- Equity securities: Federal Home Loan Bank stock... $ 1,374,000 $ -- $ -- $ 1,374,000 FHLMC preferred stock.......... 3,011,510 1,800 (80,347) 2,932,963 FNMA preferred stock........... 5,134,375 134,225 -- 5,268,600 Other.......................... 475,250 35,429 (1,379) 509,300 Debt securities: U.S. Treasury notes............ 12,990,431 45,933 (17,613) 13,018,751 ----------- -------- -------- ----------- $22,985,566 $217,387 $(99,339) $23,103,614 =========== ======== ======== =========== Securities available for sale as of December 31, 1995 are as follows: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS (LOSSES) FAIR VALUE ----------- ---------- ---------- ----------- Equity securities: Federal Home Loan Bank stock... $ 1,160,100 $ -- $ -- $ 1,160,100 FHLMC preferred stock.......... 3,011,510 32,572 (31,069) 3,013,013 Other.......................... 40,116 19,497 -- 59,613 Debt securities: U.S. Treasury notes............ 3,494,810 71,909 -- 3,566,719 ----------- -------- -------- ----------- $ 7,706,536 $123,978 $(31,069) $ 7,799,445 =========== ======== ======== =========== Securities held to maturity as of December 31, 1996 are as follows: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS (LOSSES) FAIR VALUE ----------- ---------- ---------- ----------- Debt securities, U.S. Treasury notes........................... $ 3,499,528 $ 7,034 $ -- $ 3,506,562 =========== ======== ======== =========== Securities held to maturity as of December 31, 1995 are as follows: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS (LOSSES) FAIR VALUE ----------- ---------- ---------- ----------- Debt securities, U.S. Treasury notes........................... $15,994,521 $158,792 $ (970) $16,152,343 =========== ======== ======== ===========
58 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The amortized cost and fair value of debt securities as of December 31, 1996 by contractual maturity are shown below:
SECURITIES AVAILABLE SECURITIES HELD TO FOR SALE MATURITY ----------------------- --------------------- AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE ----------- ----------- ---------- ---------- Due in one year or less........... $ 3,498,345 $ 3,493,595 $3,499,528 $3,506,562 Due in one year to five years..... 9,492,086 9,525,156 -- -- ----------- ----------- ---------- ---------- $12,990,431 $13,018,751 $3,499,528 $3,506,562 =========== =========== ========== ==========
Gross gains of $13,774, $181,871 and none were realized on the sale of available for sale securities in 1996, 1995 and 1994, respectively. At December 31, 1996, the Bank has pledged $8,000,000 of U.S. Treasury notes as collateral for certain deposits and on Federal Home Loan Bank advances. NOTE 3. LOANS RECEIVABLE Loans receivable at December 31, 1996 and 1995 are summarized as follows:
1996 1995 ------------- ------------ First mortgage loans (principally conventional) Principal balances: Secured by one-to-four family residences....... $ 106,372,691 $ 93,105,400 Secured by: Multi-family properties...................... 34,488,126 31,621,572 Commercial properties........................ 5,224,709 5,825,338 Construction loans 796,000 1,771,000 ------------- ------------ Total first mortgage loans................. 146,881,526 132,323,310 ------------- ------------ Consumer loans: Principal balances: Automobile................................... 4,154,972 2,966,631 Second mortgage.............................. 15,301,062 13,283,612 Other........................................ 2,582,812 2,735,406 ------------- ------------ Total consumer loans....................... 22,038,846 18,985,649 ------------- ------------ Total loans................................ 168,920,372 151,308,959 Less: Undisbursed portion of construction loans.... (370,881) (782,312) Unearned discounts........................... (524,679) (681,779) Net deferred loan origination fees........... (240,885) (237,603) Allowance for loan losses.................... (1,952,887) (1,735,599) ------------- ------------ $ 165,831,040 $147,871,666 ============= ============
Activity in the allowance for loan losses is summarized as follows for the years ended December 31:
1996 1995 1994 ---------- ---------- ---------- Balance, beginning.......................... $1,735,599 $1,542,609 $1,305,787 Provision charged to income............... 240,000 250,000 241,500 Loans charged off......................... (24,297) (57,956) (6,170) Recoveries................................ 1,585 946 1,492 ---------- ---------- ---------- Balance, ending............................. $1,952,887 $1,735,599 $1,542,609 ========== ========== ==========
59 NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Nonaccrual loans totaled approximately $184,000 and $181,000 at December 31, 1996 and 1995, respectively. The amount of interest related to nonaccrual loans for 1996, 1995 and 1994 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 Bank consists of the following: Balance, December 31, 1993.................................... $ 863,527 Additions................................................... 189,602 Payments.................................................... (146,256) ---------- Balance, December 31, 1994.................................... 906,873 Additions................................................... 232,800 Payments.................................................... (56,382) ---------- Balance, December 31, 1995.................................... 1,083,291 Additions................................................... 293,450 Payments.................................................... (173,128) ---------- Balance, December 31, 1996.................................... $1,203,613 ==========
NOTE 4. LOAN SERVICING Mortgage loans serviced for FHLMC and other banks are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at December 31, 1996 and 1995 were $2,498,998 and $2,555,276, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $54,000 and $58,000, at December 31, 1996 and 1995, respectively. NOTE 5. ACCRUED INTEREST RECEIVABLE Accrued interest receivable at December 31 is summarized as follows:
1996 1995 ---------- ---------- Securities......................................... $ 225,423 $ 403,067 Loans receivable................................... 1,114,498 1,018,789 ---------- ---------- 1,339,921 1,421,856 Less allowance for uncollectible interest.......... 12,188 6,745 ---------- ---------- $1,327,733 $1,415,111 ========== ==========
NOTE 6. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31:
1996 1995 ---------- ---------- Land............................................... $ 368,739 $ 255,744 Buildings and improvements......................... 2,331,709 2,219,781 Leasehold improvements............................. 10,557 10,557 Furniture, fixtures and equipment.................. 1,044,801 983,052 Vehicles........................................... 44,870 39,857 ---------- ---------- 3,800,676 3,508,991 Less accumulated depreciation...................... 2,020,284 1,887,257 ---------- ---------- $1,780,392 $1,621,734 ========== ==========
60 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 7. DEPOSITS Deposits at December 31 are as follows:
WEIGHTED WEIGHTED AVERAGE AVERAGE RATE AT 1996 RATE AT 1995 DECEMBER ----------------------- DECEMBER ----------------------- NATURE OF DEPOSIT 31, 1996 AMOUNT PERCENTAGE 31, 1995 AMOUNT PERCENTAGE ----------------- -------- ------------ ---------- -------- ------------ ---------- Demand and NOW accounts: Noninterest bearing.... --% $ 2,274,967 1.8% -- % $ 2,267,770 1.8% Interest-bearing....... 2.00 11,823,752 9.1 2.25 11,436,755 9.0 Passbook savings........ 2.25 17,755,812 13.7 2.75 18,859,673 14.9 Money market savings.... 4.33 7,280,741 5.6 4.81 5,626,891 4.5 ------------ ----- ------------ ----- 39,135,272 30.2 38,191,089 30.2 Certificates of deposit: Less than 4.0%......... 3.39 139,862 0.1 3.79 1,028,134 0.8 4.0%-4.9%.............. 4.59 8,817,252 6.8 4.33 9,661,397 7.6 5.0%-5.9%.............. 5.54 36,664,197 28.3 5.45 25,510,639 20.1 6.0%-6.9%.............. 6.30 33,044,967 25.4 6.44 33,968,592 26.8 7.0%-7.9%.............. 7.09 11,867,441 9.2 7.24 17,242,567 13.6 8.0%-8.9%.............. 8.08 53,053 -- 8.00 1,020,532 0.8 More than 9.0%......... -- -- 9.13 49,363 0.1 ------------ ----- ------------ ----- 90,586,772 69.8 88,481,224 69.8 ------------ ----- ------------ ----- 4.87% $129,722,044 100.0% 5.03% $126,672,313 100.0% ============ ===== ============ =====
At December 31, 1996, scheduled maturities of certificates of deposit are as follows:
ONE YEAR ONE TO TWO TO THREE TO FOUR TO OR LESS TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS THEREAFTER ----------- ----------- ----------- ----------- ---------- ---------- Less than 3.9%.......... $ 139,862 $ -- $ -- $ -- $ -- $ -- 4.0-4.9%................ 7,966,398 666,530 155,215 29,109 -- -- 5.0-5.9%................ 12,658,158 15,665,335 4,464,776 1,513,378 2,362,550 -- 6.0-6.9%................ 11,098,310 2,266,551 6,853,679 7,291,615 5,488,160 46,652 7.0-7.9%................ 5,057,709 499,206 1,253,343 5,057,183 -- -- More than 8.0%.......... 51,103 -- 1,950 -- -- -- ----------- ----------- ----------- ----------- ---------- ------- $36,971,540 $19,097,622 $12,728,963 $13,891,285 $7,850,710 $46,652 =========== =========== =========== =========== ========== =======
Interest expense on deposits consists of the following:
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- NOW accounts............................ $ 223,567 $ 229,368 $ 197,150 Passbook savings........................ 431,724 571,191 763,988 Money market savings.................... 306,005 196,409 63,216 Certificates of deposit................. 5,255,938 5,280,610 4,994,163 ---------- ---------- ---------- $6,217,234 $6,277,578 $6,018,517 ========== ========== ==========
The aggregate amount of certificates of deposit of $100,000 or more was $2,432,000 and $2,739,000 as of December 31, 1996 and 1995, respectively. 61 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8. BORROWED FUNDS Borrowed funds at December 31, 1996 are summarized as follows: Term borrowings from Federal Home Loan Bank of Des Moines (FHLB)..................................................... $19,300,000 Advance from FHLB open line of credit....................... 3,000,000 Note payable................................................ 35,000 ----------- $22,335,000 ===========
The term borrowings consist of the following:
WEIGHTED AVERAGE INTEREST MATURITY RATE AMOUNT -------- -------- ----------- 1997................................................ 5.63% $12,000,000 2000................................................ 5.84 3,000,000 2001................................................ 6.02 4,300,000 ---- ----------- 5.75% $19,300,000 ==== ===========
The advance from FHLB open line of credit at December 31, 1996 matures on February 28, 1997 and carries an adjustable rate of interest (6.35% at December 31, 1996). The advances and borrowings are collateralized by the Federal Home Loan Bank stock, sufficient real estate loans to at least equal 150% of the total advances and borrowings outstanding and certain investment securities. The note payable at December 31, 1996 matures on May 1, 1997 and carries an interest rate of 9.0%. NOTE 9. INCOME TAXES AND RETAINED EARNINGS Under the Internal Revenue Code and similar sections of Iowa law, the Bank is allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. Through 1995, the provisions of the Code 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. The Bank used the percentage of taxable income method to compute its deductions in 1995 and 1994. Legislation passed in 1996 eliminates the percentage of taxable income method as an option for computing bad debt deductions for 1996 and in all future years. The Bank will still be permitted to take deductions for bad debts, but will be required to compute such deductions using an experience method. The Bank will also have to recapture its tax bad debt reserves which have accumulated since 1987 amounting to approximately $1,400,000. The tax associated with the recaptured reserves is approximately $522,000 and will be paid over a six year period beginning in 1997, unless the Bank qualifies for an additional delay to 1998, based on certain residential lending requirements. Deferred income taxes have been established for the taxes associated with the recaptured reserves. Deferred taxes have been provided for certain increases in tax bad debt reserves subsequent to December 31, 1987 which are in excess of the loan loss allowances recorded in the financial statements at December 31, 1996. However, at December 31, 1996, retained earnings contain certain historical additions to bad debt reserves 62 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) for income tax purposes of approximately $1,636,000 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 $622,000. In the future, if the Bank does not meet the income tax requirements necessary to permit the deduction of an allowance for bad debts, the Bank's effective tax rate would be increased to the maximum percent under existing law. Income tax expense is summarized as follows:
YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- ---------- Current................................ $1,886,626 $1,361,316 $1,256,569 Deferred............................... (143,069) 41,946 (9,722) ---------- ---------- ---------- $1,743,557 $1,403,262 $1,246,847 ========== ========== ==========
Deferred tax assets and liabilities consist of the following components as of December 31, 1996 and 1995:
1996 1995 -------- -------- Deferred tax assets: Unearned shares, employee stock ownership plan............. $ 20,000 $ -- Allowance for loan losses.................................. 197,000 106,000 Deferred directors fees and compensation................... 68,000 19,000 Other...................................................... 15,000 21,626 -------- -------- Total gross deferred tax assets.......................... 300,000 146,626 -------- -------- Deferred tax liabilities: Federal Home Loan Bank stock dividend...................... 9,000 9,000 Unrealized gain on securities available for sale........... 45,000 32,000 Premises and equipment..................................... 15,000 14,000 Unearned shares, employee stock ownership plan............. -- 8,000 Title plant................................................ 33,000 16,000 -------- -------- Total gross deferred tax liabilities..................... 102,000 79,000 -------- -------- Net deferred tax asset................................... $198,000 $ 67,626 ======== ========
Total income tax expense differed from the amounts computed by applying the U. S. federal income tax rates of 34 percent to income before income taxes as a result of the following:
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1996 1995 1995 --------------------- --------------------- --------------------- PERCENT PERCENT PERCENT OF PRETAX OF PRETAX OF PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ---------- --------- ---------- --------- ---------- --------- Income before income taxes.................. $1,658,003 34.0% $1,313,724 34.0% $1,165,180 34.0% Nontaxable dividends.... (107,983) (2.2) (56,134) (1.4) (45,025) (1.3) State income taxes, net of federal income tax benefit................ 125,286 2.6 120,847 3.1 111,770 3.3 Other................... 68,251 1.4 24,825 0.6 14,922 0.4 ---------- ---- ---------- ---- ---------- ---- $1,743,557 35.8% $1,403,262 36.3% $1,246,847 36.4% ========== ==== ========== ==== ========== ====
63 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10. EMPLOYEE BENEFIT PLANS Retirement plans: The Bank participates in a multi-employer defined benefit pension plan covering substantially all employees. This is a multi-employer plan and information as to actuarial valuations and net assets available for benefits by participating institutions is not available. There was no pension expense for the years ended December 31, 1996, 1995 and 1994. The Bank has a defined contribution plan covering substantially all employees. Contributions to the plan were approximately $19,000, $29,000 and $28,000 for the years ended December 31, 1996, 1995 and 1994, respectively. As of July 31, 1996, the Bank no longer contributed 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 104,077 shares of common stock issued in the conversion in 1994 and $840,000 to purchase 84,000 shares of common stock issued in the conversion in 1996. These funds are borrowed from the Company. The Bank makes contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. Dividends on unallocated ESOP shares are used to pay debt service. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after five years of credited service. Forfeitures will be reallocated among remaining participating employees, in the same proportion as contributions. Benefits may be payable in the form of stock or cash upon termination of employment. If the Bank'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 that there is an established market for the Bank's stock and therefore the Bank believes there is no potential repurchase obligation at December 31, 1996 and 1995. 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 $233,027, $124,049 and $74,192 for the years ended December 31, 1996, 1995 and 1994. Shares of the Bank's common stock held by the ESOP at December 31, 1996 and 1995 are as follows:
1996 1995 ---------- -------- Allocated shares...................................... $ 40,860 $ 20,730 Unreleased (unearned) shares.......................... 147,217 83,347 ---------- -------- $ 188,077 $104,077 ========== ======== Fair market value of unreleased (unearned) shares..... $1,996,631 $879,304 ========== ========
Stock option plans: 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. 64 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Plan authorizes the granting of stock options for a total of 401,105 shares of common stock or 10% of the shares issued in the 1996 conversion. All options were granted at an exercise price of $12.375 per share, which was the market price of the common stock on the grant date. Options granted to officers and directors become exercisable in five equal annual installments commencing September 21, 1997 and continuing on each anniversary date thereafter. The options expire 10 years from the date of grant unless an earlier expiration date is triggered by death, disability, retirement or termination, as described in the Plan. The table below reflects option activity for the period indicated:
YEAR ENDED DECEMBER 31, 1996 ------------ Balance at beginning of period -- Granted.................................................... 240,000 ------- Exercised.................................................. 240,000 ======= Weighted average fair value per option of options granted during the year 4.54 ======= Options exercisable........................................ -- ======= Remaining shares available for grant 161,105 =======
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 1996 reported net income and earnings per common share would have been decreased to the pro forma amounts shown below. The 1995 and 1994 amounts for net income and earnings per common share would not have been affected since the Plan was adopted in 1996.
1996 ---------- Net income: As reported................................................. $3,132,921 Pro forma................................................... 3,098,600 Earnings per common share: As reported................................................. $ .82 Pro forma................................................... .81
The fair value of the grants is estimated at the grant date using the Black- Scholes option-pricing model with the following weighted-average assumptions: dividend rate of 1.84%, price volatility of 25%, risk-free interest rates of 6.62% to 7.40%, and expected lives of 8 years. Employment agreements: The Company and the Bank have entered into employment agreements with a key officer. Under the terms of the agreements, the officer is entitled to additional compensation in the event of certain conditions of involuntary termination. The agreements extend for up to 36 months. The Bank has entered into certain employment retention agreements with key officers. Under the terms of the agreements, the employees are entitled to additional compensation in the event of a change of control of the Bank or the Company and the employees are involuntarily terminated within the remaining unexpired employment period, up to 24 months. A change in control is generally triggered by the acquisition or control of 20% or more of the common stock. 65 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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, 1996, the Bank meets all capital adequacy requirements to which it is subject. The Bank's actual capital amounts and ratios are also presented in the table.
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ADEQUACY ACTION ACTUAL PURPOSES PROVISIONS ------------- ------------- -------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ------ ----- ------- ----- (000'S) (000'S) (000'S) As of December 31, 1996: Total Capital (to risk weighted assets)............................. $45,255 40.7% $8,880 8.0% $11,100 10.0% Tier 1 Capital (to risk weighted assets)............................. 43,861 39.5 4,440 4.0 6,660 6.0 Tier I (Core) Capital (to adjusted assets)............................. 43,861 21.8 6,045 3.0 10,076 5.0 Tangible Capital (to adjusted assets)............................. 43,861 21.8 3,023 1.5 -- -- As of December 31, 1995: Total Capital (to risk weighted assets)............................. 29,752 31.6 7,525 8.0 9,407 10.0 Tier 1 Capital (to risk weighted assets)............................. 28,570 30.3 3,763 4.0 5,644 6.0 Tier I (Core) Capital (to adjusted assets)............................. 28,570 15.9 5,391 3.0 8,985 5.0 Tangible Capital (to adjusted assets)............................. 28,570 15.9 2,695 1.5 -- --
Limitations on Dividends and Other Capital Distributions. OTS regulations impose limitations on dividends and other capital distributions by savings institutions. Capital distributions include cash dividends, payments to repurchase or otherwise acquire the savings association's shares, payments to stockholders of another institution in a cash out merger, and other distributions charged against capital. The rule establishes three tiers of institutions. An institution such as the Bank that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Association") may, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to the higher of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its surplus capital at the beginning of the calendar year or (ii) 75% of its net income over the most recent four-quarter period, subject to certain limitations and restrictions as described in the regulations. Any additional capital distributions would require prior regulatory approval. A savings institution that does not meet its current regulatory capital requirement before or after payment of a proposed capital distribution may not make any capital distributions without the prior approval of the OTS. At December 31, 1996 the Bank was considered a Tier 1 Association. 66 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The MHC, which owned 2,421,711 shares of common stock prior to the 1996 conversion, requested and received permission from the OTS to waive the receipt of dividends from the Bank for several quarterly periods. This waiver had the effect of reducing the actual amount of dividends paid in cash. The total amount of dividends waived totaled approximately $1,897,000. As a result of the 1996 reorganization and conversion, the waived dividends were added to the liquidation account (see Note 17). NOTE 12. OTHER NONINTEREST EXPENSE Other noninterest expense amounts are summarized as follows for the years ended December 31:
1996 1995 1994 ---------- ---------- -------- Advertising and promotion................. $ 92,245 $ 108,146 $ 84,805 Professional fees......................... 202,677 137,189 73,367 Printing, postage, stationery, and supplies.................................. 182,134 171,631 129,037 Checking account charges.................. 151,724 138,024 125,964 Insurance................................. 72,236 64,886 53,337 OTS general assessment.................... 54,825 48,063 44,435 Other..................................... 418,609 405,029 250,538 ---------- ---------- -------- $1,174,450 $1,072,968 $761,483 ========== ========== ========
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 they do for on-statement of financial condition instruments. The Bank does require collateral or other security to support financial instruments with credit risk. A summary of the contract amount of the Bank's exposure to off-statement of financial condition risk for commitments to extend credit are as follows:
CONTRACT OR NOTIONAL AMOUNT --------------------- DECEMBER 31, --------------------- 1996 1995 ---------- ---------- Mortgage loans........................................... $3,090,000 $2,664,000 Undisbursed overdraft loan privileges.................... 239,000 226,000
At December 31, 1996, the mortgage loan commitments above are comprised of fixed-rate commitments of $1,053,000 carrying a weighted average rate of 7.60% and variable-rate commitments of $2,037,000 carrying a weighted average interest rate of 8.75%. 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 67 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) drawn upon, the total commitment amounts above do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but normally includes real estate and personal property. NOTE 14. LENDING ACTIVITIES AND CONCENTRATIONS OF CREDIT RISK Most of the Bank's lending activity is with customers located within the state of Iowa. The Bank generally originates single and multi-family residential loans within its primary lending area of Webster and Story counties. 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 31% of the Bank's first mortgage loan portfolio at December 31, 1996 consists of loans purchased or originated outside the Bank's primary lending area. These loans are secured by the underlying properties. The properties securing these loans are physically inspected and the loans are subject to the same underwriting guidelines as loans originated locally. The Bank is also active in originating secured consumer loans to its customers, primarily automobile and second mortgage loans. Collateral for substantially all consumer loans are security agreements and/or Uniform Commercial Code filings on the purchased asset. NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amount and fair value of the Company's financial instruments as of December 31, 1996 and 1995 are as follows:
1996 1995 ------------------------- ------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------ ------------ ------------ ------------ (NEAREST (NEAREST 000) 000) Financial assets: Cash..................... $ 3,936,815 $ 3,937,000 $ 3,071,642 $ 3,072,000 Securities............... 26,603,142 26,610,000 23,793,966 23,952,000 Loans, net............... 165,831,040 168,389,000 147,871,666 150,079,000 Accrued interest receivable.............. 1,327,733 1,328,000 1,415,111 1,415,000 Financial liabilities: Deposits................. 129,722,044 131,321,000 126,672,313 128,253,000 Accrued interest payable. 85,815 86,000 68,053 68,000 Borrowed funds........... 22,335,000 22,139,000 21,940,000 21,940,000
NOTE 16. 1994 REORGANIZATION AND CONVERSION TO STOCK OWNERSHIP On January 27, 1994 the Board of Directors of First Federal Savings Bank of Fort Dodge (a mutual savings bank) adopted a plan of reorganization whereby the Bank would reorganize from a federally chartered mutual savings bank into a federal mutual holding company and concurrently form a new federally chartered stock savings bank subsidiary. Pursuant to the reorganization, the Bank (a stock savings bank) was formed as a new federal stock savings bank subsidiary of the mutual savings bank. The mutual savings bank transferred substantially all of its assets and liabilities to the stock savings bank in exchange for 2,421,711 shares of newly issued common stock of the stock savings bank. The mutual savings bank then converted its mutual savings bank charter to a federal mutual holding company charter under the name of North Central Bancshares, Inc. (the mutual holding company). The reorganization was effective August 31, 1994 at which time 2,421,711 shares of stock were issued to the mutual holding company representing approximately 65.5% of the common stock of the Bank and the remaining 35 percent, or 1,278,289 shares were sold in a public offering to persons other than the holding company at a price of $10 per share. 68 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The reorganization and stock offering was completed on August 31, 1994 and the Bank received proceeds of $12,038,638, net of costs of $644,252 and net of $100,000 retained by the mutual holding company. Persons who had membership or liquidation rights with respect to the mutual savings bank as of the date of reorganization shall, as long as they remain depositors of the Bank, continue to have such rights solely with respect to the mutual holding company after the reorganization (see Note 17). NOTE 17. THE 1996 REORGANIZATION AND CONVERSION On September 29, 1995, the Boards of Directors of the Bank and the Mutual Holding Company (MHC) adopted a Plan of Conversion and Agreement and Plan of Reorganization (the Plan). The reorganization became effective March 20, 1996. Pursuant to the Plan, (1) the MHC, which owned approximately 65.5% of the Bank, converted to an interim federal stock savings association and simultaneously merged into the Bank, with the Bank being the surviving entity; (2) the Bank then merged into an interim institution (Interim) formed as a wholly-owned subsidiary of the Company, a newly formed Iowa corporation formed in connection with the reorganization, with the Bank being the surviving entity; and, (3) the outstanding shares of the Bank's common stock (other than those held by the MHC, which were canceled) were converted into shares of common stock of the Company pursuant to a ratio that resulted in the holders of such shares owning in the aggregate approximately the same percentage of the Company as they owned of the Bank. The MHC then offered for sale pursuant to the Plan additional shares equal to 65.5% of the common shares of the Company. The reorganization was effective on March 20, 1996, at which time the Company issued an aggregate of 4,011,057 shares of its common stock, 1,385,590 shares of which were issued in exchange for all of the Bank's issued and outstanding shares, except for shares owned by the MHC which were canceled, and 2,625,467 shares of which were sold in Subscription and Community Offerings at a price of $10.00 per share, with gross proceeds amounting to $26,252,159. The Plan provided that when the conversion was completed, that a "Liquidation Account" would be established in an amount equal to the amount of any dividends waived by the MHC 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. 69 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 18. NORTH CENTRAL BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 1996 ASSETS Cash.............................................................. $ 204,843 Securities available for sale..................................... 509,300 Loan receivables, net............................................. 3,821,000 Investment in First Federal Savings Bank of Fort Dodge............ 44,951,564 Prepaid expenses and other assets................................. 26,276 ----------- Total assets.................................................. $49,512,983 =========== LIABILITIES AND EQUITY LIABILITIES Dividend payable................................................ $ 230,344 Income taxes payable............................................ 8,522 Accrued expenses and other liabilities.......................... 32,996 Deferred taxes.................................................. 6,392 ----------- Total liabilities............................................. 278,254 ----------- EQUITY Common stock.................................................... 40,111 Additional paid-in capital...................................... 37,796,611 Retained earnings............................................... 20,531,526 Unearned shares, employee stock ownership plan.................. (1,416,955) Unrealized gain on securities available for sale, net of income taxes.......................................................... 73,097 Treasury stock at cost.......................................... (7,789,661) ----------- Total equity.................................................. 49,234,729 ----------- Total liabilities and equity.................................. $49,512,983 ===========
70 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) STATEMENT OF INCOME PERIOD FROM MARCH 20, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996 Operating income: Equity in net income of subsidiary................................ $2,523,316 Interest income................................................... 418,948 ---------- 2,942,264 ---------- Operating expenses: Salaries and employee benefits.................................... 21,440 Other............................................................. 272,933 ---------- 294,373 ---------- Income before income taxes...................................... 2,647,891 Provision for income taxes.......................................... 65,400 ---------- Net income...................................................... $2,582,491 ==========
71 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) STATEMENT OF EQUITY PERIOD FROM MARCH 20, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
GAIN ON SECURITIES EMPLOYEE AVAILABLE FOR TOTAL COMMON ADDITIONAL RETAINED STOCK SALE, NET OF TREASURY STOCKHOLDERS' STOCK PAID-IN CAPITAL EARNINGS OWNERSHIP PLAN INCOME TAXES STOCK EQUITY ------- --------------- ----------- -------------- ------------- ----------- ------------- Balance, March 20, 1996. $ -- $ -- $ -- $ -- $ -- $ -- $ -- Net income............. -- -- 2,582,491 -- -- -- 2,582,491 Issuance of common stock in the conversion............ 40,111 26,211,948 -- -- -- -- 26,252,059 Expenses incurred relating to conversion to stock loan......... -- (844,469) -- -- -- -- (844,469) Transfer of equity from First Federal Savings Bank.................. -- 12,387,940 18,659,843 (768,790) 46,029 -- 30,325,022 Purchase of treasury stock................. -- -- -- -- -- (7,789,661) (7,789,661) Unearned ESOP shares... -- -- -- (840,000) -- -- (840,000) Dividends on common stock................. -- -- (710,808) -- -- -- (710,808) Extract of contribution to employee stock ownership plan........ -- 41,192 -- 191,835 -- -- 233,027 Net change in unrealized gain on securities available for sale, net......... -- -- -- -- 27,068 -- 27,068 ------- ----------- ----------- ----------- ------- ----------- ----------- Balance, December 31, 1996................... $40,111 $37,796,611 $20,531,526 $(1,416,955) $73,097 $(7,789,661) $49,234,729 ======= =========== =========== =========== ======= =========== ===========
72 NORTH CENTRAL BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) STATEMENT OF CASH FLOWS PERIOD FROM MARCH 20, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net income...................................................... $ 2,582,491 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary............... (2,523,316) Change in deferred income taxes................................ (7,228) Change in assets and liabilities: (Increase) in prepaid expenses and other assets............... (26,276) Increase in income taxes payable.............................. 8,522 Increase in accrued expenses and other liabilities............ 32,996 ------------ Net cash provided by operating activities.................... 67,189 ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans........................................... (3,821,000) Purchase of securities available for sale....................... (475,250) One half of stock proceeds paid to First Federal Savings Bank... (12,703,561) ------------ Net cash (used in) investing activities...................... (16,999,811) ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock.......................... 26,252,059 Payments for expenses incurred relating to conversion to stock form........................................................... (844,469) Purchase of treasury stock...................................... (7,789,661) Dividends paid.................................................. (480,464) ------------ Net cash provided by financing activities.................... 17,137,465 ------------ Net increase in cash......................................... 204,843 CASH Beginning....................................................... -- ------------ Ending.......................................................... $ 204,843 ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payment for income taxes................................... $ 56,000
73 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information regarding Directors and Executive Officers of the Registrant is included under the headings "Information with respect to Nominees and Continuing Directors," "Nominees for Election as Directors," "Continuing Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 25, 1997, which has been filed with the SEC and is incorporated herein by reference. Information regarding Executive Officers, who are not Directors, appears under the caption "Executive Officers" included in Item 1 of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is included under the headings "Executive Compensation" (excluding the Stock Performance Graph and the Compensation Committee Report) and "Directors' Compensation" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 25, 1997, which has been filed with the SEC and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership of certain beneficial owners and management is included under the headings "Security Ownership of Certain Beneficial Owners" and "Stock Ownership of Management" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 25, 1997, which has been filed with the SEC and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is included under the heading "Certain Relationships and Related Transactions" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 25, 1997, which has been filed with the SEC and is incorporated herein by reference. 74 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. FINANCIAL STATEMENTS The following are filed as part of this annual report on Form 10-K: . Independent Auditor's Report . Consolidated Statements of Financial Condition at December 31, 1996 and 1995 . Consolidated Statements of Income for each of the years in the three year period ended December 31, 1996 . Consolidated Statements of Shareholders' Equity for each of the years in the three year period ended December 31, 1996 . Consolidated Statements of Cash Flows for each of the year in the three year period ended December 31, 1996 . Notes to the Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (b)REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1996: A Form 8-K was filed on December 20, 1996, to report, pursuant to item 5, the retirement of Paul C. Eide, director and Chairman of the Board of the Holding Company and the Bank as of December 31, 1996, the election of Robert H. Singer, Jr. elected as a director of the Holding Company and the Bank to fill the vacancy created by Mr. Eide's retirement, and the election of David M. Bradley as Chairman of the Board of the Holding Company and the Bank, effective as of January 1, 1997. 75 (c) EXHIBITS REQUIRED BY ITEM 601 OF SECURITIES AND EXCHANGE COMMISSION REGULATION S-K:
PAGE EXHIBIT NO. DESCRIPTION NO. ----------- ----------- ---- 3.1 Articles of Incorporation of North Central Bancshares, Inc. * 3.2 Bylaws of North Central Bancshares, Inc. * 4.1 Federal Stock Charter of First Federal Savings Bank of Fort Dodge * 4.2 Bylaws of First Federal Savings Bank of Fort Dodge * 4.3 Specimen Stock Certificate of North Central Bancshares, Inc. * 10.1 Employee Stock Ownership Plan of First Federal Savings Bank of Fort Dodge and ESOP Trust Agreement * 10.2 ESOP Loan Documents, dated September 3, 1996 * 10.3 Employee Retention Agreements between First Federal Savings Bank of Fort Dodge and certain executive offi- cers ** 10.4 Employment Agreement between First Federal Savings Bank of Fort Dodge and David M. Bradley, effective as of Au- gust 31, 1994 * 10.5 Form of Employment Agreement between First Federal Sav- ings Bank of Fort Dodge and David M. Bradley * 10.6 Form of Employment Agreement between North Central Bancshares, Inc. and David M. Bradley * 10.7 Salary Continuation Plan Agreement between First Fed- eral Savings Bank of Fort Dodge and Paul C. Eide * 10.8 Lease Agreement of First Federal Savings Bank of Fort Dodge for Ames branch * 10.9 North Central Bancshares, Inc. 1996 Stock Option Plan *** 10.10 Asset Purchase Agreement between First Iowa Title Serv- ices, Inc. and Webster County Title Company, Inc.* * 10.11 Asset Purchase Agreement between First Iowa Title Serv- ices, Inc. and Calhoun County Abstract Company, Inc.* * 11.1 Statement regarding computation of per share earnings * 21.1 Subsidiaries of the Registrant ** 27.1 Financial Data Schedule * 99.1 Proxy Statement for Annual Meeting of Shareholders of North Central Bancshares, Inc. filed with the Securi- ties and Exchange Commission is incorporated herein by reference. *
(Notes on following page) 76 - -------- *Incorporated herein by reference to Registration Statement No. 33-80493 on Form S-1 of North Central Bancshares, Inc. filed with the Securities and Exchange Commission, (the "Commission") on December 18, 1995, as amended. **Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K filed by North Central Bancshares, Inc. for fiscal year 1995, filed with the Commission on March 29, 1996. ***Incorporated herein by reference to the Amended Schedule 14A of North Central Bancshares, Inc. filed with the Commission on August 19, 1996. 77 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. North Central Bancshares, Inc. /s/ David M. Bradley By: _________________________________ David M. Bradley Chairman, President and Chief Executive Officer Date: March 28, 1997 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE ---- ----- ---- /s/ David M. Bradley President, Chief Executive March 28, 1997 ____________________________________ Officer, Director, and David M. Bradley Chairman of the Board (principal executive officer) /s/ John L. Pierschbacher Treasurer (principal March 28, 1997 ____________________________________ accounting and financial John L. Pierschbacher officer) /s/ Robert H. Singer, Jr. Director March 28, 1997 ____________________________________ Robert H. Singer /s/ KaRene Egemo Director March 28, 1997 ____________________________________ KaRene Egemo /s/ Howard A. Hecht Director March 28, 1997 ____________________________________ Howard A. Hecht /s/ John M. Peters Director March 28, 1997 ____________________________________ John M. Peters /s/ Melvin R. Schroeder Director March 28, 1997 ____________________________________ Melvin R. Schroeder
S-1 TABLE OF CONTENTS LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
EXHIBIT PAGE NO. DESCRIPTION NO. ------- ----------- ---- 3.1 Articles of Incorporation of North Central Bancshares, Inc. * 3.2 Bylaws of North Central Bancshares, Inc. * 4.1 Federal Stock Charter of First Federal Savings Bank of Fort Dodge * 4.2 Bylaws of First Federal Savings Bank of Fort Dodge * 4.3 Specimen Stock Certificate of North Central Bancshares, Inc. * 10.1 Employee Stock Ownership Plan of First Federal Savings Bank of Fort Dodge and ESOP Trust Agreement * 10.2 ESOP Loan Documents, dated September 3, 1996 10.3 Employee Retention Agreements between First Federal Savings Bank of Fort Dodge and certain executive officers ** 10.4 Employment Agreement between First Federal Savings Bank of Fort Dodge and David M. Bradley, effective as of August 31, 1994 * 10.5 Form of Employment Agreement between First Federal Savings Bank of Fort Dodge and David M. Bradley * 10.6 Form of Employment Agreement between North Central Bancshares, Inc. and David M. Bradley * 10.7 Salary Continuation Plan Agreement between First Federal Sav- ings Bank of Fort Dodge and Paul C. Eide * 10.8 Lease Agreement of First Federal Savings Bank of Fort Dodge for Ames branch * 10.9 North Central Bancshares, Inc. 1996 Stock Option Plan *** 10.10 Asset Purchase Agreement between First Iowa Title Services, Inc. and Webster County Title Company, Inc.* * 10.11 Asset Purchase Agreement between First Iowa Title Services, Inc. and Calhoun County Abstract Company, Inc.* * 11.1 Statement regarding computation of per share earnings 21.1 Subsidiaries of Registrant ** 27.1 Financial Data Schedule 99.1 Proxy Statement for Annual Meeting of Shareholders of North Central Bancshares, Inc. filed with the Securities and Ex- change Commission is incorporated herein by reference.
- -------- * Incorporated herein by reference to Registration Statement No. 33-80493 on Form S-1 of North Central Bancshares, Inc. filed with the Securities and Exchange Commission, (the "Commission") on December 18, 1995, as amended. ** Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K filed by North Central Bancshares, Inc. for fiscal year 1995, filed with the Commission on March 29, 1996. *** Incorporated herein by reference to the Amended Schedule 14A of North Central Bancshares, Inc. filed with the Commission on August 19, 1996. EX-10.2 2 ESOP LOAN DOCUMENTS, DATED SEPT. 3, 1996 LOAN AGREEMENT BY AND BETWEEN FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN TRUST AND NORTH CENTRAL BANCSHARES, INC. MADE AND ENTERED INTO AS OF SEPTEMBER 3, 1996 TABLE OF CONTENTS Page ---- ARTICLE I --------- DEFINITIONS -----------
Section 1.1 Business Day.................................................. 1 Section 1.2 Code.......................................................... 2 Section 1.3 Default....................................................... 2 Section 1.4 ERISA......................................................... 2 Section 1.5 Event of Default.............................................. 2 Section 1.6 Independent Counsel........................................... 2 Section 1.7 Loan.......................................................... 2 Section 1.8 Loan Documents................................................ 2 Section 1.9 Pledge Agreement.............................................. 2 Section 1.10 Principal Amount.............................................. 2 Section 1.11 Promissory Note............................................... 2 Section 1.12 Register...................................................... 2
ARTICLE II ---------- THE LOAN; PRINCIPAL AMOUNT; INTEREST; SECURITY; INDEMNIFICATION -----------------------------------
Section 2.1 The Loan; Principal Amount.................................... 3 Section 2.2 Interest...................................................... 3 Section 2.3 Promissory Note............................................... 4 Section 2.4 Payment of Loan............................................... 4 Section 2.5 Prepayment.................................................... 5 Section 2.6 Method of Payments............................................ 5 Section 2.7 Use of Proceeds of Loan....................................... 6 Section 2.8 Security...................................................... 6 Section 2.9 Registration of the Promissory Note........................... 6
ARTICLE III ----------- REPRESENTATIONS AND WARRANTIES OF THE BORROWER ----------------------------------------------
Section 3.1 Power; Authority; Consents.................................... 7 Section 3.2 Due Execution; Validity; Enforceability....................... 7 Section 3.3 Properties; Priority of Liens................................. 7 Section 3.4 No Defaults; Compliance with Laws............................. 7 Section 3.5 Purchases of Common Stock..................................... 8
Page ---- ARTICLE IV ---------- REPRESENTATIONS AND WARRANTIES OF THE LENDER --------------------------------------------
Section 4.1 Power; Authority; Consents.................................... 8 Section 4.2 Due Execution; Validity; Enforceability....................... 8 Section 4.3 ESOP; Contributions........................................... 8 Section 4.4 Trustee; Committee............................................ 9 Section 4.5 Compliance with Laws; Actions................................. 9
ARTICLE V --------- EVENTS OF DEFAULT -----------------
Section 5.1 Events of Default Under Loan Agreement........................ 9 Section 5.2 Lender's Rights upon Event of Default......................... 10
ARTICLE VI ---------- MISCELLANEOUS PROVISIONS ------------------------
Section 6.1 Payments Due to the Lender.................................... 10 Section 6.2 Payments...................................................... 10 Section 6.3 Survival...................................................... 11 Section 6.4 Modifications, Consents and Waivers; Entire Agreement......... 11 Section 6.5 Remedies Cumulative........................................... 11 Section 6.6 Further Assurances; Compliance with Covenants................. 11 Section 6.7 Notices....................................................... 11 Section 6.8 Counterparts.................................................. 13 Section 6.9 Construction; Governing Law................................... 13 Section 6.10 Severability.................................................. 13 Section 6.11 Binding Effect; No assignment or Delegation................... 13 Exhibit A Form of Promissory Note............................................A-1 Exhibit B Form of Pledge Agreement...........................................B-1 Exhibit C Form of Assignment.................................................C-1 Exhibit D Form of Irrevocable Proxy..........................................D-1
LOAN AGREEMENT -------------- This LOAN AGREEMENT ("Loan Agreement") is made and entered into as of the 3rd day of September, 1996, by and between the FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN TRUST ("Borrower"), a trust forming part of the First Federal Savings Bank of Fort Dodge Employee Stock Ownership Plan ("ESOP"), acting through and by its Trustee, FIRST BANKERS TRUST COMPANY, N.A. ("Trustee"); and NORTH CENTRAL BANCSHARES, INC. ("Lender"), a corporation organized and existing under the laws of the state of Iowa, having an office at 825 Central Avenue, Fort Dodge, Iowa 50501. W I T N E S S E T H : ------------------- WHEREAS, the Borrower is a party to a Loan Agreement dated August __, 1994 with Northwest Savings, successor in interest to Nationar, pursuant to which the Borrower obtained a loan with an outstanding principal balance of Seven Hundred Forty-two Thousand Dollars ($742,000) on the date hereof ("First ESOP Loan"), secured on the date hereof by a collateral pledge of 83,348 shares of common stock of the Lender purchased with the proceeds of the First ESOP Loan ("First ESOP Loan Shares"); and WHEREAS, the Borrower is a party to a Loan Agreement dated March 20, 1996 with the Lender, pursuant to which the Borrower obtained a loan with an outstanding principal balance of Eight Hundred Nineteen Thousand Dollars ($819,000) on the date hereof ("Second ESOP Loan") secured by a collateral pledge of 84,000 shares of common stock of the Lender purchased with the proceeds of the Second ESOP Loan ("Second ESOP Loan Shares"); and WHEREAS, the Borrower wishes to refinance the First ESOP Loan and the Second ESOP Loan with the Lender without extending the repayment schedules therefor; and WHEREAS, the Lender is willing to accommodate such refinancing; NOW, THEREFORE, the Borrower and the Lender hereby agree as follows: ARTICLE I --------- DEFINITIONS ----------- The following definitions shall apply for purposes of this Loan Agreement, except to the extent that a different meaning is plainly indicated by the context: SECTION 1.1 BUSINESS DAY means any day other than a Saturday, Sunday or other day on which banks are authorized or required to close under federal law or the laws of the State of Iowa. -2- SECTION 1.2 CODE means the Internal Revenue Code of 1986 (including the corresponding provisions of any succeeding law). SECTION 1.3 DEFAULT means an event or condition which would constitute an Event of Default. The determination as to whether an event or condition would constitute an Event of Default shall be determined without regard to any applicable requirement of notice or lapse of time. SECTION 1.4 ERISA means the Employee Retirement Income Security Act of 1974, as amended (including the corresponding provisions of any succeeding law). SECTION 1.5 EVENT OF DEFAULT means an event or condition described in Article V. SECTION 1.6 INDEPENDENT COUNSEL means Thacher Proffitt & Wood or other counsel mutually satisfactory to both the Lender and the Borrower. SECTION 1.7 LOAN means the loan described in section 2.1. SECTION 1.8 LOAN DOCUMENTS means, collectively, this Loan Agreement, the Promissory Note and the Pledge Agreement and all other documents now or hereafter executed and delivered in connection with such documents, including all amendments, modifications and supplements of or to all such documents. SECTION 1.9 PLEDGE AGREEMENT means the agreement described in section 2.8(a). SECTION 1.10 PRINCIPAL AMOUNT means the face amount of the Promissory Note, determined as set forth in section 2.1(c). SECTION 1.11 PROMISSORY NOTE means the promissory note described in section 2.3. SECTION 1.12 REGISTER means the register described in section 2.9. ARTICLE II ---------- THE LOAN; PRINCIPAL AMOUNT; INTEREST; SECURITY; INDEMNIFICATION ----------------------------------- SECTION 2.1 THE LOAN; PRINCIPAL AMOUNT. (a) The Lender hereby agrees to lend to the Borrower on September 3, 1996 One Million Five Hundred Sixty-one Thousand Dollars ($1,561,000.00) -3- (b) For all purposes of this Loan Agreement, the Principal Amount on any date shall be equal to the excess, if any, of: (i) the aggregate amount disbursed by the Lender pursuant to section 2.1(a); over (ii) the aggregate amount of any repayments of such amounts made before such date. The Lender shall maintain on the Register a record of, and shall record on the Promissory Note, the Principal Amount, any changes in the Principal Amount and the effective date of any changes in the Principal Amount. (c) As soon as practicable after its receipt of the Principal Amount, the Borrower shall use the entire Principal Amount to satisfy its outstanding obligations pursuant to the First ESOP Loan and the Second ESOP Loan. SECTION 2.2 INTEREST. (a) The Borrower shall pay to the Lender interest on the Principal Amount, for the period commencing on the date of this Loan Agreement and continuing until the Principal Amount shall be paid in full, at the rate of seven percent (7%) per annum. Interest payable under this Agreement shall be computed on the basis of a year of 365 days and actual days elapsed (including the first day but excluding the last) occurring in the period to which the computation relates. (b) Except as otherwise provided in this section 2.2(b), accrued interest on the Principal Amount shall be payable by the Borrower quarterly in arrears commencing on the last Business Day of the first calendar quarter to end following the date of this Agreement and continuing on the last Business Day of each calendar quarter thereafter and upon the payment or prepayment of such Loan. All interest on the Principal Amount shall be paid by the Borrower in immediately available funds. The Lender shall remit to the Borrower, at least three (3) Business Days before the end of each calendar quarter, a statement of the interest payment due under section 2.2(a) for such quarter; provided, however, that a delay or failure by the Lender in providing the Borrower with such statement shall not alter the Borrower's obligation to make such payment. (c) Anything in this Loan Agreement or the Promissory Note to the contrary notwithstanding, the obligation of the Borrower to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to the Lender to the extent that the Lender's receipt thereof would not be permissible under the law or laws applicable to the Lender limiting rates of interest which may be charged or collected by the Lender. Any such payment referred to in the preceding sentence shall be made by the Borrower to the Lender on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to the Lender limiting rates of interest which may be charged or collected by the Lender. Such deferred interest shall not bear interest. SECTION 2.3 PROMISSORY NOTE. -4- The Loan shall be evidenced by a Promissory Note of the Borrower in substantially the form of Exhibit A attached hereto, dated the date hereof, payable to the order of the Lender in the Principal Amount and otherwise duly completed. SECTION 2.4 PAYMENT OF LOAN. The Principal Amount of the Loan shall be repaid in quarterly installments payable on the last Business Day of each calendar quarter beginning after the date of this Agreement. The amount of each such quarterly installment shall be as follows:
======================================================================================= Month/Year Installment Month/Year Installment Month/Year Installment - --------------------------------------------------------------------------------------- September 1996 45,000 December 1999 45,000 March 2003 45,000 - --------------------------------------------------------------------------------------- December 1996 45,000 March 2000 45,000 June 2003 45,000 - --------------------------------------------------------------------------------------- March 1997 45,000 June 2000 45,000 September 2003 45,000 - --------------------------------------------------------------------------------------- June 1997 45,000 September 2000 45,000 December 2003 45,000 - --------------------------------------------------------------------------------------- September 1997 45,000 December 2000 45,000 March 2004 43,000 - --------------------------------------------------------------------------------------- December 1997 45,000 March 2001 45,000 June 2004 21,000 - --------------------------------------------------------------------------------------- March 1998 45,000 June 2001 45,000 September 2004 21,000 - --------------------------------------------------------------------------------------- June 1998 45,000 September 2001 45,000 December 2004 21,000 - --------------------------------------------------------------------------------------- September 1998 45,000 December 2001 45,000 March 2005 21,000 - --------------------------------------------------------------------------------------- December 1998 45,000 March 2002 45,000 June 2005 21,000 - --------------------------------------------------------------------------------------- March 1999 45,000 June 2002 45,000 September 2005 21,000 - --------------------------------------------------------------------------------------- June 1999 45,000 September 2002 45,000 December 2005 21,000 - --------------------------------------------------------------------------------------- September 1999 45,000 December 2002 45,000 March 19, 2006 21,000 =======================================================================================
SECTION 2.5 PREPAYMENT. The Borrower shall be entitled to prepay the Loan in whole or in part, at any time and from time to time; provided, however, that the Borrower shall give notice to the Lender of any such prepayment; and provided, further, that any partial prepayment of the Loan shall be in an amount not less than TEN THOUSAND DOLLARS ($10,000.00). Any such prepayment shall be: (a) permanent and irrevocable: (b) accompanied by all accrued interest through the date of such prepayment; (c) made without premium or penalty; and (d) applied in the inverse order of the maturity of the installments thereof unless the Lender and the Borrower agree to apply such prepayments in some other order. SECTION 2.6 METHOD OF PAYMENTS. (a) All payments of principal, interest, other charges (including indemnities) and other amounts payable by the Borrower hereunder shall be made in lawful money of the United States, in immediately available funds, to the Lender at the address specified in or pursuant to this Loan Agreement for notices to the Lender, not later than 3:00 P.M., Iowa time, on the date on which such payment shall become due. Any such payment made on such date -5- but after such time shall, if the amount paid bears interest, and except as expressly provided to the contrary herein, be deemed to have been made on, and interest shall continue to accrue and be payable thereon until, the next succeeding Business Day. If any payment of principal or interest becomes due on a day other than a Business Day, such payment may be made on the next succeeding Business Day, and when paid, such payment shall include interest to the day on which such payment is in fact made. (b) Notwithstanding anything to the contrary contained in this Loan Agreement or the Promissory Note, neither the Borrower nor the Trustee shall be obligated to make any payment, repayment or prepayment on the Promissory Note or take or refrain from taking any other action hereunder or under the Promissory Note if doing so would cause the ESOP to cease to be an employee stock ownership plan within the meaning of section 4975(e)(7) of the Code or qualified under section 401(a) of the Code or cause the Borrower to cease to be a tax exempt trust under section 501(a) of the Code or if such act or failure to act would cause the Borrower or the Trustee to engage in any "prohibited transaction" as such term is defined in section 4975(c) of the Code and the regulations promulgated thereunder which is not exempted by section 4975(c)(2) or (d) of the Code and the regulations promulgated thereunder or in section 406 of ERISA and the regulations promulgated thereunder which is not exempted by section 408(b) of ERISA and the regulations promulgated thereunder; provided, however, that in each case, the Borrower or the Trustee or both, as the case may be, may act or refrain from acting pursuant to this section 2.6(b) on the basis of an opinion of Independent Counsel. The Borrower and the Trustee may consult with Independent Counsel, and any opinion of such Independent Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such opinion of Independent Counsel. Nothing contained in this section 2.6(b) shall be construed as imposing a duty on either the Borrower or the Trustee to consult with Independent Counsel. Any obligation of the Borrower or the Trustee to make any payment, repayment or prepayment on the Promissory Note or to take or refrain from taking any other act hereunder or under the Promissory Note which is excused pursuant to this section 2.6(b) shall be considered a binding obligation of the Borrower or the Trustee, or both, as the case may be, for the purposes of determining whether a Default or Event of Default has occurred hereunder or under the Promissory Note and nothing in this section 2.6(b) shall be construed as providing a defense to any remedies otherwise available upon a Default or an Event of Default hereunder (other than the remedy of specific performance). SECTION 2.7 USE OF PROCEEDS OF LOAN. The entire proceeds of the Loan shall be used solely for purposes of repaying all outstanding principal on the First ESOP Loan and Second ESOP Loan. SECTION 2.8 SECURITY. (a) In order to secure the due payment and performance by the Borrower of all of its obligations under this Loan Agreement, simultaneously with the execution and delivery of this Loan Agreement by the Borrower, the Borrower shall: (i) pledge to the Lender as Collateral (as defined in the Pledge Agreement), and grant to the Lender a first priority lien on and security interest -6- in, the Common Stock purchased with the proceeds of the First ESOP Loan and Second ESOP Loan and not allocated to any participant account on the date hereof, by the execution and delivery to the Lender of a Pledge Agreement in the form attached hereto as Exhibit B; and (ii) execute and deliver, or cause to be executed and delivered, such other agreements, instruments and documents as the Lender may reasonably require in order to effect the purposes of the Pledge Agreement and this Loan Agreement. (b) The Lender shall release from encumbrance under the Pledge Agreement and transfer to the Borrower, as of the date on which any payment or prepayment of the Principal Amount is made, a number of shares of Common Stock held as Collateral equal to the product of: (i) the number of shares of Common Stock purchased with the proceeds of the Loan and pledged as Collateral immediately before the release is effected; multiplied by (ii) a fraction, the numerator of which is the aggregate amount of the principal and interest payments (other than principal payments made upon any refinancing of the Loan, the First ESOP Loan and the Second ESOP Loan) made with respect to the Loan, the First ESOP Loan and the Second ESOP Loan for such calendar year, and the denominator of which is the aggregate amount of all of principal and interest remaining to be paid with respect to the Loan, the First ESOP Loan and the Second ESOP Loan as of the first day of such calendar year. SECTION 2.9 REGISTRATION OF THE PROMISSORY NOTE. (a) The Lender shall maintain a Register providing for the registration of the Principal Amount and any stated interest and of transfer and exchange of the Promissory Note. Transfer of the Promissory Note may be effected only by the surrender of the old instrument and either the reissuance by the Borrower of the old instrument to the new holder or the issuance by the Borrower of a new instrument to the new holder. The old Promissory Note so surrendered shall be cancelled by the Lender and returned to the Borrower after such cancellation. (b) Any new Promissory Note issued pursuant to section 2.9(a) shall carry the same rights to interest (unpaid and to accrue) carried by the Promissory Note so transferred or exchanged so that there will not be any loss or gain of interest on the note surrendered. Such new Promissory Note shall be subject to all of the provisions and entitled to all of the benefits of this Agreement. Prior to due presentment for registration or transfer, the Borrower may deem and treat the registered holder of any Promissory Note as the holder thereof for purposes of payment and all other purposes. A notation shall be made on each new Promissory Note of the amount of all payments of principal and interest theretofore paid. ARTICLE III ----------- REPRESENTATIONS AND WARRANTIES OF THE BORROWER ---------------------------------------------- The Borrower hereby represents and warrants to the Lender as follows: -7- SECTION 3.1 POWER; AUTHORITY; CONSENTS. The Borrower has the power to execute, deliver and perform this Loan Agreement, the Promissory Note and the Pledge Agreement, all of which have been duly authorized by all necessary and proper corporate or other action. SECTION 3.2 DUE EXECUTION; VALIDITY; ENFORCEABILITY. Each of the Loan Documents, including, without limitation, this Loan Agreement, the Promissory Note and the Pledge Agreement, have been duly executed and delivered by the Borrower; and each constitutes the valid and legally binding obligation of the Borrower, enforceable in accordance with its terms. SECTION 3.3 PROPERTIES; PRIORITY OF LIENS. The liens which have been created and granted by the Pledge Agreement constitute valid, first liens on the properties and assets covered by the Pledge Agreement, subject to no prior or equal lien. SECTION 3.4 NO DEFAULTS; COMPLIANCE WITH LAWS. The Borrower is not in default in any material respect under any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment to which it is a party or by which it is bound, or any other agreement or other instrument by which any of the properties or assets owned by it is materially affected. SECTION 3.5 PURCHASES OF COMMON STOCK. The Borrower has valid, legal and marketable title to all of the Common Stock so purchased, free and clear of any liens, other than a pledge to the Lender of the Common Stock so purchased pursuant to the Pledge Agreement. Neither the execution and delivery of the Loan Documents nor the performance of any obligation thereunder violates any provision of law or conflicts with or results in a breach of or creates (with or without the giving of notice or lapse of time, or both) a default under any agreement to which the Borrower is a party or by which it is bound or any of its properties is affected. No consent of any federal, state or local governmental authority, agency or other regulatory body, the absence of which could have a materially adverse effect on the Borrower or the Trustee, is or was required to be obtained in connection with the execution, delivery or performance of the Loan Documents and the transactions contemplated therein or in connection therewith, including, without limitation, with respect to the transfer of the shares of Common Stock purchased with the proceeds of the Loan pursuant thereto. ARTICLE IV ---------- REPRESENTATIONS AND WARRANTIES OF THE LENDER -------------------------------------------- -8- The Lender hereby represents and warrants to the Borrower as follows: SECTION 4.1 POWER; AUTHORITY; CONSENTS. The Lender has the power to execute, deliver and perform this Loan Agreement, the Pledge Agreement and all documents executed by the Lender in connection with the Loan, all of which have been duly authorized by all necessary and proper corporate or other action. No consent, authorization or approval or other action by any governmental authority or regulatory body, and no notice by the Lender to, or filing by the Lender with, any governmental authority or regulatory body is required for the due execution, delivery and performance of this Loan Agreement. SECTION 4.2 DUE EXECUTION; VALIDITY; ENFORCEABILITY. This Loan Agreement and the Pledge Agreement have been duly executed and delivered by the Lender; and each constitutes a valid and legally binding obligation of the Lender, enforceable in accordance with its terms. SECTION 4.3 ESOP; CONTRIBUTIONS. The ESOP and the Borrower have been duly created, organized and maintained by the Bank in compliance with all applicable laws, regulations and rulings. The ESOP qualifies as an "employee stock ownership plan" as defined in section 4975(e) (7) the Code. The ESOP provides that the Bank may make contributions to the ESOP in an amount necessary to enable the Trustee to amortize the Loan in accordance with the terms of the Promissory Note and this Loan Agreement, and the Bank will make such contributions; provided, however, that no such contributions shall be required if they would adversely affect the qualification of the ESOP under section 401(a) of the Code. SECTION 4.4 TRUSTEE; COMMITTEE. The Bank has taken such action as is required to be taken by it to duly appoint the Trustee and the members of the Committee. The Bank expressly acknowledges and agrees that this Loan Agreement, the Promissory Note and the Pledge Agreement are being executed by the Trustees not in their individual capacity but solely as trustee of and on behalf of the Borrower. SECTION 4.5 COMPLIANCE WITH LAWS; ACTIONS. Neither the execution and delivery by the Lender of this Loan Agreement or any instruments required thereby, nor compliance with the terms and provisions of any such documents by the Lender, constitutes a violation of any provision of any law or any regulation, order, writ, injunction or decree or any court or governmental instrumentality, or an event of default under any agreement, to which the Lender is a party or by which the Lender is bound or to which the Lender is subject, which violation or event of default would have a material adverse effect on the Lender. There is no action or proceeding pending or threatened against either of the ESOP or the Borrower before any court or administrative agency. -9- ARTICLE V --------- EVENTS OF DEFAULT ----------------- SECTION 5.1 EVENTS OF DEFAULT UNDER LOAN AGREEMENT. -------------------------------------- Each of the following events shall constitute an "Event of Default" hereunder: (a) Failure to make any payment or mandatory prepayment of principal of the Promissory Note when due, or failure to make any payment of interest on the Promissory Note not later than five (5) Business Days after the date when due. (b) Failure by the Borrower to perform or observe any term, condition or covenant of this Loan Agreement or of any of the other Loan Documents, including, without limitation, the Promissory Note and the Pledge Agreement. (c) Any representation or warranty made in writing to the Lender in any of the Loan Documents or any certificate, statement or report made or delivered in compliance with this Loan Agreement, shall have been false or misleading in any material respect when made or delivered. SECTION 5.2 LENDER'S RIGHTS UPON EVENT OF DEFAULT. ------------------------------------- If an Event of Default under this Loan Agreement shall occur and be continuing, the Lender shall have no rights to assets of the Borrower other than: (a) contributions (other than contributions of Common Stock) that are made by the Lender to enable the Borrower to meet its obligations pursuant to this Loan Agreement and earnings attributable to the investment of such contributions and (b) "Eligible Collateral" (as defined in the Pledge Agreement); provided, however, that: (i) the value of the Borrower's assets transferred to the Lender following an Event of Default in satisfaction of the due and unpaid amount of the Loan shall not exceed the amount in default (without regard to amounts owing solely as a result of any acceleration of the Loan); (ii) the Borrower's assets shall be transferred to the Lender following an Event of Default only to the extent of the failure of the Borrower to meet the payment schedule of the Loan; and (iii) all rights of the Lender to the Common Stock purchased with the proceeds of the Loan covered by the Pledge Agreement following an Event of Default shall be governed by the terms of the Pledge Agreement. ARTICLE VI ---------- MISCELLANEOUS PROVISIONS ------------------------ SECTION 6.1 PAYMENTS DUE TO THE LENDER. -------------------------- -10- If any amount is payable by the Borrower to the Lender pursuant to any indemnity obligation contained herein, then the Borrower shall pay, at the time or times provided therefor, any such amount and shall indemnify the Lender against and hold it harmless from any loss or damage resulting from or arising out of the nonpayment or delay in payment of any such amount. If any amounts as to which the Borrower has so indemnified the Lender hereunder shall be assessed or levied against the Lender, the Lender may notify the Borrower and make immediate payment thereof, together with interest or penalties in connection therewith, and shall thereupon be entitled to and shall receive immediate reimbursement therefor from the Borrower, together with interest on each such amount as provided in section 2.2(c). Notwithstanding any other provision contained in this Loan Agreement, the covenants and agreements of the Borrower contained in this section 6.1 shall survive: (a) payment of the Promissory Note and (b) termination of this Loan Agreement. SECTION 6.2 PAYMENTS. -------- All payments hereunder and under the Promissory Note shall be made without set-off or counterclaim and in such amounts as may be necessary in order that all such payments shall not be less than the amounts otherwise specified to be paid under this Loan Agreement and the Promissory Note, subject to any applicable tax withholding requirements. Upon payment in full of the Promissory Note, the Lender shall mark such Promissory Note "Paid" and return it to the Borrower. SECTION 6.3 SURVIVAL. -------- All agreements, representations and warranties made herein shall survive the delivery of this Loan Agreement and the Promissory Note. SECTION 6.4 MODIFICATIONS, CONSENTS AND WAIVERS; ENTIRE AGREEMENT. ----------------------------------------------------- No modification, amendment or waiver of or with respect to any provision of this Loan Agreement, the Promissory Note, the Pledge Agreement, or any of the other Loan Documents, nor consent to any departure from any of the terms or conditions thereof, shall in any event be effective unless it shall be in writing and signed by the party against whom enforcement thereof is sought. Any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No consent to or demand on a party in any case shall, of itself, entitle it to any other or further notice or demand in similar or other circumstances. This Loan Agreement embodies the entire agreement and understanding between the Lender and the Borrower and supersedes all prior agreements and understandings relating to the subject matter hereof. SECTION 6.5 REMEDIES CUMULATIVE. ------------------- Each and every right granted to the Lender hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Lender or the holder of the Promissory Note to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. The due payment and -11- performance of the obligations under the Loan Documents shall be without regard to any counterclaim, right of offset or any other claim whatsoever which the Borrower may have against the Lender and without regard to any other obligation of any nature whatsoever which the Lender may have to the Borrower, and no such counterclaim or offset shall be asserted by the Borrower in any action, suit or proceeding instituted by the Lender for payment or performance of such obligations. SECTION 6.6 FURTHER ASSURANCES; COMPLIANCE WITH COVENANTS. --------------------------------------------- At any time and from time to time, upon the request of the Lender, the Borrower shall execute, deliver and acknowledge or cause to be executed, delivered and acknowledged, such further documents and instruments and do such other acts and things as the Lender may reasonably request in order to fully effect the terms of this Loan Agreement, the Promissory Note, the Pledge Agreement, the other Loan Documents and any other agreements, instruments and documents delivered pursuant hereto or in connection with the Loan. SECTION 6.7 NOTICES. ------- Except as otherwise specifically provided for herein, all notices, requests, reports and other communications pursuant to this Loan Agreement shall be in writing, either by letter (delivered by hand or commercial messenger service or sent by registered or certified mail, return receipt requested, except for routine reports delivered in compliance with Article VI hereof which may be sent by ordinary first-class mail) or telex or telecopier, addressed as follows: (a) If to the Borrower: First Federal Savings Bank of Fort Dodge Employee Stock Ownership Plan Trust c/o First Bankers Trust Company, N.W. 1201 Broadway Quincy, Illinois 62301 Attention: Ms. Carmen Walch Trust Officer with copies to: Thacher Proffitt & Wood Two World Trade Center, 39th Floor New York, New York 10048 Attention: W. Edward Bright, Esq. (b) If to the Lender: North Central Bancshares, Inc. 825 Central Avenue Fort Dodge, Iowa 50501 Attention: Mr. David M. Bradley -12- President and Chief Executive Officer ------------------------------------- with a copy to: Thacher Proffitt & Wood Two World Trade Center, 39th Floor New York, New York 10048 Attention: W. Edward Bright, Esq. Any notice, request or communication hereunder shall be deemed to have been given on the day on which it is delivered by hand or by commercial messenger service, or sent by telex or telecopier, to such party at its address specified above, or, if sent by mail, on the third Business Day after the day deposited in the mail, postage prepaid, addressed as aforesaid. Any party may change the person or address to whom or which notices are to be given hereunder, by notice duly given hereunder; provided, however, that any such notice shall be deemed to have been given only when actually received by the party to whom it is addressed. SECTION 6.8 COUNTERPARTS. ------------ This Loan Agreement may be signed in any number of counterparts which, when taken together, shall constitute one and the same document. SECTION 6.9 CONSTRUCTION; GOVERNING LAW. --------------------------- The headings used in the table of contents and in this Loan Agreement are for convenience only and shall not be deemed to constitute a part hereof. All uses herein of any gender or of singular or plural terms shall be deemed to include uses of the other genders or plural or singular terms, as the context may require. All references in this Loan Agreement to an Article or section shall be to an Article or section of this Loan Agreement, unless otherwise specified. This Loan Agreement, the Promissory Note, the Pledge Agreement and the other Loan Documents shall be governed by, and construed and interpreted in accordance with the provisions of federal law and, in the absence of controlling federal law, the laws of the State of Iowa. The transaction evidenced by this Loan Agreement is intended to constitute an exempt loan under section 408(b)(3) of ERISA and section 4975(d)(3) of the Code and shall be construed and enforced to effect such intention. SECTION 6.10 SEVERABILITY. ------------ Wherever possible, each provision of this Loan Agreement shall be interpreted in such manner as to be effective and valid under applicable law; however, the provisions of this Loan Agreement are severable, and if any clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Loan Agreement in any jurisdiction. Each of the covenants, agreements and conditions contained in this Loan Agreement is independent, and compliance by a party with any of them shall not excuse non- compliance by such party with any other. The Borrower shall not -13- take any action the effect of which shall constitute a breach or violation of any provision of this Loan Agreement. SECTION 6.11 BINDING EFFECT; NO ASSIGNMENT OR DELEGATION. ------------------------------------------- This Loan Agreement shall be binding upon and inure to the benefit of the Borrower and its successors and the Lender and its successors and assigns. The rights and obligations of the Borrower under this Agreement shall not be assigned or delegated without the prior written consent of the Lender, and any purported assignment or delegation without such consent shall be void. -14- IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed as of the date first above written. FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN TRUST BY: FIRST BANKERS TRUST COMPANY, N.A., in its capacity as trustee and not in any other capacity BY: /s/ Carmen Walch ------------------------------------------ Name: Carmen Walch Title: Trust Officer DATE: September 3, 1996 NORTH CENTRAL BANCSHARES, INC. BY: /s/ David M. Bradley ------------------------------------------ David M. Bradley President and Chief Executive Officer DATE: September 3, 1996 PROMISSORY NOTE --------------- $1,561,000 Fort Dodge, Iowa PRINCIPAL AMOUNT September 3, 1996 FOR VALUE RECEIVED, the undersigned, First Federal Savings Bank of Fort Dodge Employee Stock Ownership Plan Trust ("Borrower"), acting by and through its Trustee, First Bankers Trust Company, N.A. ("Trustee"), hereby promises to pay to the order of North Central Bancshares, Inc. ("Lender") One Million Five Hundred Sixty-one Thousand Dollars ($1,561,000.00) payable in accordance with the Loan Agreement made and entered into between the Borrower and the Lender as of September 3, 1996, pursuant to which this Promissory Note is issued, in quarterly installments as follows:
======================================================================================== Month/Year Installment Month/Year Installment Month/Year Installment - ---------------------------------------------------------------------------------------- September 1996 45,000 December 1999 45,000 March 2003 45,000 - ---------------------------------------------------------------------------------------- December 1996 45,000 March 2000 45,000 June 2003 45,000 - ---------------------------------------------------------------------------------------- March 1997 45,000 June 2000 45,000 September 2003 45,000 - ---------------------------------------------------------------------------------------- June 1997 45,000 September 2000 45,000 December 2003 45,000 - ---------------------------------------------------------------------------------------- September 1997 45,000 December 2000 45,000 March 2004 43,000 - ---------------------------------------------------------------------------------------- December 1997 45,000 March 2001 45,000 June 2004 21,000 - ---------------------------------------------------------------------------------------- March 1998 45,000 June 2001 45,000 September 2004 21,000 - ---------------------------------------------------------------------------------------- June 1998 45,000 September 2001 45,000 December 2004 21,000 - ---------------------------------------------------------------------------------------- September 1998 45,000 December 2001 45,000 March 2005 21,000 - ---------------------------------------------------------------------------------------- December 1998 45,000 March 2002 45,000 June 2005 21,000 - ---------------------------------------------------------------------------------------- March 1999 45,000 June 2002 45,000 September 2005 21,000 - ---------------------------------------------------------------------------------------- June 1999 45,000 September 2002 45,000 December 2005 21,000 - ---------------------------------------------------------------------------------------- September 1999 45,000 December 2002 45,000 March 19, 2006 21,000 =======================================================================================
This Promissory Note shall bear interest at the rate per annum set forth or established under the Loan Agreement, such interest to be payable quarterly in arrears, commencing on March 31, 1996 and thereafter on the last Business Day of each calendar quarter and upon payment or prepayment of this Promissory Note. Anything herein to the contrary notwithstanding, the obligation of the Borrower to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to the Lender to the extent that the Lender's receipt thereof would not be permissible under the law or laws applicable to the Lender limiting rates of interest which A-2 may be charged or collected by the Lender. Any such payments of interest which are not made as a result of the limitation referred to in the preceding sentence shall be made by the Borrower to the Lender on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to the Lender limiting rates of interest which may be charged or collected by the Lender. Such deferred interest shall not bear interest. Payments of both principal and interest on this Promissory Note are to be made at the principal office of the Lender at 825 Central Avenue, Fort Dodge, Iowa 50501 or such other place as the holder hereof shall designate to the Borrower in writing, in lawful money of the United States of America in immediately available funds. Failure to make any payment of principal on this Promissory Note when due, or failure to make any payment of interest on this Promissory Note not later than five (5) Business Days after the date when due, shall constitute a default hereunder, whereupon the principal amount of and accrued interest on this Promissory Note shall immediately become due and payable in accordance with the terms of the Loan Agreement. This Promissory Note is secured by a Pledge Agreement between the Borrower and the Lender of even date herewith and is entitled to the benefits thereof. FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN TRUST BY: FIRST BANKERS TRUST COMPANY, N.A., in its capacity as Trustee and not in any other capacity BY: /s/ Carmen Walch ----------------------------------------- Name: Carmen Walch Title: Trust Officer EXHIBIT B --------- PLEDGE AGREEMENT ---------------- This PLEDGE AGREEMENT ("Pledge Agreement") is made as of the 3rd day of September, 1996, by and between the FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP TRUST, acting by and through its Trustee, First Bankers Trust Company, N.A. ("Pledgor"), and NORTH CENTRAL BANCSHARES, INC., a corporation organized and existing under the laws of the State of Iowa, having an office at 825 Central Avenue, Fort Dodge, Iowa 50501 ("Pledgee"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, this Pledge Agreement is being executed and delivered to the Pledgee pursuant to the terms of a Loan Agreement of even date herewith ("Loan Agreement"), by and between the Pledgor and the Pledgee; NOW, THEREFORE, in consideration of the mutual agreements contained herein and in the Loan Agreement, the parties hereto do hereby covenant and agree as follows: SECTION 1. DEFINITIONS. The following definitions shall apply for purposes of this Pledge Agreement, except to the extent that a different meaning is plainly indicated by the context; all capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Loan Agreement: (a) Collateral shall mean the Pledged Shares and, subject to section 5 hereof, and to the extent permitted by applicable law, all rights with respect thereto, and all proceeds of such Pledged Shares and rights. (b) Event of Default shall mean an event so defined in the Loan Agreement. (c) Liabilities shall mean all the obligations of the Pledgor to the Pledgee, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, under the Loan Agreement and the Promissory Note. (d) Pledged Shares shall mean all the shares of Common Stock of North Central Bancshares, Inc. purchased by the Pledgor with the proceeds of the First ESOP Loan and the Second ESOP Loan, but excluding any such shares previously released from encumbrance in accordance with the terms thereof. SECTION 2. PLEDGE. To secure the payment of and performance of all the Liabilities, the Pledgor hereby pledges to the Pledgee, and grants to the Pledgee a security interest in and lien upon, the Collateral. SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE PLEDGOR. The Pledgor represents, warrants and covenants to the Pledgee as follows: B-2 (a) the execution, delivery and performance of this Pledge Agreement and the pledging of the Collateral hereunder do not and will not conflict with, result in a violation of, or constitute a default under any agreement binding upon the Pledgor; (b) the Pledged Shares are and will continue to be owned by the Pledgor free and clear of any liens or rights of any other person except the lien hereunder and under the Loan Agreement in favor of the Pledgee, and the security interest of the Pledgee in the Pledged Shares and the proceeds thereof is and will continue to be prior to and senior to the rights of all others; (c) this Pledge Agreement is the legal, valid, binding and enforceable obligation of the Pledgor in accordance with its terms; (d) the Pledgor shall, from time to time, upon request of the Pledgee, promptly deliver to the Pledgee such stock powers, proxies, and similar documents, satisfactory in form and subsequent to the Pledgee, with respect to the Collateral as the Pledgee may reasonably request; and (e) subject to the first sentence of section 4(b), the Pledgor shall not, so long as any Liabilities are outstanding, sell, assign, exchange, pledge or otherwise transfer or encumber any of its rights in and to any of the Collateral. SECTION 4. ELIGIBLE COLLATERAL. ------------------- (a) As used herein the term "Eligible Collateral" shall mean that amount of Collateral which has an aggregate fair market value equal to the amount by which the Pledgor is in default (without regard to any amounts owing solely as the result of an acceleration of the Loan Agreement) or such lesser amount of Collateral as may be required pursuant to section 13 of this Pledge Agreement. (b) The Pledged Shares shall be released from this Pledge Agreement by the Pledgee, as of the date on which any payment or prepayment of the Principal Amount is made by the Pledgor, in a number of shares of Common Stock held as Collateral equal to the product of: (i) the number of shares of Common Stock purchased with the proceeds of the Loan and pledged as Collateral immediately before the release is effected; multiplied by (ii) a fraction, the numerator of which is the aggregate amount of the principal and interest payments on the Loan, the First ESOP Loan and the Second ESOP Loan (other than principal payments made upon any refinancing) made for such calendar year, and the denominator of which is the aggregate amount of all of principal and interest remaining to be paid on the Loan, the First ESOP Loan and the Second ESOP Loan as of the first day of such calendar year, and in a manner conforming to the requirements of Treasury Regulations Section 54.4957-7(b)(8), as the same may be from time to time amended or supplemented. Subject to such Regulations, the Pledgee may from time to time, after any Default or Event of Default, and without prior notice to the Pledgor, transfer all or any part of the Eligible Collateral into the name of the Pledgee or its nominee, with or without disclosing that such Eligible Collateral is subject to any rights of the Pledgor and may from time to time, whether before or after any of the B-3 Liabilities shall become due and payable, without notice to the Pledgor, take all or any of the following actions: (i) notify the parties obligated on any of the Eligible Collateral to make payment to the Pledgee of any amounts due or to become due thereunder, (ii) release or exchange all or any part of the Eligible Collateral, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, and (iii) take control of any proceeds of the Eligible Collateral. SECTION 5. DELIVERY. -------- (a) The Pledgor shall deliver to the Pledgee upon execution of this Pledge Agreement (i) an assignment by the Pledgor of all the Pledgor's rights to and interest in the Pledged Shares and (ii) an irrevocable proxy, in form and substance satisfactory to the Pledgee, signed by the Pledgor with respect to the Pledged Shares. (b) So long as no Default or Event of Default shall have occurred and be continuing, (i) the Pledgor shall be entitled to exercise any and all voting and other rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement, and (ii) the Pledgor shall be entitled to receive any and all cash dividends or other distributions paid in respect of the Collateral. SECTION 6. EVENTS OF DEFAULT. ----------------- (a) If a Default or an Event of Default shall be existing, in addition to the rights it may have under the Loan Agreement, the Promissory Note, and this Pledge Agreement, or by virtue of any other instrument, (i) the Pledgee may exercise, with respect to the Eligible Collateral, from time to time any rights and remedies available to it under the Uniform Commercial Code as in effect from time to time in the State of New York or otherwise available to it and (ii) the Pledgee shall have the right, for and in the name, place and stead of the Pledgor, to execute endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Eligible Collateral. Written notification of intended disposition of any of the Eligible Collateral shall be given by the Pledgee to the Pledgor at least three (3) Business Days before such disposition. Subject to section 13 below, any proceeds of any disposition of Eligible Collateral may be applied by the Pledgee to the payment of expenses in connection with the Eligible Collateral, including, without limitation, reasonable attorney's fees and legal expenses, and any balance of such proceeds may be applied by the Pledgee toward the payment of such of the Liabilities as are in Default, and in such order of application, as the Pledgee may from time to time elect. No action of the Pledgee permitted hereunder shall impair or affect its rights in and to the Eligible Collateral. All rights and remedies of the Pledgee expressed hereunder are in addition to all other rights and remedies possessed by it, including, those contained in the documents referred to in the definition of Liabilities in section 1 hereof. (b) In any sale of any of the Eligible Collateral after a Default or an Event of Default shall have occurred, the Pledgee is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is B-4 necessary in order to avoid any violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders and purchasers or further restrict such prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Eligible Collateral), or in order to obtain such required approval of the sale or of the purchase by any governmental regulatory authority or official, and the Pledgor further agrees that such compliance shall not result in such sale's being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Pledgee be liable or accountable to the Pledgor for any discount allowed by reason of the fact that such Eligible Collateral is sold in compliance with any such limitation or restriction. SECTION 7. PAYMENT IN FULL. Upon the payment in full of all outstanding Liabilities, this Pledge Agreement shall terminate and the Pledgee shall forthwith assign, transfer and deliver to the Pledgor, against receipt and without recourse to the Pledgee, all Collateral then held by the Pledgee pursuant to this Pledge Agreement. SECTION 8. NO WAIVER. No failure or delay on the part of the Pledgee in exercising any right or remedy hereunder or under any other document which confers or grants any rights in the Pledgee in respect of the Liabilities shall operate as a waiver thereof nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy of the Pledgee. SECTION 9. BINDING EFFECT; NO ASSIGNMENT OR DELEGATION. This Pledge Agreement shall be binding upon and inure to the benefit of the Pledgor, the Pledgee and their respective successors and assigns, except that the Pledgor may not assign or transfer its right hereunder without the prior written consent of the Pledgee (which consent shall not unreasonably be withheld). Each duty or obligation of the Pledgor to the Pledgee pursuant to the provisions of this Pledge Agreement shall be performed in favor of any person or entity designated by the Pledgee, and any duty or obligation of the Pledgee to the Pledgor may be performed by any other person or entity designated by the Pledgee. SECTION 10. GOVERNING LAW. This Pledge Agreement shall be governed by and construed in accordance with the provisions of federal law, and in the absence of controlling federal law, the laws of the State of Iowa applicable to agreements to be performed wholly within the State of Iowa. SECTION 11. NOTICES. All notices, requests, instructions or documents hereunder shall be in writing and delivered personally or sent by United States mail, registered or certified, return receipt requested, with proper postage prepaid, as follows: B-5 (a) If to the Pledgee: North Central Bancshares, Inc. 825 Central Avenue Fort Dodge, Iowa 50501 Attention: Mr. David M. Bradley President and Chief Executive Officer ------------------------------------- with a copy to: Thacher Proffitt & Wood Two World Trade Center, 39th Floor New York, New York 10048 Attention: W. Edward Bright, Esq. ---------------------- (b) If to the Pledgor: First Federal Savings Bank of Fort Dodge Employee Stock Ownership Plan Trust c/o First Bankers Trust Company, N.A. 1201 Broadway Quincy, Illinois 62301 Attention: Ms. Carmen Walch Trust Officer ------------- with copies to: Thacher Proffitt & Wood Two World Trade Center, 39th Floor New York, New York 10048 Attention: W. Edward Bright, Esq. ---------------------- or at such other address as either of the parties may designate by written notice to the other party. If delivered personally, the date on which the notice, request, instruction or document is delivered shall be the date on which such delivery is made, and, if delivered by mail, the date on which such notice, request, instruction or document is deposited in the mail shall be the date of delivery. Each notice, request, instruction or document shall bear the date on which it is delivered. SECTION 12. INTERPRETATION. Wherever possible each provision of this Pledge Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision hereof shall be prohibited by or invalid under such law, such provisions shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions hereof. B-6 SECTION 13. CONSTRUCTION. All provisions hereof shall be construed so as to maintain (a) the ESOP as a qualified leveraged employee stock ownership plan under section 401(a) and 4975(e)(7) of the Internal Revenue Code of 1986 (the "Code"), (b) the Trust as exempt from taxation under section 501(a) of the Code and (c) the Loan as an exempt loan under section 54.4975-7(b) of the Treasury Regulations and as described in Department of Labor Regulation section 2550.408b-3. B-7 IN WITNESS WHEREOF, this Pledge Agreement has been duly executed by the parties hereto as of the day and year first above written. FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP TRUST By: FIRST BANKERS TRUST COMPANY, N.A., in its capacity as Trustee and not in any other capacity By: /s/ Carmen Walch ------------------ Name: Carmen Walch Title: Trust Officer Date: September 3, 1996 NORTH CENTRAL BANCSHARES, INC. By: /s/ David M. Bradley ---------------------- David M. Bradley President and Chief Executive Officer Date: September 3, 1996 PROMISSORY NOTE --------------- $1,561,000 Fort Dodge, Iowa PRINCIPAL AMOUNT September 3, 1996 FOR VALUE RECEIVED, the undersigned, First Federal Savings Bank of Fort Dodge Employee Stock Ownership Plan Trust ("Borrower"), acting by and through its Trustee, First Bankers Trust Company, N.A. ("Trustee"), hereby promises to pay to the order of North Central Bancshares, Inc. ("Lender") One Million Five Hundred Sixty-one Thousand Dollars ($1,561,000.00) payable in accordance with the Loan Agreement made and entered into between the Borrower and the Lender as of September 3, 1996, pursuant to which this Promissory Note is issued, in quarterly installments as follows:
Month/Year Installment Month/Year Installment Month/Year Installment September 1996 45,000 December 1999 45,000 March 2003 45,000 December 1996 45,000 March 2000 45,000 June 2003 45,000 March 1997 45,000 June 2000 45,000 September 2003 45,000 June 1997 45,000 September 2000 45,000 December 2003 45,000 September 1997 45,000 December 2000 45,000 March 2004 43,000 December 1997 45,000 March 2001 45,000 June 2004 21,000 March 1998 45,000 June 2001 45,000 September 2004 21,000 June 1998 45,000 September 2001 45,000 December 2004 21,000 September 1998 45,000 December 2001 45,000 March 2005 21,000 December 1998 45,000 March 2002 45,000 June 2005 21,000 March 1999 45,000 June 2002 45,000 September 2005 21,000 June 1999 45,000 September 2002 45,000 December 2005 21,000 September 1999 45,000 December 2002 45,000 March 19, 2006 21,000 =======================================================================================
This Promissory Note shall bear interest at the rate per annum set forth or established under the Loan Agreement, such interest to be payable quarterly in arrears, commencing on March 31, 1996 and thereafter on the last Business Day of each calendar quarter and upon payment or prepayment of this Promissory Note. Anything herein to the contrary notwithstanding, the obligation of the Borrower to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to the Lender to the extent that the Lender's receipt thereof would not be permissible under the law or laws applicable to the Lender limiting rates of interest which may be charged or collected by the Lender. Any such payments of interest which are not made as a result of the limitation referred to in the preceding sentence shall be made by the Borrower to the Lender on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to the Lender limiting rates of interest which may be charged or collected by the Lender. Such deferred interest shall not bear interest. Payments of both principal and interest on this Promissory Note are to be made at the principal office of the Lender at 825 Central Avenue, Fort Dodge, Iowa 50501 or such other place as the holder hereof shall designate to the Borrower in writing, in lawful money of the United States of America in immediately available funds. Failure to make any payment of principal on this Promissory Note when due, or failure to make any payment of interest on this Promissory Note not later than five (5) Business Days after the date when due, shall constitute a default hereunder, whereupon the principal amount of and accrued interest on this Promissory Note shall immediately become due and payable in accordance with the terms of the Loan Agreement. This Promissory Note is secured by a Pledge Agreement between the Borrower and the Lender of even date herewith and is entitled to the benefits thereof. FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN TRUST BY: FIRST BANKERS TRUST COMPANY, N.A., in its capacity as Trustee and not in any other capacity BY: /s/ Carmen Walch ------------------ Name: Carmen Walch Title: Trust Officer ASSIGNMENT ---------- In consideration of the loan made by North Central Bancshares, Inc. ("Lender") to the First Federal Savings Bank of Fort Dodge Employee Stock Ownership Plan Trust ("Borrower") pursuant to the Loan Agreement of even date herewith between the Lender and the Borrower ("Loan Agreement") and pursuant to the Pledge Agreement between the Lender and the Borrower of even date herewith pertaining thereto, the Borrower hereby transfers, assigns and conveys to Lender all its right, title and interest in and to those certain shares of common stock of the Lender not allocated to the accounts of any participant which were purchased with the proceeds of prior loans extended by Northwest Savings and the Lender. FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN TRUST BY: FIRST BANKERS TRUST COMPANY, N.A., in its capacity as Trustee and not in any other capacity BY: /s/ Carmen Walch ------------------------------------------ Name: Carmen Walch Title: Trust Officer SEPTEMBER 3, 1996. IRREVOCABLE PROXY ----------------- In consideration of the loan made by North Central Bancshares, Inc. ("Lender") to the First Federal Savings Bank of Fort Dodge Employee Stock Ownership Plan Trust ("Borrower") pursuant to the Loan Agreement of even date herewith between the Lender and the Borrower ("Loan Agreement") and the Pledge Agreement between the Lender and the Borrower of even date herewith pertaining thereto, the undersigned Borrower hereby appoints the Lender as its proxy, with power of substitution, to represent and to vote those certain shares of common stock of the Lender not allocated to the account of any participant and which were purchased with the proceeds of prior loans extended by Northwest Savings and the Lender. This proxy, when properly executed, shall be irrevocable and shall give the Lender full power and authority to vote on any and all matters for which other holders of shares of common stock of the Lender are entitled to vote. FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN TRUST BY: FIRST BANKERS TRUST COMPANY, N.A., in its capacity as Trustee and not in any other capacity BY: /s/ Carmen Walch -------------------------------------------- Name: Carmen Walch Title: Trust Officer SEPTEMBER 3, 1996. EX-11.1 3 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 Statement re: Computation of Per Share Earnings
For the Year Ended December 31, 1996 1995 ------------ ------------ Net income applicable to common stock and common stock equivalents...................... $ 3,132,921 $ 2,460,632 ============ ============ Average number of common stock shares outstanding................................... 3,790,909 3,931,996 Common stock equivalents on employee stock ownership plan stock allocated................ 27,364 12,508 ------------ ------------ TOTAL 3,818,273 3,919,488 ============ ============ Earnings Per Share $ 0.82 $ 0.63 ============ ============
EX-27 4 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the consolidated condensed statement of financial condition and the consolidated condensed statement of income and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1996 DEC-31-1996 963,325 2,973,490 0 0 23,103,614 3,499,528 3,506,562 165,831,040 1,952,887 203,092,535 129,722,044 15,035,000 1,800,684 7,300,000 40,111 0 0 49,194,696 203,092,535 13,180,752 1,909,267 0 15,090,019 6,217,234 6,928,652 8,161,367 240,000 13,774 4,938,384 4,876,478 4,876,478 0 0 3,132,921 .82 .82 8.01 184,000 0 0 0 1,735,599 24,297 1,585 1,952,887 0 0 0
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