-----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, WqvX3otpgifqvoNdzziZPLex+pUUYSS1FQ3fDMXpWHt0T0ms5jF+hiKlufjin8Cu 3S+RBxnWIteEKo7z+/b7Mw== 0000950131-98-002240.txt : 19980401 0000950131-98-002240.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950131-98-002240 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980130 ITEM INFORMATION: FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH CENTRAL BANCSHARES INC CENTRAL INDEX KEY: 0001005188 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 421449849 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-27672 FILM NUMBER: 98582119 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 8-K/A 1 AMENDMENT #1 TO FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K/A AMENDMENT NO. 1 TO CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) January 30, 1998 NORTH CENTRAL BANCSHARES, INC. (Exact name of Registrant as specified in its Charter) IOWA 0-27672 42-1449849 (State or other jurisdiction (Commission File No.) (IRS Employer of incorporation) Identification Number) FIRST FEDERAL SAVINGS BANK OF IOWA 825 CENTRAL AVENUE, FORT DODGE, IOWA 50501 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 515-576-7531 N/A - ----------------------------------------------------------------------------- (Former name or former address, if changed since last report) ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS As of the close of business on January 30, 1998 (the "Effective Time"), North Central Bancshares, Inc., an Iowa corporation ("North Central"), and its wholly owned subsidiary, First Federal Savings Bank of Iowa (formerly known as First Federal Savings Bank of Fort Dodge), a federally chartered stock savings bank ("First Federal"), completed the acquisition (the "Acquisition") of Valley Financial Corp., an Iowa corporation ("Valley Financial") pursuant to the Agreement and Plan of Merger, dated as of September 18, 1997, by and among North Central, First Federal and Valley Financial (the "Merger Agreement"). This form 8-K/A includes as Exhibits certain financial information required under Item 7 which was not contained in the previously filed Form 8-K dated January 30, 1998. (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. Financial statements for Valley Financial Corp. as of and for the years ended December 31, 1996 and 1995, are attached hereto as Exhibit 99.1 are incorporated herein by reference. Unaudited Statement of Financial Condition for Valley Financial Corp. as of September 30, 1997. Unaudited Statements of Income and Cash Flows for Valley Financial Corp. for the nine months ended September 30, 1997 and 1996. (b) UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION Unaudited pro forma combined financial information consisting of: Unaudited Pro Forma Combined Consolidated Balance Sheet as of September 30, 1997 and related notes are herein attached as exhibit 99.2 Unaudited Pro Forma Combined Consolidated Statements of Income for the nine months ended September 30, 1997 and the Unaudited Pro Forma Combined Consolidated Statements of Income for the year ended December 31, 1996 and the related notes to the above mentioned Statements of Income are herein attached at exhibit 99.2 (c) EXHIBITS 2.1 Agreement and Plan of Merger, dated as of September 18, 1997, by and among North Central Bancshares, Inc., First Federal Savings Bank of Fort Dodge and Valley Financial Corp. (incorporated by reference from the Current Report on Form 8-K filed by the registrant on September 26, 1997. 23.1 Consent of Marti, Lynch & Company dated March 27, 1998. 99.1 Financial statements for Valley Financial Corp. as of and for the years ended December 31, 1996 and 1995. Valley Financial Corp. Unaudited Statement of Financial Condition as of September 30, 1997 and Unaudited Statements of Income and Cash Flows for the nine months ended September 30, 1997 and 1996. 99.2 North Central Bancshares, Inc. and Valley Financial Corp. Unaudited Pro Forma Combined Consolidated Balance Sheet as of September 30, 1997 and Unaudited Pro Forma Combined Consolidated Statements of Income for the year ended December 31, 1996. CAUTIONARY STATEMENT FOR PURPOSED OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Current Report and other written and oral statements made by or on behalf of North Central contain, or may contain, certain "forward-looking statements," including statements concerning plans, objectives and future events or performance, and other statements which are other than statements of historical fact. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, the following: (i) failure to fully realize or to realize within the expected time frame expected cost savings from the Merger; (ii) lower than expected income or revenues following the Merger, or higher than expected operating costs; (iii) a significant increase in competitive pressure in the banking and financial services industry; (iv) business disruption related to the Merger; (v) greater than expected costs or difficulties related to the integration of the Valley Financial employees into North Central; (vi) litigation costs and delays caused by litigation; (vii) unanticipated regulatory constraints arising from the Merger; (viii) reduction in interest margins due to changes in the interest rate environment; (ix) poorer than expected general economic conditions, including acquisition and growth opportunities, in the states which North Central does business; (x) legislation or regulatory changes which adversely affect the businesses in which North Central is engaged; and (xi) other unanticipated occurrences which increase the costs related to the Merger or decrease the expected financial benefits of the Merger. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. NORTH CENTRAL BANCSHARES, INC. Date: March 27, 1998 By: /s/ David M. Bradley ------------------- ------------------------------------- David M. Bradley, Chairman, President and Chief Executive Officer EX-23.1 2 CONSENT OF MARTI, LYNCH & COMPANY EXHIBIT 23.1 Exhibit 23.1 Consent of Marti, Lynch & Company CONSENT OF MARTI, LYNCH & COMPANY The Board of Directors North Central Bancshares, Inc. We consent to the incorporation by reference of our report dated February 7, 1997, relating to the consolidated statements of financial condition of Valley Financial Corp. as of December 31, 1996 and 1995 and the related statements of operations, stockholders' equity and cash flows for the years then ended, which report appears in the Form 8-K/A filed on or about March 31, 1998 by North Central Bancshares, Inc. related to the acquisition of Valley Financial Corp. by North Central Bancshares, Inc., in the following Registration Statement of North Central Bancshares, Inc.: No. 333-33089 on Form S-8. /s/ Marti, Lynch & Company ----------------------------- Marti, Lynch & Company Burlington, Iowa March 27, 1998 EX-99.1 3 FINANCIAL STATEMENT OF VALLEY FINANCIAL CORP. EXHIBIT 99.1 Exhibit 99.1 Financial Statements for Valley Financial Corp. CONTENTS INDEPENDENT AUDITOR'S REPORT 1 FINANCIAL STATEMENTS Consolidated Statements of Financial Condition 2 Consolidated Statements of Operations 3 Consolidated Statements of Stockholders' Equity 4 Consolidated Statements of Cash Flow 5 Notes to Consolidated Financial Statements 7 INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders VALLEY FINANCIAL CORP. We have audited the accompanying consolidated statements of financial condition of Valley Financial Corp. and its wholly-owned subsidiary, Valley Savings Bank, FSB, as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of Valley Financial Corp.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 Valley Financial Corp. and its wholly-owned subsidiary, Valley Savings Bank, FSB, as of December 31, 1996 and 1995 and the consolidated results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles. February 7, 1997 /s/ Marti, Lynch & Company ----------------------------- Marti, Lynch & Company -1- VALLEY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 1996 and 1995
1996 1995 -------------- -------------- ASSETS: Cash and due from banks $ 5,929,792 $ 5,170,744 -------------- -------------- Investment securities: Securities held-to-maturity (fair value of $691,800 in 1996 and 1995) 691,800 691,800 Securities available-for-sale, at fair value 27,914,542 19,978,099 -------------- -------------- Total investment securities (Notes 1, 2 & 3) 28,606,342 20,669,899 -------------- -------------- Mortgage-backed securities: Securities available-for-sale, at fair value 8,423,607 6,553,072 -------------- -------------- Total mortgage-backed securities (Notes 1 & 2) 8,423,607 6,553,072 -------------- -------------- Inventory of loans, at cost -- 81,958 Loans receivable, net (Notes 1, 4 & 5) 61,180,347 60,447,448 Accounts receivable - loans sold (Notes 1 & 15) 128,579 252,152 Accrued interest receivable 842,503 703,052 Foreclosed real estate, net 3,052 24,541 Premises and equipment (Notes 1 & 7) 1,151,430 1,212,396 Deferred tax asset (Notes 1 & 11) 17,980 -- Other assets 143,889 124,470 -------------- -------------- TOTAL ASSETS $ 106,427,521 $ 95,239,732 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY: Liabilities: Deposits (Notes 1 & 8) $ 97,554,754 $ 86,520,234 Borrowed funds (Note 9) 500,000 550,000 Advances from borrowers for taxes and insurance 244,580 263,338 Deferred tax liability (Notes 1 & 11) -- 74,513 Accrued expenses and other liabilities 1,075,032 983,548 -------------- -------------- Total liabilities 99,374,366 88,391,633 -------------- -------------- Commitments and contingencies (Note 13) Stockholders' equity: (Note 12) Common stock, $1 par value, 100,000 shares authorized; 31,900 issued; 28,050 outstanding 1996; 29,050 outstanding 1995 31,900 31,900 Additional paid-in capital 2,979,900 2,979,900 Retained earnings, substantially restricted (Note 12) 5,220,601 4,554,320 Unrealized gain on securities available-for-sale, net of applicable deferred income taxes (Note 2) (50,546) 85,679 Less cost of shares acquired for the treasury: 1996, 3,850 shares; 1995, 2,850 shares (1,128,700) (803,700) -------------- -------------- Total stockholders' equity 7,053,155 6,848,099 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 106,427,521 $ 95,239,732 ============== ============== See notes to consolidated financial statements.
-2- VALLEY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1996 and 1995
1996 1995 -------------- ------------ INTEREST INCOME: Loans receivable: First-mortgage loans $ 4,787,517 $ 4,606,246 Consumer and other loans 676,537 670,950 Investment securities 1,568,599 1,335,204 Mortgage-backed and related securities 368,273 236,916 Other interest-earning assets 93,584 113,760 -------------- ------------- Total interest income 7,494,510 6,963,076 -------------- ------------- INTEREST EXPENSE: Deposits (Note 8) 4,401,078 3,834,712 Borrowed funds (Note 9) 70,087 79,113 -------------- ------------- Total interest expense 4,471,165 3,913,825 -------------- ------------- Net interest income 3,023,345 3,049,251 Provision for loan losses (Notes 1 & 4) (6,000) (14,000) -------------- ------------- Net interest income after provision for loan losses 3,017,345 3,035,251 -------------- ------------- NON-INTEREST INCOME: Net realized gains on sales of available-for-sale securities (Note 2) 15,970 21,045 Loan origination and commitment fees (Note 1) 391,088 322,239 Service charges and fees 443,973 403,475 Other (Note 6) 219,446 204,983 -------------- ------------- Total non-interest income 1,070,477 951,742 -------------- ------------- NON-INTEREST EXPENSE: General and administrative: Compensation and benefits (Note 10) 1,252,330 1,119,579 Occupancy and equipment (Notes 7 & 14) 300,079 300,472 Deposit insurance premiums (Note 19) 754,180 189,940 Loss on foreclosed real estate 5,899 11,881 Other (Note 6) 775,307 778,542 -------------- ------------- Total non-interest expense 3,087,795 2,400,414 -------------- ------------- Net non-interest expense (2,017,318) (1,448,672) -------------- ------------- Income Before Income Taxes 1,000,027 1,586,579 Income tax expense (Notes 1 & 11) 333,746 552,988 -------------- ------------- NET INCOME $ 666,281 $ 1,033,591 ============== ============= NET INCOME PER SHARE OF COMMON STOCK $ 23.48 $ 35.58 ============== =============
See notes to consolidated financial statements. -3- VALLEY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1996 and 1995
Net Unrealized Appreciation (Depreciation) on Securities Total Additional Retained Available- Stockholders' Capital Stock Paid-In Capital Earnings Treasury Stock For-Sale Equity --------------- ---------------- ---------------- ---------------- ---------------- ---------------- Balances at December 31, 1994 $ 31,900 $ 2,979,900 $ 3,520,729 $ (803,700) $ (365,437) $ 5,363,392 Net income for the year ended December 31, 1995 -- -- 1,033,591 -- -- 1,033,591 Change in net unrealized appreciation on securities available-for-sale, net of applicable deferred taxes of $52,513 -- -- -- -- 451,116 451,116 --------------- ---------------- ---------------- ---------------- ---------------- ---------------- Balances at December 31, 1995 31,900 2,979,900 4,554,320 (803,700) 85,679 6,848,099 Net income for the year ended December 31, 1996 -- -- 666,281 -- -- 666,281 Purchase of treasury stock -- -- -- (325,000) -- (325,000) Change in net unrealized depreciation on securities available-for-sale, net of applicable deferred taxes of $30,980 -- -- -- -- (136,225) (136,225) --------------- ---------------- ---------------- ---------------- ---------------- ---------------- BALANCES AT DECEMBER 31, 1996 $ 31,900 $ 2,979,900 $ 5,220,601 $ (1,128,700) $ (50,546) $ 7,053,155 =============== ================ ================ ================ ================ ================
See notes to consolidated financial statements. -4- VALLEY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996 and 1995
1996 1995 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 666,281 $ 1,033,591 -------------- -------------- Adjustments to reconcile net income to net cash provided by operating activities: Amortization of excess of cost over fair value of net assets acquired - goodwill 4,071 4,071 Deferred loan origination fees (355) (626) Premiums and discounts on loans -- (8,161) Amortization of premiums and discounts on investment securities 45,797 28,223 FHLB stock dividends included in income -- (13,600) Provision for loan losses 6,000 2,000 Net gain on sales of investment and mortgage-backed securities (15,970) (21,045) Depreciation of premises and equipment 81,710 82,223 (Increase) Decrease in: Deferred taxes (9,000) 54,000 Prepaid expenses and other assets 6,275 (15,349) Accrued interest receivable (139,451) (42,023) Accounts receivable - loans sold 123,573 (51,865) Income taxes receivable (29,765) 11,223 Inventory of loans 81,958 (81,958) Increase (Decrease) in: Accrued expenses and other liabilities 94,190 92,889 Income taxes payable (2,706) (1,802) -------------- -------------- Total adjustments 246,327 38,200 -------------- -------------- Net Cash Provided by Operating Activities 912,608 1,071,791 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of treasury stock (325,000) -- Expenditures for premises and equipment (20,744) (24,043) Loan originations and principal payment on loans (717,055) (4,228,182) Principal payments on mortgage-backed and related securities, net of discounts and premiums 1,304,575 785,385 Purchase of investment securities held-to-maturity -- (3,590,696) Purchase of investment securities available-for-sale (17,826,100) (2,017,924) Proceeds from sales of investment securities 250,000 515,390 Proceeds from maturities of invest securities available-for-sale 9,391,448 5,250,000 Proceeds from sales of mortgage-backed and related securities available-for-sale 1,171,663 683,409 Purchase of mortgage-backed securities available-for-sale (4,348,109) (1,293,846) -------------- -------------- Net Cash Used in Investing Activities (11,119,322) (3,920,507) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on bank loans (50,000) (1,800,000) Net increase in demand deposits, NOW accounts, passbook savings accounts and certificates of deposit 11,034,520 4,315,915 Net decrease in advance payments by borrowers for taxes and insurance (18,758) (1,748) -------------- -------------- Net Cash Provided by Financing Activities 10,965,762 2,514,167 -------------- -------------- NET INCREASE (DECREASE) IN CASH 759,048 (334,549) CASH AND DUE FROM BANKS, JANUARY 1 5,170,744 5,505,293 -------------- -------------- CASH AND DUE FROM BANKS, DECEMBER 31 $ 5,929,792 $ 5,170,744 ============== ==============
(Con't) -5- VALLEY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996 and 1995 (Continued)
1996 1995 -------------- -------------- SUPPLEMENTAL DISCLOSURES: Cash paid for: Interest on deposits, advances, and other borrowings $ 4,399,594 $ 3,782,125 Income taxes 375,217 498,901 Change in unrealized gain or loss on securities available-for-sale (219,718) 651,891 Deferred taxes applicable to investment securities available-for-sale 30,980 (52,513)
There are no cash equivalents included in the statements of cash flows. See notes to consolidated financial statements. -6- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-- Nature of Operations - Valley Savings Bank, FSB (the Bank) provides a full line of banking services, including commercial and real estate lending, and provides these services at three locations. The activities of Valley Services, Inc. are selling credit life insurance and acting as a broker in security transactions. Hearthstone Mortgage Company, Inc. is in the business of originating and selling mortgage loans in the secondary market. All operations are carried out from locations in eastern Iowa. Basis of Consolidation - The accompanying consolidated financial statements for 1996 include the accounts of Valley Savings Bank, FSB (the Bank), a wholly-owned subsidiary of Valley Financial Corp., and Hearthstone Mortgage Company, Inc. and Valley Services, Inc., wholly-owned subsidiaries of Valley Savings Bank, FSB. All material intercompany balances and transactions have been eliminated in consolidation. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. 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 local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgements about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowances for losses on loans and foreclosed real estate may change materially in the near term. Investment and Mortgage-Backed Securities - The Bank adopted Statement of Financial Accounting Standards (SFAS) 115 and classified some investment and mortgage-backed securities as available-for-sale at fair value. The net appreciation or depreciation after deferred taxes is recorded in stockholders' equity. Information relating to this is recorded in other notes to the financial statements. Investment Securities - Investment securities that management has the ability and intent to hold to maturity are classified as held-to-maturity and carried at cost, adjusted for amortization of premiums and accretion of discounts using methods approximating the interest method. Other marketable securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses, net of tax, on securities available-for-sale are reported as a net amount in a separate component of stockholders' equity until realized. Cost of securities sold is recognized using the specific identification method. Allowance for Losses - It is the policy of the Bank to provide valuation allowances for estimated losses on loans and real estate when a significant and permanent decline in value occurs. In providing valuation allowances, costs of holding real estate (including the cost of capital) are considered. -7- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued Allowance for Losses - Continued Major loans, real estate owned (including development projects), and major lending areas are reviewed periodically to determine potential problems at an early date. The Bank's experience has shown that foreclosures on loans result in some loss. Therefore, in addition to allowances for specific loans, the Bank makes provision for losses on properties based in part on experience and in part on prevailing market conditions. Additions to allowances are charged to earnings. Management evaluates the carrying value of such assets at least annually and the allowances are adjusted accordingly. While management uses the best information available in establishing the allowances for losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Deferred Profit on Sale of Real Estate - Profit on sale of real estate owned is deferred when the buyer's initial investment is not adequate for recognition of profit by the full accrual method. Savings Deposits - Savings deposits vary as to terms, with major differences being minimum balances required, maturity, interest rates and the provision for payment of interest. Mortgage-Backed Securities - Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Mortgage-backed securities held to maturity are carried at unpaid principal balances, adjusted for unamortized premiums and unearned discounts. Premiums and discounts are amortized using methods approximating the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Management intends and has the ability to hold such securities to maturity. Should any be sold, cost of securities sold is determined using the specific identification method. All mortgage-backed securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on mortgage-backed securities available-for-sale are recognized as direct increases or decreases in stockholders' equity. At December 31, 1996, the Bank had no outstanding commitments to sell securities. The market value of its mortgage-backed securities portfolio is disclosed in Note 2. Loans Receivable - Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, and net deferred loan-origination fees and 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. Discounts on consumer loans are recognized over the lives of the loans using methods that approximate the interest method. The allowance for loan losses is increased by charges to income and decreased 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, the estimated value of any underlying collateral, and current economic conditions. -8- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-- Continued Loans Receivable - Continued Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. 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 judgement, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. Loan-Origination Fees, Commitment Fees, and Related Costs - Loan fees are accounted for and in accordance with FASB Statement No. 91, Accounting For Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. 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. Commitment fees and costs relating to commitments, the likelihood of exercise of which is remote, are recognized over the commitment period on a straight-line basis. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield. Foreclosed Real Estate - Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. The historical average holding period for such properties is eighteen months. Premises and Equipment - Land is carried at cost. Bank premises, furniture and equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method. Mortgage Loans Funded For Sale - Mortgage loans funded for sale are carried at the amount of purchase commitment received from the buyer. All loans granted through Hearthstone Mortgage Company, Inc. have been pre-approved by the purchaser. Income Taxes - Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Net Income Per Share - Net income per share of common stock has been computed using the weighted average number of common shares outstanding (28,379 shares in 1996; 29,050 in 1995). -9- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 2: INVESTMENT SECURITIES-- The amortized cost and estimated market values of investments in securities are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gain Losses Value ----------- -------- -------- ----------- SECURITIES AVAILABLE-FOR-SALE: December 31, 1996: - ------------------ Bonds, notes and debentures at amortized cost: U.S. government and federal agencies $22,936,227 $ 66,461 $ 96,297 $22,906,391 State and local governments 4,500,092 59,511 40,297 4,519,306 Corporate debt securities 497,686 -- 8,841 488,845 Mortgage-backed securities 8,485,670 26,654 88,717 8,423,607 ----------- -------- -------- ----------- $36,419,675 $152,626 $234,152 $36,338,149 =========== ======== ======== =========== December 31, 1995: - ------------------ Bonds, notes and debentures at amortized cost: U.S. government and federal agencies $15,589,782 $108,962 $ 21,113 $15,677,631 State and local governments 2,992,274 70,731 14,837 3,048,168 Corporate debt securities 1,265,093 -- 12,793 1,252,300 Mortgage-backed securities 6,545,830 48,711 41,469 6,553,072 ----------- -------- -------- ----------- $26,392,979 $228,404 $ 90,212 $26,531,171 =========== ======== ======== =========== SECURITIES HELD-TO-MATURITY: December 31, 1996: - ------------------ Equity securities: Stock in Federal Home Loan Bank, at cost $ 691,800 $ -- $ -- $ 691,800 =========== ======== ======== =========== December 31, 1995: - ------------------ Equity securities: Stock in Federal Home Loan Bank, at cost $ 691,800 $ -- $ -- $ 691,800 =========== ======== ======== ===========
Gross realized gains on sales of securities available-for-sale were:
1996 1995 ------- ------- U.S. government & agency securities $ 9,277 $17,645 Mortgage-backed securities 6,693 3,400 ------- ------- $15,970 $21,045 ======= =======
-10- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 2: INVESTMENT SECURITIES--Continued Following is a summary of maturities of securities held-to-maturity and available-for-sale as of December 31, 1996, excluding the Federal Home Loan Bank stock. Mortgage-backed securities are not being allocated.
Securities Available-For-Sale ------------------------------- Amortized Cost Fair Value -------------- ----------- Amounts maturing: In one year or less $ 4,031,079 $ 4,043,049 After one year through five years 16,092,496 16,054,497 After five years through ten years 4,164,089 4,186,759 After ten years 3,646,341 3,630,237 ----------- ----------- 27,934,005 27,914,542 Mortgage-backed securities 8,485,670 8,423,607 ----------- ----------- $36,419,675 $36,338,149 =========== ===========
Included in investment securities are securities pledged with a market value of $2,485,100 and $1,991,749 for 1996 and 1995, respectively, to secure savings accounts. Also included in investment securities are securities with a carrying value of $997,071 and a market value of $991,406 for 1996, pledged to secure federal funds purchases. There were no purchases outstanding on December 31, 1996. NOTE 3: CAPITAL STOCK INVESTMENT-- The Bank is a member of the Federal Home Loan Bank system. As a member of this system, the Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank. No ready market exists for suck stock; however, any stock held in excess of the required balance is redeemable at par. The stock is recorded at cost. NOTE 4: LOANS RECEIVABLE-- The components of loans in the consolidated statements of financial condition were as follows:
1996 1995 ----------- ----------- Commercial $ 3,672,549 $ 3,711,132 Real estate construction 1,103,363 1,017,395 Commercial real estate 16,099,716 17,409,694 Residential real estate 36,882,423 34,622,002 Mobile homes 904,241 1,104,414 Consumer 3,043,750 3,112,690 ----------- ----------- 61,706,042 60,977,327 Allowance for loan losses (525,695) (529,879) ----------- ----------- $61,180,347 $60,447,448 =========== ===========
An analysis of the change in the allowance for losses follows:
1996 1995 ----------- ----------- Balance at January 1 $ 529,879 $ 620,265 Loans charged off (14,541) (110,595) Recoveries 4,357 6,209 ----------- ----------- Net loans charged off (10,184) (104,386) Provision for loan losses 6,000 14,000 ----------- ----------- Balance at December 31 $ 525,695 $ 529,879 =========== ===========
-11- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 4: LOANS RECEIVABLE--Continued In the ordinary course of business, the Bank has and expects to continue to have transactions, including borrowings, with its officers, directors, stockholders, and their affiliates. In the opinion of management, such transactions were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectibility or present any other unfavorable features to the Bank. Loans to such borrowers totaled $638,371 and $709,333 at December 31, 1996 and 1995, respectively. NOTE 5: LOAN SERVICING-- Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at December 31, 1996 and 1995, were $1,452,996 and $2,673,195, respectively. There were no custodial escrow balances in connection with the foregoing loan servicing at December 31, 1996 and 1995. NOTE 6: OTHER NON-INTEREST INCOME AND EXPENSE-- Other non-interest income and expense amounts are summarized as follows for the years ended December 31:
1996 1995 ---------------- ---------------- Other non-interest income: Office building rental $ 65,225 $ 65,364 Other 154,221 139,619 ---------------- ---------------- $ 219,446 $ 204,983 ================ ================ Other non-interest expense: Advertising and promotion $ 76,255 $ 73,731 Data processing 223,983 211,739 Professional fees 120,344 120,725 Printing, postage, stationery, and supplies 170,717 169,880 Telephone 29,623 31,996 Other 154,385 170,471 ---------------- ---------------- $ 775,307 $ 778,542 ================ ================
NOTE 7: PREMISES AND EQUIPMENT-- Premises and equipment at December 31 are summarized as follows:
1996 1995 ---------------- ---------------- Cost: Land $ 398,680 $ 398,680 Buildings 930,866 915,216 Furniture, fixtures & equipment 363,072 357,977 ---------------- ---------------- 1,692,618 1,671,873 Less accumulated depreciation 541,188 459,477 ---------------- ---------------- $ 1,151,430 $ 1,212,396 ================ ================ Depreciation $ 81,710 $ 82,223 ================ ================
-12- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 7: PREMISES AND EQUIPMENT--Continued Valley Savings Bank, FSB, leases out portions of its office facilities under several operating lease agreements. Rental income includes $65,224 and $65,364, respectively, for the years ended December 31, 1996 and 1995. The leased property is part of the buildings occupied by Valley Savings Bank, FSB; thus, the carrying amount and accumulated depreciation of the leased property is not easily segregated. The minimum future lease payments due to Valley Savings Bank, FSB, under these lease agreements are as follows:
December 31, Amount -------------- -------------- 1997 $ 32,853 1998 3,466 -------------- Total $ 36,319 ==============
NOTE 8: DEPOSITS-- The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $7,686,117 and $3,030,009 in 1996 and 1995, respectively. At December 31, 1996, the scheduled maturities of certificates of deposit are as follows:
1997 $ 13,318,727 1998 43,743,300 1999-2000 7,920,868 2001 and thereafter 4,086,139 --------------- $ 69,069,034 ===============
Interest expense on deposits for the years ended December 31 is summarized as follows:
1996 1995 ----------------- ----------------- Money market $ 337,505 $ 347,320 Passbook savings 264,260 279,289 NOW 190,655 170,783 Certificates of deposit: Over $100,000 335,351 189,599 Under $100,000 3,273,307 2,847,721 ----------------- ----------------- $ 4,401,078 $ 3,834,712 ================= =================
NOTE 9: BORROWED FUNDS-- Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB), advances are secured by all stock in the FHLB and qualifying first-mortgage loans. There were no advances from the FHLB for years ended December 31, 1996 and 1995. The Bank has a line of credit with the FHLB of $2,000,000 on December 31, 1996. Interest expense on advances from the FHLB for the years ended December 31, 1996 and 1995, was $27,111 and $9,658, respectively. Federal funds purchases usually mature within one to four days of the transaction date. The Bank has a secured line of credit of $892,000 on December 31, 1996, based on pledged securities as collateral for federal fund transactions. The Bank has pledged Federal Home Loan Bank securities to secure transactions of this nature. On December 31, -13- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 9: BORROWED FUNDS--Continued 1996, the combined book value of these securities is $997,071 and the market value is $991,406. There were no outstanding federal funds transactions on December 31, 1996. During 1994, Valley Financial Corp. borrowed $850,000 for acquisition of treasury stock. The note was due on October 1, 1996, and had an interest rate of 8.5%. The note was renewed in 1996 at 8.25% interest and matures on July 1, 1997. Total interest paid on the note for the years ended December 31, 1996 and 1995, was $42,079 and $69,455, respectively. Valley Financial Corp. pledged all capital stock of Valley Savings Bank, FSB for the loan. The unpaid balance on the note is $500,000 on December 31, 1996. NOTE 10: PROFIT SHARING (401K) PLAN-- During 1996, the Company adopted a 401k plan. To participate in the plan and be eligible for discretionary employer contributions, an employee must have attained twenty one (21) years of age and completed twelve (12) months and one thousand (1,000) hours of service. To be eligible for matching contributions, the employee must meet all of the above requirements and make contributions to the 401k plan. Maximum contribution by the employee is $9,500 for 1996. The Company will match up to three percent (3%) of employee contributions, and maximum combined contributions (employer and employee) cannot exceed the lessor of $30,000 or twenty-five percent (25%) of the employee's annual salary. Employees are automatically one-hundred percent (100%) vested in their Qualified Non-Elective account. The vesting schedule for matching and discretionary employer accounts is as follows: Years of Service Percent Vested ---------------- -------------- Less than 2 0 2 but less than 3 20 3 but less than 4 40 4 but less than 5 60 5 but less than 6 80 6 or more 100 In 1994, the Bank had a qualified, non contributory defined-benefit pension plan covering substantially all of its employees. The plan was with Financial Institutions Retirement Fund and was funded through a tax qualified pension trust. Effective October 1, 1995, the Bank terminated its participation in the Financial Institutions Retirement Fund. All employees who are members on the withdrawal date, including those on leaves of absence, automatically become fully vested retirants of the Fund. Payment may be commenced in accordance with the Regulations as of the first day of the month of the employee's choice after attainment of age 45, or age 55 as previously designated by the employer for all its retirants, regardless of whether or not employment continues. NOTE 11: INCOME TAXES-- In computing federal income taxes, the Bank was allowed the larger of a statutory bad debt deduction of 8% of otherwise taxable income, or an amount necessary to increase the year end balance in the reserve for losses or qualifying real property loans to a specified percentage of defined eligible loans, subject to limitations based on aggregate loans and savings balances. The Bank used the percentage of taxable income method for 1995. -14- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 11: INCOME TAXES--Continued The 1996 Small Business Act repealed the percentage-of-income bad debt method for thrift institutions effective for tax years beginning in 1996 and required recapture of excess reserves over a six-year period beginning in 1996. The total excess required to be recaptured and included in taxable income is approximately $236,000, of which approximately $39,000 is includible in taxable income for 1996. Consolidated returns/tax-sharing agreement: Valley Financial Corp. files a consolidated federal income tax return with Valley Savings Bank, FSB and its subsidiaries. Valley Financial Corp. has entered into a tax-sharing agreement with Valley Savings Bank, FSB to allocate federal income taxes based on applicable rates and to take into account benefits of each entity. The taxes are to be computed on an entity-by-entity basis with payments and refund being necessary so each party pays its pro rata share of the federal income taxes. The provision for federal income taxes differs from that computed by applying statutory rates because of bad debt expense, depreciation, tax-exempt interest and Federal Home Loan Bank stock dividends. Deferred tax assets or liabilities have been provided for taxable temporary differences related to unrealized gains or losses on available-for-sale securities upon adoption of Statement of Financial Accounting Standards (SFAS) No. 115 in December of 1993. Deferred tax assets have been provided for deductible temporary differences related to the allowance for loan losses, accumulated depreciation, and Federal Home Loan Bank stock dividends. The net deferred tax assets and liabilities in the accompanying consolidating schedules of financial condition include the following components:
1996 1995 --------------- --------------- Deferred tax assets: Allowance for loan losses $ 121,362 $ 115,468 Net unrealized depreciation on available- for-sale securities 30,980 -- -------------- --------------- 152,342 115,468 ============== =============== Deferred tax liabilities: Deferred loan fees $ (6,456) $ (3,525) Accumulated depreciation (67,642) (70,277) Federal Home Loan Bank stock (60,264) (63,666) Net unrealized appreciation on available- for-sale securities -- (52,513) --------------- --------------- (134,362) (189,981) --------------- --------------- Net deferred tax assets (liabilities) $ 17,980 $ (74,513) =============== ===============
Retained earnings at December 31, 1996 and 1995, include approximately $810,000 for which no deferred federal income tax liability has been recognized. These amounts represent an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $300,000 at December 31, 1996 and 1995. -15- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 11: INCOME TAXES--Continued Income tax expense for the years ended December 31, 1996 and 1995 is summarized as follows:
1996 1995 --------------- --------------- Federal: Current $ 295,775 $ 423,608 Deferred (11,000) 46,000 --------------- --------------- 284,775 469,608 --------------- --------------- State: Current 46,971 75,380 Deferred 2,000 8,000 --------------- --------------- 48,971 83,380 --------------- --------------- Total taxes $ 333,746 $ 552,988 =============== ===============
Included in other assets are income taxes receivable of $48,263 for 1996 and $18,498 for 1995. The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows:
Percent of Pre-tax Income ------------------------ 1996 1995 ------ ------ Statutory rates 34.0% 34.0% Increase (decrease) resulting from: Effect of tax-exempt income (3.6%) (1.2%) State income taxes, net of Federal income tax benefit 3.2% 3.5% Other, net (.2%) (1.5%) ------ ------- 33.4% 34.8% ====== =======
NOTE 12: REGULATORY MATTERS-- The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of Thrift Supervision (OTS). Failure to meet the minimum regulatory 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 the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving 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 under the prompt corrective action guidelines are also subject to qualitative judgements 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 of total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes, as of December 31, 1996, that the Bank meets all the capital adequacy requirements to which it is subject. -16- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 12: REGULATORY MATTERS--Continued As of December 31, 1996, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank will have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Bank's prompt corrective action category.
For Capital Adequacy Purposes And to Be Adequately Capitalized Under the Prompt Corrective Action Actual Provisions ---------------------- --------------------- Amount Ratio Amount Ratio -------------- ------- ------------- ------- As of December 31, 1996: - ------------------------ Total Capital (to Risk-Weighted Assets) $ 7,589,817 15.69% $ 3,869,440 8.00% Tier I Capital (to Risk-Weighted Assets) 7,589,817 15.69 3,869,440 4.00 Tier I Capital (to Average Assets) 7,589,817 7.62 3,985,084 4.00 As of December 31, 1995: - ------------------------ Total Capital (to Risk-Weighted Assets) $ 7,253,636 15.10% $ 3,844,160 8.00% Tier I Capital (to Risk-Weighted Assets) 7,253,636 15.10 3,844,160 4.00 Tier I Capital (to Average Assets) 7,253,636 7.86 3,691,205 4.00
-17- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 13: COMMITMENTS AND CONTINGENCIES-- In the ordinary course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. At December 31, 1996, the Bank had outstanding firm commitments to originate or purchase loans as follows:
Fixed Rate Variable Rate Total --------------- --------------- --------------- Fixed-mortgage loans $ 35,000 $ 350,500 $ 385,500 Consumer/other loans -- -- -- ----------- ----------- ----------- $ 35,000 $ 350,500 $ 385,500 =========== =========== ===========
The Bank also had outstanding letters of credit totaling $76,400 at December 31, 1996. NOTE 14: LEASE EXPENSE-- Lease expense for the year ended December 31, 1996 and 1995, was $42,583 and $48,553, respectively, which includes building rental of $24,394 for Hearthstone Mortgage Company, Inc. in 1996. Following is a schedule by years of future minimum equipment lease payments required under existing operating leases: December 31, 1997 $ 4,442 ========= NOTE 15: ACCOUNTS RECEIVABLE - LOANS SOLD-- Firm commitments to purchase loans had been received for all of the loans carried in accounts receivable - loans sold. The carrying value is the total due from the purchaser since the loans were closed and ready for sale. NOTE 16: GOODWILL-- Goodwill recorded on the acquisition of Hearthstone Mortgage Company, Inc. amounted to $40,710 and is being amortized over a ten-year period. Goodwill amortization for 1996 and 1995 was $4,071 per year, leaving a balance of $20,355 on December 31, 1996. NOTE 17: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK-- Most of the Bank's business activity, with the exception of mortgage loans, is with customers located within Iowa and Illinois. The Bank uses another bank to facilitate check collection and other bank activities. Due to the dollar volume of these activities, it is necessary to maintain account balances in excess of the FDIC insurance limit. NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS-- Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, if it is cost effective to determine the fair values. Management has determined that it is not cost effective to secure the information on most of the financial instruments; however, the following financial assets are carried at an amount which approximates fair value: Cash Investment securities available-for-sale Mortgage-backed securities available-for-sale Accounts receivable - loans sold -18- VALLEY FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS--Continued The carrying amounts of the financial assets listed above are included in the Consolidated Statement of Financial Condition. Fair value of investment securities and mortgage-backed securities is 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. NOTE 19: DEPOSIT INSURANCE PREMIUMS-- The Fiscal 1997 Spending Bill signed into law on September 30, 1996 imposed a special assessment on Savings Association Insurance Fund (SAIF)-insured deposits of financial institutions. Valley Savings Bank, FSB's one-time assessment amounted to $551,449, which was paid in 1996 and is included in deposit insurance premiums in 1996. -19- VALLEY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION September 30, 1997 (Unaudited)
ASSETS: Cash $ 3,364,164 Securities available-for-sale 38,311,112 Mortgage-backed securities 7,364,143 Loans receivable, net 60,039,484 Accrued interest receivable 991,964 Foreclosed real estate, net of allowance for losses 67,605 Premises and equipment 1,102,634 Other assets 144,325 -------------- TOTAL ASSETS $ 111,385,431 ============== LIABILITIES AND STOCKHOLDERS' EQUITY: Liabilities: Deposits $ 101,734,158 Borrowed funds 500,000 Advances from borrowers for taxes and insurance 97,996 Deferred taxes 108,156 Accrued expenses and other liabilities 773,576 -------------- Total liabilities 103,213,886 -------------- Stockholders' Equity: Common stock 31,900 Additional paid-in capital 2,979,900 Retained earnings, substantially restricted 6,133,445 Unrealized gain on securities available-for-sale, net of applicable income taxes 155,000 Treasury stock (1,128,700) -------------- Total stockholders' equity 8,171,545 -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 111,385,431 ==============
See Notes to Consolidated Financial Statements VALLEY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the nine months ended September 30, 1997 and 1996 (Unaudited)
1997 1996 ----------- ----------- INTEREST INCOME: Loans receivable: First-mortgage loans $ 3,600,780 $ 3,631,251 Consumer and other loans 452,833 513,124 Investment securities 1,714,293 1,184,108 Mortgage-backed and related securities 301,881 270,584 Other interest-earning assets 43,406 61,344 ----------- ----------- Total interest income 6,113,193 5,660,411 ----------- ----------- INTEREST EXPENSE: Deposits 3,663,083 3,262,695 Borrowed funds 41,255 46,324 ----------- ----------- Total interest expense 3,704,338 3,309,019 ----------- ----------- Net interest income 2,408,855 2,351,392 Provision for Loan losses (100,000) 6,000 ----------- ----------- Net interest income after provision for loan losses 2,508,855 2,345,392 ----------- ----------- NON-INTEREST INCOME: Gain on sale of interest-earning assets, net 9,404 12,084 Loan origination and commitment fees 228,121 143,100 Service charges and fees 344,853 333,239 Other income 17,240 45,756 ----------- ----------- Total non-interest income 599,618 534,179 ----------- ----------- NON-INTEREST EXPENSE: General and administrative: Compensation and benefits 877,192 832,622 Occupancy and equipment 171,155 157,929 SAIF deposit insurance premiums 34,453 701,939 Loss on foreclosed real estate 4,180 5,925 Other expenses 655,431 569,954 ----------- ----------- Total non-interest expense 1,742,411 2,268,369 ----------- ----------- Income Before Income Taxes 1,366,062 611,202 Income tax expense 453,218 213,135 ----------- ----------- NET INCOME $ 912,844 $ 398,067 =========== =========== Net income per share of Common Stock $ 32.54 $ 13.97 =========== ===========
See Notes to Consolidated Financial Statements VALLEY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1997 and 1996 (Unaudited)
1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 912,844 $ 398,067 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Amortization of excess of cost over fair value of net assets acquired - goodwill 3,053 3,053 Amortization of premiums and discounts on investment securities 42,650 33,348 Provision for loan losses (100,000) 6,000 Net gain on sales of investment and mortgage-backed securities (9,404) (12,084) Depreciation of premises and equipment 55,022 61,282 (Increase) Decrease in: Prepaid expenses and other assets (67,886) (240,519) Accrued interest receivable (149,461) (158,640) Inventory of loans -- 81,958 Increase (Decrease) in: Accrued expenses and other liabilities (301,456) 226,611 ----------- ----------- Total adjustments (527,482) 1,009 ----------- ----------- Net Cash Provided by Operating Activities 385,362 399,076 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of treasury stock -- (325,000) Expenditures for premises and equipment (6,226) (20,354) Loan originations and principal payment on loans 1,369,442 (1,308,153) Principal payments on mortgage-backed and related securities, net of discounts and premiums 1,177,412 855,512 Purchase of investment securities available-for-sale (17,477,112) (12,909,650) Proceeds from sales of investment securities 996,875 -- Proceeds from maturities of invest securities available-for-sale 6,955,799 7,930,000 Proceeds from sales of mortgage-backed and related securities available-for-sale -- 819,148 Purchase of mortgage-backed securities available-for-sale -- (3,819,650) ----------- ----------- Net Cash (Used in) Investing Activities (6,983,810) (8,778,147) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in borrowed funds -- 2,150,000 Net increase in demand deposits, NOW accounts, passbook savings accounts and certificates of deposit 4,179,404 4,657,606 Net decrease in advance payments by borrowers for taxes and insurance (146,584) (166,239) ----------- ----------- Net Cash Provided by Financing Activities 4,032,820 6,641,367 ----------- ----------- NET (DECREASE) IN CASH (2,565,628) (1,737,704) CASH AND DUE FROM BANKS, BEGINNING 5,929,792 5,170,744 ----------- ----------- CASH AND DUE FROM BANKS, ENDING $ 3,364,164 $ 3,433,040 =========== =========== SUPPLEMENTAL DISCLOSURES: Cash paid for: Interest on deposits and borrowed funds $ 3,664,943 $ 3,265,542 Income taxes 340,535 358,403
See Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) VALLEY FINANCIAL CORP. AND SUBSIDIARIES NOTE 1. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements for the nine month period ended September 30, 1997 and 1996 are unaudited. In the opinion of the management of Valley Financial Corp., these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosure normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the requirements for interim financial statements. The consolidated financial statements include the accounts of Valley Financial Corp. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. NOTE 2. SUBSEQUENT EVENT - ACQUISITION OF VALLEY FINANCIAL CORP. As of the close of business on January 30, 1998, North Central completed the Acquisition of Valley Financial Corp., pursuant to an Agreement and Plan of Merger, dated as of September 18, 1997. The Acquisition resulted in the merger of Valley Financial's wholly-owned subsidiary, Valley Savings Bank, FSB with and into First Federal with First Federal as the resulting financial institution. 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. The pricing reflects 190.6% of Valley's June 30, 1997 book value and 13.0 times Valley's earnings for the twelve months ended June 30, 1997, as adjusted for the one-time SAIF charge. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) VALLEY FINANCIAL CORP. AND SUBSIDIARIES NOTE 1. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements for the nine month period ended September 30, 1997 and 1996 are unaudited. In the opinion of the management of Valley Financial Corp., these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosure normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the requirements for interim financial statements. The consolidated financial statements include the accounts of Valley Financial Corp. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. NOTE 2. SUBSEQUENT EVENT ACQUISITION OF VALLEY FINANCIAL CORP. As of the close of business on January 30, 1998, North Central completed the Acquisition of Valley Financial Corp., pursuant to an Agreement and Plan of Merger, dated as of September 18, 1997. The Acquisition resulted in the merger of Valley Financial's wholly-owned subsidiary, Valley Savings Bank, FSB with and into First Federal with First Federal as the resulting financial institution. 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. The pricing reflects 190.6% of Valley's June 30, 1997 book value and 13.0 times Valley's earnings for the twelve months ended June 30, 1997, as adjusted for the one-time SAIF charge. EX-99.2 4 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STMNTS EXHIBIT 99.2 Exhibit 99.2 UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES VALLEY FINANCIAL CORP. AND SUBSIDIARIES The unaudited pro forma combined consolidated financial statements presented on the following pages are based on the historical financial statements of North Central and reflect the pro forma effects of the acquisition of Valley Financial (the "Acquisition"). The Acquisition was accounted for under the purchase method of accounting. For purposes of the pro forma statements, the purchase price of Valley Financial has been allocated to the acquired net assets based on information currently available with regard to the values of such net assets. Pro forma adjustments have been made only for those assets and liabilities which, based solely on preliminary estimates, may have fair values significantly different from historical amounts. As such, final adjustments to recorded amounts may differ significantly from the pro forma adjustments presented herein. The unaudited pro forma consolidated statements of income for the nine months ended September 30, 1997 and the year ended December 31, 1996 were prepared as if the Acquisition had occurred as of the beginning of the respective periods for the purposes of the combined consolidated statements of income and as if such an acquisition had occurred at the end of the period for purposes of the combined consolidated balance sheet. 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. The pro forma statements should be read in connection with the notes thereto. NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES VALLEY FINANCIAL CORP. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET at September 30, 1997
North Valley Pro Forma Central Financial Adjustments Combined -------------- -------------- --------------- --------------- ASSETS Cash and cash equivalents $ 4,520,553 $ 3,364,164 $ -- $ 7,884,717 Securities available for sale 22,241,637 45,675,255 (3,417,490)(1) 64,499,402 Securities held to maturity -- -- -- -- Loans receivable, net 181,119,869 60,039,484 706,781 (2) 241,866,134 Accrued interest receivable 1,328,799 991,964 -- 2,320,763 Foreclosed real estate 231,814 67,605 -- 299,419 Premises and equipment, net 2,015,152 1,102,634 -- 3,117,786 Rental real estate 2,083,625 -- -- 2,083,625 Title plant 925,256 -- -- 925,256 Deferred taxes 74,000 -- (74,000)(3) -- Goodwill -- -- 6,821,989 (4) 6,821,989 Prepaid expenses and other assets 592,683 144,325 -- 737,008 ------------- ------------- ----------- ------------- Total Assets $ 215,133,388 $ 111,385,431 $ 4,037,280 $ 330,556,099 ============= ============= =========== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 139,254,875 $ 101,734,158 $ 410,165 (2) $ 241,399,198 Other borrowed funds 25,550,000 500,000 11,308,760 (1) 37,358,760 Advances from borrowers for taxes and insurance 364,994 97,996 -- 444,990 Dividend payable 203,624 -- -- 203,624 Income taxes payable 118,930 -- -- 118,930 Deferred taxes -- 108,156 (17,100)(3),(5) 91,056 Accrued expenses and other liabilities 356,169 773,576 507,000 (5) 1,636,745 ------------- ------------- ----------- ------------- Total Liabilities 165,830,592 103,213,886 12,208,825 281,253,303 ------------- ------------- ----------- ------------- COMMITMENTS STOCKHOLDERS' EQUITY Common stock 40,111 31,900 (31,900)(1) 40,111 Additional paid-in-capital 37,895,518 2,979,900 (2,979,900)(1) 37,895,518 Retained earnings, substantially restricted 22,760,386 6,133,445 (6,133,445)(1) 22,760,386 Unrealized gain on securities available for sale, net of income taxes 364,532 155,000 (155,000)(1) 364,532 Treasury stock at cost (10,496,411) (1,128,700) 1,128,700 (1) (10,496,411) Unearned shares, employee stock ownership plan (1,261,340) -- -- (1,261,340) ------------- ------------- ----------- ------------- Total stockholders' equity 49,302,796 8,171,545 (8,171,545) 49,302,796 ------------- ------------- ----------- ------------- Total Liabilities and Stockholders' Equity $ 215,133,388 $ 111,385,431 $ 4,037,280 $ 330,556,099 ============= ============= =========== =============
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES VALLEY FINANCIAL CORP AND SUBSIDIARIES NOTES TO UNAUDITED PROFORMA COMBINED CONSOLIDATED BALANCE SHEET Pursuant to the Merger and consistent with generally accepted accounting principles ("GAAP"), certain purchase method accounting adjustments relating to Valley Financial will be recorded. The purchase method accounting adjustments are preliminary estimates and are subject to revision as economic conditions change or as more information becomes available. The purchase price was $14.7 million, consisting of 28,050 outstanding shares of Valley Financial stock, at $525 per share. The following notes further explain the adjustments. (1) Represents the planned sale of $3.4 million of securities available for sale and borrowings of $11.3 million to fund the purchase and the elimination of the stockholders' equity of Valley Financial under the purchase method of accounting. (2) Represents the mark-to-market adjustments to reflect the fair market value of the Valley Financial assets acquired and liabilities assumed under the purchase method of accounting. The following summarizes the net mark-to- market premium or (discounts) established for the following asset and liability categories: Loans $ 706,781 Deposits (410,165) -------------- Total $ 296,616 ============== (3) Represents the reclassification of deferred income taxes. (4) Represents the excess of the purchase price paid for Valley Financial over the fair market value of the tangible and identifiable assets acquired and the fair value of the liabilities (goodwill) assumed under the purchase method of accounting. Goodwill is assumed to amortize on a straight-line basis over 15 years. The merger consideration of $14.7 million was allocated as follows: Net assets at fair value (note 1 & 2) $ 8,468,161 Professional fees (note 5) (363,000) Other accrued liabilities (note 5) (144,000) Goodwill 6,821,989 Net deferred tax liabilities (note 5) (56,900) --------------- Purchase Price $ 14,726,250 =============== (5) Represents accruals for other Merger related costs such as professional fees including investment banker, accountants and attorneys fees ($363,000), accruals for other liabilities ($144,000) and net deferred tax liabilities of ($56,900). NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES VALLEY FINANCIAL CORP. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME For the Nine Months Ended September 30, 1997
North Valley Pro Forma Central Financial Adjustment Combined ------------- ------------- ------------ ------------- INTEREST INCOME: Loans receivable: First mortgage loans $ 9,111,895 $ 3,600,780 $ (166,831)(1) $ 12,545,844 Consumer and other loans 1,623,475 452,833 -- 2,076,308 Securities and cash deposits 1,200,805 2,059,580 (279,334)(2) 2,981,051 ------------- ------------- ----------- ------------- Total interest income 11,936,175 6,113,193 (446,165) 17,603,203 ------------- ------------- ----------- ------------- INTEREST EXPENSE: Deposits 4,795,481 3,663,083 (265,956)(3) 8,192,608 Borrowed funds 980,208 41,255 508,895 (4) 1,530,358 ------------- ------------- ----------- ------------- Total interest expense 5,775,689 3,704,338 242,939 9,722,966 ------------- ------------- ----------- ------------- Net interest income 6,160,486 2,408,855 (689,104) 7,880,237 Provision for loan losses 180,000 (100,000) -- 80,000 ------------- ------------- ----------- ------------- Net interest income after loan losses 5,980,486 2,508,855 (689,104) 7,800,237 ------------- ------------- ----------- ------------- NONINTEREST INCOME: Fees and service charges 472,074 344,853 -- 816,927 Loan origination and commitment fees -- 228,121 -- 228,121 Abstract fees 886,981 -- -- 886,981 Gain on sale of securities available for sale -- 9,404 -- 9,404 Other income 317,371 17,240 -- 334,611 ------------- ------------- ----------- ------------- Total noninterest income 1,676,426 599,618 -- 2,276,044 ------------- ------------- ----------- ------------- NONINTEREST EXPENSE: Salaries and employee benefits 1,607,769 877,192 -- 2,484,961 Premises and equipment 316,908 171,155 -- 488,063 Data processing 191,224 129,896 -- 321,120 SAIF deposit insurance premiums 63,181 34,453 -- 97,634 Other expenses 1,160,676 529,715 341,100 (5) 2,031,491 ------------- ------------- ----------- ------------- Total noninterest expense 3,339,758 1,742,411 341,100 5,423,269 ------------- ------------- ----------- ------------- Income before income taxes 4,317,154 1,366,062 (1,030,204) 4,653,012 Provision for income taxes 1,495,563 453,218 (257,036) 1,691,745 ------------- ------------- ----------- ------------- Net Income $ 2,821,591 $ 912,844 $ (773,168) $ 2,961,267 ============= ============= =========== ============= Basic earnings per common share $ 0.88 $ 0.92 ============= ============= Earnings per common share - assuming dilution $ 0.87 $ 0.91 ============= =============
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES VALLEY FINANCIAL CORP. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME For the Year Ended December 31, 1996
North Valley Pro Forma Central Financial Adjustment Combined ----------- ---------- ----------- ----------- INTEREST INCOME: Loans receivable: First mortgage loans $11,173,567 $4,787,517 $ (222,442)(1) $15,738,642 Consumer and other loans 2,007,185 676,537 -- 2,683,722 Securities and cash deposits 1,909,267 2,030,456 (372,445)(2) 3,567,278 ----------- ---------- ----------- ----------- Total interest income 15,090,019 7,494,510 (594,887) 21,989,642 ----------- ---------- ----------- ----------- INTEREST EXPENSE: Deposits 6,217,234 4,401,078 (354,608)(3) 10,263,704 Borrowed funds 711,418 70,087 678,526 (4) 1,460,031 ----------- ---------- ----------- ----------- Total interest expense 6,928,652 4,471,165 323,918 11,723,735 ----------- ---------- ----------- ----------- Net interest income 8,161,367 3,023,345 (918,805) 10,265,907 Provision for loan losses 240,000 6,000 -- 246,000 ----------- ---------- ----------- ----------- Net interest income after loan losses 7,921,367 3,017,345 (918,805) 10,019,907 ----------- ---------- ----------- ----------- NONINTEREST INCOME: Fees and service charges 579,999 443,973 -- 1,023,972 Loan origination and commitment fees -- 391,088 -- 391,088 Abstract fees 931,031 -- -- 931,031 Gain on sale of securities available for sale 13,774 15,970 -- 29,744 Other income 368,691 219,446 -- 588,137 ----------- ---------- ----------- ----------- Total noninterest income 1,893,495 1,070,477 -- 2,963,972 ----------- ---------- ----------- ----------- NONINTEREST EXPENSE: Salaries and employee benefits 2,003,701 1,252,330 -- 3,256,031 Premises and equipment 420,633 300,079 -- 720,712 Data processing 243,762 172,836 -- 416,598 SAIF deposit insurance premiums 1,095,838 754,180 -- 1,850,018 Other expenses 1,174,450 608,370 454,800 (5) 2,237,620 ----------- ---------- ----------- ----------- Total noninterest expense 4,938,384 3,087,795 454,800 8,480,979 ----------- ---------- ----------- ----------- Income before income taxes 4,876,478 1,000,027 (1,373,605) 4,502,900 Provision for income taxes 1,743,557 333,746 (342,714) 1,734,589 ----------- ---------- ----------- ----------- Net Income $ 3,132,921 $ 666,281 $(1,030,891) $ 2,768,311 =========== ========== =========== =========== Basic earnings per common share $ 0.82 $ 0.72 =========== =========== Earnings per common share - assuming dilution $ 0.82 $ 0.72 =========== ===========
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES VALLEY FINANCIAL CORP. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME Pursuant to the Merger and consistent with GAAP, certain adjustments will be recorded, primarily to accrue for specific, identified costs related to the merger of Valley Financial. The amounts of the Merger related costs are preliminary estimates and are subject to revisions as economic conditions change or as more information become available. North Central expects to achieve operating cost savings primarily through the consolidation of back office functions, elimination of redundant professional fees and elimination of some employee benefits. The operating cost savings are expected to be achieved in various amounts at various times during the years subsequent to the acquisition of Valley Financial and not ratably over, or at the beginning or end of, such periods. No adjustment has been reflected in the Unaudited Pro Forma Combined Consolidated Statement of Income for the year ended December 31, 1996, or for the nine months ended September 30, 1997 for the anticipated cost savings. (1) Represents amortization of Valley Financial mark-to-market adjustments under the purchase method of accounting for loans. (2) Represents amortization of Valley Financial mark-to-market adjustments under the purchase method of accounting for securities, and the forgone interest income resulting from the planned sale of $3.4 million of securities, at a rate of 6.0%. (3) Represents amortization of Valley Financial mark-to-market adjustments under the purchase method of accounting for deposits. (4) Represents the cost of borrowing $11.3 million to fund the Valley Financial acquisition, at a rate of 6.0%. (5) Represents amortization of goodwill. -----END PRIVACY-ENHANCED MESSAGE-----