-----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, Nq+eKL0zqI2wwXwlf17dAr/z315MlLJgIsF+WKQ0VOPDJHAsThfECQgYNoQ3IS0x FXS7bUy13u7rYyP8jNEs4w== 0000950131-00-002084.txt : 20000329 0000950131-00-002084.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950131-00-002084 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 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: SEC FILE NUMBER: 000-27672 FILM NUMBER: 581183 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, 1999 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ 0-27672 (Commission File Number) NORTH CENTRAL BANCSHARES, INC. (Exact Name of Registrant as Specified in its Charter) Iowa 421449849 (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) c/o First Federal Savings Bank of Iowa 825 Central Avenue, Fort Dodge, Iowa 50501 (Address of Principal Executive Offices) (Zip Code) (515) 576-7531 (Registrant's Telephone Number including area code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file 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 19,2000, there were issued and outstanding 2,057,242 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 March 1, 2000 was $27,526,539. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof. ================================================================================ PART I ITEM 1. BUSINESS Forward Looking Statements This Annual Report on Form 10-K contains certain forward looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include: changes in general, economic and market conditions; the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments; and depositor and borrower preferences. General North Central Bancshares, Inc. (the "Holding Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Iowa (the "Bank"), a federally chartered savings bank. Collectively, the Holding Company and the Bank are referred to herein as the "Company." The Holding Company 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 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 Iowa The Bank is a federally chartered savings bank that conducts its operations from its main office located in Fort Dodge, Iowa and seven branch offices located in Iowa. Four of the Bank's branches are located in north central Iowa in the cities of Fort Dodge, Nevada, Ames and Perry. On January 30, 1998, the Bank completed the acquisition of Valley Financial Corp., an Iowa corporation and the holding company for Valley Savings Bank, FSB (the "Acquisition"). See "Acquisition of Valley Financial Corp." As a result of the Acquisition, the Bank also has three branches in southeastern Iowa in the cities of Burlington and Mount Pleasant. The Bank is the successor to First Federal Savings and Loan Association of Fort Dodge, which was chartered originally in 1954, and on May 7, 1987 became a federally chartered savings bank. The Bank adopted its present name on February 27, 1998. The Bank is a community-oriented savings institution that is primarily engaged in the business of attracting deposits from the general public in the Bank's market areas and investing such deposits in one- to four-family residential real estate mortgages, multi-family and commercial mortgages and, to a lesser extent, secured and unsecured consumer loans, with emphasis on second mortgage loans. The Bank's deposits are insured by the FDIC under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1954. At December 31, 1999, the Bank had total assets of $367.6 million, total deposits of $271.8 million, and total shareholders' equity of $36.8 million. -2- 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. Acquisition of Valley Financial Corp. As of the close of business on January 30, 1998, the Bank completed the Acquisition of Valley Financial Corp. ("Valley Financial"), pursuant to an Agreement and Plan of Merger, dated as of September 18, 1997, (the "Merger Agreement"). The Acquisition resulted in the merger of Valley Financial's wholly owned subsidiary, Valley Savings Bank, FSB ("Valley Savings") with and into the Bank, with the Bank as the resulting financial institution (the "Bank Merger"). Valley Savings, formerly headquartered in Burlington, Iowa, was a federally-chartered stock savings bank with three branch offices located in southeastern Iowa. In connection with the Acquisition, each share of Valley Financial's common stock, par value $1.00 per share, issued and outstanding (other than shares held as treasury stock of Valley Financial) was cancelled and converted automatically into the right to receive $525.00 per share in cash pursuant to the terms and conditions of the Merger Agreement. As a result of the Acquisition, shareholders of Valley Financial were paid a total of $14,726,250 in cash. The source of funds for the Acquisition consisted of the Bank's accumulation of its cash flow from the maturity of short-term liquid investments, principal and interest on loans, sale of other investment securities, other cash receipts, net of operating expenses and other projected disbursements. Market Area and Competition The Company is an independent savings and loan company serving its primary market area of Webster, Story, Dallas, Henry and Des Moines Counties, which are located in the central, north central and south eastern parts of the State of Iowa. The Company's market area is influenced by agriculture as well as retail sales, professional services and public education. The Company is headquartered in Fort Dodge, the Webster County seat, where it operates two Company locations. The 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. Burlington, the county seat of Des Moines County, is a strong retail center for southeastern Iowa. Mount Pleasant is the county seat of Henry County. The unemployment rate for Webster County as of December 1999 was 2.2%, compared to the national rate of 4.1% and the State of Iowa rate of 2.2%. The unemployment rate for Story County was 1.8%, for Des Moines County was 1.9%, for Henry County was 2.2% and for Dallas County was 1.5%. 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, as well as the markets in Burlington, Mount Pleasant and Perry, Iowa. However, due to the 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 multi-family and commercial real estate loans) from out of state. The Company intends to continue such originations and purchases pursuant to its underwriting standards for Company- originated loans. The Company faces strong and increasing competition both in making loans and in attracting savings deposits. The Company's competition for loans comes principally from commercial banks, savings banks, other savings and loan associations, mortgage banking companies, finance companies and credit unions. The Company's most direct competition for savings deposits historically has come from commercial banks, savings banks, other savings and loan associations and credit unions. In addition, the Company faces increasing competition for savings deposits from non-bank institutions such as brokerage firms, insurance companies, money market mutual funds, other mutual funds (such as corporate and government securities funds) and annuities. Many such institutions have greater financial and marketing resources available to them than does the Company. Trends toward the consolidation of the banking industry, especially after enactment of the -3- Gramm-Leach-Bliley Act, and the lifting of interstate banking and branching restrictions may make it more difficult for relatively smaller institutions, such as the Bank, to compete effectively with large national and regional financial institutions. While the Company is subject to competition from other financial institutions which may have greater financial and marketing resources, the Company believes that it benefits from its community bank orientation and can compete with other institutions by offering customers a high level of personal service and a wide range of competitively priced financial products. Further, management believes that the variety, depth and stability of the communities in which the Company is located support the service and lending activities conducted by the Bank. 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 multi-family residential real estate and, to a lesser extent, secured and unsecured consumer loans, with emphasis on second mortgage loans. At December 31, 1999, the Company's loans receivable totalled $291.8 million, of which $164.1 million, or 56.3%, were one- to four-family residential real estate first mortgage loans and $91.1 million, or 31.2%, were other first mortgage loans, primarily multi-family and commercial real estate loans purchased by the Company. Consumer loans, consisting primarily of automobile loans and second mortgage loans, totalled $36.6 million, or 12.5%, of the Company's loan portfolio. Savings associations, such as the Bank, are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, in the aggregate not exceeding 10% of unimpaired capital and surplus, if any such loan or extension of credit is fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. For the year ended December 31, 1999, it was the Company's policy to limit loans to one borrower to $2.5 million. At December 31, 1999, the Company's largest aggregate outstanding loan to one borrower was $2.5 million and the second largest borrower had an aggregate balance of $2.0 million. All such loans were first mortgage multi- family residential real estate loans and were performing as of that date. -4- Analysis of Loan Portfolio. Set forth below are selected data relating to the composition of the Company's loan portfolio by type of loan as of the dates indicated:
---------------------------------------------------------------------------------- At December 31, ---------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------- --------------------------- ------------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------------ -------------- ------------ ------------- ------------ ----------- (Dollars in thousands) First mortgage loans: One- to four-family residential(1)..... $164,057 56.23% $148,992 57.46% $115,763 59.48% Multi-family........................... 73,417 25.16 64,895 25.02 51,345 26.38 Commercial............................. 17,723 6.07 11,396 4.39 3,800 1.95 -------- ------ -------- ------ -------- ------ Total first mortgage loans............ 255,197 87.47 225,283 86.87 170,908 87.81 -------- ------ -------- ------ -------- ------ Consumer loans: Automobiles............................ $ 8,003 2.74% $ 7,348 2.83% $ 4,696 2.41% Second mortgage(2)..................... 23,604 8.09 20,784 8.01 16,226 8.34 Other(3)............................... 4,956 1.70 5,946 2.29 2,796 1.44 -------- ------ -------- ------ -------- ------ Total consumer loans.................. 36,563 12.53 34,078 13.13 23,718 12.19 -------- ------ -------- ------ -------- ------ Total loans receivable................ $291,760 100.00% $259,361 100.00% $194,626 100.00% Less: Undisbursed portion of construction loans.................... $ 1,982 0.68% $ 2,025 0.78% $ 453 0.23% Unearned loan discount................. 136 0.05 312 0.12 424 0.22 Net deferred loan origination fee...... 106 0.04 316 0.12 349 0.18 Allowance for loan losses.............. 2,777 0.95 2,676 1.03 2,151 1.11 -------- ------ -------- ------ -------- ------ Total loans receivable, net........... $286,759 98.29% $254,032 97.95% $191,249 98.26% -------- ------ -------- ------ -------- ------ 1996 1995 --------------------------------------------------------- Percent Percent Amount of Total Amount of Total ---------- ------------- ------------ ------------- First mortgage loans: One- to four-family residential(1)........ $107,168 63.44% $ 84,203 65.48% Multi-family.............................. 34,488 20.42 21,474 16.70 Commercial................................ 5,225 3.09 6,163 4.79 -------- ------ ---------- ------ Total first mortgage loans............... 146,881 86.95 111,840 86.97 -------- ------ ---------- ------ Consumer loans: Automobiles............................... $ 4,155 2.46% $ 2,889 2.25% Second mortgage(2)........................ 15,303 9.06 10,735 8.35 Other(3).................................. 2,582 1.53 3,127 2.43 -------- ------ ---------- ------ Total consumer loans..................... 22,040 13.05 16,751 13.03 -------- ------ ---------- ------ Total loans receivable................... $168,921 100.00% $ 128,591 100.00% Less: Undisbursed portion of construction loans....................... $ 371 0.22% $ 1,048 0.81% Unearned loan discount.................... 525 0.31 1,013 0.79 Net deferred loan origination fee......... 241 0.14 203 0.16 Allowance for loan losses................. 1,953 1.16 1,543 1.20 -------- ------ ---------- ------ Total loans receivable, net.............. $165,831 98.17% $ 124,784 97.04% ======== ====== ========== ========
_______________________ (1) Includes interest-only construction loans that convert to permanent loans. (2) Second mortgage loans included $1.5 million, $1.4 million, $1.1 million, $862,000 and $724,000 (in actual dollars) of nonowner-occupied residential first mortgage loans at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. (3) Other consumer loans included $1.6 million, $2.3 million, $269,000, $213,000 and $299,000 (in actual dollars) of commercial mortgage loans at December 31, 1999, 1998, 1997, 1996 and 1995, respectively. -5- Loan Maturity Schedule. The following table sets forth the maturity or period to repricing of the Company's loan portfolio at December 31, 1999. Overdraft lines of credit are reported as due in one year or less. Adjustable- rate loans are included in the period in which interest rates are next scheduled to adjust rather than in which they contractually mature, and fixed rate loans are included in the period in which the final contractual repayment is due.
At December 31, 1999 ------------------------------------------------------------------------------------ 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)......... $31,786 $17,799 $42,215 $63,060 $ 8,297 $900 $164,057 Multi-family............. 31,862 14,816 15,065 11,670 4 -- 73,417 Commercial............... 3,040 2,262 6,225 4,411 1,785 -- 17,723 Consumer loans (2)............ 4,865 9,699 20,789 1,190 20 -- 36,563 ------- ------- ------- ------- ------- ---- -------- Total.................. $71,553 $44,576 $84,294 $80,331 $10,106 $900 $291,760 ======= ======= ======= ======= ======= ==== ========
________________________ (1) One- to four-family loans include $93.5 million of 7 year fixed rate loans that convert to adjustable rates at the beginning of the eighth year and are annually adjustable thereafter. $50.5 million of these loans with repricing periods greater than 5 years have been classified as fixed rate loans. $43.0 million of these loans with repricing periods less than 5 years have been classified as adjustable rate loans. (2) Includes second mortgage loans of $23.6 million at December 31, 1999. The following table sets forth the dollar amounts of all fixed rate and adjustable rate loans in each loan category at December 31, 1999 due after December 31, 2000.
Due After December 31, 2000 ---------------------------------- Fixed Adjustable Total ---------- ---------- --------- (In thousands) First mortgage loans: One- to four-family residential(1)............. $ 70,906 $ 61,365 $132,271 Multi-family................................... 6,498 35,057 41,555 Commercial..................................... 7,321 7,362 14,683 Consumer loans (2)............................... 31,343 355 31,698 -------- -------- -------- Total........................................... $116,068 $104,139 $220,207 ======== ======== ========
________________________ (1) One- to four-family loans include $86.8 million of 7 year fixed rate loans that convert to adjustable rates at the beginning of the eighth year and are annually adjustable thereafter. $50.5 million of these loans with repricing periods greater than 5 years have been classified as fixed rate loans. $36.3 million of these loans with repricing periods less than 5 years have been classified as adjustable rate loans. (2) Includes second mortgage loans of $21.2 million at December 31, 1999. One- to four-family Residential Real Estate Loans. Traditionally, the Company's primary lending activity consists of the origination of fixed- and adjustable-rate one- to four-family owner-occupied residential first mortgage loans, substantially all of which are collateralized by properties located in the Company's market area. The Company also originates one- to four-family, interest only construction loans that convert to permanent loans after an initial construction period that generally does not exceed nine months. At December 1999, 43.5% of the Company's residential real estate loans had fixed rates, and 56.5% had adjustable rates. The Company originates loans for portfolio and sells loans in the secondary mortgage market. However, the Company's one- to four-family, fixed-rate, residential real estate loans originated for portfolio are generally originated and underwritten according to standards that qualify such loans to be included in Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") purchase and guarantee programs and that otherwise permit resale in the secondary mortgage market. The Bank has sold fixed-rate loans with maturities equal to or in excess of 15 years in the secondary mortgage market. -6- For the year ended December 31, 1999, the Bank sold $475,000 of mortgage loans consisting of seven one- to four-family residential mortgage loans. One- to four-family loans are underwritten and originated according to policies approved by the Board of Directors. First Iowa Mortgage, Inc., the Bank's wholly owned mortgage banking subsidiary, sold $19.6 million of mortgage loans consisting of 207 one- to four-family residential mortgage loans. 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 to be held in portfolio. The Company also offers 5 and 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 loans, or "ARM loans," are generally originated for terms of up to 30 years, with interest rates that adjust annually. The Company establishes various annual and life-of-the-loan caps on ARM loan interest rate adjustments. 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. At present, the interest rate on its ARM loans is calculated by using the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year. The Company currently offers one-year ARM loans with initially discounted rates, often known as "teaser rates." The Company determines whether a borrower qualifies for an ARM loan based on the fully indexed rate of the ARM loan at the time the loan is originated, rather than the introductory or "teaser" rate or the maximum life-of-the rate to which the loan could adjust. In addition, the Company establishes floors for each loan originated below which the loan may not adjust. One- to four-family residential ARM loans totalled $92.7 million, or 32.3%, of the Company's total net loan portfolio at December 31, 1999. 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 "Discussion of Market Risk-- 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. See "Regulation-- Regulation of Federal Savings Associations--Real Estate Lending Standards." The Company's lending policies limit the maximum loan-to-value ratio on mortgage loans without private mortgage insurance to 80% of the lesser of the appraised value or the purchase price of the property to serve as collateral for the loan. The Company generally makes one- to four-family first real estate loans with loan-to-value ratios of up to 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 -7- 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. Multi-family Residential and Commercial Real Estate Loans. The Company's loan portfolio contains loans secured by multi-family residential and commercial real estate. Such loans constituted approximately $91.1 million, or 31.8%, of the Company's total net loan portfolio at December 31, 1999. Of such loans, $83.6 million, or 91.8%, were purchased or originated by the Company and were secured by properties outside the State of Iowa (the "out of state" properties). There was no multi-family or commercial real estate loan more than 90 days past due at December 31, 1999. These loans are primarily secured by multi-family residences such as apartment buildings, and by commercial facilities, such as office buildings and retail buildings. Multi-family 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 multi-family project. Fixed- rate loans generally amortize over 15 to 30 years, and generally contain call provisions permitting the Company to require that the entire principal balance be repaid at the end of five to fifteen years. Such loans are priced as five to fifteen year loans with maximum loan-to-value ratios of 80%. See "-- Purchased or Out of State Originated Loans." All purchased or out of state originated loans in excess of $200,000 are approved by the Chief Executive Officer, Chief Operating Officer and the Board of Directors and are subject to the same underwriting standards as for loans originated by the Company. All purchased or out of state originated loans less than $200,000 are approved by the Chief Executive Officer and Chief Operating Officer and ratified by the Board of Directors and are subject to the same underwriting standards as loans originated by the Company. Before a loan is purchased, the Company obtains a copy of the original loan application, certified rent rolls, the original title insurance policy and personal financial statements of any guarantors of the loan. An executive officer or director of the Company also makes a personal inspection of the property securing the loan. Such purchases are made without recourse to the seller. The originating financial institution or mortgage banker may continue service the loans, remitting principal and interest to the Company. As of December 31, 1999, $21.5 million purchased or out of state originated loans were serviced by the Bank and $72.4 million were serviced by the originating financial institution or mortgage banker. The Company has a $2.5 million limit on the aggregate size of multi- family and commercial loans to any one borrower. Any exceptions to the limit must be specifically approved by the Board of Directors on a loan-by-loan basis within the Company's legal lending limit. See "Regulation -- Regulation of Federal Savings Associations -- Loans to One Borrower." Loans secured by multi-family and commercial real estate generally involve a greater degree of credit risk than single-family residential mortgage loans and typically, such loans also have larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family 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, which primarily include second mortgage loans. As of December 31, 1999, second mortgage loans totalled $23.6 million, or 8.2%, 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 generally no more than 80%. The average principal amount of the Company's second mortgage loans is approximately $13,000. The Company also offers home equity lines of credit secured by second mortgage loans. -8- 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 of up to five years. In addition, 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 $2,500. 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, 1999, $102,000, or 0.28%, of the Company's consumer loan portfolio was on nonaccrual 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 originated prior to 1998 were approved by the Chief Executive Officer. Beginning in 1998, the Chief Executive Officer approves all first mortgage loans greater than $150,000. All first mortgage loans less than $150,000 are approved by two members of senior management. The Loan Committee of the Board of Directors meets monthly to review a sampling of all loans originated in the month. After a loan is approved, a loan commitment letter is promptly issued to the borrower. The commitment letter specifies the terms and conditions of the proposed loan including the amount of the loan, interest rate, amortization term, a brief description of the required collateral, and required insurance coverage. Commitments are typically issued for 60-day periods in the case of loans to refinance, loans to purchase existing real estate, and construction loans. The borrower must provide proof of fire and casualty insurance on the property serving as collateral, which insurance must be maintained during the full term of the loan. An abstract of title along with an attorney's title opinion is required on all first mortgage loans secured by real property in Iowa. At December 31, 1999, the Company had outstanding commitments to originate $1.4 million of loans. This amount does not include commitments to purchase loans, 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 $94.0 million of loans secured by out of state properties. These loans represented 32.2% of the Company's total loan portfolio at December 31, 1999. Substantially all of the multi-family residential and commercial real estate loans in the Company's loan portfolio are purchased or originated out of state by the Company without recourse to the seller. The Company's investment in properties located in Wisconsin totalled $36.0 million and was primarily distributed between the Milwaukee and Madison areas. The Company's investment in properties in Colorado totalled $22.7 million and was primarily distributed between the Colorado Springs and Denver areas. At December 31, 1999, the Company's investment in properties located in California totalled $15.0 million and was distributed primarily in southern California. The remainder of the Company's purchased or out of state originated loans are distributed in various states. At December 31, 1999, the Company's multi-family residential and commercial real estate loans had an average balance of $410,000 and the largest loan had a principal -9- balance of $2.5 million. As of December 31, 1999 there were no multi-family or commercial real estate loan that was more than 90 days past due or on a 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, 1999, $10.3 million, or 3.5%, of the Company's total loan portfolio consisted of purchased one- to four-family loans, of which $4.5 million were secured by properties located in Missouri and $1.9 million were secured by properties in Wisconsin. As of December 31, 1999 there were no purchased one- to four-family first mortgage loans that were on a nonaccrual status. 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 servicer of the loan for ongoing collection efforts and collateral review. In addition, the Company purchases loans with a variety of terms, including maturities, interest rate caps and indices for adjustment of interest rates that may differ from those offered at the time by the Company in connection with loans the Company originates. Finally, the market areas in which the properties which secure the purchased loans are located are subject to economic and real estate market conditions that may significantly differ from those experienced in the Company's market areas. If economic conditions continue to limit the Company's opportunities to originate loans in its market areas, the Company may increase its investment in out of state mortgage loans. There can be no assurance, however, that economic conditions in these out of state areas will not deteriorate in the future resulting in increased loan delinquencies and loan losses among the loans secured by property in these areas. In an effort to reduce the risk of loss on out of state purchased loans, the Company 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 generally conduct annual inspections of the underlying real estate collateral and copies of the reports of such inspections are typically provided to the Company. -10- Set forth below is a table of the Company's purchased or out of state originated loans by state of origin (including multi-family residential, commercial real estate and one- to four-family first mortgage loans) as of December 31, 1999. Balance as of State December 31, 1999 ----- ----------------- (In thousands) Arizona $ 1,204 California 14,976 Colorado 22,708 Florida 289 Georgia 69 Illinois 249 Indiana 813 Kansas 817 Michigan 19 Minnesota 332 Missouri 5,406 Montana 101 Nebraska 556 Nevada 655 New Mexico 75 North Carolina 737 North Dakota 80 Ohio 806 Oregon 2,716 South Carolina 122 Tennessee 196 Texas 1,818 Utah 1,185 Virginia 47 Washington 1,942 Wisconsin 36,037 ------- Total $93,955 ======= -11- 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, ----------------------------------- 1999 1998 1997 --------- --------- --------- (In thousands) Total loans receivable at beginning of period........ $259,361 $194,626 $168,921 -------- -------- -------- Originations: First mortgage loans: One- to four-family residential................. 60,811 58,120 25,001 Multi-family.................................... 700 -- -- Commercial...................................... -- 1,100 50 Consumer loans: Automobile...................................... 6,912 6,349 3,698 Second mortgage................................. 16,141 14,493 9,642 Other........................................... 2,301 2,595 1,591 -------- -------- -------- Total originations:........................... 86,865 82,657 39,982 Effect of Valley Financial Acquisition.......... -- 58,911 -- Loan Purchases: First mortgage -- one- to four-family........... 5,870 3,159 51 First mortgage -- multi-family.................. 23,332 21,315 22,313 First mortgage -- commercial.................... 11,142 -- Loan Sales: First mortgage -- one- to four-family........... 20,117 26,411 815 Transfer of mortgage loans to foreclosed real estate.......................... 212 373 175 Repayments........................................... 74,481 74,523 35,651 -------- -------- -------- Net loan activity.................................... 33,399 63,734 25,705 -------- -------- -------- Total loans receivable at end of period....... $291,760 $259,361 $194,626 ======== ======== ========
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, 1999, the Company had $106,000 of deferred loan origination fees, net. Such fees vary with the type of loans and commitments made. The Company typically charges a document preparation fee on fixed- and adjustable-rate first mortgage loans. In addition to loan origination fees, the Company also receives other fees, service charges (such as overdraft fees), and other income that consist primarily of deposit transaction account service charges and late charges. The Company recognized fees and service charges of $1.5 million, $1.2 million and $657,000 for the fiscal years ended December 31, 1999, 1998 and 1997, respectively. -12- Investment Activities At December 31, 1999, the Company's investment portfolio is comprised of United States Treasury securities, United States Government agencies, municipal obligations, mortgage-backed securities, equity securities consisting of FHLMC preferred stock, FNMA preferred stock, FHLB stock, other common and preferred stocks and interest-earning deposits. At December 31, 1999, $4.5 million, or 11.8%, of the Company's investment portfolio, excluding equity securities, was scheduled to mature in one year or less, and $13.1 million, or 34.7%, was scheduled to mature within 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 source 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, ---------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Investment securities: U.S. Treasury notes.................. $ 4,260 $ 9,410 $11,046 U.S. Government agencies............. 18,799 18,884 -- Mortgage-backed securities........... 9,955 7,508 -- State and local obligations.......... 4,772 4,378 -- FHLB stock........................... 3,035 2,379 1,550 Equity securities.................... 8,872 7,323 7,220 ------- ------- ------- Total investment securities........ 49,693 49,882 19,816 Interest-earning deposits............ 4,127 13,201 2,463 ------- ------- ------- Total investments.................. $53,820 $63,083 $22,279 ======= ======= =======
-13- 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, 1999.
At December 31, 1999 ------------------------------------------------------------------------------------------------- One Year or Less Over Five Years Over Five Years Total ------------------------------------------------------------------------------------------------- Annualized Annualized Annualized Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Market Value Yield Value Yield Value Yield Value Value -------- ----------- --------- ----------- --------- ----------- --------- --------- (Dollars in thousands) Investment securities: U.S. Treasury notes............ $3,757 5.67% $ 503 6.81% $ 0 0.00% $ 4,260 $ 4,260 U.S. Government agencies(1).... 324 5.84 17,478 6.01 998 7.18 18,800 18,800 Mortgage-backed securities..... 507 5.48 1,869 5.73 7,579 6.16 9,955 9,955 State and local obligations.... -- -- 1,664 5.31 3,108 5.07 4,772 4,772 FHLB stock..................... -- -- -- -- -- -- 3,035 3,035 Common Stock................... -- -- -- -- -- -- 457 457 Preferred stock-other.......... -- -- -- -- -- -- -- -- Preferred stock-FNMA........... -- -- -- -- -- -- 5,157 5,157 Preferred stock-FHLMC.......... -- -- -- -- -- -- 3,257 3,257 ------ ------- ------- ------- ------- Total....................... $4,588 5.66% $21,514 5.95% $11,685 5.96% $49,693 $49,693 Interest-bearing deposits at the FHLB.................. 4,127 4.91 -- -- -- -- 4,127 4,127 ------ ------- ------- ------- ------- Total investments........... $8,715 5.30% $21,514 5.95% $11,685 5.96% $53,820 $53,820 ====== ======= ======= ======= ======= Annualized Average Weighted Life in Average Years Yield ------- ----------- Investment securities: U.S. Treasury notes.............. 1 5.77% U.S. Government agencies(1)...... 5 6.05 Mortgage-backed securities....... 4 5.92 State and local obligations...... 5 4.65 FHLB stock....................... 6.35 Common Stock..................... 4.65 Preferred stock-other............ -- Preferred stock-FNMA............. 6.53 Preferred stock-FHLMC............ 5.77 Total....................... 5.90% Interest-bearing deposits at the FHLB.................... 4.91 Total investments........... 5.83%
___________________ (1) Certain securities have call features which allows the issuer to call the security prior to maturity date. -14- 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. The Company may use borrowings 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. During 1999, consumer and commercial deposits were attracted principally from within the Company's market area through the offering of a broad selection of deposit instruments including NOW accounts, savings accounts, money market savings, certificates of deposit and individual retirement accounts. The Company also offers these products in its new market area which it now serves as a result of the Acquisition. See "--Acquisition of Valley Financial Corp." Deposit account terms vary according to the minimum balance required, the period of time during which the funds must remain on deposit, and the interest rate, among other factors. The maximum rate of interest which the Company may pay is not established by regulatory authority. The Company regularly evaluates its internal cost of funds, surveys rates offered by competing institutions, reviews the Company's cash flow requirements for lending and liquidity, and executes rate changes when deemed appropriate. During 1999, the Company became a more active bidder for public funds in the State of Iowa. As a result, public fund deposits totalled $20.5 million at December 31, 1999. The Company does not obtain retail funds through brokers by solicitation of funds, nor by offering negotiated rates on certificates of deposit in excess of $100,000. Deposit Portfolio. Deposits with the Company as of December 31, 1999 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 $ 6,412 2.37% 1.25 None NOW accounts 50 30,096 11.10 2.00 None Savings accounts 25 25,830 9.53 3.61 None Money Market savings 2,500 17,464 6.44 Certificates of Deposit ----------------------- 4.78 1-3 months Fixed term, fixed rate $1,000 $ 1,328 0.49 4.84 4-6 months Fixed term, fixed rate 1,000 5,426 2.00 5.58 7-9 months Fixed term, fixed rate 1,000 5,757 2.12 5.12 10-12 months Fixed term, fixed rate 1,000 18,731 6.91 5.25 13-24 months Fixed term, fixed rate 1,000 84,465 31.17 5.48 25-36 months Fixed term, fixed rate 1,000 24,138 8.91 5.85 37-48 months Fixed term, fixed rate 1,000 1,488 0.55 6.09 49-60 months Fixed term, fixed rate 1,000 48,926 18.05 6.16 61 months or greater Fixed term, fixed rate 1,000 827 0.31 3.50 Various Variable rate 100 143 0.05 -------- ------ Total certificates of deposit $271,031 100.00% ======== ======
-15- The following table sets forth the change in dollar amount of deposits in the various types of deposit accounts offered by the Company between the dates indicated.
Increase Increase Increase Increase Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance 12/31/99 % $ 12/31/98 % $ 12/31/97 ------------------------------------------------------------------------------- (Dollars in thousands) Noninterest-bearing demand........ $ 6,412 17.48% $ 954 $ 5,458 73.55% $ 2,313 $ 3,145 NOW............................... 30,096 (2.63) (813) 30,909 113.80 16,452 14,457 Savings account................... 25,830 (1.03) (269) 26,099 52.45 8,979 17,120 Money market savings.............. 17,464 (11.92) (2,364) 19,828 121.34 10,870 8,958 Certificates of deposit that mature: within 12 months.............. 117,515 44.55 36,220 81,295 99.44 40,533 40,762 within 12-36 months........... 52,707 (18.86) (12,255) 64,962 53.20 22,558 42,404 beyond 36 months.............. 21,007 15.81 2,868 18,139 27.04 3,861 14,278 --------- -------- --------- -------- --------- Total...................... $ 271,031 9.87% $ 24,341 $ 246,690 74.80% $105,566 $ 141,124 ========= ======== ========= ======== ========= Increase Increase Increase Increase Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance 12/31/97 % $ 12/31/96 % $ 12/31/95 ------------------------------------------------------------------------------- (Dollars in thousands) Noninterest-bearing demand........ $ 3,145 38.24% $ 870 $ 2,275 0.04% $ 8 $ 2,267 NOW............................... 14,457 22.27 2,633 11,824 3.39 388 11,436 Passbook savings.................. 17,120 (3.58) (636) 17,756 (5.85) (1,104) 18,860 Money market savings.............. 8,958 23.05 1,678 7,280 29.38 1,653 5,627 Certificates of deposit that mature: within 12 months.............. 40,762 10.25 3,790 36,972 22.37 6,759 30,213 within 12-36 months........... 42,404 33.24 10,578 31,826 (6.77) (2,311) 34,137 beyond 36 months.............. 14,278 (34.47) (7,511) 21,789 (9.71) (2,343) 24,132 --------- ------- --------- ------- --------- Total...................... $ 141,124 8.79% $11,402 $ 129,722 2.41% $ 3,050 $ 126,672 ========= ======= ========= ======= =========
-16- The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated:
At December 31, -------------------------------------- 1999 1998 1997 --------- -------- -------- (In thousands) Rate - ---- 3.99% or less........ $ 688 $ 232 $ 91 4.00-5.99%........... 154,231 110,152 45,749 6.00-7.99%........... 36,300 53,829 51,585 8.00 or greater...... 10 183 19 --------- -------- ------- $191,229 $164,396 $97,444 ========= ======== =======
The following table sets forth the amount and maturities of certificates of deposit at December 31, 1999.
Amount Due --------------------------------------------------------------------- Less Than 1 1-2 2-3 3-4 4-5 After 5 Year Years Years Years Years Years Total --------- -------- -------- -------- -------- ------- --------- (In thousands) Rate - ---- 3.99% or less........... $ 688 $ -- $ -- $ -- $ -- $ -- $ 688 4.00-5.99%.............. 100,804 29,711 4,709 8,853 10,025 130 154,232 6.00-7.99%.............. 16,023 11,069 7,208 1,796 6 197 36,299 8.00 or greater......... -- -- 10 -- -- -- 10 -------- ------- ------- ------- ------- ---- -------- $117,515 $40,780 $11,927 $10,649 $10,031 $327 $191,229 ======== ======= ======= ======= ======= ==== ========
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, 1999. This amount does not include savings accounts of greater than $100,000, which totalled approximately $981,000 at December 31, 1999.
Certificates of Deposit over Remaining Maturity $100,000 ------------------------------------ ----------------- (In thousands) Three months or less................ $ 3,395 Three through six months............ 12,886 Six through twelve months........... 6,580 Over twelve months.................. 9,355 -------- Total............................. $ 32,216 ========
-17- The following table sets forth the savings activities of the Company for the periods indicated:
Year Ended December 31, ------------------------------ 1999 1998 1997 -------- ---------- -------- (In thousands) Net increase (decrease) before interest credited and deposits acquired................ $15,582 $ (2,943) $ 6,132 Effect of Valley Financial Acquisition......... -- 99,269 -- Interest credited.............................. 8,758 9,240 5,270 ------- -------- ------- Net increase in deposits................... $24,340 $105,566 $11,402 ======= ======== =======
Borrowings Deposits are the Company's primary source of funds. The Company may also obtain funds from the FHLB. FHLB advances are collateralized by selected assets of the Company. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, for purposes other than meeting withdrawals, fluctuates from time to time in accordance with the policies of the OTS and the FHLB. The maximum amount of FHLB advances to a member institution generally is reduced by borrowings from any other source.
For the Year Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in thousands) Weighted average rate paid on: (1) FHLB advances.......................... 5.62% 5.81% 5.94% FHLB advances: Maximum balance........................ $60,691 $42,550 $29,800 Average balance........................ 43,711 33,980 23,672 Weighted average rate paid on: Other borrowings....................... 1.00% 1.00% 9.00% Other borrowings: Maximum balance........................ $ 38 $ 42 $ 35 Average balance........................ 36 40 7
________________________ (1) Calculated using monthly weighted average interest rates. Title Abstract Business A component of the Company's operating strategy is to increase noninterest income through the expansion of its abstract company business conducted by First Iowa Title Services Inc. ("First Iowa"), a wholly owned subsidiary of the Company. On December 28, 1996, First Iowa purchased the assets of two abstract companies located in Webster and Calhoun Counties in Iowa. The abstract company in Calhoun County was subsequently sold on March 30, 1997. First Iowa currently provides real estate title abstracting services in Webster, Boone and Jasper Counties. These services include researching recorded documents at the county courthouse and providing a history of those documents as they pertain to specific parcels of real estate. This information is used to determine who owns specific parcels of real estate and what encumbrances are on those specific parcels. The abstract business performed by First Iowa replaces a significant portion of the function of a title insurance company. Iowa law prohibits Iowa insurance companies or companies authorized to do business in Iowa from issuing title insurance or insurance against loss or -18- 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 19 employees as of December 31, 1999. Insurance, Annuity and Mutual Fund Business The Company has another wholly-owned subsidiary, First Federal Investment Services, Inc., ("First Federal Investment") formerly known as First Financial Service Corporation, which the Company began in 1971. On February 25, 2000, First Financial's name was changed to First Federal Investment Services, Inc. First Federal Investment's activities include the sale of life insurance on mortgage loans, and credit life, accident and health insurance on consumer loans made by the Company. In addition, First Federal Investment sells life insurance annuity products and mutual funds. First Federal Investment also originates leases for equipment such as computers, office equipment, light industrial equipment and commercial cleaning equipment. First Federal Investment has no employees. The subsidiary has executed a management agreement with the Company which provides its management and staff. Mortgage Company Business First Iowa Mortgage, Inc. (formerly known as Hearthstone Mortgage Company, Inc., "FIM") was acquired by the Company as part of the Acquisition and is a wholly-owned subsidiary of the Bank. FIM originates first mortgage loans and subsequently sells these loans and the mortgage servicing rights to investors. FIM currently operates in Ames, Iowa and at December 31, 1999 had 3 employees. Multi-family Apartment Building On July 13, 1995, the Company formed the Northridge Apartments Limited Partnership with the Fort Dodge Housing Corporation ("FDHC"), a non-profit Iowa corporation formed to acquire, develop and manage low- and moderate-income housing for residents of the Fort Dodge area. The FDHC is controlled by the Fort Dodge Municipal Housing Agency, an agency chartered by the City of Fort Dodge. The Northridge Partnership is a low-income housing tax credit project for certain federal tax purposes. A 44-unit apartment complex was completed on February 1, 1997. The tax credits for the year ended December 31, 1999 are approximately $154,000. The tax credits will continue for a seven-year period. Personnel At December 31, 1999, the Company had 106 full-time and 23 part-time employees (including the 19 employees of First Iowa and the 3 employees at FIM). None of the Company's employees is represented by a collective bargaining group. The Company believes its relationship with its employees to be good. -19- 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 has not been audited in the last five years. 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. Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an adjusted tax basis of $500 million or less) is permitted to maintain a reserve for bad debts with respect to "qualifying loans," which, in general, are loans secured by certain interests in real property, and to make, within specified formula limits, annual additions to the reserve which are deductible for purposes of computing the Bank's taxable income. Pursuant to the Small Business Job Protection Act of 1996, the Bank is now recapturing (taking into income) over a multi-year period a portion of the balance of its bad debt reserve as of December 31, 1995. Distributions. To the extent that the Company makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Company's "base year reserve," i.e. its reserve as "of December 31, 1987, to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the 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). The Company does not expect to be subject to the AMT. Dividends-Received Deduction. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. 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. -20- 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 Iowa corporation tax returns, 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 subject to regulation, examination and supervision by the OTS, as its chartering agency, and the Federal Deposit Insurance Corporation ("FDIC"), as its deposit insurer. 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 Securities and Exchange Commission (the "SEC") under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank, and the operations of both. 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 and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Holding Company and any of its non-savings association subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings association. The Home Owners' 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% 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 -21- 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 "grandfathered" under the Gramm-Leach-Bliley Act, 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. 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 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. 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 20% of an association's assets on commercial loans with the amount of commercial loans in excess of 10% of assets being limited to small business 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% of assets on non-conforming loans (loans in excess of the specific limitations of HOLA); and (vi) a limit of the greater of 5% 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, 1999, the Bank generally imposed a $2.5 million limit on the aggregate size of loans to any one borrower. 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, 1999, the Bank's largest aggregate amount of loans to one -22- borrower was $2.5 million, and the second largest borrower had an aggregate balance of $2.0 million. The Bank is in compliance with all applicable limitations on loans to one borrower. QTL Test. HOLA requires a savings association to meet a qualified thrift lender, or "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) goodwill and other intangible assets, 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, consumer loans, small business loans, education loans and credit card loans. A savings association may also satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code of 1986. At December 31, 1999, the Bank maintained 91.4% 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. 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% of core capital to such adjusted total assets, and a risk- based capital ratio requirement of 8% of total risk-based capital to total risk- weighted assets. In determining compliance with the risk-based capital requirement, a savings association must compute its risk-weighted 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 the OTS believes are inherent in the type of asset. Tangible capital is defined, generally, as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings and minority interests in equity accounts of fully consolidated subsidiaries, less intangibles (other than certain purchased mortgage servicing rights) and investments in an loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative and other 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. The OTS and the other federal banking agencies are required to take into account interest rate risk ("IRR") in their risk-based capital standards. The OTS adopted regulations, effective January 1, 1994, that set forth the methodology for calculating an IRR component to be incorporated into the OTS risk-based capital regulations. The OTS has indefinitely deferred the implementation of the IRR component in the computation of an institution's risk- based capital requirement. The OTS continues to monitor the IRR of individual institutions and retains the right to impose additional capital on individual institutions. At December 31, 1999, the Bank was not required to maintain any additional risk-based capital under this regulation. -23- At December 31, 1999, 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, 1999:
Bank Capital Requirements Excess Capital Amount Percent Amount Percent Amount Percent -------- -------- ------- ------- -------- -------- (In thousands) Tangible capital............... $30,685 8.5% $ 5,416 1.5% $25,269 7.0% Core capital................... 30,685 8.5 10,833 3.0 19,852 5.5 Risk-based capital............. 33,168 16.7 15,870 8.0 17,298 8.7
A reconciliation between regulatory capital and GAAP capital at December 31, 1999 in the accompanying financial statements is presented below:
Tangible Capital Core Capital Risk-based Capital ----------------- ------------- ------------------- (In thousands) GAAP capital........................................... $36,766 $36,766 $36,766 Intangible assets...................................... (6,842) (6,842) (6,842) Unrealized loss on certain available for sale assets............................................... 761 761 761 Allowance for loan losses includable in supplementary capital............................. -- -- 2,483 ------- ------- ------- Regulatory capital..................................... $30,685 $30,685 $33,168 ======= ======= =======
Limitation on Capital Distributions. Effective April 1, 1999, the OTS amended its capital distribution regulations to reduce regulatory burdens on savings associations. Under the amendments adopted by the OTS, certain savings associations will be permitted to pay capital distributions during a calendar year that do not exceed the association's net income for that year plus it retained net income for the prior two years, without notice to, or the approval of the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Bank, will continue to have to file a notice unless the specific capital distribution requires an application. 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." 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% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4%. OTS regulations also require each savings association to maintain an average daily balance of short-term liquid assets at a specified percentage of the total of its net withdrawable deposit account and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. At December 31, 1999, the Bank's liquidity position was $31.7 million, or 10.84% of liquid assets, compared to $45.7 million or 17.58% at December 31, 1998. The Bank has never been subject to monetary penalties for failure to meets 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. The OTS adopted amendments to its regulations, effective January 1, 1999, that are intended to assess savings associations on a more equitable basis. The new regulations base the assessment for an individual -24- savings association on three components: the size of the association, on which the basic assessment would be based; the association's supervisory condition, which would result in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination; and the complexity of the association's operations, which would result in an additional assessment based on a percentage of the basic assessment for any savings association that managed over $1 billion in trust assets, serviced for others loans aggregating more than $1 billion, or had certain off-balance sheet assets aggregating more than $1 billion. In order to avoid a disproportionate impact on the smaller savings institutions, which are those whose total assets never exceeded $100 million, the new regulations provide that the portion of the assessment based on assets size will be the lesser of the assessment under the amended regulations or the regulations before the amendment. Management believes that the change in its rate of OTS assessments under the amended regulations was not material. Branching. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (i) in states that expressly authorize branches of savings associations located in another state and (ii) to an association that qualifies as a "domestic building and loan association" under the Code, which imposes qualification requirements similar to those for a "qualified thrift lender" under HOLA. See "-- QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an "Outstanding" CRA rating in its most recent examination. The CRA regulations establish an assessment system that bases an association's rating on its actual performance in meeting community needs. In particular, the assessment system focuses 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 benefitting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("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. -25- 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. 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 have adopted 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. 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 -26- 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. FDICIA establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, based upon the five categories of institutions established by FDICIA: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," which are categories defined by the institution's regulatory capital ratios. Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." In addition, various mandatory supervisory actions become immediately applicable to any undercapitalized institution, including restrictions on growth of assets and other forms of expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Generally, subject to a narrow exception, FDICIA requires the applicable banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. Under the OTS regulations, generally, a federally chartered savings association is treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. As of December 31, 1999, the Bank met the criteria for being considered "well capitalized" by the OTS. When 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 risk-based assessment system for determining the deposit insurance assessments to be paid by insured depositary institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the 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. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. As a result of the Deposit Insurance Funds Act of 1996 (the "1996 Funds Act"), both the BIF and the SAIF currently satisfy the reserve ratio requirement. If the FDIC determines that assessment rates should be increased, institutions in all risk categories could be affected. The FDIC has exercised this authority several times in the past and could raise insurance assessment rates in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank. 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 Bank has not been so classified by the FDIC or the OTS. 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 -27- annual rate of assessments for the payments on the FICO bonds for the first, second, third and fourth quarters of the fiscal year 1999 were 0.0610%, 0.0588%, 0.0580% and 0.0592%, respectively. 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. Privacy Protection. The OTS has recently proposed regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Act (the "GLB Act"). The proposed regulations would require each financial institution to adopt procedures to protect customers' and consumers' "nonpublic personal information" by November 13, 2000. The Bank would be required to disclose its privacy policy, including identifying with whom the Bank shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank would be required to provide its customers with the ability to "opt-out" of having to share their personal information with unaffiliated third parties. The Bank intends to have a privacy protection policy in place prior to when the regulations are adopted in final form. The GLB Act also provides for the ability of each state to enact legislation that is more protective of consumers' personal information. Currently, there are no privacy bills pending in the Iowa legislature. If any such bills are considered by the Iowa legislature, the Bank cannot predict what impact, if any, these bills would have. 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, has been 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, 1999 of $3.0 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances were required to be obtained only for the purpose of providing funds for residential housing finance. Pursuant to the GLB Act, the foregoing minimum share ownership requirements will be replaced by regulations to be promulgated by the Federal Housing Finance Board. The GLB Act specifically provides that the minimum requirements in existence immediately prior to adoption of the GLB Act shall remain in effect until such regulations are adopted. Formerly, federal savings associations, such as the Bank, were also required to be members of the FHLB System. The new law removed the mandatary membership requirement and authorized voluntary membership for federal savings associations as is the case for all other eligible institutions. In addition to changes to the membership and share ownership requirements, the GLB Act removed certain requirements governing advances made by FHLBs. Greater stock purchases required of non-QTL FHLB members when they receive advances were eliminated, as was the requirement that such members only apply for advances for housing finance purposes. A priority for making advances to QTL members and a 30% limit on total advances to non-QTL members was also removed. Further, the new law eliminated restrictions on obtaining new advances and having to repay advances after three years applicable to savings associations that are not QTLs. 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 noninterest-earning reserves against their deposit accounts -28- 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% of the aggregate of transaction accounts up to $46.5 million. The amount of aggregate transaction accounts in excess of $46.5 million are currently subject to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%. The FRB regulations currently exempt $4.9 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 noninterest-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. Federal Securities Law The Holding Company is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding Company is subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. -29- ITEM 2. PROPERTIES The Company conducts its business through its main office located in Fort Dodge, Iowa and seven full-service offices located in Fort Dodge, Nevada, Ames, Perry, Burlington and Mount Pleasant, Iowa. The following table sets forth certain information concerning the main office and each branch office of the Company and the offices of First Iowa Title Services and First Iowa Mortgage, Inc. at December 31, 1999. All of the offices of the Company are owned. In addition to the properties listed below, First Federal Investment Services, Inc. owns land in Fort Dodge, Iowa with a net book value of $99,000 and Northridge Apartments Limited Partnership owns a multi-family apartment building with a net book value of $1.8 million at December 31, 1999. The aggregate net book value of the Company's premises and equipment, on a consolidated basis was $5.4 million at December 31, 1999.
Lease Location Opening Date Expiration Date Net Book Value - -------- ------------ ---------------- -------------- Main Office: 825 Central Avenue 1973 N/A $1,042,286 Fort Dodge, Iowa Branch Offices: 201 South 25th Street 1977 N/A $ 237,037 Fort Dodge, Iowa 404 Lincolnway 1977 N/A $ 529,970 Nevada, Iowa 107 Main Street 1977 N/A $ 368,051 Ames, Iowa 1111-141st Street 1999 N/A $ 946,903 Perry, Iowa 321 North Third Street 1953 N/A $ 578,092 Burlington, Iowa 1010 North Roosevelt 1975 N/A $ 329,675 Burlington, Iowa 102 South Main 1991 N/A $ 235,414 Mount Pleasant, Iowa First Iowa Offices: 805 Central Avenue 1982 2001 (1) $ 42,464 Fort Dodge, Iowa 814 8th Street 1996 2003 (2) $ 15,424 Boone, Iowa 200 1st Street South 1996 2003 (2) $ 8,011 Newton, Iowa First Iowa Mortgage Office: 1998 2003 $ 30,110 415 South Duff Ames, Iowa Construction in Process: 316 South Duff N/A N/A $ 992,660 Ames, Iowa
_____________________ (1) Does not include option to renew for an additional 3 years. (2) Does not include option to renew for an additional 5 years. -30- 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, 1999. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information required by this Item is incorporated herein by reference to page 65 of the Company's 1999 Annual Report to Shareholders under the heading "Shareholder Information," which section is included in Exhibit 13.1 to this Report. -31- 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 on Form 10-K.
At December 31, (11) ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (In thousands) Selected Consolidated Financial Condition Data: Total assets.......................... $367,433 $336,690 $221,954 $203,093 $179,930 Cash (noninterest-bearing)............ 8,542 2,435 982 963 709 Loans receivable, net:(1) First mortgage loans secured by one- to four-family residences........................ 161,547 145,967 114,286 106,053 93,438 First mortgage loans secured by multi-family properties........ 71,503 63,285 49,895 33,015 30,070 First mortgage loans secured by commercial properties.......... 17,470 11,168 3,724 5,068 5,650 Consumer loans...................... 36,239 33,612 23,344 21,695 18,714 -------- -------- -------- -------- -------- Total loans receivable, net....... 286,759 254,032 191,249 165,831 147,872 Investment securities(2).............. 53,820 63,084 22,279 29,577 26,156 Deposits.............................. 271,031 246,690 141,124 129,722 126,672 Borrowed funds........................ 55,715 38,832 28,550 22,335 21,940 Total shareholders' equity............ 38,127 48,207 50,417 49,235 29,900 For the Year Ended December 31, 1999 1998 1997 1996 1995 -------- -------- -------- ------- -------- (In thousands) Selected Operating Data: Interest income....................... $24,556 $23,602 $16,205 $15,090 $13,148 Interest expense...................... 13,604 12,869 7,900 6,929 7,079 ------- ------- ------- ------- ------- Net interest income before provision for loan losses........ 10,952 10,733 8,305 8,161 6,069 Provision for loan losses............. 120 210 240 240 250 ------- ------- ------- ------- ------- Net interest income after provision for loan losses........ 10,832 10,523 8,065 7,921 5,819 ------- ------- ------- ------- ------- Noninterest income: Fees and service charges......... 1,485 1,243 657 580 445 Abstract fees.................... 1,421 1,584 1,222 931 794 Other income..................... 1,157 1,088 658 382 463 ------- ------- ------- ------- ------- Total noninterest income....... 4,063 3,915 2,537 1,893 1,702 ------- ------- ------- ------- ------- Noninterest expense: Salaries and employee benefits... 4,026 3,482 2,209 2,004 1,681 Premises and equipment........... 931 812 444 421 382 Data processing.................. 522 553 258 244 236 One-time SAIF special assessment. -- -- -- 817 -- SAIF deposit insurance premiums....................... 147 143 85 279 287 Goodwill........................... 472 436 28 29 30 Other expenses................... 2,356 2,146 1,553 1,144 1,042 ------- ------- ------- ------- ------- Total noninterest expense...... 8,454 7,572 4,577 4,938 3,658 ------- ------- ------- ------- ------- Income before income taxes............ 6,441 6,866 6,025 4,876 3,863 Income tax expense.................... 2,241 2,481 2,108 1,744 1,403 ------- ------- ------- ------- ------- Net income......................... $ 4,200 $ 4,385 $ 3,917 $ 3,132 $ 2,460 ======= ======= ======= ======= =======
-32-
At or for the Year Ended December 31, ------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- -------- --------- --------- -------- Key Financial Ratios and Other Data: Performance Ratios: (%) Net interest rate spread (difference between average yield on interest-earning assets and average cost of interest- bearing liabilities)....................... 2.86% 2.81% 2.87% 3.01% 2.75% Net interest margin (net interest income as a percentage of average interest- earning assets)............................ 3.35 3.50 4.06 4.33 3.66 Return on average assets (net income divided by average total assets)........... 1.21 1.35 1.86 1.62 1.45 Return on average equity (net income divided by average equity)................. 9.51 8.73 7.94 6.30 8.54 Noninterest income to average assets......... 1.21 1.21 1.20 0.98 1.00 Efficiency ratio(3).......................... 56.30 51.69 42.21 49.11 47.07 Noninterest expense to average assets........ 2.45 2.34 2.17 2.56 2.16 Net interest income after provision for loan losses to noninterest expenses........ 128.13 138.97 176.22 160.40 159.07 Financial Condition Ratios: (%) (4) Equity to assets at period end............... 10.38 14.32 22.72 24.24 16.62 Tangible equity to tangible assets at period end (5) (6)...................... 8.68 12.42 22.32 23.80 16.09 Average shareholders' equity divided by average total assets....................... 12.77 15.52 23.38 25.73 16.99 Average tangible shareholders equity divided by average tangible total assets (5) (6)... 10.94 13.71 22.96 25.29 16.42 Average interest-earning assets to average interest-bearing liabilities............... 112.05 116.28 130.97 136.02 121.37 Asset Quality Ratios: (%) (4) Nonaccrual loans to total net loans.......... 0.07 0.38 0.08 0.11 0.12 Nonperforming assets to total assets(7)...... 0.20 0.34 0.10 0.15 0.23 Allowance for loan losses as a percent of total loans receivable at end of period.... 0.95 1.03 1.10 1.16 1.15 Allowance for loan losses to nonaccrual loans...................................... 1,301.13 279.72 1,468.33 1,059.35 960.20 Per Share Data: Book value per share......................... $ 16.86 $ 16.26 $ 15.43 $ 14.36 $ 8.72 Tangible book value per share(5)............. 13.83 13.79 15.09 14.01 8.39 Basic earnings per share (8)................. 1.64 1.44 1.23 0.82 0.63 Diluted earnings per share (9)............... 1.60 1.40 1.21 0.82 0.63 Dividends declared per share................. 0.40 0.32 0.25 0.28 0.60 Dividend payout ratio........................ 0.24 0.22 0.20 0.34 0.95 Key Financial Ratios Excluding SAIF Assessment: (%) (10) Return on average assets (net income divided by average total assets)................... 1.21% 1.35% 1.86% 1.89% 1.45% Return on average equity (net income divided by average equity)................. 9.51 8.73 7.94 7.34 8.54 Efficiency ratio (3)......................... 56.30 51.69 42.21 40.99 47.07 Noninterest expense to average assets........ 2.45 2.34 2.17 2.13 2.16 Net interest income after provision for loan losses to noninterest expenses.......... 128.13 138.97 176.22 192.21 159.07 Other Data: Cash earnings (12)........................... $ 4,672 $ 4,821 $ 3,945 $ 3,161 $ 2,490 Cash earnings per share diluted (9) (12)..... 1.78 1.54 1.22 0.83 0.64 Cash return on average assets (12)........... 1.35 1.49 1.87 1.64 1.47 Cash return on average equity (12)........... 10.58 9.60 7.99 6.77 8.64
_______________________ (Notes on following page) -33- (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, 1999, 1998, 1997, 1996 and 1995 was $2.8 million, $2.7 million, $2.2 million, $2.0 million and $1.7 million, respectively. (2) Includes interest-bearing deposits with the Federal Home Loan Bank of Des Moines (the "FHLB"). (3) Efficiency ratio represents noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income. (4) Asset Quality Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods and are annualized where appropriate. (5) Tangible equity consists of stockholders' equity less goodwill and title plant. Goodwill and title plant at December 31, 1999, 1998, 1997, 1996 and 1995 was $6.8 million, $7.3 million, $1.1 million, $1.2 million and $1.1 million, respectively. (6) Tangible assets consists of total assets less goodwill and title plant. Goodwill and title plant at December 31, 1999, 1998, 1997, 1996 and 1995 was $6.8 million, $7.3 million, $1.1 million, $1.2 million and $1.1 million, respectively. (7) Nonperforming assets consists of nonaccrual loans, foreclosed real estate and other nonperforming assets. (8) Basic earnings per share information is calculated by dividing net income by the weighted average number of shares outstanding. The weighted average number of shares outstanding for basic earnings per share computation for 1999, 1998, 1997, 1996 and 1995 were 2,562,940, 3,048,148, 3,184,269, 3,818,273 and 3,919,488, respectively. (9) Diluted earnings per share information is calculated by dividing net income by the weighted average number of shares outstanding, adjusted for the effect of dilutive potential common shares outstanding which consists of stock options granted. The weighted average number of shares outstanding for diluted earnings per share computation for 1999, 1998, 1997, 1996 and 1995 were 2,621,542, 3,132,833, 3,241,069, 3,818,273 and 3,919,488, respectively. (10) For 1996, excludes the one-time $817,000 (pre-tax) special assessment for the recapitalization of the Savings Association Insurance Fund ("SAIF"). (11) As of the close of business on January 30, 1998, the Company completed the Acquisition of Valley Financial Corp. Subsequent to January 30, 1998, the information contained in the Financial Selected Data tables reflect the effect of the Acquisition. Financial data prior to January 30, 1998, does not reflect the Acquisition and is based upon historical figures. (12) Cash earnings excludes from net income the amortization of goodwill. -34- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated herein by reference to pages 7 through 30 of the Company's 1999 Annual Report to Shareholders under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," which section is included in Exhibit 13.1 to this Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is incorporated herein by reference to pages 12 through 14 of the Company's 1999 Annual Report to Shareholders under the heading "Discussion of Market Risk--Interest Rate Sensitivity Analysis," which section is included in Exhibit 13.1 to this Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated herein by reference to pages 31 through 63 of the Company's 1999 Annual Report to Shareholders under the headings "Independent Auditor's Report," "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements," which section are included in Exhibit 13.1 to this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding Directors and Executive Officers of the Registrant is included under the headings "Information with Respect to Nominees and Continuing Directors," "Nominees for Election as Directors," "Continuing Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 28,2000, which has been filed with the SEC and is incorporated herein by reference. 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 28, 2000, 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 "Principal Shareholders of the Company" and "Security Ownership of Management" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 28, 2000, which has been filed with the SEC and is incorporated herein by reference. -35- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is included under the heading "Transaction with Certain Related Persons" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 28, 2000, which has been filed with the SEC and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules and Exhibits 1. The consolidated balance sheets of North Central Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, equity and cash flows for the years ended December 31, 1999, 1998 and 1997, together with the related notes and the independent auditor's report of McGladrey & Pullen, LLP, independent certified public accounts. 2. Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. 3. See Exhibit Index on following page. (b) Reports on Form 8-K filed during the last quarter of 1999 None. -36-
Exhibit No. Description - ----------- ----------- 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 Iowa* 4.2 Bylaws of First Federal Savings Bank of Iowa* 4.3 Specimen Stock Certificate of North Central Bancshares, Inc.* 10.1 Employee Stock Ownership Plan of First Federal Savings Bank of Iowa and ESOP Trust Agreement (incorporating Amendments 1 and 2)***** 10.2 ESOP Loan Documents, dated September 3, 1996**** 10.3 Employee Retention Agreements between First Federal Savings Bank of Iowa and certain executive officers** 10.4 Employment Agreement between First Federal Savings Bank of Iowa and David M. Bradley, effective as of August 31, 1994* 10.5 Form of Employment Agreement between First Federal Savings Bank of Iowa and David M. Bradley* 10.6 Form of Employment Agreement between North Central Bancshares, Inc. and David M. Bradley* 10.8 North Central Bancshares, Inc. 1996 Stock Option Plan*** 10.9 Amendment No. 1 to the North Central Bancshares, Inc. 1996 Stock Option Plan***** 13.1 Annual Report to security holders 21.1 Subsidiaries of the Registrant* 23.1 Consent of McGladrey & Pullen, LLP 27.1 Financial Data Schedule 99.1 Proxy Statement for Annual Meeting of Shareholders of North Central Bancshares, Inc. filed with the Securities and Exchange Commission 99.2 Press release dated October 29, 1999 (regarding stock repurchase program) 99.3 Press release dated November 19, 1999 (regarding declaration of dividend) 99.4 Press release dated January 18, 2000 (regarding fourth quarter and year end 1999 earnings)
-37- * Incorporated herein by reference to Registration Statement No. 33-80493 on Form S-1 of North Central Bancshares, Inc. (the "Registrant") filed with the Securities and Exchange Commission, (the "Commission") on December 18, 1995, as amended. ** Incorporated herein by reference to the Exhibits to the Annual Report on Form 10-K filed by Registrant for fiscal year 1995, filed with the Commission on March 29, 1996. *** Incorporated herein by reference to the Amended Schedule 14A of Registrant filed with the Commission on August 19, 1996. **** Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 31, 1997. ***** Incorporated herein by reference to the Annual Report on Form 10-K of the Registrant filed with the Commission on March 31, 1998. -38- Conformed SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant and has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. North Central Bancshares, Inc. Date: March 27, 2000 /s/ David M. Bradley ------------------------ By: David M. Bradley Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ David M. Bradley President, Chief Executive Officer, March 27, 2000 - --------------------------- David M. Bradley Director, and Chairman of the Board (principal executive officer) /s/ John L. Pierschbacher Treasurer March 27, 2000 - --------------------------- John L. Pierschbacher (principal accounting and financial officer) /s/ Robert H. Singer, Jr. Director March 27, 2000 - --------------------------- Robert H. Singer, Jr. /s/ KaRene Egemo Director March 27, 2000 - --------------------------- KaRene Egemo /s/ Howard A. Hecht Director March 27, 2000 - --------------------------- Howard A. Hecht /s/ Melvin R. Schroeder Director March 27, 2000 - --------------------------- Melvin R. Schroeder /s/ Mark M. Thompson Director March 27, 2000 - --------------------------- Mark M. Thompson
-39- EX-13.1 2 ANNUAL REPORT TO SECURITY HOLDERS NORTH CENTRAL BANCSHARES, INC. Holding Company for First Federal Savings Bank of Iowa 1999 ANNUAL REPORT TABLE OF CONTENTS MESSAGE OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER........... 3 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA........................... 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 7 INDEX TO FINANCIAL STATEMENTS............................................ 31 QUARTERLY RESULTS OF OPERATIONS (Unaudited).............................. 63 MANAGEMENT OF THE HOLDING COMPANY AND THE BANK........................... 64 SHAREHOLDER INFORMATION.................................................. 65
This Annual Report to Shareholders contains certain forward looking statements consisting of estimates with respect to the financial condition, results of operations (including noninterest expense and availability of potential tax credits) and business of Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include changes in general, economic and market conditions, the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments, and changes in depositor preferences for financial products. March 27, 2000 MESSAGE OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Dear Shareholders: We are pleased to report to you the operating results of North Central Bancshares, Inc. ("North Central Bancshares" or the "Company") for the year ended December 31, 1999. North Central Bancshares is the holding company for First Federal Savings Bank of Iowa (the "Bank"). For the year ended December 31, 1999, North Central Bancshares' net income was $4.2 million, or $1.60 diluted earnings per share, as compared to $4.4 million, or $1.40 diluted earnings per share, for the year ended December 31, 1998. Some of our achievements during the past year include: 1999 HIGHLIGHTS . Total assets, loans, deposits and earnings per share reached new Company highs. . Total assets reached a high of $367.4 million . Total net loans increased by 12.9% or $32.7 million. . Total deposits grew to $271.0 million. . Earnings per share reached a high of $1.60, a 14.3% increase over the prior year. . Repurchased a total of 702,707 shares or 23.7% of outstanding stock for the year ended December 31, 1999. . Increased quarterly dividends in April, 1999 to $0.10 per share, a 25% increase. . Opened a new office in Perry, Iowa. . Began construction on a new larger branch office building in Ames, Iowa. . Began offering mutual funds and variable annuities through the Bank's wholly owned subsidiary, First Federal Investment Services, Inc., formerly known as First Financial Services Corporation. . Successfully completed all computer and operational preparations for the year 2000 rollover. I want to thank our loyal and valued staff who helped make 1999 a successful year for it is truly our people who make the difference. The directors, officers and staff of North Central Bancshares, Inc. and its subsidiary, First Federal Savings Bank of Iowa, wish to thank you for your continued interest and support. We pledge to continue our efforts to increase the overall financial return to you, our shareholders. Sincerely, David M. Bradley Chairman, President and Chief Executive Officer SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The selected consolidated financial and other data of North Central Bancshares, Inc. set forth below is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto presented elsewhere in this Annual Report.
At December 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (In thousands) Selected Consolidated Financial Condition Data: Total assets............................... $367,433 $336,690 $221,954 $203,093 $179,930 Cash (noninterest-bearing)................. 8,542 2,435 982 963 709 Loans receivable, net:(1) First mortgage loans secured by one- to four-family residences............................. 161,547 145,967 114,286 106,053 93,438 First mortgage loans secured by multi-family properties............. 71,503 63,285 49,895 33,015 30,070 First mortgage loans secured by commercial properties............... 17,470 11,168 3,724 5,068 5,650 Consumer loans........................... 36,239 33,612 23,344 21,695 18,714 -------- -------- -------- -------- -------- Total loans receivable, net............ 286,759 254,032 191,249 165,831 147,872 Investment securities(2)................... 53,820 63,084 22,279 29,577 26,156 Deposits................................... 271,031 246,690 141,124 129,722 126,672 Borrowed funds............................. 55,715 38,832 28,550 22,335 21,940 Total shareholders' equity................. 38,127 48,207 50,417 49,235 29,900
For the Year Ended December 31, ----------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- ------- -------- (In Thousands) Selected Operating Data: Interest income............................ $24,556 $23,602 $16,205 $15,090 $13,148 Interest expense........................... 13,604 12,869 7,900 6,929 7,079 ------- ------- ------- ------- ------- Net interest income before provision for loan losses............. 10,952 10,733 8,305 8,161 6,069 Provision for loan losses.................. 120 210 240 240 250 ------- ------- ------- ------- ------- Net interest income after provision for loan losses............. 10,832 10,523 8,065 7,921 5,819 ------- ------- ------- ------- ------- Noninterest income: Fees and service charges.............. 1,485 1,243 657 580 445 Abstract fees......................... 1,421 1,584 1,222 931 794 Other income.......................... 1,157 1,088 658 382 463 ------- ------- ------- ------- ------- Total noninterest income............ 4,063 3,915 2,537 1,893 1,702 ------- ------- ------- ------- ------- Noninterest expense: Salaries and employee benefits........ 4,026 3,482 2,209 2,004 1,681 Premises and equipment................ 931 812 444 421 382 Data processing....................... 522 553 258 244 236 One-time SAIF special assessment...... -- -- -- 817 -- SAIF deposit insurance premiums............................ 147 143 85 279 287 Goodwill............................ 472 436 28 29 30 Other expenses........................ 2,356 2,146 1,553 1,144 1,042 ------- ------- ------- ------- ------- Total noninterest expense........... 8,454 7,572 4,577 4,938 3,658 ------- ------- ------- ------- ------- Income before income taxes................. 6,441 6,866 6,025 4,876 3,863 Income tax expense......................... 2,241 2,481 2,108 1,744 1,403 ------- ------- ------- ------- ------- Net income.............................. $ 4,200 $ 4,385 $ 3,917 $ 3,132 $ 2,460 ======= ======= ======= ======= =======
-4-
At or for the Year Ended December 31, ------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- -------- ---------- ---------- -------- Key Financial Ratios and Other Data: Performance Ratios: (%) Net interest rate spread (difference between average yield on interest-earning assets and average cost of interest- bearing liabilities).................................. 2.86% 2.81% 2.87% 3.01% 2.75% Net interest margin (net interest income as a percentage of average interest- earning assets)....................................... 3.35 3.50 4.06 4.33 3.66 Return on average assets (net income divided by average total assets)...................... 1.21 1.35 1.86 1.62 1.45 Return on average equity (net income divided by average equity)............................ 9.51 8.73 7.94 6.30 8.54 Noninterest income to average assets.................... 1.21 1.21 1.20 0.98 1.00 Efficiency ratio(3)..................................... 56.30 51.69 42.21 49.11 47.07 Noninterest expense to average assets................... 2.45 2.34 2.17 2.56 2.16 Net interest income after provision for loan losses to noninterest expenses................... 128.13 138.97 176.22 160.40 159.07 Financial Condition Ratios: (%) (4) Equity to assets at period end.......................... 10.38 14.32 22.72 24.24 16.62 Tangible equity to tangible assets at period end (5) (6)............................... 8.68 12.42 22.32 23.80 16.09 Average shareholders' equity divided by average total assets.................................. 12.77 15.52 23.38 25.73 16.99 Average tangible shareholders equity divided by average tangible total assets (5) (6)............ 10.94 13.71 22.96 25.29 16.42 Average interest-earning assets to average interest-bearing liabilities.......................... 112.05 116.28 130.97 136.02 121.37 Asset Quality Ratios: (%) (4) Nonaccrual loans to total net loans..................... 0.07 0.38 0.08 0.11 0.12 Nonperforming assets to total assets(7)................. 0.20 0.34 0.10 0.15 0.23 Allowance for loan losses as a percent of total loans receivable at end of period............... 0.95 1.03 1.10 1.16 1.15 Allowance for loan losses to nonaccrual loans................................................. 1,301.13 279.72 1,468.33 1,059.35 960.20 Per Share Data: Book value per share.................................... $ 16.86 $ 16.26 $ 15.43 $ 14.36 $ 8.72 Tangible book value per share(5)........................ 13.83 13.79 15.09 14.01 8.39 Basic earnings per share (8)............................ 1.64 1.44 1.23 0.82 0.63 Diluted earnings per share (9).......................... 1.60 1.40 1.21 0.82 0.63 Dividends declared per share............................ 0.40 0.32 0.25 0.28 0.60 Dividend payout ratio................................... 0.24 0.22 0.20 0.34 0.95 Key Financial Ratios Excluding SAIF Assessment: (%) (10) Return on average assets (net income divided by average total assets).............................. 1.21% 1.35% 1.86% 1.89% 1.45% Return on average equity (net income divided by average equity)............................ 9.51 8.73 7.94 7.34 8.54 Efficiency ratio (3).................................... 56.30 51.69 42.21 40.99 47.07 Noninterest expense to average assets................... 2.45 2.34 2.17 2.13 2.16 Net interest income after provision for loan losses to noninterest expenses................. 128.13 138.97 176.22 192.21 159.07 Other Data: Cash earnings (12)...................................... $ 4,672 $ 4,821 $ 3,945 $ 3,161 $ 2,490 Cash earnings per share diluted (9) (12)................ 1.78 1.54 1.22 0.83 0.64 Cash return on average assets (12)...................... 1.35 1.49 1.87 1.64 1.47 Cash return on average equity (12)...................... 10.58 9.60 7.99 6.77 8.64
______________________ (Notes on following page) -5- (1) Loans receivable, net represents total loans less discounts, loans in process, net deferred loan fees and allowance for loan losses. The allowance for loan losses at December 31, 1999, 1998, 1997, 1996 and 1995 was $2.8 million, $2.7 million, $2.2 million, $2.0 million and $1.7 million, respectively. (2) Includes interest-bearing deposits with the Federal Home Loan Bank of Des Moines (the "FHLB"). (3) Efficiency ratio represents noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income. (4) Asset Quality Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods and are annualized where appropriate. (5) Tangible equity consists of stockholders' equity less goodwill and title plant. Goodwill and title plant at December 31, 1999, 1998, 1997, 1996 and 1995 was $6.8 million, $7.3 million, $1.1 million, $1.2 million and $1.1 million, respectively. (6) Tangible assets consists of total assets less goodwill and title plant. Goodwill and title plant at December 31, 1999, 1998, 1997, 1996 and 1995 was $6.8 million, $7.3 million, $1.1 million, $1.2 million and $1.1 million, respectively. (7) Nonperforming assets consists of nonaccrual loans, foreclosed real estate and other nonperforming assets. (8) Basic earnings per share information is calculated by dividing net income by the weighted average number of shares outstanding. The weighted average number of shares outstanding for basic earnings per share computation for 1999, 1998, 1997, 1996 and 1995 were 2,562,940, 3,048,148, 3,184,269, 3,818,273 and 3,919,488, respectively. (9) Diluted earnings per share information is calculated by dividing net income by the weighted average number of shares outstanding, adjusted for the effect of dilutive potential common shares outstanding which consists of stock options granted. The weighted average number of shares outstanding for diluted earnings per share computation for 1999, 1998, 1997, 1996 and 1995 were 2,621,542, 3,132,833, 3,241,069, 3,818,273 and 3,919,488, respectively. (10) For 1996, excludes the one-time $817,000 (pre-tax) special assessment for the recapitalization of the Savings Association Insurance Fund ("SAIF"). (11) As of the close of business on January 30, 1998, the Company completed the Acquisition of Valley Financial Corp. Subsequent to January 30, 1998, the information contained in the Financial Selected Data tables reflect the effect of the Acquisition. Financial data prior to January 30, 1998, does not reflect the Acquisition and is based upon historical figures. (12) Cash earnings excludes from net income the amortization of goodwill. -6- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General North Central Bancshares, Inc. (the "Holding Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Iowa (the "Bank"), a federally-chartered savings bank. Collectively, the Holding Company and the Bank are referred to herein as the "Company." The Holding Company 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 ("Common Stock"), 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 primarily consist 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 which primarily consists of service fees and charges and abstract fees, and noninterest expense, which primarily consists of compensation and employee benefit expenses, premises and equipment and data processing. 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. Acquisition of Valley Financial Corp. As of the close of business on January 30, 1998 (the "Effective Time"), the Company completed the acquisition ( the "Acquisition") of Valley Financial Corp., ("Valley Financial"), pursuant to an Agreement and Plan of Merger, dated as of September 18, 1997, (the "Merger Agreement"). The Acquisition resulted in the merger of Valley Financial's wholly owned subsidiary, Valley Savings Bank, ("Valley Savings") with and into the Bank, with the Bank as the resulting financial institution. Valley Savings, headquartered in Burlington, Iowa, was a federally-chartered stock savings bank with three branch offices located in southeastern Iowa. In connection with the Acquisition, each share of Valley Financial's common stock, par value $1.00 per share, issued and outstanding (other than shares held as treasury stock of Valley Financial) was cancelled and converted automatically into the right to receive $525.00 per share in cash pursuant to the terms and conditions of the Merger Agreement. As a result of the Acquisition, shareholders of Valley Financial were paid $14,726,250 in cash. 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 -7- in the 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. For the fiscal years ended December 31, 1999, 1998 and 1997, the Bank incurred $147,000, $143,000 and $85,000, respectively, in deposit insurance premiums 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. 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 primarily by using deposits and advances from the FHLB as its source of funds and maintaining a substantial part of its assets in loans secured by one- to four-family residential real estate, multi-family residential real estate and commercial real estate located both inside and outside the Company's market area, consumer and other loans and in other liquid investment securities. Specifically, the Company's business strategy incorporates the following elements: (1) operating as a community-oriented financial institution, maintaining a strong core customer base by providing 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 multi-family and commercial real estate loans) and securities issued or guaranteed by the United States Government or agencies thereof and mortgage-backed securities; (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 through (i) abstract company business conducted through a wholly owned subsidiary, (ii)mortgage banking business conducted through a wholly owned subsidiary (iii)sale of fixed and variable rate annuities and mutual funds conducted through a wholly owned subsidiary and (iv)other increases in fees and service charges. Highlights of the Company's business strategy are as follows: Community-Oriented Institution. The Company is committed to meeting the financial needs of the communities in which it operates. Based in part on its participation in several different programs designed to facilitate residential lending to low- and moderate-income households, the Bank has received an "Outstanding" Community Reinvestment Act rating. 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. Such proximity allows senior management of the Bank to quickly and personally respond to customer needs and inquiries. Strong Retail Deposit Base. In 1999, the Company had a relatively strong and stable retail deposit base drawn from its offices located in Fort Dodge, Ames, Nevada, Perry, Burlington and Mount Pleasant, Iowa. The stability of the Company's deposit base has been enhanced by the Company's offering of certificates of deposit with original terms longer than one year (which comprise $160.0 million, or 59.0%, of total deposits at December 31, 1999) 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, 1999, 29.4% of the deposit base, or $79.8 million, consisted of core deposits, which included money market accounts, savings accounts, NOW accounts, and noninterest-bearing demand accounts. Core deposits are considered to be a more stable and lower cost source of funds than certificates of deposit or outside borrowings. The Company will continue to emphasize retail deposits by providing quality customer service, offering competitive rates on deposit accounts, and providing depositors with a full range of accounts. -8- 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. At December 31, 1999, 44.0% of the Company's total assets consisted of one- to four-family residential first mortgage loans. To supplement local mortgage loan originations and to diversify its mortgage loan portfolio geographically, the Company has purchased loans in the secondary mortgage market, with an emphasis on multi-family and commercial real estate loans secured by properties outside the State of Iowa (the "out of state properties"). At December 31, 1999, the Company's portfolio of loans which were either originated or purchased by the Company and secured by out of state properties consisted of $10.3 million of one- to four-family residential mortgage loans, or 3.5% of the Company's total loan portfolio, and $83.6 million of multi-family and commercial loans, or 28.7% of the Company's total loan portfolio. At December 31, 1999, the Company's ratio of nonperforming assets to total assets was 0.20%. The Company also invests in United States Treasury securities, United States Government agencies, state and local obligations, mortgage-backed securities, interest-earning deposits, equity securities and FHLB stock. Generally, the yield on mortgage loans originated and purchased by the Company is greater than that of securities purchased by the Company. Future economic conditions and continued strong banking competition could result in diminished lending opportunities. 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 Internal Growth. Total equity increased from $29.9 million at December 31, 1995 to $38.1 million at December 31, 1999, an increase of 27.5%. Total assets have increased by $187.5 million, or 104.2%, since December 31, 1995. As a result, the ratio of total equity to total assets has decreased from 16.6% at December 31, 1995 to 10.4% at December 31, 1999. The Company's growth can be attributed to the Acquisition and the Company's emphasis on the origination and purchase of residential mortgage loans and the purchase of multi-family and commercial mortgage loans. The Company's growth has been funded through a combination of the use of proceeds from the stock offerings held in 1994 and 1996, FHLB advances and deposit growth. The Company intends to maintain strong levels of total equity and capital ratios by controlling growth to the extent that adequate capital levels can be maintained. Acquisition Strategy. With the consummation of the Acquisition in 1998, the Company has grown through the purchase of another financial institution. The Acquisition resulted in an increase in total assets of approximately 42%, making effective use of the Company's excess capital. The Company intends to continue evaluating the possibility of acquiring branch offices and other financial institutions, which involves executing confidentiality agreements and conducting due diligence. 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 the Company's evaluation is complete. Increasing Noninterest Income. The Company has attempted to increase its level of noninterest income from both new and traditional lines of business to supplement net interest income. The Company currently owns an abstract company which operates in Webster, Boone and Jasper counties in Iowa, through First Iowa Title Services, Inc. ("First Iowa"), the Bank's wholly owned subsidiary. The abstract business performed by First Iowa replaces the function of a title insurance company. The Company believes that First Iowa can continue to be an excellent source of fee income. Noninterest income from such business for the year ended December 31, 1999 was $1.4 million, offset by noninterest expense attributable to First Iowa. The Company also owns a mortgage banking company in Ames, Iowa, First Iowa Mortgage, Inc. ("First Iowa Mortgage"), the Bank's wholly owned subsidiary. On January 30, 1998, the Company acquired First Iowa Mortgage as a part of the Acquisition of Valley Financial. Non-interest income for such business for the year ended December 31, 1999 was $368,000, offset by non- interest expense attributable to First Iowa Mortgage. 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 -9- acceptable interest rate spread. At December 31, 1999, total interest-bearing liabilities maturing or repricing within one year exceeded total interest- earning assets maturing or repricing in the same period by $60.4 million, representing a one-year gap to total assets ratio of negative 16.5% as compared to a positive 3.0% at December 31, 1998. 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 short to medium term United States Treasury notes, U. S. Government agencies, mortgage- backed securities and has sought to lengthen the terms of its deposits through its pricing strategies with respect to longer term certificates of deposit. See "-- Discussion of Market Risk --Interest Rate Sensitivity Analysis". Liquidity and Capital Resources Office of Thrift Supervision ("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 4% of its net withdrawable deposits plus short-term borrowings. At December 31, 1999, the amount of the Bank's liquid assets were $31.7 million, resulting in a liquidity ratio of 10.8%. 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 prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Company manages the pricing of its deposits to maintain a desired deposit balance. In addition, the Company invests in short- to medium-term interest-earning assets, which provide liquidity to meet lending requirements. At December 31, 1999, $4.5 million, or 11.8%, of the Company's investment portfolio, excluding equity securities, was scheduled to mature in one year or less; $12.6 million, or 33.3%, was scheduled to mature in one to five years and $20.8 million, or 54.9%, was scheduled to mature in more than five years. Certificates of deposit scheduled to mature in less than one year, at December 31, 1999, totalled $117.5 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 $151.9 million as of December 31, 1999. For additional information about cash flows from the Company's operating, financing and investing activities, see the Statements of Cash Flows included in the Consolidated Financial Statements. At December 31, 1999, the Company had outstanding loan commitments of $5.4 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 payments from the Bank in the form of dividends and loan repayments. The main cash outflows are payments of dividends to shareholders and funds used to repurchase the Common Stock. During 1999, the Holding Company repurchased 702,707 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. For a description of the liquidation account, see Notes 16 and 17 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, however, it is subject to the requirements of Iowa law. Iowa law generally prohibits the Holding Company from paying a dividend if, after giving it effect, either of the following would result: (a) the Holding Company would not be able to pay its debts as they become due in the usual course of business; or (b) the Holding Company's total assets would be less than the sum of its total liabilities, plus the amount that would be needed, if the Holding Company were to be dissolved at the time of distribution, to satisfy -10- 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, 1999, 1998 and 1997, the Company's disbursements for loan originations and purchases totaled $91.7 million, $85.2 million and $62.3 million, respectively. These activities were funded primarily by net deposit inflows, principal repayments on loans, proceeds from the sale of securities and FHLB advances. Net cash flows used in investing activities amounted to $37.2 million, $2.2 million and $19.1 million for the years ended December 31, 1999, 1998 and 1997, respectively. Net cash flows provided by financing activities amounted to $28.0 million, $9.4 million and $14.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. 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, 1999 with tangible and leverage capital ratios of 8.5% and a total risk-based capital ratio of 16.7%. 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, 1999:
Capital Excess Amount Requirements Capital -------- -------------- -------- (In thousands) Tangible capital........... $ 30,685 $ 5,416 $ 25,269 Core capital............... 30,685 10,833 19,852 Risk-based capital......... 33,168 15,870 17,298
-11- Discussion of Market Risk--Interest Rate Sensitivity Analysis As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the market value of all interest-earning assets, other than those which possess a short term to maturity. Since all of the Company's interest-bearing liabilities and virtually all of the Company's interest-earning assets are located at the Bank, virtually all of the Company's interest rate risk management procedures are performed at the Bank level. Based upon the Bank's nature of operations, the Bank is not subject to foreign currency exchange or commodity price risk. The Bank's real estate loan portfolio, within Iowa, is subject to risks associated with the local economy. The Company has sought to diversify its loan portfolio by purchasing loans secured by properties outside of Iowa. At December 31, 1999, 32.2% of the Company's loan portfolio was secured by properties outside the State of Iowa, located in twenty-six states. See "Asset Quality." The Bank does not own any trading assets. At December 31, 1999, neither the Holding Company nor the Bank had any hedging transactions in place, such as interest rate swaps and caps. The Company seeks to manage its interest risk by monitoring and controlling the variation in repricing intervals between its assets and liabilities. To a lesser extent, the Company also monitors its interest rate sensitivity by analyzing the estimated changes in market value of its assets and liabilities assuming various interest rate scenarios. As discussed more fully below, there are a variety of factors which influence the repricing characteristics of any given asset or liability. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The "interest rate sensitivity gap" is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to positively affect net interest income. Similarly, during a period of falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net interest income. The Company's policy in recent years has been to manage its exposure to interest rate risk generally by focusing on the maturities of its interest rate sensitive assets and by emphasizing adjustable-rate mortgage loans, and maintaining a level of liquidity by investing in short- to medium-term United States Treasury notes, U. S. Government agencies, mortgage-backed securities and short-term interest-earning deposits. The Company generally offers competitive rates on deposit accounts and prices certificates of deposit to provide customers with incentives to choose certificates of deposit with longer terms. At December 31, 1999, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $60.4 million, representing a one-year gap ratio of negative 16.5%, compared to a one-year gap ratio of positive 3.0% at December 31, 1998. The Chief Executive Officer regularly meets with the Bank's senior executive officers to review trends in deposits as well as mortgage and consumer lending. The Chief Executive Officer also regularly meets with the investment committee to review the investment portfolio. The Chief Executive Officer reports quarterly to the Board of Directors on interest rate risks and trends, as well as liquidity and capital ratios and requirements. -12- Gap Table. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1999 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, 1999 (1) --------------------------------------------------------------------------------- Within 1-3 3-5 5-10 10-20 Over 20 1 Year Years Years Years Years Years Total --------- --------- --------- --------- --------- --------- --------- (Dollars in thousands) Interest-earning assets: First mortgage loans Adjustable (2).......................... $ 63,686 $ 54,069 $ 28,788 $ -- $ -- $ -- $146,543 Fixed (2).............................. 27,833 31,498 27,157 30,380 2,011 24 118,903 Consumer and other loans.................. 14,911 15,258 5,844 515 34 1 36,563 Investment securities(3) (4).............. 13,235 5,457 14,093 10,355 432 -- 43,572 -------- -------- -------- -------- -------- -------- -------- Total interest-earning assets.......... $119,665 $106,282 $ 75,882 $ 41,250 $ 2,477 $ 25 $345,581 ======== ======== ======== ======== ======== ======== ======== Rate sensitive liabilities: Savings accounts.......................... $ 4,391 $ 6,670 $ 4,595 $ 6,166 $ 3,386 $ 622 $ 25,830 NOW accounts.............................. 11,136 11,435 4,538 2,691 293 3 30,096 Money market accounts..................... 13,797 3,667 -- -- -- -- 17,464 Certificate accounts...................... 117,503 52,719 20,680 327 -- -- 191,229 Noninterest-bearing deposits.............. 6,412 -- -- -- -- -- 6,412 FHLB advances and other liabilities....... 26,872 18,414 10,412 17 -- -- 55,715 -------- -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities..... $180,111 $ 92,905 $ 40,225 $ 9,201 $ 3,679 $ 625 $326,746 ======== ======== ======== ======== ======== ======== ======== Interest sensitivity gap..................... $(60,446) $ 13,377 $ 35,657 $ 32,049 $ (1,202) $ 600 Cumulative interest sensitivity gap.......... $(60,446) $(47,069) $(11,412) $ 20,637 $ 19,435 $ 20,035 Interest sensitivity gap to total assets..... -16.45% 3.64% 9.70% 8.72% -0.33% -0.16% Cumulative interest-sensitivity gap to total assets.............................. -16.45% -12.81% -3.10% 5.61% 5.29% 5.45% Ratio of interest-earning assets to interest-bearing liabilities.............. 66.44% 114.40% 188.64% 448.32% 67.33% 4.00% 107.88% Cumulative ratio of interest-earning assets to interest-bearing liabilities.... 66.44% 82.76% 96.36% 106.40% 105.96% 105.76% 105.76% Total assets................................. $367,562 $367,562 $367,562 $367,562 $367,562 $367,562 $367,562 Cumulative interest-bearing assets........... $119,665 $225,947 $301,829 $343,079 $345,556 $345,581 $345,581 Cumulative interest sensitive liabilities.... $180,111 $273,016 $313,241 $322,442 $326,121 $326,746 $326,746
(1) The following assumptions were used in regard to prepayment speed for loans: (i) one- to four-family first mortgage residential properties will prepay at 15 percent per year, (ii) multi-family mortgage and commercial mortgage properties will prepay at 12 percent per year, (iii) all other loans including second mortgage residential properties, mortgage-backed securities and other consumer loans will prepay at 20 percent per year. Besides prepayment assumptions, the chart above also includes normal principal payments based upon the loan contractual agreements. Savings accounts are assumed to be withdrawn at an annual rate of 17 percent. NOW accounts are assumed to be withdrawn at an annual rate of 37 percent. Money Market accounts are assumed to be withdrawn at 79% percent during the first year with the balance being withdrawn within the one - to three - year category. These assumptions are annual percentages based on remaining balances and should not be regarded as indicative of the actual prepayments and withdrawals that may be experienced by the Company. Certain short comings are inherent in the analysis presented by the foregoing table. (2) Includes $492,000 and $9.2 million in mortgage-backed securities in adjustable and fixed first mortgage loans, respectively. (3) Includes other equity securities, interest-bearing deposits and FHLB stock, all of which are shown in the within-one-year category. Components include interest-bearing deposits of $4.1 million and securities available for sale of $39.5 million. (4) Includes FHLMC preferred stock and FNMA preferred stock, which are included in the appropriate repricing category based upon their call dates. Certain shortcomings are inherent in the method of analysis presented in the Gap Table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of changes in interest rates, prepayment and early withdrawal levels would -13- likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase. 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 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, 1999, is an analysis of the Company'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 Company's current capital position.
Interest Rate Sensitivity of Net Portfolio Value (NPV)(1) Net Portfolio Value NPV as % of PV of Assets ---------------------------------------------------------------- ------------------------------------------ Change in Rates $ Amount $ Change % Change NPV Ratio Change - -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- (Dollars in Thousands) +300 bp 26,369 -9,917 -27 7.63 -234bp +200 bp 30,044 -6,242 -17 8.54 -144bp +100 bp 33,607 -2,678 -7 9.38 -59bp 0 bp 36,286 -- -- 9.97 -- -100 bp 37,931 1,646 5 10.30 32bp -200 bp 38,767 2,481 7 10.41 44bp -300 bp 39,065 2,780 8 10.40 42bp
_____________________ (1) Denotes rate shock used to compute interest rate risk capital component. As is the case with the Gap Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV Table presented assumes that the composition of the Company's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV Table provides an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not provide, a precise forecast of the effect of changes in market interest rates on the Company's net interest income and will differ from actual results. Asset Quality 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 satisfactory payment terms are not reached with the borrower, foreclosure proceedings are initiated. To the extent required by the Department of Housing and Urban Development ("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 -14- 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 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. 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, 1999, the Company's foreclosed real estate consisted of ten properties with an aggregate value of $503,000. 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. At 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.
At December 31, ---------------------------------------- 1999 1998 1997 1996 1995 ------ -------- ------ ------ ------ (Dollars in Thousands) Nonaccrual loans and nonperforming assets: First mortgage loans: One- to four-family residential.......... $ 111 $ 403 $ 122 $ 149 $ 137 Multi-family and commercial properties (1)......................... -- 423 -- -- -- Consumer loans:............................. 102 130 25 35 44 ----- ------ ----- ----- ----- Total nonaccrual loans................... 213 956 147 184 181 Total foreclosed real estate(2)............. 503 187 67 128 128 Other nonperforming assets.................. -- 1 -- 2 109 ----- ------ ----- ----- ----- Total nonperforming assets............... $ 716 $1,144 $ 214 $ 314 $ 418 ===== ====== ===== ===== ===== Total nonaccrual loans to net loans receivable............................... 0.07% 0.38% 0.08% 0.11% 0.12% Total nonaccrual loans to total assets...... 0.06 0.28 0.07 0.09 0.10 Total nonperforming assets to total assets................................... 0.20 0.34 0.10 0.15 0.23
________________________ (1) Includes a purchased loan which was secured by a commercial property that was 90 days past due in the amount of $364,636 (in actual dollars). This loan was repaid in March, 1999. (2) 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. -15- 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, ------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (In Thousands) Loans past due 60-89 days: First mortgage loans: One- to four-family residential........ $ 521 $1,070 $ 275 $ 323 $ 311 Multi-family and commercial properties 491 22 -- -- -- Consumer loans............................ 198 270 135 51 28 ------ ------ ----- ----- ----- Total past due 60-89 days............ $1,210 $1,362 $ 410 $ 374 $ 339 ====== ====== ===== ===== =====
The following table sets forth information with respect to the Company's delinquent loans and other problem assets at December 31, 1999
At December 31, 1999 --------------------------------- Balance Number -------------- -------------- (Dollars in Thousands) One- to four-family first mortgage loans: Loans 60 to 89 days delinquent......................... $521 19 Loans 90 days or more delinquent....................... 111 4 Multi-family and commercial first mortgage loans: Loans 60 to 89 days delinquent...................... 491 1 Loans 90 days or more delinquent.................... -- Consumer Loans: Loans 60 to 89 days delinquent...................... 198 22 Loans 90 days or more delinquent.................... 102 25 Foreclosed real estate................................. 503 10 Other nonperforming assets............................. -- -- Loans to facilitate sale of foreclosed real estate..... 162 4 Special mention loans.................................. 761 29
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, 1999, the Company had $761,000 of special mention loans, consisting of thirteen loans secured by one- to four-family residences, one commercial property and fifteen consumer loans. -16- The following table sets forth the aggregate amount of the Company's classified assets at the dates indicated. At December 31, ----------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ -------- (In Thousands) Substandard assets.......... $ 689 745 (2) $ 208 $ 311 1,134 (1) Doubtful assets............. -- -- -- -- -- Loss assets................. 60 35 18 9 -- ----- ------- ----- ----- ------- Total classified assets.... $ 749 $ 780 $ 226 $ 320 $ 1,134 ===== ======= ===== ===== ======= - --------------------- (1) Includes one purchased loan which was secured by a multi-family property that was 30 days past due in the amount of $791,000 (in actual dollars). This loan was repaid in January, 1996. (2) Includes one purchased loan which was secured by a commercial property that was 90 days past due in the amount of $364,636 (in actual dollars). This loan was repaid in March, 1999. 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 multi-family 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, 1999, 1998 and 1997, the Company's provision for loan losses were $120,000, $210,000 and $240,000, respectively. The Company's allowance for loan losses totalled $2.8 million, $2.7 million and $2.2 million at December 31, 1999, 1998 and 1997, 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 Bank's allowances for loan losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. -17- 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, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Total loans outstanding................... $ 291,760 $259,360 $ 194,626 $ 168,921 $151,310 Average net loans outstanding............. 265,553 246,510 175,284 156,708 137,068 Allowance balances (at beginning of period)................................ 2,676 2,151 1,953 1,736 1,543 --------- -------- --------- --------- -------- Provisions for losses: First mortgage loans................... 105 135 190 150 200 Consumer loans......................... 15 75 50 90 50 Effect of Valley Financial Corp................ -- 343 -- -- -- Charge-Offs: First mortgage loans................... 5 6 21 5 2 Consumer loans......................... 23 23 31 19 56 Recoveries: First mortgage loans................... -- -- -- -- -- Consumer loans......................... 8 1 10 1 1 --------- -------- --------- --------- -------- Net charge-offs........................ 20 28 42 23 57 --------- -------- --------- --------- -------- Allowance balance (at end of period)...... $ 2,776 $ 2,676 $ 2,151 $ 1,953 $ 1,736 ========= ======== ========= ========= ======== Allowance for loan losses as a percent of total loans receivable at end of period................................. 0.95% 1.03% 1.10% 1.16% 1.15% Net loans charged off as a percent of average net loans outstanding.......... 0.01 0.01 0.02 0.01 0.04 Ratio of allowance for loan losses to total nonaccrual loans at end of period................................. 1,301.13 279.72 1,468.33 1,059.35 960.20 Ratio of allowance for loan losses to total nonaccrual loans and foreclosed real estate at end of period........... 387.78 233.95 1,006.96 621.31 562.15
-18- 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, ------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 ----------------------- ----------------------- ----------------------- ---------------------- % of Loans % of Loans % of Loans % of Loans In Each In Each In Each In Each Category to Category to Category to Category to 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................ $ 726 56.23% $ 684 57.45% $ 675 59.48% $ 503 63.44% Multi-family residential mortgage loans... 1,332 25.17 1,298 25.02 1,026 26.38 948 20.42 Commercial mortgage loans...... 252 6.07 228 4.39 76 1.95 157 3.09 Consumer loans................. 466 12.53 466 13.14 374 12.19 345 13.05 ------ ------ ------ ------ ------ ------ ------ ------ Total allowance for loan losses................ $2,776 100.00% $2,676 100.00% $2,151 100.00% $1,953 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ----------------------------- 1995 ----------------------------- % of Loans In Each Category to Amount Total Loans -------- ----------------- Balance at end of period applicable to: One- to four-family residential mortgage loans................ $ 418 62.70% Multi-family residential mortgage loans... 870 20.90 Commercial mortgage loans...... 175 3.85 Consumer loans................. 273 12.55 ------ ------ Total allowance for loan losses................ $1,736 100.00% ====== ======
Average Balance Sheet The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances were computed on a monthly basis. -19-
For the Year Ended December 31, ----------------------------------------------------------------------- At December 31, 1999 1999 1998 ------------------------ ----------------------------------- ---------------------------------- Average Average Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost --------- --------- ----------- ---------- ---------- ----------- ----------- -------- (Dollars In Thousands) Assets: Interest-earning assets: First mortgage loans(1)............ $ 252,897 7.72% $ 233,457 $18,104(8) 7.75% $ 216,914 $17,318(8) 7.98% Consumer loans(1).................. 36,639 8.74 34,831 3,111 8.93 32,173 3,014 9.37 Investment securities.............. 55,295(4) 5.83 58,666(5) 3,341 5.69 57,826(6) 3,270 5.65 --------- ------ --------- ------- ------ --------- ------- ------ Total interest-earning assets....................... 344,831 7.52% 326,954 24,556 7.51% 306,913 23,602 7.69% ======= Noninterest-earning assets........ 22,602 18,750 16,847 --------- --------- --------- Total assets.................... $ 367,433 $ 345,704 $ 323,760 ========= ========= ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings.......................... $ 47,560 2.12% $ 47,551 $ 1,088 2.29% $ 44,622 $ 1,351 3.03% Savings........................... 25,830 2.00 27,189 562 2.07 25,591 594 2.32 Certificates of Deposit........... 191,229 5.48 173,329 9,463 5.46 159,701 8,948 5.60 Borrowed funds.................... 55,715 5.71 43,711 2,491 5.62 34,020 1,976 5.81 --------- ------ --------- ------- ------ --------- ------- ------ Total interest-bearing liabilities.................. $ 320,334 4.64% $ 291,780 $13,604 4.65% $ 263,934 $12,869 4.88% Noninterest-bearing liabilities...................... 8,972 9,776 9,587 --------- --------- --------- Total liabilities............... $ 329,306 $ 301,556 $ 273,521 Equity.............................. 38,127 44,148 50,239 --------- --------- --------- Total liabilities and equity.... 367,433 345,704 323,760 ========= ========= ========= Net interest income $10,952 $10,733 ======= ======= Net interest rate spread(2)......... 2.88% 2.86% 2.81 ====== ====== ====== Net interest margin (3)............. 3.21 3.35 3.50 ====== ====== ====== Ratio of average interest-earning assets to average interest- bearing liabilities............... 107.65 112.05 116.28 ====== ====== ====== ------------------------------------- 1997 ------------------------------------- Average Average Yield/ Balance Interest Cost ------------ ---------- --------- Assets: Interest-earning assets: First mortgage loans(1)...................... $ 154,227 $12,433(8) 8.06% Consumer loans(1)............................ 23,138 2,201 9.51 Investment securities........................ 27,102(7) 1,571 5.79 --------- ------- ------ Total interest-earning assets................................. $ 204,467 $16,205 7.93 ======= Noninterest-earning assets.................. 6,645 --------- Total assets $ 211,112 ========= Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings.................................... $ 21,777 $ 632 2.90% Savings..................................... 17,425 392 2.25 Certificates of Deposit..................... 93,239 5,470 5.87 Borrowed funds.............................. 23,679 1,406 5.94 --------- ------- Total interest-bearing liabilities............................ $ 156,120 $ 7,900 5.06% ======= Noninterest-bearing liabilities................................ 5,634 --------- Total liabilities......................... $ 161,754 Equity........................................ 49,358 --------- Total liabilities and equity.............. $ 211,112 ========= Net interest income........................... $ 8,305 ======= Net interest rate spread(2)................... 2.87% ====== Net interest margin (3)....................... 4.06 ====== Ratio of average interest-earning assets to average interest- bearing liabilities......................... 130.97 ======
_________________________ (1) Balance is net of deferred loan fees, loan discounts and loans in process. Nonaccrual loans are included in the balances. (2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average total interest-earning assets. (4) Includes interest-bearing deposits of $4,127,000 and securities available for sale of $51,168,000. (5) Includes interest-bearing deposits of $7,309,000 and securities available for sale of $51,357,000. (6) Includes interest-bearing deposits of $8,235,000 and securities available for sale of $49,590,000. (7) Includes interest-bearing deposits of $3,912,000, securities available for sale of $22,440,000 and securities held to maturity of $750,000. (8) Includes loan fee amortization of $(9,000), $(29,000) and $(35,000) for the years ended December 31, 1999, 1998 and 1997. -20- 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, 1999 December 31, 1998 Compared to Compared to Year Ended Year Ended December 31, 1998 December 31, 1997 --------------------------------------------- ----------------------------------------------- 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......... $1,320 $(496) $(38) $ 786 $5,054 $(120) $ (49) $4,885 Consumer loans............... 249 (140) (12) 97 859 (33) (13) 813 Investment securities........ 77 6 (12) 71 1,770 (83) 12 1,699 ------ ----- ---- ----- ------ ----- ----- ------ Total interest-earning assets................... $1,646 $(630) $(62) $ 954 $7,683 $(236) $ (50) $7,397 ====== ===== ==== ===== ====== ===== ===== ====== Interest expense: NOW and money market savings..................... $ 89 $(330) $(22) $(263) $ 663 $ 27 $ 29 $ 719 Savings...................... 37 (65) (4) (32) 184 13 6 203 Certificate of deposits...... 763 (228) (19) 516 3,897 (246) (175) 3,476 Borrowed funds............... 563 (38) (11) 514 614 (30) (13) 571 ------ ----- ---- ----- ------ ----- ----- ------ Total interest-bearing liabilities.............. $1,452 $(661) $(56) $ 735 $5,358 $(236) $(153) $4,969 Net change in net interest ====== ===== ==== ===== ====== ===== ===== ====== income......................... $ 194 $ 31 $ (6) $ 219 $2,325 $ -- $ 103 $2,428 ====== ===== ==== ===== ====== ===== ===== ======
-21- PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED) The unaudited pro forma consolidated statement of income is based on the historical financial statements of the Company and Valley Financial. The unaudited pro forma consolidated statement of income for the year ended December 31, 1998 was prepared as if the Acquisition had occurred as of the beginning of the period for purposes of the combined consolidated statements of income. The income statement for the year ended December 31, 1998 would therefore include the month ended January 31, 1998 for Valley Financial. These pro forma financial statements are not necessarily indicative of the results of operations that might have occurred had the Acquisition taken place at the beginning of the period, or to project the Company's results of operations at any future date or for any future period. NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES ACTUAL AND PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Years Ended December 31, ---------------------------------------- Actual Pro forma Pro forma 1999 1998 1997 ------------ ------------ ------------ Interest income.................................................. $24,556,267 $24,223,861 $23,955,770 Interest expense................................................. 13,603,841 13,319,040 13,401,812 ----------- ----------- ----------- Net interest income........................................... 10,952,426 10,904,821 10,553,958 Provision for loan losses........................................ 120,000 210,000 140,000 ----------- ----------- ----------- Net interest income after provision for loan losses.................................................. 10,832,426 10,694,821 10,413,958 ----------- ----------- ----------- Noninterest income: Fees and service charges...................................... 1,484,962 1,279,153 1,139,663 Abstract fees................................................. 1,420,955 1,583,773 1,221,807 Gain on sale of securities available for sale, net.................................... 61,564 51,362 263,870 Other income.................................................. 1,095,565 1,054,151 769,602 ----------- ----------- ----------- Total noninterest income................................... 4,063,046 3,968,439 3,394,942 ----------- ----------- ----------- Noninterest expense: Salaries and employee benefits................................ 4,025,744 3,650,905 3,463,118 Premises and equipment........................................ 930,988 846,223 739,524 Data processing............................................... 522,122 583,111 429,843 SAIF deposit insurance premiums............................... 147,243 148,226 135,206 Goodwill amortization......................................... 472,290 472,290 473,875 Other expenses................................................ 2,356,024 2,277,600 2,201,702 ----------- ----------- ----------- Total noninterest expense.................................. 8,454,411 7,978,355 7,443,268 ----------- ----------- ----------- Income before income taxes....................................... 6,441,061 6,684,905 6,365,632 Provision for income taxes....................................... 2,240,886 2,439,432 2,343,256 ----------- ----------- ----------- Net Income....................................................... $ 4,200,175 $ 4,245,473 $ 4,022,376 =========== =========== ===========
Comparison of Financial Condition as of December 31, 1999, December 31, 1998 and December 31, 1997 Total assets increased $30.7 million, or 9.1%, from $336.7 million at December 31, 1998 to $367.4 million at December 31, 1999. Interest-bearing cash decreased $9.1 million, or 68.7%, from $13.2 million at December 31, 1998 to $4.1 million at December 31, 1999. Noninterest-bearing cash increased $6.1 million, or 250.7%, from $2.4 million at December 31, 1998 to $8.5 million at December 31, 1999. Customer-focused preparations for the Year 2000 resulted in increased noninterest-bearing cash. Noninterest-bearing cash has decreased to historical numbers since December 31, 1999. Securities available for sale decreased $190,000, or 0.4%, primarily due to the sales, calls, payments and maturities on U.S. Treasury notes, U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of U.S. Government agencies and mortgage-backed securities. Total loans receivable, net, increased by $32.7 million, or 12.9%, from $254.0 million at December 31, 1998 to $286.8 million at December 31, 1999, primarily due to the origination of $60.8 million of first mortgage loans secured by one- to four-family residences, purchases and originations of first mortgage loans primarily secured by one- to four-family residences, multi-family residences and commercial real estate loans of $40.3 million, and originations of $16.1 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, 1999. Deposits increased $24.3 million, or 9.9%, from $246.7 million at December 31, 1998 to $271.0 million at December 31, 1999, primarily reflecting increases in certificates of deposit accounts, due to an increase in deposits of certain public funds. Other borrowings, primarily FHLB advances, increased $16.9 million, from $38.8 million at December 31, 1998 to $55.7 million at December 31, 1999. Total shareholders' equity decreased $10.1 million from $48.2 million at December 31, 1998 to $38.1 million at December 31, 1999, primarily due to dividends paid to shareholders and funds used for repurchases of Common Stock less, net income and increased unrealized losses. The pro forma statement of financial condition as of December 31, 1997 was compared with the December 31, 1998 statement of financial condition in order to more clearly present the changes in financial condition. Total assets increased $2.2 million, or 0.6%, from $334.5 million at December 31, 1997 to $336.7 million at December 31, 1998. Interest-bearing cash increased $6.7 million, or 103.7%, from $6.5 million at December 31, 1997 to $13.2 million at December 31, 1998. Securities available for sale decreased $8.9 million, or 15.1%, primarily due to the sales, calls, payments and maturities on U.S. Treasury notes, U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of U.S. Government agencies and mortgage-backed securities. Total loans receivable, net, increased by $3.3 million, or 1.3%, from $250.7 million at December 31, 1997 to $254.0 million at December 31, 1998, primarily due to the origination of $58.1 million of first mortgage loans secured by one- to four-family residences, purchases and originations of first mortgage loans primarily secured by multi-family residences located out of state of $24.5 million, and originations of $14.5 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, 1998. Deposits increased $6.0 million, or 2.5%, from $240.7 million at December 31, 1997 to $246.7 million at December 31, 1998, primarily reflecting increases in NOW accounts and money market accounts. Other borrowings, primarily FHLB advances, decreased $1.4 million, from $38.8 million at December 31, 1997 to $37.9 million at December 31, 1998. Total shareholders' equity decreased $2.2 million from $48.2 million at December 31, 1997 to $50.4 million at December 31, 1998, primarily due to dividends paid to shareholders and funds used for repurchases of Common Stock less, net income and increased unrealized gains. Comparison of Results of Operations for the Years Ended December 31, 1999 and 1998 The actual statement of income for the year ended December 31, 1999 was compared to the pro forma statement of income for the years ended December 31, 1998 for comparison purposes in order to more clearly present the changes in the results of operations. -23- Interest Income. Interest income increased by $332,000 to $24.6 million for the year ended December 31, 1999 compared to $24.2 million for the year ended December 31, 1998. The increase in interest income was primarily due to a $11.9 million increase in average interest-earning assets to $327.0 million for the year ended December 31, 1999, from $315.1 million for 1998. The increase in the average balances of interest-earning assets primarily reflects increases in the average balances of first and second mortgage loans, partially offset by decreases in securities available for sale. These increases were primarily derived from originations of $60.8 million of first mortgage loans secured by one- to four-family residences, purchases and originations of first mortgage loans secured by one- to four-family residences, multi-family residences and commercial real estate of $40.3 million and originations of $16.1 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, 1999. The increase in average interest-earning assets reflects the Company's continued emphasis on residential lending. See "Business Strategy." The decreases in available for sale securities were primarily due to the sales, calls, payments and maturities on U.S. Treasury Notes, U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of U.S. Government agencies, mortgage-backed securities and certain equities. The impact of the increase in average interest-earning assets was offset in part by a decrease in the average yields. The average yield on interest-earning assets decreased to 7.51% for the year ended December 31, 1999 from 7.69% for the year ended December 31, 1998, primarily due to a general decrease in market interest rates. Interest Expense. Interest expense increased by $285,000 to $13.6 million for the year ended December 31, 1999 compared to $13.3 million for the year ended December 31, 1998. The increase in interest expense was primarily due to a $18.5 million increase in the average balance of interest-bearing liabilities to $291.8 million for the year ended December 31, 1999, from $273.3 million for 1998. The increase in the average balance of interest-bearing liabilities primarily reflects an increase in the certificates of deposit and borrowed funds. The increases in certificates of deposit is primarily due to an increase in deposits of certain public funds. The increase in borrowed funds was due to the borrowing of funds in part to fund the corresponding asset growth and stock repurchases. The impact of the increase in the average balances of interest- bearing liabilities was offset in part by a decrease in the average cost of interest-bearing liabilities. The average cost of interest-bearing liabilities decreased to 4.65% for the year ended December 31, 1999 from 4.87% for the year ended December 31, 1998. The decrease in the average cost of funds is due to the general decrease in market interest rates. Net Interest Income. Net interest income before provision for loan losses increased by $47,000 to $11.0 million for the year ended December 31, 1999 from $10.9 million for the year ended December 31, 1998. The increase is primarily due to the decreases in the average yield on the average interest-bearing assets being less than the decrease in the cost of the average interest-bearing liabilities. This was offset in part by a decrease in the excess of average interest-earning assets over the average balances of interest-bearing liabilities. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) increased to 2.86% for the year ended December 31, 1999 from 2.82% for the year ended December 31, 1998. The increase in the spread reflects the general decline in the overall costs on interest- bearing liabilities in excess of the decline in yields on the interest-earning assets offset, in part, by the increase in the average interest-bearing liabilities in excess of the increase in the interest-earning assets. -24- The following table sets forth certain information relating to the Company's actual and pro forma average balance sheets and reflects the actual and pro forma average yield on assets and the actual and pro forma average cost of liabilities for the years ended December 31, 1999 and 1998.
For Years Ended December 31, ------------------------------------------------------------------ Actual Pro Forma 1999 1998 ------------------------------- -------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost --------- -------- ---------- --------- -------- ---------- (Dollars in thousands) Assets: Interest-earning assets: Loans................................... $268,288 $21,215 7.91% $253,863 $20,737 8.17% Securities available for sale........... 51,357 2,998 5.84 53,138 3,106 5.85 Interest-bearing cash................... 7,309 343 4.69 8,103 381 4.70 -------- ------- ------ -------- ------- ------ Total interest-earning assets......... 326,954 24,556 7.51% 315,104 $24,224 7.69% ------- ------ Noninterest-earning assets................... 18,750 18,299 -------- -------- Total assets.......................... $345,704 $333,403 ======== ======== Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings............ $ 47,551 $ 1,088 2.29% $ 46,457 $ 1,416 3.05% Savings................................. 27,189 562 2.07 26,329 616 2.34 Certificates of deposit................. 173,329 9,463 5.46 165,207 9,236 5.59 Borrowed funds.......................... 43,711 2,491 5.62 35,275 2,051 5.81 -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities........ $291,780 $13,604 4.65% $273,268 $13,319 4.87% ------- ------ ------- ------ Noninterest-bearing liabilities........... 9,776 9,896 -------- -------- Total liabilities..................... 301,556 283,164 Equity.................................... 44,148 50,239 -------- -------- Total liabilities and equity.......... $345,704 $333,403 ======== ======== Net interest income.......................... $10,952 $10,905 ======= ======= Net interest rate spread..................... 2.86% 2.82% ====== ====== Net interest margin.......................... 3.35% 3.46% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities...... 112.05% 115.31% ====== ======
Provision for Loan Losses. The Company's provision for loan losses was $120,000 and $210,000 for years ended December 31, 1999 and December 31, 1998, respectively. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, which includes a significant amount of multi-family 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 $20,000 for the year ended December 31, 1999 as compared to $28,000 for the year ended December 31, 1998. The resulting allowance for loan loss was $2.8 million at December 31, 1999 as compared to $2.7 million at December 31, 1998. The increase in the allowance is primarily due to the increase in total loans from $259.4 million at December 31, 1998 to $291.8 million at December 31, 1999. The allowance for loan losses as a percentage of total loans receivable decreased to 0.95% at December 31, 1999 from 1.03% at December 31, 1998. The level of nonperforming loans has decreased to $213,000 at December 31, 1999 from $956,000 at December 31, 1998. 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. -25- Noninterest Income. Total noninterest income increased by $95,000, or 2.4%, to $4.1 million for the year ended December 31, 1999 from $4.0 million for the year ended December 31, 1998. The increase is due to increases in fees and service charges, partially offset by a decrease in abstract fees. Fees and service charges increased $206,000 due to increases in overdraft fees on NOW accounts, service charges on NOW and savings accounts, service charges on ATM/debit cards and loan prepayment fees. Abstract fees decreased $163,000 due to decreased sales volume. Sales volume decreased in part due to a general decline in real estate activity. Noninterest income for the year ended December 31, 1999 also reflects gains on the sales of securities available for sale of $62,000, as compared to gains on the sale of such securities of $51,000 for the 1998 comparable period. See "--Business Strategy--Increased Noninterest Income." Noninterest Expense. Total non-interest expense increased by $476,000 to $8.5 million for the year ended December 31, 1999 from $8.0 million for the year ended December 31, 1998. The increase is primarily due to an increase in the employee salaries and benefits and premises and equipment, offset in part by a decrease in data processing. The increase in salaries and benefits was primarily a result of normal salary increases, increased personnel due to the opening of a branch located in Perry, Iowa, an increase in the number of employees and related insurance costs and payroll taxes. The increase in premises and equipment was primarily due to an increase in depreciation expense relating to the purchase of computer equipment and software, ATM's, the opening of a branch located in Perry, Iowa and normal cost increases. The decrease in data processing is primarily due to the signing of a multi-year data processing contract in 1999, offset in part by additional data processing services utilized by the Bank due to the Acquisition, upgrading the Bank's operating systems and Year 2000 costs. The Company's efficiency ratio for the year ended December 31, 1999 and 1998 were 56.30% and 53.64%, respectively. The Company's ratio of noninterest expense to average assets for the year ended December 31, 1999 and 1998 were 2.45% and 2.39%, respectively. Income Taxes. Income taxes decreased by $199,000 to $2.2 million for the year ended December 31, 1999 as compared to $2.4 million for the year ended December 31, 1998. The decrease was principally due to a decrease in pre-tax earnings during the 1999 period as compared to the 1998 period. Net Income. Net income totalled $4.2 million for the year ended December 31, 1999 compared to $4.2 million for the same period in 1998. Comparison of Results of Operations for the Years Ended December 31, 1998 and 1997 The pro forma statements of income for the years ended December 31, 1998 and 1997 were used for comparison purposes in order to more clearly present the changes in the results of operations. Interest Income. Interest income increased by $268,000 to $24.2 million for the year ended December 31, 1998 compared to $24.0 million for the year ended December 31, 1997. The increase in interest income was primarily due to a $5.4 million increase in average interest-earning assets to $315.1 million for the year ended December 31, 1998 from $309.7 million for 1997. The increase in the average balances of interest-earning assets primarily reflects increases in the average balances of first and second mortgage loans, partially offset by decreases in securities available for sale. These increases were primarily derived from originations of $58.1 million of first mortgage loans secured by one- to four-family residences, purchases and originations of first mortgage loans secured by multi-family residences located outside of the State of Iowa of $24.5 million and originations of $14.5 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, 1998. The increase in average interest-earning assets reflects the Company's continued emphasis on residential lending. See "Business Strategy." The decreases in available for sale securities were primarily due to the sales, calls, payments and maturities on U.S. Treasury Notes, U.S. Government agencies and mortgage-backed securities, partially offset by the purchase of U.S. Government agencies and mortgage-backed securities. The average yield on interest-earning assets decreased to 7.69% for the year ended December 31, 1998 from 7.74% for the year ended December 31, 1997, primarily due to a general decrease in market interest rates. -26- Interest Expense. Interest expense decreased by $83,000 to $13.3 million for the year ended December 31, 1998 compared to $13.4 million for the year ended December 31, 1997. The decrease in interest expense was primarily due to a decrease in the average cost of NOW and money market accounts, savings accounts and borrowed funds and a decrease in the average balance of borrowed funds. The decrease in the average cost of funds is due to the general decrease in market interest rates. The decrease in the average balance of borrowed funds was partially due to the utilization of excess cash funds to repay certain borrowings. This decrease was partially offset by an increase in the average balances of interest-bearing-liabilities of $3.1 million from $270.2 million for the year ended December 31, 1997, compared to $273.3 million for the year ended December 31, 1998. The increase in the average balances of interest-bearing liabilities reflects an increase in the average balances of NOW accounts and money market accounts and certificates of deposit, consistent with the Company's strategy of controlled internal growth. The average cost of interest-bearing liabilities decreased from 4.96% for the year ended December 31, 1997 to 4.87% for the year ended December 31, 1998, reflecting changes in the distribution of NOW and money market savings accounts and borrowing of funds with longer maturities and, to a lesser extent, decreases in the average cost of NOW and money market savings accounts and borrowed funds. Net Interest Income. Net interest income before provision for loan losses increased by $351,000 to $10.9 million for the year ended December 31, 1998 from $10.6 million for the year ended December 31, 1997. The increase is primarily due to the increases in the average interest-earning assets and decreases in the cost of interest-bearing liabilities, offset in part by decreases in the average interest-bearing liabilities and decreases in the average yield on interest- bearing assets. The interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) increased from 2.78% for the year ended December 31, 1997 to 2.82% for the year ended December 31, 1998. The increase in the spread reflects the general decline in the overall costs on interest-bearing liabilities in excess of the decline in yields on the interest- earning assets combined with the increase in the average interest-bearing assets in excess of the increase in the interest-bearing liabilities. The following table sets forth certain information relating to the Company's pro forma average balance sheets and reflects the pro forma average yield on assets and pro forma average cost of liabilities for the years ended December 31, 1998 and 1997.
For Years Ended December 31, ------------------------------------------------------------------ 1998 1997 ------------------------------------------------------------------ Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost --------- -------- ----------- --------- -------- ----------- (Dollars in thousands) Assets: Interest-earning assets: Loans......................................... $253,863 $20,737 8.17% $238,973 $19,768 8.27% Securities available for sale................. 53,138 3,106 5.85 65,556 3,914 5.97 Interest-bearing cash......................... 8,103 381 4.70 5,167 274 5.31 -------- ------- ------ -------- ------- ------ Total interest-earning assets............... 315,104 $24,224 7.69% 309,696 $23,956 7.74% ------- ------ ------- ------ Noninterest-earning assets........................ 18,299 18,215 -------- -------- Total assets................................ $333,403 $327,911 ======== ======== Liabilities and Equity: Interest-bearing liabilities: NOW and money market savings.................. $ 46,457 $ 1,416 3.05% $ 42,295 $ 1,325 3.13% Savings....................................... 26,329 616 2.34 26,465 650 2.46 Certificates of deposit....................... 165,207 9,236 5.59 161,888 9,070 5.60 Borrowed funds................................ 35,275 2,051 5.81 39,512 2,357 5.96 -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities................ 273,268 $13,319 4.87% 270,160 $13,402 4.96% ------- ------ ------- ------ Noninterest-bearing liabilities................... 9,896 8,394 -------- -------- Total liabilities........................... 283,164 278,554 Equity............................................ 50,239 49,357 -------- -------- Total liabilities and equity................ $333,403 $327,911 ======== ======== Net interest income................................ $10,905 $10,554 ======= ======= Net interest rate spread........................... 2.82% 2.78% ====== ====== Net interest margin................................ 3.46% 3.41% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities............ 115.31% 114.63% ====== ======
-27- Provision for Loan Losses. The Company's provision for loan losses was $210,000 and $140,000 for the years ended December 31, 1998 and December 31, 1997, respectively. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, which includes a significant amount of multi-family 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 $28,000 for the year ended December 31, 1998 as compared to $124,000 for the year ended December 31, 1997. The resulting allowance for loan loss was $2.7 million at December 31, 1998 as compared to $2.5 million at December 31, 1997. The increase in the allowance is primarily due to the increase in total loans from $253.8 million at December 31, 1997 to $259.4 million at December 31, 1998. The allowance for loan losses as a percentage of total loans receivable increased to 1.03% at December 31, 1998 from 0.99% at December 31, 1997. The level of nonperforming loans has increased to $956,000 at December 31, 1998 from $317,000 at December 31, 1997. 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 $573,000, or 16.9%, to $4.0 million for the year ended December 31, 1998 from $3.4 million for the year ended December 31, 1997. The increase is due to increases in fees and service charges, abstract fees and other income, partially offset by a decrease in the gain on the sale of investments. Fees and service charges increased $139,000 due to increases in overdraft fees on NOW accounts, service charges on NOW and savings accounts and loan prepayment fees. Abstract fees increased $362,000 due to increased sales volume. Sales volume increased in part due to a general decline in market interest rates. Other income increased by $285,000, primarily due to an increase in loan origination and commitment fee from First Iowa Mortgage, an increase in insurance sales, the rental income from the Bank's investment in the Northridge Apartment Limited Partnership, offset in part by a decrease in annuity sales. Noninterest income for the year ended December 31, 1998 also reflects gains on the sales of securities available for sale of $51,000, as compared to gains on the sale of such securities of $264,000 for the 1997 comparable period due to a substantial portion of the Holding Company's available for sale securities being sold in 1997. See "--Business Strategy--Increased Noninterest Income." Noninterest Expense. Total non-interest expense increased by $535,000 to $8.0 million for the year ended December 31, 1998 from $7.4 million for the year ended December 31, 1997. The increase is primarily due to an increase in the employee salaries and benefits, premises and equipment, data processing and SAIF deposit insurance premiums. The increase in salaries and benefits was primarily a result of the expenses associated with the ESOP, normal salary increases, an increase in the number of employees and one time costs associated with the acquisition of Valley Financial. The increase in premises and equipment was primarily a result of purchases of computer equipment for the Bank and one time costs associated with the acquisition of Valley Financial. The increase in data processing is due to normal annual increases and one time costs associated with the acquisition of Valley Financial. The increase in SAIF deposit insurance premiums were due to a corresponding increase in the deposits at the Bank. The Company's efficiency ratio for the year ended December 31, 1998 and 1997 were 53.64% and 53.36%, respectively. The Company's ratio of noninterest expense to average assets for the year ended December 31, 1998 and 1997 were 2.39% and 2.27%, respectively. Income Taxes. Income taxes increased by $96,000 to $2.4 million for the year ended December 31, 1998 as compared to $2.3 million for the year ended December 31, 1997. The increase was principally due to an increase in pre-tax earnings during the 1998 period as compared to the 1997 period, offset in part by an increase in the tax credits recognized from the Bank's investment in the Northridge Apartments Limited Partnership in 1998 as compared to 1997. Net Income. Net income totalled $4.2 million for the year ended December 31, 1998 compared to $4.0 million for the same period in 1997. -28- 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 Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives Instruments and Hedging Activities" (SFAS No. 133) which, as amended by SFAS No. 137, is required to be adopted in years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivatives instruments, including certain derivative instruments embedded in other contracts, and for hedging contracts. It requires that an entity recognize all derivatives as either assets or liabilities, and measures those instruments at fair value. It also sets forth the proper accounting for hedging activities, which is determined by the intended use of the derivative and how that use is designated by the entity. Earlier application is permitted and should not be applied retroactively to financial statements of prior periods. Since the Company is not currently holding any derivative instruments (as defined) and is not engaged in hedging activities, the adoption of SFAS No. 133 is expected to have no effect on the Company's financial condition or results of operations. Year 2000 Based on a review of the Company's business since January 1, 2000, the Company has not experienced any material effects of the Year 2000 problem. Although the Company has not been informed of any material risks associated with the Year 2000 problem from third parties, there can be no assurance that the Company will not be impacted in the future. The Company will continuously monitor its business applications and maintain contact with its third party vendors and key business partners to resolve any Year 2000 problems that may arise in the future. Monitoring and managing the Year 2000 project has resulted in direct and indirect costs to the Company. The Company currently estimates that the total costs will not exceed $100,000 and does not believe that such costs will have a material effect on results of operations. Both direct and indirect costs of addressing the Year 2000 problem have been charged to earnings as incurred. Impact of Enactment of the Gramm-Leach-Bliley Act On November 12, 1999, President Clinton signed into law the Gramm-Leach- Bliley Act (the "GLB Act"), which among other things, establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies and securities firms. Generally, the new law (i) repeals the historic restrictions and eliminates many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers, (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies, (iii) broadens the activities that may be conducted by subsidiaries of national banks and state banks, (iv) provides an enhanced framework for protecting the privacy of information gathered by financial institutions regarding their customers and consumers, (v) adopts a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the Federal Home Loan Bank System, (vi) requires public disclosure of certain agreements relating to funds expended in connection with an institution's compliance with the Community Reinvestment Act, and (vii) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions, including the functional regulation of bank securities and insurance activities. -29- The GLB Act also restricts the powers of new unitary savings and loan holding companies. Unitary savings and loan holding companies that are "grandfathered," i.e., unitary savings and loan holding companies in existence, or with applications filed with the OTS, on or before Mary 4, 1999, such as the Holding Company, retain their authority under prior law to engage in any type of commercial or other non-financial activity so long as their thrift subsidiary meets the Qualified Thrift Lender test. All other unitary savings and loan holding companies are limited to financially related activities permissible for bank holding companies, as defined under the GLB Act. The GLB Act also prohibits non-financial companies, from acquiring grandfathered unitary savings and loan holding companies. Further, the new law requires financial institutions to disclose (a) on ATM machines any non-customer fees and (b) to their customers upon the issuance of an ATM card any fees that may be imposed by the institution on ATM on ATM users. For older ATMs, the new law gives financial institutions until December 31, 2004 to provide such notices. Under the GLB Act, bank holding companies are permitted to engage in a wider variety of financial activities than permitted under the prior law, particularly with respect to insurance and securities activities. In addition, in a change from the prior law, bank holding companies are in a position to be owned, controlled or acquired by any company engaged in financially related activities. Management does not believe that the new law will have a material adverse affect upon the Company's operations in the near-term. However, to the extent that the new law permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This type of consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets that the Company currently serves. -30- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS - -------------------------------------------- INDEPENDENT AUDITOR'S REPORT............................................... 32 - -------------------------------------------- FINANCIAL STATEMENTS Consolidated statements of financial condition........................... 33 Consolidated statements of income........................................ 34 Consolidated statements of shareholders' equity.......................... 35 Consolidated statements of cash flows.................................... 36 Notes to consolidated financial statements............................... 38 -31- INDEPENDENT AUDITOR'S REPORT 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, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for the three years ended December 31, 1999, 1998 and 1997. 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 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, 1999 and 1998, and the results of their operations and their cash flows for the three years ended December 31, 1999, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Des Moines, Iowa February 8, 2000 -32- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 1999 and 1998
ASSETS 1999 1998 - ------------------------------------------------------------------------------------------------------------ Cash and due from banks: Interest-bearing $ 4,127,153 $ 13,201,437 Noninterest-bearing 8,541,525 2,435,439 Securities available-for-sale (Notes 3 and 9) 49,692,857 49,882,544 Loans receivable, net (Notes 4, 5, 9 and 15) 286,759,101 254,032,497 Loans held for sale 335,564 1,681,017 Accrued interest receivable (Note 6) 2,082,598 1,933,237 Foreclosed real estate 503,150 186,931 Premises and equipment, net (Note 7) 5,356,097 3,616,438 Rental real estate 1,846,134 1,945,851 Title plant 925,256 925,256 Goodwill 5,915,381 6,387,671 Deferred taxes (Note 10) 921,057 13,490 Prepaid expenses and other assets 426,772 448,331 ----------------------------------------- Total assets $ 367,432,645 $ 336,690,139 ========================================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits (Note 8) $ 271,030,791 $ 246,690,313 Borrowed funds (Note 9) 55,715,289 38,832,239 Advances from borrowers for taxes and insurance (Note 5) 1,204,025 1,066,025 Dividend payable 226,174 237,133 Income taxes payable 74,214 199,224 Accrued expenses and other liabilities 1,055,228 1,458,391 ----------------------------------------- Total liabilities 329,305,721 288,483,325 ----------------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 14 and 17) STOCKHOLDERS' EQUITY (Notes 12 and 18) Common stock, $.01 par value, authorized 15,500,000 shares; issued and outstanding 1999 and 1998 4,011,057 shares 40,111 40,111 Preferred stock, $.01 par value, authorized 3,000,000 shares; issued and outstanding 1999 and 1998 none - - Additional paid-in capital 38,278,872 38,135,817 Retained earnings, substantially restricted (Note 10) 30,290,488 27,084,907 Unearned shares, employee stock ownership plan (Note 11) (825,484) (1,013,284) Accumulated other comprehensive income (loss) (921,138) 358,666 Less cost of treasury stock, 1999 1,749,315 shares; 1998 1,046,608 shares (28,735,925) (16,399,403) ----------------------------------------- Total stockholders' equity 38,126,924 48,206,814 ----------------------------------------- Total liabilities and stockholders' equity $ 367,432,645 $ 336,690,139 =========================================
See Notes to Consolidated Financial Statements. -33- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Interest income: Loans receivable: First mortgage loans $ 18,104,426 $ 17,317,988 $ 12,432,797 Consumer loans 3,111,402 3,013,947 2,200,965 Securities and cash deposits 3,340,439 3,269,617 1,570,932 --------------------------------------------------------- 24,556,267 23,601,552 16,204,694 --------------------------------------------------------- Interest expense: Deposits (Note 8) 11,113,533 10,893,081 6,493,931 Other borrowed funds 2,490,308 1,975,879 1,405,679 --------------------------------------------------------- 13,603,841 12,868,960 7,899,610 --------------------------------------------------------- Net interest income 10,952,426 10,732,592 8,305,084 Provision for loan losses (Note 4) 120,000 210,000 240,000 --------------------------------------------------------- Net interest income after provision for loan losses 10,832,426 10,522,592 8,065,084 --------------------------------------------------------- Noninterest income: Fees and service charges 1,484,962 1,243,248 656,695 Abstract fees 1,420,955 1,583,773 1,221,807 Mortgage banking fees 367,696 339,397 Gain on sale of securities available-for-sale, net 61,564 51,362 248,526 Other income 727,869 696,919 409,968 --------------------------------------------------------- Total noninterest income 4,063,046 3,914,699 2,536,996 --------------------------------------------------------- Noninterest expense: Salaries and employee benefits (Note 11) 4,025,744 3,482,210 2,208,807 Premises and equipment 930,988 811,725 444,231 Data processing 522,122 553,288 258,250 SAIF deposit insurance premiums 147,243 142,932 84,742 Goodwill amortization 472,290 435,817 27,947 Other expenses (Note 13) 2,356,024 2,145,854 1,552,675 --------------------------------------------------------- Total noninterest expense 8,454,411 7,571,826 4,576,652 --------------------------------------------------------- Income before income taxes 6,441,061 6,865,465 6,025,428 Provision for income taxes (Note 10) 2,240,886 2,480,620 2,108,304 --------------------------------------------------------- Net income $ 4,200,175 $ 4,384,845 $ 3,917,124 ========================================================= Basic earnings per common share (Note 19) $ 1.64 $ 1.44 $ 1.23 Earnings per common share - assuming dilution (Note 19) 1.60 1.40 1.21 Dividends declared per common share (Note 12) 0.40 0.32 0.25
See Notes to Consolidated Financial Statements. -34- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS" EQUITY Years Ended December 31, 1999,1998 and 1997
Additional Comprehensive Common Paid-in Retained Income Stock Capital Earnings - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 40,111 $ 37,796,611 $ 20,531,604 Comprehensive income: Net income $ 3,917,124 - - 3,917,124 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) 281,684 - - - ----------------- Total comprehensive income $ 4,198,808 ================= Purchase of treasury stock - - - Dividends on common stock - - (787,764) Effect of contribution to employee stock ownership plan - 147,968 - Effect of stock options exercise - 5,019 - -------------------------------------------------- Balance, December 31, 1997 40,111 37,949,598 23,660,964 Comprehensive income: Net income $ 4,384,845 - - 4,384,845 Other comprehensive income, unrealized gains on securities, - net of reclassification adjustment, net of tax (Note 3) 3,885 - - - ----------------- Total comprehensive income $ 4,388,730 ================= Purchase of treasury stock - - - Dividends on common stock - - (960,902) Effect of contribution to employee stock ownership plan - 206,636 - Effect of stock options exercised - (20,417) - -------------------------------------------------- Balance, December 31, 1998 40,111 38,135,817 27,084,907 Comprehensive income: Net income $ 4,200,175 - - 4,200,175 Other comprehensive (loss), unrealized (losses) on securities, net of reclassification adjustment, net of tax (Note 3) (1,279,804) - - - ----------------- Total comprehensive income $ 2,920,371 ================= Purchase of treasury stock - - - Dividends on common stock - - (994,594) Effect of contribution to employee stock ownership plan - 143,055 - -------------------------------------------------- Balance, December 31, 1999 $ 40,111 $ 38,278,872 $ 30,290,488 ================================================== Employee Accumulated Stock Other Total Ownership Comprehensive Treasury Stockholders' Plan Income (Loss) Stock Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ (1,416,955) $ 73,097 $ (7,789,661) $ 49,234,807 Comprehensive income: Net income - - - 3,917,124 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) - 281,684 - 281,684 Total comprehensive income - - Purchase of treasury stock - - (2,706,750) (2,706,750) Dividends on common stock - - - (787,764) Effect of contribution to employee stock ownership plan 206,514 - - 354,482 Effect of stock options exercise - 118,474 123,493 ---------------------------------------------------------------------- Balance, December 31, 1997 (1,210,441) 354,781 (10,377,937) 50,417,076 Comprehensive income: - - - Net income 4,384,845 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) - 3,885 - 3,885 Total comprehensive income Purchase of treasury stock - - (6,164,419) (6,164,419) Dividends on common stock - - - (960,902) Effect of contribution to employee stock ownership plan 197,157 - - 403,793 Effect of stock options exercised - - 142,953 122,536 ---------------------------------------------------------------------- Balance, December 31, 1998 (1,013,284) 358,666 (16,399,403) 48,206,814 Comprehensive income: Net income - - 4,200,175 Other comprehensive (loss), unrealized (losses) on securities, net of reclassification adjustment, net of tax (Note 3) - (1,279,804) - (1,279,804) Total comprehensive income Purchase of treasury stock - - (12,336,522) (12,336,522) Dividends on common stock - - - (994,594) Effect of contribution to employee stock ownership plan 187,800 - - 330,855 ---------------------------------------------------------------------- Balance, December 31, 1999 $ (825,484) $ (921,138) $ (28,735,925) $ 38,126,924 ======================================================================
See Notes to Consolidated Financial Statements. -35- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,200,175 $ 4,384,845 $ 3,917,124 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 120,000 210,000 240,000 Depreciation 596,815 488,989 298,927 Amortization and accretion 483,546 539,878 74,219 Deferred taxes (141,678) (164,846) (80,591) Effect of contribution to employee stock ownership plan 330,855 403,793 354,482 (Gain) on sale of foreclosed real estate and loans, net (28,827) (4,726) (7,499) (Gain) on sale of securities available-for-sale (61,564) (51,362) (248,526) Loss on disposal of equipment 19,270 9,191 3,321 Proceeds from sales of loans held for sale 20,146,594 26,334,791 458,622 Originations of loans held for sale (18,801,141) (28,015,808) (458,622) Change in assets and liabilities: Accrued interest receivable (149,361) 386,631 27,238 Prepaid expenses and other assets 21,559 453,985 (301,190) Income taxes payable (125,010) 25,036 29,211 Accrued expenses and other liabilities (403,163) (41,121) 3,950 ------------------------------------------------------- Net cash provided by operating activities 6,208,070 4,959,276 4,310,666 ------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans 7,376,603 20,168,334 (3,298,056) Purchase of loans (40,343,689) (24,644,011) (22,363,597) Proceeds from sale of securities available-for-sale 438,915 4,445,868 3,204,196 Purchase of securities available-for-sale (18,922,917) (18,371,558) (2,777,723) Proceeds from maturities of securities available-for-sale 16,512,369 25,460,742 3,500,000 Proceeds from maturities of securities held-to-maturity - - 3,500,000 Purchase of premises, equipment and rental real estate (2,259,834) (776,473) (981,010) Proceeds from sale of equipment 3,807 58 31,325 Proceeds from sale of title plant - - 45,000 Cash paid in connection with acquisition of Valley Financial Corporation net of cash received - (8,568,743) - Other (975) 69,974 62,925 ------------------------------------------------------- Net cash (used in) investing activities (37,195,721) (2,215,809) (19,076,940) -------------------------------------------------------
(Continued) -36- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 24,340,478 $ 6,297,514 $ 11,401,663 Net increase (decrease) in advances from borrowers for taxes and insurance 138,000 (154,127) 72,881 Net change in short-term borrowings 14,000,000 (3,000,000) Proceeds from other borrowed funds 8,000,000 16,542,000 21,250,000 Payments of other borrowed funds (5,116,950) (6,259,761) (12,035,000) Purchase of treasury stock (12,336,522) (6,164,419) (2,706,750) Proceeds from issuance of treasury stock 114,963 105,781 Dividends paid (1,005,553) (927,924) (813,953) --------------------------------------------------------- Net cash provided by financing activities 28,019,453 9,448,246 14,274,622 --------------------------------------------------------- Net increase (decrease) in cash (2,968,198) 12,191,713 (491,652) CASH Beginning 15,636,876 3,445,163 3,936,815 --------------------------------------------------------- Ending $ 12,668,678 $ 15,636,876 $ 3,445,163 ========================================================= SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors $ 11,181,280 $ 10,989,646 $ 6,479,044 Interest paid on borrowings 2,414,957 1,975,691 1,477,850 Income taxes 2,507,574 2,628,003 2,180,268
See Notes to Consolidated Financial Statements. -37- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- Note 1. Significant Accounting Policies Organization, nature of business and basis of presentation: North Central - ---------------------------------------------------------- Bancshares, Inc., (the Company), an Iowa corporation, is a unitary savings and loan holding company that owns 100% of the outstanding stock of First Federal Savings Bank of Iowa (the Bank), which is a federally chartered stock savings bank that conducts its operations from its main office located in Fort Dodge, Iowa, and seven branch offices located in Fort Dodge, Nevada, Ames, Perry, Burlington and Mt. Pleasant, Iowa. Comprehensive income: Statement No. 130 requires unrealized gains and losses on - -------------------- the Bank's available-for-sale securities to be included in comprehensive income. 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 Investment Services, Inc., formerly First Financial Service Corporation (which sells insurance, annuity products, mutual funds and originates equipment leases), First Iowa Title Services, Inc. (which provides real estate abstracting services), Northridge Apartments Limited Partnership (which owns a multifamily apartment building) and First Iowa Mortgage, Inc. (which originates and sells mortgage loans in the secondary market). All significant intercompany balances and transactions have been eliminated in consolidation. Accounting estimates and assumptions: The preparation of financial statements - ------------------------------------ in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses. Securities available-for-sale: Securities classified as available-for-sale are - ----------------------------- those debt and equity securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available-for-sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, 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. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Loans held for sale: Loans held for sale are those loans held with the intent - ------------------- to sell in the foreseeable future. They are carried at the lower of aggregate cost or market value. Sales are made without recourse and any gain or loss is recognized at the settlement date. -38- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- 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 fair value less estimated selling costs. Premises and equipment: Premises and equipment are stated at cost, net of - ---------------------- accumulated depreciation. Depreciation is computed primarily by straight-line and double-declining balance methods over the estimated useful lives of the assets. Rental real estate: Rental real estate is comprised of a low-income housing, - ------------------ multifamily apartment building and equipment which is stated at cost, net of accumulated depreciation. Depreciation is computed primarily by the straight- line and double-declining balance methods over the estimated useful lives of the assets. Title plant: Title plant is carried at cost and, in accordance with FASB - ----------- Statement No. 61, is not depreciated. Costs incurred to maintain and update the title plant are expensed as incurred. -39- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- Goodwill: Goodwill is stated at cost, net of accumulated amortization and is - -------- being amortized over 10 - 15 years using the straight-line method. Income taxes: Deferred taxes are provided on a liability method whereby - ------------ deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their income tax bases. Income taxes are allocated to the Company and its subsidiaries based on each entity's income tax liability as if it filed a separate return. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of the deferred tax assets, will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Earnings per share: Basic earnings per share and earnings per common share - - ------------------ assuming dilution were computed using the methodology prescribed by FASB Statement No. 128 Earnings per Share. The basic earnings per common share amounts were computed using the weighted average number of shares outstanding during the periods presented. The earnings per common share amounts - assuming dilution were computed using the weighted average number of shares outstanding during the periods presented, adjusted for the effect of dilutive potential common shares outstanding which consists of stock options granted. In accordance with Statement of Position 93-6, shares owned by the ESOP that have not been committed to be released are not considered to be outstanding for the purpose of computing earnings per share. Stock-option plan: SFAS No. 123, Accounting for Stock-Based Compensation, - ----------------- establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from nonemployees. However, the standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees, but requires expanded disclosures. The Company has elected to apply the intrinsic value based method of accounting for stock options issued to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Fair value of financial instruments: 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 sheets, 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. -40- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash: The carrying amount of cash represents the fair value. ---- Securities: Fair values for all securities are based on quoted market prices, ---------- where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and have experienced no ----- significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Deposits: Fair values disclosed for demand, NOW, savings and money market -------- savings deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits. Borrowed funds: The fair value of borrowed funds is estimated based on -------------- discounted cash flows using currently available borrowing rates. Accrued interest receivable and payable: The fair values of both accrued --------------------------------------- interest receivable and payable are their carrying amounts. Commitments to extend credit: The fair values of commitments to extend credit ---------------------------- are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and creditworthiness of the counterparties. At December 31, 1999 and 1998, the carrying amount and fair value of the commitments were not significant. Note 1. Business Combination As of the close of business on January 30, 1998, the Bank completed the acquisition of Valley Financial Corp. ("Valley Financial") pursuant to an Agreement and Plan of Merger, dated as of September 19, 1997. The acquisition resulted in the merger of Valley Financial's wholly-owned subsidiary, Valley Savings Bank, FSB ("Valley Savings") with and into the Bank, with the Bank as the resulting financial institution. Valley Savings, headquartered in Burlington, Iowa, was a federally-charted stock savings bank with three branch offices located in southeastern Iowa. The former offices of Valley Savings are being operated as branches of the Bank. -41- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- In connection with the acquisition, each share of Valley Financial's common stock, par value $1.00 per share, issued and outstanding (other than shares held as treasury stock of Valley Financial) was canceled and converted automatically into the right to receive $525 per share in cash pursuant to the terms and conditions of the Merger Agreement. As a result of the acquisition, shareholders of Valley Financial were paid a total of $14,726,250 in cash. The excess of the total acquisition cost over the fair value of the net assets acquired of $6,627,859 is being amortized over 15 years by the straight-line method. The acquisition was accounted for as a purchase transaction and therefore, the operating results of the former offices of Valley Savings Bank are included in the operating results of the Company from the date of acquisition. The following is a summary of the assets acquired and liabilities assumed in connection with the acquisition of Valley Financial Corporation: Cash $ 6,157,507 Securities 41,818,057 Loans 58,567,364 Accrued interest receivable 1,019,373 Premises and equipment 1,081,890 Goodwill 6,627,859 Prepaid expenses and other assets 228,785 Deposits (99,269,092) Advances from borrowers for taxes and insurance (301,783) Deferred income taxes (262,738) Accrued taxes payable 12,565 Accrued expenses and other liabilities (953,537) ------------- Cash paid 14,726,250 Less: cash received (6,157,507) ------------- Cash paid, net of cash received $ 8,568,743 =============
Unaudited pro forma consolidated results of operations for the years ended December 31, 1998 and 1997, as though Valley Savings Bank had been acquired as of January 1, 1997, follow:
1998 1997 -------------------------- Net interest income $ 10,904,821 $ 10,553,958 Net income 4,245,473 4,022,376 Basic earnings per common share 1.39 1.26 Earnings per common share - assuming dilution 1.36 1.24
-42- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- Note 3. Securities Securities available-for-sale as of December 31, 1999, were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value --------------------------------------------------------------------------- Equity securities: Federal Home Loan Bank stock $ 3,034,600 $ - $ - $ 3,034,600 FHLMC preferred stock 3,499,375 - (241,875) 3,257,500 FNMA preferred stock 5,134,375 37,625 (15,000) 5,157,000 Other 499,283 16,300 (58,478) 457,105 --------------------------------------------------------------------------- 12,167,633 53,925 (315,353) 11,906,205 --------------------------------------------------------------------------- Debt securities: U.S. Treasury notes 4,270,840 (10,410) 4,260,430 U.S. Government agencies 19,582,382 (782,856) 18,799,526 State and political subdivisions 4,866,505 5,657 (100,165) 4,771,997 Mortgage-backed securities 10,280,363 (325,664) 9,954,699 --------------------------------------------------------------------------- 39,000,090 5,657 (1,219,095) 37,786,652 --------------------------------------------------------------------------- $ 51,167,723 $ 59,582 $(1,534,448) $ 49,692,857 ===========================================================================
Securities available-for-sale as of December 31, 1998, were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ---------------------------------------------------------------------------- Equity securities: Federal Home Loan Bank stock $ 2,379,400 $ $ $ 2,379,400 FHLMC preferred stock 975,000 20,748 995,748 FNMA preferred stock 5,134,375 268,661 5,403,036 Other 861,509 92,573 (29,376) 924,706 ----------------------------------------------------------------------------- 9,350,284 381,982 (29,376) 9,702,890 ----------------------------------------------------------------------------- Debt securities: U.S. Treasury notes 9,325,175 84,919 9,410,094 U.S. Government agencies 18,859,431 48,583 (23,939) 18,884,075 State and political subdivisions 4,282,940 95,195 (182) 4,377,953 Mortgage-backed securities 7,493,887 27,042 (13,397) 7,507,532 ----------------------------------------------------------------------------- 39,961,433 255,739 (37,518) 40,179,654 ----------------------------------------------------------------------------- $ 49,311,717 $ 637,721 $ (66,894) $ 49,882,544 =============================================================================
-43- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The amortized cost and fair value of debt securities as of December 31, 1999, by contractual maturity are shown below. Certain securities have call features which allow the issuer to call the security prior to maturity. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary:
Securities Available-for-Sale ---------------------------------------- Amortized Cost Fair Value ---------------------------------------- Due in one year or less $ 4,468,390 $ 4,453,582 Due from one to five years 13,098,750 12,572,362 Due from five to ten years 10,333,202 9,988,141 Due after ten years 819,385 817,868 Mortgage-backed securities 10,280,363 9,954,699 ---------------------------------------- $ 39,000,090 $ 37,786,652 ========================================
Gross gains of $61,564, $71,923 and $248,526 were realized on the sale of available-for-sale securities in 1999, 1998 and 1997, respectively. Gross losses of none, $20,561 and none were realized on the sale of available-for-sale securities in 1999, 1998 and 1997, respectively. The components of other comprehensive income (loss) - net unrealized gains (losses) on securities for the years ended December 31, 1999, 1998 and 1997, were as follows:
1999 1998 1997 -------------------------------------------------------------- Unrealized holding gains (losses) arising during the period $ (1,984,129) $ 57,558 $ 697,783 Less reclassification adjustment for net gains realized in net income 61,564 51,362 248,526 -------------------------------------------------------------- Net unrealized gains (losses) before tax (expense) benefit (2,045,693) 6,196 449,257 Tax (expense) benefit 765,889 (2,311) (167,573) -------------------------------------------------------------- Other comprehensive income (loss) - net unrealized gains (losses) on securities $ (1,279,804) $ 3,885 $ 281,684 ==============================================================
-44- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 4. Loans Receivable Loans receivable at December 31, 1999 and 1998, are summarized as follows:
1999 1998 ----------------------------------------- First mortgage loans (principally conventional) Principal balances: Secured by one-to-four family residences $ 159,970,037 $ 144,777,159 Secured by: Multifamily properties 73,416,278 64,895,056 Commercial properties 17,723,455 11,396,311 Construction loans 4,087,495 4,213,903 ----------------------------------------- Total first mortgage loans 255,197,265 225,282,429 ----------------------------------------- Consumer loans Principal balances: Automobile 8,003,907 7,348,369 Second mortgage 23,603,060 20,784,380 Other 4,955,638 5,946,051 ----------------------------------------- Total consumer loans 36,562,605 34,078,800 ----------------------------------------- Total loans 291,759,870 259,361,229 Less: Undisbursed portion of construction loans (1,981,962) (2,023,859) Unearned discounts (135,953) (312,381) Net deferred loan origination fees (106,315) (316,054) Allowance for loan losses (2,776,539) (2,676,438) ----------------------------------------- $ 286,759,101 $ 254,032,497 =========================================
Activity in the allowance for loan losses is summarized as follows for the years ended December 31:
1999 1998 1997 -------------------------------------------------------------- Balance, beginning $ 2,676,438 $ 2,150,587 $ 1,952,887 Provision charged to income 120,000 210,000 240,000 Effect of acquisition of Valley Financial Corporation 343,418 Loans charged-off (28,032) (28,422) (52,724) Recoveries 8,133 855 10,424 -------------------------------------------------------------- Balance, ending $ 2,776,539 $ 2,676,438 $ 2,150,587 ==============================================================
Nonaccrual loans totaled approximately $213,394 and $955,835, at December 31, 1999 and 1998, respectively. The amount of interest related to nonaccrual loans for 1999 and 1998, is insignificant. -45- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 consisted of the following for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 -------------------------------------------------------------- Beginning balance $ 1,075,964 $ 1,045,188 $ 1,203,613 New loans 825,200 166,701 221,983 Repayments (216,063) (135,925) (380,408) -------------------------------------------------------------- Ending balance $ 1,685,101 $ 1,075,964 $ 1,045,188 ==============================================================
Note 5. Loan Servicing Mortgage loans serviced for FHLMC and other banks are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at December 31, 1999 and 1998, are $6,673,921 and $7,742,415, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $53,000 at December 31, 1999 and 1998. Note 6. Accrued Interest Receivable Accrued interest receivable at December 31, is summarized as follows:
1999 1998 ---------------------------------------- Securities $ 467,804 $ 515,681 Loans receivable 1,642,479 1,449,004 ---------------------------------------- 2,110,283 1,964,685 Less allowance for uncollectible interest 27,685 31,448 ---------------------------------------- $ 2,082,598 $ 1,933,237 ========================================
-46- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 7. Premises and Equipment Premises and equipment consisted of the following at December 31:
1999 1998 ---------------------------------------- Land $ 1,696,695 $ 501,680 Buildings and improvements 4,236,326 3,765,208 Leasehold improvements 15,546 15,546 Furniture, fixtures and equipment 2,020,593 1,639,447 Vehicles 87,968 65,956 ---------------------------------------- 8,057,128 5,987,837 Less accumulated depreciation 2,701,031 2,371,399 ---------------------------------------- $ 5,356,097 $ 3,616,438 ========================================
Note 8. Deposits Deposits at December 31, were as follows:
Weighted- Weighted- Average Average Rate at 1999 Rate at 1998 December --------------------------- December ---------------------------- Nature of Deposit 31, 1999 Amount Percentage 31, 1998 Amount Percentage - ---------------------------------------------------------------------------------------------------------------------------- Demand and NOW accounts: Noninterest bearing - % $ 6,411,709 2.4% - % $ 5,458,374 2.2% Interest-bearing 1.25 30,096,432 11.1 1.50 30,909,378 12.5 Savings accounts 2.00 25,829,919 9.5 2.25 26,098,591 10.6 Money market savings 3.61 17,463,869 6.4 3.90 19,828,064 8.0 -------------------------- ---------------------------- 79,801,929 29.4 82,294,407 33.3 -------------------------- ---------------------------- Certificates of deposit: Less than 4.0% 3.65 687,639 0.3 3.41 231,825 0.1 4.0% - 4.9% 4.65 30,875,083 11.4 4.68 15,922,939 6.5 5.0% - 5.9% 5.44 123,356,192 45.5 5.52 94,229,132 38.2 6.0% - 6.9% 6.24 30,506,154 11.3 6.22 46,652,259 18.9 7.0% - 7.9% 7.09 5,793,434 2.1 7.08 7,176,955 2.9 More than 8.0% 8.00 10,360 0.0 8.45 182,796 0.1 -------------------------- ---------------------------- 191,228,862 70.6 164,395,906 66.7 -------------------------- ---------------------------- 4.42% $ 271,030,791 100.0% 4.54% $ 246,690,313 100.0% =========================== =============================
-47- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- At December 31, 1999, scheduled maturities of certificates of deposit were as follows:
One year One to Two to Three to Four to or less two years three four years five years Thereafter years ------------------------------------------------------------------------------------------------- Less than 4.0% $ 687,639 $ - $ - $ - $ - $ - 4.0 - 4.9% 21,710,708 8,099,734 1,036,035 28,606 - - 5.0 - 5.9% 79,093,258 21,611,011 3,672,943 8,824,616 10,024,831 129,533 6.0 - 6.9% 10,496,354 11,017,213 7,203,107 1,783,492 5,988 7.0 - 7.9% 5,526,882 51,994 4,633 12,293 6,030 191,602 More than 8.0% 10,360 ------------------------------------------------------------------------------------------------- $ 117,514,841 $ 40,779,952 $ 11,927,078 $ 10,649,007 $ 10,030,861 $ 327,123 =================================================================================================
Interest expense on deposits consisted of the following:
Years ended December 31, ------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------ NOW accounts $ 419,878 $ 554,031 $ 253,210 Savings 562,178 594,276 392,064 Money market savings 668,340 797,372 378,981 Certificates of deposit 9,463,137 8,947,402 5,469,676 ------------------------------------------------------------ $ 11,113,533 $ 10,893,081 $ 6,493,931 ============================================================
The aggregate amount of certificates of deposit of $100,000 or more was $32,215,908 and $9,899,375 as of December 31, 1999 and 1998, respectively. Note 9. Borrowed Funds Borrowed funds at December 31, 1999, included miscellaneous borrowings of $33,703 and borrowings from Federal Home Loan Bank of Des Moines (FHLB) as follows:
Weighted- Stated Average Maturity Interest Rate Amount Features -------------------------------------------------------------------------------------------------- 2000 4.23% $ 5,000,000 Open line of credit 2000 5.82 20,000,000 $4,000,000 callable February 2000 2001 5.93 9,300,000 2002 6.06 6,000,000 2003 5.13 1,000,000 2004 5.51 1,000,000 2008 5.31 9,000,000 All callable, various dates 2001 to 2003 2009 5.44 2,000,000 Callable October 2000 2013 5.25 2,381,586 15-year amortizing, repayable 2003 ---------------------------------- 5.59% $ 55,681,586 ==================================
-48- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Borrowed funds at December 31, 1999, included miscellaneous borrowings of $37,759 and borrowings from the FHLB of $38,794,480. Such borrowings carried a weighted-average interest rate of 5.62% with maturities ranging from 1999 through 2013. The Bank has an open line of credit of $10,000,000 at the FHLB which matures on March 15, 2000. The term borrowings and open line of credit are collateralized by the FHLB stock and qualifying first mortgage loans representing 125% of the total borrowings outstanding. Note 10. Income Taxes and Retained Earnings Under previous law, the provisions of the IRS and similar sections of Iowa Law 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. Legislation passed in 1996 eliminated the percentage of taxable income method as an option for computing bad debt deductions for 1996, and in all future years. The Bank is recapturing its tax bad debt reserves which have accumulated since 1987, amounting to approximately $1,659,000. The tax associated with the recaptured reserves is approximately $615,000 and is being paid in years beginning in 1996 and ending in 2003. Deferred income taxes have been established for the taxes associated with the recaptured reserves. Deferred taxes have been provided for the difference between tax bad debt reserves and the loan loss allowances recorded in the financial statements subsequent to December 31, 1987. However, at December 31, 1999, retained earnings contain certain historical additions to bad debt reserves for income tax purposes of approximately $2,445,000 as of December 31, 1987, for which no deferred taxes have been provided because the Bank does not intend to use these reserves for purposes other than to absorb losses. If these amounts which qualified as bad debt deductions are used for purposes other than to absorb bad debt losses or adjustments arising from the carryback of net operating losses, income taxes may be imposed at the then existing rates. The approximate amount of unrecognized tax liability associated with these historical additions is $929,000. Income tax expense is summarized as follows:
Years ended December 31, -------------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------------- Current $ 2,382,564 $ 2,645,466 $ 2,188,895 Deferred (141,678) (164,846) (80,591) -------------------------------------------------------------- $ 2,240,886 $ 2,480,620 $ 2,108,304 ==============================================================
-49- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Deferred tax assets and liabilities consisted of the following components as of December 31, 1999 and 1998:
1999 1998 ------------------------------- Deferred tax assets: Unearned shares, employee stock ownership plan $ 40,000 $ 30,000 Allowance for loan losses 668,000 526,000 Deferred directors fees and compensation 52,000 57,000 Deposit acquired - 23,000 Unrealized losses on securities available-for-sale 551,000 - Other 133,894 96,044 ------------------------------- Total gross deferred tax assets 1,444,894 732,044 ------------------------------- Deferred tax liabilities: Federal Home Loan Bank stock dividend 47,000 41,000 Unrealized gain on securities available-for-sale - 214,000 Loan costs 43,000 - Premises and equipment 75,000 76,000 Title plant 99,000 67,000 Loans acquired 129,000 188,000 Investments acquired 63,000 111,000 Deferred directors' fees and compensation 60,000 21,000 Other 7,837 554 ------------------------------- Total gross deferred tax liabilities 523,837 718,554 ------------------------------- Net deferred tax assets $ 921,057 $ 13,490 ===============================
Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rates of 34% to income before income taxes as a result of the following:
Years Ended December 31, ------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------------------------------------- Percent Percent Percent of Pretax of Pretax of Pretax Amount Income Amount Income Amount Income ------------------------------------------------------------------------------------- Income before income taxes $ 2,189,961 34.0% $ 2,334,258 34.0% $ 2,048,646 34.0% Nontaxable dividends (109,022) (1.7) (105,296) (1.5) (119,550) (2.0) State income taxes, net of federal income tax benefit 233,647 3.6 226,613 3.1 174,621 2.9 Municipal interest income (62,762) (1.0) (54,286) (0.8) - - Low income housing tax credit (153,680) (2.4) (148,867) (2.1) (97,894) (1.6) Goodwill amortization 145,546 2.3 137,536 2.1 - - Other (2,804) 0.0 90,662 1.3 102,481 1.7 ------------------------------------------------------------------------------------- $ 2,240,886 34.8% $ 2,480,620 36.1% $ 2,108,304 35.0% =====================================================================================
-50- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 11. Employee Benefit Plans Retirement plans: The Bank participates in a multiemployer defined benefit - ---------------- pension plan covering substantially all employees. This is a multiemployer plan and information as to actuarial valuations and net assets available for benefits by participating institutions is not available. There was no pension expense for the years ended December 31, 1999, 1998 and 1997. The Bank has a defined contribution plan covering substantially all employees. As of July 31, 1996, the Bank no longer contributes to this plan. Employee Stock Ownership Plan (ESOP): In conjunction with the Bank's conversion - ------------------------------------ to stock ownership, the Bank established an ESOP for eligible employees. All employees of the Bank as of January 1, 1994, were eligible to participate immediately and employees of the Bank hired after January 1, 1994, are eligible to participate after they attain age 21 and complete one year of service during which they work at least 1,000 hours. The ESOP borrowed funds in the amount of $960,000 to purchase 104,075 shares of common stock issued in the conversion in 1994 and $840,000 to purchase 84,000 shares of common stock issued in the reorganization and conversion in 1996. These funds are borrowed from the Company. The Bank makes contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. Dividends on unallocated ESOP shares are used to pay debt service. Contributions to the ESOP and shares released from the suspense account in an amount proportional to the repayment of the ESOP loan are allocated among ESOP participants on the basis of compensation in the year of allocation. Benefits generally become 100% vested after five years of credited service. Forfeitures will be reallocated among remaining participating employees, in the same proportion as contributions. Benefits may be payable in the form of stock or cash upon termination of employment. If the 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 there is an established market for the Bank's stock and therefore the Bank believes there is no potential repurchase obligation at December 31, 1999 and 1998. 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 $330,855, $403,793 and $354,482 for the years ended December 31, 1999, 1998 and 1997, respectively. Shares of the Company's common stock held by the ESOP, at December 31, 1999 and 1998, are as follows:
1999 1998 ----------------------- Allocated shares 98,626 80,254 Unreleased (unearned) shares 85,507 105,098 ----------------------- 184,133 185,352 ======================= Fair market value of unreleased (unearned) shares $ 1,282,605 $1,773,529 =======================
-51- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Stock option plan: In 1996, the stockholders of the Company ratified the 1996 - ----------------- Incentive Option Plan (the Plan). The Plan provides for the grant of options at an exercise price equal to the fair market value on the date of grant. The Plan is intended to promote stock ownership by directors and selected officers and employees of the Company to increase their proprietary interest in the success of the Company and to encourage them to remain in the employment of the Company or its subsidiaries. Awards granted under the Plan may include incentive stock options, nonqualified stock options and limited rights which are exercisable only upon a change in control of the Bank or the Company. All awards to date are nonqualified stock options. The Plan 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 are granted at an exercise price 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 on the first anniversary of the grant date and continuing on each anniversary date thereafter. The options granted to officers expire ten years from the date of grant unless an earlier expiration date is triggered by death, disability, retirement or termination, as described in the Plan. A person who becomes a director after September 21, 1996, receives an annual grant of options to purchase 2,000 shares of common stock. Options granted to directors expire ten years from the date of grant, unless an earlier expiration date is triggered by removal for cause. The table below reflects option activity for the period indicated:
Weighted- Average Exercise Number Price per of Shares Share --------------------------------- Outstanding, December 31, 1996 237,000 $ 12.38 Granted 3,500 15.44 Forfeited (1,000) 12.38 Exercised (8,500) 12.45 --------------------------------- Outstanding, December 31, 1997 231,000 12.42 Granted 62,000 19.32 Forfeited Exercised (10,290) 12.38 --------------------------------- Outstanding, December 31, 1998 282,710 13.93 Granted 12,000 15.76 Forfeited Exercised --------------------------------- Outstanding, December 31, 1999 294,710 $ 14.01 ================================= Options exercisable 142,110 $ 13.26 ================================= Remaining shares available for grant 86,605 =================================
-52- NORTH CENTRAL BANCSHARES, INC. AND SUBISIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- As of December 31, 1999, the 294,710 options outstanding under the Plan have exercise prices between $12.375 and $20.00. The weighted average fair value per option of options granted during the years ended December 31, 1999, 1998 and 1997, were $4.68, $5.96 and $5.75, respectively. 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 1999, 1998 and 1997, reported net income and earnings per common share would have been decreased to the pro forma amounts shown below:
1999 1998 1997 ---------------------------------------------------- Net income: As reported $ 4,200,175 $ 4,384,845 $ 3,917,124 Pro forma 4,011,266 4,202,056 3,780,710 Earnings per common share: As reported 1.64 1.44 1.23 Pro forma 1.57 1.38 1.19 Earnings per common share - assuming dilution: As reported 1.60 1.40 1.21 Pro forma 1.53 1.34 1.17
The fair values of the grants are estimated at the grant date using the Black- Scholes option-pricing model with the following weighted-average assumptions for grants in 1999, 1998 and 1997, respectively: dividend rate of 2.4%, 1.3% and 1.6%, price volatility of 25%, 17% and 24%, risk-free interest rates of 4.64%, 5.65% and 6.59% and expected lives of eight years for all 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 36 months. A change in control is generally triggered by the acquisition or control of 20% or more of the common stock. -53- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 12. Stockholder's 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, 1999, 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 following table:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------------ (000's) (000's) (000's) As of December 31, 1999: Total Capital (to risk weighted assets) $ 33,168 16.7% $ 15,870 8.0% $ 19,837 10.0% Tier 1 Capital (to risk weighted assets) 30,685 15.4 7,935 4.0 11,902 6.0 Tier I (Core) Capital (to adjusted assets) 30,685 8.5 10,833 3.0 18,054 5.0 Tangible Capital (to adjusted assets) 30,685 8.5 5,416 1.5 - - As of December 31, 1998: Total Capital (to risk weighted assets) $ 40,509 23.8% $ 13,614 8.0% $ 17,018 10.0% Tier 1 Capital (to risk weighted assets) 38,245 22.5 6,807 4.0 10,211 6.0 Tier I (Core) Capital (to adjusted assets) 38,245 11.7 9,834 3.0 16,390 5.0 Tangible Capital (to adjusted assets) 38,245 11.7 4,917 1.5 - -
-54- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 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, 1999, the Bank was considered a Tier 1 Association. Note 13. Other Noninterest Expense Other noninterest expense amounts are summarized as follows for the years ended December 31:
1999 1998 1997 --------------------------------------- Advertising and promotion $ 191,828 $ 168,105 $ 147,605 Professional fees 207,211 171,761 249,617 Printing, postage, stationery and supplies 441,243 369,877 215,332 Checking account charges 328,380 299,530 158,512 Insurance 80,400 85,987 81,056 OTS general assessment 73,168 80,337 49,326 Telephone 108,292 91,900 45,069 ATM costs 111,982 82,285 37,580 Other 813,520 796,072 568,578 --------------------------------------- $ 2,356,024 $ 2,145,854 $ 1,552,675 =======================================
Note 14. 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. -55- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 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 is as follows:
Contract or Notional Amount --------------------------------- December 31, --------------------------------- 1999 1998 --------------------------------- Mortgage loans (including one-to-four family and multifamily loans) $ 5,440,249 $ 4,788,000 Undisbursed overdraft loan privileges and undisbursed home equity lines of credit 952,000 770,000
At December 31, 1998, the mortgage loan commitments above were comprised of variable-rate commitments carrying a weighted-average interest rate of 7.73% and fixed-rate commitments carrying a weighted-average interest rate of 7.97%. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts above do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but normally includes real estate and personal property. Note 15. 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 family residential loans within its primary lending area of Webster, Story, Des Moines and Henry 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 36% of the Bank's first mortgage loan portfolio at December 31, 1999, consisted of loans purchased or originated outside the state of Iowa, generally multifamily residential loans. Approximately $30,200,000 of loans purchased at December 31, 1999, were purchased from a bank in Wisconsin. These loans are secured by the underlying properties. The properties securing these loans are physically inspected. 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. -56- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Note 16. Fair Values of Financial Instruments The carrying amount and fair value of the Company's financial instruments as of December 31, 1999 and 1998, were as follows:
1999 1998 ---------------------------------------- ---------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------------------------------------------------------------------------------- (nearest 000) (nearest 000) Financial assets: Cash $ 12,668,678 $ 12,669,000 $ 15,636,876 $ 15,637,000 Securities 49,692,857 49,693,000 49,882,544 49,883,000 Loans, net 286,759,101 285,004,000 254,032,497 258,001,000 Accrued interest receivable 2,082,598 2,083,000 1,933,237 1,933,000 Financial liabilities: Deposits 271,030,791 270,849,000 246,690,313 249,040,000 Borrowed funds 55,715,289 54,860,000 38,832,239 39,183,000 Accrued interest payable 431,750 432,000 423,958 424,000
Note 17. 1994 Reorganization and Conversion to Stock Ownership Effective August 31, 1994, First Federal Savings Bank of Iowa (a mutual savings bank) reorganized such that its assets and liabilities were transferred to a newly formed stock savings bank and a federal mutual holding company was formed under the name of North Central Bancshares, Inc. The stock savings bank issued approximately 65% of its shares of stock to the mutual holding company and the remainder were sold in a public offering. 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 18). Note 18. The 1996 Reorganization and Conversion Effective March 20, 1996, the mutual holding company and the Bank executed a Plan of Conversion and Agreement and Plan of Reorganization (the Plan). The Company became an Iowa corporation owning 100% of the stock of the Bank and offered shares to the public. The mutual holding company ceased to exist. -57- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The Plan provided that when the conversion was completed, a "Liquidation Account" would be established in an amount equal to the amount of any dividends waived by the mutual holding company (totaling approximately $1,897,000), plus 65.5% of the Bank's total stockholders' equity, as reflected in its latest statement of financial condition in the final prospectus utilized in the conversion. The Liquidation Account is established to provide a limited priority claim to the assets of the Bank to qualifying depositors as of specified dates (Eligible Account Holders and Supplemental Eligible Account Holders) who continue to maintain deposits in the Bank after the conversion. In the unlikely event of a complete liquidation of the Bank, and only in such an event, Eligible Account Holders and Supplemental Eligible Account Holders would receive from the Liquidation Account a liquidation distribution based on their proportionate share of the then total remaining qualifying deposits. Note 19. Earnings Per Common Share Presented below is the reconciliation of the numerators and denominators of the computations for earnings per common share and earnings per common share - diluted, for the years ended December 31:
1999 1998 1997 --------------------------------------------------- Numerator, income available to common stockholders $ 4,200,175 $ 4,384,845 $ 3,917,124 =================================================== Denominator: Weighted-average shares outstanding 2,660,629 3,166,041 3,323,346 Less unallocated ESOP 97,689 117,894 139,077 ---------------------------------------------------- Weighted-average shares outstanding-basic 2,562,940 3,048,147 3,184,269 Dilutive effect of stock options 58,602 84,684 56,800 ---------------------------------------------------- Weighted-average shares outstanding-diluted 2,621,542 3,132,831 3,241,069 ==================================================== Basic earnings per common share 1.64 1.44 1.23 Earnings per common share-assuming dilution 1.60 1.40 1.21
Note 20. Pending Accounting Pronouncements and Regulations In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivatives Instruments and Hedging Activities (SFAS No. 133) which, as amended by SFAS No. 137, is required to be adopted in years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging contracts. It requires an entity recognize all derivatives as either assets or liabilities, and measures those instruments at fair value. It also sets forth the proper accounting for hedging activities, which is determined by the intended use of the derivative and how that use is designated by the entity. Earlier application is permitted and should not be applied retroactively to financial statements of prior periods. Since the Company is not currently holding any derivative instruments (as defined) and is not engaged in hedging activities, the adoption of SFAS No. 133 is expected to have no effect on the Company's financial condition or results of operations. -58- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 21. North Central Bancshares, Inc. (Parent Company Only) Financial Information STATEMENTS OF FINANCIAL CONDITION December 31, 1999 and 1998
1999 1998 -------------------------------- ASSETS Cash $ 190,106 $ 409,397 Securities available-for-sale 457,105 924,706 Loan receivables, net 951,000 1,261,000 Investment in First Federal Savings Bank of Iowa 36,765,460 45,876,022 Income taxes receivable 30,809 28,490 Prepaid expenses and other assets 11,549 10,586 --------------------------------- Total assets $ 38,406,029 $ 48,510,201 ================================= LIABILITIES AND EQUITY LIABILITIES Dividend payable $ 226,174 $ 237,133 Accrued expenses and other liabilities 32,639 47,129 Deferred taxes 20,292 19,125 --------------------------------- Total liabilities 279,105 303,387 --------------------------------- EQUITY Common stock 40,111 40,111 Additional paid-in capital 38,278,872 38,135,817 Retained earnings 30,290,488 27,084,907 Unearned shares, employee stock ownership plan (825,484) (1,013,284) Accumulated other comprehensive income (921,138) 358,666 Treasury stock at cost (28,735,925) (16,399,403) --------------------------------- Total equity 38,126,924 48,206,814 --------------------------------- Total liabilities and equity $ 38,406,029 $ 48,510,201 =================================
-59- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STATEMENTS OF INCOME Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ----------------------------------------------------- Operating income: Equity in net income of subsidiary $ 4,173,425 $ 4,393,955 $ 3,802,303 Interest income 286,915 200,055 334,775 Gain on sale of securities available-for-sale, net 61,564 71,923 248,526 ----------------------------------------------------- 4,521,904 4,665,933 4,385,604 ----------------------------------------------------- Operating expenses: Salaries and employee benefits 45,750 45,000 39,950 Other 267,979 265,088 351,480 ----------------------------------------------------- 313,729 310,088 391,430 ----------------------------------------------------- Income before income taxes 4,208,175 4,355,845 3,994,174 Provision for income taxes 8,000 (29,000) 77,050 ----------------------------------------------------- Net income $ 4,200,175 $ 4,384,845 $ 3,917,124 =====================================================
-60- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STATEMENTS OF EQUITY Years Ended December 31, 1999, 1998 and 1997
Additional Comprehensive Common Paid-in Retained Income Stock Capital Earnings ------------------------------------------------------------------- Balance, December 31, 1996 $ 40,111 $ 37,796,611 $ 20,531,604 Comprehensive income: Net income $ 3,917,124 - - 3,917,124 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) 281,684 - - - -------------- Total comprehensive income $ 4,198,808 ============== Purchase of treasury stock - - - Dividends on common stock - - (787,764) Effect of contribution to employee stock ownership plan - 147,968 - Effect of stock options exercise - 5,019 - --------------------------------------------------- Balance, December 31, 1997 40,111 37,949,598 23,660,964 Comprehensive income: Net income $ 4,384,845 - - 4,384,845 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) 3,885 - - - -------------- Total comprehensive income $ 4,388,730 ============== Purchase of treasury stock - - - Dividends on common stock - - (960,902) Effect of contribution to employee stock ownership plan - 206,636 - Effect of stock options exercised - (20,417) - --------------------------------------------------- Balance, December 31, 1998 40,111 38,135,817 27,084,907 Comprehensive income: Net income $ 4,200,175 - - 4,200,175 Other comprehensive (loss), unrealized (losses) on securities, net of reclassification adjustment, net of tax (Note 3) (1,279,804) - - - -------------- Total comprehensive income $ 2,920,371 ============== Purchase of treasury stock - - - Dividends on common stock - - (994,594) Effect of contribution to employee stock ownership plan - 143,055 - --------------------------------------------------- Balance, December 31, 1999 $ 40,111 $ 38,278,872 $ 30,290,488 =================================================== Employee Accumulated Stock Other Total Ownership Comprehensive Treasury Stockholders' Plan Income (Loss) Stock Equity - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 $ (1,416,955) $ 73,097 $ (7,789,661) $ 49,234,807 Comprehensive income: Net income - - - 3,917,124 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) - 281,684 - 281,684 Total comprehensive income Purchase of treasury stock - - (2,706,750) (2,706,750) Dividends on common stock stock ownership plan - - - (787,764) Effect of contribution to employee 206,514 - - 354,482 Effect of stock options exercise - 118,474 123,493 ----------------------------------------------------------------------- Balance, December 31, 1997 (1,210,441) 354,781 (10,377,937) 50,417,076 Comprehensive income: Net income - - - 4,384,845 Other comprehensive income, unrealized gains on securities, net of reclassification adjustment, net of tax (Note 3) - 3,885 - 3,885 Total comprehensive income Purchase of treasury stock - - (6,164,419) (6,164,419) Dividends on common stock - - - (960,902) Effect of contribution to employee stock ownership plan 197,157 - - 403,793 Effect of stock options exercised - - 142,953 122,536 ----------------------------------------------------------------------- Balance, December 31, 1998 (1,013,284) 358,666 (16,399,403) 48,206,814 Comprehensive income: Net income - - - 4,200,175 Other comprehensive (loss), unrealized (losses) on securities, net of reclassification adjustment, net of tax (Note 3) - (1,279,804) - (1,279,804) Total comprehensive income Purchase of treasury stock - - (12,336,522) (12,336,522) Dividends on common stock - - - (994,594) Effect of contribution to employee stock ownership plan 187,800 - - 330,855 ----------------------------------------------------------------------- Balance, December 31, 1999 $ (825,484) $ (921,138) $ (28,735,925) $ 38,126,924 =======================================================================
-6- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 --------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,200,175 $ 4,384,845 $ 3,917,124 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of First Federal Savings Bank of Iowa (4,173,425) (4,393,955) (3,802,303) Dividends received from First Federal Savings Bank of Iowa 12,398,262 3,295,694 10,000,000 (Gain) on sale of securities available-for-sale (61,564) (71,923) (248,526) Change in deferred income taxes 43,318 (485) 4,021 Change in assets and liabilities: Income taxes receivable (2,319) (20,917) - Prepaid expenses and other assets (963) 2,191 13,499 Income taxes payable - (2,723) 11,913 Accrued expenses and other liabilities (14,490) 5,836 8,297 --------------------------------------------------------- Net cash provided by operating activities 12,388,994 3,198,563 9,904,025 --------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans 310,000 8,680,000 (6,120,000) Proceeds from sale of securities available-for-sale 438,915 128,550 1,270,447 Purchase of securities available-for-sale (15,125) (361,058) (1,103,749) Capital contributions to First Federal Savings Bank - (5,000,000) - --------------------------------------------------------- Net cash provided by (used in) investing activities 733,790 3,447,492 (5,953,302) --------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury stock (12,336,522) (6,164,419) (2,706,750) Proceeds from issuance of treasury stock - 114,963 105,781 Dividends paid (1,005,553) (927,924) (813,875) --------------------------------------------------------- Net cash (used in) financing activities (13,342,075) (6,977,380) (3,414,844) --------------------------------------------------------- Net increase (decrease) in cash (219,291) (331,325) 535,879 CASH Beginning 409,397 740,722 204,843 --------------------------------------------------------- Ending $ 190,106 $ 409,397 $ 740,722 ========================================================= SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payment (receipts) for income taxes $ (32,998) $ 82,158 $ 105,781
-62- QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Year Ended December 31, 1999 ---------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- -------- -------- (In thousands, except per share amounts) Interest income........................................... $5,967 $6,005 $6,129 $6,455 Interest expense.......................................... 3,200 3,235 3,390 3,779 ------ ------ ------ ------ Net interest income....................................... 2,767 2,770 2,739 2,676 Provision for loan losses................................. 30 30 30 30 ------ ------ ------ ------ Net interest income after provision for loan losses.............................................. 2,737 2,740 2,709 2,646 Noninterest income: ------ ------ ------ ------ Fees and service charges................................ 361 334 378 412 Abstract fees........................................... 343 383 372 323 Other income............................................ 216 338 379 224 ------ ------ ------ ------ Total noninterest income............................. 920 1,055 1,129 959 Noninterest expense: Salaries and employee benefits......................... 973 1,007 1,033 1,013 Premises and equipment................................. 207 216 236 272 Data Processing........................................ 148 149 111 114 SAIF deposit insurance premiums........................ 37 36 36 38 Goodwill............................................... 118 118 118 118 Other.................................................. 571 631 594 560 ------ ------ ------ ------ Total noninterest expense............................ 2,054 2,157 2,128 2,115 ------ ------ ------ ------ Income before income taxes................................ 1,603 1,638 1,710 1,490 Provision for income tax expense.......................... 545 564 622 510 ------ ------ ------ ------ Net Income................................................ $1,058 $1,074 $1,088 $ 980 ====== ====== ====== ====== Basic earnings per share.................................. $ 0.37 $ 0.39 $ 0.44 $ 0.44 ====== ====== ====== ====== Diluted earnings per share................................ $ 0.36 $ 0.38 $ 0.43 $ 0.43 ====== ====== ====== ======
Year Ended December 31, 1998 ---------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- -------- -------- (In thousands, except per share amounts) Interest income.......................................... $5,465 $6,050 $6,045 $6,042 Interest expense......................................... 2,873 3,291 3,318 3,387 ------ ------ ------ ------ Net interest income...................................... 2,592 2,759 2,727 2,655 Provision for loan losses................................ 60 60 60 30 ------ ------ ------ ------ Net interest income after provision for loan losses............................................. 2,532 2,699 2,667 2,625 Noninterest income: ------ ------ ------ ------ Fees and service charges.............................. 238 312 335 358 Abstract fees......................................... 361 401 399 423 Other income.......................................... 216 261 295 316 ------ ------ ------ ------ Total noninterest income............................ 815 974 1,029 1,097 ------ ------ ------ ------ Noninterest expense: Salaries and employee benefits........................ 771 874 916 921 Premises and equipment................................ 153 182 223 254 Data Processing....................................... 99 121 181 152 SAIF deposit insurance premiums....................... 32 37 37 37 Goodwill.............................................. 80 117 121 118 Other................................................. 499 564 538 545 ------ ------ ------ ------ Total noninterest expense........................... 1,634 1,895 2,016 2,027 ------ ------ ------ ------ Income before income taxes............................... 1,713 1,778 1,680 1,695 Provision for income tax expense......................... 607 662 606 606 ------ ------ ------ ------ Net income............................................... $1,106 $1,116 $1,074 $1,089 ====== ====== ====== ====== Basic earnings per share................................. $ 0.35 $ 0.36 $ 0.36 $ 0.37 ====== ====== ====== ====== Diluted earnings per share............................... $ 0.34 $ 0.35 $ 0.35 $ 0.36 ====== ====== ====== ======
-63- MANAGEMENT OF THE HOLDING COMPANY AND THE BANK The Board of Directors of the Holding Company is divided into three classes, each of which contains one-third of the Board. The Bylaws of the Holding Company currently authorize six directors. Currently, all directors of the Holding Company are also directors of the Bank. Directors David M. Bradley is Chairman of the Board, President and Chief Executive Officer of the Holding Company and the Bank. Howard A. Hecht is a retired insurance executive who was a Vice President with Principal Mutual Life Insurance Company in Des Moines, Iowa. Melvin R. Schroeder is Vice President of Instruction at Iowa Central Community College in Fort Dodge, Iowa. KaRene Egemo is the owner of Egemo Realty, Inc. in Fort Dodge, Iowa. Robert H. Singer, Jr. is the co-owner of Calvert, Singer & Kelley Insurance Services, Inc., an insurance agency in Fort Dodge, Iowa. Mark Thompson is the owner of Mark Thompson, CPA, P.C. since 1984 and has been a certified public accountant since 1978. Executive Officers Who are Not Directors C. Thomas Chalstrom is Chief Operating Officer of the Bank and Executive Vice President of the Holding Company and the Bank. Jean L. Lake is Secretary of the Holding Company and the Bank. John L. Pierschbacher, CPA is Treasurer of the Holding Company and the Bank. Kirk A. Yung is Senior Vice President of the Bank. -64- SHAREHOLDER INFORMATION Price Range of the Company's Common Stock The Company's Common Stock trades on The Nasdaq National Market System under the symbol "FFFD." The following table shows the high and low per share sales prices of the Company's Common Stock as reported by Nasdaq and the dividends declared per share during the periods indicated. Such quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
Price Range -------------- Dividends Declared Quarter Ended High Low Per Share - ------------------- ------ ------ ------------------ 1998 - ---- First Quarter..................... 22.875 18.750 0.08 Second Quarter.................... 24.875 21.188 0.08 Third Quarter..................... 21.250 15.000 0.08 Fourth Quarter.................... 18.313 15.406 0.08 1999 - ---- First Quarter..................... 17.250 16.250 0.10 Second Quarter.................... 18.750 16.000 0.10 Third Quarter..................... 17.625 16.188 0.10 Fourth Quarter.................... 17.000 15.000 0.10
- ------------------------ The Company's Common Stock was traded at $12.875 as of March 13, 2000. Information Relating to the Company's Common Stock As of March 13, 2000, the Company had 1,796 shareholders of record, which does include the number of persons or entities who hold their Common Stock in nominee or "street" name through various brokerage firms. As of such date 2,057,242 shares of the Common Stock were outstanding. The Company's current quarterly dividend is $0.125 per share. The Board of Directors of the Company plans to maintain a regular quarterly dividend in the future and will continue to review the dividend payment amount in relation to the Company's earnings, financial condition and other relevant factors (such as regulatory requirements). The Bank will not be permitted to pay dividends to the Holding Company on its capital stock if its shareholders' equity would be reduced below the amount required for the liquidation account. For information concerning federal regulations which apply to the Bank in determining the amount of proceeds which may be retained by the Company and regarding a savings institution's ability to make capital distributions including payment of dividends to its holding company, see Note 11 to the Consolidated Financial Statements. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders, although the source of such dividends will be dependent 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. -65- Annual Meeting The Annual Meeting of Shareholders of the Company will be held at 10:00 a.m., Friday, April 28, 2000 at the Country Inn, 3259 5th Avenue South, Fort Dodge, Iowa. Stockholders and General Inquiries David M. Bradley North Central Bancshares, Inc. c/o First Federal Savings Bank of Iowa 825 Central Avenue Fort Dodge, Iowa 50501 (515) 576-7531 General Counsel Independent Auditor Johnson, Erb, Bice, McGladrey & Pullen, LLP Kramer, Good & Mulholland, P.C. 400 Locust Street, Suite 640 809 Central Avenue Des Moines, Iowa 50309 Fort Dodge, Iowa 50501 Transfer Agent Special Counsel American Securities Transfer and Trust, Inc. Thacher Proffitt & Wood 12039 West Alameda Parkway 1700 Pennsylvania Avenue, N.W., Suite 800 Lakewood, Colorado 80228 Washington, D.C. 20006 (303) 986-5400 email: www.asttrust.com
Annual Report on Form 10-K A copy of the Company's Form 10-K (without exhibits) for the fiscal year ended December 31, 1999 will be furnished without charge to shareholders as of March 13, 2000 upon written request to Jean L. Lake, Corporate Secretary, North Central Bancshares, Inc., c/o First Federal Savings Bank of Iowa, 825 Central Avenue, Fort Dodge, Iowa 50501. -66- EX-23.1 3 CONSENT OF MCGLADREY & PULLEN, LLP EXHIBIT 23.1 Exhibit 23.1 Consent of McGladrey & Pullen, LLP To the Board of Directors North Central Bancshares, Inc. Fort Dodge, Iowa We consent to the incorporation by reference in the North Central Bancshares, Inc. Registration Statement on Form S-8 of North Central Bancshares, Inc., pertaining to the North Central Bancshares, Inc. 1996 Stock Option Plan, of our report dated February 8, 2000, which appears in the annual report on Form 10-K of North Central Bancshares, Inc. and subsidiaries for the year ended December 31, 1999. /s/ McGladrey & Pullen, LLP ----------------------------- McGladrey & Pullen, LLP Des Moines, Iowa March 27, 2000 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. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 4,127,153 8,541,525 0 0 49,692,857 0 0 286,759,101 2,776,539 367,432,645 271,030,791 27,000,000 2,559,641 28,715,289 0 0 40,111 38,086,813 367,432,645 21,215,828 3,340,439 0 24,556,267 11,113,533 13,603,841 10,952,426 120,000 61,564 8,454,411 6,441,061 6,441,061 0 0 4,200,175 1.64 1.60 7.51 213,394 0 0 0 2,676,438 28,032 8,133 2,776,539 2,776,539 0 0
EX-99.1 5 PROXY SATEMENT FOR ANNUAL MEETING UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6(E)(2)) [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12 North Central Bancshares, Inc. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [x] No fee required. [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------- (5) Total fee paid: ------------------------------------------------------------------------- [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------- (3) Filing Party: ------------------------------------------------------------------------- (4) Date Filed: ------------------------------------------------------------------------- Notes: Reg. (S) 240.14a-101. SEC 1913 (3-99) North Central Bancshares, Inc. 825 Central Avenue . PO Box 1237 Fort Dodge, Iowa 50501-1237 ======================================== March 27, 2000 Dear Shareholders: You are cordially invited to attend the 2000 Annual Meeting of Shareholders (the "Annual Meeting") of North Central Bancshares, Inc. (the "Company"), which will be held on April 28, 2000 at 10:00 a.m., Central Time, at the Country Inn, located at 3259 5th Avenue South, Fort Dodge, Iowa. Enclosed are a Notice of Annual Meeting, Proxy Statement, Proxy Card and 1999 Annual Report to Shareholders. The attached Notice of Annual Meeting of Shareholders and Proxy Statement describe the formal business to be transacted at the Annual Meeting. In addition, management will report on the operations and activities of the Company and there will be an opportunity for you to ask questions about the Company's business. Your vote is important regardless of the number of shares you own. Whether or not you plan to attend the Annual Meeting, the Board of Directors urges you to sign, date and return your Proxy Card as soon as possible in the enclosed postage-paid envelope. This will not prevent you from voting in person at the Annual Meeting, but will assure that your vote is counted if you are unable to attend. If you are a shareholder whose shares are not registered in your own name, you will need additional documentation from your record holder to attend and to vote personally at the Annual Meeting. Examples of such documentation would include a broker's statement, letter or other document that will confirm your ownership of shares of the Company. On behalf of the Board of Directors and all of the employees of the Company and the First Federal Savings Bank of Iowa, I wish to thank you for your continued support. Sincerely, /s/ David M. Bradley David M. Bradley Chairman of the Board, President and Chief Executive Officer North Central Bancshares, Inc. 825 Central Avenue Fort Dodge, Iowa 50501 (515) 576-7531 ________________________ NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To Be Held on April 28, 2000 NOTICE IS HEREBY GIVEN that the 2000 Annual Meeting of Shareholders (the "Annual Meeting") of North Central Bancshares, Inc. (the "Company") will be held on April 28, 2000 at 10:00 a.m., Central Time, at the Country Inn, located at 3259 5th Avenue South, Fort Dodge, Iowa, for the following purposes: 1. To elect two directors to hold office until the annual meeting of shareholders to be held in 2003 and until their respective successors have been duly elected and qualified; 2. To ratify the appointment by the Board of Directors of the firm of McGladrey & Pullen, LLP as independent auditors for the Company for the fiscal year ending December 31, 2000; and 3. To transact such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof. As of the date hereof, management is not aware of any other such business. Pursuant to the Bylaws of the Company, the Board of Directors has fixed March 13, 2000 as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting and at any adjournment or postponement thereof. A list of shareholders entitled to vote at the Annual Meeting will be available for inspection at 825 Central Avenue, Fort Dodge, Iowa 50501, beginning on March 29, 2000 and will also be available at the Annual Meeting. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE. By Order of the Board of Directors, /s/ Jean L. Lake Jean L. Lake Secretary Fort Dodge, Iowa March 27, 2000 North Central Bancshares, Inc. 825 Central Avenue Fort Dodge, Iowa 50501 (515) 576-7531 ________________________ PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 28, 2000 ================================= GENERAL INFORMATION ================================= General This Proxy Statement and the accompanying Proxy Card are being mailed to shareholders of North Central Bancshares, Inc. ("North Central Bancshares" or the "Company") on or about March 27, 2000 in connection with the solicitation by the Board of Directors of the Company of proxies to be used at the 2000 Annual Meeting of Shareholders (the "Annual Meeting") and at any adjournment or postponement thereof. The Annual Meeting will be held on April 28, 2000 at 10:00 a.m., Central Time, at the Country Inn, located at 3259 5th Avenue South, Fort Dodge, Iowa. As more fully described in this Proxy Statement, the purposes of the Annual Meeting are (1) to elect two directors, each to serve for a three-year term expiring in 2003 ("Proposal 1"); (2) to ratify the appointment of McGladrey & Pullen, LLP as independent auditors for the Company for the fiscal year ending December 31, 2000 ("Proposal 2"); and (3) authorization of the Board of Directors, in its discretion, to direct the vote of proxies upon such matters incident to the conduct of the Annual Meeting, as may properly come before the Annual Meeting, and any adjournment or postponement thereof, including, without limitation, a motion to adjourn the Annual Meeting ("Proposal 3"). Record Date and Voting The Board of Directors of the Company has fixed the close of business on March 13, 2000 as the record date (the "Record Date") for the determination of the holders of the Company's common stock, par value $.01 per share (the "Common Stock"), entitled to notice of and to vote at the Annual Meeting. Only holders of record of Common Stock at the close of business on that date will be entitled to vote at the Annual Meeting and at any adjournment or postponement thereof. At the close of business on the Record Date, there were 2,057,242 shares of Common Stock outstanding. Each holder of shares of Common Stock outstanding on the Record Date will be entitled to one vote for each share held of record upon each matter properly submitted at the Annual Meeting and at any adjournment or postponement thereof. The presence, in person or by proxy, of the holders of at least a majority of the total number of outstanding shares of Common Stock entitled to vote at the Annual Meeting is necessary to constitute a quorum thereat. As provided in the Company's Articles of Incorporation, record holders of Common Stock who beneficially own in excess of 10% of the outstanding shares of Common Stock ("Excess Shares") shall be entitled to cast one one-hundredth of one vote per share for each Excess Share. A person or entity is deemed to beneficially own shares owned by an affiliate as well as persons acting in concert with such person or entity. The Company's Articles of Incorporation authorize the Board of Directors to interpret and apply the provisions of the Articles of Incorporation and Bylaws governing Excess Shares, and to determine on the basis of information known to them after reasonable inquiry all facts necessary to ascertain compliance with the Articles of Incorporation, including, without limitation, (i) the number of shares of Common Stock beneficially owned by any person or purported owner, (ii) whether a person or purported owner is an affiliate or associate of, or is acting in concert with, any other person or purported owner and (iii) whether a person or purported owner has an agreement or understanding with any person or purported owner as to the voting or disposition of any shares of Common Stock. If the enclosed Proxy Card is properly executed and received by the Company in time to be voted at the Annual Meeting, the shares represented thereby will be voted in accordance with the instructions marked thereon. Executed proxies with no instructions indicated thereon will be voted FOR each of the nominees for election as Directors and FOR each of the other proposals set forth in the accompanying Notice of Annual Meeting. Management is not aware of any matters other than those set forth in the Notice of Annual Meeting that may be brought before the Annual Meeting. If any other matters properly come before the Annual Meeting, the persons named in the accompanying proxy will vote the shares represented by all properly executed proxies on such matters in such manner as shall be determined by a majority of the Board of Directors of the Company. Vote Required Directors are elected by a plurality of the votes cast in person or by proxy at the Annual Meeting. The holders of Common Stock may not vote their shares cumulatively for the election of directors. Approval of Proposals 2 and 3 requires the affirmative vote of the holders of a majority of the outstanding shares of Common Stock represented in person or by proxy at the Annual Meeting and entitled to vote thereon. Shares as to which the "ABSTAIN" box has been selected on the Proxy Card with respect to any of Proposals 2 or 3 will be counted as present and entitled to vote and will have the effect of a vote against such proposal. In contrast, shares underlying broker non-votes will not be counted as present and entitled to vote and will have no effect on the votes for Proposals 2 and 3. Revocability of Proxies The presence of a shareholder at the Annual Meeting will not automatically revoke such shareholder's proxy. However, a shareholder may revoke a proxy at any time prior to its exercise by (1) filing a written notice of revocation with the Secretary of the Company, (2) delivering to the Secretary of the Company prior to the Annual Meeting a duly executed proxy bearing a later date or (3) attending the Annual Meeting, filing a written notice of revocation with the secretary of the meeting and voting in person. If you are a shareholder whose shares are not registered in your own name, you will need additional documentation from your record holder to attend and to vote personally at the Annual Meeting. Examples of such documentation would include a broker's statement, letter or other document that will confirm your ownership of shares of the Company. 2 Solicitation of Proxies The Company will bear the cost of soliciting proxies from its shareholders. Proxies may be solicited personally or by telephone or telegraph by directors, officers and employees of the Company or its subsidiaries, without additional compensation. The Company also will provide persons, firms and corporations holding shares in their names, or in the name of their nominees, which are beneficially owned by others, proxy material for transmittal to such beneficial owners, and will reimburse such record holders for their reasonable expenses incurred in connection therewith. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Principal Shareholders of the Company The following table sets forth, as of January 31, 2000, certain information as to the Common Stock beneficially owned by persons owning in excess of 5% of the outstanding shares of Common Stock. Management knows of no person, except as listed below, who beneficially owned more than 5% of the Company's outstanding shares of Common Stock as of January 31, 2000. Except as otherwise indicated, the information provided in the following table was obtained from filings with the Securities and Exchange Commission (the "SEC") and with the Company pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Addresses provided are those listed in the filings as the address of the person authorized to receive notices and communications. For purposes of the table below and the table set forth under "Security Ownership of Management," in accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of Common Stock (1) over which such person has or shares, directly or indirectly, voting or investment power, or (2) of which such person has the right to acquire beneficial ownership at any time within 60 days after January 31, 2000. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" includes the power to dispose or direct the disposition of such shares.
Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership Percent(5) ---------------- -------------------- ---------- Wellington Management Company, LLP 225,700(1) 10.05% 75 State Street Boston, MA 02109 Brandes Investment Partners, L.P. 162,237(2) 7.22% 12750 High Bluff Drive San Diego, CA 92130 Dimensional Fund Advisors, Inc. 157,100(3) 6.99% 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 Employee Stock Ownership Plan of 184,133(4) 8.20% First Federal Savings Bank of Iowa 825 Central Avenue Fort Dodge, IA 50501
- ------------------- (1) Based on a Schedule 13G/A, dated December 31, 1999, and filed with the SEC on February 11, 2000 by Wellington Management Company, LLP ("Wellington"). Wellington is an investment advisor which may be deemed to beneficially own the 225,700 shares of the Company's Common Stock which are held of record by clients of Wellington, which clients are entitled to receive, or have the power to direct the receipt of, dividends from, or the proceeds from the sale of, such shares. Wellington has shared voting power over 188,700 shares and has shared investment power over 225,700 shares of the Company's Common Stock. (footnotes continued on following page) 3 (2) Based on Schedule 13G/A, dated December 31, 1999, and filed with the SEC on February 14, 2000 by Brandes Investment Partners, L.P. ("Brandes"). Brandes is an investment adviser which may be deemed to beneficially own the 162,237 shares of the Company's Common Stock. Brandes has shared voting and investment power over the 162,237 shares of the Company's Common Stock. (3) Based on a Schedule 13G, dated December 31, 1999, and filed with the SEC on February 3, 2000 by Dimensional Fund Advisors, Inc. ("Dimensional"). Dimensional is an investment adviser which may be deemed to beneficially own the 157,100 shares of the Company's Common Stock. Dimensional disclaims beneficial ownership of such shares. (4) The Employee Stock Ownership Plan ("ESOP") is administered by a committee of the Company's Board of Directors (the "ESOP Committee"). The ESOP's assets are held in a trust (the "ESOP Trust"), for which First Bankers Trust Company, N.A. serves as trustee (the "ESOP Trustee"). The ESOP Trust purchased these shares with funds borrowed from the Company, initially placed these shares in a suspense account for future allocation and intends to allocate them to employees over a period of years as its acquisition debt is retired. The terms of the ESOP Trust Agreement provide that, subject to the ESOP Trustee's fiduciary responsibilities under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the ESOP Committee will vote, tender or exchange shares of Common Stock held in the ESOP Trust in accordance with the following rules. The ESOP Committee will vote, tender or exchange shares of Common Stock allocated to participants' accounts in accordance with instructions received from the participants. As of December 31, 1999, 98,625 shares held by the ESOP Trust have been allocated. The ESOP Committee will vote allocated shares as to which no instructions are received and any shares that have not been allocated to participants' accounts in the same proportion as allocated shares with respect to which the ESOP trustee receives instructions are voted. The ESOP Trustee will tender or exchange any shares in the suspense account or that otherwise have not been allocated to participants' accounts in the same proportion as allocated shares with respect to which the ESOP Trustee receives instructions are tendered or exchanged. With respect to allocated shares as to which no instructions are received, the ESOP Trustee will be deemed to have received instructions not to tender or exchange such shares. Except as described above, the ESOP Committee of the Company's Board of Directors has sole investment power, but no voting power over the Common Stock held in the ESOP Trust. (5) Percentages with respect to each person or group of persons have been calculated based upon 2,246,742 shares of Common Stock, the number of shares outstanding as of January 31, 2000. 4 Security Ownership of Management The following table sets forth information with respect to the shares of Common Stock beneficially owned by each director of the Company, by each Named Executive Officer of the Company identified in the Summary Compensation Table included elsewhere herein and all directors and executive officers of the Company or the Company's wholly owned subsidiary, First Federal Savings Bank of Iowa (the "Bank") as a group as of January 31, 2000.
Amount and Percent of Nature of Common Beneficial Stock Name Title (1) Ownership(2)(3)(4) Outstanding(5) - ---- --------- ------------------ -------------- David M. Bradley Chairman of the Board, 55,282 (6) 2.43% President and Chief Executive Officer KaRene Egemo Director 30,382 (7) 1.35 Howard A. Hecht Director 32,064 (8) 1.42 Melvin R. Schroeder Director 19,504 (9) 0.86 Mark M. Thompson Director 6,500 (10) 0.29 Robert H. Singer, Jr. Director 12,312 (11) 0.55 All directors and executive 403,791 17.02 officers as a group (10 persons)(12)
- ------------------------- (1) Titles are for both the Company and the Bank. (2) See "Principal Shareholders of the Company" for a definition of "beneficial ownership." All persons shown in the above table have sole voting and investment power, except as otherwise indicated. (3) The figure shown for all directors and executive officers as a group includes all 184,133 shares held in the ESOP as to which the members of the Company's ESOP Committee (consisting of Directors Hecht, Egemo and Schroeder) may be deemed to have sole investment power, except in limited circumstances, thereby causing each such Committee member to be deemed a beneficial owner of such shares. Each of the members of the ESOP Committee disclaims beneficial ownership of such shares and, accordingly, such shares are not attributed to the members of the ESOP Committee individually. (4) The figures shown include shares held pursuant to First Federal Savings Bank of Iowa Employees' Savings and Profit Sharing Plan and Trust that have been allocated as of December 31, 1999 to all executive officers as a group, 3,342 shares. Such persons have sole voting power and sole investment power as to such shares. (5) Percentages with respect to each person or group of persons have been calculated as though the number of outstanding shares of Common Stock was 2,246,742, the number of shares of Common Stock outstanding as of January 31, 2000, plus in the case of each individual and the group, the number of additional shares of Common Stock which would be issued upon the exercise of all options by such individuals or group, respectively, within 60 days after January 31, 2000. (6) Includes 7,740 shares over which Mr. David M. Bradley has shared voting and investment power. The figure shown includes 11,083 shares held in trust pursuant to the ESOP that have been allocated as of January 31, 2000 to Mr. Bradley's individual account. Mr. Bradley has voting power (subject to the legal duties of the ESOP Trustee) but no investment power, except in limited circumstances, as to such shares. The figure shown for Mr. Bradley does not include 85,508 shares held in trust pursuant to the ESOP that have not been allocated to any individual's account and as to which Mr. Bradley shares voting power with other ESOP participants. Includes 32,000 shares which may be acquired upon the exercise of stock options within 60 days of January 31, 2000. (footnotes continued on following page) 5 (7) Includes 19,762 shares over which Ms. KaRene Egemo has shared voting and investment power. Includes 10,710 shares which may be acquired upon the exercise of stock options within 60 days of January 31, 2000. (8) Includes 7,264 shares over which Mr. Howard A. Hecht has shared voting and investment power. Includes 12,000 shares which may be acquired upon the exercise of stock options within 60 days of January 31, 2000. (9) Includes 7,504 shares over which Mr. Melvin R. Schroeder has shared voting and investment power. Includes 12,000 shares which may be acquired upon the exercise of stock options within 60 days of January 31, 2000. (10) Includes 2,000 shares which may be acquired upon the exercise of stock options within 60 days of January 31, 2000. (11) Includes 4,812 shares over which Mr. Robert H. Singer, Jr. has shared voting and investment power. Includes 7,500 shares which may be acquired upon the exercise of stock options within 60 days of January 31, 2000. (12) Includes 43,334 shares over which the directors and executive officers share voting power, 43,334 shares over which the directors and executive officers share investment power and an aggregate of 125,810 shares which may be acquired upon the exercise of stock options within 60 days after January 31, 2000. ================================= PROPOSAL ONE ELECTION OF DIRECTORS ================================= General The Articles of Incorporation of the Company provide that the Board of Directors shall be divided into three classes, each class to contain, as near as may be possible, one-third of the entire number of the Board. The directors of each class serve for a term of three years, with one class elected each year. In all cases, directors serve until their successors are elected and qualified. The Nominating Committee, composed of Directors Hecht, Schroeder and Egemo, with Mr. Hecht as Chairman, has nominated two candidates for election as directors at the Annual Meeting, each to serve for a three-year term ending in 2003. Each nominee has consented to being named in this Proxy Statement and to serve, if elected. However, if any nominee should become unable to serve, the proxies received in response to this solicitation that were voted in favor of such nominee will be voted for the election of such other person as shall be designated by the Board of Directors of the Company, unless the Board of Directors shall determine to further reduce the number of directors pursuant to the Bylaws of the Company. In any event, proxies cannot be voted for a greater number of persons than the two nominees named. Information with Respect to Nominees and Continuing Directors The following table sets forth certain information with respect to each nominee for election as a director and each director whose term does not expire at the Annual Meeting ("Continuing Director"). There are no arrangements or understandings between the Company and any director or nominee pursuant to which such person was elected or nominated to be a director of the Company. For information with respect to security ownership of directors, see "General Information -- Security Ownership of Certain Beneficial Owners and Management -- Security Ownership of Management." 6
End of Director Name Age(1) Term Position Held with Company Since(2) - ---- ------ ------ ------------------------------------ ----------- Nominees for a Three-Year Term Expiring in 2003 David M. Bradley 48 2003 Chairman of the Board, President and 1989 Chief Executive Officer Robert H. Singer, Jr. 51 2003 Director 1997 Continuing Directors Howard A. Hecht 72 2001 Director 1990 Melvin R. Schroeder 63 2001 Director 1992 KaRene Egemo 63 2002 Director 1993 Mark M. Thompson 48 2002 Director 1999
- ------------------------ (1) At March 27, 2000. (2) Includes terms as directors of the Bank prior to the incorporation of the Company on December 5, 1995. The principal occupation and business experience of each nominee for election as director and of each continuing director are set forth below. Nominees for Election as Directors David M. Bradley has been President of the Bank since 1990 and Chief Executive Officer of the Bank since 1992. He has been affiliated with the Bank since 1982. Mr. Bradley became Chairman of the Board of the Company and the Bank as of January 1, 1997. Robert H. Singer, Jr. has been the co-owner of Calvert, Singer & Kelley Insurance Services, Inc., an insurance agency, in Fort Dodge, Iowa, since 1988. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF BOTH NOMINEES FOR ELECTION AS DIRECTORS. Continuing Directors Howard A. Hecht is a retired insurance executive. He was employed for 39 years as Vice President with Principal Mutual Life Insurance Company, Des Moines, Iowa. Melvin R. Schroeder is Vice President of Instruction at Iowa Central Community College in Fort Dodge, Iowa. He has been employed with the College since 1967. KaRene Egemo has been the owner of Egemo Realty, Inc. in Fort Dodge, Iowa since 1978. Mark M. Thompson has been the owner of Mark Thompson CPA, P.C. since 1984 and has been a certified public accountant since 1978. Board and Committee Meetings The Company's Board of Directors held 14 meetings during 1999. During 1999, all directors of the Company attended at least 75% of the total meetings held during the period of their service on the Board of Directors and committees thereof. The Board of Directors maintains committees, the nature and composition of which are described below. 7 Examining and Audit Committee. The Examining and Audit Committee recommends the selection of the Company's independent accountants to the Board and meets with the accountants to discuss the scope and to review the results of the annual audit. It is comprised of Directors Schroeder (Chairman), Egemo and Thompson. The Examining and Audit Committee of the Company met 2 times during the year ended December 31, 1999. Personnel and Compensation Committee. The Personnel and Compensation Committee meets periodically to review the performance of and to make recommendations to the Board regarding the compensation of the Company's officers. The Personnel and Compensation Committee of the Company is comprised of Directors Hecht (Chairman), Egemo and Schroeder. The Personnel and Compensation Committee met two times during the year ended December 31, 1999. Nominating Committee. The Nominating Committee discusses director nominations prior to each Annual Meeting of the Company. It is comprised of Directors Hecht (Chairman), Schroeder and Egemo. The Nominating Committee met 1 time during the year ended December 31, 1999. The Nominating Committee met on January 28, 2000 to select the nominees for election as directors at the Annual Meeting. In accordance with the Bylaws of the Company, no nominations for election as directors, except those made by the Nominating Committee, shall be voted upon at the Annual Meeting unless properly made by a shareholder. No nominations for directors were received from shareholders for the elections to be held at the Annual Meeting. To be timely, notice of a shareholder's nomination for an annual meeting must be delivered to or received by the Corporate Secretary of the Company not less than 60 days prior to the date of the meeting if such meeting is to be held on a day which is within 30 days preceding the anniversary of the previous year's annual meeting, not less than 90 days prior to the date of the meeting if such meeting is to be held on or after the anniversary of the previous year's annual meeting, or, with respect to an annual meeting held at any other time, not more than 10 days following the date on which notice of such meeting is first given to shareholders. Executive Officers The following individuals are executive officers of the Company and the Bank and hold the offices set forth below opposite their names. Name Position Held with the Company and the Bank ---- ------------------------------------------- C. Thomas Chalstrom Executive Vice President Jean L. Lake Secretary John L. Pierschbacher Treasurer Name Position Held with the Bank ---- --------------------------- C. Thomas Chalstrom Chief Operating Officer Kirk A. Yung Senior Vice President The executive officers of the Company and the Bank are elected annually and hold office until their respective successors have been elected and qualified, or until death, resignation, or removal by the Boards of Directors of each of the Company and the Bank. Biographical information of executive officers of the Company and the Bank is set forth below. C. Thomas Chalstrom, age 36, has been employed with the Bank since 1985, was named Executive Vice President in December 1994. Mr. Chalstrom was named Chief Operating Officer of the Bank in December 1998. Jean L. Lake, age 57, 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. 8 John L. Pierschbacher, CPA, age 40, has been employed with the Bank since 1992. Mr. Pierschbacher was named Treasurer of the Bank in January 1994. He is the Bank and the Company's chief financial officer and is in charge of the accounting functions of the Bank and the Company. Mr. Pierschbacher was employed in public accounting for nine years at the public accounting firm of McGladrey & Pullen, LLP prior to joining the Bank. Kirk A. Yung, age 37, 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 experience in various positions with financial institutions before joining the Bank. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS Directors' Compensation Fee Arrangements. Currently, non-employee directors receive monthly fees of $450 and an additional director's fee of $300 for each monthly meeting attended. Stock Option Plan. Directors of the Company are eligible to receive grants of Options pursuant to the Company's Option Plan. See "-- Stock Option Plan." Under the Stock Option Plan, individuals who were non-employee directors ("Eligible Directors") on September 21, 1996, (the "Effective Date") received an initial grant of an option to purchase 20,000 shares of Common Stock. All such options are exercisable in five equal installments beginning one year from the date of grant. Individuals who became an Eligible Director after the Effective Date, but before January 1, 1998, were granted on each of January 1, 1997 and 1998, an option to purchase 500 shares and on January 23, 1998, an additional option to purchase 3,000 shares of Common Stock. Such options were immediately exercisable upon grant. Such Eligible Directors and any individuals who become an Eligible Director after January 1, 1998, will be granted on each January 1 after 1998, an option, which will be immediately exercisable upon grant, to purchase 2,000 shares of Common Stock, provided the Plan is still in effect and the Eligible Director is still serving as such on the date of grant. All options granted to Eligible Directors under the Stock Option Plan have an exercise price per share equal to the fair market value of a share of Common Stock on the date of the option grant. Executive Compensation The Report of the Company's Personnel and Compensation Committee and the Performance Graph included in this section are provided in accordance with the rules and regulations of the SEC. Pursuant to such rules and regulations, the Report and the Graph shall not be deemed "soliciting material," filed with the SEC, subject to Regulation 14A or 14C of the SEC or subject to the liabilities of section 18 of the Exchange Act. Compensation Committee Report. The 1999 compensation programs described in this Proxy Statement were established by the Personnel and Compensation Committee of the Company's Board of Directors. The Committee is comprised entirely of non-employee directors. The Company's compensation program was designed to create and sustain high performance, to attract and retain the people necessary to grow the business, and to induce employees to act as shareholders of the business and to become personally accountable for their own individual actions and the overall Company's success. The program was designed to be highly sensitive to performance and reflect both short and long term performance. The 1999 compensation program consists of three components: (1) base salary; (2) annual bonus; and (3) long term incentives, e.g., stock options and fringe benefits. These elements are intended to provide an overall compensation package that is commensurate with the Company's financial resources, that is appropriate to assure the retention of experienced management personnel, especially in these times of great competition for skilled personnel, and align their financial interests with those of the Company's 9 shareholders, and that is responsive to the immediate and long-term needs of executive officers and their families. During 1999, base salaries were set at levels determined, in the subjective judgment of the Compensation Committee, to be commensurate with the executive officers' customary respective duties and responsibilities and to enable them to maintain appropriate standards of living within their communities. Discretionary bonuses for 1999 were determined, in the subjective judgment of the Compensation Committee, with the intention of rewarding effort, performance and results at levels above and beyond those assumed in establishing base salary rates. Fringe benefit plans, consisting of a pension plan, 401(k) plan, and group insurance coverages, are designed to provide for the health and welfare of the executives and their families as well as for their long-term financial needs. In addition, all executive officers participate in the Bank's Employee Stock Ownership Plan (the "ESOP"). Each executive officer has an individual account within the ESOP Trust which is invested primarily in employer securities, with the result that a portion of each executive officer's long-term retirement savings is tied to the performance of the Bank and the Company. The Chief Executive Officer's base salary for 1999 was $175,000; and he was awarded a $5,101 bonus for 1999. Personnel and Compensation Committee of North Central Bancshares, Inc. Howard A. Hecht, Chairman KaRene Egemo, Member Melvin R. Schroeder, Member Compensation Committee Interlocks and Insider Participation. There are no interlocks, as defined under the rules and regulations of the SEC, between the Personnel and Compensation Committee and corporate affiliates of members of the Personnel and Compensation Committee or otherwise. 10 Performance Graph. Pursuant to the regulations of the SEC, the graph below compares the performance of the Bank with that of the Nasdaq Composite Index (U.S. Companies) and the Nasdaq Bank Composite Index (banks and bank holding companies, over 99% of which are based in the United States) from December 31, 1995 through December 31, 1999. On March 20, 1996, the Bank completed a reorganization from the mutual holding company form of organization to the stock holding company form of organization. In connection with this reorganization, each outstanding share of the Bank's common stock was converted into 1,385,590 shares of the Company's common stock and the Company sold and issued 2,625,467 additional shares of its common stock at a subscription price of $10.00 per share. At that time, the Company replaced the Bank as the issuer listed by The Nasdaq Stock Market. Accordingly, the graph below presents performance of the Bank's stock through March 20, 1996 and the Company's stock through December 31, 1999. The graph assumes the reinvestment of dividends in additional shares of the same class of equity securities as those below. [PERFORMANCE GRAPH]
- ---------------------------------------------------------------------------------------------------------------------------- Legend Symbol CRSP Total Returns Index for: 12/1994 12/1995 12/1996 12/1997 12/1998 12/1999 - ------ ----------------------------- ------- ------- ------- ------- ------- ------- ______ North Central Bancshares, Inc. 100.0 140.6 169.0 251.4 217.1 197.6 ...__. * Nasdaq Stock Market (US Companies) 100.0 141.3 173.9 213.1 300.2 545.7 - ----- Nasdaq Financial Stocks 100.0 145.7 187.0 286.1 277.7 274.0 SIC 6000-6799 US & Foreign Notes: A. The lines represent monthly index levels derived from compounded daily returns that include all dividends. B. The indexes are reweighted daily, using the market capitalization on the previous trading day. C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used. D. The index level for all series was set to $100.0 on 12/30/1994. - -----------------------------------------------------------------------------------------------------------------------------
There can be no assurance that stock performance will continue into the future with the same or similar trends depicted in the graph above. 11 Summary Compensation Table. The following Summary Compensation Table includes individual compensation information on the Chief Executive Officer (the "Named Executive Officer") for services rendered in all capacities to the Company and the Bank during the fiscal years ended December 31, 1999, 1998 and 1997. No other officer received total salary and bonus in excess of $100,000 in fiscal 1999. Summary Compensation Table
Long Term Compensation ---------------------- Annual Compensation Awards --------------------- ---------------------- Securities Underlying Options/ All Other Name and Principal Salary Bonus SARS Compensation Positions Year ($)(1) ($) (#) ($)(2) - ---------------------- ---- ---------- ------- ---------------------- ----------------- David M. Bradley 1999 175,000 5,101 -- 21,503 Chairman of the Board, 1998 165,000 101 20,000 38,595 President and Chief Executive 1997 140,000 10,101 -- 46,806 Officer
- -------------------- (1) Amount shown is gross earnings, including amounts contributed by Mr. Bradley on an after-tax basis to the Bank's Thrift Plan. (2) Includes allocations under the ESOP of 1,434, 2,173 and 2,355 shares of the Company's Common Stock for 1999, 1998 and 1997 with a total market value of $21,503, $38,595 and $46,806, respectively, as of their respective allocation dates of December 31, 1999, 1998 and 1997, based on the closing sales prices for shares of the Company's common stock on The Nasdaq Stock Market on such dates. Employment Agreements. Effective as of March 20, 1996, the Company entered into an employment agreement with Mr. Bradley, and the Bank entered into an amended and restated employment agreement with Mr. Bradley (collectively, the "Employment Agreements"). The Employment Agreements establish the duties and compensation of Mr. Bradley and are intended to ensure that the Bank and the Company will be able to maintain a stable and competent management base. The Employment Agreements with Mr. Bradley provide for a three-year term. The Bank Employment Agreement provides that, commencing on the first anniversary date and continuing each anniversary date thereafter, the Board of Directors may, with Mr. Bradley's concurrence and after conducting a performance evaluation, extend this term for an additional year, so that the remaining term shall be three years. The Company Employment Agreement provides for automatic daily extensions such that the term of the Company Employment Agreement shall be a rolling period of three years unless written notice of non-renewal is given by the Company's Board of Directors or Mr. Bradley. Mr. Bradley's base salary will be reviewed annually by the Personnel and Compensation Committee of the Board. Subject to such review, Mr. Bradley's base salary may be increased on the basis of his job performance and the overall performance of the Bank and the Company. In addition to base salary, the Employment Agreements provide for, among other things, entitlement to participation in stock, retirement and welfare benefit plans and eligibility for fringe benefits applicable to executive personnel such as a company car and fees for club and organization memberships deemed appropriate by the Bank or the Company and Mr. Bradley. The Employment Agreements provide for termination by the Bank or the Company at any time for "cause" as defined in the Employment Agreements. In the event the Bank or the Company chooses to terminate Mr. Bradley's employment for reasons other than for cause, or in the event of Mr. Bradley's resignation from the Bank and the Company upon: (i) failure to re-appoint, elect or re-elect him to his current offices; (ii) a material change in his functions, duties or responsibilities; (iii) a relocation of his principal place of employment outside 12 Webster County, Iowa without his consent; (iv) liquidation or dissolution of the Bank or the Company; (v) a change of control; or (vi) a breach of the Employment Agreement by the Bank or the Company, Mr. Bradley or, in the event of death, his beneficiary, would be entitled to a lump sum cash payment in an amount equal to the present value of the remaining base salary and bonus payments due to him and the additional contributions or benefits that would have been earned under any employee benefit plans of the Bank or the Company during the remaining terms of the Employment Agreements. The Bank and the Company would also continue Mr. Bradley's life, health and disability insurance coverage for the remaining term of the Employment Agreements. In general, for purposes of the Employment Agreements and the plans maintained by the Company or the Bank, a "change in control" will generally be deemed to occur when a person or group of persons acting in concert acquires beneficial ownership of 20% or more of any class of equity security, such as Common Stock of the Company or the Bank, or in the event of a tender offer, exchange offer, merger or other form of business combination, sale of assets or contested election of directors which results in a change in control of the majority of the Board of Directors of the Company or the Bank. Payment under the Company Agreement would be made by the Company. In addition, payments to Mr. Bradley under the Bank Agreement will be guaranteed by the Company in the event that payments or benefits are not paid by the Bank. However, to the extent that payments under the Company Agreement and the Bank Agreement are duplicative, payments due under the Company's Employment Agreement would be offset by amounts actually paid by the Bank. The Employment Agreements also provide that Mr. Bradley would be entitled to reimbursement of certain costs incurred in negotiating, interpreting or enforcing the Employment Agreements. Mr. Bradley would also be indemnified by the Bank and the Company to the fullest extent allowable under federal and Iowa law, respectively. Cash and benefits paid to Mr. Bradley under the Employment Agreements together with payments under other benefit plans following a "change in control" of the Bank or the Company may constitute an "excess parachute" payment under Section 280G of the Internal Revenue Code (the "Code"), resulting in the imposition of a 20% excise tax on the recipient and the denial of the deduction for such excess amounts to the Company and the Bank. In such an event, payments under the Employment Agreements will be limited to the lesser of: (i) 2.99 times Mr. Bradley's average total compensation (whether or not taxable) for the period of five taxable years ending immediately prior to his termination of employment, or (ii) after provision for the excise tax, if any, imposed under section 4999 of the Code, the greater of an amount 2.99 times Mr. Bradley's average taxable compensation for the period of five taxable years ending immediately prior to his termination of employment or the maximum amount which may be paid to Mr. Bradley under the Employment Agreements without giving rise to such tax. The Employment Agreements also generally provide that for a period of one year following termination for cause, Mr. Bradley agrees not to compete with the Bank or Company in any city, town or county in which the Bank or Company maintains an office or has filed an application to establish an office. The Employment Agreements also provide that Mr. Bradley agrees to keep any material document or information obtained from the Bank or Company confidential. In addition, the Employment Agreements provide that for a period of one year following termination, Mr. Bradley agrees not to solicit or offer employment to any officer or employee of the Bank or Company or solicit their respective customers. Pension Plan. The Bank participates in a multiple-employer noncontributory tax-qualified defined benefit plan (the "Retirement Plan") for eligible employees. As required, the Bank annually contributes an amount to the Retirement Plan necessary to satisfy the actuarially determined minimum funding requirements in accordance with the ERISA. 13 Pension Plan Table. The following table sets forth the estimated annual benefits payable upon retirement at age 65 under the Bank's Retirement Plan based on the Retirement Plan provisions at December 31, 1999. The amounts are expressed in the form of a single life annuity available at various levels of compensation and years of benefit service:
Years of Service and Benefit Payable at Retirement ------------------------------------------------------- Highest Average Salary 15 20 25 30 35 - ----------------- ------ ------ ------ ------- ------- $100,000 27,521 36,694 45,868 55,041 64,215 125,000 35,021 46,694 58,368 70,041 81,715 150,000 42,521 56,694 70,868 85,041 99,215 175,000(1) 50,021(1) 66,694(1) 83,368(1) 100,041(1) 116,715(1)
- ---------------- (1) Under section 401(a)(17) of the Code, a participant's compensation in excess of $170,000 (as adjusted to reflect cost-of-living increases) is disregarded for purposes of determining highest average salary for benefit accruals in plan years beginning in or after 1994. These annual benefit amounts are subject to adjustments for Social Security benefits. At December 31, 1999, David M. Bradley had 16 years of credited service under the Retirement Plan and his highest average salary was $160,000. Compensation recognized for purposes of retirement plan benefits consists of salary as reported in the "Salary" column of the Summary Compensation Table. Stock Option Plan. The Option Plan was approved by the Company's shareholders at a Special Meeting of Shareholders held on September 21, 1996. The Option Plan provides for the grant of Options to certain officers, employees and outside directors of the Company. The Option Plan is not subject to ERISA. The purpose of the Option Plan is to promote the growth and profitability of the Company; to provide certain key officers; employees and directors of the Company and its affiliates with an incentive to achieve corporate objectives, to attract and retain individuals of outstanding competence and to provide such individuals with an equity interest in the Company. 14 The following table provides information with respect to the number of shares of Common Stock represented by outstanding options held by Mr. Bradley on December 31, 1999 and the value for such options that are "in-the-money" options. The value for "in-the-money" options represents the positive spread between the exercise price of any such option and the year-end price of the Common Stock, which was $15.00 per share. 1999 Fiscal Year-End Option/SAR Values
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs at Fiscal Options/SARs at Fiscal Year-end Year-end (#) ($) Name (1) Exercisable/Unexercisable Exercisable/Unexercisable - -------- -------------------------- -------------------------- David M. Bradley 32,000/28,000 63,000/42,000 Chairman of the Board, President and Chief Executive Officer
- ----------------------- (1) Mr. Bradley did not exercise options during the fiscal year ended December 31, 1999. Transactions With Certain Related Persons From time to time the Bank makes loans to its and the Company's officers and directors, which loans are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires the Company's directors and certain officers, and persons who own more than ten percent of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of copies of such reports of ownership furnished to the Company or the Bank, or written representations that no forms were necessary, the Company believes that, during the last fiscal year, all filing requirements applicable to its officers, directors and greater than ten percent shareholders of the Company and the Bank were complied with. 15 =========================== PROPOSAL TWO RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS =========================== The Board of Directors has appointed the firm of McGladrey & Pullen, LLP to continue as independent auditors for the Company for the fiscal year ending December 31, 2000, subject to ratification of such appointment by the Company's shareholders. Representatives of McGladrey & Pullen, LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT OF MCGLADREY & PULLEN, LLP AS INDEPENDENT AUDITORS FOR THE COMPANY. =========================== PROPOSAL THREE AUTHORIZATION OF THE BOARD OF DIRECTORS, IN ITS DISCRETION, TO DIRECT THE VOTE OF THE PROXIES UPON SUCH OTHER MATTERS INCIDENT TO THE CONDUCT OF THE ANNUAL MEETING AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING, AND ANY ADJOURNMENT OR POSTPONEMENT THEREOF, INCLUDING, WITHOUT LIMITATION, A MOTION TO ADJOURN THE ANNUAL MEETING =========================== The Board of Directors is not aware of any other business that may properly come before the Annual Meeting. The Board seeks the authorization of the shareholders of the Company, in the event matters incident to the conduct of the Annual Meeting properly come before the Meeting, including, but not limited to, the consideration of whether to adjourn the Annual Meeting once called to order, to direct the manner in which those shares represented at the Annual Meeting by proxies solicited pursuant to this Proxy Statement shall be voted. As to all such matters, the Board intends that it would direct the voting of such shares in the manner determined by the Board, in its discretion, and in the exercise of its duties and responsibilities, to be in the best interests of the Company and its shareholders, taken as a whole. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" AUTHORIZATION OF THE BOARD OF DIRECTORS OF NORTH CENTRAL BANCSHARES, INC., IN ITS DISCRETION, TO DIRECT THE VOTE OF THE PROXIES UPON SUCH OTHER MATTERS INCIDENT TO THE CONDUCT OF THE ANNUAL MEETING AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING, AND ANY ADJOURNMENT OR POSTPONEMENT THEREOF, INCLUDING, WITHOUT LIMITATION, A MOTION TO ADJOURN THE ANNUAL MEETING. 16 ADDITIONAL INFORMATION Date for Submission of Shareholder Proposals Any shareholder proposal intended for inclusion in the Company's proxy statement and proxy card relating to the Company's 2001 Annual Meeting of Shareholders must be received by the Company by November 27, 2000, pursuant to the proxy soliciting regulations of the SEC. Nothing in this paragraph shall be deemed to require the Company to include in its proxy statement and proxy card for such meeting any shareholder proposal which does not meet the requirements of the SEC in effect at the time. Any such proposal will be subject to 17 C.F.R. (S)240.14a-8 of the Rules and Regulations promulgated by the SEC under the Exchange Act. Notice of Business to be Conducted at the Annual Meeting The Bylaws of the Company provide an advance notice procedure for a shareholder to properly bring business before an annual meeting or to nominate any person for election to the Board of Directors. The shareholder must be a shareholder of record and have given timely notice thereof in writing to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to or received by the Secretary not later than the following dates: (i) with respect to an annual meeting of shareholders, sixty (60) days in advance of such meeting if such meeting is to be held on a day which is within thirty (30) days preceding the anniversary of the previous year's annual meeting, or ninety (90) days in advance of such meeting if such meeting is to be held on or after the anniversary of the previous year's annual meeting; and (ii) with respect to an annual meeting of shareholders held at a time other than within the time periods set forth in the immediately preceding clause (i), the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to shareholders. Notice shall be deemed to first be given to shareholders when disclosure of such date of the meeting of shareholders is first made in a press release reported to Dow Jones News Services, Associated Press or comparable national news service, or in a document publicly filed by the Company with the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act. A shareholder's notice to the Secretary shall set forth such information as required by the Bylaws of the Company. Nothing in this paragraph shall be deemed to require the Company to include in its proxy statement and proxy card relating to an annual meeting any shareholder proposal or nomination which does not meet all of the requirements for inclusion established by the SEC in effect at the time such proposal or nomination is received. See "Date For Submission of Shareholder Proposals." Other Matters Which May Properly Come Before the Annual Meeting As of the date of this Proxy Statement, management does not know of any other matters to be brought before the shareholders at the Annual Meeting. If, however, any other matters not now known are properly brought before the Annual Meeting, the persons named in the accompanying proxy will vote the shares represented by all properly executed proxies on such matters in such manner as shall be determined by a majority of the Board of Directors. 17 FINANCIAL STATEMENTS A copy of the Annual Report to Shareholders for the year ended December 31, 1999, containing financial statements as of December 31, 1999 and 1998 and for each of the years in the three-year period ended December 31, 1999, prepared in conformity with generally accepted accounting principles, accompanies this Proxy Statement. The consolidated financial statements have been audited by McGladrey & Pullen, LLP whose report thereon appears in the Annual Report. The Annual Report serves as the Bank's Annual Disclosure Statement for purposes of the regulations of the Federal Deposit Insurance Corporation. An additional copy of the Annual Report will be promptly furnished without charge to shareholders upon request. The Company will file an annual report on Form 10-K for its fiscal year ended December 31, 1999 with the SEC. Shareholders may obtain, free of charge, a copy of such annual report (excluding exhibits) by writing to Ms. Jean L. Lake, Secretary, North Central Bancshares, Inc., c/o First Federal Savings Bank of Iowa, 825 Central Avenue, Fort Dodge, Iowa 50501. TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. A-1 NORTH CENTRAL BANCSHARES, INC. REVOCABLE PROXY 825 Central Avenue Fort Dodge, Iowa 50501 This proxy is solicited on behalf of the Board of Directors of North Central Bancshares, Inc. for the Annual Meeting of Shareholders to be held on April 28, 2000 The undersigned shareholder of North Central Bancshares, Inc. hereby appoints Howard A. Hecht, Melvin R. Schroeder and KaRene Egemo, or any of them, with full powers of substitution, to represent and to vote as proxy, as designated, all shares of common stock of North Central Bancshares, Inc. held of record by the undersigned on March 13, 2000, at the Annual Meeting of Shareholders (the "Annual Meeting") to be held on April 28, 2000 at 10:00 a.m., Central Time, at the Country Inn, located at 3259 5th Avenue South, Fort Dodge, Iowa, or at any adjournment or postponement thereof. The undersigned hereby revokes all prior proxies. This Proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder. If no direction is given, this Proxy will be voted FOR the election of nominees listed in Item 1 and FOR the proposals in Items 2 and 3. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof. As of the date of the Proxy Statement for the Annual Meeting, the Board of Directors is not aware of any such other business. PLEASE MARK, SIGN AND DATE THIS PROXY ON THE REVERSE SIDE AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. The Board of Directors of North Central I Will Attend the Bancshares, Inc. unanimously recommends a Annual Meeting [_] vote "FOR" all nominees in Item 1 and "FOR" Please Mark Your the proposals in Items 2 and 3. Choice Like This [X] in Blue or Black Ink. - -------------------------------------------------------------------------------- 1. Election of Directors to a Three Year Term. For Withhold Nominees: David M. Bradley and Robert H. Singer, Jr. all for all Nominees Nominees [_] [_] Instruction: To withhold authority for any individual nominee, write that nominee's name in the space provided: _______________________________________________ - -------------------------------------------------------------------------------- 2. Ratification of appointment of For Against Abstain McGladrey & Pullen LLP as [_] [_] [_] independent auditors for the Company for the fiscal year ending December 31, 2000. - -------------------------------------------------------------------------------- 3. Authorization of the Board of For Against Abstain Directors, in its discretion, to [_] [_] [_] direct the vote of proxies upon such matters incident to the conduct of the Annual Meeting as may properly come before the Annual Meeting, and any adjournment or postponement thereof, including, without limitation, a motion to adjourn the Annual Meeting. - -------------------------------------------------------------------------------- The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of Shareholders and the Proxy Statement for the Annual Meeting. -------------------------------------- -------------------------------------- Signature(s) Dated:_________________________ , 2000 Please sign exactly as your name appears on this Proxy. Joint owners should each sign personally. If signing as attorney, executor, administrator, trustee or guardian, please include your full title. Corporate or partnership proxies should be signed by an authorized officer. [LETTERHEAD OF FIRST FEDERAL SAVINGS BANK OF IOWA] March 27, 2000 To: All Participants in the First Federal Savings Bank of Iowa Employee Stock Ownership Plan (the "ESOP") Re: Annual Meeting of Shareholders to be held on April 28, 2000 ----------------------------------------------------------- In connection with the Annual Meeting of Shareholders of North Central Bancshares, Inc. (the "Company") to be held on April 28, 2000, enclosed are the following documents: 1. Confidential Voting Instruction Card; 2. Proxy Statement dated March 27, 2000, including a Notice of Annual Meeting of Shareholders; and 3. a postage-paid return envelope addressed to American Securities Transfer, Incorporated ("American Securities Transfer"). American Securities Transfer is the Confidential Voting Instruction tabulator for the ESOP. As a participant in the ESOP, you have the right to direct the trustee of the ESOP (the "ESOP Trustee") how to vote the shares of the Company's common stock ("Shares") held by the ESOP trust as of March 13, 2000, the record date for the Annual Meeting ("Record Date"). Your rights will vary depending on whether the matter being voted on is an "Anticipated Proposal" or an "Unanticipated Proposal." Anticipated Proposals. Under the terms of the ESOP, each participant has the right to instruct the ESOP Trustee how to vote the Shares allocated to such participant's account under the ESOP as of the Record Date. In general, the ESOP Trustee will be instructed to vote such Shares held by the ESOP trust and awarded to you by casting votes FOR and AGAINST each proposal as specified by you on the Confidential Voting Instruction Card accompanying this letter. The number of shares allocated to your account under the ESOP is shown on the enclosed Confidential Voting Instruction Card. The ESOP generally states that if you do not direct the ESOP Trustee how to vote the Shares allocated to your account, such Shares, as well as unallocated Shares held under the ESOP, will be voted by the ESOP Trustee, to the extent consistent with its fiduciary duties, in a manner calculated to most accurately reflect the instructions received from other participants regarding allocated Shares. The ESOP Trustee's fiduciary duties require it to vote any shares as to which it receives no voting instructions, as well as any unallocated Shares, in a manner determined by it to be prudent and solely in the interest of the participants and beneficiaries. To be considered by the ESOP Trustee in determining how to vote the Shares held by the ESOP trust, your voting instruction must be received by American Securities Transfer not later than April 24, 2000. Unanticipated Proposals. It is possible, although very unlikely, that proposals other than those specified on the Confidential Voting Instruction Card will be presented for shareholder action at the 2000 Annual Meeting of Shareholders. If this should happen, the ESOP Trustee will vote upon such matters in its discretion, or cause such matters to be voted upon in the discretion of the individuals named in any proxies executed by it. * * * * * Your voting instruction is very important. You are encouraged to review the enclosed materials carefully and to complete, sign and date the enclosed Confidential Voting Instruction Card to signify your direction to the ESOP Trustee. You should then seal the card in the enclosed envelope and return it -------------------------------------------------------------------- to American Securities Transfer. To direct the voting of Shares within the - ------------------------------- ESOP, the Confidential Voting Instruction Card must be received by American Securities Transfer no later than April 24, 2000. Please note that the voting instructions of individual participants are to be kept confidential by American Securities Transfer, who has been instructed not to disclose them to anyone at First Federal Savings Bank of Iowa or the Company. This memorandum is subject in its entirety to the information set forth in the enclosed Proxy Statement, which you are encouraged to read and study thoroughly. If you have questions regarding the terms of the ESOP or the voting procedure, please call Mr. C. Thomas Chalstrom at (515) 576-7531. Very truly yours, The ESOP Committee of First Federal Savings Bank of Iowa Enclosures NORTH CENTRAL BANCSHARES, INC. CONFIDENTIAL VOTING INSTRUCTION SOLICITED BY THE EMPLOYEE STOCK OWNERSHIP PLAN COMMITTEE OF NORTH CENTRAL BANCSHARES, INC. FOR THE FIRST FEDERAL SAVINGS BANK OF IOWA EMPLOYEE STOCK OWNERSHIP PLAN The undersigned participant, former participant or beneficiary of a deceased former participant in the First Federal Savings Bank of Iowa Employee Stock Ownership Plan (the "ESOP") hereby provides the voting instructions specified to the trustee of the ESOP (the "Trustee"), which instructions shall be taken into account by the Trustee in voting, in person, by limited or general power of attorney, or by proxy, the shares and fractional shares of common stock of North Central Bancshares, Inc. that are held by the Trustee, in its capacity as Trustee of the ESOP, as of March 13, 2000 at the 2000 Annual Meeting of Shareholders of North Central Bancshares, Inc. to be held on April 28, 2000 at 10:00 a.m., Central Time, at the Country Inn, located at 3259 5th Avenue South, Fort Dodge, Iowa, and at any adjournment or postponement thereof. As to the proposals listed on the reverse side, which are more particularly described in the Proxy Statement dated March 27, 2000, the Trustee will vote the common stock of North Central Bancshares, Inc. held by the ESOP trust to reflect the voting instructions on this Confidential Voting Instruction, in the manner described in the accompanying letter from the ESOP Committee dated March 27, 2000. RETURN THIS SHEET TO AMERICAN SECURITIES TRANSFER ON OR BEFORE APRIL 24, 2000. (Continued on the reverse side. Please complete, sign and date on the reverse side and promptly return in the enclosed postage-paid envelope.) The Board of Directors of North Central Bancshares, Inc. recommends a vote "FOR" all nominees in Proposal No. 1 and "FOR" Proposals No. 2 and No. 3. If this Confidential Voting Instruction is signed but no direction is given, this voting instruction sheet will be deemed to instruct votes "FOR" all nominees in Proposal No. 1, and "FOR" Proposals No. 2 and No. 3. The directions, if any, given in this Confidential Voting Instruction will be kept confidential from all directors, officers and employees of North Central Bancshares, Inc.
Please mark your votes like this [X] - ----------------------------------------------------------------------------------------------------------------------------------- 1. Election of two Directors for terms of three years each. FOR all nominees WITHHOLD as to all nominees Nominees: David M. Bradley and Robert H. Singer, Jr. (except as otherwise indicated) [_] [_] To withhold authority to vote FOR any individual nominee, write that nominee's name in the space provided:________________________________ - ----------------------------------------------------------------------------------------------------------------------------------- FOR AGAINST ABSTAIN - ----------------------------------------------------------------------------------------------------------------------------------- 2. Ratification of the appointment of McGladrey & Pullen, LLP as [_] [_] [_] independent auditors of North Central Bancshares, Inc. for the fiscal year ending December 31, 2000. - ------------------------------------------------------------------------------------------------------------------------------------ 3. Authorization of the Board of Directors, in its discretion, to [_] [_] [_] direct the vote of proxies upon such other business as may come before the Annual Meeting or any adjournment or postponement thereof or to cause such matters to be voted upon in the discretion of the individuals named in any proxies executed by the Trustee. - ------------------------------------------------------------------------------------------------------------------------------------
All proposals listed above in this Confidential Voting Instruction were proposed by North Central Bancshares, Inc. The undersigned hereby instructs the Trustee to vote in accordance with the voting instruction indicated above and hereby acknowledges receipt, prior to the execution of this Confidential Voting Instruction, of a Voting Instruction Letter, a Notice of Annual Meeting of Shareholders of North Central Bancshares, Inc., a Proxy Statement dated March 27, 2000 for the Annual Meeting and a 1999 Annual Report to Shareholders. Please sign and date below and return promptly in the enclosed postage-paid envelope. Your Confidential Voting Instruction must be received no later than April 24, 2000. Date ----------------------------------------------- Signature ----------------------------------------------- Signature of participant, former participant or designated beneficiary of deceased former participant. Please sign name exactly as it appears herein. When signing as attorney, executor, administrator, trustee or guardian, please give your full title as such. [LETTERHEAD OF FIRST FEDERAL SAVINGS BANK OF IOWA] March 27, 2000 To: All Participants in the First Federal Savings Bank of Iowa Employees' Savings and Profit Sharing Plan and Trust (the "401(k) Plan") Re: Annual Meeting of Shareholders to be held on April 28, 2000 ----------------------------------------------------------- As you have been advised, the 401(k) Plan of the First Federal Savings Bank of Iowa (the "Bank") contains an investment alternative to purchase stock of the Bank's parent company, North Central Bancshares, Inc. (the "Company") using funds from your 401(k) Plan account (the "401(k) Plan Stock Fund"). These shares are held by The Bank of New York, as trustee (the "Trustee") for the 401(k) Plan. Interests in shares that you have purchased in the 401(k) Plan Stock Fund are being held by the Trustee for your benefit. The 401(k) Plan allows participants (including former participants and beneficiaries) to have certain voting rights at the Company's shareholder meetings. In connection with the Annual Meeting of Shareholders of the Company to be held on April 28, 2000, enclosed are the following documents: 1. Confidential Voting Instruction Card; 2. Proxy Statement dated March 27, 2000, including a Notice of Annual Meeting of Shareholders; and 3. a postage-paid return envelope addressed to American Securities Transfer, Incorporated ("American Securities Transfer"). American Securities Transfer is the Confidential Voting Instruction tabulator for the 401(k) Plan. As a participant in the 401(k) Plan, you have the right to direct the voting of your shares in the 401(k) Plan Stock Fund as of March 13, 2000, the record date for the Annual Meeting ("Record Date"), on the proposals to be voted by the Company's shareholders. Your rights as a participant in the 401(k) Plan will vary depending on whether the matter being voted on is an "Anticipated Proposal" or an "Unanticipated Proposal." Anticipated Proposals. In general, 401(k) Plan participants have the right to direct how their shares in the 401(k) Plan Stock Fund are to be voted. The Named Fiduciary of the 401(k) Plan ("Named Fiduciary") will direct the Trustee to vote FOR and AGAINST each proposal specified on the Confidential Voting Instruction Card in the same proportions as instructions to cast votes FOR and AGAINST such proposal are given by 401(k) Plan participants entitled to give voting instructions. The instructions given by each 401(k) Plan participant will be weighted according to the value of his or her respective interest in the 401(k) Plan Stock Fund as of the Record Date. For purposes of the 401(k) Plan, if you ABSTAIN as to a proposal, or if you do not return your Confidential Voting Instruction Card for the 401(k) Plan to American Securities Transfer by April 24, 2000, your instructions will not be counted. If you do not have any shares of Company stock allocated to your 401(k) Plan Stock Fund as of the Record Date, there will be no Confidential Voting Instruction Card for the 401(k) Plan enclosed with this letter. Unanticipated Proposals. It is possible, although very unlikely, that proposals other than those specified on the Confidential Voting Instruction Card will be presented for shareholder action at the 2000 Annual Meeting of Shareholders. If this should happen, the Named Fiduciary will direct the Trustee how to vote on such matters in the Named Fiduciary's discretion, or cause such matters to be voted upon in the discretion of the individuals named in any proxies executed by the Trustee at the Named Fiduciary's discretion. * * * * * Your voting instruction is very important. You are encouraged to review the enclosed material carefully and to complete, sign and date the enclosed Confidential Voting Instruction Card to signify your direction to the Named Fiduciary. You should then seal the completed card in the enclosed envelope and -------------------------------------------------------------------- return it directly to American Securities Transfer using the postage-paid return - -------------------------------------------------------------------------------- envelope provided. The Confidential Voting Instruction Card must be received by - ----------------- American Securities Transfer no later than April 24, 2000. Please note that the voting instructions of individual participants are to be kept confidential by American Securities Transfer and the Trustee, who have been instructed not to disclose them to anyone at the Bank or the Company. This memorandum is subject in its entirety to the information set forth in the enclosed Proxy Statement, which you are encouraged to read and study thoroughly. If you have questions regarding the terms of the 401(k) Plan or the voting procedure, please call Mr. C. Thomas Chalstrom at (515) 576-7531. Very truly yours, The Personnel and Compensation Committee of First Federal Savings Bank of Iowa Enclosures NORTH CENTRAL BANCSHARES, INC. CONFIDENTIAL VOTING INSTRUCTION SOLICITED BY THE PERSONNEL AND COMPENSATION COMMITTEE OF NORTH CENTRAL BANCSHARES, INC. FOR THE FIRST FEDERAL SAVINGS BANK OF IOWA EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN AND TRUST The undersigned participant, former participant or beneficiary of a deceased former participant in the First Federal Savings Bank of Iowa Employees' Savings and Profit Sharing Plan and Trust (the "401(k) Plan") hereby provides the voting instructions specified to the Named Fiduciary of the 401(k) Plan (the "Named Fiduciary"), which instructions shall be taken into account by the Named Fiduciary in directing the Trustee of the 401(k) Plan ("Trustee") in voting, in person, by limited or general power of attorney, or by proxy, the shares and fractional shares of common stock of North Central Bancshares, Inc. that are held by the Trustee, in its capacity as Trustee of the 401(k) Plan, as of March 13, 2000 at the 2000 Annual Meeting of Shareholders of North Central Bancshares, Inc. to be held on April 28, 2000 at 10:00 a.m., Central Time, at the Country Inn, located at 3259 5th Avenue South, Fort Dodge, Iowa, and at any adjournment or postponement thereof. As to the proposals listed on the reverse side, which are more particularly described in the Proxy Statement dated March 27, 2000, the Trustee will vote the common stock of North Central Bancshares, Inc. held by the 401(k) Plan trust to reflect the voting instructions on this Confidential Voting Instruction, in the manner described in the accompanying letter from the Personnel and Compensation Committee dated March 27, 2000. RETURN THIS SHEET TO AMERICAN SECURITIES TRANSFER ON OR BEFORE APRIL 24, 2000. (Continued on the reverse side. Please complete, sign and date on the reverse side and promptly return in the enclosed postage-paid envelope.) The Board of Directors of North Central Bancshares, Inc. recommends a vote "FOR" all nominees in Proposal No. 1 and "FOR" Proposals No. 2 and No. 3. If this Confidential Voting Instruction is signed but no direction is given, this voting instruction sheet will be deemed to instruct votes "FOR" all nominees in Proposal No. 1, and "FOR" Proposals No. 2 and No. 3. The directions, if any, given in this Confidential Voting Instruction will be kept confidential from all directors, officers and employees of North Central Bancshares, Inc.
Please mark your votes like this [X] - ------------------------------------------------------------------------------------------------------------------------------------ 1. Election of two Directors for terms of three years each. FOR all nominees WITHHOLD as to all nominees Nominees: David M. Bradley and Robert H. Singer, Jr. (except as otherwise indicated) [_] [_] To withhold authority to vote FOR any individual nominee, write that nominee's name in the space provided:_______________________________ - ------------------------------------------------------------------------------------------------------------------------------------ FOR AGAINST ABSTAIN - ------------------------------------------------------------------------------------------------------------------------------------ 2. Ratification of the appointment of McGladrey & Pullen, LLP as [_] [_] [_] independent auditors of North Central Bancshares, Inc. for the fiscal year ending December 31, 2000. - ------------------------------------------------------------------------------------------------------------------------------------ 3. Authorization of the Board of Directors, in its discretion, to [_] [_] [_] direct the vote of proxies upon such other business as may come before the Annual Meeting or any adjournment or postponement thereof or to cause such matters to be voted upon in the discretion of the individuals named in any proxies executed by the Trustee. - ------------------------------------------------------------------------------------------------------------------------------------
All proposals listed above in this Confidential Voting Instruction were proposed by North Central Bancshares, Inc. The undersigned hereby instructs Named Fiduciary to direct the Trustee to vote in accordance with the voting instruction indicated above and hereby acknowledges receipt, prior to the execution of this Confidential Voting Instruction, of a Voting Instruction Letter, a Notice of Annual Meeting of Shareholders of North Central Bancshares, Inc., a Proxy Statement dated March 27, 2000 for the Annual Meeting and a 1999 Annual Report to Shareholders. Please sign and date below and return promptly in the enclosed postage-paid envelope. Your Confidential Voting Instruction must be received no later than April 24, 2000. Date ------------------------------------------------------- Signature ------------------------------------------------------- Signature of participant, former participant or designated beneficiary of deceased former participant. Please sign name exactly as it appears herein. When signing as attorney, executor, administrator, trustee or guardian, please give your full title as such. EX-99.2 6 PRESS RELEASE DATED OCTOBER 29, 1999 Exhibit 99.2 Press Release PRESS RELEASE October 29, 1999 For further information contact: David M. Bradley Chairman, President and Chief Executive Officer North Central Bancshares, Inc. 825 Central Avenue Fort Dodge, Iowa 50501 515-576-7531 NORTH CENTRAL BANCSHARES, INC. ANNOUNCES STOCK REPURCHASE PROGRAM Fort Dodge, Iowa, October 29, 1999 - North Central Bancshares, Inc. (Nasdaq: "FFFD") (the "Company"), the holding company for First Federal Savings Bank of Iowa, announced that it will commence a stock repurchase program beginning on or about November 4, 1999. The program authorizes the Company to repurchase up to 6.36% or 150,000 shares of its 2,357,242 outstanding shares of common stock during the next twelve months. The repurchases will be made from time to time, in open market transactions, at the discretion of management. North Central Bancshares, Inc., with over $367 million in assets, is the holding company for First Federal Savings Bank of Iowa, a federally chartered stock savings bank. First Federal is a community-oriented institution serving Iowa through 8 full service locations in Fort Dodge, Nevada, Ames, Burlington, Mt. Pleasant, and Perry, Iowa. First Federal's deposits are insured by the Federal Deposit Insurance Corporation. EX-99.3 7 PRESS RELEASE DATED NOVEMBER 19, 1999 Exhibit 99.3 Press Release PRESS RELEASE November 19, 1999 For further information contact: David M. Bradley Chairman, President & Chief Executive Officer North Central Bancshares, Inc. 825 Central Avenue Fort Dodge, Iowa 50501 515-576-7531 NORTH CENTRAL BANCSHARES, INC. DECLARES DIVIDEND David M. Bradley, Chairman, President and Chief Executive Officer of North Central Bancshares, Inc. (the "Company") announced today that the Company declared a regular quarterly cash dividend of $0.10 per share on the Company's common stock for the fiscal quarter ended December 31, 1999. The dividend will be payable to all stockholders of record as of December 20, 1999 and will be paid on January 6, 2000. North Central Bancshares, Inc. serves north central and southeastern Iowa at 8 full service locations in Fort Dodge, Nevada, Ames, Burlington, Mount Pleasant and Perry, Iowa through its wholly-owned subsidiary, First Federal Savings Bank of Iowa, headquartered in Fort Dodge, Iowa. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. The Company's stock is traded on The Nasdaq National Market under the symbol "FFFD". EX-99.4 8 PRESS RELEASE DATED JANUARY 18, 2000 Exhibit 99.4 Press Release PRESS RELEASE January 18,2000 For further information contact: David M. Bradley Chairman, President and Chief Executive Officer North Central Bancshares, Inc. 825 Central Avenue PO Box 1237 Fort Dodge, Iowa 50501 515-576-7531 NORTH CENTRAL BANCSHARES, INC. ANNOUNCES FOURTH QUARTER AND YEAR END 1999 EARNINGS (Nasdaq: FFFD) Fort Dodge, Iowa -- North Central Bancshares, Inc. (the "Company"), the holding company for First Federal Savings Bank of Iowa (the "Bank"), announced today that the Company earned $0.43 diluted earnings per share for the fourth quarter of 1999, compared to diluted earnings per share of $0.36 for the fourth quarter of 1998, an increase of 19.4%. In dollars, the Company earned $981,000 for the fourth quarter of 1999, compared to $1,089,000 for the fourth quarter of 1998. For the year ended December 31, 1999, the Company's net earnings were $4.2 million, or diluted earnings per share of $1.60, as compared to $4.4 million, or diluted earnings per share of $1.40, for the corresponding period a year ago, an increase in diluted earnings per share of 14.3%. Total assets at December 31, 1999 were $367.4 million as compared to $336.7 million at December 31, 1998. The increase in assets resulted primarily from increases in loans and premises and equipment, offset by a decrease in cash. Cash decreased $3.1 million, or 19.0%, from $15.6 million at December 31, 1998 to $12.7 million at December 31, 1999. Loans increased by $32.8 million, or 12.9 %, to $286.8 million at December 31, 1999 from $254.0 million at December 31, 1998. Premises and equipment increased $1.7 million, or 48.1%, to $5.4 million at December 31, 1999 from $3.6 million at December 31, 1998. Deposits increased $24.3 million, or 9.9%, to $271.0 million at December 31, 1999 from $246.7 million at December 31, 1998. Other borrowed funds increased $16.9 million, or 43.5%, to $55.7 million at December 31, 1999 from $38.8 million at December 31, 1998. On January 30, 1998, the Bank completed the acquisition of Valley Financial Corp., headquartered in Burlington, Iowa. The acquisition resulted in the merger of Valley Financial's wholly owned subsidiary, Valley Savings Bank, FSB, into First Federal Savings Bank of Iowa. Valley Savings was a federally-charted stock savings bank with three branch offices located in southeastern Iowa, with assets of approximately $110 million. The acquisition was accounted for as a purchase transaction and therefore, the operating results of the former offices of Valley Savings Bank are included in the 1998 operating results of the Company only from the date of acquisition through December 31, 1998. Therefore, the comparison between periods is significantly impacted by this acquisition. - MORE - The unaudited pro forma consolidated statement of income for the year ended December 31, 1998, presented in this press release is based on the historical financial statements of the Company and Valley Financial and was prepared as if the acquisition had occurred as of the beginning of the period for the purposes of the combined consolidated statement of income. The pro forma financial statement of income is not necessarily indicative of the results of operations that might have occurred had the acquisition taken place at the beginning of the period, or to project the Company' results of operations at any future date or for any future period. Nonperforming assets were 0.20% of total assets as of December 31, 1999 compared to 0.34% of total assets as of December 31, 1998. The allowance for loan losses was $2.8 million or 0.95% of total loans at December 31, 1999, compared to $2.7 million or 1.03% of total loans at December 31, 1998. The net interest spread for the year ended December 31, 1999 of 2.86% was increased from the pro forma net interest spread of 2.81% for the year ended December 31, 1998. The net interest margin for the year ended December 31, 1999 of 3.35% was a decrease from the pro forma net interest margin of 3.46% for the year ended December 31, 1998. Net interest income for the year ended December 31, 1999 was $11.0 million, compared to pro forma net interest income of $10.9 million for the corresponding period a year ago. The Bank's provision for loan losses was $120,000 for the year ended December 31, 1999, compared to a pro forma provision for loan loss of $210,000 for the corresponding period a year ago. 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 conditions, the volume and type of loans in the Bank's portfolio, and other factors related to the collectibility of the Bank's loan portfolio. Stockholders' equity was $38.1 million at December 31, 1999, compared to $48.2 million at December 31, 1998. Book value, or stockholders' equity, per share at December 31, 1999 was $16.86 and was $16.26 at December 31, 1998. The ratio of stockholders' equity to total assets was 10.4% at December 31, 1999, as compared to 14.3% for the corresponding date in 1998. Stockholders of record on December 20, 1999, received a quarterly cash dividend of $0.10 per share on January 6, 2000. The Bank opened a newly constructed 3,000 square foot branch office on June 1, 1999 in Perry, Iowa in Dallas County. Also on October 1, 1999, the Bank began construction on a new 8,000 square foot branch office in Ames, Iowa. When completed during the summer of 2000, the Bank's current Ames branch office will relocate to this new site. North Central Bancshares, Inc. serves north central and southeastern Iowa at 8 full service locations in Fort Dodge, Nevada, Ames, Perry, Burlington and Mount Pleasant, Iowa through its wholly-owned subsidiary, First Federal Savings Bank of Iowa, headquartered in Fort Dodge, Iowa. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. The Company's stock is traded on The Nasdaq National Market under the symbol "FFFD". For more information contact: David M. Bradley, President, 515-576-7531 FINANCIAL HIGHLIGHTS OF NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Financial Condition
(Dollars in Thousands, except per share and share data) December 31, 1999 December 31, 1998 ------------------ ------------------ Assets Cash and cash equivalents $ 12,669 $ 15,637 Securities available for sale 49,693 49,883 Loans (net of allowance of loan loss of $2.8 million and $2.7 million, respectively) 286,838 254,032 Goodwill 5,915 6,388 Other assets 12,318 10,750 ----------- ----------- Total Assets $ 367,433 $ 336,690 ========== ========== Liabilities Deposits $ 271,031 $ 246,690 Other borrowed funds 55,715 38,832 Other liabilities 2,560 2,961 ---------- ---------- Total Liabilities 329,306 288,483 Stockholders' Equity 38,127 48,207 ---------- ---------- Total Liabilities and Stockholders' Equity $ 367,433 $ 336,690 ========== ========== Stockholders' equity to total assets 10.38% 14.32% ========== ========== Book value per share $ 16.86 $ 16.26 ========== ========== Total shares outstanding 2,261,742 2,964,449 ========== ==========
Condensed Consolidated Statements of Income (Dollars in Thousands, except per share data)
For the Three Months For the Year Ended December 31, Ended December 31, 1999 1998 1999 1998 ------- ------- -------- ------- Interest income $6,455 $6,041 $24,556 $23,602 Interest expense 3,778 3,387 13,604 12,869 ------ ------ ------- ------- Net interest income 2,677 2,654 10,952 10,733 Provision for loan loss 30 30 120 210 ------ ------ ------- ------- Net interest income after provision for loan loss 2,647 2,624 10,832 10,523 Noninterest income 959 1,125 4,002 3,864 Gain on the sale of securities available for sale -- -- 61 51 Noninterest expense 2,115 2,055 8,454 7,572 Income before income taxes ------ ------ ------- ------- 1,491 1,694 6,441 6,866 Income taxes 510 605 2,241 2,481 ------ ------ ------- ------- Net income $ 981 $1,089 $ 4,200 $ 4,385 ====== ====== ======= ======= Basic earnings per share $ 0.44 $ 0.37 $1.63 $1.44 ====== ====== ======= ======= Diluted earnings per share $ 0.43 $ 0.36 $1.60 $1.40 ====== ====== ======= =======
Selected Financial Ratios
For the Three Months For the Year Ended December 31, Ended December 31, 1999 1998 1999 1998 -------- -------- -------- --------- Performance ratios: Actual Net interest spread 2.79% 2.80% 2.86% 2.81% Net interest margin 3.11% 3.38% 3.35% 3.50% Return on average assets 1.07% 1.30% 1.21% 1.35% Return on average equity 10.07% 8.77% 9.51% 8.73% Efficiency ratio (noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income) 58.17% 54.39% 56.30% 51.69%
Condensed Consolidated Statements of Income
For the Year Ended December 31, Actual Pro Forma* 1999 1998 -------- --------- Interest income $24,556 $24,224 Interest expense 13,604 13,319 ------- ------- Net interest income 10,952 10,905 Provision for loan loss 120 210 ------- ------- Net interest income after provision for loan loss 10,832 10,695 Noninterest income 4,002 3,917 Gain on the sale of securities available for sale 61 51 Noninterest expense 8,454 7,978 ------- ------- Income before income taxes 6,441 6,685 Income taxes 2,241 2,440 ------- ------- Net income $ 4,200 $ 4,245 ======= =======
*See explanatory note below. Selected Financial Ratios
For the Year Ended December 31, Actual Pro Forma * 1999 1998 ------- ------- Performance ratios Net interest spread 2.86% 2.81% Net interest margin 3.35% 3.46% Return on average assets 1.21% 1.27% Return on average equity 9.51% 8.45% Efficiency ratio (noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income) 56.30% 53.64%
*See explanatory note below. *Pro Forma Consolidated Condensed Statement of Income (Unaudited) The above unaudited pro forma consolidated statement of income presented is based on the historical financial statements of the Company and Valley Financial. The unaudited pro forma consolidated statement of income for the year ended December 31, 1998 was prepared as if the acquisition had occurred as of the beginning of the respective period for purposes of the combined consolidated statement of income. The pro forma financial statements are not necessarily indicative of the results of operations that might have occurred had the acquisition taken place at the beginning of the period, or to project the Company' results of operations at any future date or for any future period. -----END PRIVACY-ENHANCED MESSAGE-----