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