-----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, IDm0QNKoN6ZIBJ865S4ndXH1qIajH83HHTzD7NfwMpIfUOnZVpjLbBooNtIvtIgj jiInfQtCVi4ExjKboLmLTg== 0000950131-98-002245.txt : 19980401 0000950131-98-002245.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950131-98-002245 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27672 FILM NUMBER: 98582413 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 ANNUAL REPORT ============================================================================= 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, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 (I.R.S. Employer of Incorporation or Organization) Identification Number) c/o FIRST FEDERAL SAVINGS BANK OF IOWA 825 CENTRAL AVENUE, FORT DODGE, IOWA 50501 (Address of Principal Executive Offices) (Zip Code) (515) 576-7531 (Registrant's Telephone Number including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] As of March 20, 1998, there were issued and outstanding 3,266,483 shares of the Registrant's Common Stock. The aggregate value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of the Common Stock as of February 28, 1998 $62,160,588. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof. ============================================================================= PART I ITEM 1. BUSINESS GENERAL North Central Bancshares, Inc. (the "Holding Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Iowa (formerly known as First Federal Savings Bank of Fort Dodge) (the "Bank"), a federally chartered savings bank. Collectively, the Holding Company and the Bank are referred to herein as the "Company." The Holding Company was organized on December 5, 1995 at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock to be issued by the Bank in connection with the conversion and reorganization of the Bank and North Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding company structure (these transactions are collectively referred to as the "Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding Company issued an aggregate of 4,011,057 shares of its Common Stock, par value $0.01 per share, of which 1,385,590 shares were issued in exchange for all of the Bank's issued and outstanding shares, except for shares owned by the MHC which were cancelled, and 2,625,467 shares of which were sold in Subscription and Community Offerings at a price of $10.00 per share, with gross proceeds amounting to $26,254,670. At this time, the Holding Company conducts business as a unitary savings and loan holding company and the principal business of the Holding Company consists of the operation of its wholly- owned subsidiary, the Bank. The Holding Company's executive offices are located at the home office of the Company at 825 Central Avenue, Fort Dodge, Iowa. The Holding Company's telephone number is (515) 576-7531. FIRST FEDERAL SAVINGS BANK OF IOWA The Bank is a federally chartered savings bank that conducts its operations from its main office located in Fort Dodge, Iowa and six branch offices located in Iowa. Three of the Bank's branches are located in north central Iowa, in the cities of Fort Dodge, Nevada and Ames. 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 and multifamily mortgages and, to a lesser extent, secured and unsecured consumer loans, with emphasis on second mortgage loans. The Bank's deposits are insured by the FDIC under the SAIF. The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1954. At December 31, 1997, the Bank had total assets of $223.4 million, total deposits of $141.7 million, and total shareholders' equity of $39.3 million. The Bank's principal executive office is located at 825 Central Avenue, Fort Dodge, Iowa and its telephone number at that address is (515) 576-7531. 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 -2- the resulting financial institution (the "Bank Merger"). Valley Savings, headquartered in Burlington, Iowa was a federally-chartered stock savings bank with three branch offices located in southeastern Iowa. The former offices of Valley Savings are being operated as a division of the Bank. 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 Acquisition is expected to be slightly accretive to earnings in 1998. 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 and Story Counties, which are located in the central and north central part of the State of Iowa. As a result of the Acquisition, the Company also operates branch locations in Burlington and Mount Pleasant, Iowa. The Company's market area is influenced by agriculture as well as gypsum mining, retail sales, professional services and public education. The Company is headquartered in Fort Dodge, the Webster County seat, where it operates two Company locations. The Company's Nevada branch operates in the city of Nevada, Iowa, the county seat for Story County. Nevada is located close to Ames, the location of Iowa State University, and is also located 35 miles from Des Moines, the state capital. The Company's Ames branch operates in the city of Ames, Iowa and is also located 30 miles from Des Moines. Fort Dodge has become a strong retail center for North Central Iowa and Nevada and Ames are significantly influenced by the proximity of Iowa State University and certain Iowa state government agencies. 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. Major employers and industries within the Company's market area include Trinity Regional Hospital, Iowa Central Community College, Iowa State University, Iowa Department of Transportation, Fort Dodge Animal Health, Celotex, U.S. Gypsum and Goldbond (gypsum mining companies), Decker Trucking Company, Smithway Trucking Company, and Donnelley Marketing Company. Construction is underway on a 700 bed prison which will employ approximate 280 people in Fort Dodge, Iowa. The unemployment rate for Webster County as of December 1997 was 3.5%, compared to the national rate of 4.7% and the State of Iowa rate of 2.9%. The unemployment rate for Story County was 2.2%. 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, Iowa and Mount Pleasant, 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 multifamily loans) from out of state. The Company intends to continue such originations and purchases pursuant to its underwriting standards for Company-originated loans. The Company encounters strong competition both in attracting deposits and in originating real estate and other loans. Its most direct competition for deposits has historically come from commercial and savings banks, other savings associations, and credit unions in its market area. Competition for loans comes from such financial institutions as well as mortgage banking companies. The Company expects continued strong competition in the foreseeable future. Many such institutions have greater financial and marketing resources available to them than does the Company. The Company competes for savings deposits by offering depositors a high level of personal service and a wide range of competitively priced financial products. In recent years, additional strong competition has come from stock and bond dealers and brokers and in particular, mutual -3- funds. The Company competes for real estate loans primarily through the interest rates and loan fees it charges and advertising, as well as by offering high levels of personal service. LENDING ACTIVITIES Loan Portfolio Composition. The principal components of the Company's loan portfolio are fixed- and adjustable-rate first mortgage loans secured by one-to-four family owner-occupied residential real estate, fixed- and adjustable-rate first mortgage loans secured by multifamily residential real estate and, to a lesser extent, secured and unsecured consumer loans, with emphasis on second mortgage loans. At December 31, 1997, the Company's loans receivable totalled $194.7 million, of which $115.8 million, or 59.5% were one-to-four family residential real estate first mortgage loans, and $55.1 million, or 28.3%, were other first mortgage loans, primarily purchased multifamily and commercial real estate loans. Consumer loans, consisting primarily of automobile loans and second mortgage loans, totalled $23.7 million, or 12.2% 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, 1997, it was the Company's policy to limit loans to one borrower to $1.5 million. Exceptions to this policy are made on a case by case basis and only with approval of the Company's Board of Directors. At December 31, 1997, the Company's largest aggregate outstanding loan to one borrower was $1.3 million and the second largest borrower had an aggregate balance of $1.26 million, both of which were first mortgage multifamily residential real estate loans and both 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, ------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------ ------------------- ------------------- ------------------- ------------------ Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total -------- --------- --------- --------- --------- --------- --------- --------- --------- -------- (Dollars in thousands) First mortgage loans: One-to-four family residential(1) $115,763 59.48% $107,168 63.44% $ 94,876 62.70% $ 84,203 65.48% $ 76,843 63.98% Multifamily 51,345 26.38 34,488 20.42 31,622 20.90 21,474 16.70 22,490 18.73 Commercial 3,800 1.95 5,225 3.09 5,825 3.85 6,163 4.79 6,472 5.39 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total first mortgage loans 170,908 87.81 146,881 86.95 132,323 87.45 111,840 86.97 105,805 88.10 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Consumer loans: Automobiles $ 4,696 2.41% $ 4,155 2.46% $ 2,967 1.96% $ 2,889 2.25% $ 1,993 1.66% Second mortgage(2) 16,226 8.34 15,303 9.06 13,284 8.78 10,735 8.35 8,481 7.06 Other(3) 2,796 1.44 2,582 1.53 2,736 1.81 3,127 2.43 3,818 3.18 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total consumer loans 23,718 12.19 22,040 13.05 18,987 12.55 16,751 13.03 14,292 11.90 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans receivable $194,626 100.00% $168,921 100.00% $151,310 100.00% $128,591 100.00% $120,097 100.00% Less: Undisbursed portion of construction loans $ 453 0.23% $ 371 0.22% $ 782 0.52% $ 1,048 0.81% $ 309 0.26% Unearned loan discount 424 0.22 525 0.31 682 0.45 1,013 0.79 1,368 1.14 Net deferred loan origination fee 349 0.18 241 0.14 238 0.16 203 0.16 148 0.12 Allowance for loan losses 2,151 1.11 1,953 1.16 1,736 1.14 1,543 1.20 1,305 1.09 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans receivable, net $191,249 98.26% $165,831 98.17% $147,872 97.73% $124,784 97.04% $116,967 97.39% ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
_______________________ (1) Includes interest-only construction loans that convert to permanent loans. (2) Second mortgage loans included $1.1 million, $862,000, $724,000, $403,000 and $362,000 (in actual dollars) of nonowner-occupied residential first mortgage loans at December 31, 1997, 1996, 1995, 1994 and 1993 respectively. (3) Other consumer loans included $269,000, $213,000, $299,000, $499,000 and $770,000 (in actual dollars) of commercial mortgage loans at December 31, 1997, 1996, 1995, 1994 and 1993 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, 1997. 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, 1997 - ------------------------------------------------------------------------------- WITHIN 1-3 3-5 5-10 10-20 BEYOND 20 1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL - ------- ------- ------- ------- ------- ------- -------- (IN THOUSANDS) $19,259 $14,695 $23,924 $47,194 $10,126 $ 565 $115,763 21,817 9,349 11,480 8,125 574 - 51,345 1,918 613 792 - 477 - 3,800 2,700 7,644 12,749 611 14 - 23,718 - ------- ------- ------- ------- ------- ------- -------- $45,694 $32,301 $48,945 $55,930 $11,191 $ 565 $194,626 ======= ======= ======= ======= ======= ======= ========
________________________ (1) One-to-four family loans include $77.5 million of 7 year fixed rate loans that convert to adjustable rates at the beginning of the eighth year and are annually adjustable thereafter. $44.0 million of these loans with repricing periods greater than 5 years have been classified as fixed rate loans. $33.5 million of these loans with repricing periods less than 5 years have been classified as adjustable rate loans. (2) Includes second mortgage loans of $16.2 million at December 31, 1997. The following table sets forth the dollar amounts of all fixed rate and adjustable rate loans in each loan category at December 31, 1997 due after December 31, 1998.
Due After December 31, 1998 --------------------------------- Fixed Adjustable Total ------- ------- ------- (In thousands) First mortgage loans: One-to-four family $58,413 $38,091 $96,504 residential(1) Multifamily 7,098 22,430 29,528 Commercial 785 1,097 1,882 Consumer loans (2) 20,996 22 21,018 ------- ------- ------- Total $87,292 $61,640 $148,932 ======= ======= =======
(1) One-to-four family loans include $77.1 million of 7 year fixed rate loans that convert to adjustable rates at the beginning of the eighth year and are annually adjustable thereafter. $44.0 million of these loans with repricing periods greater than 5 years have been classified as fixed rate loans. $33.1 million of these loans with repricing periods less than 5 years have been classified as adjustable rate loans. (2) Includes second mortgage loans of $15.0 million at December 31, 1997. 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 intends to pursue this strategy in southeastern Iowa, which has been added to the Company's market area as a result of the Acquisition. See "Acquisition of Valley Financial Corp." 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 1997, 50.5% of the Company's residential real estate loans had fixed rates, and 49.5% had adjustable rates. -6- The Company is a portfolio lender and generally does not sell loans in the secondary mortgage market. However, the Company's one-to-four family, fixed-rate, residential real estate loans generally are originated and underwritten according to standards that qualify such loans to be included in Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") purchase and guarantee programs and that otherwise permit resale in the secondary mortgage market. By action of the Board of Directors, on a case-by-case basis, the Company has sold fixed-rate loans with maturities equal to or in excess of 15 years, servicing retained, in the secondary mortgage market. For the year ended December 31, 1997, the Company sold $815,000 of mortgage loans consisting of ten 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. 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 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 $57.3 million, or 29.4%, of the Company's total net loan portfolio at December 31, 1997. The primary purpose of offering ARM loans is to make the Company's loan portfolio more interest rate sensitive. ARM loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase. It is possible, therefore, that during periods of rising interest rates, the risk of default on ARM loans may increase due to the upward adjustment of interest costs to the borrower. Management believes that the Company's credit risk associated with its ARM loans is reduced because of the annual and lifetime interest rate adjustment limitations on such loans, although such limitations do create an element of interest rate risk. See Item 7A. "Discussion of Market Risk- Interest Rate Sensitivity Analysis". 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. -7- 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 Item 1. "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 and casualty insurance, flood insurance, where applicable, an abstract of title, and a title opinion on all properties securing real estate loans originated by the Company. Multifamily Residential and Commercial Real Estate Loans. The Company's loan portfolio contains loans secured by multifamily residential and commercial real estate. Such loans constituted approximately $55.1 million, or 28.8%, of the Company's total net loan portfolio at December 31, 1997. Of such loans, $53.0 million, or 96.0%, were purchased or originated by the Company and were secured by properties outside the State of Iowa (the "out of state" properties). There were no multifamily residential or commercial real estate loans greater than 30 days past due at December 31, 1997. These loans are primarily secured by multifamily residences, such as apartment buildings and by commercial facilities such as office buildings and retail buildings. Multifamily residential real estate loans are offered with fixed and adjustable rates and are structured in a number of different ways depending upon the circumstances of the borrower and the type of multifamily project. Fixed rate loans generally amortize over 15 to 30 years, and generally contain call provisions permitting the Company to require that the entire principal balance be repaid at the end of five to fifteen years. Such loans are priced as five to fifteen year loans with 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 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 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. Generally, the originating financial institution or mortgage banker continues to service the loans, remitting principal and interest to the Company. The Company generally imposes a $1.5 million limit on the aggregate size of multifamily 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 multifamily and commercial real estate generally involve a greater degree of credit risk than single-family residential mortgage loans and typically, such loans also have larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multifamily and commercial real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from such real estate projects 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, primarily, second mortgage loans. As of December 31, 1997, second mortgage loans totalled $16.2 million, or 8.5%, 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 -8- borrower's principal residence generally with a maximum loan-to-value ratio, including the principal balances of both the first and second mortgage loans, of no more than 80%. The average principal amount of the Company's second mortgage loans is approximately $11,000. To a lesser extent, the Company also originates loans secured by automobiles, with fixed rates generally on a 80% loan-to-value basis for new cars. All of the Company's automobile loans were originated by the Company, and generally have terms up to five years. 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 $1,812. 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, 1997, $25,000 or 0.11%, of the Company's consumer loan portfolio was on non-accrual status. Loan Originations, Solicitation, Processing, and Commitments. Loan originations are derived from a number of sources such as real estate agent referrals, existing customers, borrowers, builders, attorneys, and walk-in customers. Upon receiving a loan application, the Company obtains a credit report and employment verification to verify specific information relating to the applicant's employment, income, and credit standing. In the case of a real estate loan, an appraiser approved by the Company appraises the real estate intended to collateralize the proposed loan. An underwriter in the Company's loan department checks the loan application file for accuracy and completeness, and verifies the information provided. Pursuant to the Company's written loan policies, all first mortgage loans originated during 1997 were approved by the Chief Executive Officer. Beginning in 1998, senior management will approve all first mortgage loans greater than $100,000. All first mortgage loans less than $100,000 are approved by two loan officers. The Loan Committee of the Board of Directors meets monthly to review a sampling of all loans originated in the month. After the 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, 1997, the Company had outstanding commitments to originate $804,000 of loans. This amount does not include the undisbursed overdraft loan privileges or the unfunded portion of loans in process. Purchased or Out of State Originated Loans. The Company's loan portfolio contains $60.5 million of loan secured by out of state properties. These loans represented 31.1% of the Company's total loan portfolio at December 31, 1997. Substantially all of the multifamily residential and commercial real estate loans in the Company's loan portfolio are purchased or originated out of state by the Company without recourse to the seller. At December 31, 1997, approximately $13.4 million of these purchased loans represented loans secured by real estate in the west coast states of California, Oregon and Washington. At -9- that date, the Company's investment in properties located in California totalled $6.6 million and was distributed among two dozen cities. Most of these loans were originated from 1973 through 1987 and were purchased by the Company between 1982 and 1988 generally under a 75% loan-to-value guideline. Of the total purchased loans in the Company's portfolio as of December 31, 1997, $13.9 million were originated prior to January 1, 1990. The Company's loans in California were purchased prior to December 31, 1988. Concentrations of California real estate loans exist in three areas, Los Angeles, Lodi/Stockton and San Diego. The downturn in California real estate markets has not adversely impacted the Company. The Company's investment in properties located in Wisconsin totalled $20.4 million and was primarily distributed between the Milwaukee and Madison areas. These loans were originated between 1985 and 1997 and were purchased by the Company between 1991 and 1997. The remainder of the Company's purchased or out of state originated loans are distributed in various states. At December 31, 1997, the Company's multifamily residential and commercial real estate loans had an average balance of $290,000 and the largest loan had a principal balance of $1.3 million. As of December 31, 1997 there were no purchased loans that were on nonaccrual status. To supplement its origination of one-to-four family first mortgage loans, the Company also purchases loans secured by one-to- four family residences out of state. At December 31, 1997, $7.6 million or 3.9% of the Company's total loan portfolio consisted of purchased one-to-four family loans, of which $1.0 million were secured by properties located in California and $3.7 million were secured by properties in Missouri. As of December 31, 1997 there were no purchased one-to-four family first mortgage loans that were on nonaccrual status, although there was one purchase loan included in foreclosed real estate. 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 conduct annual inspections of the underlying real estate collateral and copies of the reports of such inspections are 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 multifamily residential, commercial real estate and one-to-four family first mortgage loans) as of December 31, 1997.
Balance as of State December 31, 1997 ----- ----------------- (In thousands) California $ 7,649 Colorado 16,041 Georgia 177 Indiana 773 Kansas 1,033 Minnesota 313 Missouri 4,856 Montana 205 Nebraska 553 Oregon 5,966 Texas 508 Utah 100 Virginia 127 Washington 1,787 Wisconsin 20,393 Other 39 ------- Total $60,520 =======
-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, --------------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (IN THOUSANDS) Total loans receivable at beginning of period $ 168,921 $ 151,310 $ 128,591 ORIGINATIONS: First mortgage loans: One-to-four family residential 25,001 24,178 19,714 Multifamily - 3,410 - Commercial 50 235 88 Consumer loans: Automobile 3,698 3,962 2,248 Second mortgage 9,642 10,060 9,411 Other 1,591 2,247 2,199 ---------- ---------- ---------- Total originations: 39,982 44,092 33,660 LOAN PURCHASES: First mortgage - one-to-four family 51 3,133 1,848 First mortgage - multifamily 22,313 4,813 12,655 LOAN SALES: First mortgage - one-to-four family 815 - 105 First mortgage - multifamily - 380 - Consumer loan - 67 - Transfer of mortgage loans to foreclosed real estate 175 148 288 Repayments 35,651 33,832 25,051 ---------- ---------- ---------- Net loan activity 25,705 17,611 22,719 ---------- ---------- ---------- Total loans receivable at end of period $ 194,626 $ 168,921 $ 151,310 ========== ========== ==========
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, 1997, the Company had $349,000 of deferred loan origination fees, net. Such fees vary with the type of loans and commitments made. The Company typically charges an origination fee on fixed- and adjustable-rate first mortgage loans. In addition to loan origination fees, the Company also receives other fees, service charges (such as overdraft fees), and other income that consist primarily of deposit transaction account service charges and late charges. The Company recognized fees and service charges of $657,000, $580,000 and $445,000 for the fiscal years ended December 31, 1997, 1996 and 1995 respectively. -12- INVESTMENT ACTIVITIES At December 31, 1997, the Company's investment portfolio is comprised of United States Treasury securities, virtually all of which were purchased with 2-year maturities, equity securities consisting of FHLMC preferred stocks, FNMA preferred stock, FHLB stock, other common and preferred stocks and interest-earning deposits. At December 31, 1997, $9.0 million, or 81.6%, of the Company's investment portfolio, excluding equity securities, was scheduled to mature in one year or less, and $2.0 million, or 18.4% 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, ------------------------------- 1997 1996 1995 -------- ---------- -------- (IN THOUSANDS) Investment securities: U.S. Treasury securities $11,046 $16,518 $19,561 FHLB stock 1,550 1,374 1,160 Equity securities 7,220 8,711 3,073 ------- ------- ------- Total investment securities 19,816 26,603 23,794 Interest-earning deposits 2,463 2,973 2,362 ------- ------- ------- Total investments $22,279 $29,576 $26,156 ======= ======= =======
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, 1997.
AT DECEMBER 31, 1997 ---------------------------------------------------------------------------------------------- ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL ---------------------- ------------------------ ---------------------------------------------- ANNUALIZED ANNUALIZED ANNUALIZED WEIGHTED WEIGHTED AVERAGE WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET LIFE IN AVERAGE VALUE YIELD VALUE YIELD VALUE VALUE YEARS YIELD --------- ---------- ---------- ------------ --------- ------------ ------- ------------ (DOLLARS IN THOUSANDS) Investment securities: U.S. Treasury securities $ 9,015 5.94% $ 2,031 6.54% $11,046 $11,046 1 6.05% FHLB Stock - - - - 1,550 1,550 7.00 Common Stock. - - - - 545 545 2.66 Preferred Stock-other - - - - 274 274 7.01 Preferred Stock-FNMA - - - - 5,400 5,400 6.49 Preferred Stock-FHLMC - - - - 1,001 1,001 6.53 ------- ---- ------- ---- ------- ------- ---- Total $ 9,015 5.94% $ 2,031 6.54% $19,816 $19,816 6.22% Interest-bearing deposits at the FHLB 2,463 5.37 - - 2,463 2,463 5.37 ------- ---- ------- ---- ------- ------- ---- Total investments $11,478 5.82% $ 2,031 6.54% $22,279 $22,279 6.12% ======= ==== ======= ==== ======= ======= ====
-13- SOURCES OF FUNDS General. Deposits are the major source of the Company's funds for lending and other investment purposes. In addition to deposits, the Company derives funds from FHLB advances, the amortization and prepayment of loans, the maturity of investment securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. 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 1997, 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, passbook savings, statement savings, 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. The Company has sought to decrease the risk associated with changes in interest rates by offering competitive rates on deposit accounts and by pricing certificates of deposit to provide customers with incentives to choose certificates of deposit with longer terms. The Company does not obtain funds through brokers through a solicitation of funds outside its market area, nor by offering negotiated rates on certificates of deposit in excess of $100,000. Deposit Portfolio. Deposits with the Company as of December 31, 1997, were represented by the various types of deposit programs described below.
WEIGHTED AVERAGE CHECKING AND PERCENTAGE INTEREST ORIGINAL SAVINGS OF TOTAL RATE TERM DEPOSITS MINIMUM BALANCE BALANCES DEPOSITS -------- -------- ------------ --------------- -------- ---------- (Dollars in thousands) 0.00% None Noninterest- $ 50 $ 3,145 2.23% bearing demand 2.00% None NOW accounts 50 14,457 10.24 2.25% None Passbook 25 17,120 12.13 savings 4.35% None Money Market savings 2,500 8,958 6.35 CERTIFICATES OF DEPOSIT ----------------- 3.02% 1-3 months Fixed term, fixed rate 1,000 34 0.02 4.27% 4-6 months Fixed term, fixed rate 1,000 1,074 0.76 5.57% 7-9 months Fixed term, fixed rate 1,000 1,002 0.71 5.57% 10-12 months Fixed term, fixed rate 1,000 7,872 5.58 5.69% 13-24 months Fixed term, fixed rate 1,000 27,298 19.35 5.75% 25-36 months Fixed term, fixed rate 1,000 12,150 8.61 6.33% 37-48 months Fixed term, fixed rate 1,000 599 0.42 6.24% 49-60 months Fixed term, fixed rate 1,000 47,183 33.44 6.35% 61 months or Fixed term, greater fixed rate 1,000 176 0.12 3.50% Various Variable rate 100 56 0.04 -------- ------ Total certificates of deposit 97,444 69.05 -------- ------ $141,124 100.00% ======== ======
-14- The following table sets forth the change in dollar amount of deposits in the various types of deposit accounts offered by the Company between the dates indicated.
INCREASE INCREASE INCREASE INCREASE BALANCE (DECREASE) (DECREASE) BALANCE (DECREASE) (DECREASE) BALANCE 12/31/97 % $ 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 ======== ====== ======= ======== ===== ======= ========
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 $ 2,267 1.93% $ 43 $ 2,224 (8.14)% $ (197) $ 2,421 NOW 11,436 6.20 668 10,768 6.25 633 10,135 Passbook savings 18,860 (14.17) (3,114) 21,974 (11.67) (2,903) 24,877 Money market savings 5,627 169.62 3,540 2,087 (14.85) (364) 2,451 Certificates of deposit that mature: within 12 months 30,213 (21.32) (8,185) 38,398 (16.56) (7,620) 46,018 within 12-36 months 34,137 19.54 5,580 28,557 (8.22) (2,557) 31,114 beyond 36 months 24,132 19.58 3,951 20,181 42.83 6,052 14,129 -------- ------ ------- -------- ------ ------- -------- Total $126,672 2.00% $ 2,483 $124,189 (5.30)% $(6,956) $131,145 ======== ====== ======= ======== ====== ======= ========
-15- The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated:
AT DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- (IN THOUSANDS) RATE ---- 3.99% or less $ 91 $ 140 $ 1,028 4.00-5.99% 45,749 45,481 35,172 6.00-7.99% 51,585 44,913 51,212 8.00 or greater 19 53 1,070 ------- ------- ------- $97,444 $90,587 $88,482 ======= ======= =======
The following table sets forth the amount and maturities of certificates of deposit at December 31, 1997.
Amount Due --------------------------------------------------------------- Less After Than 1 1-2 2-3 3-4 4-5 5 Year Years Years Years Years Years Total ------- ------- ------- ------ ------- ----- ------- (In thousands) Rate ---- 3.99% or less $ 91 $ - $ - $ - $ - $ - $ 91 4.00-5.99% 26,277 12,430 4,667 2,264 111 - 45,749 6.00-7.99% 14,377 12,211 13,094 5,567 6,325 11 51,585 8.00% or greater 17 2 - - - - 19 ------- ------- ------- ------ ------- ---- ------- $40,762 $24,643 $17,761 $7,831 $ 6,436 $ 11 $97,444 ======= ======= ======= ====== ======= ==== =======
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, 1997. This amount does not include passbook savings accounts of greater than $100,000, which totalled approximately $585,000 at December 31, 1997.
Certificates of Deposit over Remaining Maturity $100,000 --------------------------------- --------------- (In thousands) Three months or less $ 219 Three through six months 818 Six through twelve months 1,513 Over twelve months 3,232 ------ Total $5,782 ======
-16- The following table sets forth the savings activities of the Company for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 -------- -------- -------- (IN THOUSANDS) Net increase (decrease) before interest credited $ 6,132 $(1,751) $(2,502) Interest credited 5,270 4,801 4,985 ------- ------- ------- Net increase in deposits $11,402 $ 3,050 $ 2,483 ======= ======= =======
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. In conjunction with the Bank's conversion from mutual to stock form in 1994, the Bank established an Employee Stock Ownership Plan (the "ESOP") for eligible employees. The ESOP borrowed $960,000 from an unrelated third party lender to finance the purchase of 96,000 shares of the Bank's common stock. Collateral for such loan consisted of the common stock held by the ESOP, as well as $100,000 in cash pledged by North Central Bancshares, MHC. The term of the loan was 10 years. The ESOP also borrowed funds in the amount of $840,000 from the Holding Company to purchase 84,000 shares of the Holding Company's Common Stock issued in the reorganization of the Bank and the MHC to the stock holding company form in 1996. In September 1996, these two loans were consolidated into a single loan from the Holding Company to the ESOP.
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Weighted average rate paid on: (1) FHLB advances 5.94% 5.76% 5.63% FHLB advances: Maximum balance $29,800 $24,300 $21,000 Average balance 23,672 11,503 12,734 Weighted average rate paid on: ESOP advances N/A 8.03% 8.70% ESOP advances: Maximum balance N/A 790 886 Average balance N/A 513 850 Weighted average rate paid on: Other borrowings 9.00% 7.00% 7.00% Other borrowings: Maximum balance $35 $130 $150 Average balance 7 98 150
________________________ (1) Calculated using monthly weighted average interest rates. -17- TITLE ABSTRACT BUSINESS A component of the Company's operating strategy is to increase non-interest income, primarily through the expansion of the abstract company business conducted through a wholly owned subsidiary, First Iowa Title Services Inc. ("First Iowa"). 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 damage by reason of defective title, encumbrance or otherwise. Institutions can purchase title insurance, for their own protection or to sell loans on the secondary market, but the cost of this insurance may not be passed on to the borrower. First Iowa had 18 employees as of December 31, 1997. INSURANCE AND ANNUITY BUSINESS The Company has another wholly-owned subsidiary, First Financial Service Corporation ("First Financial"), which it began in 1971. First Financial's activities include the sale of life insurance on mortgage loans, and credit life and accident and health insurance on consumer loans made by the Company. In addition, First Financial sells life insurance annuity products. In connection with the Acquisition, the Bank acquired Valley Services, Inc., which was merged into First Financial. First Financial also originates leases for equipment such as computers, office equipment, light industrial equipment and commercial cleaning equipment. First Financial has no employees. The subsidiary has executed a management agreement with the Company which provides its management and staff. MORTGAGE COMPANY BUSINESS First Iowa Mortgage Corp. (formerly known as Hearthstone Mortgage Company, Inc.) was acquired as a part of the Acquisition of Valley Financial and is a wholly-owned subsidiary of the Bank. First Iowa Mortgage Corp. originates and buys first mortgage loans and subsequently sells these loans to investors. MULTIFAMILY 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, 1997 are approximately $100,000. The tax credits will amount to approximately $150,000 for each year during the nine-year period commencing with the year ended December 31, 1998. PERSONNEL At December 31, 1997, the Company had 58 full-time and 23 part-time employees (including the 18 employees of First Iowa). In connection with the Acquisition, the Company added 35 full-time and 3 part-time employees. None of the Company's employees is represented by a collective bargaining group. The Company believes its relationship with its employees to be good. -18- FEDERAL AND STATE TAXATION FEDERAL TAXATION General. The following is a general discussion of material tax matters and does not purport to be a comprehensive description of the tax rules applicable to the Holding Company or the Bank. The Bank was last audited for its taxable year ended December 31, 1985. For federal income tax purposes, the Holding Company and the Bank will be eligible to file consolidated income tax returns and report their income on a calendar year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts, discussed below. Recent Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996 (the "Small Business Act"), for federal income tax purposes, thrift institutions such as the Bank, which met certain definitional tests primarily relating to their assets and the nature of their business, were permitted to establish tax reserves for bad debts and to make annual additions thereto, which additions could, within specified limitations, be deducted in arriving at their taxable income. The Company's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, could be computed using an amount based on a six-year moving average of the Company's actual loss experience (the "Experience Method"), or a percentage equal to 8.0% of the Company's taxable income (the "PTI Method"), computed without regard to this deduction and with additional modifications and reduced by the amount of any permitted addition to the non- qualifying reserve. Under the Small Business Act, the PTI Method was repealed and the Bank, as a "small bank" (one with assets having an adjusted basis of $500 million or less) is required to use the Experience Method of computing additions to its bad debt reserve for taxable years beginning with the Company's taxable year beginning January 1, 1996. In addition, the Company is required to recapture (i.e., take into taxable income) over a six-year period, beginning with the Company's taxable year beginning January 1, 1996, the excess of the balance of its bad debt reserves (other than the supplemental reserve) as of December 31, 1995 over the greater of (a) the balance of its "base year reserve," i.e., its reserves as of December 31, 1987 or (b) an amount that would have been the balance of such reserves as of December 31, 1995 had the Company always computed the additions to its reserves using the Experience Method. However, under the Small Business Act such recapture requirements is suspended for each of the two successive taxable years beginning January 1, 1996 in which the Company originates a minimum amount of certain residential loans during such years that is not less than the average of the principal amounts of such loans made by the Company during its six taxable years preceding January 1, 1996. Thus, the Bank will begin this recapture in its 1998 taxable year. Distributions. To the extent that the Company makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Company's base year reserve to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Company's taxable income. Nondividend distributions include distributions in excess of the Company's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Company's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute nondividend distributions and, therefore, will not be included in the Company's income. The amount of additional taxable income created from a nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. -19- Corporate Alternative Maximum Tax. The Internal Revenue Code (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net operating losses. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). In addition, for taxable years beginning before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million was imposed on corporations, including the Company, whether or not an Alternative Maximum Tax ("AMT") is paid. Under President Clinton's fiscal year 1999 budget proposal ("President Clinton's Proposal"), the corporate environmental income tax would be reinstated for taxable years beginning after December 31, 1997 and before January 1, 2009. The Company does not expect to be subject to the AMT, but would be subject to the environmental tax liability. 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. STATE AND LOCAL TAXATION Iowa Taxation. The Holding Company and the Bank's subsidiaries will file Iowa corporation tax returns and the Bank will file an Iowa franchise tax return. The Bank currently files an Iowa franchise tax return, and the Holding Company and the Bank's subsidiaries file an Iowa corporation tax return, on a calendar year basis. The State of Iowa imposes a tax on the Iowa franchise taxable income of thrift institutions at the rate of 5%. Iowa franchise taxable income is generally similar to federal taxable income except that interest from state and municipal obligations is taxable, and no deduction is allowed for state franchise taxes. The net operating loss carryback and carryforward rules are similar to the federal rules. The state corporation income tax rate ranges from 6% to 12% depending upon Iowa corporation taxable income. Interest from federal securities is not deductible for purposes of the Iowa corporation income tax. REGULATION GENERAL The Bank is a federal savings bank subject to the regulation, examination and supervision by the OTS and is subject to the examination and supervision of the Federal Deposit Insurance Corporation ("FDIC") as its deposit insurer. The Bank is a member of the SAIF, and its deposit accounts are insured up to applicable limits by the FDIC. All of the deposit premiums paid by the Bank to the FDIC for deposit insurance are currently paid to the SAIF. The Bank is also a member of the FHLB of Des Moines, which is one of the 12 regional FHLBs. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The Holding Company, as a -20- savings and loan holding company, files certain reports with, and otherwise complies with, the rules and regulations of the OTS and of the Commission under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank, and the operations of both. Legislative proposals to restructure the organization and regulation of the financial services industry have been submitted to Congress in recent years. In addition, the Deposit Insurance Funds Act of 1996 (the "1996 Funds Act") requires the Secretary of the Treasury to conduct a study of the relevant factors with respect to the development of a common charter for all insured depository institutions and to the abolition of separate charters for banks and thrifts, and the Secretary of the Treasury is to report his conclusions and findings to the Congress. The Secretary of the Treasury has recommended to the Congress that the separate charter for thrifts be eliminated only if other legislation is adopted that permits bank holding companies to engage in certain non-financial activities. Absent legislation permitting bank holding companies to engage in such non-financial activities, the Secretary of the Treasury recommended that the thrift charter be retained. Proposed legislation agreed to in March 1998 by the House Committee on Banking and Financial Services and the House Committee on Commerce provides for the retention of the thrift charter, subject to a requirement that a thrift invest at least 10% of its assets in home mortgages. Existing thrift holding companies, such as the Holding Company, would be grandfathered and continue to be able, in the absence of certain events, to engage in the same activities as were permissible for it before the enactment of the new law. The House Committees also agreed that the BIF and the SAIF would be merged on January 1, 2000 and that the OTS would be made a division of the Office of the Comptroller of the Currency. The outcome of this legislation is uncertain. Therefore, the Company is unable to determine the extent to which any such legislation, if enacted, would affect the Company's business. The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations and their holding companies, and it does not purport to be a comprehensive description of all such statutes and regulations. REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES The Holding Company is a savings and loan holding company 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 Owner and Loan Act ("HOLA"), as amended, prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings association or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5.0% of a non-subsidiary savings association, a non-subsidiary holding company or a non-subsidiary company engaged in activities other than those permitted by HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application by a holding company to acquire a savings association, the OTS must consider the financial and managerial resources and future prospects of the company and savings association involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. As a unitary savings and loan holding company, the Holding Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to satisfy the QTL test. See "- Regulation of Federal Savings Associations - QTL Test" for a discussion of the QTL requirements. Upon any nonsupervisory acquisition by the Company of another savings -21- 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. Transactions between the Bank and the Holding Company and its other subsidiaries would be subject to various conditions and limitations. See "- Regulation of Federal Savings Associations - Transactions with Related Parties." The Bank would have to give 30- days written notice to the OTS prior to any declaration of the payment of any dividends or other capital distributions to the Holding Company. See "- Regulation of Federal Savings Associations - Limitation on Capital Distributions." REGULATION OF FEDERAL SAVINGS ASSOCIATIONS Business Activities. The Bank derives its lending and investment powers from the HOLA and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including: (i) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (ii) a limit of 400% of an association's capital on the aggregate amount of loans secured by nonresidential real estate property; (iii) a limit of 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 5.0% of assets on non-conforming loans (loans in excess of the specific limitations of HOLA); and (vi) a limit of the greater of 5.0% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. Loans to One Borrower. Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, in the aggregate not exceeding 10% of unimpaired capital and surplus, if any such loan or extension of credit is fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. For the year ended December 31, 1997, the Bank generally imposed a $1.5 million limit on the aggregate size of loans to any one borrower. Any exception to the limit -22- 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, 1997, the Bank's largest aggregate amount of loans to one borrower was $1.3 million, and the second largest borrower had an aggregate balance of $1.26 million. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." QTL Test. HOLA requires a savings association to meet a QTL test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least 9 months of the most recent 12- month period. "Portfolio assets" means, in general, an association's total assets less the sum of (i) specified liquid assets up to 20% of total assets, (ii) 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, and loans for personal, family, household and certain other purposes up to a limit of 20% of an association's portfolio assets. Recent legislation broadened the scope of "qualified thrift investments" to include 100% of an institution's credit card loans, education loans, and small business 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, 1997, the Bank maintained 97.2% 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 3.0% of core capital to such adjusted total assets, and a risk-based capital ratio requirement of 8.0% of core and supplementary capital to total risk-based assets. The 3.0% core capital requirement has been effectively superseded by the OTS' prompt corrective action regulations, which impose a 4.0% core capital requirement for "adequately capitalized" thrifts and a 5.0% core capital requirement for "well capitalized" thrifts. See "- Prompt Corrective Regulatory Action." The OTS and the federal banking regulators have proposed amendments to their minimum capital regulations to provide that the minimum leverage capital ratio for a depository institution that has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Ratings System will be 3% and that the minimum leverage capital ratio for any other depository institution will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks found by the OTS to be inherent in the type of asset. Tangible capital is defined, generally, as common stockholder's equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of -23- fully consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and the allowance for loan and lease losses. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. 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, 1997, the Bank was not required to maintain any additional risk-based capital under this regulation. At December 31, 1997, 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, 1997:
CAPITAL EXCESS BANK REQUIREMENTS CAPITAL --------- ------------ ------- (IN THOUSANDS) Tangible capital $37,935 $3,298 $34,637 Core capital 37,935 6,595 31,340 Risk-based capital 39,478 9,830 29,648
A reconciliation between regulatory capital and GAAP capital at December 31, 1997 in the accompanying financial statements is presented below:
TANGIBLE CORE RISK-BASED CAPITAL CAPITAL CAPITAL -------- ------- ---------- (IN THOUSANDS) GAAP capital $39,251 $39,251 $39,251 Intangible assets (1,121) (1,121) (1,121) Unrealized (gain) on certain available for sale assets (195) (195) (195) Allowance for loan losses includable in supplementary capital - - 1,543 ------- ------- ------- Regulatory capital $37,935 $37,935 $39,478 ======= ======= =======
Limitation on Capital Distributions. OTS regulations currently impose limitations upon capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger, and other distributions charged against capital. At least 30-days written notice must be given to the OTS of a proposed capital distribution by a savings association, and capital distributions in excess of specified earnings or by certain institutions are subject to approval by the OTS. An association that has capital in excess of all fully phased-in regulatory capital requirements before and after a proposed capital distribution and that is not otherwise restricted in making capital distributions, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (ii) 75% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if -24- the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described above. See "- Prompt Corrective Regulatory Action." The OTS has proposed amendments of its capital distribution regulations to reduce regulatory burdens on savings associations. If adopted as proposed, certain savings associations will be permitted to pay capital distributions within the amounts described above for Tier 1 institutions without notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Association, will continue to have to file a notice unless the specific capital distribution requires an application. Liquidity. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4.0% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4.0%. Monetary penalties may be imposed for failure to meet these liquidity requirements. At December 31, 1997, the Bank's liquidity position was $14.0 million or 9.28% of liquid assets, compared to $13.1 million or 9.11% at December 31, 1996. During the fourth quarter of 1997, the OTS revised its liquidity requirements by reducing the minimum liquidity requirements from 5% to 4% and eliminating the short term liquidity requirement. Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semi-annual basis, is computed upon the savings association's total assets, including consolidated subsidiaries, as reported in the association's latest quarterly Thrift Financial Report. Branching. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (i) in states that expressly authorize branches of savings associations located in another state and (ii) to an association that qualifies as a "domestic building and loan association" under the Code, which imposes qualification requirements similar to those for a "qualified thrift lender" under HOLA. See "- QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Branch applications for Boone, Iowa and Perry, Iowa have been submitted and approved by the Office of Thrift Supervision. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an "Outstanding" CRA rating in its most recent examination. In April 1995, the OTS and the other federal banking agencies adopted amendments revising their CRA regulations. Among other things, the amended CRA regulations substitute for the prior process-based assessment factors a new evaluation system that would rate an institution based on its actual performance in meeting community needs. In particular, the proposed system would focus on three tests: (i) a lending test, -25- to evaluate the institution's record of making loans in its service areas; (ii) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. Small savings associations are to be assessed pursuant to a streamlined approach focusing on a lesser range of information and performance standards. The term "small savings association" is defined as including associations with less than $250 million in assets or an affiliate of a holding company with banking and thrift assets of less than $1.0 billion, which would include the Bank. The amended CRA regulations also clarify how an institution's CRA performance would be considered in the application process. Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Bank's subsidiaries other than those that are insured depository institutions. The OTS regulations prohibit a savings association (i) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the BHC Act and (ii) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank's authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board (the "FRB") thereunder. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of credit in excess of certain limits must be approved by the association's board of directors. Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution-affiliated parties," including any controlling stockholder or any stockholder, attorney, appraiser and accountant who knowingly or recklessly participates in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause a more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide range of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders and certain written agreements and conditions continue, up to $1,000,000 per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $10 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that -26- 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 adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the OTS adopted regulations that authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. See "- Prompt Corrective Regulatory Action." If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. Real Estate Lending Standards. The OTS and the other federal banking agencies adopted regulations to prescribe standards for extensions of credit that (i) are secured by real estate or (ii) are made for the purpose of financing the construction of improvements on real estate. The OTS regulations require each savings association to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying OTS guidelines, which include loan-to-value ratios for the different types of real estate loans. Associations are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are reviewed and justified appropriately. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standards are justified. Prompt Corrective Regulatory Action. 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, 1997, the Association met the criteria for being considered "well capitalized" by the OTS. Where appropriate, the OTS can impose corrective action by a savings and loan holding company under the "prompt corrective action" provisions of FDICIA. -27- Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established a new risk-based assessment system for determining the deposit insurance assessments to be paid by insured depositary institutions. Under the new assessment system, which began in 1993, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the reporting period ending seven months before the assessment period. The three capital categories consist of (i) well capitalized, (ii) adequately capitalized, or (iii) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. 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. In addition, the 1996 Funds Act expanded the assessment base for the payments on the FICO bonds. Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured institutions were assessed for the payments on the FICO bonds. Until December 31, 1999, or such earlier date on which the last savings association ceases to exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual rate of assessments for the payments on the FICO bonds for the semi-annual period beginning on January 1, 1997 was set at 0.0130% for BIF-assessable deposits and 0.0648% for SAIF-assessable deposits. For the semi-annual period beginning on July 1, 1997, the rates of assessment for the FICO bonds was 0.0126% for BIF- assessable deposits and 0.0630% for SAIF-assessable deposits. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB of Des Moines, is required to acquire and hold shares of capital stock in the FHLB of Des Moines in an amount at least equal to the greater of 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 1/20 of its advances (borrowings) from the FHLB of Des Moines. The Bank was in compliance with this requirement with an investment in FHLB of Des Moines stock at December 31, 1997 of $1.5 million. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would likely also be reduced. -28- Federal Reserve System. The Bank is subject to provisions of the FRA and the FRB's regulations pursuant to which depositary institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts up to $47.8 million. The amount of aggregate transaction accounts in excess of $47.8 million are currently subject to a reserve ratio of 10.0%, which ratio the FRB may adjust between 8.0% and 12%. The FRB regulations currently exempt $4.7 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the FRB at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve discount window, but FRB regulations require such institutions to exhaust all FHLB sources before borrowing from a Federal Reserve Bank. -29- EXECUTIVE OFFICERS OF THE HOLDING COMPANY The name, age, position, term of office as officer and period during which he or she has served as an officer is provided below for each executive officer of the Holding Company. David M. Bradley, Jean L. Lake, C. Thomas Chalstrom and John L. Pierschbacher are executive officers of the Holding Company and the Bank. Kirk A. Yung is an executive officer of the Bank, and as such, is deemed to be executive officer of the Holding Company pursuant to SEC regulations. David M. Bradley, CPA has been President of the Bank since 1990, Chief Executive Officer of the Bank since 1992 and was named Chairman of the Board in January 1997. He has been affiliated with the Bank for 15 years. Mr. Bradley is 45 years of age. Jean L. Lake has been employed with the Bank since 1972 and was named Secretary in 1987. Ms. Lake serves as Board Secretary and is in charge of marketing. Ms. Lake is 55 years of age. John L. Pierschbacher, CPA has been employed with the Bank since 1992. Mr. Pierschbacher was named Treasurer in January 1994. He is the Bank's chief financial officer and is in charge of the accounting functions of the Bank. Mr. Pierschbacher was employed in public accounting for nine years at the public accounting firm of McGladrey & Pullen, LLP prior to joining the Bank. Mr. Pierschbacher is 38 years of age. C. Thomas Chalstrom has been employed with the Bank since 1985, was named Executive Vice President of the Bank in January 1995 and Executive Vice President of the Holding Company in January, 1998. Mr. Chalstrom is in charge of real estate mortgage lending. Mr. Chalstrom is 33 years of age. Kirk A. Yung has been employed with the Bank since 1990, was named Senior Vice President in January 1995, and is in charge of consumer lending. Mr. Yung had five years of prior experience in various positions in financial institutions before joining the Bank. Mr. Yung is 35 years of age. ITEM 2. PROPERTIES The Company conducts its business through its main office located in Fort Dodge, Iowa and six full-service offices located in Fort Dodge, Nevada, Ames, 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 at December 31, 1997. All of the offices of the Company are owned. In addition to the properties listed below, First Financial owns land in Fort Dodge, Iowa with a net book value of $99,000 and Northridge Apartments Limited Partnership owns a multifamily apartment building with a net book value of $2.1 million at December 31, 1997. The aggregate net book value of the Company's premises and equipment, on a consolidated basis was $2.1 million at December 31, 1997. -30-
LEASE LOCATION OPENING DATE EXPIRATION DATE NET BOOK VALUE -------- ------------ --------------- -------------- MAIN OFFICE: 825 Central Avenue 1973 N/A $746,299 Fort Dodge, Iowa BRANCH OFFICES: 201 South 25th Street 1977 N/A $233,512 Fort Dodge, Iowa 404 Lincolnway 1977 N/A $582,644 Nevada, Iowa 107 Main Street 1977 N/A $394,409 Ames, Iowa 321 North Third Street 1953 N/A $776,494(3) Burlington, Iowa 1010 North Roosevelt 1975 N/A $214,980(3) Burlington, Iowa 102 South Main 1991 N/A $ 82,886(3) Mount Pleasant, Iowa FIRST IOWA OFFICES: 805 Central Avenue 1982 1998 (1) $ 14.975 Fort Dodge, Iowa 814 8th Street 1996 1998 $ 8,486 Boone, Iowa 200 1st Street South 1996 1998 (2) $ 12,722 Newton, Iowa REAL PROPERTY: 1st Avenue and Hwy 141 N/A N/A $149,969 Perry, 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. (3) Acquired on January 30, 1998 in connection with the Acquisition. 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, 1997. -31- PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS PRICE RANGE OF THE COMPANY'S COMMON STOCK The Company's Common Stock trades on The Nasdaq National Market System under the symbol "FFFD." The following table shows the high and low per share sales prices of the 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 ------------- ---- --- --------- 1996 (1) ---- First Quarter 11.293 10.625 0.0922 Second Quarter 11.375 10.000 0.0625 Third Quarter 12.750 10.125 0.0625 Fourth Quarter 14.125 12.375 0.0625 1997 ---- First Quarter 16.750 13.375 0.0625 Second Quarter 16.125 15.000 0.0625 Third Quarter 18.250 15.625 0.0625 Fourth Quarter 20.125 17.188 0.0625
______________ (1) From August 31, 1994 to March 20, 1996, the prices indicated have been adjusted for the retroactive effect of the Conversion. INFORMATION RELATING TO THE COMPANY'S COMMON STOCK As of March 19, 1998, the Company had 714 shareholders of record, which does not reflect the number of persons or entities who hold their Common Stock in nominee or "street" name through various brokerage firms. As of such date 3,266,483 shares of the Common Stock were outstanding. The Company's current quarterly dividend is $0.08 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 -32- preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. 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. -33-
AT DECEMBER 31, ------------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS) SELECTED CONSOLIDATED FINANCIAL CONDITION DATA: Total assets $221,954 $203,093 $179,930 $157,153 $147,130 Cash (noninterest bearing) 982 963 709 719 602 Loans receivable, net:(1) First mortgage loans secured by one-to-four family residences 114,286 106,053 93,438 82,523 76,112 First mortgage loans secured by multifamily properties 49,895 33,015 30,070 19,815 20,476 First mortgage loans secured by commercial properties 3,724 5,068 5,650 5,974 6,291 Consumer loans 23,344 21,695 18,714 16,472 14,088 -------- -------- -------- -------- -------- Total loans receivable, net 191,249 165,831 147,872 124,784 116,967 Investment securities(2) 22,279 29,577 26,156 28,389 26,830 Deposits 141,124 129,722 126,672 124,189 131,145 Borrowed funds 28,550 22,335 21,940 3,886 - Total shareholders' equity 50,417 49,235 29,900 27,813 14,761
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS) Selected Operating Data: Interest income $ 16,205 $ 15,090 $ 13,148 $ 11,592 $ 11,668 Interest expense 7,900 6,929 7,079 6,048 6,614 -------- -------- -------- -------- -------- Net interest income before provision for loan losses 8,305 8,161 6,069 5,544 5,054 Provision for loan losses 240 240 250 242 248 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 8,065 7,921 5,819 5,302 4,806 -------- -------- -------- -------- -------- Noninterest income: Fees and service charges 657 580 445 430 461 Abstract fees 1,222 931 794 332 365 Other income 658 382 463 286 232 -------- -------- -------- -------- -------- Total noninterest income 2,537 1,893 1,702 1,048 1,058 -------- -------- -------- -------- -------- Noninterest expense: Salaries and employee benefits 2,209 2,004 1,681 1,282 1,103 Premises and equipment 444 421 382 326 321 Data processing 258 244 236 248 284 One-time SAIF special assessment - 817 - - - SAIF deposit insurance premiums 85 279 287 306 248 Other expenses 1,581 1,173 1,072 761 618 -------- -------- -------- -------- -------- Total noninterest expense 4,577 4,938 3,658 2,923 2,574 -------- -------- -------- -------- -------- Income before income taxes 6,025 4,876 3,863 3,427 3,290 Income tax expense 2,108 1,744 1,403 1,247 1,223 -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle 3,917 3,132 2,460 2,180 2,067 Change in accounting principle - - - - 135 -------- -------- -------- -------- -------- Net income $ 3,917 $ 3,132 $ 2,460 $ 2,180 $ 2,202 ======== ======== ======== ======== ========
-34-
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- 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) 2.87% 3.01% 2.75% 3.02% 2.94% Net interest margin (net interest income as a percentage of average interest- earning assets) 4.06 4.33 3.66 3.70 3.50 Return on average assets (net income divided by average total assets) 1.86 1.62 1.45 1.43 1.50 Return on average equity (net income divided by average equity) 7.94 6.30 8.54 11.19 16.06 Noninterest income to average assets 1.20 0.98 1.00 0.69 0.72 Efficiency ratio(3) 42.21 49.11 47.07 44.35 42.11 Noninterest expense to average assets 2.17 2.56 2.16 1.92 1.76 Net interest income after provision for loan losses to noninterest expenses 176.22 160.40 159.07 181.41 186.71 FINANCIAL CONDITION RATIOS:(4) (%) Equity to assets at period end 22.72 24.24 16.62 17.70 10.02 Average shareholders' equity divided by average total assets 23.38 25.73 16.99 12.82 9.37 Average interest-earning assets to average interest-bearing liabilities 130.97 136.02 121.37 116.87 112.23 ASSET QUALITY RATIOS:(4) (%) Nonaccrual loans to total net loans 0.08 0.11 0.12 0.26 0.09 Nonperforming assets to total assets(5) 0.10 0.15 0.23 0.21 0.08 Allowance for loan losses as a percent of total loans receivable at end of period 1.10 1.16 1.15 1.20 1.09 Allowance for loan losses to nonaccrual loans 1,468.33 1,059.35 960.20 476.23 1,279.41 PER SHARE DATA: Book value per share $15.43 $14.36 $8.72 $8.11 N/A Basic earnings per share (6) 1.23 0.82 0.63 0.21 N/A Diluted earnings per share (7) 1.21 0.82 0.63 0.21 N/A Dividends declared per share 0.25 0.28 0.60 0.12 N/A Dividend payout ratio 0.20 0.34 0.95 0.57 N/A KEY FINANCIAL RATIOS EXCLUDING SAIF ASSESSMENT: (%) (8) Return on average assets (net income divided by average total assets) 1.86% 1.89% 1.45% 1.43% 1.50% Return on average equity (net income divided by average equity) 7.94 7.34 8.54 11.19 16.06 Efficiency ratio (3) 42.21 40.99 47.07 44.35 42.11 Noninterest expense to average assets 2.17 2.13 2.16 1.92 1.76 Net interest income after provision for loan losses to noninterest expenses 176.22 192.21 159.07 181.41 186.71
_______________________ (Notes on following page) -35- (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, 1997, 1996, 1995, 1994 and 1993 was $2.2 million, $2.0 million, $1.7 million, $1.5 million and $1.3 million, respectively. (2) Includes interest-bearing deposits with the Federal Home Loan Bank of Des Moines (the "FHLB"). The Company has classified its securities as "held-to-maturity" or "available-for-sale" since January 1, 1994, when it adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." (3) Efficiency ratio represents noninterest expense divided by the sum of net interest income before provision for loan losses plus noninterest income. (4) Asset Quality Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods and are annualized where appropriate. (5) Nonperforming assets consists of nonaccrual loans, foreclosed real estate and other nonperforming assets. (6) Basic earnings per share information is calculated by dividing net income by the weighted average number of shares outstanding. Basic earnings per share information for the year ended December 31, 1994 is calculated by dividing net income subsequent to the conversion of the Bank from mutual to stock form in 1994 by the weighted average number of shares outstanding. The weighted average number of shares outstanding for basic earnings per share computation for 1997, 1996, 1995 and 1994 were 3,184,269, 3,818,273, 3,919,488 and 3,906,980, respectively. Net income subsequent to such conversion was $810,000 for the period ended December 31, 1994. See Note 18 to the Consolidated Financial Statements. (7) 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. Diluted earnings per share information for the year ended December 31, 1994 is calculated by dividing net income subsequent to the conversion of the Bank from mutual to stock form in 1994 by the weighted average number of shares outstanding. The weighted average number of shares outstanding for diluted earnings per share computation for 1997, 1996, 1995 and 1994 were 3,241,069, 3,818,273, 3,919,488 and 3,906,980, respectively. Net income subsequent to such conversion was $810,000 for the period ended December 31, 1994. See Note 18 to the Consolidated Financial Statements. (8) For 1996, excludes the one-time $817,000 (pre-tax) special assessment for the recapitalization of the Savings Association Insurance Fund ("SAIF"). -36- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL North Central Bancshares, Inc. (the "Holding Company"), an Iowa corporation, is the holding company for First Federal Savings Bank of Iowa (formerly known as First Federal Savings Bank of Fort Dodge) (the "Bank"), a federally chartered savings bank. Collectively, the Holding Company and the Bank are referred to herein as the "Company." The Holding Company was organized on December 5, 1995 at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock to be issued by the Bank in connection with the conversion and reorganization of the Bank and North Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding company structure (these transactions are collectively referred to as the "Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding Company issued an aggregate of 4,011,057 shares of its Common Stock, par value $0.01 per share, of which 1,385,590 shares were issued in exchange for all of the Bank's issued and outstanding shares, except for shares owned by the MHC which were cancelled, and 2,625,467 shares of which were sold in Subscription and Community Offerings at a price of $10.00 per share, with gross proceeds amounting to $26,254,670. At this time, the Holding Company conducts business as a unitary savings and loan holding company and the principal business of the Holding Company consists of the operation of its wholly-owned subsidiary, the Bank. The profitability of the Company depends primarily on its level of net interest income, which is the difference between interest earned on the Company's interest-earning assets, consisting primarily of loans and investment securities, and the interest paid on interest-bearing liabilities, which 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 Bank completed the acquisition (the "Acquisition") of Valley Financial Corp., an Iowa corporation ("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, headquartered in Burlington, Iowa was a federally-chartered stock savings bank with three branch offices located in southeastern Iowa. The former offices of Valley Savings are being operated as a division of the Bank. 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 Acquisition is expected to be slightly accretive to earnings in 1998. 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 -37- receipts, net of operating expenses and other projected disbursements. The Acquisition was consummated after the receipt of regulatory and Valley shareholder approvals. SAIF RECAPITALIZATION In response to the disparity in deposit insurance assessment rates that existed between banks insured by the Bank Insurance Fund ("BIF") and thrifts insured by the SAIF, the Deposits Funds Insurance Act of 1996 (the "Funds Act") was enacted on September 30, 1996. The Funds Act authorized the Federal Deposit Insurance Corporation ("FDIC") to impose a special assessment on all institutions with SAIF-assessable deposits in the 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 year ended December 31, 1997, the Bank incurred $85,000 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 by primarily using deposits and advances from the FHLB, as its source of funds and maintaining a substantial part of its assets in loans secured by one- to four-family residential real estate located both inside and outside the Company's market area, multifamily loans, consumer and other loans and in other liquid investment securities. Specifically, the Company's business strategy incorporates the following elements: (1) operating as a community-oriented financial institution, maintaining a strong core customer base by providing quality service and offering customers the access to senior management and services that a locally-headquartered institution can offer; (2) maintaining high asset quality by emphasizing investment in residential mortgage loans (including the purchase of qualifying multifamily loans) and securities issued or guaranteed by the United States Government or agencies thereof; (3) maintaining capital in excess of regulatory requirements and growing only to the extent that adequate capital levels can be maintained; (4) controlling noninterest expenses; (5) managing interest rate risk exposure while achieving desirable levels of profitability; and (6) increasing noninterest income, primarily through the expansion of the abstract company business conducted through a wholly owned subsidiary. Highlights of the Company's business strategy are as follows: Community-Oriented Institution. The Company is committed to meeting the financial needs of the community in which it operates. Based in part on its participation in several different programs designed to facilitate residential lending to low- and moderate-income households, the Bank has received an "Outstanding" Community Reinvestment Act rating. The Company believes it is large enough to provide a full range of personal and business financial services and yet is small enough to be able to provide such services on a personalized and efficient basis. Management believes that the Company can be more effective in servicing its customers than many of its competitors which are not headquartered locally, because senior management of the Bank quickly and personally responds to customer needs and inquiries. Strong Retail Deposit Base. In 1997, the Company had a relatively strong and stable retail deposit base drawn from its offices located in Fort Dodge, Ames and Nevada, Iowa. In recent years, the stability of the Company's deposit base has been enhanced by the Company's offering of 5-year certificates of deposit (which comprises $47.2 million, or 33.4%, of total deposits at December 31, 1997) 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, 1997, 31.0% of the deposit base or $43.7 million consisted of core deposits, which included money market accounts, passbook savings accounts, NOW accounts, and noninterest-bearing demand accounts. Core deposits are considered to be a more stable and lower cost source of funds than certificates of deposit or outside borrowings. The Company will continue to emphasize retail -38- deposits by providing quality customer service, offering competitive rates on deposit accounts, and providing depositors with a full range of accounts. With the addition of the three branches of Valley Savings, the Company has sought to strengthen its deposit base. 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, 1997, 51.5% of the Company's total assets consisted of one- to-four family residential first mortgage loans. To supplement local mortgage loan originations and to diversify its mortgage loan portfolio geographically, the Company has purchased loans in the secondary mortgage market, with an emphasis on adjustable-rate multifamily loans secured by properties outside the State of Iowa (the "out of state properties"). At December 31, 1997, the Company's portfolio of loans which were either originated or purchased by the Company and secured by out of state properties consisted of $7.6 million of one-to-four family residential mortgage loans, or 3.9% of the Company's total loan portfolio, and $52.9 million of multifamily and commercial loans, or 27.2% of the Company's total loan portfolio. At December 31, 1997, the Company's ratio of nonperforming assets to total assets was 0.10%. The Company also invests in United States Treasury 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 $14.8 million at December 31, 1993, to $50.4 million at December 31, 1997, an increase of 241.6%. Total assets have increased by $74.8 million, or 50.9%, since December 31, 1993. As a result, the ratio of total equity to total assets has improved from 10.02% at December 31, 1993 to 22.7% at December 31, 1997. The Company's growth has been produced from its emphasis on the origination and purchase of residential mortgage loans and purchases of primarily multifamily 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 and a combination of 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, including the execution of 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 such evaluation by the Company is complete. Controlled Noninterest Expense. The Company has managed to control noninterest expense by limiting the overall number of its employees and managing operating expenses. Noninterest expense (excluding the SAIF Assessment incurred in 1996) as a percentage of average total assets did not exceed 2.17% for any year from the fiscal year ended December 31, 1993 through December 31, 1997. The Company's efficiency ratio (excluding the SAIF Assessment) did not exceed 48% for any year from the fiscal year ended December 31, 1993 through December 31, 1997. 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 abstract companies in Webster, Boone and Jasper counties in Iowa. The abstract companies are operated by First Iowa Title Services, Inc. ("First Iowa"), the Bank's wholly owned subsidiary. On -39- December 28, 1996, First Iowa purchased the assets of two abstract companies located in Webster and Calhoun County, Iowa. The abstract company in Calhoun County was subsequently sold March 30, 1997. 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, 1997 was $1.2 million, offset by noninterest expense attributable to First Iowa. Liquidity and Interest Rate Risk Management. Management seeks to manage the Company's interest rate risk exposure by monitoring the levels of interest rate sensitive assets and liabilities while maintaining an acceptable interest rate spread. At December 31, 1997, total interest-bearing assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same period by $614,000, representing a one-year gap to total assets ratio of positive 0.28% as compared to a negative 4.36% at December 31, 1996. To reduce the potential volatility of the Company's earnings in a changing interest rate environment, the Company has emphasized the origination of 7-year fixed rate mortgage loans that convert to adjustable rates at the conclusion of their initial terms and have overall maturities of up to 30 years, adjustable-rate loans, investment in 2-year United States Government securities and has sought to lengthen the terms of its deposits through its pricing strategies with respect to longer term certificates of deposit. See "- Discussion of Market Risk - Interest Rate Sensitivity Analysis". LIQUIDITY AND CAPITAL RESOURCES OTS regulations require that thrift institutions such as the Bank maintain an average daily balance of liquid assets (cash, certain time deposits, banker's acceptances and specified United States Government, state or federal agency obligations) equal to a monthly average of not less than 4% of its net withdrawable deposits plus short-term borrowings. At December 31, 1997, the amount of the Bank's liquid assets were $14.0 million, resulting in a liquidity ratio of 9.28%. During the fourth quarter of 1997, the OTS revised its liquidity requirements by reducing the minimum liquidity requirements from 5% to 4% and by eliminating the 1% short term liquidity requirement. 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-term interest-earning assets, which provide liquidity to meet lending requirements. At December 31, 1997, $9.0 million, or 81.6%, of the Company's investment portfolio, excluding equity securities, was scheduled to mature in one year or less and $2.0 million, or 18.4%, was scheduled to mature in one to five years. Certificates of deposit scheduled to mature in less than one year, at December 31, 1997, totalled $40.8 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 $109.7 million as of December 31, 1997. 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, 1997, the Company had outstanding loan commitments of $804,000. 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 1997, the Holding Company repurchased 171,472 shares of its Common Stock, pursuant to repurchase programs which were approved by the OTS. On March 5, 1998, the Company announced that it had received OTS approval and will commence a stock repurchase program for up to 5% of its 3,266,483 outstanding shares of Common -40- Stock. 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 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, 1997, 1996 and 1995, the Company's disbursements for loan originations and purchases totaled $62.3 million, $52.0 million and $48.2 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 $19.1 million, $21.3 million and $23.3 million for the years ended December 31, 1997, 1996 and 1995, respectively. Net cash flows provided by financing activities amounted to $14.3 million, $19.8 million and $19.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. The OTS regulations require savings associations, such as the Bank, to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations; a leverage ratio requirement of 3% of core capital to such adjusted total assets; and a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-based assets. The Bank satisfied these minimum capital standards at December 31, 1997 with tangible and leverage capital ratios of 17.3% and a total risk-based capital ratio of 32.1%. 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, 1997:
Capital Excess Amount Requirements Capital ------ ------------ ------- (In thousands) Tangible capital $37,935 $3,298 $34,637 Core capital 37,935 6,595 31,340 Risk-based capital 39,478 9,830 29,648
-41- 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 Company'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, concentrated primarily 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, 1997, 31.1% of the Company's loan portfolio was secured by properties outside the State of Iowa, located in sixteen states. See "Asset Quality." The Bank does not own any trading assets. At December 31, 1997, neither the Company nor the Bank had any hedging transactions in place, such as interest rate swaps and caps. The Company seeks to manage its interest 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 focussing 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 two-year United States Government 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, 1997, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same period by $614,000, representing a one-year gap ratio of positive 0.28%, compared to a one-year gap ratio of negative 4.36% at December 31, 1996. To manage 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 and has sought to lengthen the terms of its deposits through its pricing strategies with respect to longer term certificates of deposit. The Chief Executive Officer regularly meets with the Bank's senior executive officers to review trends in deposits as well as mortgage and consumer lending. The Chief Executive Officer also regularly meets with the 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. -42- Gap Table. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1997, 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. -43-
AT DECEMBER 31, 1997 (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 $ 49,072 $ 41,979 $ 13,488 $ - $ - $ - $104,539 Fixed (2) 17,257 21,522 11,914 15,440 235 - 66,369 Consumer and other loans 8,729 13,186 1,763 40 1 - 23,718 Investment securities(3) 20,248 2,031 - - - - 22,279 -------- -------- -------- -------- -------- -------- -------- Total interest-earning assets $ 95,306 $ 78,718 $ 27,165 $ 15,480 $ 236 $ - $216,905 ======== ======== ======== ======== ======== ======== ======== RATE SENSITIVE LIABILITIES: Passbook and statement savings accounts $ 17,120 $ - $ - $ - $ - $ - $ 17,120 NOW accounts 14,457 - - - - - 14,457 Money market accounts 8,958 - - - - - 8,958 Certificate accounts 40,762 42,404 14,278 - - - 97,444 Non-interest-bearing deposits 3,145 - - - - - 3,145 FHLB advances and other liabilities 10,250 8,000 10,300 - - - 28,550 -------- -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities $ 94,692 $ 50,404 $ 24,578 $ - $ - $ - $169,674 ======== ======== ======== ======== ======== ======== ======== Interest sensitivity gap $ 614 $ 28,314 $ 2,587 $ 15,480 $ 236 $ - Cumulative interest-sensitivity gap $ 614 $ 28,928 $ 31,515 $ 46,995 $ 47,231 $ 47,231 Interest sensitivity gap to total assets 0.28% 12.76% 1.17% 6.97% 0.11% - Cumulative interest-sensitivity gap to total assets 0.28% 13.03% 14.20% 21.17% 21.28% 21.28% Ratio of interest-earning assets to interest-bearing liabilities 100.65% 156.17% 110.53% 100.00% 100.00% - 127.84% Cumulative ratio of interest- earning assets to interest-bearing liabilities 100.65% 119.94% 118.57% 127.70% 127.84% 127.84% 127.84% Total assets $221,954 $221,954 $221,954 $221,954 $221,954 $221,954 $221,954 Cumulative interest bearing assets $ 95,306 $174,024 $201,189 $216,669 $216,905 $216,905 $216,905 Cumulative interest sensitive liabilities $ 94,692 $145,096 $169,674 $169,674 $169,674 $169,674 $169,674
_________________________________ (1) The Company prepared the above table using December 31, 1997 composite interest rate sensitivity assumptions of the Eighth District of the FHLB where such assumptions were available. Where such information was not available, the assumptions were made based on December 1997 OTS assumptions or the Company's actual experience. These assumptions are as follows: (i) fixed- rate first mortgage loans on one-to-four family residential properties with interest rates less than 8%, 8% to 9%, 9% to 10%, 10% to 11%, and 11% and over, and the remaining terms to maturity of over 15 years will prepay annually at 9%, 22%, 18%, 13% and 13%, respectively; (ii) adjustable-rate first mortgage loans on one-to-four family residential properties will prepay at 6% to 8% per year; (iii) fixed- and adjustable-rate mortgage loans on multifamily and commercial properties will repay at 8% per year; (iv) second mortgage consumer loans will prepay at 9% per year; (v) fixed-rate deposits will not be withdrawn prior to maturity; and (vi) passbook savings accounts, NOW accounts, money market accounts and noninterest-bearing deposit accounts are assumed to reprice within one year due to the possibility that such deposits will reprice in the event of significant changes in the overall level of interest rates. These assumptions are annual percentages based on remaining balances and should not be regarded as indicative of the actual prepayments and withdrawals that may be experienced by the Company. Certain shortcomings are inherent in the analysis presented by the foregoing table. (2) Fixed rate first mortgage loans include $44.0 million of one-to-four family seven year fixed rate loans than convert to adjustable rates at the beginning of the eighth year and are adjustable thereafter. (3) Includes FHLMC preferred stock, FNMA preferred stock, other equity securities, interest-bearing deposits and FHLB stock, all of which are shown in the within-one-year category. Components include interest-bearing deposits of $2.5 million and securities available for sale of $19.8 million. Certain shortcomings are inherent in the method of analysis presented in the Gap Table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase. -44- NPV Analysis. As part of its efforts to maximize net interest income and manage the risks associated with changing interest rates, management uses the "market value of portfolio equity" ("NPV") methodology which the OTS has adopted as part of its capital regulations. Under this methodology, interest rate risk exposure is assessed by reviewing the estimated changes in Net Interest Income ("NII") and NPV which would hypothetically occur if interest rates rapidly rise or fall all along the yield curve. Projected values of NII and NPV at both higher and lower regulatory defined rate scenarios are compared to base case values (no change in rates) to determine the sensitivity to changing interest rates. Presented below, as of December 31, 1997, 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) +400 bp $47,750 -6,401 -12% 22.63% -134bp +300 bp 49,784 -4,367 -8 23.15 -83bp +200 bp 51,704 -2,447 -5 23.61 -37bp +100 bp 53,231 -920 -2 23.90 -8bp 0 bp 54,151 - - 23.98 - -100 bp 54,239 88 - 23.76 -22bp -200 bp 53,883 -268 - 23.40 -58bp -300 bp 54,107 -44 - 23.24 -74bp -400 bp 54,669 518 1 23.18 -80bp
_________________________________ (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. DELINQUENCIES AND CLASSIFIED ASSETS Delinquencies. The Company's collection procedures provide that when a loan is 15 days past due, a computer-generated late charge notice is sent to the borrower requesting payment, plus a late charge for mortgage loans. If delinquency continues, on the 20th day past due, a telephone call is made to the borrower seeking payment. If the loan is 30 days past due, a delinquent notice is mailed along with a letter advising that the mortgagors are in violation of the terms of their mortgage contract. If a loan becomes 60 days past due, the loan becomes subject to possible legal action. After 90 days, if 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 (the "HUD") regulations, generally within 45 days of delinquency, a Section 160 HUD notice is given to the borrower which provides access to consumer counseling services. -45- It is sometimes necessary and desirable to arrange special repayment schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The mortgagors are required to submit a written repayment schedule which is closely monitored for compliance. Under these terms, the account is brought to date, usually within a few months. Nonperforming Assets. Loans are reviewed on a regular basis and are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful. Mortgage loans and consumer loans are placed on nonaccrual status generally when either principal or interest is more than 90 days past due. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is deemed foreclosed real estate until such time as it is sold. In general, the Company considers collateral for a loan to be in substance foreclosed if: (i) the borrower has little or no equity in the collateral; (ii) proceeds for repayment of the loan can be expected to come only from the operation or sale of the collateral; and (iii) the borrower has either formally or effectively abandoned control of the collateral to the Company, or retained control of the collateral but is unlikely to be able to rebuild equity in the collateral or otherwise repay the loan in the foreseeable future. Cash flow attributable to in-substance foreclosures is used to reduce the carrying value of the collateral. When foreclosed real estate is acquired or otherwise deemed foreclosed real estate, it is recorded at the lower of the unpaid principal balance of the related loan or its estimated fair value, less estimated selling expenses. Valuations are periodically performed by management, and any subsequent decline in fair value is charged to operations. At December 31, 1997, the Company's foreclosed real estate consisted of two properties with an aggregate value of $67,000. 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, ------------------------------------------------------ 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) NONACCRUAL LOANS AND NONPERFORMING ASSETS: First mortgage loans: One-to-four family residential $ 122 $ 149 $ 137 $ 299 $ 91 Multifamily and commercial properties - - - - 7 Consumer loans: 25 35 44 25 4 Total nonaccrual loans 147 184 181 324 102 Total foreclosed real estate(1) 67 128 128 - 15 Other nonperforming assets - 2 109 - - ----- ----- ----- ----- ----- Total nonperforming assets $ 214 $ 314 $ 418 $ 324 $ 117 ===== ===== ===== ===== ===== Total nonaccrual loans to net loans receivable 0.08% 0.11% 0.12% 0.26% 0.09% Total nonaccrual loans to total assets 0.07 0.09 0.10 0.21 0.07 Total nonperforming assets to total assets 0.10 0.15 0.23 0.21 0.08
________________________ (1) Represents the net book value of property acquired by the Company through foreclosure or deed in lieu of foreclosure. Upon acquisition, this property is recorded at the lower of cost or fair value less estimated selling expenses. -46- 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, ------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- ------ ------ ------ ------ (IN THOUSANDS) LOANS PAST DUE 60-89 DAYS: First mortgage loans: One-to-four family residential $ 275 $ 323 $ 311 $ 288 $ 5222 Multifamily and commercial properties - - - - - Consumer loans 135 51 28 62 1 ------ ------ ------ ------ ------ Total past due 60-89 days $ 410 $ 374 $ 339 $ 350 $ 523 ====== ====== ====== ====== ======
The following table sets forth information with respect to the Company's delinquent loans and other problem assets at December 31, 1997.
AT DECEMBER 31, 1997 ----------------------------------- BALANCE NUMBER ------- ------ (DOLLARS IN THOUSANDS) One-to-four family first mortgage loans: Loans 60 to 89 days delinquent $ 275 9 Loans 90 days or more delinquent 122 3 Multifamily and commercial first mortgage loans: Loans 60 to 89 days delinquent - - Loans 90 days or more delinquent - - Consumer Loans: Loans 60 to 89 days delinquent 135 8 Loans 90 days or more delinquent 25 11 Foreclosed real estate 67 2 Other nonperforming assets - - Loans to facilitate sale of foreclosed real estate 297 9 Special mention loans 422 32
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, 1997, the Company had $422,000 of special mention loans, consisting of twelve loans secured by one-to-four family residences and twenty consumer loans. -47- The following table sets forth the aggregate amount of the Company's classified assets at the dates indicated.
AT DECEMBER 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (IN THOUSANDS) Substandard assets $ 208 $ 311 $ 1,134(1) $ 357 $ 143 Doubtful assets - - - - - Loss assets 18 9 - 10 5 --------- --------- --------- --------- --------- Total classified assets $ 226 $ 320 $ 1,134 $ 367 $ 148 ========= ========= ========= ========= =========
______________ (1) Includes one purchased loan which was secured by a multifamily property that was 30 days past due in the amount of $791,000 (in actual dollars). This loan was repaid in January 1996. Allowance for Loan Losses. It is management's policy to provide an allowance for estimated losses on the Company's loan portfolio based on management's evaluation of the prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, which includes a significant amount of multifamily loans, substantially all of which are purchased and are collateralized by properties located outside of the Company's market area, and other factors related to the collectibility of the Company's loan portfolio. The Company regularly reviews its loan portfolio, including problem loans, to determine whether any loans require classification or the establishment of appropriate reserves or allowances for losses. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral. During the years ended December 31, 1997, 1996 and 1995 the Company's provision for loan losses were $240,000, $240,000 and $250,000, respectively. The Company's allowance for loan losses totalled $2.2 million, $2.0 million and $1.7 million at December 31, 1997, 1996 and 1995, 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. -48- 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, ------------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Total loans outstanding $194,626 $168,921 $151,310 $128,951 $120,097 Average net loans outstanding 175,284 156,708 137,068 118,997 114,163 Allowance balances (at beginning of period 1,953 1,736 1,543 1,306 1,077 -------- -------- -------- -------- -------- Provisions for losses: First mortgage loans 190 150 200 165 200 Consumer loans 50 90 50 77 48 Charge-Offs: First mortgage loans 21 5 2 - 7 Consumer loans 31 19 56 7 13 Recoveries: First mortgage loans - - - - - Consumer loans 10 1 1 2 1 -------- -------- -------- -------- -------- Net charge-offs 42 23 57 5 19 -------- -------- -------- -------- -------- Allowance balance (at end of period) $ 2,151 $ 1,953 $ 1,736 $ 1,543 $ 1,306 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total loans receivable at end of period 1.10% 1.16% 1.15% 1.20% 1.09% Net loans charged off as a percent of average net loans outstanding 0.02 0.01 0.04 - 0.02 Ratio of allowance for loan losses to total nonaccrual loans at end of period 1468.33 1,059.35 960.20 476.23 1,279.41 Ratio of allowance for loan losses to total nonaccrual loans and foreclosed real estate at end of period 1006.96 621.31 562.15 476.23 1,115.38
-49- 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, ---------------------------------------------------------------------- 1997 1996 1995 ------------------------ ---------------------- ---------------------- % OF LOANS % OF LOANS % OF LOANS IN EACH IN EACH IN EACH CATEGORY TO CATEGORY TO CATEGORY TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS ------- ----------- ------ ----------- ------ ----------- (DOLLARS IN THOUSANDS) Balance at end of period applicable to: One-to-four family residential mortgage loans $ 675 59.48% $ 503 63.44% $ 418 62.70% Multifamily residential mortgage loans 1,026 26.38 948 20.42 870 20.90 Commercial mortgage loans 76 1.95 157 3.09 175 3.85 Consumer loans 374 12.19 345 13.05 273 12.55 ------ ------ ------ ------ ------ ------ Total allowance for loan losses $2,151 100.00% $1,953 100.00% $1,736 100.00% ====== ====== ====== ====== ====== ======
AT DECEMBER 31, -------------------------------------------------- 1994 1993 -------------------------- ----------------------- % OF LOANS % OF LOANS IN EACH IN EACH CATEGORY TO CATEGORY TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS ------ ----------- ------ ----------- Balance at end of period applicable to: One-to-four family residential mortgage loans $ 429 65.48% $ 272 63.98% Multifamily residential mortgage loans 646 16.70 646 18.73 Commercial mortgage loans 189 4.79 181 5.39 Consumer loans 279 13.03 207 11.90 ------ ------ ------ ------ Total allowance for loan losses $1,543 100.00% $1,306 100.00% ====== ====== ====== ======
AVERAGE BALANCE SHEET The following tables sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. For purposes of these tables, average balances were computed on a monthly basis. -50-
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- AT DECEMBER 31, 1997 1997 1996 -------------------- ---------------------------------- --------------------------------- AVEREAGE 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) $169,682 8.07% $154,227 $ 12,433(8) 8.06% $137,668 $11,174(8) 8.12% Consumer loans(1) 23,717 9.50 23,138 2,201 9.51 20,900 2,007 9.60 Investment securities 21,706(4) 6.12 27,102(5) 1,571 5.79 29,827(6) 1,909 6.40 -------- -------- -------- -------- ------- Total interest- earning assets $215,105 8.03 $204,467 $ 16,205 7.93 $188,395 $15,090 8.01 Noninterest-earning assets 6,849 6,645 ======== 4,721 ======= -------- -------- -------- Total assets $221,954 $211,112 $193,116 ======== ======== ======== LIABILITIES AND EQUITY: Interest-bearing liabilities: NOW and money market savings $ 23,415 2.90% $ 21,777 $ 632 2.90% $ 18,704 $ 530 2.83% Passbook savings 17,120 2.25 17,425 392 2.25 18,997 432 2.27 Certificates of Deposit 97,444 5.94 93,239 5,470 5.87 88,688 5,256 5.93 Borrowed funds 28,550 5.93 23,679 1,406 5.94 12,114 711 5.87 -------- -------- -------- -------- ------- Total interest-bearing liabilities $166,529 5.13% $156,120 $ 7,900 5.06% $138,503 $ 6,929 5.00% Noninterest-bearing ======== ======= liabilities 5,008 5,634 4,920 -------- -------- -------- Total liabilities $171,537 $161,754 $143,423 Equity 50,417 49,358 49,693 -------- -------- -------- Total liabilities and equity $221,954 $211,112 $193,116 ======== ======== ======== Net interest income $ 8,305 $ 8,161 Net interest rate spread(2) 2.90% ======== 2.87% ======== 3.01% Net interest margin(3) 4.06 4.06 4.33 Ratio of average interest-earning assets to average interest-bearing liabilities 129.17 130.97 136.02
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1995 ---------------------------------- AVERAGE AVERAGE YIELD/ BALANCE INTEREST COST ------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: First mortgage loans(1) $120,825 $ 9,818(8) 8.13 Consumer loans(1) 17,865 1,703 9.53 Investment securities 27,128(7) 1,627 6.00 -------- ------- Total interest- earning assets $165,818 $13,148 7.93 Noninterest-earning assets 3,722 ======= -------- Total assets $169,540 ======== LIABILITIES AND EQUITY: Interest-bearing liabilities: NOW and money market savings $ 15,000 $ 426 2.84% Passbook savings 19,777 571 2.89 Certificates of Deposit 88,107 5,281 5.99 Borrowed funds 13,734 801 5.84 -------- ------- Total interest-bearing liabilities $136,618 $ 7,079 5.18% Noninterest-bearing ======= liabilities 4,111 -------- Total liabilities $140,729 Equity 28,811 -------- Total liabilities and equity $169,540 ======== Net interest income $ 6,069 ======= Net interest rate spread(2) 2.75% Net interest margin(3) 3.66 Ratio of average interest-earning assets to average interest-bearing liabilities 121.37
____________________ (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 $2,463,000 and securities available for sale of $19,243,000. (5) Includes interest-bearing deposits of $3,912,000, securities available for sale of $22,440,000 and securities held to maturity of $750,000. (6) Includes interest-bearing deposits of $3,323,000, securities available for sale of $16,298,000 and securities held to maturity of $10,206,000. (7) Includes interest-bearing deposits of $2,251,000, securities available for sale of $5,846,000 and securities held to maturity of $19,031,000. (8) Includes loan fee amortization of $(35,000), $(33,000) and $(57,000) for the years ended December 31, 1997, 1996 and 1995. -51- 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 DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------- INCREASE/(DECREASE) DUE TO -------------------------------------- TOTAL RATE/ INCREASE VOLUME RATE VOLUME (DECREASE) ------ ---- ------ --------- (IN THOUSANDS) INTEREST INCOME: First mortgage loans $ 1,344 $ (76) $ (9) $ 1,259 Consumer loans 215 (19) (2) 194 Investment securities (216) (109) (13) (338) ------- ------- ------- ------- Total interest-earning assets $ 1,343 $ (204) $ (24) $ 1,115 ======= ======= ======= ======= INTEREST EXPENSE: NOW and money market savings $ 87 $ 13 $ 2 $ 102 Passbook savings (36) (4) - (40) Certificate of deposits 271 (53) (3) 215 Borrowed funds 679 8 7 694 ------- ------- ------- ------- Total interest-bearing liabilities $ 1,001 $ (36) $ 6 $ 971 ======= ======= ======= ======= Net change in net interest income $ 342 $ (168) $ (30) $ 144 ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 -------------------------------------------------------- INCREASE/(DECREASE) DUE TO -------------------------------------- TOTAL RATE/ INCREASE VOLUME RATE VOLUME (DECREASE) ------ ---- ------- ---------- (IN THOUSANDS) INTEREST INCOME: First mortgage loans $ 1,369 $ (11) $ (2) $ 1,356 Consumer loans 289 13 2 304 Investment securities 183 153 (54) 282 ------- ------- ------- ------- Total interest-earning assets $ 1,841 $ 155 $ (54) $ 1,942 ======= ======= ======= ======= INTEREST EXPENSE: NOW and money market savings $ 105 $ (1) $ - $ 104 Passbook savings (23) (122) 5 (140) Certificate of deposits 35 (59) - (24) Borrowed funds (94) 5 (1) (90) ------- ------- ------- ------- Total interest-bearing liabilities $ 23 $ (177) $ 4 $ (150) ======= ======= ======= ======= Net change in net interest income $ 1,818 $ 332 $ (58) $ 2,092 ======= ======= ======= =======
-52- COMPARISON OF FINANCIAL CONDITION AS OF DECEMBER 31, 1997, DECEMBER 31, 1996 AND DECEMBER 31, 1995 Total assets increased $18.9 million, or 9.3%, from $203.1 million at December 31, 1996 to $222.0 million at December 31, 1997. Securities available for sale decreased $3.3 million, or 14.2%, primarily due to the maturities of several U.S. Treasury Notes and the call of certain equity securities, partially offset by the purchase of several U.S. Treasury Notes and the purchase of certain equity securities. Securities held to maturity decreased $3.5 million, or 100.0%, due to the maturities of several U.S. Treasury Notes and the Company's decision not to replace such securities at the present time, in order to allow the Company greater flexibility in managing its portfolio of investment securities. Total loans receivable, net, increased by $25.4 million, or 15.3%, from $165.8 million at December 31, 1996 to $191.3 million at December 31, 1997, primarily due to the origination of $25.0 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans primarily secured by multifamily residences located out of state of $22.3 million, and originations of $9.6 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, 1997. Deposits increased $11.4 million, or 8.8%, from $129.7 million at December 31, 1996 to $141.1 million at December 31, 1997, primarily reflecting increases in certificates of deposit. Other borrowings, primarily FHLB advances, increased $6.2 million, to $28.6 million at December 31, 1997 from $22.3 million at December 31, 1996. Total shareholders' equity increased $1.2 million from $49.2 million at December 31, 1996 to $50.4 million at December 31, 1997, primarily due to net income and increased unrealized gains, less dividends paid to shareholders and funds used for repurchases of Common Stock. Total assets increased $23.2 million, or 12.9%, from $179.9 million at December 31, 1995 to $203.1 million at December 31, 1996, reflecting the use of proceeds from the Conversion. Total loans receivable, net, increased by $18.0 million, or 12.1%, from $147.9 million at December 31, 1995 to $165.8 million at December 31, 1996, primarily due to the origination of $24.2 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans secured by one-to-four family and multifamily residences located out of state of $11.4 million, and originations of $10.1 million of second mortgage loans. These originations and purchases were offset in part by payments, prepayments and sales of loans during the year ended December 31, 1996. Deposits increased $3.0 million, or 2.4%, from $126.7 million at December 31, 1995 to $129.7 million at December 31, 1996. Other borrowings, primarily FHLB advances, increased $395,000, to $22.3 million at December 31, 1996 from $21.9 million at December 31, 1995. A portion of the proceeds from the Conversion was used to repay then outstanding FHLB advances. Subsequently, borrowings were increased primarily to fund loan growth. Total shareholders' equity increased $19.3 million from $29.9 million at December 31, 1995 to $49.2 million at December 31, 1996, primarily due to the issuance of stock in connection with the Conversion, less dividends paid to shareholders and stock repurchases. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Interest Income. Interest income increased by $1.1 million to $16.2 million for the year ended December 31, 1997 compared to $15.1 million for the year ended December 31, 1996. The increase in interest income was primarily due to a $16.1 million increase in average interest earning assets to $204.5 million for the year ended December 31, 1997, from $188.4 million for 1996. The increase in the average balances of interest earning assets primarily reflects increases in the average balances of first and second mortgage loans. These increases were primarily derived from originations of $25.0 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans secured by multifamily residences located outside of the State of Iowa of $22.3 million and originations of $9.6 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, 1997. The increase in average interest-earning assets reflects the Company's continued emphasis on residential lending. See "-Business Strategy." The average balance of securities held to maturity decreased $9.5 million, or 92.7%, and such securities were in part, replaced by lower yielding securities available for sale. The average yield on interest earning assets decreased -53- to 7.93% for the year ended December 31, 1997 from 8.01% for the year ended December 31, 1996, primarily due to a general decrease in market interest rates. Interest Expense. Interest expense increased by $971,000 to $7.9 million for the year ended December 31, 1997 compared to $6.9 million for the year ended December 31, 1996. The increase in interest expense was primarily due to a $17.6 million increase in the average balances of interest bearing liabilities to $156.1 million for the year ended December 31, 1997 compared to $138.5 million for comparable 1996 period. The increase in the average balances of interest bearing liabilities reflects an increase in the average balances of certificates of deposit and borrowed funds, consistent with the Company's strategy of controlled internal growth. The increase of $11.6 million, or 95.5%, of the average balance of borrowed funds from 1996 reflects the repayment of borrowed funds with the proceeds of the Conversion in 1996 and the increase of borrowed funds subsequent to the Reorganization to fund asset growth. The average cost of interest bearing liabilities increased to 5.06% for the year ended December 31, 1997 from 5.00% for the year ended December 31, 1996, reflecting changes in the distribution of NOW and money market savings accounts and borrowing of funds with longer maturities and to a lesser extent increases in the average cost of NOW and money market savings accounts and borrowed funds. This was offset in part by a decline in the average cost of certificates of deposit, primarily reflecting maturities of certificates of deposit at a rate of higher than the current market rate. Net Interest Income. Net interest income before provision for loan losses increased by $144,000 to $8.3 million for the year ended December 31, 1997 from $8.2 million for the year ended December 31, 1996. The increase is primarily due to the increases in the average interest earning assets, and increases in the average interest bearing liabilities. This increase was offset in part by the decrease in the interest rate spread (i.e., the difference in the average yield on assets and average cost of liabilities) from 3.01% for the year ended December 31, 1996 to 2.87% for the year ended December 31, 1997. The decline in the spread reflects the general decline in the overall yields on interest-earning assets combined with the increase in the average balance of borrowed funds and certificates of deposit which have higher costs than other interest-bearing liabilities. Provision for Loan Losses. The Company's provision for loan losses was $240,000 for years ended December 31, 1997 and December 31, 1996. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, which includes a significant amount of multifamily loans, substantially all of which are purchased and are secured by properties located out of state, and other factors related to the collectibility of the Company's loan portfolio. The net charge offs were $42,000 for the year ended December 31, 1997 as compared to $23,000 for the year ended December 31, 1996. The resulting allowance for loan loss was $2.2 million at December 31, 1997 as compared to $2.0 million at December 31, 1996. The increase in the allowance is primarily due to the increase in total loans from $168.9 million at December 31, 1996 to $194.6 million at December 31, 1997 as well as the increase in multifamily loans both on an aggregate basis and a percentage of the total loan portfolio. The allowance for loan losses as a percentage of total loans receivable decreased to 1.10% at December 31, 1997 from 1.16% at December 31, 1996. The level of nonperforming loans has decreased to $147,000 at December 31, 1997 from $184,000 at December 31, 1996. 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 problem loans, identification of additional problem loans, and other factors, both within and outside of management's control. -54- Noninterest income. Total noninterest income increased by $644,000, or 34.0%, to $2.5 million for the year ended December 31, 1997 from $1.9 million for the year ended December 31, 1996. The increase is due to increases in abstract fees, other income and gain on the sale of investments. Abstract fees increased $291,000 due to increased sales volume, which is in part attributable to the purchase of the assets of an abstract company in December, 1996. Other income increased by $41,000, primarily due to the rental income from the Bank's investment in the Northridge Apartment Limited Partnership, offset in part by decreases in annuity sales. Non interest income for the year ended December 31, 1997 also reflects gains on the sales of securities available for sale of $249,000, as compared to gains on the sale of such securities of $14,000 for the 1996 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 decreased by $362,000 million to $4.6 million for the year ended December 31, 1997 from $4.9 million for the year ended December 31, 1996. The decrease is primarily due to the $817,000 one-time assessment to recapitalize the SAIF in 1996. Absent the one-time SAIF special assessment, the noninterest expense for the year ended December 31, 1997 increased $455,000 over the corresponding period in 1996. The increase in 1997 is primarily due to increases in salaries and employee benefits and other expenses, offset in part by decreases in SAIF deposit insurance premiums. The increase in salaries and benefits was primarily a result of the expenses associated with the ESOP, normal salary increases and increase in the number of employees at the Ames office and at First Iowa, offset in part by the costs incurred in 1996 related to the adoption of a retirement plan for the benefit of the former Chairman of the Board. The increase in other expenses is primarily due to higher expenditures for advertising, employee expenses, professional fees and expenses associated with the Bank's investment in the Northridge Apartments Limited Partnership. The decrease in SAIF deposit insurance, excluding the one-time assessment, was primarily due to the enactment of legislation which decrease assessment rates for institutions such as the Bank. See "SAIF Recapitalization." The Company's efficiency ratio, excluding the one-time SAIF assessment, for the year ended December 31, 1997 and 1996 were 42.21% and 40.99%, respectively. The Company's ratio of noninterest expense to average assets, excluding the one-time SAIF assessment, for the year ended December 31, 1997 and 1997 were 2.17% and 2.13%, respectively. Income Taxes. Income taxes increased by $365,000 to $2.1 million for the year ended December 31, 1997 as compared to $1.7 million for the year ended December 31, 1996. The increase was principally due to an increase in pre-tax earnings during the 1997 period as compared to the 1996 period, offset in part by the tax credits recognized from the Bank's investment in the Northridge Apartments Limited Partnership in 1997. Net Income. Net income totalled $3.9 million for the year ended December 31, 1997 compared to $3.1 million for the same period in 1996. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Interest Income. Interest income increased by $1.9 million to $15.1 million for the year ended December 31, 1996 compared to $13.1 million for the year ended December 31, 1995. The increase in interest income was primarily due to a $22.7 million increase in average interest earning assets (consisting primarily first and second mortgage loans) to $188.4 million for the year ended December 31, 1996, from $165.7 million for the comparable 1995 period. The increase in the average balances of interest earning assets primarily reflects increases in the average balances of first and second mortgage loans. These increases were primarily derived from originations of $24.2 million of first mortgage loans secured by one-to-four family residences, purchases and originations of first mortgage loans secured by one-to-four family and multifamily residences located outside of the State of Iowa of $11.4 million and originations of $10.1 million of second mortgage loans, which originations and purchases were offset in part by payments, prepayments and sales of loans during the year ended December 31, 1996. The increase in average interest-earning assets reflects the use of proceeds from the Conversion and the Company's emphasis on residential lending. See "-Business Strategy." The increase in interest income was also due to an increase in the average yield on investment securities to 6.40% from 6.00% for the year ended December 31, 1996 and 1995, respectively, -55- reflecting the purchase of certain higher yielding equity securities during the year ended December 31, 1996. The average yield on interest earning assets increased to 8.01% for the year ended December 31, 1996 from 7.93% for the year ended December 31, 1995. Interest Expense. Interest expense decreased by $150,000 to $6.9 million for the year ended December 31, 1996 compared to $7.1 million for the year ended December 31, 1995. The decrease in interest expense was due to the decrease in the average cost of deposits from 5.11% for the year ended December 31, 1995 to 4.92% for the year ended December 31, 1996. The decline in the average cost of deposits was primarily due to a decline in the Company's average cost of passbook accounts reflecting a general decline in market interest rates, as well as a net increase of $3.7 million in the average balance of NOW and money market savings accounts, which accounts bear interest at lower rates than the Company's average cost of funds. The decrease in interest expense was also due to a decrease in the average balance of borrowed funds from $13.7 million for the year ended December 31, 1995, to $12.1 million for the 1996 comparable period, as the Company used a portion of the proceeds of the Conversion to repay FHLB advances. The decrease was offset in part by an increase of $3.5 million in the average interest-bearing deposits from $122.9 million for the year ended December 31, 1995 to $126.4 million for the year ended December 31, 1996, due to the Company's offering of favorable rates on certain types of deposit accounts. The average cost of interest bearing liabilities decreased to 5.00% for the year ended December 31, 1996 from 5.18% for the year ended December 31, 1995. Net Interest Income. Net interest income before provision for loan losses increased by $2.1 million to $8.2 million for the year ended December 31, 1996 from $6.1 million for the year ended December 31, 1995. The increase is primarily due to the increase in the excess of average interest earning assets over average interest bearing liabilities and an increase in the Company's interest rate spread (i.e., the difference between the average yield on assets and the average cost of liabilities) from 2.75% for the year ended December 31, 1995 to 3.01% for the year ended December 31, 1996. Provision for Loan Losses. The Company's provision for loan losses decreased by $10,000 to $240,000 for year ended December 31, 1996 from $250,000 for the same period of the prior year. The Company establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level which is deemed to be appropriate based upon an assessment of prior loss experience, industry standards, past due loans, economic conditions, the volume and type of loans in the Company's portfolio, which includes a significant amount of multifamily loans, substantially all of which are purchased and are secured by properties located out of state, and other factors related to the collectibility of the Company's loan portfolio. The net charge offs were $23,000 for the year ended December 31, 1996 as compared to $57,000 for the year ended December 31, 1995. The resulting allowance for loan loss was $2.0 million at December 31, 1996 as compared to $1.7 million at December 31, 1995. The increase in the allowance is primarily due to the increase in total loans from $151.3 million at December 31, 1995 to $168.9 million at December 31, 1996. The allowance for loan losses as a percentage of total loans receivable increased to 1.16% at December 31, 1996 from 1.15% at December 31, 1995. The level of nonperforming loans has increased slightly to $184,000 at December 31, 1996 from $181,000 at December 31, 1995. See "Asset Quality". Management believes that the allowance for loan losses is adequate. While management estimates loan losses using the best available information, such as independent appraisals for significant collateral properties, no assurance can be made that future adjustments to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans, and other factors, both within and outside of management's control. Noninterest income. Total noninterest income increased by $191,000, or 11.2%, to $1.9 million for the year ended December 31, 1996 from $1.7 million for the year ended December 31, 1995. The increase is primarily due to a $136,000 increase in abstract fees, attributable to increased sales volume, a $111,000 increase in checking account charges and a $82,000 increase in annuity commissions, which commissions are -56- generated by the annuity sales activities of First Financial Service Corporation, a wholly owned subsidiary of the Bank. This increase, over fiscal year 1995, was offset in part by a $182,000 gain on the sale of securities available for sale for the year ended December 31, 1995. See "-Business Strategy-Increase Noninterest Income". Noninterest Expense. Total non-interest expense increased by $1.3 million to $4.9 million for the year ended December 31, 1996 from $3.7 million for the year ended December 31, 1995, primarily due to the $817,000 one-time SAIF Assessment. Absent the SAIF Assessment, the increase reflects a $322,000 increase in salaries and benefits, a $39,000 increase in premises and equipment and $101,000 increase in other expenses. The increase in salaries and benefits was primarily a result of a one-time adoption of a retirement plan for the benefit of the former Chairman of the Board, the increased costs associated with the Company's Employee Stock Option Plan ("ESOP") and normal salary increases. The increase in premises and equipment is primarily a result of increased depreciation expense due to expenditures in the Company's Nevada office and equipment in the abstract companies. The increase in other expenses is primarily a result of increased professional fees, checking account costs and costs incurred for a Special Meeting of Shareholders in September, 1996. Income Taxes. Income taxes increased by $340,000 to $1.7 million for the year ended December 31, 1996 as compared to $1.4 million for the year ended December 31, 1995. The increase was principally due to an increase in pre-tax earnings during the 1996 period as compared to the 1995 period. Net Income. Net income totalled $3.1 million for the year ended December 31, 1996 compared to $2.5 million for the same period in 1995. 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 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 requires that all items that are components of comprehensive income defined as "the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from nonowner sources, including all changes in equity during a period except those resulting from investments by owners and distributions to owners," be reported in a financial statement that is displayed with the same prominence as other financial statements. Companies will be required to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, and requires reclassification of prior periods presented. As the requirements of SFAS No. 130 are disclosure related, its implementation will have no impact on the Company's financial condition or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information (SFAS No. 131). SFAS No. 131 requires that enterprises report certain financial and descriptive information about operating segments in complete sets of financial statements of the Company and in condensed financial statements of interim periods issued to -57- shareholders. It also requires that a Company report certain information about their products and services, geographic areas in which they operate and their major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. As the requirements of SFAS No. 131 are disclosure related, its implementation will have no impact on the Company's financial condition or results of operations. -58- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES See Item 7. Management Discussion and Analysis. "Discussion of Market Risk - Interest Rate Sensitivity Analysis." ITEM 8. FINANCIAL STATEMENTS NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT 60 - -------------------------------------------------------------------------- FINANCIAL STATEMENTS Consolidated statements of financial condition 61 Consolidated statements of income 62 Consolidated statements of shareholders' equity 63 Consolidated statements of cash flows 64 Notes to consolidated financial statements 66 - -------------------------------------------------------------------------- -59- [LOGO] McGLADREY & PULLEN, LLP ----------------------- Certified Public Accountants and Consultants INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENTS To the Board of Directors North Central Bancshares, Inc. Fort Dodge, Iowa We have audited the accompanying consolidated statements of financial condition of North Central Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the three years ended December 31, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Central Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the three years ended December 31, 1997, 1996 and 1995 in conformity with generally accepted accounting principles. /S/ MCGLADREY & PULLEN LLP Des Moines, Iowa January 30, 1998 -60- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 - --------------------------------------------------------------------------------------------------------- CASH: Interest-bearing $ 2,462,809 $ 2,973,490 Noninterest-bearing 982,354 963,325 Securities available for sale (Notes 2 and 8) 19,815,913 23,103,614 Securities held to maturity (Note 2) 3,499,528 Loans receivable, net (Notes 3, 4, 8 and 14) 191,248,830 165,831,040 Accrued interest receivable (Note 5) 1,300,495 1,327,733 Foreclosed real estate 67,107 128,471 Premises and equipment, net (Note 6) 2,143,016 1,780,392 Rental real estate 2,059,148 1,775,844 Title plant 925,256 968,747 Deferred taxes (Note 9) 105,139 198,000 Prepaid expenses and other assets 843,541 542,351 ------------ ------------ TOTAL ASSETS $221,953,608 $203,092,535 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits (Note 7) $141,123,707 $129,722,044 Borrowed funds (Note 8) 28,550,000 22,335,000 Advances from borrowers for taxes and insurance (Note 4) 918,369 845,488 Dividend payable 204,155 230,344 Income taxes payable 194,325 182,826 Accrued expenses and other liabilities 545,976 542,026 ------------ ------------ TOTAL LIABILITIES 171,536,532 153,857,728 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 13, 16 and 19) STOCKHOLDERS' EQUITY (Notes 11 and 17) Common stock, $.01 par value, authorized 15,500,000 shares; issued and outstanding 1997 and 1996 4,011,057 shares 40,111 40,111 Preferred stock, $.01 par value, authorized 3,000,000 shares; issued and outstanding 1997 and 1996 none Additional paid-in capital 37,949,598 37,796,611 Retained earnings, substantially restricted (Note 9) 23,660,964 20,531,604 Unearned shares, employee stock ownership plan (Note 10) (1,210,441) (1,416,955) Unrealized gain on securities available for sale, net of income taxes 354,781 73,097 Less cost of treasury stock, 1997 744,574 shares; 1996 581,602 shares (10,377,937) (7,789,661) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 50,417,076 49,234,807 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $221,953,608 $203,092,535 ============ ============
See Notes to Consolidated Financial Statements. -61- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Interest income: Loans receivable: First mortgage loans $12,432,797 $11,173,567 $9,817,876 Consumer loans 2,200,965 2,007,185 1,702,971 Securities and cash deposits 1,570,932 1,909,267 1,627,516 ------------------------------------------ 16,204,694 15,090,019 13,148,363 ------------------------------------------ Interest expense: Deposits (Note 7) 6,493,931 6,217,234 6,277,578 Other borrowed funds 1,405,679 711,418 801,448 ------------------------------------------ 7,899,610 6,928,652 7,079,026 ------------------------------------------ NET INTEREST INCOME 8,305,084 8,161,367 6,069,337 Provision for loan losses (Note 3) 240,000 240,000 250,000 ------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,065,084 7,921,367 5,819,337 ------------------------------------------ Noninterest income: Fees and service charges 656,695 579,999 444,916 Abstract fees 1,221,807 931,031 794,732 Gain on sale of securities available for sale, net 248,526 13,774 181,871 Other income 409,968 368,691 281,286 ------------------------------------------ TOTAL NONINTEREST INCOME 2,536,996 1,893,495 1,702,805 ------------------------------------------ Noninterest expense: Salaries and employee benefits (Note 10) 2,208,807 2,003,701 1,681,290 Premises and equipment 444,231 420,633 381,771 Data processing 258,250 243,762 235,626 SAIF special assessment - 817,275 _ SAIF deposit insurance premiums 84,742 278,563 286,593 Other expenses (Note 12) 1,580,622 1,174,450 1,072,968 ------------------------------------------ TOTAL NONINTEREST EXPENSE 4,576,652 4,938,384 3,658,248 ------------------------------------------ INCOME BEFORE INCOME TAXES 6,025,428 4,876,478 3,863,894 Provision for income taxes (Note 9) 2,108,304 1,743,557 1,403,262 ------------------------------------------ NET INCOME $3,917,124 $3,132,921 $2,460,632 ========================================== Basic earnings per common share (Note 18) $ 1.23 $ .82 $ .63 Earnings per common share-assuming dilution (Note 18) $ 1.21 $ .82 $ .63 Dividends declared per common share (Note 11) $ .25 $ .28 $ .60
See Notes to Consolidated Financial Statements. -62- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
Gain (Loss) on Securities Available Employee for Sale, Additional Stock Net of Common Paid-in Retained Ownership Income Stock Capital Earnings Plan Taxes - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 $ 37,000 $12,344,001 $16,541,883 $ (886,000) $ (223,855) Net income - - 2,460,632 - - Dividends on common stock - - (781,889) - - Effect on contribution to employee stock ownership plan - 6,839 - 117,210 - Reclassification of security to available for sale (Note 2) - - - - 27,766 Net change in unrealized gain on securities available for sale, net - - - - 256,741 ------------------------------------------------------------------- Balance, December 31, 1995 37,000 12,350,840 18,220,626 (768,790) 60,652 Net income - - 3,132,921 - - Reorganization and conversion to stock form and proceeds from issuance of common stock in connection therewith 3,111 26,249,048 - - - Expenses incurred relating to conversion to stock form - (844,469) - - - Purchase of treasury stock - - - - - Unearned ESOP shares - - - (840,000) - Dividends on common stock - - (821,943) - - Effect of contribution to employee stock ownership plan - 41,192 - 191,835 - Net change in unrealized gain on securities available for sale, net - - - - 12,445 ------------------------------------------------------------------- Balance, December 31, 1996 40,111 37,796,611 20,531,604 (1,416,955) 73,097 Net income - - 3,917,124 - - Purchase of treasury stock - - - - - Dividends on common stock - - (787,764) - - Effect of contribution to employee stock ownership plan - 147,968 - 206,514 - Effect of stock options exercised - 5,019 - - - Net change in unrealized gain on securities available for sale, net - - - - 281,684 ------------------------------------------------------------------- Balance, December 31, 1997 $ 40,111 $37,949,598 $23,660,964 $(1,210,441) $ 354,781 ===================================================================
Total Treasury Stockholders Stock Equity - --------------------------------------------------------------------------------------- Balance, December 31, 1994 $ - $27,813,029 Net income - 2,460,632 Dividends on common stock - (781,889) Effect on contribution to employee stock ownership plan - 124,049 Reclassification of security to available for sale (Note 2) - 27,766 Net change in unrealized gain on securities available for sale, net - 256,741 ---------------------------- Balance, December 31, 1995 - 29,900,328 Net income - 3,132,921 Reorganization and conversion to stock form and proceeds from issuance of common stock in connection therewith - 26,252,159 Expenses incurred relating to conversion to stock form - (844,469) Purchase of treasury stock (7,789,661) (7,789,661) Unearned ESOP shares - (840,000) Dividends on common stock - (821,943) Effect of contribution to employee stock ownership plan - 233,027 Net change in unrealized gain on securities available for sale, net - 12,445 ---------------------------- Balance, December 31, 1996 (7,789,661) 49,234,807 Net income - 3,917,124 Purchase of treasury stock (2,706,750) (2,706,750) Dividends on common stock - (787,764) Effect of contribution to employee stock ownership plan - 354,482 Effect of stock options exercised 118,474 123,493 Net change in unrealized gain on securities available for sale, net - 281,684 ---------------------------- Balance, December 31, 1997 $(10,377,937) $50,417,076 ============================
-63- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,917,124 $ 3,132,921 $ 2,460,632 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 240,000 240,000 250,000 Depreciation 298,927 202,911 170,445 Amortization and accretion 74,219 (163,796) (306,421) Deferred taxes (80,591) (143,069) 41,946 Effect of contribution to employee stock ownership plan 354,482 185,027 28,049 (Gain) on sale of foreclosed real estate and loans, net (7,499) (16,924) (11,675) (Gain) on sale of securities available for sale (248,526) (13,774) (181,871) Loss on disposal of equipment 3,321 19,781 Stock dividend on Federal Home Loan Bank stock - - (22,900) Change in assets and liabilities: (Increase) decrease in accrued interest receivable 27,238 87,378 (236,323) (Increase) decrease in income taxes receivable - 31,766 (31,766) (Increase) in prepaid expenses and other assets (301,190) (1,449,942) (587,546) Increase (decrease) in income taxes payable 29,211 182,826 (57,646) Increase in accrued expenses and other liabilities 3,950 34,345 74,195 ------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 4,310,666 2,329,450 1,589,119 ------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) in loans (3,298,056) (10,546,067) (8,537,826) Purchase of loans (22,363,597) (7,499,489) (14,503,589) Proceeds from sale of securities available for sale 3,204,196 53,891 1,165,856 Purchase of securities available for sale (2,777,723) (15,314,175) (3,172,234) Proceeds from maturities of securities available for sale 3,500,000 - - Proceeds from maturities of securities held to maturity 3,500,000 12,500,000 8,000,000 Purchase of securities held to maturity - - (4,992,057) Purchase of premises, equipment and rental real estate (981,010) (381,450) (424,827) Proceeds from sale of equipment 31,325 100 500 Purchase of title plant - (110,947) (699,270) Proceeds from sale of title plant 45,000 - - Other 62,925 16,442 (116,314) ------------------------------------------ NET CASH (USED IN) INVESTING ACTIVITIES (19,076,940) (21,281,695) (23,279,761) ------------------------------------------
(Continued) -64- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 11,401,663 $ 3,049,731 $ 2,483,023 Increase in advances from borrowers for taxes and insurance 72,881 63,943 7,740 Net change in short-term borrowings (3,000,000) (7,965,000) 15,000,000 Proceeds from other borrowed funds 21,250,000 9,300,000 3,150,000 Payments of other borrowed funds (12,035,000) (892,000) - Proceeds from conversion to stock form - 25,412,159 - Payments for expenses incurred relating to conversion to stock form - (642,326) - Deferred conversion costs - - (202,143) Purchase of treasury stock (2,706,750) (7,789,661) - Proceeds from issuance of treasury stock 105,781 - - Dividends paid (813,953) (719,428) (654,060) ------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 14,274,622 19,817,418 19,784,560 ------------------------------------------ NET INCREASE (DECREASE) IN CASH (491,652) 865,173 (1,906,082) CASH Beginning 3,936,815 3,071,642 4,977,724 ------------------------------------------ Ending $ 3,445,163 $ 3,936,815 $ 3,071,642 ========================================== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payments for: Interest paid to depositors $ 6,479,044 $ 6,236,351 $ 6,320,563 Interest paid on borrowings 1,477,850 684,894 767,995 Income taxes 2,180,268 1,656,411 1,450,728
See Notes to Consolidated Financial Statements. -65- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- Note 1. Significant Accounting Policies Organization and nature of business and basis of presentation: North Central Bancshares, Inc. (the Company), an Iowa corporation, is a unitary savings and loan holding company that owns 100% of the outstanding stock of First Federal Savings Bank of Iowa (the Bank), formerly First Federal Savings Bank of Fort Dodge, which is a federally chartered stock savings bank that conducts its operations from its main office located in Fort Dodge, Iowa and three branch offices located in Fort Dodge, Nevada and Ames, Iowa. The Company was created as part of a reorganization and conversion effected by the Bank and North Central Bancshares, M.H.C. (the MHC) which became effective on March 20, 1996. See Note 17 for a more complete description of the reorganization and conversion. Prior to March 20, 1996, the MHC owned approximately 65% of the Bank with the remaining 35% owned by members of the general public (including directors and officers of the Bank). The MHC became effective on August 31, 1994 when First Federal Savings Bank of Iowa (the mutual savings bank) converted to a federal mutual holding company and concurrently formed a new federally chartered stock savings bank subsidiary (the Bank). See Note 16 for a more complete description. The financial statements presented for the Company include, since March 20, 1996, the consolidated statements of the Company and the Bank and, for periods prior to the March 20, 1996 conversion, the consolidated statements of the MHC and the Bank as if the MHC owned 100% of the Bank. These financial statements were prepared as if the pooling-of-interests method of accounting were applied to the conversions. Principles of consolidation: The consolidated financial statements, as described above, include the accounts of the Company and its wholly-owned subsidiary, the Bank and the Bank's wholly-owned subsidiaries, First Financial Service Corporation (which sells insurance and annuity products and originates equipment leases), First Iowa Title Services, Inc. (which provides real estate abstracting services), and Northridge Apartments Limited Partnership (which owns a multifamily apartment building). All significant intercompany balances and transactions have been eliminated in consolidation. Accounting estimates and assumptions: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities held to maturity: Debt securities for which the Company has both the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Amortization of premiums and accretion of discounts is computed by the interest method over their contractual lives. -66- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- Securities available for sale: Securities classified as available for sale are those debt and equity securities that 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 stockholders' equity, net of the related deferred tax effect. The amortization of premiums and accretion of discounts is computed by the interest method over their contractual lives. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Loans receivable: Loans receivable are stated at unpaid principal balances, less the allowance for loan losses, net deferred loan origination fees, and unearned discounts. Discounts on first mortgage loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. The allowance for loan losses is increased by provisions charged to income and reduced by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. Uncollectible interest on loans that are contractually past due is charged off or an allowance is established based on management's periodic evaluation, generally when loans become 90 days past due. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is no longer in doubt, in which case the loan is returned to accrual status. Loan origination fees and related costs: Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on the Bank's historical prepayment experience. Foreclosed real estate: Real estate properties acquired through loan foreclosure are initially recorded at the lower of cost or fair value less selling costs at the date of foreclosure. Costs relating to development and improvement of property are capitalized, whereas costs relating to the holding of property are expensed. Valuations are periodically performed by management, and an allowance for losses is established by a charge to income if the carrying value of a property exceeds its market value less estimated selling costs. -67- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- Premises and equipment: Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed primarily by straight-line and double declining-balance methods over the estimated useful lives of the assets. Rental real estate: Rental real estate is comprised of a low-income housing, multi-family 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. 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," which became effective for the year ended December 31, 1997. The basic earnings per share amounts were computed using the weighted average number of shares outstanding during the periods presented. The earnings per 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. Earnings per share for 1995 have been restated to account for the effect of the stock conversion ratio in the 1996 conversion. 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 non-employees. 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. -68- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- 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. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash: The fair value of cash approximates the carrying amount. Securities: Fair values for all securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans that reprice frequently and that have experienced no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. Deposits: Fair values disclosed for demand, NOW, passbook savings and money market savings deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits. Borrowed funds: The fair value of borrowed funds is estimated based on discounted cash flows using currently available borrowing rates. Accrued interest receivable and payable: The fair values of both accrued interest receivable and payable approximate their carrying amounts. Commitments to extend credit: The fair values of commitments to extend credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and credit worthiness of the counterparties. At December 31, 1997 and 1996, the carrying amount and fair value of the commitments were not significant. -69- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE 2. SECURITIES Securities available for sale as of December 31, 1997 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS (LOSSES) FAIR VALUE ------------------------------------------------------ EQUITY SECURITIES: FEDERAL HOME LOAN BANK STOCK $ 1,549,700 $ - $ - $ 1,549,700 FHLMC PREFERRED STOCK 1,005,810 (3,978) 1,001,832 FNMA PREFERRED STOCK 5,134,375 265,445 - 5,399,820 OTHER 557,078 261,858 - 818,936 DEBT SECURITIES: U.S. TREASURY NOTES 10,995,766 50,994 (1,135) 11,045,625 ------------------------------------------------------ $19,242,729 $578,297 $(5,113) $19,815,913 ======================================================
Securities available for sale as of December 31, 1996 are as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ------------------------------------------------------ Equity securities: Federal Home Loan Bank stock $ 1,374,000 $ - $ - $ 1,374,000 FHLMC preferred stock 3,011,510 1,800 (80,347) 2,932,963 FNMA preferred stock 5,134,375 134,225 - 5,268,600 Other 475,250 35,429 (1,379) 509,300 Debt securities: U.S. Treasury notes 12,990,431 45,933 (17,613) 13,018,751 ------------------------------------------------------ $22,985,566 $217,387 $(99,339) $23,103,614 ======================================================
Securities held to maturity as of December 31, 1996 are as follows:
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value ------------------------------------------------------ Debt securities, U.S. Treasury notes $ 3,499,528 $ 7,034 $ - $ 3,506,562 ======================================================
-70- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- The amortized cost and fair value of debt securities as of December 31, 1997 by contractual maturity are shown below:
Securities Available for Sale ----------------------------- Amortized Cost Fair Value ----------------------------- Due in one year or less $ 8,997,801 $ 9,014,846 Due in one year to five years 1,997,965 2,030,782 --------------------------- $10,995,766 $11,045,628 ===========================
Gross gains of $248,526, $13,774 and $181,871 were realized on the sale of available for sale securities in 1997, 1996 and 1995, respectively. At December 31, 1997, the Bank has pledged $5,000,000 of U.S. Treasury notes as collateral for certain deposits. NOTE 3. LOANS RECEIVABLE Loans receivable at December 31, 1997 and 1996 are summarized as follows:
1997 1996 ---------------------------- First mortgage loans (principally conventional) Principal balances: Secured by one-to-four family residences $114,692,784 $106,372,691 Secured by: Multi-family properties 51,345,391 34,488,126 Commercial properties 3,799,728 5,224,709 Construction loans 1,070,100 796,000 ---------------------------- Total first mortgage loans 170,908,003 146,881,526 ---------------------------- Consumer loans: Principal balances: Automobile 4,696,339 4,154,972 Second mortgage 16,225,834 15,301,062 Other 2,794,877 2,582,812 ---------------------------- Total consumer loans 23,717,050 22,038,846 ---------------------------- Total loans 194,625,053 168,920,372 Less: Undisbursed portion of construction loans (453,434) (370,881) Unearned discounts (423,640) (524,679) Net deferred loan origination fees (348,562) (240,885) Allowance for loan losses (2,150,587) (1,952,887) ---------------------------- $191,248,830 $165,831,040 ============================
-71- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- Activity in the allowance for loan losses is summarized as follows for the years ended December 31:
1997 1996 1995 -------------------------------------- Balance, beginning $1,952,887 $1,735,599 $1,542,609 Provision charged to income 240,000 240,000 250,000 Loans charged off (52,724) (24,297) (57,956) Recoveries 10,424 1,585 946 -------------------------------------- Balance, ending $2,150,587 $1,952,887 $1,735,599 ======================================
Nonaccrual loans totaled approximately $147,000 and $184,000 at December 31, 1997 and 1996, respectively. The amount of interest related to nonaccrual loans for 1997, 1996 and 1995 is insignificant. The Bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, executive officers and their immediate families (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Activity in loans receivable from certain executive officers and directors of the Bank consists of the following:
$ Balance, December 31, 1994 906,873 Additions 232,800 Payments (56,382) ---------- Balance, December 31, 1995 1,083,291 Additions 293,450 Payments (173,128) ---------- Balance, December 31, 1996 1,203,613 Additions 221,983 Payments (380,408) ---------- BALANCE, DECEMBER 31, 1997 $1,045,188 ==========
NOTE 4. LOAN SERVICING Mortgage loans serviced for FHLMC and other banks are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at December 31, 1997 and 1996 are $2,963,396 and $2,498,998, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $27,000 and $54,000, at December 31, 1997 and 1996, respectively. -72- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE 5. ACCRUED INTEREST RECEIVABLE Accrued interest receivable at December 31 is summarized as follows:
1997 1996 -------------------------- Securities $ 127,653 $ 225,423 Loans receivable 1,177,763 1,114,498 ------------------------- 1,305,416 1,339,921 Less allowance for uncollectible interest 4,921 12,188 ------------------------- $1,300,495 $1,327,733 =========================
NOTE 6. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at December 31:
1997 1996 -------------------------- Land $ 255,744 $ 368,739 Buildings and improvements 2,784,872 2,331,709 Leasehold improvements 15,546 10,557 Furniture, fixtures and equipment 1,218,608 1,044,801 Vehicles 48,723 44,870 -------------------------- 4,323,493 3,800,676 Less accumulated depreciation 2,180,477 2,020,284 -------------------------- $ 2,143,016 $ 1,780,392 ==========================
-73- NOTE 7. DEPOSITS Deposits at December 31 are as follows:
Weighted Weighted Average Average Rate at 1997 Rate at 1996 December 31, -------------------- December 31, ------------------------ Nature of Deposit 1997 Amount Percentage 1997 Amount Percentage - ------------------------------------------------------------------------------------------------------ Demand and NOW accounts: Noninterest bearing -% $ 3,144,412 2.2 -% $ 2,274,967 1.8 Interest-bearing 2.00 14,456,894 10.2 2.00 11,823,752 9.1 Passbook savings 2.25 17,119,633 12.1 2.25 17,755,812 13.7 Money market savings 4.35 8,958,483 6.4 4.33 7,280,741 5.6 --------------------- ---------------------- 43,679,422 30.9 39,135,272 30.2 --------------------- ---------------------- Certificates of deposit: Less than 4.0% 3.32 90,438 0.1 3.39 139,862 0.1 4.0% - 4.9% 4.68 5,403,762 3.8 4.59 8,817,252 6.8 5.0% - 5.9% 5.60 40,345,775 28.6 5.54 36,664,197 28.3 6.0% - 6.9% 6.23 44,707,179 31.7 6.30 33,044,967 25.4 7.0% - 7.9% 7.06 6,877,794 4.9 7.09 11,867,441 9.2 8.0% - 8.9% 8.23 19,337 0.0 8.08 53,053 - --------------------- ---------------------- 97,444,285 69.1 90,586,772 69.8 --------------------- ---------------------- 4.85% $141,123,707 100.0% 4.87% $129,722,044 100.0 ===================== ======================
At December 31, 1997, scheduled maturities of certificates of deposit are as follows:
One year One to Two to Three to Four to or less two years three years four years five years Thereafter ------------------------------------------------------------------------------------------- Less than 3.9% $ 90,438 $ - $ - $ - $ - $ - 4.0 - 4.9% 4,358,583 888,683 150,642 5,854 - - 5.0 - 5.9% 21,918,572 11,541,153 4,516,435 2,258,357 111,258 - 6.0 - 6.9% 13,858,816 10,958,844 7,987,260 5,566,739 6,324,583 10,937 7.0 - 7.9% 518,678 1,252,264 5,106,852 - - - More than 8.0% 17,210 2,127 - - - - ------------------------------------------------------------------------------------------- $40,762,297 $24,643,071 17,761,189 7,830,950 6,435,841 10,937. ===========================================================================================
-74- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- Interest expense on deposits consists of the following:
Years ended December 31, ---------------------------------------- 1997 1996 1995 ---------------------------------------- NOW accounts $ 253,210 $ 223,567 $ 229,368 Passbook savings 392,064 431,724 571,191 Money market savings 378,981 306,005 196,409 Certificates of deposit $5,469,676 $5,255,938 $5,280,610 ---------------------------------------- $6,493,931 $6,217,234 $6,277,578 ========================================
The aggregate amount of certificates of deposit of $100,000 or more was $5,782,000 and $2,432,000 as of December 31, 1997 and 1996, respectively. Note 8. BORROWED FUNDS Borrowed funds at December 31, 1997 consist of term borrowings from Federal Home Loan Bank of Des Moines (FHLB) as follows:
Weighted Average Maturity Interest Rate Amount -------- ------------- ------ 1998 5.76 $10,250,000 1999 6.14 3,000,000 2000 5.90 5,000,000 2001 6.02 4,300,000 2002 6.06 6,000,000 ---- ----------- 5.93 $28,550,000 ==== ===========
The Bank has an open line of credit which matures on February 28, 1998. There were no advances on the FHLB open line of credit at December 31, 1997. The term borrowings and open line of credit are collateralized by the Federal Home Loan Bank stock and sufficient real estate loans to at least equal 150% of the total borrowings outstanding. -75- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE 9. INCOME TAXES AND RETAINED EARNINGS Through 1995, the provisions of the Internal Revenue 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. The Bank used the percentage of taxable income method to compute its deductions in 1995. 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 will still be permitted to take deductions for bad debts, but will be required to compute such deductions using an experience method. The Bank is recapturing its tax bad debt reserves which have accumulated since 1987 amounting to approximately $1,400,000. The tax associated with the recaptured reserves is approximately $522,000 and will be paid over a six year period beginning in 1998. 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, 1997, retained earnings contain certain historical additions to bad debt reserves for income tax purposes of approximately $1,636,000 as of December 31, 1987, for which no deferred taxes have been provided because the Bank does not intend to use these reserves for purposes other than to absorb losses. If these amounts which qualified as bad debt deductions are used for purposes other than to absorb bad debt losses or adjustments arising from the carryback of net operating losses, income taxes may be imposed at the then existing rates. The approximate amount of unrecognized tax liability associated with these historical additions is $622,000. Income tax expense is summarized as follows:
Years ended December 31, ------------------------------------ 1997 1996 1995 ------------------------------------ Current $2,188,895 $1,886,626 $1,361,316 Deferred (80,591) (143,069) 41,946 ------------------------------------ $2,108,304 $1,743,557 $1,403,262 ====================================
-76- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred tax assets and liabilities consist of the following components as of December 31, 1997 and 1996:
1997 1996 ------------------------ Deferred tax assets: Unearned shares, employee stock ownership plan $ 24,000 $ 20,000 Allowance for loan losses 270,000 197,000 Deferred directors fees and compensation 62,000 68,000 Other 28,591 15,000 ------------------------ Total gross deferred tax assets 384,591 300,000 ------------------------ Deferred tax liabilities: Federal Home Loan Bank stock dividend 9,000 9,000 Unrealized gain on securities available for sale 218,452 45,000 Premises and equipment 10,000 15,000 Title plant 42,000 33,000 ------------------------ Total gross deferred tax liabilities 279,452 102,000 ------------------------ Net deferred tax assets $ 105,139 $ 198,000 ========================
Total income tax expense differed from the amounts computed by applying the U. S. federal income tax rates of 34 percent to income before income taxes as a result of the following:
Years Ended December 31, -------------------------------------------------------------------------- 1997 1996 1995 -------------------------------------------------------------------------- PERCENT OF PERCENT OF PERCENT OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME -------------------------------------------------------------------------- Income before income taxes $2,048,646 34.0% $1,658,003 34.0% $1,313,724 34.0 Nontaxable dividends (119,550) (2.0) (107,983) (2.2) (56,134) (1.4) State income taxes, net of federal income tax benefit 174,621 2.9 125,286 2.6 120,847 3.1 Low income housing tax credit (97,894) (1.6) - - - Other 102,481 1.7 68,251 1.4 24,825 0.6 -------------------------------------------------------------------------- $2,108,304 35.0% $1,743,557 35.8 $1,403,262 36.3 ==========================================================================
NOTE 10. EMPLOYEE BENEFIT PLANS Retirement plans: The Bank participates in a multi-employer defined benefit pension plan covering substantially all employees. This is a multi-employer plan and information as to actuarial valuations and net assets available for benefits by participating institutions is not available. There was no pension expense for the years ended December 31, 1997, 1996 and 1995. -77- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- The Bank has a defined contribution plan covering substantially all employees. Contributions to the plan were approximately none, $19,000 and $29,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 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 that there is an established market for the Bank's stock and therefore the Bank believes there is no potential repurchase obligation at December 31, 1997 and 1996. 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 $354,482, $233,027 and $124,049 for the years ended December 31, 1997, 1996 and 1995. Shares of the Company's common stock held by the ESOP at December 31, 1997 and 1996 are as follows: 1997 1996 ---------------------------- Allocated shares $ 62,408.00 $ 40,861.00 Unreleased (unearned) shares 125,667.00 147,214.00 ---------------------------- $ 188,075.00 $ 188,075.00 ============================ Fair market value of unreleased (unearned) shares $2,497,632.00 $1,996,590.00 ============================
-78- 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 September 21, 1997 and continuing on each anniversary date thereafter. The options expire 10 years from the date of grant unless an earlier expiration date is triggered by death, disability, retirement or termination, as described in the Plan. The table below reflects option activity for the period indicated: Weighted- Average Exercise Number Price per of Shares Share ----------------------- Outstanding, December 31, 1995 - - Granted 237,000 12.38 Exercised - - --------------------- 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 ===================== Options exercisable 39,200 $ 12.38 ===================== Remaining shares available for grant 160,605 ======= As of December 31, 1997, the 231,000 options outstanding under the Plan have exercise prices between $12.375 and $15.75. The weighted average fair value per option of options granted during the years ended December 31, 1997 and 1996 were $5.75 and $4.54, respectively. -79- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- 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 1997 and 1996 reported net income and earnings per common share would have been decreased to the pro forma amounts shown below. The 1995 amounts for net income and earnings per common share would not have been affected since the Plan was adopted in 1996. 1997 1996 -------------------------- Net income: As reported $ 3,917,124 $ 3,132,921 Pro forma 3,780,710 3,098,600 Earnings per common share: As reported $ 1.23 $ .82 Pro forma 1.19 .81 Earnings per common share - assuming dilution: As reported $ 1.21 $ .82 Pro forma 1.17 .81 The fair values of the grants are estimated at the grant date using the Black-Scholes option-pricing model with the following weighted Lverage assumptions: dividend rate of 1.84%, price volatility of 25%, risk-free interest rates of 6.62% to 7.40%, and expected lives of eight years. Employment agreements: The Company and the Bank have entered into employment agreements with a key officer. Under the terms of the agreements, the officer is entitled to additional compensation in the event of certain conditions of involuntary termination. The agreements extend for up to 36 months. The Bank has entered into certain employment retention agreements with key officers. Under the terms of the agreements, the employees are entitled to additional compensation in the event of a change of control of the Bank or the Company and the employees are involuntarily terminated within the remaining unexpired employment period, up to 24 months. A change in control is generally triggered by the acquisition or control of 20% or more of the common stock. NOTE 11. STOCKHOLDERS' EQUITY Regulatory capital requirements: The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. -80- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- 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, 1997, the Bank meets all capital adequacy requirements to which it is subject. The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under 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, 1997: TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) $ 39,478 32.1% $ 9,830 8.0% $ 12,288 10.0% TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS) 37,935 30.9 4,915 4.0 7,373 6.0 TIER I (CORE) CAPITAL (TO ADJUSTED ASSETS) 37,935 17.3 6,595 3.0 10,992 5.0 TANGIBLE CAPITAL (TO ADJUSTED ASSETS) 37,935 17.3 3,298 1.5 - - As of December 31, 1996: Total Capital (to risk weighted assets) $ 45,255 40.7% $ 8,880 8.0% $ 11,100 10.0% Tier 1 Capital (to risk weighted assets) 43,861 39.5 4,440 4.0 6,660 6.0 Tier I (Core) Capital (to adjusted assets) 43,861 21.8 6,045 3.0 10,076 5.0 Tangible Capital (to adjusted assets) 43,861 21.8 3,023 1.5 - -
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, 1997 the Bank was considered a Tier 1 Association. -81- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- The MHC, which owned 2,421,711 shares of common stock prior to the 1996 conversion, requested and received permission from the OTS to waive the receipt of dividends from the Bank for several quarterly periods. This waiver had the effect of reducing the actual amount of dividends paid in cash. The total amount of dividends waived totaled approximately $1,897,000. As a result of the 1996 reorganization and conversion, the waived dividends were added to the liquidation account (see Note 17). NOTE 12. OTHER NONINTEREST EXPENSE Other noninterest expense amounts are summarized as follows for the years ended December 31:
1997 1996 1995 ---------- ---------- ---------- Advertising and promotion $ 147,605 $ 92,245 $ 108,146 Professional fees 249,617 202,677 137,189 Printing, postage, stationery, and supplies 215,332 182,134 171,631 Checking account charges 158,512 151,724 138,024 Insurance 81,056 72,236 64,886 OTS general assessment 49,326 54,825 48,063 Other 679,174 418,609 405,029 ---------- ---------- ---------- $1,580,622 $1,174,450 $1,072,968 ========== ========== ==========
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-STATEMENT OF FINANCIAL CONDITION RISK The Bank is a party to financial instruments with off-statement of financial condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-statement of financial condition instruments. The Bank does require collateral or other security to support financial instruments with credit risk. A summary of the contract amount of the Bank's exposure to off-statement of financial condition risk for commitments to extend credit are as follows: Contract or Notional Amount --------------------------- December 31, --------------------------- 1997 1996 --------------------------- Mortgage loans $ 1,412,000 $ 3,090,000 Undisbursed overdraft loan privileges 255,000 239,000 -82- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- At December 31, 1997, the mortgage loan commitments above are comprised of variable-rate commitments carrying a weighted average interest rate of 7.44%. 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 14. LENDING ACTIVITIES AND CONCENTRATIONS OF CREDIT RISK Most of the Bank's lending activity is with customers located within the state of Iowa. The Bank generally originates single family residential loans within its primary lending area of Webster and Story counties. The Bank's underwriting policies require such loans to be 80% loan to value based upon appraised values unless private mortgage insurance is obtained. Approximately 36% of the Bank's first mortgage loan portfolio at December 31, 1997 consists of loans purchased or originated outside the Bank's primary lending area, generally multi-family residential loans. These loans are secured by the underlying properties. The properties securing these loans are physically inspected and the loans are subject to the same underwriting guidelines as loans originated locally. The Bank is also active in originating secured consumer loans to its customers, primarily automobile and second mortgage loans. Collateral for substantially all consumer loans are security agreements and/or Uniform Commercial Code filings on the purchased asset. NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amount and fair value of the Company's financial instruments as of December 31, 1997 and 1996 are as follows:
1997 1996 ----------------------------------------------------------------- CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value ----------------------------------------------------------------- (NEAREST 000) (nearest 000) Financial assets: Cash $ 3,445,163 $ 3,445,000 $ 3,936,815 $ 3,937,000 Securities 19,815,913 19,816,000 26,603,142 26,610,000 Loans, net 191,248,830 192,436,000 165,831,040 168,389,000 Accrued interest receivable 1,300,495 1,300,000 1,327,733 1,328,000 Financial liabilities: Deposits 141,123,707 142,850,000 129,722,044 131,321,000 Accrued interest payable 28,532 29,000 85,815 86,000 Borrowed funds 28,550,000 28,620,000 22,335,000 22,139,000
-83- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- NOTE 16. 1994 REORGANIZATION AND CONVERSION TO STOCK OWNERSHIP On January 27, 1994 the Board of Directors of First Federal Savings Bank of Fort Dodge (a mutual savings bank) adopted a plan of reorganization whereby the Bank would reorganize from a federally chartered mutual savings bank into a federal mutual holding company and concurrently form a new federally chartered stock savings bank subsidiary. Pursuant to the reorganization, the Bank (a stock savings bank) was formed as a new federal stock savings bank subsidiary of the mutual savings bank. The mutual savings bank transferred substantially all of its assets and liabilities to the stock savings bank in exchange for 2,421,711 shares of newly issued common stock of the stock savings bank. The mutual savings bank then converted its mutual savings bank charter to a federal mutual holding company charter under the name of North Central Bancshares, Inc. (the mutual holding company). The reorganization was effective August 31, 1994 at which time 2,421,711 shares of stock were issued to the mutual holding company representing approximately 65.5% of the common stock of the Bank and the remaining 35 percent, or 1,278,289 shares were sold in a public offering to persons other than the holding company at a price of $10 per share. The reorganization and stock offering was completed on August 31, 1994 and the Bank received proceeds of $12,038,638, net of costs of $644,252 and net of $100,000 retained by the mutual holding company. Persons who had membership or liquidation rights with respect to the mutual savings bank as of the date of reorganization shall, as long as they remain depositors of the Bank, continue to have such rights solely with respect to the mutual holding company after the reorganization (see Note 17). NOTE 17. THE 1996 REORGANIZATION AND CONVERSION On September 29, 1995, the Boards of Directors of the Bank and the Mutual Holding Company (MHC) adopted a Plan of Conversion and Agreement and Plan of Reorganization (the Plan). The reorganization became effective March 20, 1996. Pursuant to the Plan, (1) the MHC, which owned approximately 65.5% of the Bank, converted to an interim federal stock savings association and simultaneously merged into the Bank, with the Bank being the surviving entity; (2) the Bank then merged into an interim institution (Interim) formed as a wholly-owned subsidiary of the Company, a newly formed Iowa corporation formed in connection with the reorganization, with the Bank being the surviving entity; and, (3) the outstanding shares of the Bank's common stock (other than those held by the MHC, which were canceled) were converted into shares of common stock of the Company pursuant to a ratio that resulted in the holders of such shares owning in the aggregate approximately the same percentage of the Company as they owned of the Bank. The Company then offered for sale pursuant to the Plan additional shares equal to 65.5% of the common shares of the Company. The reorganization was effective on March 20, 1996, at which time the Company issued an aggregate of 4,011,057 shares of its common stock, 1,385,590 shares of which were issued in exchange for all of the Bank's issued and outstanding shares, except for shares owned by the MHC which were canceled, and 2,625,467 shares of which were sold in Subscription and Community Offerings at a price of $10.00 per share, with gross proceeds amounting to $26,252,159. -84- 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 MHC plus 65.5% of the Bank's total stockholders' equity as reflected in its latest statement of financial condition in the final prospectus utilized in the conversion. The Liquidation Account is established to provide a limited priority claim to the assets of the Bank to qualifying depositors as of specified dates (Eligible Account Holders and Supplemental Eligible Account Holders) who continue to maintain deposits in the Bank after the conversion. In the unlikely event of a complete liquidation of the Bank, and only in such an event, Eligible Account Holders and Supplemental Eligible Account Holders would receive from the Liquidation Account a liquidation distribution based on their proportionate share of the then total remaining qualifying deposits. NOTE 18. 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.
1997 ----------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------------------------------------- Income available to common stockholders $ 3,917,124 3,323,346 Less unallocated ESOP shares - 139,077 ------------------------- Basic earnings per common share Income available to common stockholders 3,917,124 3,184,269 $1.23 Effect of dilutive securities - options - 56,800 ------------------------- Earnings per common share - assuming dilution Income available to common stockholders + assumed conversions $3,917,124 3,241,069 $1.21 =========================
Basic earnings per common share information for 1996 and 1995 is calculated by dividing net income by the weighted number of shares outstanding (3,818,273 and 3,919,488, respectively). Earnings per common share - assuming dilution for 1996 did not include the effect of options to purchase 237,000 shares of common stock because the exercise price was greater than the average market price of the common shares. Earnings per common share - assuming dilution for 1995 did not differ from basic earnings per common share because there were no stock options or other common stock equivalents outstanding. -85- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- NOTE 19. SUBSEQUENT EVENT Effective January 30, 1998, the Bank acquired for cash all of the outstanding shares of Valley Financial Corp. of Burlington, Iowa. Valley Financial Corp. was the parent company of Valley Savings Bank, FSB, an OTS regulated savings bank headquartered in Burlington, Iowa with branch offices in Burlington and Mt. Pleasant, Iowa. At January 30, 1998, Valley Financial Corporation and subsidiaries had consolidated assets of approximately $108,700,000; deposits of $98,300,000 and stockholders' equity of $8,400,000. The Company acquired 28,050 shares at a price of $525 per share, resulting in a purchase price of approximately $14,700,000. The acquisition will be accounted for using the purchase method of accounting and will result in goodwill estimated at $6,500,000. NOTE 20. PENDING ACCOUNTING PRONOUNCEMENTS AND REGULATIONS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 requires that all items that are components of comprehensive income defined as "the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from nonowner sources, including all changes in equity during a period except those resulting from investments by owners and distributions to owners," be reported in a financial statement that is displayed with the same prominence as other financial statements. Companies will be required to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, and requires reclassification of prior periods presented. As the requirements of SFAS No. 130 are disclosure related, its implementation will have no impact on the Company's financial condition or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information (SFAS No. 131). SFAS No. 131 requires that enterprises report certain financial and descriptive information about operating segments in complete sets of financial statements of the Company and in condensed financial statements of interim periods issued to shareholders. It also requires that a Company report certain information about their products and services, geographic areas in which they operate and their major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. As the requirements of SFAS No. 131 are disclosure related, its implementation will have no impact on the Company's financial condition or results of operations. -86- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21. NORTH CENTRAL BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION STATEMENTS OF FINANCIAL CONDITION December 31, 1997 and 1996
1997 1996 ------------------------ ASSETS Cash $ 740,722 $ 204,843 Securities available for sale 818,936 509,300 Loan receivables, net 9,941,000 3,821,000 Investment in First Federal Savings Bank of Fort Dodge 39,250,882 44,951,564 Prepaid expenses and other assets 12,777 26,276 ------------------------ TOTAL ASSETS $50,764,317 $49,512,983 ======================== LIABILITIES AND EQUITY LIABILITIES Dividend payable $ 204,155 $ 230,344 Income taxes payable 2,723 8,522 Accrued expenses and other liabilities 41,293 32,996 Deferred taxes 99,070 6,392 ------------------------ TOTAL LIABILITIES 347,241 278,254 ------------------------ EQUITY Common stock 40,111 40,111 Additional paid-in capital 37,949,598 37,796,611 Retained earnings 23,660,964 20,531,526 Unearned shares, employee stock ownership plan (1,210,441) (1,416,955) Unrealized gain on securities available for sale, net of income taxes 354,781 73,097 Treasury stock at cost (10,377,937) (7,789,661) ------------------------ TOTAL EQUITY 50,417,076 49,234,729 ------------------------ TOTAL LIABILITIES AND EQUITY 50,764,317 49,512,983 ========================
-87- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS Period From March 20, 1996 (Date of Inception) to December 31, 1996 and Year Ended December 31, 1997
1997 1996 --------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,917,124 $ 2,582,491 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of First Federal Savings Bank (3,802,303) (2,523,316) (Gain) on sale of securities available for sale (248,526) - Change in deferred income taxes 4,021 (7,228) Change in assets and liabilities: (Increase) decrease in prepaid expenses and other assets 13,499 (26,276) Increase (decrease) in income taxes payable 11,913 8,522 Increase in accrued expenses and other liabilities 8,297 32,996 --------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES (95,975) 67,189 --------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (6,120,000) (3,821,000) Proceeds from sale of securities available for sale 1,270,447 - Purchase of securities available for sale (1,103,749) (475,250) Dividends received from First Federal Savings Bank 10,000,000 - One half of stock proceeds paid to First Federal Savings Bank - (12,703,561) --------------------------- NET CASH (USED IN) INVESTING ACTIVITIES 4,046,698 (16,999,811) --------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock - 26,252,059 Payments for expenses incurred relating to conversion to stock form - (844,469) Purchase of treasury stock (2,706,750) (7,789,661) Proceeds from issuance of treasury stock 105,781 - Dividends paid (813,875) (480,464) --------------------------- NET CASH (USED IN) FINANCING ACTIVITIES (3,414,844) 17,137,465 --------------------------- NET INCREASE IN CASH 535,879 204,843 CASH Beginning 204,843 - --------------------------- Ending $ 740,722 $ 204,843 =========================== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash payment for income taxes $ 105,781 $ 56,000
-88- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS OF EQUITY Period From March 20, 1996 (Date of Inception) to December 31, 1996 and Year Ended December 31, 1997
Gain (Loss) on Securities Available Employee for Sale, Additional Stock Net of Common Paid-in Retained Ownership Income Stock Capital Earnings Plan Taxes ---------------------------------------------------------------------- Balance, March 20, 1996 $ - $ - $ - $ - $ - Net Income - - 2,582,491 - - Issuance of common stock in the conversion 40,111 26,211,948 - - - Expenses incurred - (844,469) - - - Transfer of equity from First Federal Savings Bank - 12,387,940 18,659,843 (786,790) 46,029 Purchase of treasury stock - - - - - Unearned ESOP shares - - - (840,000) - Dividends on common stock - - (710,808) - - Effect of contribution to employee stock ownership plan - - - 191,835 - Net change in unrealized loss on securities available for sale, net - - - - 27,068 ---------------------------------------------------------------------- Balance, December 31, 1996 40,111 37,769,611 20,531,526 (1,416,955) 73,097 Net income - - 3,917,124 - - Purchase of treasury stock - - - - - Dividends on common stock - - (787,686) - - Effect of contribution to employee stock ownership plan - 147,968 - 206,514 - Effect of stock options exercised - 5,019 - - - Net change in unrealized loss on securities available for sale, net - - - - 281,684 ---------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 $40,111 $37,949,598 $23,660,964 $(1,210,441) $354,781 ======================================================================
Total Treasury Stockholders' Stock Equity --------------------------- Balance, March 20, 1996 $ - $ - Net Income - 2,582,491 Issuance of common stock in the conversion - 26,252,059 Expenses incurred - (844,469) Transfer of equity from First Federal Savings Bank - Purchase of treasury stock (7,789,661) (7,789,661) Unearned ESOP shares - (840,000) Dividends on common stock - (710,808) Effect of contribution to employee stock ownership plan - 233,027 Net change in unrealized loss on securities available for sale, net - 27,068 --------------------------- Balance, December 31, 1996 (7,789,661) 49,234,729 Net income - 3,917,124 Purchase of treasury stock (2,706,750) (2,706,750) Dividends on common stock - (787,686) Effect of contribution to employee stock ownership plan - 354,482 Effect of stock options exercised 118,474 123,493 Net change in unrealized loss on securities available for sale, net - 281,684 --------------------------- BALANCE, DECEMBER 31, 1997 $(10,377,937) $50,417,076 ===========================
-89- NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------- STATEMENTS OF INCOME Period From March 20, 1996 (Date of Inception) to December 31, 1996 and Year Ended December 31, 1997
1997 1996 ----------------------------- Operating income: Equity in net income of subsidiary $ 3,802,303 $ 2,523,316 Interest income 334,775 418,948 Gain on sale of securities available for sale, net 248,526 - ----------------------------- 4,385,604 2,942,264 ----------------------------- Operating expenses: Salaries and employee benefits 39,950 21,440 Other 351,480 272,933 ----------------------------- 391,430 294,373 ----------------------------- INCOME BEFORE INCOME TAXES 3,994,174 2,647,891 Provision for income taxes 77,050 65,400 ----------------------------- NET INCOME $ 3,917,124 $ 2,582,491 =============================
-90- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information regarding Directors and Executive Officers of the Registrant is included under the headings "Information with respect to Nominees and Continuing Directors," "Nominees for Election as Directors," "Continuing Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 24, 1998, which has been filed with the SEC and is incorporated herein by reference. Information regarding Executive Officers, who are not Directors, appears under the caption "Executive Officers" included in Item 1 of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is included under the headings "Executive Compensation" (excluding the Stock Performance Graph and the Compensation Committee Report) and "Directors' Compensation" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 24, 1998, which has been filed with the SEC and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership of certain beneficial owners and management is included under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 24, 1998, which has been filed with the SEC and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is included under the heading "Certain Relationships and Related Transactions" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on April 24, 1998, which has been filed with the SEC and is incorporated herein by reference. -91- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS The following are filed as part of this annual report on Form 10-K: - Independent Auditor's Report - Consolidated Statements of Financial Condition at December 31, 1997 and 1996 - Consolidated Statements of Income for each of the years in the three year period ended December 31, 1997 - Consolidated Statements of Shareholders' Equity for each of the years in the three year period ended December 31, 1997 - Consolidated Statements of Cash Flows for each of the years in the three year period ended December 31, 1997 - Notes to the Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1997: None -92- (C) EXHIBITS REQUIRED BY ITEM 601 OF SECURITIES AND EXCHANGE COMMISSION REGULATION S-K: EXHIBIT NO. DESCRIPTION PAGE NO. 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 Iowa and Valley Financial Corp. ***** 3.1 Articles of Incorporation of North Central Bancshares, Inc. * 3.2 Bylaws of North Central Bancshares, Inc. * 4.1 Federal Stock Charter of First Federal Savings Bank of Fort Dodge * 4.2 Bylaws of First Federal Savings Bank of Fort Dodge * 4.3 Specimen Stock Certificate of North Central Bancshares, Inc. * 10.1 Employee Stock Ownership Plan of First Federal Savings Bank of Fort Dodge and ESOP Trust Agreement (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 Fort Dodge and certain executive officers ** 10.4 Employment Agreement between First Federal Savings Bank of Fort Dodge and David M. Bradley, effective as of August 31, 1994 * 10.5 Form of Employment Agreement between First Federal Savings Bank of Fort Dodge and David M. Bradley * 10.6 Form of Employment Agreement between North Central Bancshares, Inc. and David M. Bradley * 10.7 Employment Agreement between Valley Financial Corp. and Valley Savings Bank and Doyle V. Ruble 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 10.10 Asset Purchase Agreement between First Iowa Title Services, Inc. and Webster County Title Company, Inc. * 10.11 Asset Purchase Agreement between First Iowa Title Services, Inc. and Calhoun County Abstract Company, Inc. * 11.1 Statement regarding computation of per share earnings 21.1 Subsidiaries of 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 is incorporated herein by reference. ________________________ (Notes on following page) -93- * 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 Current Report on Form 8-K of the Registrant filed with the Commission on September 26, 1997. -94- 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, 1998 /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, 1998 - ----------------------------- Director, and Chairman of the Board David M. Bradley (principal executive officer) /s/ John L. Pierschbacher Treasurer March 27, 1998 - ----------------------------- (principal accounting and John L. Pierschbacher financial officer) /s/ Robert H. Singer, Jr. Director March 27, 1998 - ----------------------------- Robert H. Singer /s/ KaRene Egemo Director March 27, 1998 - ----------------------------- KaRene Egemo /s/ Howard A. Hecht Director March 27, 1998 - ----------------------------- Howard A. Hecht /s/ John M. Peters Director March 27, 1998 - ----------------------------- John M. Peters /s/ Melvin R. Schroeder Director March 27, 1998 - ----------------------------- Melvin R. Schroeder
-95- TABLE OF CONTENTS LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED) EXHIBIT NO. DESCRIPTION PAGE NO. ----------- ----------- -------- 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 Iowa and Valley Financial Corp. ***** 3.1 Articles of Incorporation of North Central * Bancshares, Inc. 3.2 Bylaws of North Central Bancshares, Inc. * 4.1 Federal Stock Charter of First Federal Savings Bank of Fort Dodge * 4.2 Bylaws of First Federal Savings Bank of Fort Dodge * 4.3 Specimen Stock Certificate of North Central Bancshares, Inc. * 10.1 Employee Stock Ownership Plan of First Federal Savings Bank of Fort Dodge and ESOP Trust Agreement (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 Fort Dodge and certain executive officers ** 10.4 Employment Agreement between First Federal Savings Bank of Fort Dodge and David M. Bradley, effective as of August 31, 1994 * 10.5 Form of Employment Agreement between First Federal Savings Bank of Fort Dodge and David M. Bradley * 10.6 Form of Employment Agreement between North Central Bancshares, Inc. and David M. Bradley * 10.7 Employment Agreement between Valley Financial Corp. and Valley Savings Bank and Doyle V. Ruble 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 10.10 Asset Purchase Agreement between First Iowa Title Services, Inc. and Webster County Title Company, Inc. * 10.11 Asset Purchase Agreement between First Iowa Title Services, Inc. and Calhoun County Abstract Company, Inc. * 11.1 Statement regarding computation of per share earnings 21.1 Subsidiaries of 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 is incorporated herein by reference. ________________________ (Notes on following page) -96- * 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 Current Report on Form 8-K of the Registrant filed with the Commission on September 26, 1997. -97- EX-10.1 2 STOCK OWNERSHIP PLAN EXHIBIT 10.1 Exhibit 10.1 Employee Stock Ownership Plan of First Federal Savings Bank of Fort Dodge and ESOP Trust Agreement (incorporating Amendments 1 and 2) NORTH CENTRAL BANCSHARES, INC. 1996 STOCK OPTION PLAN (Adopted on July 26, 1996 Effective as of September 21, 1996) AMENDMENT --------- 1. Article IV - Effective as of April 25, 1997, section 4.4(b) shall be amended to read in its entirety as follows: (b) Any Person who becomes an Eligible Director after the Effective Date shall be granted, subject to section 4.2, on January 1 of each succeeding calendar year during which the Plan is in effect (or, if such date is not a business day, the first business day thereafter) and provided that the Eligible Director is still an Eligible Director on that date, an additional Option to purchase Five Hundred (500) Shares. All Options granted under this section 4.4(b) shall instead be exercisable immediately upon grant. 2. Article IV - Effective as of April 25, 1997, the last sentence of section 4.4(g) shall be amended to read in its entirety as follows: To the extent that any Option shall not have become exercisable prior to the date on which the Option holder terminates all Service with the Company, such Option shall not thereafter become exercisable; provided, however, that such an Option shall become fully exercisable, and all optioned Shares not previously purchased shall become available for purchase, on the date of the Option holder's termination of Service due to Retirement, death or Disability or upon the occurrence of a Change in Control of the Company. 3. Article IV - Effective as of April 25, 1997, section 4.8 shall be deleted in its entirety, and section 4.9 shall be amended to read in its entirety as follows: SECTION 4.9 REQUIRED REGULATORY PROVISIONS. ------------------------------- Notwithstanding anything contained herein to the contrary: (a) The Exercise Period of any Option granted hereunder, whether or not previously vested, shall be suspended as of the time and date at which the Option holder has received notice from the Board that his or her employment is subject to a possible Termination for Cause. Such suspension shall remain in effect until the Option holder receives official notice from the Board that he or she has been cleared of any possible Termination for Cause, at which time, the original Exercise Period shall be reinstated without any adjustment for the intervening suspended period. (b) No Option granted hereunder, whether or not previously vested, shall be exercised after the time and date at which the Option holder's employment with the Company is terminated in a Termination for Cause. -98- 4. Article V - Effective as of April 25, 1997, section 5.3(c) shall be amended to read in its entirety as follows: (c) In the event that the Company shall declare and pay any dividend with respect to Shares (other than a dividend payable in Shares or a regular quarterly cash dividend), including a dividend which results in a nontaxable return of capital to the holders of Shares for federal income tax purposes, or otherwise than by dividend makes distribution of property to the holders of its Shares, at the election of the Committee: (i) the Company shall make an equivalent payment to each Person holding an outstanding Option as of the record date for such dividend. Such payment shall be made at substantially the same time, in substantially the same form and in substantially the same amount per optioned Share as the dividend or other distribution paid with respect to outstanding Shares; provided, however, that if any dividend or distribution on outstanding Shares is paid in property other than cash, the Company, in its discretion applied uniformly to all outstanding Options, may make such payment in a cash amount per optioned Share equal in fair market value to the fair market value of the non-cash dividend or distribution; or (ii) with respect to any one or more outstanding Options and in lieu of the payment provided under section 5.3(c)(i), the Committee, may adjust the Exercise Price per Share of outstanding Options in such a manner as the Committee may determine to be necessary to reflect the effect of the dividend or other distribution on the Fair Market Value of a Share. -99- EX-10.7 3 EMPLOYMENT AGREEMENT EXHIBIT 10.7 Exhibit 10.7 Employment Agreement between Valley Financial Corp. and Valley Savings Bank and Doyle V. Rule EMPLOYMENT AGREEMENT -------------------- This Agreement is made effective as of September 18, 1997, by and between Valley Savings Bank ("Bank"), Burlington, Iowa, Valley Financial Corp. ("Company") and Doyle V. Ruble, Jr., ("Executive"). WHEREAS, the Bank and Company wish to be assured of the services of Executive for the period provided in this Agreement; and WHEREAS, the Executive is willing to serve in the employ of the Bank as determined by the Board of Directors of Bank for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, the Executive agrees to serve as President of Bank and, if the Executive agrees to serve, if elected, as an officer and director of Company or any subsidiary or affiliate of the Bank or Company. 2. TERMS AND DUTIES (a) The term of this Agreement shall be deemed to have commenced as of June 12, 1997 and shall continue through the close of business on June 30, 1998; provided however, that if any person or entity shall acquire beneficial ownership (within the meaning of section 13 of the Securities Exchange Act of 1934, as amended) of fifty-one percent (51%) or more of the outstanding common stock of either the Company or the Bank (an "Acquisition of Control") after June 12, 1997 and on or before June 30, 1998, the term of this Agreement shall continue through the close of business on the first anniversary of such Acquisition of Control. Following the expiration date of the term of this Agreement, the Executive's employment shall continue through the six (6) month anniversary of the date on which the Bank or the Company gives notice of its intention to terminate Executive's employment for reasons other than "Termination for Cause," but such continued employment shall not be deemed an extension of the term of this Agreement. (b) The Executive shall devote substantially all of his business time, attention, skill and efforts to the faithful performance of his duties for the position elected regarding the operation and management of Bank. The Executive may serve, or continue to serve, on the Boards of Directors of, and hold any other offices or positions in, companies or organizations, which in the judgement of the Bank's Board of Directors, will not present any conflict of interest with the Bank or Company, or materially affect the performance of Executive's duties pursuant to this Agreement. -100- 3. COMPENSATION AND REIMBURSEMENT (a) The compensation specified under this Agreement shall be the salary and benefits approved as compensation by the Board of Directors of Bank which shall be approved no less than once a calendar year; provided, however, in no event shall the salary approved be less than the salary in effect on the date of this Agreement, $87,400 per annum. (b) In addition to the compensation provided by paragraph (a) above, the Bank shall pay or reimburse the Executive for all travel and other obligations incurred by Executive which are reasonable and necessary for the Executive to complete his required duties. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION (a) Upon the occurrence of an Event of Termination (as herein defined), the follo wing provisions shall apply. (b) As used in this Agreement an "Event of Termination" shall mean and include any one or more of the following; (1) death or disability of the Executive or (2) termination of the Executive's employment, other than "Termination for Cause," by Bank or Company. (c) Upon the occurrence of an Event of Termination during the term of this Agreement and prior to an Acquisition of Control, the Bank shall pay the Executive, or in the event of his subsequent death, his beneficiaries or his estate as the case may be, as severance pay or liquidated damages, or both, an amount equal to one year's base salary, payable in twelve (12) equal installments on the first business day of each month commencing with the first day of the month following the effective date of the Event of Termination and for eleven (11) months thereafter. In the event of the death of the Executive during the period from the Event of Termination until the first anniversary thereof, the remaining payments shall be paid to the Executive's beneficiaries or his estate, as the case may be. (d) In the event that the Bank or Company terminates the Executive's employment, other than "Termination for Cause," on any date following the term of this Agreement, the Bank or Company shall provide Executive with at least six (6) month's notice of such termination. In the event that the Bank or Company fails to provide such notice, the Bank shall pay the Executive, or in the event of his subsequent death, his beneficiaries or his estate as the case may be, as severance pay or liquidated damages, or both, an amount equal to his monthly base salary, multiplied by the number of months during the six (6) month period prior to the Executive's termination for which the Executive did not receive notice of such termination ("Non-notice Months"). Such amount shall be payable in equal installments on the first business day of each month commencing with the first day of the month following the effective date of the Executive's termination and shall continue to be paid for the number of Non-notice Months. In the event of the death of the Executive during the period from the Event of Termination until the payment period described above has terminated, the remaining payments shall be paid to the Executive's beneficiaries or his estate, as the case may be. (e) If, as a result of the Executive's incapacity due to physical or mental illness, he shall have been absent from the performance of his duties for Bank for six (6) consecutive months, the Bank may terminate Executive's employment for "disability". -101- (f) Upon the occurrence of an Event of Termination, the Bank will cause, to the extent it is able, continuation of life, medical, dental and disability benefits coverage as maintained for Executive prior to his termination. Such coverage shall cease upon the expiration of payments due under the Agreement. 5. TERMINATION FOR CAUSE The term "Termination for Cause" pursuant to this Agreement shall mean termination of the Executive as a result of: (1) intentional failure to perform stated duties, (2) personal dishonesty which results in loss to the Bank or one of its affiliates, (3) willful violation of any law, rule, regulation (other than traffic violations or similar offenses), (4) breach of fiduciary duty involving personal profit, (5) final cease-and-desist order or (6) material breach of this Agreement. 6. OTHER (a) Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. §1828(k) regarding golden parachutes and indemnification payments and any regulations promulgated thereunder. (b) The headings or sections and paragraphs herein are included solely for convenience or reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. (c) This Agreement shall be governed by the laws of the State of Iowa, unless otherwise specified herein. (d) The Bank and the Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, of all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. (e) This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreement, understandings or representations relating to the subject matter hereof, including, but not limited to, the Employment Agreement effective as of June 12, 1997. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. -102- IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed by a duly authorized officer or member of the Board of Directors and Executive has signed this Agreement, as of the date first above written. Attest: Valley Savings Bank /s/ Donald E. Holder By /s/ Larry L. Wenzl - --------------------------- ------------------------ Attest: Valley Financial Corp. /s/ Donald E. Holder By /s/ Larry L. Wenzl - --------------------------- ------------------------ Attest: /s/ Donald E. Holder /s/ Doyle V. Ruble, Jr. - --------------------------- --------------------------- Executive -103- EX-10.9 4 AMEND. #1 TO STOCK OPTION PLAN EXHIBIT 10.9 Exhibit 10.9 Amendment to No. 1 no the North Central Bancshares, Inc. 1996 Stock Option Plan FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN (adopted effective January 1, 1994) (Incorporating the First and Second Amendments) -104- CONTENTS Section 1. PLAN IDENTITY 1 1.1 NAME 1 1.2 PURPOSE 1 1.3 EFFECTIVE DATE 1 1.4 FISCAL PERIOD 1 1.5 SINGLE PLAN FOR ALL EMPLOYERS 1 1.6 INTERPRETATION OF PROVISIONS 1 Section 2. DEFINITIONS. 2 Section 3. ELIGIBILITY FOR PARTICIPATION 12 3.1 INITIAL ELIGIBILITY 13 3.2 DEFINITION OF ELIGIBILITY YEAR 13 3.3 TERMINATED EMPLOYEES 13 3.4 CERTAIN EMPLOYEES INELIGIBLE 13 3.5 PARTICIPATION AND REPARTICIPATION 14 Section 4. CONTRIBUTIONS AND CREDITS 14 4.1 DISCRETIONARY CONTRIBUTIONS 14 4.2 CONTRIBUTIONS FOR STOCK OBLIGATIONS 14 4.3 DEFINITIONS RELATED TO CONTRIBUTIONS 15 4.4 CONDITIONS AS TO CONTRIBUTIONS 16 4.5 TRANSFERS 17 Section 5. LIMITATIONS ON CONTRIBUTIONS AND ALLOCATIONS 17 5.1 LIMITATION ON ANNUAL ADDITIONS 17 5.2 COORDINATED LIMITATION WITH OTHER PLANS 19 5.3 EFFECT OF LIMITATIONS 20 5.4 LIMITATIONS AS TO CERTAIN PARTICIPANTS 20 Section 6. TRUST FUND AND ITS INVESTMENT 22 6.1 CREATION OF TRUST FUND 22 6.2 STOCK FUND AND INVESTMENT FUND 22 6.3 ACQUISITION OF STOCK 22 6.4 PARTICIPANTS' OPTION TO DIVERSIFY 24 Section 7. VOTING RIGHTS AND DIVIDENDS ON STOCK 25 7.1 VOTING AND TENDERING OF STOCK 25 7.2 DIVIDENDS ON STOCK 26 Section 8. ADJUSTMENTS TO ACCOUNTS 27 8.1 ADJUSTMENTS FOR TRANSACTIONS 27 8.2 VALUATION OF INVESTMENT FUND 27 8.3 ADJUSTMENTS FOR INVESTMENT EXPERIENCE 28 SECTION 9. VESTING OF PARTICIPANTS' INTERESTS 28 9.1 DEFERRED VESTING IN ACCOUNTS 28 -105- 9.2 COMPUTATION OF VESTING YEARS 29 9.3 FULL VESTING UPON CERTAIN EVENTS 29 9.3-1 FULL VESTING UPON CHANGE OF CONTROL 29 9.3-2 FULL VESTING UPON PLAN TERMINATION 31 9.4 FORFEITURE, REPAYMENT, AND RESTORAL 31 9.5 ACCOUNTING FOR FORFEITURES 32 9.6 VESTING AND NONFORFEITABILITY 32 SECTION 10. PAYMENT OF BENEFITS 32 10.1 BENEFITS FOR PARTICIPANTS 32 10.2 TIME FOR DISTRIBUTION 33 10.3 MARITAL STATUS 35 10.4 DELAY IN BENEFIT DETERMINATION 36 10.5 ACCOUNTING FOR BENEFIT PAYMENTS 36 10.6 OPTIONS TO RECEIVE AND SELL STOCK 36 10.7 RESTRICTIONS ON DISPOSITION OF STOCK 38 10.8 CONTINUING LOAN PROVISIONS; CREATIONS OF PROTECTIONS AND RIGHTS 39 10.9 DIRECT ROLLOVER OF ELIGIBLE DISTRIBUTION 39 Section 11. RULES GOVERNING BENEFIT CLAIMS AND REVIEW OF APPEALS 40 11.1 CLAIM FOR BENEFITS 40 11.2 NOTIFICATION BY COMMITTEE 40 11.3 CLAIMS REVIEW PROCEDURE 41 Section 12. THE COMMITTEE AND ITS FUNCTIONS 41 12.1 AUTHORITY OF COMMITTEE 41 12.2 IDENTITY OF COMMITTEE 42 12.3 DUTIES OF COMMITTEE 42 12.4 VALUATION OF STOCK 43 12.5 COMPLIANCE WITH ERISA 43 12.6 ACTION BY COMMITTEE 44 12.7 EXECUTION OF DOCUMENTS 44 12.8 ADOPTION OF RULES 44 12.9 RESPONSIBILITIES TO PARTICIPANTS 44 12.10 ALTERNATIVE PAYEES IN EVENT OF INCAPACITY 45 12.11 INDEMNIFICATION BY EMPLOYERS 45 12.12 NONPARTICIPATION BY INTERESTED MEMBER 45 Section 13. ADOPTION, AMENDMENT, OR TERMINATION OF THE PLAN 46 13.1 ADOPTION OF PLAN BY OTHER EMPLOYERS 46 13.2 ADOPTION OF PLAN BY SUCCESSOR 46 13.3 PLAN ADOPTION SUBJECT TO QUALIFICATION 46 13.4 RIGHT TO AMEND OR TERMINATE 47 Section 14. MISCELLANEOUS PROVISIONS 48 14.1 PLAN CREATES NO EMPLOYMENT RIGHTS 48 14.2 NONASSIGNABILITY OF BENEFITS 49 14.3 LIMIT OF EMPLOYER LIABILITY 49 14.4 TREATMENT OF EXPENSES 49 14.5 NUMBER AND GENDER 49 -106- 14.6 NONDIVISION OF ASSETS 50 14.7 SEPARABILITY OF PROVISIONS 50 14.8 SERVICE OF PROCESS 50 14.9 GOVERNING STATE LAW 50 14.10 EMPLOYER CONTRIBUTIONS CONDITIONED ON DEDUCTIBILITY 50 14.11 UNCLAIMED ACCOUNTS 50 14.12 QUALIFIED DOMESTIC RELATIONS ORDER 51 Section 15. TOP-HEAVY PROVISIONS 53 15.1 TOP-HEAVY PLAN 53 15.2 SUPER TOP-HEAVY PLAN 53 15.3 DEFINITIONS 53 15.4 TOP-HEAVY RULES OF APPLICATION 55 15.5 TOP-HEAVY RATIO 56 15.6 MINIMUM CONTRIBUTIONS 57 15.7 MINIMUM VESTING 57 15.8 MAXIMUM COMPENSATION 58 15.9 TOP-HEAVY PROVISIONS CONTROL IN TOP-HEAVY PLAN 58 -107- FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN SECTION 5.PLAN IDENTITY. 1.1 NAME. The name of this Plan is "First Federal Savings Bank of Fort Dodge Employee Stock Ownership Plan." 1.2 PURPOSE. The purpose of this Plan is to describe the terms and conditions under which contributions made pursuant to the Plan will be credited and paid to the Participants and their Beneficiaries. 1.3 EFFECTIVE DATE. The Effective Date of this Plan is January 1, 1994. 1.4 FISCAL PERIOD. This Plan shall be operated on the basis of a January 1 to December 31 fiscal year for the purpose of keeping the Plan's books and records and distributing or filing any reports or returns required by law. 1.5 SINGLE PLAN FOR ALL EMPLOYERS. This Plan shall be treated as a single plan with respect to all participating Employers for the purpose of crediting contributions and forfeitures and distributing benefits, determining whether there has been any termination of Service, and applying the limitations set forth in Section 5. 1.6 INTERPRETATION OF PROVISIONS. The Employers intend this Plan and the Trust to be a qualified stock bonus plan under Section 401(a) of the Code and an employee stock ownership plan within the meaning of Section 407(d)(6) of ERISA and Section 4975(e)(7) of the Code. The Plan is intended to have its assets invested primarily in qualifying employer securities of one or more Employers within the meaning of Section 407(d)(3) of ERISA, and to satisfy any requirement under ERISA or the Code applicable to such a plan. Accordingly, the Plan and Trust Agreement shall be interpreted and applied in a manner consistent with this intent and shall be administered at all times and in all respects in a nondiscriminatory manner. SECTION 6. DEFINITIONS. The following capitalized words and phrases shall have the meanings specified when used in this Plan and in the Trust Agreement, unless the context clearly indicates otherwise: -108- "ACCOUNT" means a Participant's interest in the assets accumulated under this Plan as expressed in terms of a separate account balance which is periodically adjusted to reflect his Employer's contributions, the Plan's investment experience, and distributions and forfeitures. "ACTIVE PARTICIPANT" means any Employee who has satisfied the eligibility requirements of Section 3 and who qualifies as an Active Participant for a particular Plan Year under Section 4.3. "BANK" means First Federal Savings Bank of Fort Dodge, and any entity which succeeds to the business of First Federal Savings Bank of Fort Dodge and adopts this Plan as its own pursuant to Section 13.2. "BENEFICIARY" means the person or persons who are designated by a Participant to receive benefits payable under the Plan on the Participant's death. In the absence of any designation or if all the designated Beneficiaries shall die before the Participant dies or shall die before all benefits have been paid, the Participant's Beneficiary shall be his surviving spouse, if any, or his estate if he is not survived by a spouse. The Committee may rely upon the advice of the Participant's executor or administrator as to the identity of the Participant's spouse. "BREAK IN SERVICE" means any Vesting Year in which an Employee has 500 or fewer Hours of Service. Solely for this purpose, an Employee shall be considered employed for his normal hours of paid employment during a Recognized Absence (but shall not be credited with more than 501 Hours of Service for the sole purpose of avoiding a Break in Service), unless he does not resume his Service at the end of the Recognized Absence. Further, if an Employee is absent for any period beginning on or after January 1, 1985, (i) by reason of the Employee's pregnancy, (ii) by reason of the birth of the Employee's child, (iii) by reason of the placement of a child with the Employee in connection with the Employee's adoption of the child, tely after such birth or placement, the Employee shall be credited with the Hours of Service which would normally have been credited but for such absence, up to a maximum of 501 Hours of Service. "CODE" means the Internal Revenue Code of 1986, as amended. -109- "COMMITTEE" means the committee responsible for the administration of this Plan in accordance with Section 12. "DISABILITY" means only a disability which renders the Participant totally unable, as a result of bodily or mental disease or injury, to perform any duties for an Employer for which he is reasonably fitted, which disability is expected to be permanent or of long and indefinite duration. However, this term shall not include any disability directly or indirectly resulting from or related to habitual drunkenness or addiction to narcotics, a criminal act or attempt, service in the armed forces of any country, an act of war, declared or undeclared, any injury or disease occurring while compensation to the Participant is suspended, or any injury which is intentionally self-inflicted. Further, this term shall apply only if (i) the Participant is sufficiently disabled to qualify for the payment of disability benefits under the federal Social Security Act or Veterans Disability Act, or (ii) the Participant's disability is certified by a physician selected by the Committee. Unless the Participant is sufficiently disabled to qualify for disability benefits under the federal Social Security Act or Veterans Disability Act, the Committee may require the Participant to be appropriately examined from time to time by one or more physicians chosen by the Committee, and no Participant who refuses to be examined shall be treated as having a Disability. In any event, the Committee's good faith decision as to whether a Participant's Service has been terminated by Disability shall be final and conclusive. "EARLY RETIREMENT" means retirement on or after a Participant's attainment of age 55 and the completion of ten years of Service for an Employer. If the Participant separates from Service before satisfying the age requirement, but has satisfied the Service requirement, the Participant will be entitled to elect Early Retirement upon satisfaction of the age requirement. "EFFECTIVE DATE" means January 1, 1994. "EMPLOYEE" means any individual who is or has been emp individual employed by a leasing organization who, pursuant to an agreement between an Employer and the leasing organization, has performed services for the Employer and any related persons (within the meaning of Section 414(n)(6) of the Code) on a substantially full-time basis for more than -110- one year, if such services are of a type historically performed by employees in the Employer's business field. However, such a "leased employee" shall not be considered an Employee if (i) he participates in a money purchase pension plan sponsored by the leasing organization which provides for immediate participation, immediate full vesting, and an annual contribution of at least 10 percent of the Employee's Total Compensation, and (ii) leased employees do not constitute more than 20 percent of the Employer's total work force (including leased employees, but excluding Highly Paid Employees and any other employees who have not performed services for the Employer on a substantially full-time basis for at least one year). "EMPLOYER" means the Bank or any affiliate within the purview of section 414(b), (c) or (m) and 415(h) of the Code, any other corporation, partnership, or proprietorship which adopts this Plan with the Bank's consent pursuant to Section 13.1, and any entity which succeeds to the business of any Employer and adopts the Plan pursuant to Section 13.2. "ENTRY DATE" means the Effective Date of the Plan and each January I and July 1 of each Plan Year. "ERISA" means the Employee Retirement Income Security Act of 1974 (P.L. 93-406, as amended). "HIGHLY PAID EMPLOYEE" for any Plan Year means an Employee who, during either of that or the immediately preceding Plan Year, (i) owned more than five percent of the outstanding equity interest or the outstanding voting interest in any Employer, (ii) had Total Compensation exceeding $75,000 (as adjusted pursuant to section 415(d) of the Code), (iii) had Total Compensation exceeding $50,000 (as adjusted pursuant to section 415(d) of the Code) and was among the most highly compensated one-fifth of all Employees, or (iv) was at any time an officer of an Employer and had Total Compensation exceeding $45,000 (or 50 percent of the currently applicable dollar limit under Section 415(b)(1)(A) of the Code). For this purpose: (a) "Total Compensation" shall include any amount which is excludable from the Employee's gross income for tax purposes pursuant to Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b) of the Code. (b) The number of Employees in "the most highly compensated one-fifth of all Employees" shall be determined by taking into account all individuals working for all related Employer entities described in the definition of "Service", but excluding any individual who has not completed six months of Service, who normally works fewer than 17-1/2 hours per week or in fewer than six months per year, who has not reached age 21, whose employment is covered by a collective -111- bargaining agreement, or who is a nonresident alien who receives no earned income from United States sources. (c) The number of individuals counted as "officers" shall not be more than the lesser of (i) 50 individuals and (ii) the greater of 3 individuals or 10 percent of the total number of Employees. If no officer earns more than $45,000 (or the adjusted limit), then the highest paid officer shall be a Highly Paid Employee. (d) A former employee shall be treated as a highly compensated employee if such employee was a highly paid employee when such employee separated from service, or if such employee was a highly paid employee at any time after attaining age 55. "HOURS OF SERVICE" means hours to be credited to an Employee under the following rules: (a) Each hour for which an Employee is paid or is entitled to be paid for services to an Employer is an Hour of Service. (b) Each hour for which an Employee is directly or indirectly paid or is entitled to be paid for a period of vacation, holidays, illness, disability, lay-off, jury duty, temporary military duty, or leave of absence is an Hour of Service. However, except as otherwise specifically provided, no more than 501 Hours of Service shall be credited for any single continuous period which an Employee performs no duties. Further, no Hours of Service shall be credited on account of payments made solely under a plan maintained to comply with worker's compensation, unemployment compensation, or disability insurance laws, or to reimburse an Employee for medical expenses. (c) Each hour for which back pay (ignoring any mitigation of damages) is either awarded or agreed to by an Employer is an Hour of Service. However, no more than 501 Hours of Service shall be credited for any single continuous period during which an Employee would not have performed any duties. (d) Hours of Service shall be credited in any one period only under one of the foregoing paragraphs (a), (b) and (c); an Employee may not get double credit for the same period. (e) If an Employer finds it impractical to count the actual Hours of Service for any class or group of non-hourly Employees, each Employee in that class or group shall be credited with 45 Hours of Service for each weekly pay period in which he has at least one Hour of Service. However, an Employee shall be credited only for his normal working hours during a paid absence. (f) Hours of Service to be credited on account of a payment to an Employee (including back pay) shall be recorded in the period of Service for which the payment was made. If the period overlaps two or more Plan Years, the Hours of Service credit shall be allocated in proportion to the respective portions of the period included in the several Plan Years. However, in the case of periods of 31 days or less, the Administrator may apply a uniform policy of crediting the Hours of Service to either the first Plan Year or the second. (g) In all respects an Employee's Hours of Service shall be counted as required by Section 2530.200b-2(b) and (c) of the Department of Labor's regulations under Title I of ERISA. "INVESTMENT FUND" means that portion of the Trust Fund consisting of assets other than Stock. -112- "NORMAL RETIREMENT" means retirement on or after the later of a Participant's 65th birthday or fifth year of Service for the Employer. "PARTICIPANT" means any Employee who is participating in the Plan, or who has previously participated in the Plan and still has a balance credited to his Account. "PLAN YEAR" means the plan year commencing January 1, 1994 and ending December 31, 1994, and each period of 12 consecutive months beginning on January 1 of each succeeding year. "RECOGNIZED ABSENCE" means a period for which-- (a) an Employer grants an Employee a leave of absence for a limited period, but only if an Employer grants such leave on a nondiscriminatory basis; or (b) an Employee is temporarily laid off by an Employer because of a change in business conditions; or (c) an Employee is on active military duty, but only to the extent that his employment rights are protected by the Military Selective Service Act of 1967 (38 U.S.C. Sec. 2021). "SERVICE" means an Employee's period(s) of employment or self-employment with an Employer, excluding for initial eligibility purposes any period in which the individual was a nonresident alien and did not receive from an Employer any earned income which constituted income from sources within the United States. An Employee's Service shall include any service which constitutes service with a predecessor employer within the meaning of Section 414(a) of the Code. An Employee's Service shall also include any service with an entity which is not an Employer, but only either (i) for a period after 1975 in which the other entity is a member of a controlled group of corporations or is under common control with other trades and businesses within the meaning of Section 414(b) or 414(c) of the Code, and a member of the controlled group or one of the trades and businesses is an Employer, (ii) for a period after 1979 in which the other entity is a member of an affiliated service group within the meaning of Section 414(m) of the Code, and a member of the affiliated service group is an Employer, or (iii) all employers aggregated with the Employer under Section 414(o) of the Code (but not until the Proposed Regulations under Section 414(o) become effective). "SPOUSE" means the individual, if any, to whom a Participant is lawfully married on the date benefit payments to the Participant are to begin, or on the date of the Participant's death, if earlier. A former spouse -113- shall be treated as the Spouse or surviving spouse to the extent provided under a qualified domestic relations order as described in section 414(p) of the Code "STOCK" means shares of the Bank's voting common stock or preferred stock meeting the requirements of Section 409(e)(3) of the Code issued by an Employer or an affiliated corporation. "STOCK FUND" means that portion of the Trust Fund consisting of Stock. "STOCK OBLIGATION" means an indebtedness arising from any extensionying Stock and which satisfies the requirements set forth in Section 6.3. "TOTAL COMPENSATION" (a) shall mean: (i) A Participant's wages, salaries, fees for professional services and other amounts received (without regard to whether an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer while a Participant in the Plan, (including, but not limited to, commissions paid to salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, severance payments and amounts paid as a result of termination, and any deferred compensation contributions made to this or any other Section 401(k) Plan on behalf of the Participants), taxable fringe benefits, reimbursements and expense allowances under a nonaccountable plan (as described in Section 1.62-2(c) of the Treasury Regulations). (ii) Amounts described in sections 104(a)(3), 105(a), and 105(h), but only to the extent that these amounts are includable in the gross income of the employee. (iii) Amounts paid or reimbursed by the employer for moving expenses incurred by an employee, but only to the extent that at the time of payment it is reasonable to believe that these amounts are not deductible by the employee under section 217. -114- (iv) The value of a non-qualified stock option granted to an employee by the employer, but only to the extent that the value of the option is includable in the gross income of the employee for the taxable year in which granted. (v) The amount includable in the gross income of an employee upon making the election described in section 83(b). (b) The term "Total Compensation" does not include items such as: (i) Contributions made by the Employer to a Plan of deferred compensation to the extent that before the application of Section 415 limitations to the Plan, the contributions are not includable in the gross income of the Employee for the taxable year in which contributed, except for deferred compensation contributions made by the Employer to a Section 401(k) Plan on behalf of the Participant. However, for purposes of computing Code Section 415 annual additions, deferred compensation contributions made by the Employer to a Section 401(k) Plan on behalf of a Participant shall be deducted from Total Compensation. In addition, Employer contributions made on behalf of an Employee to a simplified employee pension plan described in Code Section 408(k) are not considered as compensation for the taxable year in which contributed to the extent such contributions are deductible by the Employee under Code Section 219(b)(7). Additionally, any distributions from a Plan of deferred compensation are not considered as compensation for Code Section 415 purposes, regardless of whether such amounts are includable in the gross income of the Employee when distributed. However, any amounts received by an Employee pursuant to an unfunded non-qualified Plan may be considered as compensation for Code Section 415 purposes in the year such amounts are includable in the gross income of the Employee. (ii) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture. -115- (iii) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option. (iv) Other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includable in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code Section 403(b) (whether or not the contributions are excludable from the gross income of the Employee). (c) For Plan years beginning after December 31, 1993, compensation in excess of $150,000 (as indexed) shall be disregarded for all Participants. Such amount shall be adjusted for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code, effective for the Plan Year which begins within the applicable calendar year. For purposes of the $150,000 limit, compensation shall be prorated over short plan years. In determining the compensation of a Participant for purposes of this limitation, the rules of Code Section 414(q)(6) shall apply, except as set forth in Section 4.3 hereof. If as a result of the application of such rules, the adjusted $150,000 limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's compensation, as determined under this Section prior to the application of this limitation. "TRUST" or "TRUST FUND" means the trust fund created under this Plan. "TRUST AGREEMENT" means the agreement between the Bank and the Trustee concerning the Trust Fund. If any assets of the Trust Fund are held in a co-mingled trust fund with assets of other qualified retirement plans, "Trust Agreement" shall be deemed to include the trust agreement governing that co-mingled trust fund. With respect to the allocation of investment responsibility for the assets of the Trust Fund, the provisions of Section 2.4 of the Trust Agreement are incorporated herein by reference. "TRUSTEE" mean serve as trustee or co-trustees of the Trust Fund. -116- "UNALLOCATED STOCK FUND" means that portion of the Stock Fund consisting of the Plan's holding of stock which have been acquired in exchange for one or more Stock Obligations and which have not yet been allocated to the Participant's Accounts in accordance with Section 4.2 "VALUATION DATE" means the last day of the Plan Year and each other date as of which the committee shall determine the investment experience of the Investment Fund and adjust the Participants' accounts accordingly. The adoption of any additional Valuation Dates by the Committee, shall be made in a uniform and non-discriminatory manner. "VALUATION PERIOD" means the period following a Valuation Date and ending with the next Valuation Date. "VESTING YEAR" means a unit of Service credited to a Participant pursuant to Section 9.2 for purposes of determining his vested interest in his Account. SECTION 7. ELIGIBILITY FOR PARTICIPATION. 3.1 INITIAL ELIGIBILITY. An Employee shall enter the Plan as of the Entry Date coinciding with or next following the later of the following dates: (a) the last day of the Employee's first Eligibility Year, and (b) the Employee's 21st birthday. However, if an Employee is not in active Service with an Employer on the date he would otherwise first enter the Plan, his entry shall be deferred until the next day he is in Service. 3.2 DEFINITION OF ELIGIBILITY YEAR. An "Eligibility Year" means an applicable eligibility period (as defined below) in which the Employee has completed 1,000 Hours of Service for the Employer. For this purpose: (a) an Employee's first "eligibility period" is the 12-consecutive month period beginning on the first day on which he has an Hour of Service, and (b) his subsequent eligibility periods will be 12-consecutive month periods beginning on each January 1 after that first day of Service. 3.3 TERMINATED EMPLOYEES. No Employee shall have any interest or rights under this Plan if he is never in active Service with an Employer on or after the Effective Date. -117- 3.4 CERTAIN EMPLOYEES INELIGIBLE. No Employee shall participate in the Plan while his Service is covered by a collective bargaining agreement between an Employer and the Employee's collective bargaining representative if (i) retirement benefits have been the subject of good faith bargaining between the Employer and the representative and (ii) the collective bargaining agreement does not provide for the Employee's participation in the Plan. No Employee shall participate in the Plan while he is actually employed by a leasing organization rather than an Employer. Employees who were employees of Valley Savings Bank, FSB, as of the close of business on January 30, 1998 and who became Employees of an Employer as of the opening of business on February 2, 1998, shall not be eligible to participate in the Plan prior to July 1, 1999. 3.5 PARTICIPATION AND REPARTICIPATION. Subject to the satisfaction of the foregoing requirements, an Employee shall participate in the Plan during each period of his Service from the date on which he first becomes eligible until his termination. For this purpose, an Employee returning within five years of his or her termination who previously satisfied the initial eligibility requirements shall re-enter the Plan as of the date of his return to Service with an Employer. SECTION 8. CONTRIBUTIONS AND CREDITS. 4.1 DISCRETIONARY CONTRIBUTIONS. The Employer shall from time to time contribute, with respect to a Plan Year, such amounts as it may determine from time to time. The Employer shall have no obligation to contribute any amount under this Plan except as so determined in its sole discretion. The Employer's contributions and available forfeitures for a Plan Year shall be credited as of the last day of the year to the Accounts of the Active Participants in proportion to their amounts of Cash Compensation. 4.2 CONTRIBUTIONS FOR STOCK OBLIGATIONS. If the Trustee, upon instructions from the Committee, incurs any Stock Obligation upon the purchase of Stock, the Employer may contribute for each Plan Year an amount sufficient to cover all payments of principal and interest as they come due under the terms of the Stock Obligation. If there is more than one Stock Obligation, the Employer shall designate the one to which any contribution is to be applied. The Employer's obligation to make contributions under this Section 4.2 shall -118- be reduced to the extent of any investment earnings realized on such contributions and any dividends paid by the Employer on Stock held in the Unallocated Stock Account, which earnings and dividends shall be applied to the Stock Obligation related to that Stock. In each Plan Year in which Employer contributions, earnings on contributions, or dividends on unallocated Stock are used as payments under a Stock Obligation, a certain number of shares of the Stock acquired with that Stock Obligation which is then held in the Unallocated Stock Fund shall be released for allocation among the Participants. The number of shares released shall bear the same ratio to the total number of those shares then held in the Unallocated Stock Fund (prior to the release) as (i) the principal and interest payments made on the Stock Obligation in the current Plan Year bears to (ii) the sum of (i) above, and the remaining principal and interest payments required (or projected to be required on the basis of the interest rate in effect at the end of the Plan Year) to satisfy the Stock Obligation. At the direction of the Committee, the current and projected payments of interest under a Stock Obligation may be ignored in calculating the number of shares to be released in each year if (i) the Stock Obligation provides for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years, (ii) the interest included in any payment is ignoree determined to be interest under standard loan amortization tables, and (iii) the term of the Stock Obligation, by reason of renewal, extension, or refinancing, has not exceeded 10 years from the original acquisition of the Stock. For these purposes, each Stock Obligation, the Stock purchased with it, and any dividends on such Stock, shall be considered separately. The Stock released from the Unallocated Stock Fund in any Plan Year shall be credited as of the last day of the year to the Accounts of the Active Participants in proportion to their amounts of Cash Compensation. 4.3 DEFINITIONS RELATED TO CONTRIBUTIONS. For the purposes of this Plan, the following terms have the meanings specified: -119- "ACTIVE PARTICIPANT" means a Participant who has satisfied the eligibility requirements under Section 3 and who has at least 1,000 Hours of Service during the current Plan Year. However, a Participant shall not qualify as an Active Participant unless (i) he is in active Service with an Employer as of the last day of the Plan Year, or (ii) he is on a Recognized Absence as of that date, or (iii) his Service terminated during the Plan Year by reason of Early Retirement, Normal Retirement, Disability or death. "CASH COMPENSATION" A Participant's Cash Compensation shall include all wages within the meaning of Section 3401(a) of the Code (for purposes of income tax withholding at the source) received by the Participant during the Plan Year, and shall also include amounts contributed under a salary reduction agreement pursuant to Section 401(k) or Section 125 of the Code. In determining the Cash Compensation of a Participant for purposes of this limitation, the rules of Code Section 414(q)(6) shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 years before the close of the year. If as a result of the application of such rules the adjusted $150,000 limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each individual's compensation, as determined under this Section prior to the application of this limitation. 4.4 CONDITIONS AS TO CONTRIBUTIONS. Employers' contributions shall in all events be subject to the limitations set forth in Section 5. Contributions may be made in the form of cash, or securities and other property to the extent permissible under ERISA, including Stock, and shall be held by the Trustee in accordance with the Trust Agreement. In addition to the provisions of Section 13.3 for the return of an Employer's contributions in connection with a failure of the Plan to qualify initially under the Code, any amount contributed by an Employer due to a good faith mistake of fact, or bated upon a good faith but erroneous determination of its deductibility under Section 404 of the Code, shall be returned to the Employer within one year after the date on which the contribution was originally made, or within one year after its nondeductibility has been finally determined. However, the amount to be returned shall be reduced to take -120- account of any adverse investment experience within the Trust Fund in order that the balance credited to each Participant's Account is not less that it would have been if the contribution had never been made. 4.5 TRANSFERS. This plan shall not accept any direct or indirect transfers from any other retirement plan that is tax-qualified under Section 401(a) of the Code and which is subject to the survivor annuity requirements of section 401(a)(11) and section 417 of the Code. SECTION 9. LIMITATIONS ON CONTRIBUTIONS AND ALLOCATIONS. 5.1 LIMITATION ON ANNUAL ADDITIONS. Notwithstanding anything herein to the contrary, allocation of Employer contributions for any Plan Year shall be subject to the following: 5.1-1 If allocation of Employer contributions in accordance with Section 4.1 will result in an allocation of more than one-third the total contributions for a Plan Year to the accounts of Highly Paid Employees, then allocation of such amount shall be adjusted so that such excess will not occur. 5.1-2 After adjustment, if any, required by the preceding paragraph, the annual additions during any Plan Year to any Participant's Account under this and any other defined contribution plans maintained by the Employer or an affiliate (within the purview of Section 414(b), (c) and (m) and Section 415(h) of the Code, which affiliate shall be deemed the Employer for this purpose) shall not exceed the lesser of $30,000 (or such other dollar amount which results from cost-of-living adjustments under Section 415(d) of the Code) or "25 percent of the Participant's Total Compensation for such limitation year." In the event that annual additions exceed the aforesaid limitations, they shall be reduced in the following priority: (i) If the Participant is covered by the Plan at the end of the Plan Year, any excess amount at the end of the Plan Year that cannot be allocated to the Participant's account shall be used to reduce the employer contribution for such Participant in the next limitation year and any succeeding limitation years if necessary. (ii) If the Participant is not covered by the Plan at the end of the Plan Year, the excess amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future employer contributions for all remaining Participants in the next limitation year and each succeeding limitation year if necessary. (iii) If a suspense account is in existence at any time during a limitation year, it will not participate in any allocation of investment gains and losses. All amounts held in suspense accounts must be allocated to Participant's accounts before any contributions may be made to the Plan for the limitation year. (iv) If a suspense account exists at the time of plan termination, amounts held in the suspense account that cannot be allocated shall revert to the Employer. 5.1-3 For purposes of this Section 5.1 and the following Section 5.2, the "annual addition" to a Participant's accounts means the sum of (i) employer contributions, (ii) employee contributions, if any, and (iii) forfeitures. Annual additions to a defined contribution plan also include amounts -121- allocated, after March 31, 1984, to an individual medical account, as defined in Section 415(1)(2) of the Internal Revenue Code, which is part of a pension or annuity plan maintained by the Employer, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee under a welfare benefit fund, as defined in Section 419A(d) of the Internal Revenue Code, maintained by the Employer. The $30,000 limitations referred to shall, for each limitation year ending after 1988, be automatically adjusted to the new dollar limitations determined by the Commissioner of Internal Revenue for the calendar year beginning in that limitation year. 5.14 Notwithstanding the foregoing, if no more than one-third of the Employer Contributions to the Plan for a year which are deductible under Section 404(a)(9) of the Code are allocated to Highly Paid Employees (within the meaning of Section 414(q) of the Internal Revenue Code), the limitations imposed herein shall not apply to: (i) forfeitures of employer securities (within the meaning of Section 409 of the Code) under the Plan if such securities were acquired with the proceeds of a loan described in Section 404(a)(9)(A) of the Code), or (ii) Employer Contributions to the Plan which are deductible under Section 404(a)(9)(B) and charged against a Participant's account. 5.1-5 If the Employer contributes amounts, on behalf of Employees covered by this Plan, to other "defined contribution plans" as defined in Section 3(34) of ERISA, the limitation on annual additions provided in this Section shall be applied to annual additions in the aggregate to this Plan and to such other plans. Reduction of annual additions, where required, shall be accomplished first by reductions under such other plan pursuant to the directions of the named Fiduciary for administration of such other plans or under priorities, if any, established under the terms of such other plans and then by allocating any remaining excess for this Plan in the manner and priority set out above with respect to this Plan." 5.1-6 A limitation year shall mean each 12 consecutive month period beginning each January 1. 5.2 COORDINATED LIMITATION WITH OTHER PLANS. Aside from the limitation proscribed by Section 5.1 with respect to the annual addition to a Participant's accounts for any single limitation year, if a Participant has ever participated in one or more defined benefit plans maintained by an Employer or an affiliate, then the annual additions to his accounts shall be limited on a cumulative basis so that the sum of his defined contribution plan fraction and his defined benefit plan fraction does not exceed one. For this purpose: 5.2-1 A Participant's defined contribution plan fraction with respect to a Plan Year shall be a fraction, (i) the numerator of which is the sum of the annual additions to his accounts through the current year, and (ii) the denominator of which is the sum of the lesser of the following amounts -A- and -B- determined for the current limitation year and each prior limitation year of Service with an Employer: -A- is 1.25 times the dollar limit in effect for the year under Section 415(c)(1)(A) of -122- the Code, or 1.0 times such dollar limitation if the Plan is top-heavy, and -B- is 35 percent of the Participant's Total Compensation for such year. Further, if the Participant participated in any related defined contribution plan in any years beginning before 1976, any-excess of the sum of the actual annual additions to the Participant's accounts for those years over the maximum annual additions which could have been made in accordance with Section 5.1 shall be ignored, and voluntary contributions by the Participant during those years shall be taken into account as to each such year only to the extent that his average annual voluntary contribution in those years exceeded 10 percent of his average annual Total Compensation in those years. 5.2-2 A Participant's defined benefit plan fraction with respect to a limitation year shall be a fraction, (i) the numerator of which is his projected annual benefit payable at normal retirement under the Employers' defined benefit plans, and (ii) the denominator of which is the lesser of (a) 1.25 times $90,000, or 1.0 times such dollar limitation if the Plan is top-heavy, and (b) 1.4 times the Participant's average Total Compensation during his highest-paid three consecutive limitation years. 5.3 EFFECT OF LIMITATIONS. The Committee shall take whatever action may be necessary from time to time to assure compliance with the limitations set forth in Section 5.1 and 5.2. Specifically, the Committee shall see that each Employer restrict its contributions for any Plan Year to an amount which, taking into account the amount of available forfeitures, may be completely allocated to the Participants consistent with those limitations. Where the limitations would otherwise be exceeded by any Participant, further allocations to the Participant shall be curtailed to the extent necessary to satisfy the limitations. Where an excessive amount is contributed on account of a mistake as to one or more Participants' compensation, or there is an amount of forfeitures which may not be credited in the Plan Year in which it becomes available, the amount shall be held in a suspense account to be allocated in lieu of any Employer contributions in future years until it is eliminated, and to be returned to the Employer if it cannot be credited consistent with these limitations before the termination of the Plan. 5.4 LIMITATIONS AS TO CERTAIN PARTICIPANTS. Aside from the limitations set forth in Section 5.1 and 5.2, if the Plan acquires any Stock in a transaction as to which a selling shareholder or the estate of a deceased shareholder claiming the benefit of Section 1042 of the Code, the Committee shall see that none of such Stock, and no other assets in lieu of such Stock, are allocated to the Accounts of certain Participants in order to comply with Section 409(n) of the Code. This restriction shall apply at all times to a Participant who owns (taking into account the attribution rules under Section 318(a) of the Code, without regard to the exception for employee plan trusts in Section -123- 318(a)(2)(B)(i) more than 25 percent of any class of stock of a corporation which issued the Stock acquired by the Plan, or another corporation within the same controlled group, as defined in Section 409(l)(4) of the Code (any such class of stock hereafter called a "Related Class"). For this purpose, a Participant who owns more than 25 percent of any Related Class at any time within the one year preceding the Plan's purchase of the Stock shall be subject to the restriction as to all allocations of the Stock, but any other Participant shall be subject to the restriction only as to allocations which occur at a time when he owns more than 25 percent of any Related Class. Further, this restriction shall apply to the selling shareholder claiming the benefit of Section 1042 and any other Participant who is related to such a shareholder within the meaning of Section 267(b) of the Code, during the period beginning on the date of sale and ending on the later of (1) the date that is ten years after the date of sale, or (2) the date of the plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with the sale. This restriction shall not apply to any Participant who is a lineal descendant of a selling shareholder if the aggregate amounts allocated under the Plan for the benefit of all such descendants do uired from the shareholder. SECTION 10. TRUST FUND AND ITS INVESTMENT. 6.1 CREATION OF TRUST FUND. All amounts received under the Plan from Employers and investments shall be held as the Trust Fund pursuant to the terms of this Plan and of the Trust Agreement between the Bank and the Trustee. The benefits described in this Plan shall be payable only from the assets of the Trust Fund, and none of the Bank, any other Employer, its board of directors or trustees, its stockholders, its officers, its employees, the Committee, and the Trustee shall be liable for payment of any benefit under this Plan except from the Trust Fund. 6.2 STOCK FUND AND INVESTMENT FUND. The Trust Fund held by the Trustee shall be divided into the Stock Fund, consisting entirely of Stock, and the Investment Fund, consisting of all assets of the Trust other than Stock. The Trustee shall have no investment responsibility for the Stock Fund, but shall accept any -124- Employer contributions made in the form of Stock, and shall acquire, sell, exchange, distribute, and otherwise deal with and dispose of Stock in accordance with the instructions of the Committee. The Trustee shall have full responsibility for the investment of the Investment Fund, except to the extent such responsibility may be delegated from time to time to one or more investment managers pursuant to Section 2.3 of the Trust Agreement. 6.3 ACQUISITION OF STOCK. From time to time the Committee may, in its sole discretion, direct the Trustee to acquire Stock from the issuing Employer or from shareholders, including shareholders who are or have been Employees, Participants, or fiduciaries with respect to the Plan. The Trustee shall pay for such Stock no more than its fair market value, which shall be determined conclusively by the Committee pursuant to Section 12.4. The Committee may direct the Trustee to finance the acquisition of Stock by incurring or assuming indebtedness to the seller or another party which indebtedness shall be called a "Stock Obligation". The term "Stock Obligation" shall refer to a loan made to the Plan by a disqualified person within the meaning of Section 4975(e)(2) of the Code, or a loan to the Plan which is guaranteed by a disqualified person. A Stock Obligation includes a direct loan of cash, a purchase-money transaction, and an assumption of an obligation of a tax-qualified employee stock ownership plan under Section 4975(e)(7) of the Code ("ESOP"). For these purposes, the term "guarantee" shall include an unsecured guarantee and the use of assets of a disqualified person as collateral for a loan, even though the use of assets may not be a guarantee under applicable state law. An amendment of a Stock Obligation in order to qualify as an "exempt loan" is not a refinancing of the Stock Obligation or the making of another Stock Obligation. The term "exempt loan" refers to a loan that satisfies the provisions of this paragraph. A "non-exempt loan" fails to satisfy this paragraph. Any Stock Obligation shall be subject to the following conditions and limitations: 6.3-1 A Stock Obligation shall be for a specific term, shall not be payable on demand except in the event of default, and shall bear a reasonable rate of interest. 6.3-2 A Stock Obligation may, but need not, be secured by a collateral pledge of either the Stock acquired in exchange for the Stock Obligation, or the Stock previously pledged in connection with a prior Stock Obligation which is being repaid with the proceeds of the current Stock Obligation. No other assets of the Plan and Trust may be used as collateral for a Stock Obligation, and no -125- creditor under a Stock Obligation shall have any right or recourse to any Plan and Trust assets other than Stock remaining subject to a collateral pledge. 6.3-3 Any pledge of Stock to secure a Stock Obligation must provide for the release of pledged Stock in connection with payments on the Stock obligations in the ratio prescribed in Section 4.2. 6.3-4 Repayments of principal and interest on any Stock Obligation shall be made by the Trustee only from Employer cash contributions designated for such payments, from earnings on such contributions, and from cash dividends received on Stock held in the Unallocated Stock Fund. 6.3-5 In the event of default of a Stock Obligation, the value of plan assets transferred in satisfaction of the Stock Obligation must not exceed the amount of the default. If the lender is a disqualified person within the meaning of Section 4975 of the Code, a Stock Obligation must provide for a transfer of plan assets upon default only upon and to the extent of the failure of the plan to meet the payment schedule of said Stock Obligation. For purposes of this paragraph, the making of a guarantee does not make a person a lender. 6.4 PARTICIPANTS' OPTION TO DIVERSIFY. The Committee shall provide for a procedure under which each Participant may, during the qualified election period, elect to "diversify" a portion of the Employer Stock allocated to his Account, as provided in Section 401(a)(28)(B) of the Code. An election to diversity must be made on the prescribed form and filed with the Committee within the period specified herein. For each of the first five (5) Plan years in the qualified election period, the Participant may elect to diversify an amount which does not exceed 25% of the number of shares allocated to his Account since the inception of the Plan, less all shares with respect to which an election under this Section has already been made. For the last year of the qualified election period, the Participant may elect to have up to 50 percent of the value of his Account committed to other investments, less all shares with respect to which an election under this Section has already been made. The term "qualified election period" shall mean the six (6) Plan Year period beginning with the first Plan Year in which a Participant has both attained age 55 and completed 10 years of participation in the Plan. A Participant's election to diversify his Account may be made within each year of the qualified election period and shall continue for the 90-day period immediately following the last day of each year in the qualified election period. Once a Participant makes such election, the Plan must complete diversification in accordance with such election within 90 days after the end of the period during -126- which the election could be made for the Plan Year. In the discretion of the Committee, the Plan may satisfy the diversification requirement by any of the following methods: 6.4-1 The Plan may distribute all or part of the amount subject to the diversification election. 6.4-2 The Plan may offer the Participant at least three other distinct investment options, if available under the Plan. The other investment options shall satisfy the requirements of Regulations under Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 6.4-3 The Plan may transfer the portion of the Participant's Account subject to the diversification election to another qualified defined contribution plan of the Employer that offers at least three investment options satisfying the requirements of the Regulations under Section 404(c) of ERISA. SECTION 11. VOTING RIGHTS AND DIVIDENDS ON STOCK. 7.1 VOTING AND TENDERING OF STOCK. The Trustee generally shall vote all shares of Stock held under the Plan in accordance with the written instructions of the Committee. However, if any Employer has registration-type class of securities within the meaning of Section 409(e)(4) of the Code, or if a matter submitted to the holders of the Stock involves a merger, consolidation, recapitalization, reclassification, liquidation, dissolution, or sale of substantially all assets of an entity, then (i) the shares of Stock which have been allocated to Participants' Accounts shall be voted by the Trustee in accordance with the Participants' written instructions, and (ii) the Trustee shall vote any unallocated Stock in a manner calculated to most accurately reflect the instructions it has received from Participants regarding the allocated Stock; provided however, that if an exempt loan, as defined in Section 4975(d) of the Code, is outstanding and the Plan is in default on such exempt loan, as default is defined in the loan documents, then to the extent that such loan documents require the lender to exercise voting rights with respect to the unallocated shares, the loan documents will prevail. In the event no shares of Stock have been allocated to Participants' Accounts at the time Stock is to be voted and any exempt loan which may be outstanding is not in default, each Participant shall be deemed to have one share of Stock allocated to his or her account for the sole purpose of providing the Trustee with voting instructions. -127- Notwithstanding any provision hereunder to the contrary, all unallocated shares of Stock must be voted by the Trustee in a manner determined by the Trustee to be for the exclusive benefit of the Participants and Beneficiaries. Whenever such voting rights are to be exercised, the Employers, the Committee, and the Trustee shall see that all Participants are provided with the same notices and other materials as are provided to other holders of the Stock, and are provided with adequate opportunity to deliver theitee regarding the voting of Stock allocated to their Accounts. The instructions of the Participants' with respect to the voting of allocated shares hereunder shall be confidential. 7.1-1 In the event of a tender offer, Stock shall be tendered by the Trustee in the same manner as set forth above with respect to the voting of Stock. Notwithstanding any provision hereunder to the contrary, Stock must be tendered by the Trustee in a manner determined by the Trustee to be for the exclusive benefit of the Participants and Beneficiaries. 7.2 DIVIDENDS ON STOCK. Dividends on Stock which are received by the Trustee in the form of additional Stock shall be retained in the Stock Fund, and shall be allocated among the Participant's Accounts and the Unallocated Stock Fund in accordance with their holdings of the Stock on which the dividends have been paid. Dividends on Stock credited to Participants' Accounts which are received by the Trustee in the form of cash shall, at the direction of the Employer paying the dividends, either (i) be credited to the Accounts in accordance with Section 8.03 and invested as part of the Investment Fund, (ii) be distributed to the Participants within 90 days of the close of the Plan Year in which paid in proportion with the Participants' Account balance, or (iii) be used to repay the Stock Obligation. In the event that the dividends are applied to repay the Stock Obligation in accordance with (iii) above, Stock with a fair market value equal to the dividends so applied, must be allocated to such Participants in lieu of such dividends. Dividends on Stock held in the Unallocated Stock Fund which are received by the Trustee in the form of cash shall be applied as soon as practicable to payments of principal and interest under the Stock Obligation incurred with the purchase of the Stock. SECTION 12. ADJUSTMENTS TO ACCOUNTS. 8.1 ADJUSTMENTS FOR TRANSACTIONS. An Employer contribution pursuant to Section 4.1 shall be credited to the Participants' Accounts as of the last day of the Plan Year for which it is contributed. Stock -128- released from the Unallocated Stock Fund upon the Trust's repayment of a Stock Obligation pursuant to Section 4.2 shall be credited to the Participants' Accounts as of the last day of the Plan Year in which the repayment occurred. Any excess amounts remaining from the use of proceeds of a sale of Stock from the Unallocated Stock Fund to repay a Stock Obligation shall be allocated as of the last day of the Plan Year in which the repayment occurred among the Participants' Accounts in proportion to the opening balance in each Account. Any benefit which is paid to a Participant or Beneficiary pursuant to Section 10 shall be charged to the Participant's Account as of the first day of the Valuation Period in which it is paid. Any forfeiture or restoral shall be charged or credited to the Participant's Account as of the first day of the Valuation Period in which the forfeiture or restoral occurs pursuant to Section 9.6. 8.2 VALUATION OF INVESTMENT FUND. As of each Valuation Date, the Trustee shall prepare a balance sheet of the Investment Fund, recording each asset (including any contribution receivable from an Employer) and liability at its fair market value. Any liability with respect to short positions or options and any item of accrued income or expense and unrealized appreciation or depreciation shall be included; provided, however, that such an item may be estimated or excluded if it is not readily ascertainable unless estimating or excluding it would result in a material distortion. The Committee shall then determine the net gain or loss of the Investment Fund since the preceding Valuation Date, which shall mean the entire income of the Investment Fund, including realized and unrealized capital gains and losses, net of any expenses to be charged to the general Investment Fund and excluding any contributions by the Employer. The determination of gain or loss shall be consistent with the balance sheets of the Investment Fund for the current and preceding Valuation Dates. 8.3 ADJUSTMENTS FOR INVESTMENT EXPERIENCE. Any net gain or loss of the Investment Fund during a Valuation Period, as determined pursuant to Section 8.2, shall be allocated as of the last day of the Valuation Period among the Participants' Accounts in proportion to the opening balance in each Account, as adjusted for benefit payments and forfeitures during the Valuation Period, without regard to whatever Stock may be credited to an Account. -129- SECTION 13. VESTING OF PARTICIPANTS' INTERESTS. 9.1 DEFERRED VESTING IN ACCOUNTS. A Participant's vested interest in his Account shall be based on his Vesting Years in accordance with the following Table, subject to the balance of this Section 9: Vesting Percentage of Years Interest Vested ------- --------------- Fewer than 5 0% 5 or more 100% 9.2 COMPUTATION OF VESTING YEARS. For purposes of this Plan, a "Vesting Year" means a Plan Year in which an Employee has at least 1,000 Hours of Service, beginning with the first Plan Year in which the Employee has completed an Hour of Service with the Employer, and including Service with other employers as provided in the definition of "Service". However, a Participant's Vesting Years shall be computed subject to the following conditions and qualifications: (a) A Participant's vested interest in his Account accumulated before five (5) consecutive Breaks in Service shall be determined without regard to any Service after such five consecutive Breaks in Service. Further, if a Participant has five (5) consecutive Breaks in Service before his interest in his Account has become vested to some extent, pre-Break years of Service shall not be required to be taken into account for purposes of determining his post-Break vested percentage. (b) Unless otherwise specifically excluded, a Participant's Vesting Years shall include any period of active military duty to the extent required by the Military Selective Service Act of 1967 (38 U.S.C. Section 2021). 9.3 FULL VESTING UPON CERTAIN EVENTS. Notwithstanding Section 9.1, a Participant's interest in his Account shall fully vest on the Participant's Normal Retirement. The Participant's interest shall also fully vest in the event that his Service is terminated by Early Retirement, Disability or by death. 9.3-1 FULL VESTING UPON CHANGE OF CONTROL. The Participant's interest in his Account shall also fully vest in the event of a "Change in Control" of the Bank, or the Company. For these purposes "Change in Control" means: (a) a reorganization, merger, merger conversion, consolidation or sale of all or substantially all of the assets of the Bank, the Company or the Stock Holding Company, or a similar transaction in which the Bank, the Company or the Stock Holding Company is not the resulting entity and that is not approved by a majority of the Board of Directors of the Bank, the Company or the Stock Holding Company; -130- (b) individuals who constitute the Incumbent Board of the Bank, the Company, or the Stock Holding Company cease for any reason to constitute a majority thereof; or (c) a change in control within the meaning of 12 C.F.R. § 574.4, as determined by the board of directors of the Bank or the Company; provided, however, that a change in control shall not be deemed to occur if the transaction(s) constituting a change in control is approved by a majority of the board of directors of the Bank or the Company, as the case may be. (d) In the event that the Company converts to the Stock Holding Company on a stand-alone basis, a "change in control" of the Bank or the Stock Holding Company (a) shall mean an event of a nature that would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or results in a Change in Control of the Bank or the Stock Holding Company within the meaning of the Home Owners' Loan Act of 1933 and the Rules and Regulations promulgated by the Office of Thrift Supervision (or its predecessor agency), as in effect on the date hereof, (b) without limitation shall be deemed to have occurred at such time as (i) any "person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act) other than the Stock Holding Company is or becomes a "beneficial owner" (as defined in Rule 13-d under the Exchange Act) directly or indirectly, of securities of the Bank representing 25 % or more of the Bank's outstanding securities ordinarily having the right to vote at the election of directors except for any securities of the Bank received by the Stock Holding Company in connection with the Reorganization and any securities purchased by the Bank's employee stock ownership plan and trust shall not be counted in determining whether such plan is the beneficial owner of more than 25% of the Bank's securities, (ii) a proxy statement soliciting proxies from stockholders of the Bank, by someone other than the current management of the Bank, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Stock Holding Company of the Bank or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged or converted into cash or property or securities not issued by the Bank or the Stock Holding Company, or (iii) a tender othe voting securities of the Bank and the shareholders owning beneficially or of record 25% or more of the outstanding securities of the Bank have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. Notwithstanding, the foregoing, a "Change in Control" of the Bank or the Company shall not be deemed to have occurred if the Company ceases to own at least 51% of all outstanding shares of stock of the Bank in connection with a conversion of the Company from mutual to stock form. 9.3-2 FULL VESTING UPON PLAN TERMINATION. Notwithstanding Section 9.1, a Participant's interest in his Account shall fully vest, and shall be nonforfeitable to the extent funded, upon termination of this Plan or upon the permanent and complete discontinuance of contributions. In the event of a partial termination or termination, the interest of each affected Participant as of such date of partial or complete -131- termination, and shall be nonforfeitable to the extent funded, with respect to that part of the Plan which is terminated. 9.4 FORFEITURE, REPAYMENT, AND RESTORAL. If a Participant's Service terminates before his interest in his Account is fully vested, that portion which has not vested shall be forfeited if he either (i) receives a distribution of his entire vested interest pursuant to Section 10.1, or (ii) incurs five consecutive Breaks In Service. If a Participant's Service terminates prior to having any portion of his Account become vested, such Participant shall be deemed to have received a distribution of his vested interest as of the Valuation Date next following his termination of Service. If a Participant who has received his entire vested interest returns to Service before he has five consecutive Breaks in Service, he may repay to the Trustee an amount equal to the distribution. The Participant may repay such amount at any time within five years after he has returned to Service. The amount shall be credited to his account as of the last day of the Plan Year in which it is repaid; an additional amount equal to that portion of his Account which was previously forfeited shall be restored to his Account at the same time from other Employees' forfeitures and, if such forfeitures are insufficient, from a special contribution by his Employer for that year. A Participant who was deemed to receive a distribution of his vested interest in the Plan shall have his Account restored as of the last day of the Plan Year in which he returns to Service. 9.5 ACCOUNTING FOR FORFEITURES. If a portion of a Participant's account is forfeited, Stock allocated to said Participant's account shall be forfeited only after other assets are forfeited. If interests in more than one class of Stock have been allocated to a Participant's account, the Participant must be treated as forfeiting the same proportion of each class of Stock. A forfeiture shall be charged to the Participant's Account as of the first day of the first Valuation Period in which the forfeiture becomes certain pursuant to Section 9.4. Except as otherwise provided in that Section, a forfeiture shall be added to the contributions of the terminated Participant's Employer which are to be credited to other Participants pursuant to Section 4. l as of the last day of the Plan Year in which the forfeiture becomes certain. -132- 9.6 VESTING AND NONFORFEITABILITY. A Participant's interest in his Account which has become vested shall be nonforfeitable for any reason. SECTION 14. PAYMENT OF BENEFITS. 10.1 BENEFITS FOR PARTICIPANTS. For a Participant whose Service ends for any reason, distribution will be made to or for the benefit of the Participant or, in the case of the Participant's death, his Beneficiary, by either, or a combination of the following methods: 10.1.l By payment in a lump sum, in accordance with Section 10.2; or 10.1.2 By payment in a series of substantially equal annual installments over a period not to exceed five (S) years, provided the maximum period over which the distribution of a Participant's Account may be made shall be extended by 1 year, up to five (5) additional years, for each $100,000 (or fraction thereof) by which such Participant's Account balance exceeds $500,000 (the aforementioned figures are subject to cost-of-living adjustments prescribed by the Secretary of the Treasury pursuant to Section 409(o)(2) of the Code). The Participant shall elect the manner in which his vested Account balance will be distributed to him. If a Participant so desires, he may direct how his benefits are to be paid to his Beneficiary. If a deceased Participant did not file a direction with the Committee, the Participant's benefits shall be distributed to his Beneficiary in a lump sum. Notwithstanding the foregoing, if the balance credited to his Account exceeds $3,500, his benefits shall not be paid before the latest of his 65th birthday or the tenth anniversary of the year in which he commenced participation in the Plan unless he elects an early payment date in a written election filed with the Committee. A Participant may modify such an election at any time, provided any new benefit payment date is at least 30 days after a modified election is delivered to the Committee. In all events, a Participant's benefits shall be paid by April 1st of the calendar year in which he reaches age 71-1/2. 10.2 TIME FOR DISTRIBUTION. -133- 10.2.1 Distribution of the balance of a Participant's Account generally shall commence as soon as practicable after the last day of the Plan Year next following his termination of Service for any reason, but no later than one year after the close of the Plan Year: (i) in which the Participant separates from service by reason of Early Retirement, Normal Retirement, Disability, or death; or (ii) which is the fifth Plan Year following the year in which the Participant resigns or is dismissed, unless he is reemployed before such date. 10.2.2 Unless the Participant elects otherwise, the distribution of the balance of a Participant's Account shall commence not later than the 60th day after the latest of the close of the plan year in which - (i) the Participant attains the age of 65; (ii) occurs the tenth anniversary of the year in which the Participant commenced participation in the Plan; or (iii) the participant terminates his service with the Employer. 10.2.3 Notwithstanding any other provision in this Section 10.2 to the contrary, distribution of a Participant's Account shall commence (whether or not he remains in the employ of the Employer) not later than the April 1 of the calendar year next following the calendar year in which the Participant attains age 70 and 1/2 years. A Participant's benefit from that portion of his Account committed to the Investment Fund shall be calculated on the basis of the most recent Valuation Date before the date of payment. 10.2.4 Distribution of a Participant's Account balance after his death shall comply with the following requirements: (i) If a Participant dies before his distributions have commenced, distribution of his Account to his Beneficiary shall commence not later than one year after the end of the Plan Year in which the Participant died, however, if the Participant's Beneficiary is his -134- surviving spouse, distributions may commence on the date on which the Participant would have attained age 70-1/2. In either case, distributions shall be completed within five years after the they commence. (ii) If the Participant dies after distribution has commenced pursuant to Section 10.1.2 but before his entire interest in the Plan has been distributed to him, then the remaining portion of that interest shall, in accordance with Section 401(a)(9) of the Code, be distributed at least as rapidly as under the method of distribution being used under Section 10.1.2 at the date of his death. (iii) If a married Participant dies before his benefit payments begin, then unless he has specifically elected otherwise the Committee shall cause the balance in his Account to be paid to his Spouse. No election by a married Participant of a different Beneficiary shall be valid unless the election is accompanied by the Spouse's written consent, which (i) must acknowledge the effect of the election, (ii) must explicitly provide either that the designated Beneficiary may not subsequently be changed by the Participant without the Spouse's further consent, or that it may be changed without such consent, and (iii) must be witnessed by the Committee, its representative, or a notary public. (This requirement shall not apply if the Participant establishes to the Committee's satisfaction that the Spouse may not be located.) 10.3 MARITAL STATUS. The Committee shall from time to time take whatever steps it deems appropriate to keep informed of each Participant's marital status. Each Employer shall provide the Committee with the most reliable information in the Employer's possession regarding its Participants' marital status, and the Committee may, in its discretion, require a notarized affidavit from any Participant as to his marital status. The Committee, the Plan, the Trustee, and the Employers shall be fully protected and discharged from any liability to the extent of any benefit payments made as a result of the Committee's good faith and reasonable reliance upon information obtained from a Participant and his Employer as to his marital status. -135- 10.4 DELAY IN BENEFIT DETERMINATION. If the Committee is unable to determine the benefits payable to a Participant or Beneficiary on or before the latest date prescribed for payment pursuant to Section 10.1 or 10.2, the benefits shall in any event be paid within 60 days after they can first be determined, with whatever makeup payments may be appropriate in view of the delay. 10.5 ACCOUNTING FOR BENEFIT PAYMENTS. Any benefit payment shall be charged to the Participant's Account as of the first day of the Valuation Period in which the payment is made. 10.6 OPTIONS TO RECEIVE AND SELL STOCK. Unless ownership of virtually all Stock is restricted to active Employees and qualified retirement plans for the benefit of Employees pursuant to the certificates of incorporation or by-laws of the Employers issuing Stock, a terminated Participant or the Beneficiary of a deceased Participant may instruct the Committee to distribute the Participant's entire vested interest in his Account in the form of Stock. In that event, the Committee shall apply the Participant's vested interest in the Investment Fund to purchase sufficient Stock from the Stock Fund or from any owner of stock to make the required distribution. In all other cases, the Participant's vested interest in the Stock Fund shall be distributed in shares of Stock, and his vested interest in the Investment Fund shall be distributed in cash. Any Participant who receives Stock pursuant to Section 10.1, and any person who has received Stock from the Plan or from such a Participant by reason of the Participant's death or incompetency, by reason of divorce or separation from the Participant, or by reason of a rollover contribution described in Section 402(a)(5) of the Code, shall have the right to require the Employer which issued the Stock to purchase the Stock for its current fair market value (hereinafter referred to as the "put right"). The put right shall be exercisable by written notice to the Committee during the first 60 days after the Stock is distributed by the Plan, and, if not exercised in that period, during the first 60 days in the following Plan Year after the Committee has communicated to the Participant its determination as to the Stock's current fair market value. However, the put right shall not apply to the extent that the Stock, at the time the put right would otherwise be exercisable, may be sold on an established market in accordance with federal and state securities laws and regulations. Similarly, the put right shall not apply with respect to the portion of a Participant's account which -136- the Participantunder Code Section 401(a)(28)(B). If the put right is exercised, the Trustee may, if so directed by the Committee in its sole discretion, assume the Employer's rights and obligations with respect to purchasing the Stock. Notwithstanding anything herein to the contrary, in the case of a plan established by a Bank (as defined in Code Section 581), the put right shall not apply if prohibited by a federal or state law and Participants are entitled to elect that their benefits be distributed in cash. If a Participant elects to receive his distribution in the form of a lump sum pursuant to Section 10.1.1 of the Plan, the Employer or the Trustee, as the case may be, may elect to pay for the Stock in equal periodic installments, not less frequently than annually, over a period not longer than five years from the 60th day after the put right is exercised, with adequate security and interest at a reasonable rate on the unpaid balance, all such terms to be set forth in a promissory note delivered to the seller with normal terms as to acceleration upon any uncured default. If a Participant elects to receive his distribution in the form of an installment payment pursuant to Section 10.1.2 of the Plan, the Employer or the Trustee, as the case may be, shall pay for the Stock distributed in the installment distribution over a period which shall not exceed 30 days after the exercise of the put right. Nothing contained herein shall be deemed to obligate any Employer to register any Stock under any federal or state securities law or to create or maintain a public market to facilitate the transfer or disposition of any Stock. The put right described herein may only be exercised by a person described in the second preceding paragraph, and may not be transferred with any Stock to any other person. As to all Stock purchased by the Plan in exchange for any Stock Obligation, the put right shall be nonterminable. The put right for Stock acquired through a Stock Obligation shall continue with respect to such Stock after the Stock Obligation is repaid or the Plan ceases to be an employee stock ownership plan. 10.7 RESTRICTIONS ON DISPOSITION OF STOCK. Except in the case of Stock which is traded on an established market, a Participant who receives Stock pursuant to Section 10.1, and any person who has received Stock from the Plan or from such a Participant by reason of the Participant's death or incompetency, -137- by reason of divorce or separation from the Participant, or by reason of a rollover contribution described in Section 402(a)(5) of the Code, shall, prior to any sale or other transfer of the Stock to any other person, first offer the Stock to the issuing Employer and to the Plan at the greater of (i) its current fair market value, or (ii) the purchase price offered in good faith by an independent third party purchaser. This restriction shall apply to any transfer, whether voluntary, involuntary, or by operation of law, and whether for consideration or gratuitous. Either the Employer or the Trustee may accept the offer within 14 days after it is delivered. Any Stock distributed by the Plan shall bear a conspicuous legend describing the right of first refusal under this Section 10.7, as well as any other restrictions upon the transfer of the Stock imposed by federal and state securities laws and regulations. 10.8 CONTINUING LOAN PROVISIONS; CREATIONS OF PROTECTIONS AND RIGHTS. Except as otherwise provided in Sections 10.6 and 10.7 and this Section, no shares of Employer Stock held or distributed by the Trustee may be subject to a put, call or other option, or buy-sell arrangement. The provisions of this Section shall continue to by applicable to such Stock even if the Plan ceases to be an employee stock ownership plan under Section 4975(e)(7) of the Code. 10.9 DIRECT ROLLOVER OF ELIGIBLE DISTRIBUTION. A Participant or distributee may elect, at the time and in the manner prescribed by the Trustee or the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the Participant or distributee in a direct rollover. 10.9-1 An "eligible rollover" is any distribution that does not include any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the Participant and the Participant's Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not included in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). 10.9-2 An "eligible retirement plan" is an individual retirement account described in Code Section 401(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. -138- 10.9-3 A "direct rollover" is a payment by the Plan to the eligible retirement plan specified by the distributee. 10.9-4 The term "distributee" shall refer to a deceased Participant's spouse or a Participant's former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p). SECTION 15. RULES GOVERNING BENEFIT CLAIMS AND REVIEW OF APPEALS. 11.1 CLAIM FOR BENEFITS. Any Participant or Beneficiary who qualifies for the payment of benefits shall file a claim for his benefits with the Committee on a form provided by the Committee. The claim, including any election of an alternative benefit form, shall be filed at least 30 days before the date on which the benefits are to begin. If a Participant or Beneficiary fails to file a claim by the 30th day before the date on which benefits become payable, he shall be presumed to have filed a claim for payment for the Participant's benefits in the standard form prescribed by Sections 10.1 or 10.2. 11.2 NOTIFICATION BY COMMITTEE. Within 90 days after receiving a claim for benefits (or within 180 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary within 90 days after receiving the claim for benefits), the Committee shall notify the Participant or Beneficiary whether the claim has been approved or denied. If the Committee denies a claim in any respect, the Committee shall set forth in a written notice to the Participant or Beneficiary: (i) each specific reason for the denial; (ii) specific references to the pertinent Plan provisions on which the denial is based; (iii) a description of any additional material or information which could be submitted by the Participant or Beneficiary to support his claim, with an explanation of the relevance of such information; and (iv) an explanation of the claims review procedures set forth in Section 11.3. 11.3 CLAIMS REVIEW PROCEDURE. Within 60 days after a Participant or Beneficiary receives notice from the Committee that his claim for benefits has been denied in any respect, he may file with the Committee a written notice of appeal setting forth his reasons for disputing the Committee's determination. In connection with his appeal the Participant or Beneficiary or his representative may inspect or purchase copies of pertinent -139- documents and records to the extent not inconsistent with other Participants' and Beneficiaries' rights of privacy. Within 60 days after receiving a notice of appeal from a prior determination (or within 120 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary and his representative within 60 days after receiving the notice of appeal), the Committee shall furnish to the Participant or Beneficiary and his representative, if any, a written statement of the Committee's final decision with respect to his claim, including the reasons for such decision and the particular Plan provisions upon which it is based. SECTION 16. THE COMMITTEE AND ITS FUNCTIONS. 12.1 AUTHORITY OF COMMITTEE. The Committee shall be the "plan administrator" within the meaning of ERISA and shall have exclusive responsibility and authority to control and manage the operation and administration of the Plan, including the interpretation and application of its provisions, except to the extent such responsibility and authority are otherwise specifically (i) allocated to the Bank, the Employers, or the Trustee under the Plan and Trust Agreement, (ii) delegated in writing to other persons by the Bank, the Employers, the Committee, or the Trustee, or (iii) allocated to other parties by operation of law. The Committee shall have exclusive responsibility regarding decisions concerning the payment of benefits under the Plan. The Committee shall have no investment responsibility with respect to the Investment Fund except to the extent, if any, specifically provided in the Trust Agreement. In the discharge of its duties, the Committee may employ accountants, actuaries, legal counsel, and other agents (who also may be employed by an Employer or the Trustee in the same or some other capacity) and may pay their reasonable expenses and compensation. 12.2 IDENTITY OF COMMITTEE. The Committee shall consists of three or more individuals selected by the Bank. Any individual, including a director, trustee, shareholder, officer, or employee of an Employer, shall be eligible to serve as a member of the Committee. The Bank shall have the power to remove any individual -140- serving on the Committee at any time without cause upon 10 days written notice, and any individual may resign from the Committee at any time upon 10 days written notice to the Bank. The Bank shall notify the Trustee of any change in membership of the Committee. 12.3 DUTIES OF COMMITTEE. The Committee shall keep whatever records may be necessary to implement the Plan and shall furnish whatever reports may be required from time to time by the Bank. The Committee shall furnish to the Trustee whatever information may be necessary to properly administer the Trust. The Committee shall see to the filing with the appropriate government agencies of all reports and returns required of the plan Committee under ERISA and other laws. Further, the Committee shall have exclusive responsibility and authority with respect to the Plan's holdings of Stock and shall direct the Trustee in all respects regarding the purchase, retention, sale, exchange, and pledge of Stock and the creation and satisfaction of Stock Obligations. The Committee shall at all times act consistently with the Bank's long-term intention that the Plan, as an employee stock ownership plan, be invested primarily in Stock. Subject to the direction of the Board as to the application of Employer contributions to Stock Obligations, and subject to the provisions of Sections 6.4 and 10.6 as to Participants' rights under certain circumstances to have their Accounts invested in Stock or in assets other than Stock, the Committee shall determine in its sole discretion the extent to which assets of the Trust shall be used to repay Stock Obligations, to purchase Stock, or to invest in other assets to be selected by the Trustee or an investment manager. No provision of the Plan relating to the allocation or vesting of any interests in the Stock Fund or the Investment Fund shall restrict the Committee from changing any holdings of the Trust, whether the changes involve an increase or a decrease in the Stock or other assets credited to Participants' Accounts. In determining the proper extent of the Trust's investment in Stock, the Committee shall be authorized to employ investment counsel, legal counsel, appraisers, and other agents to pay their reasonable expenses and compensation. 12.4 VALUATION OF STOCK. If the valuation of any Stock is not established by reported trading on a generally recognized public market, the Committee shall have the exclusive authority and responsibility to determine its value for all purposes under the Plan. Such value shall be determined as of each Valuation Date, -141- and on any other date as of which the Plan purchases or sells such Stock. The Committee shall use generally accepted methods of valuing stock of similar corporations for purposes of arm's length business and investment transactions, and in this connection the Committee shall obtain, and shall be protected in relying upon, the valuation of such Stock as determined by an independent appraiser experienced in preparing valuations of similar businesses. 12.5 COMPLIANCE WITH ERISA. The Committee shall perform all acts necessary to comply with ERISA. Each individual member or employee of the Committee shall discharge his duties in good faith and in accordance with the applicable requirements of ERISA. 12.6 ACTION BY COMMITTEE. All actions of the Committee shall be governed by the affirmative vote of a number of members which is a majority of the total number of members currently appointed, including vacancies. The members of the Committee may meet informally and may take any action without meeting as a group. 12.7 EXECUTION OF DOCUMENTS. Any instrument executed by the Committee shall be signed by any member or employee of the Committee. 12.8 ADOPTION OF RULES. The Committee shall adopt such rules and regulations of uniform applicability as it deems necessary or appropriate for the proper administration and interpretation of the Plan. 12.9 RESPONSIBILITIES TO PARTICIPANTS. The Committee shall determine which Employees qualify to enter the Plan. The Committee shall furnish to each eligible Employee whatever summary plan descriptions, summary annual reports, and other notices and information may be required under ERISA. The Committee also shall determine when a Participant or his Beneficiary qualifies for the payment of benefits under the Plan. The Committee shall furnish to each such Participant or Beneficiary whatever information is required under ERISA (or is otherwise appropriate) to enable the Participant or Beneficiary to make whatever elections may be available pursuant to Sections 6 and 10, and the Committee shall provide for the payment of benefits in the proper form and amount from the assets of the Trust Fund. The Committee may decide in its sole -142- discretion to permit modifications of elections and to defer or accelerate benefits to the extent consistent with applicable law and the best interests of the individuals concerned. 12.10 ALTERNATIVE PAYEES IN EVENT OF INCAPACITY. If the Committee finds at any time that an individual qualifying for benefits under this Plan is a minor or is incompetent, the Committee may direct the benefits to be paid, in the case of a minor, to his parents, his legal guardian, a custodian for him under the Uniform Gifts to Minors Act, or the person having actual custody of him, or, in the case of an incompetent, to his spouse, his legal guardian, or the person having actual custody of him, the payments to be used for the individual's benefit. The Committee and the Trustee shall not be obligated to inquire as to the actual use of the funds by the person receiving them under this Section 12.10, and any such payment shall completely discharge the obligations of the Plan, the Trustee, the Committee, and the Employers to the extent of the payment. 12.11 INDEMNIFICATION BY EMPLOYERS. Except as separately agreed in writing, the Committee, and any member or employee of the Committee, shall be indemnified and held harmless by the Employer, jointly and severally, to the fullest extent permitted by law against any and all costs, damages, expenses, and liabilities reasonably incurred by or imposed upon it or him in connection with any claim made against it or him or in which it or he may be involved by reason of its or his being, or having been, the Committee, or a member or employee of the Committee, to the extent such amounts are not paid by insurance. 12.12 NONPARTICIPATION BY INTERESTED MEMBER. Any member of the Committee who also is a Participant in the Plan shall take no part in any determination specifically relating to his own participation or benefits, unless his abstention would leave the Committee incapable of acting on the matter. SECTION 17. ADOPTION, AMENDMENT, OR TERMINATION OF THE PLAN. 13.1 ADOPTION OF PLAN BY OTHER EMPLOYERS. With the consent of the Bank, any entity may become a participating Employer under the Plan by (i) taking such action as shall be necessary to adopt the Plan, (ii) becoming a party to the Trust Agreement establishing the Trust Fund, and (iii) executing and -143- delivering such instruments and taking such other action as may be necessary or desirable to put the Plan into effect with respect to the entity's Employees. 13.2 ADOPTION OF PLAN BY SUCCESSOR. In the event that any Employer shall be reorganized by way of merger, consolidation, transfer of assets or otherwise, so that an entity other than an Employer shall succeed to all or substantially all of the Employer's business, the successor entity may be substituted for the Employer under the Plan by adopting the Plan and becoming a party to the Trust Agreement. Contributions by the Employer shall be automatically suspended from the effective date of any such reorganization until the date upon which the substitution of the successor entity for the Employer under the Plan becomes effective. If, within 90 days following the effective date of any such reorganization, the successor entity shall not have elected to become a party to the Plan, or if the Employer shall adopt a plan of complete liquidation other than in connection with a reorganization, the Plan shall be automatically terminated with respect to Employees of the Employer as of the close of business on the 90th day following the effective date of the reorganization, or as of the close of business on the date of adoption of a plan of complete liquidation, as the case may be. 13.3 PLAN ADOPTION SUBJECT TO QUALIFICATION. Notwithstanding any other provision of the Plan, the adoption of the Plan and the execution of the Trust Agreement are conditioned upon their being determined initially by the Internal Revenue Service to meet the qualification requirements of Section 401(a) of the Code, so that the Employers may deduct currently for federal income tax purposes their contributions to the Trust and so that the Participants may exclude the contributions from their gross income and recognize income only when they receive benefits. In the event that this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a), the Plan may be amended retroactively to the earliest date permitted by U.S. Treasury Regulations in order to secure qualification under Section 401(a). If this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a) either as originally adopted or as amended, each Employer's contributions to the Trust under this Plan (including any earnings thereon) shall be returned to it and this Plan shall be terminated. In the event that this Plan is amended after its initial qualification and the Plan as amended is held by the Internal Revenue Service not to qualify under Section 401(a), the -144- amendment may be modified retroactively to the earliest date permitted by U.S. Treasury Regulations in order to secure approval of the amendment under Section 401(a). 13.4 RIGHT TO AMEND OR TERMINATE. The Bank intends to continue this Plan as a permanent program. However, each participating Employer separately reserves the right to suspend, supersede, or terminate the Plan at any time and for any reason, as it applies to that Employer's Employees, and the Bank reserves the right to amend, suspend, supersede, merge, consolidate, or terminate the Plan at any time and for any reason, as it applies to the Employees of each Employer. No amendment, suspension, supersession, merger, consolidation, or termination of the Plan shall (i) reduce any Participant's or Beneficiary's proportionate interest in the Trust Fund, (ii) reduce or restrict, either directly or indirectly, the benefit provided any Participant prior to the amendment, or (iii) divert any portion of the Trust Fund to purposes other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan. Moreover, there shall not be any transfer of assets to a successor plan or merger or consolidation with another plan unless, in the event of the termination of the successor plan or the surviving plan immediately following such transfer, merger, or consolidation, each participant or beneficiary would be entitled to a benefit equal to or greater than the benefit he would have been entitled to if the plan in which he was previously a participant or beneficiary had terminated immediately prior to such transfer, merger, or consolidation. Following a termination of this Plan by the Bank, the Trustee shall continue to administer the Trust and pay benefits in accordance with the Plan as amended from time to time and the Committee's instructions. If any amendment changes the vesting schedule, including an automatic change to or from a top-heavy vesting schedule, any Participant with three (3) or more Vesting Years may, by filing a written request with the Employer, elect to have his vested percentage computed under the vesting schedule in effect prior to the amendment. Thenot later than the later of sixty (60) days after the amendment is adopted, the amendment becomes effective, or the Participant is issued written notice of the amendment by the Employer or the Committee. -145- SECTION 18. MISCELLANEOUS PROVISIONS. 14.1 PLAN CREATES NO EMPLOYMENT RIGHTS. Nothing in this Plan shall be interpreted as giving any Employee the right to be retained as an Employee by an Employer, or as limiting or affecting the rights of an Employer to control its Employees or to terminate the Service of any Employee at any time and for any reason, subject to any applicable employment or collective bargaining agreements. 14.2 NONASSIGNABILITY OF BENEFITS. No assignment, pledge, or other anticipation of benefits from the Plan will be permitted or recognized by the Employer, the Committee, or the Trustee. Moreover, benefits from the Plan shall not be subject to attachment, garnishment, or other legal process for debts or liabilities of any Participant or Beneficiary, to the extent permitted by law. This prohibition on assignment or alienation shall apply to any judgment, decree, or order (including approval of a property settlement agreement) which relates to the provision of child support, alimony, or property rights to a present or former spouse, child or other dependent of a Participant pursuant to a State domestic relations or community property law, unless the judgment, decree, or order is determined by the Committee to be a qualified domestic relations order within the meaning of Section 414(p) of the Code, as more fully set forth in Section 14.2 hereof. 14.3 LIMIT OF EMPLOYER LIABILITY. The liability of the Employer with respect to Participants under this Plan shall be limited to making contributions to the Trust from time to time, in accordance with Section 4. 14.4 TREATMENT OF EXPENSES. All expenses incurred by the Committee and the Trustee in connection with administering this Plan and Trust Fund shall be paid by the Trustee from the Trust Fund to the extent the expenses have not been paid or assumed by the Employer or by the Trustee. 14.5 NUMBER AND GENDER. Any use of the singular shall be interpreted to include the plural, and the plural the singular. Any use of the masculine, feminine, or neuter shall be interpreted to include the masculine, feminine, or neuter, as the context shall require. -146- 14.6 NONDIVISION OF ASSETS. Except as provided in Sections 5.3 and 13.3, under no circumstances shall any portion of the Trust Fund be diverted to or used for any purpose other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan. 14.7 SEPARABILITY OF PROVISIONS. If any provision of this Plan is held to be invalid or unenforceable, the other provisions of the Plan shall not be affected but shall be applied as if the invalid or unenforceable provision had not been included in the Plan. 14.8 SERVICE OF PROCESS. The agent for the service of process upon the Plan shall be the president of the Bank, or such other person as may be designated from time to time by the Bank. 14.9 GOVERNING STATE LAW. This Plan shall be interpreted in accordance with the laws of the State of Iowa to the extent those laws are applicable under the provisions of ERISA. 14.10 EMPLOYER CONTRIBUTIONS CONDITIONED ON DEDUCTIBILITY. Employer Contributions to the Plan are conditioned on deductibility under Code Section 404. In the event that the Internal Revenue Service shall determine that all or any portion of an Employer Contribution is not deductible under that Section, the nondeductible portion shall be returned to the Employer within one year of the disallowance of the deduction. 14.11 UNCLAIMED ACCOUNTS. Neither the Employer nor the Trustees shall be under any obligation to search for, or ascertain the whereabouts of, any Participant or beneficiary. The Employer or the Trustees, by certified or registered mail addressed to his last known address of record with the Employer, shall notify any Participant or beneficiary that he is entitled to a distribution under this Plan, and the notice shall quote the provisions of this Section. If the Participant or beneficiary fails to claim his benefits or make his whereabouts known in writing to the Employer or the Trustees within seven (7) calendar years after the date of notification, the benefits of the Participant or beneficiary under the Plan will be disposed of as follows: (a) If the whereabouts of the Participant is unknown but the whereabouts of the Participant's beneficiary is known to the Trustees, distribution will be made to the beneficiary. (b) If the whereabouts of the Participant and his beneficiary are unknown to the Trustees, but the whereabouts of one (1) or more relatives of the Participants by adoption, blood or marriage is known to the Trustees, the Trustees shall distribute the Participant's benefits to any one (1) or more of such relatives and in such proportions as the Trustees shall determine. -147- (c) If the Trustees do not know the whereabouts of any of the above persons, they shall then notify the Social Security Administration of the Participant's (or beneficiary's) failure to claim the distribution to which he is entitled. The Trustees shall request the Social Security Administration to notify the Participant (or beneficiary) in accordance with the procedures it has established for this purpose. Any payment made pursuant to the power herein conferred upon the Trustees shall operate as a complete discharge of all obligations of the Trustees, to the extent of the distributions so made. 14.12 QUALIFIED DOMESTIC RELATIONS ORDER. Section 14.2 shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), and such other domestic relations orders permitted to be so treated by Administrator under the provisions of the Retirement Equity Act of 1984. Further, to the extent provided under a "qualified domestic relations order", a former spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan. In the case of any domestic relations order received by the Plan: (a) The Employer or the Plan Committee shall promptly notify the Participant and any other alternate payee of the receipt of such order and the Plan's procedures for determining the qualified status of domestic relations orders, and (b) Within a reasonable period after receipt of such order, the Employer or the Plan Committee shall determine whether such order is a qualified domestic relations order and notify the Participant and each alternate payee of such determination. The Employer or the Plan Committee shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. During any period in which the issue of whether a domestic relations order is a qualified domestic relations order is being determined (by the Employer or Plan Committee, by a court of competent jurisdiction, or otherwise), the Employer or the Plan Committee shall segregate in a separate account in the Plan or in an escrow account the amounts which would have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order. If within eighteen (18) months the order (or modification thereof) is determined to be a qualified domestic relations order, the Employer or the Plan Committee shall pay the segregated amounts (plus any interest thereon) to the person or persons entitled -148- thereto. If within eighteen (18) months it is determinens order, or the issue as to whether such order is a qualified domestic relations order is not resolved, then the Employer or the Plan Committee shall pay the segregated amounts (plus any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order. Any determination that an order is a qualified domestic relations order which is made after the close of the eighteen (18) month period shall be applied prospectively only. The term "alternate payee" means any spouse, former spouse, child or other dependent of a Participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefit payable under a Plan with respect to such Participant. SECTION 19. TOP-HEAVY PROVISIONS. 15.1 TOP-HEAVY PLAN. For any Plan Year beginning after December 31, 1983, this Plan is top-heavy if any of the following conditions exist: (a) If the top-heavy ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any required aggregation group or permissive aggregation group; (b) If this Plan is a part of a required aggregation group (but is not part of a permissive aggregation group) and the aggregate top-heavy ratio for the group of Plans exceeds sixty percent (60%); or (c) If this Plan is a part of a required aggregation group and part of a permissive aggregation group and the aggregate top-heavy ratio for the permissive aggregation group exceeds sixty percent (60%). 15.2 SUPER TOP-HEAVY PLAN. For any Plan Year beginning after December 31, 1983, this Plan will be a super top-heavy Plan if any of the following conditions exist: (a) If the top-heavy ratio for this Plan exceeds ninety percent (90%) and this Plan is not part of any required aggregation group or permissive aggregation group. (b) If this Plan is a part of a required aggregation group (but is not part of a permissive aggregation group) and the aggregate top-heavy ratio for the group of Plans exceeds ninety percent (90%), or (c) If this Plan is a part of a required aggregation group and part of a permissive aggregation group and the aggregate top-heavy ratio for the permissive aggregation group exceeds ninety percent (90%). -149- 15.3 DEFINITIONS. In making this determination, the Committee shall use the following definitions and principles: 15.3-1 The "Determination Date", with respect to the first Plan Year of any plan, means the last day of that Plan Year, and with respect to each subsequent Plan Year, means the last day of the preceding Plan Year. If any other plan has a Determination Date which differs from this Plan's Determination Date, the top-heaviness of this Plan shall be determined on the basis of the other plan's Determination Date falling within the same calendar years as this Plan's Determination Date. 15.3-2 A "Key Employee", with respect to a Plan Year, means an Employee who at any time during the five years ending on the top-heavy Determination Date for the Plan Year has received compensation from an Employer and has been (i) an officer of the Employer having Total Compensation greater than 50 percent of the limit then in effect under Section 415(b)(1)(A) of the Code, (ii) one of the 10 Employees owning the largest interests in the Employer having Total Compensation greater than the limit then in effect under Section 415(c)(1)(A), (iii) an owner of more than five percent of the outstanding equity interest or the outstanding voting interest in any Employer, or (iv) an owner of more than one percent of the outstanding equity interest or the outstanding voting interest in an Employer whose Total Compensation exceeds $150,000. In determining which individuals are Key Employees, the rules of Section 415(i) of the Code and Treasury Regulations promulgated thereunder shall apply. The Beneficiary of a Key Employee shall also be considered a Key Employee. 15.3-3 A "Non-key Employee" means an Employee who at any time during the five years ending on the top-heavy Determination Date for the Plan Year has received compensation from an Employer and who has never been a Key Employee, and the Beneficiary of any such Employee. 15.3-4 A "required aggregation group" includes (a) each qualified Plan of the Employer in which at least one Key Employee participates in the Plan Year containing the Determination Date and any of the four (4) preceding Plan Years, and (b) any other qualified Plan of the Employer which enables a Plan described in (a) to meet the requirements of Code Sections 401(a)(4) and 410. For purposes of the preceding sentence, a qualified Plan of the Employer includes a terminated Plan maintained by the Employer within the five (5) year period ending on the Determination Date. In the case of a required aggregation group, each Plan in the group will be considered a top-heavy Plan if the required aggregation group is a top-heavy group. No Plan in the required aggregation group will be considered a top-heavy Plan if the required aggregation group is not a top-heavy group. All Employers aggregated under Code Sections 414(b), (c) or (m) or (o) (but only after the Code Section 414(o) regulations become effective) are considered a single Employer. 15.3-5 A "permissive aggregation group" includes the required aggregation group of Plans plus any other qualified Plan(s) of the Employer that are not required to be aggregated but which, when considered as a group with the required aggregation group, satisfy the requirements of Code Sections 401(a)(4) and 410 and are comparable to the Plans in the required aggregation group. No Plan in the permissive aggregation group will be considered a top-heavy Plan if the permissive aggregation group is not a top-heavy group. Only a Plan that is part of the required aggregation group will be considered a top-heavy Plan if the permissive aggregation group is top-heavy. 15.4 TOP-HEAVY RULES OF APPLICATION. -150- For purposes of determining the value of account balances and the present value of accrued benefits the following provisions shall apply: 15.4-1 The value of account balances and the present value of accrued benefits will be determined as of the most recent valuation date that falls within or ends with the twelve (12) month period ending on the Determination Date. 15.4-2 For purposes of testing whether this Plan is top-heavy, the present value of an individual's accrued benefits and an individual's account balances is counted only once each year. 15.4-3 The account balances and accrued benefits of a Participant who is not presently a Key Employee but who was a Key Employee in a Plan Year beginning on or after January 1, 1984 will be disregarded. 15.4-4 For years beginning after December 31, 1984, non-deductible Voluntary Employee Contributions will be taken into account for purposes of computing the top-heavy ratio. Employer contributions attributable to a salary reduction or similar arrangement will be taken into account. 15.4-5 When aggregating Plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. 15.4-6 The present value of the accrued benefits or the amount of the account balances of an Employee shall be increased by the aggregate distributions made to such Employee from a Plan of the Employer. No distribution, however, made from the Plan to an individual (other than the beneficiary of a deceased Employee who was an Employee within the five (5) year period ending on the Determination Date) who has not been an Employee at any time during the five (5) year period ending on the Determination Date shall be taken into account in determining whether the Plan is top-heavy. Also, any amounts recontributed by an Employee upon becoming a Participant in the Plan shall no longer be counted as a distribution under this paragraph. 15.4-7 The present value of the accrued benefits or the amount of the account balances of an Employee shall be increased by the aggregate distributions made to such Employee from a terminated Plan of the Employer, provided that such Plan (if not terminated) would have been required to be included in the aggregation group. 15.4-8 Accrued benefits and account balances of an individual shall not be taken into account for purposes of determining the top-heavy ratios if the individual has performed no services for the Employer during the five (5) year period ending on the applicable Determination Date. Compensation for purposes of this subparagraph shall not include any payments made to an individual by the Employer pursuant to a qualified or non-qualified deferred compensation plan. 15.4-9 The present value of the accrued benefits or the amount of the account balances of any Employee participating in this Plan shall not include any rollover contributions or other transfers voluntarily initiated by the Employee except as described below. If a rollover was received by this Plan after December 31, 1983, the rollover or transfer voluntarily initiated by the Employee was received prior to January 1, 1984, then the rollover or transfer shall be considered as part of the accrued benefit by the Plan receiving such rollover or transfer. If this Plan transfers or rolls over funds to another Plan in a transaction voluntarily initiated by the Employee after December 31, 1983, then this Plan shall count the distribution for purposes of determining account balances or the present -151- value of accrued benefits. A transfer incident to a merger or consolidation of two or more Plans of the Employer (including Plans of related Employers treated as a single Employer under Code Section 414), or a transfer or rollover between Plans of the Employer, shall not be considered as voluntarily initiated by the Employee. 15.5 TOP-HEAVY RATIO. If the Employer maintains one (1) or more defined contribution plans (including any simplified Employee pension plan) and the Employer has never maintained any defined benefit plans which have covered or could cover a Participant in this Plan, the top-heavy ratio is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date, and the denominator of which is the sum of the account balances of all Employees as of the Determination Date. Both the numerator and denominator of the top-heavy ratio shall be increased to reflect any contribution which is due but unpaid as of the Determination Date. If the Employer maintains one (1) or more defined contribution plans (including any simplified Employee pension plan) and the Employer maintains or has maintained one (1) or more defined benefit plans which have covered or could cover a Participant in this Plan, the top-heavy ratio is a fraction, the numerator of which is the sum of account balances under the defined contribution plans for all Key Employees and the present value of accrued benefits under the defined benefit plans for all Key Employees, and the denominator of which is the sum of the account balances under the defined contribution plans for all Employees and the present value of accrued benefits under the defined benefit plans for all Employees. 15.6 MINIMUM CONTRIBUTIONS. For any Top-Heavy Year, each Employer shall make a special contribution on behalf of each Participant to the extent that the total allocations to his Account pursuant to Section 4 is less than the lesser of: (i) three percent of his Total Compensation for that year, or (ii) the highest ratio of such allocation to Total Compensation received by any Key Employee for that year. For purposes of the special contribution of this Section 15.2, a Key Employee's Total Compensation shall include amounts the Key Employee elected to defer under a qualified 401(k) arrangement. Such a special contribution shall be made on behalf of each Participant who is employed by an Employer on the last day of the Plan Year, regardless of the number of his Hours of Service, and shall be allocated to his Account. -152- For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key Employee is a Participant in both this Plan and a defined benefit plan included in the plan aggregation group which is top heavy, the Top-Heavy minimum will be provided in the Employer's defined benefit plan. 15.7 MINIMUM VESTING. If a Participant's vested interest in his Account is to be determined in a Top-Heavy Year, it shall be based on the following "top-heavy table": Vesting Percentage of Years Interest Vested ------- --------------- Fewer than 3 years 0% 3 100% 15.8 MAXIMUM COMPENSATION. For any Top-Heavy Year, a Participant's "Cash Compensation" as defined in Section 4.3, and his "Total Compensation" for purposes of Section 15.2, shall not exceed $150,000 (or the limit currently in effect under Section 415(d) of the Code). 15.9 TOP-HEAVY PROVISIONS CONTROL IN TOP-HEAVY PLAN. In the event this Plan becomes top-heavy and a conflict arises between the top-heavy provisions herein set forth and the remaining provisions set forth in this Plan, the top-heavy provisions shall control. -153- FIRST FEDERAL SAVINGS BANK OF FORT DODGE EMPLOYEE STOCK OWNERSHIP PLAN This Employee Stock Ownership Plan, executed on the day of , 1994, by First Federal Savings Bank of Fort Dodge, a federally chartered stock savings association (the "Bank"), WITNESSETH THAT WHEREAS, the board of directors of the Bank has resolved to adopt an employee stock ownership plan for eligible employees in accordance with the terms and conditions presented to the directors; NOW, THEREFORE, the Bank hereby adopts the following Plan setting forth the terms and conditions pertaining to contributions by the Employer and the payment of benefits to Participants and Beneficiaries, effective January 1, 1994. IN WITNESS WHEREOF, the Bank has adopted this Plan and caused this instrument to be executed by its duly authorized officers as of the above date. ATTEST: FIRST FEDERAL SAVINGS BANK OF FORT DODGE By: Jean Lake, Secretary David M. Bradley, President -154- EX-11.1 5 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 Exhibit 11.1 Statement regarding computation of per share earnings. Presented below is the reconciliation of the numerators and denominators of the computations for earnings per common share and earnings per common share - diluted.
1997 Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Income available to common stockholder $3,917,124 3,323,346 Less unallocated ESOP shares -- 139,077 ---------- ---------- Basic earnings per common share Income available to common stockholders 3,917,124 3,184,269 $ 1.23 Effective of dilutive securities - options -- 56,800 ---------- ---------- Earnings per common share - assuming dilution Income available to common stockholders + assumed conversions $3,917,124 $3,241,069 $ 1.21
Basic earnings per common share information for 1996 and 1995 is calculated by dividing net income by the weighted number of shares outstanding (3,818,273 and 3,919,488, respectively). Earnings per common share - assuming dilution for 1996 did not include the effect of options to purchase 237,000 shares of common stock because the exercise price was greater than the average market price of the common shares. Earnings per common share - assuming dilution for 1995 did not differ from basic earnings per common share because there were no stock options or other common stock equivalents outstanding. -155- EX-21.1 6 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of Registrant. STATE OF SUBSIDIARY INCORPORATION PERCENTAGE OWNED First Financial Service Corporation Iowa Wholly owned by the Bank First Iowa Title Services, Inc. Iowa Wholly owned by the Bank Northridge Apartments Limited Partnership Iowa 99% owned by the Bank First Iowa Mortgage, Inc. Iowa Wholly owned by the Bank First Federal Savings Bank of Iowa Federal Wholly owned by the Registrant -156- EX-23.1 7 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 January 30, 1998, which appears in the annual report on Form 10-K of North Central Bancshares, Inc. and subsidiaries for the year ended December 31, 1997. /s/ McGladrey & Pullen, LLP --------------------------------- McGladrey & Pullen, LLP Des Moines, Iowa March 26, 1998 -157- EX-27 8 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from 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. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 982,354 2,462,809 0 0 19,815,913 0 0 191,248,830 2,150,587 221,953,608 141,123,707 10,250,000 1,862,825 18,300,000 40,111 0 0 50,376,965 221,953,608 14,633,762 1,570,932 0 16,204,694 6,493,931 7,899,610 8,305,084 240,000 248,526 4,576,652 6,025,428 6,025,428 0 0 3,917,124 1.23 1.21 7.93 146,000 0 0 0 1,952,887 52,724 10,424 2,150,587 0 0 0
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