<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------------------------
FORM 10-Q
[Mark One]
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________________________________ to
_____________________________________
Commission File Number 0-27672
NORTH CENTRAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Iowa 42-1449849
-----------------------------------------------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
825 Central Avenue Fort Dodge, Iowa 50501
----------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code #(515)576-7531
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at November 13, 1998
- --------------------------------------------------------------------------------
(Common Stock, $.01 par value) 3,104,159
<PAGE>
NORTH CENTRAL BANCSHARES, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Page
Part I. Financial Information
Item 1. Consolidated Condensed
Financial Statements (unaudited) 1 to 4
Consolidated Condensed Statements of
Financial Condition at September 30,
1998 and December 31, 1997 (Unaudited) 1
Consolidated Condensed Statements of
Income for the three and nine months ended
September 30, 1998 and 1997 (Unaudited) 2
Consolidated Condensed Statements of
Cash Flows for the nine months ended
September 30, 1998 and 1997 (Unaudited) 3 & 4
Notes to Consolidated Condensed Financial
Statements 5 & 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7 to 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Part II. Other Information 17 & 18
Items 1 through 6 17
Signatures 18
Exhibits
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
ASSETS 1998 1997
------------- -------------
Cash:
Interest-bearing $ 4,817,693 $ 2,462,809
Noninterest-bearing 1,712,024 982,354
Securities available for sale 51,234,184 19,815,913
Loans receivable, net 258,576,406 191,248,830
Loans held for sale 2,527,186 - -
Accrued interest receivable 2,125,494 1,300,495
Foreclosed real estate 107,415 67,107
Premises and equipment, net 3,565,293 2,143,016
Rental real estate 1,974,542 2,059,148
Title plant 925,256 925,256
Goodwill 6,506,298 195,628
Deferred taxes - - 105,139
Prepaid expenses and other assets 646,633 647,913
------------ ------------
Total assets $334,718,424 $221,953,608
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Deposits $245,659,068 $141,123,707
Other borrowed funds 37,087,759 28,550,000
Advances from borrowers for taxes and insurance 440,033 918,369
Dividend payable 248,333 204,155
Deferred income taxes 17,000 - -
Income taxes payable 125,900 194,325
Accrued expenses and other liabilities 1,404,812 545,976
------------ ------------
Total liabilities 284,982,905 171,536,532
------------ ------------
COMMITMENTS AND CONTINGENCIES
aSTOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, authorized 3,000,000
shares, issued and outstanding none) - - - -
Common Stock ($.01 par value, authorized 15,500,000
shares; issued and outstanding 4,011,057) 40,111 40,111
Additional paid-in capital 38,109,601 37,949,598
Retained earnings, substantially restricted 26,223,152 23,660,964
Accumulated other comprehensive income-unrealized gain on
securities available for sale, net of income taxes 371,458 354,781
Treasury stock at cost (906,898 and 744,574 shares, respectively) (13,946,978) (10,377,937)
Unearned shares, employee stock ownership plan (1,061,825) (1,210,441)
------------ ------------
Total stockholders' equity 49,735,519 50,417,076
------------ ------------
Total liabilities and stockholders' equity $334,718,424 $221,953,608
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ----------- ------------ --------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $5,212,578 $3,679,808 $15,118,419 $10,735,370
Securities and cash deposits 832,371 419,857 2,441,673 1,200,805
---------- ---------- ----------- -----------
6,044,949 4,099,665 17,560,092 11,936,175
---------- ---------- ----------- -----------
Interest expense:
Deposits 2,830,448 1,665,152 8,044,700 4,795,481
Other borrowed funds 487,464 360,422 1,436,707 980,208
---------- ---------- ----------- -----------
3,317,912 2,025,574 9,481,407 5,775,689
---------- ---------- ----------- -----------
Net Interest Income 2,727,037 2,074,091 8,078,685 6,160,486
Provision for loan losses 60,000 60,000 180,000 180,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses 2,667,037 2,014,091 7,898,685 5,980,486
---------- ---------- ----------- -----------
Noninterest income:
Fees and service charges 335,294 163,074 884,692 472,074
Abstract fees 398,974 324,204 1,161,535 886,981
Gain (loss) on sale of securities available
for sale, net (3,491) - - 51,362 - -
Other income 298,413 106,165 692,417 317,371
---------- ---------- ----------- -----------
Total noninterest income 1,029,190 593,443 2,790,006 1,676,426
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 916,321 551,866 2,560,557 1,607,769
Premises and equipment 222,793 110,419 557,522 316,908
Data processing 181,001 65,022 400,834 191,224
SAIF deposit insurance premiums 37,249 20,950 107,173 63,181
Goodwill amortization 120,850 6,987 317,189 20,960
Other expenses 537,823 355,826 1,573,559 1,139,716
---------- ---------- ----------- -----------
Total noninterest expense 2,016,037 1,111,070 5,516,834 3,339,758
---------- ---------- ----------- -----------
Income before income taxes 1,680,190 1,496,464 5,171,857 4,317,154
Provision for income taxes 605,972 523,347 1,875,847 1,495,563
---------- ---------- ----------- -----------
Net Income $1,074,218 $ 973,117 $ 3,296,010 $ 2,821,591
========== ========== =========== ===========
Basic earnings per common share $0.36 $0.31 $1.07 $0.88
========== ========== =========== ===========
Diluted earnings per common share $0.35 $0.31 $1.04 $0.87
========== ========== =========== ===========
Dividends declared per common share $0.0800 $0.0625 $0.2400 $0.1875
========== ========== =========== ===========
Comprehensive Income $1,134,724 $1,150,832 $ 3,312,687 $ 3,113,026
========== ========== =========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
-2-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,296,010 $ 2,821,591
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 180,000 180,000
Depreciation, premises and equipment 234,250 143,081
Depreciation, rental real estate 85,341 55,000
Amortization and accretion 381,805 73,508
Deferred taxes (179,096) (57,825)
Effect of contribution to employee stock ownership plan 317,757 254,522
(Gain) on sale of foreclosed real estate and loans, net (10,714) (20,685)
(Gain) on sale of securities available for sale (51,362) - -
Loss on disposal of equipment 2,545 4,674
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable 194,374 ( 1,066)
(Increase) decrease in prepaid expenses and other assets 211,186 (50,332)
(Decrease) in income taxes payable (55,860) (63,896)
Increase (decrease) in accrued expenses and other liabilities 9,808 (185,857)
------------ ------------
Net cash provided by operating activities 4,616,044 3,152,715
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net( increase) decrease in loans 7,806,513 (3,376,990)
Net (increase) in loans held for sale (2,527,186) - -
Purchase of loans (20,477,978) (12,259,359)
Proceeds from sale of loans 3,708,775 161,381
Proceeds from sales, calls and maturities of securities available for sale 23,911,786 3,933,750
Purchase of securities available for sale (13,655,875) (2,664,973)
Proceeds from maturities of securities held to maturity - - 3,500,000
Purchase of premises and equipment (577,212) (413,815)
Proceeds from sale of equipment 30 31,300
Purchase of rental real estate (735) (362,781)
Proceeds from sale of title plant - - 43,491
Cash paid in connection with acquisition of Valley Financial Corp.,
net of cash received (8,561,493) - -
Other 78,703 (84,039)
------------ ------------
Net cash (used in) investing activities (10,294,672) (11,492,035)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,273,366 9,532,831
(Decrease) in advances from borrowers for taxes and insurance (780,119) (498,494)
Net change in short term borrowings 250,000 (10,000,000)
Proceeds from other borrowed funds 14,542,000 16,250,000
Payments of other borrowings (6,254,241) (3,035,000)
Purchase of treasury stock (3,584,419) (2,706,750)
Dividends paid (689,644) (619,529)
Other 6,239 - -
------------ ------------
Net cash provided by financing activities 8,763,182 8,923,058
------------ ------------
Net increase in cash 3,084,554 583,738
CASH
Beginning 3,445,163 3,936,815
------------ ------------
Ending $ 6,529,717 $ 4,520,553
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 7,973,289 $ 4,757,337
Interest paid on borrowings 1,436,432 1,052,379
Income taxes 2,088,987 1,619,750
</TABLE>
(Continued)
-3-
<PAGE>
The following is a summary of the assets acquired and liabilities assumed in
connection with the acquisition of Valley Financial Corp.
<TABLE>
<CAPTION>
<S> <C>
Securities $ 41,818,057
Loans 58,567,364
Accrued interest receivable 1,019,373
Premises and equipment 1,081,890
Goodwill 6,565,174
Prepaid expenses and other assets 209,906
Deposits (99,261,995)
Advances from borrowers for taxes and insurance (301,783)
Deferred income taxes (300,030)
Accrued taxes payable 12,565
Accrued expenses and other liabilities (849,028)
------------
Cash Paid, less cash received $ 8,561,493
============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
-4-
<PAGE>
ITEM 1.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated condensed financial statements for the three and nine month
period ended September 30, 1998 and 1997 are unaudited. In the opinion of the
management of North Central Bancshares, Inc. (the "Company" or the "Registrant")
these financial statements reflect all adjustments, consisting only of normal
recurring accruals, necessary to present fairly these consolidated financial
statements. The results of operations for the interim periods are not
necessarily indicative of results which may be expected for an entire year.
Certain information and footnote disclosure normally included in complete
financial statements prepared in accordance with generally accepted accounting
principles have been omitted in accordance with the requirements for interim
financial statements. The financial statements and notes thereto should be read
in conjunction with the Company's 1997 Annual Report on Form 10-K.
The consolidated condensed financial statements include the accounts of the
Company and its wholly-owned subsidiaries (See Note 2). All significant
intercompany balances and transactions have been eliminated in consolidation.
2. REORGANIZATION
The Company was organized on December 5, 1995 at the direction of the Board of
Directors of First Federal Savings Bank of Iowa, formerly known as First Federal
Savings Bank of Fort Dodge, (the "Bank") for the purpose of acquiring all of the
capital stock of the Bank, in connection with the conversion of the Bank and
North Central Bancshares, M.H.C. (the "Mutual Holding Company" or "MHC") from
the mutual to the stock holding company structure (these transactions are
collectively referred to as the "Reorganization"). On March 20, 1996, upon
completion of the Reorganization, 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 cancelled, and 2,625,467 shares of which were sold in
Subscription and Community Offerings (the "Offering") at a price of $10.00 per
share, with gross proceeds amounting to $26.3 million. In addition, the Company
replaced the Bank as the issuer listed on The Nasdaq Stock Market.
At this time, the Company conducts business as a unitary savings and loan
holding company and the principal business of the Company consists of the
operation of its wholly owned subsidiary, the Bank.
3. ACQUISITION OF VALLEY FINANCIAL CORP.
As of the close of business on January 30, 1998, the Bank completed the
acquisition of Valley Financial Corp., ("Valley Financial") (the "Acquisition")
pursuant to an Agreement and Plan of Merger, dated as of September 18, 1997 (the
"Merger Agreement"). The acquisition resulted in the merger of Valley
Financial's wholly owned subsidiary, Valley Savings Bank, FSB ("Valley Savings")
with and into the Bank, with the Bank as the resulting financial institution.
Valley Savings, headquartered in Burlington, Iowa, was a federally-charted stock
savings bank with three branch offices located in southeastern Iowa. The former
offices of Valley Savings are being operated as a division of the Bank.
In connection with the Acquisition, each share of Valley Financial's common
stock, par value $1.00 per share, issued and outstanding (other than shares held
as treasury stock of Valley Financial) was cancelled and converted automatically
into the right to receive $525 per share in cash pursuant to the terms and
conditions of the Merger Agreement. As a result of the Acquisition,
shareholders of Valley Financial were paid a total of $14.7 million in cash.
The Acquisition was accounted for as a purchase transaction, resulting in
goodwill of $6.6 million. The operating results of the former offices of Valley
Savings are included in the 1998 operating results of the Company only from the
date of acquisition through September 30, 1998.
-5-
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
4. 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 No. 93-6, Employers' Accounting for Employee Stock
Ownership Plans, issued by the American Institute of Certified Public
Accountants, shares owned by the Bank's Employee Stock Ownership Plan that have
not been committed to be released are not considered to be outstanding for the
purpose of computing earnings per share. For the three month period ended
September 30, 1998, the weighted average number of shares outstanding for basic
and diluted earnings per share computation were 2,996,571 and 3,070,727,
respectively. For the nine month period ended September 30, 1998, the weighted
average number of shares outstanding for basic and diluted earnings per share
computation were 3,081,083 and 3,174,142, respectively. For the three month
period ended September 30, 1997, the weighted average number of shares
outstanding for basic and diluted earnings per share computation were 3,121,633
and 3,182,889, respectively. For the nine month period ended September 30,
1997, the weighted average number of shares outstanding for basic and diluted
earning per share computation were 3,201,155 and 3,251,004, respectively.
5. DIVIDENDS
On August 28, 1998, the Company declared a cash dividend on its common stock,
payable on October 5, 1998 to stockholders of record as of September 15, 1998,
equal to $0.08 per share.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In October 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 134, "Accounting for Mortgage-
Backed Securities Retained After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." (SFAS No. 134). SFAS No. 134 amends
FASB Statement No. 65 and conforms the subsequent accounting for securities
retained after the securitization of mortgage loans held for sale by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a nonmortgage banking enterprise.
Therefore, after the securitization of a mortgage loan held for sale, any
retained mortgage-backed securities shall by classified in accordance with the
provisions of FASB Statement No. 115. The adoption of SFAS No. 134 is expected
to have no effect on a company's financial condition or results of operations.
-6-
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q contains forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Company that are subject to various factors which
could cause actual results to differ materially from these estimates. These
factors include, changes in general, economic, market, legislative and
regulatory conditions, and the development of an interest rate environment that
adversely affects the interest rate spread or other income anticipated from the
Company's operations and investments. The Company's actual results may differ
from the results discussed in the forward looking statements.
ACQUISITION OF VALLEY FINANCIAL CORP.
On September 18, 1997, the Company announced the execution of a definitive
agreement to acquire Valley Financial, a privately held Iowa corporation and
parent company of Valley Savings, Burlington, Iowa. As of the close of business
on January 30, 1998, the Bank completed the Acquisition. Under the terms of the
Merger Agreement, the Bank was acquired in a cash transaction totalling $14.7
million, or $525 per share, of all 28,050 shares outstanding of Valley
Financial's common stock.
Valley Savings was a federally chartered savings bank, with two offices in
Burlington, Iowa and one office in Mount Pleasant, Iowa. At January 30, 1998,
just prior to the merger, Valley Financial had assets of $108.0 million, loans
of $57.9 million and deposits of $98.9 million.
The acquisition of Valley Financial resulted in the merger of Valley Financial's
wholly-owned subsidiary, Valley Savings, with and into the Bank, with the three
Valley Savings branches continuing to operate as Valley Savings Bank, a division
of First Federal Savings Bank of Iowa. The transaction was accounted for as a
purchase, resulting in goodwill of $6.6 million and closed on January 30, 1998,
consequently the operating results of the former Valley Savings are included in
the 1998 operating results of the Company only from the date of acquisition
through September 30, 1998.
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma consolidated financial statements presented on
the following pages are based on the historical financial statements of the
Company and Valley Financial. The unaudited pro forma consolidated statements
of income for the three and nine months ended September 30, 1998 and 1997 were
prepared as if the Acquisition had occurred as of the beginning of the
respective periods for purposes of the combined consolidated statements of
income and as if such an acquisition had occurred at December 31, 1997 for
purposes of the combined consolidated statement of financial condition.
These pro forma financial statements are not necessarily indicative of the
results of operations that might have occurred had the Acquisition taken place
at the beginning of the period, or to project the Company's results of
operations at any future date or for any future period. The pro forma
consolidated condensed statements should be read in connection with the notes
thereto.
-7-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
ACTUAL AND PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
Actual Pro Forma
September 30, December 31,
ASSETS 1998 1997
------------- ------------
<S> <C> <C>
Cash:
Interest-bearing $ 4,817,693 $ 6,481,513
Noninterest-bearing 1,712,024 2,035,107
Securities available for sale 51,234,184 58,892,100
Loans receivable, net 258,576,406 250,700,535
Loans held for sale 2,527,186 - -
Accrued interest receivable 2,125,494 2,273,563
Foreclosed real estate 107,415 74,240
Premises and equipment, net 3,565,293 3,229,923
Rental real estate 1,974,542 2,059,148
Title plant 925,256 925,256
Goodwill 6,506,298 6,734,983
Prepaid expenses and other assets 646,633 742,395
------------ ------------
Total assets $334,718,424 $334,148,763
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Deposits $245,659,068 $240,634,725
Other borrowed funds 37,087,759 39,858,760
Advances from borrowers for taxes and insurance 440,033 1,164,417
Dividend payable 248,333 204,155
Deferred income taxes 17,000 209,657
Income taxes payable 125,900 98,558
Accrued expenses and other liabilities 1,404,812 1,561,415
------------ ------------
Total liabilities 284,982,905 283,731,687
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, authorized 3,000,000 shares,
issued and outstanding none) - - - -
Common Stock ($.01 par value, authorized 15,500,000 shares;
issued and outstanding 4,011,057) 40,111 40,111
Additional paid-in capital 38,109,601 37,949,598
Retained earnings, substantially restricted 26,223,152 23,660,964
Unrealized gain on securities available for sale, net of
income taxes 371,458 354,781
Treasury stock at cost (906,898 and 744,574 shares, respectively) (13,946,978) (10,377,937)
Unearned shares, employee stock ownership plan (1,061,825) (1,210,441)
------------ ------------
Total stockholders' equity 49,735,519 50,417,076
------------ ------------
Total liabilities and stockholders' equity $334,718,424 $334,148,763
============ ============
</TABLE>
-8-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $6,044,949 $6,086,194 $18,182,401 $17,753,638
Interest expense 3,317,912 3,415,142 9,931,487 9,827,238
---------- ---------- ----------- -----------
Net interest income 2,727,037 2,671,052 8,250,914 7,926,400
Provision for loan losses 60,000 60,000 180,000 80,000
---------- ---------- ----------- -----------
Net interest income after provision for
loan losses 2,667,037 2,611,052 8,070,914 7,846,400
---------- ---------- ----------- -----------
Noninterest income:
Fees and service charges 335,294 299,966 920,597 816,927
Abstract fees 398,974 324,204 1,161,535 886,981
Gain (loss) on sale of securities
available for sale, net (3,491) 9,404 51,362 9,404
Other income 298,413 179,928 710,252 562,732
---------- ---------- ----------- -----------
Total noninterest income 1,029,190 813,502 2,843,746 2,276,044
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 916,321 884,864 2,729,252 2,484,961
Premises and equipment 222,793 134,943 592,020 488,063
Data processing 181,001 107,797 430,657 321,120
SAIF deposit insurance premiums 37,249 36,345 112,467 97,634
Goodwill amortization 120,850 119,538 353,662 352,349
Other expenses 537,823 553,936 1,705,305 1,669,431
---------- ---------- ----------- -----------
Total noninterest expense 2,016,037 1,837,423 5,923,363 5,413,558
---------- ---------- ----------- -----------
Income before income taxes 1,680,190 1,587,131 4,991,297 4,708,886
Provision for income taxes 605,972 582,459 1,834,659 1,708,964
---------- ---------- ----------- -----------
Net Income $1,074,218 $1,004,672 $ 3,156,638 $ 2,999,922
========== ========== =========== ===========
</TABLE>
-9-
<PAGE>
FINANCIAL CONDITION
The pro forma statement of financial condition as of December 31, 1997 was
compared with the September 30, 1998 statement of financial condition in order
to more clearly present the changes in financial condition.
Total assets increased $570,000, or 0.2%, to $334.7 million at September 30,
1998 compared to $334.1 million at December 31, 1997. Interest bearing cash
decreased $1.7 million, or 25.7%, due in part to the anticipation of the
Acquisition at December 31, 1997. Securities available for sale decreased $7.7
million, or 13.0%, primarily due to $21.2 million of maturities, calls and
proceeds from sales, partially offset by $13.4 million of purchases. Total
loans receivable, net, increased by $7.9 million, or 3.1%, from December 31,
1997, due primarily to payments and prepayments of loans (of approximately $53.0
million) and loan sales of $3.8 million, which payments, prepayments and sales
were offset in part by originations of $27.8 million of first mortgage loans
secured primarily by one-to-four family residences, purchases of $20.3 million
of first mortgage loans secured primarily by multi-family residences and
originations of $11.4 million of second mortgage loans. Deposits increased $5.0
million, or 2.1%, from $240.6 million at December 31, 1997 to $245.7 million at
September 30, 1998, reflecting increases primarily in certificates of deposit.
This increase was due primarily to offering competitive interest rates on
certain deposit products. Other borrowings, primarily FHLB advances, decreased
by $2.8 million to $37.1 million at September 30, 1998 from $39.9 million at
December 31, 1997, primarily due to the repayment of short term advances with
excess cash available from the Acquisition of Valley Financial. Total
stockholders' equity decreased $682,000, from $50.4 million at December 31, 1997
to $49.7 million at September 30, 1998. See "Capital".
CAPITAL
The Company's total stockholders' equity decreased by $682,000 to $49.7 million
at September 30, 1998 from $50.4 million at December 31, 1997, primarily due to
stock repurchases and dividends declared, which were offset in part by earnings.
The changes in stockholders' equity were also due to an increase in the
unrealized gain on securities available for sale by $17,000 to $371,000 at
September 30, 1998 from $355,000 at December 31, 1997. The unearned shares from
the Employee Stock Ownership Plan (the "ESOP") decreased by $149,000 to
$1,061,000 at September 30, 1998 from $1,210,000 at December 31, 1997, due to
the release of shares by the ESOP to employees of the Bank.
The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum
tangible, leverage (core) and risk-based capital requirements. As of September
30, 1998, the Bank exceeded all of its regulatory capital requirements. The
Bank's required, actual and excess capital levels as of September 30, 1998 are
as follows:
<TABLE>
<CAPTION>
Amount Percentage of Assets
-------- ---------------------
(dollars in thousands)
<S> <C> <C>
Tangible capital:
Capital level $38,036 11.68%
Less Requirement 4,886 1.50%
------- -----
Excess $33,150 10.18%
======= =====
Core capital:
Capital level $38,036 11.68%
Less Requirement 13,028 4.00%
------- -----
Excess $25,008 7.68%
======= =====
Risk-based capital:
Capital level $40,309 23.59%
Less Requirement 13,668 8.00%
------- -----
Excess $26,641 15.59%
======= =====
</TABLE>
LIQUIDITY
The Company's primary sources of funds are cash provided by operating activities
(including principal and interest payment on loans), certain financing
activities (including increases in deposits and proceeds from borrowings) and
certain investing activities (including maturities and calls of securities and
other investments). During the first nine months of 1998 and 1997, principal
payments and repayments on loans totalled $53.3 million and $26.4 million,
respectively. The increase in loan payments and repayments is due to the current
interest rate environment and the Acquisition of Valley Financial. The net
increases in deposits during the first nine months of 1998 and 1997 totalled
-10-
<PAGE>
$5.3 million and $9.5 million, respectively. The proceeds from borrowed funds
during the first nine months of 1998 and 1997 totalled $14.8 million and $16.3
million, respectively. During the first nine months of 1998 and 1997, the
proceeds from the maturities, calls and sales of securities totalled $23.9
million and $7.4 million, respectively. The increase in proceeds from securities
is due in part to the Acquisition of Valley Financial and the calls of certain
investments due to the current interest rate environment. Cash provided from
operating activities during the first nine months of 1998 and 1997 totalled $4.6
million and $3.2 million, respectively, of which $3.3 million and $2.8 million,
respectively, represented net income of the Company. The Company's primary use
of funds is cash used to originate and purchase loans, repayment of borrowed
funds and other financing activities. During the first nine months of 1998 and
1997, the Company's gross purchases and origination of loans totalled $66.1
million and $42.8 million, respectively. The increase in purchase and
origination of loans is due to the current interest rate environment and the
Acquisition of Valley Financial. The repayment of borrowed funds during the
first nine months of 1998 and 1997 totalled $6.3 million and $13.0 million,
respectively. For additional information about cash flows from the Company's
operating, financing and investing activities, see "Statements of Cash Flows in
the Condensed Consolidated Financial Statements."
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) in each calendar
quarter of not less than four percent of either (1) the liquidity base at the
end of the preceding quarter, or (2) the average daily balance of the liquidity
base during the preceding quarter equal to a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10%, depending upon economic conditions and the savings flows
of member institutions, and is currently 4.0%. Monetary penalties may be
imposed for failure to meet these liquidity requirements. At September 30,
1998, the Bank's liquidity position was $37.5 million, or 14.65%, of liquid
assets, compared to $14.0 million, or 9.28%, at December 31, 1997. The increase
in the Bank's liquidity position was due primarily to the Acquisition of Valley
Financial on the close of business as of January 30, 1998.
Stockholders' equity totaled $49.7 million at September 30, 1998 compared to
$50.4 million at December 31, 1997, reflecting the Company's earnings for the
quarter, stock repurchases, the amortization of the unallocated portion of
shares held by the ESOP, dividends declared on common stock and the change in
the net unrealized gains on securities, net of taxes.
On July 6, 1998, the Company paid a quarterly cash dividend equal to $0.08 per
share on common stock outstanding as of the close of business on June 16, 1998,
aggregating $253,000. On August 28, 1998, the Company declared a quarterly cash
dividend of $0.08 per share payable on October 5, 1998 to shareholders of record
as of the close of business on September 15, 1998, aggregating $248,000.
RESULTS OF OPERATIONS
The pro forma statements of income for the three and nine months ended September
30, 1998 and 1997 were used for comparison purposes in order to more clearly
present the changes in the results of operations.
Interest Income. Interest income decreased by $41,000 to $6.045 million for the
three months ended September 30, 1998 compared to $6.086 million for the three
months ended September 30, 1997. The decrease in interest income was primarily
due to a decrease in the average yield on interest earning assets from 7.74% for
the three months ended September 30, 1997 to 7.66% for the three months ended
September 30, 1998. The average yields on interest bearing assets declined due
to a general decrease in the market interest rates. The impact of the decrease
in average yields was offset in part by an increase in the average balance of
interest bearing assets. The average balance of interest bearing assets
increased $1.3 million (primarily first mortgage and consumer loans) to $315.3
million for the three months ended September 30, 1998 from $314.0 million for
the comparable 1997 period. The increase in the average balance of loans
generally reflects an increase over the past twelve months in originations of
first and second mortgage loans and purchases of first mortgage loans secured
primarily by multi-family residences, which were offset, in part, by payments
and prepayments on such loans. See "Financial Condition." The impact of the
increase in the average balances of loans was offset in part by a decrease in
the average balance of securities available for sale. The decrease in the
average balance of securities available for sale was due to sales, calls and
maturities, which were offset, in part, by purchases of lower yielding available
for sale securities.
-11-
<PAGE>
RESULTS OF OPERATIONS (Continued)
Interest income increased by $429,000 to $18.2 million for the nine months ended
September 30, 1998 compared to $17.8 million for the nine months ended September
30, 1997. The increase in interest income was primarily due to a $8.6 million
increase in the average balance of interest earning assets (primarily first
mortgage and consumer loans) to $315.3 million for the nine months ended
September 30, 1998 from $306.7 million for the comparable 1997 period. The
increase in the average balance of loans generally reflects an increase over the
past twelve months in originations of first and second mortgage loans and
purchases of first mortgage loans secured by multi-family residences, which were
offset, in part, by payments and prepayments on such loans. See "Financial
Condition." The impact of the increase in the average balances of loans was
offset in part by a decrease in the average yield on interest earning assets and
a decrease in the average balance of securities available for sale. The average
yield on interest earning assets decreased to 7.69% for the nine months ended
September 30, 1998 from 7.72% for the nine months ended September 30, 1997,
primarily due to a general decrease in market interest rates. The decrease in
the average balance of securities available for sale was due to sale, calls and
maturities, which were offset, in part, by purchases.
Interest Expense. Interest expense decreased by $97,000 to $3.3 million for the
three months ended September 30, 1998 compared to $3.4 million for the three
months ended September 30, 1997. The decrease in interest expense was primarily
due to a $2.9 million decrease in the average balance of borrowed funds and a
decline in the average cost of borrowed funds to 5.68% for the three months
ended September 30, 1998 from 5.95% for the three months ended September 30,
1997. The decrease in the average balance of borrowed funds was due to the
repayment of short term advances with excess cash available from the Acquisition
of Valley Financial. The decrease in the average cost of borrowed funds is
primarily due to a general decrease in market interest rates. The impact of
these decreases were offset in part by increases in the average balances of NOW,
money market and certificate of deposit accounts. The increase in such deposit
accounts are due to marketing of the Company's checking accounts, offering
competitive rates on the certificate of deposit and money market accounts and a
NOW account opened for a certain governmental entity. The average cost of
interest bearing liabilities decreased from 4.91% for the three months ended
September 30, 1997 to 4.83% for the three months ended September 30, 1998.
Interest expense increased by $104,000 to $9.9 million for the nine months ended
September 30, 1998 compared to $9.8 million for the nine months ended September
30, 1997. The increase in interest expense was primarily due to a $5.5 million
increase in the average balance of interest bearing deposits (primarily NOW
accounts, money market accounts and certificates of deposit), partially offset
by a decrease in borrowed funds, to $273.0 million for the nine months ended
September 30, 1998 from $267.5 million for the comparable 1997 period. The
increase in such deposit accounts are due to marketing of the Company's
checking accounts, offering competitive rates on the certificate of deposit and
money market accounts and a $4.4 million money market account opened for a
certain governmental entity. The decrease in borrowed funds was due to the
repayment of short term advances with excess cash available from the Acquisition
of Valley Financial. The impact of the increase in the average balances of NOW
accounts, money market accounts and certificates of deposit was offset in part
by a decrease in the average cost of interest bearing liabilities. The decrease
in the average cost of interest bearing liabilities is primarily due to a
general decrease in market interest rates. The average cost of interest bearing
liabilities decreased from 4.90% for the nine months ended September 30, 1997 to
4.86% for the nine months ended September 30, 1998.
Net Interest Income. Net interest income before the provision for loan losses
increased by $56,000 to $2.727 million for the three months ended September 30,
1998 from $2.671 million for the three months ended September 30, 1997. The
increase is primarily due to the increase in the excess of average interest
earning assets over the average interest bearing liabilities. The interest rate
spread (i.e., the difference in the average yield on assets and average cost of
liabilities) remained the same at 2.83% for the three months ended September
30, 1998 and 1997.
Net interest income before the provision for loan losses increased by $325,000
to $8.3 million for the nine months ended September 30, 1998 from $7.9 million
for the nine months ended September 30, 1997. The increase is primarily due to
the increase in the excess of average interest earning assets over the average
interest bearing liabilities and an increase in the interest rate spread. The
interest rate spread (i.e., the difference in the average yield on assets and
average cost of liabilities) increased slightly from 2.82% for the nine months
ended September 30, 1997 to 2.83% for the nine months ended September 30, 1998.
The following table sets forth certain information relating to the Company's pro
forma average balance sheets and reflects the pro forma average yield on assets
and pro forma average cost of liabilities for the three and nine month periods
ended September 30, 1998 and 1997.
-12-
<PAGE>
RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
For Three Months Ended September 30,
------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ----------- --------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans..................................... $255,838 $ 5,212 8.15% $239,737 $ 4,978 8.31%
Securities available for sale............. 52,730 755 5.68 67,202 1,013 5.98
Interest bearing cash..................... 6,716 78 4.58 7,066 95 5.32
-------- ------- ------ -------- ------- ------
Total interest-earning assets........... 315,284 $ 6,045 7.66% 314,005 $ 6,086 7.74%
------- ------ ------- ------
Noninterest-earning assets.................. 17,624 18,403
-------- --------
Total assets............................ $332,908 $332,408
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings.............. $ 46,001 $ 360 3.10% $ 44,778 $ 361 3.20%
Passbook savings.......................... 26,474 156 2.33 26,488 164 2.45
Certificates of deposit................... 166,180 2,315 5.53 164,196 2,287 5.52
Borrowed funds............................ 33,588 487 5.68 39,668 603 5.95
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities.......... 272,243 $ 3,318 4.83% 275,130 $ 3,415 4.91%
------- ------ ------- ------
Noninterest-bearing liabilities............. 11,151 8,414
-------- --------
Total liabilities....................... 283,394 283,544
Equity...................................... 49,514 48,864
-------- --------
Total liabilities and equity............ $332,908 $332,408
======== ========
Net interest income............................ $ 2,727 $ 2,671
======= =======
Net interest rate spread....................... 2.83% 2.83%
====== ======
Net interest margin............................ 3.46% 3.40%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 115.81% 114.13%
====== ======
For Nine Months Ended September 30,
------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- -------- ----------- --------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans..................................... $252,713 $15,523 8.19% $235,741 $14,622 8.27%
Securities available for sale............. 55,184 2,391 5.79 65,995 2,937 5.95
Interest bearing cash..................... 7,399 268 4.84 4,968 195 5.23
-------- ------- ------ -------- ------- ------
Total interest-earning assets........... 315,296 $18,182 7.69% 306,704 $17,754 7.72%
------- ------ ------- ------
Noninterest-earning assets.................. 17,444 18,371
-------- --------
Total assets............................ $332,740 $325,075
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings.............. $ 47,012 $ 1,088 3.12% $ 41,523 $ 964 3.11%
Passbook savings.......................... 26,412 466 2.36 26,552 488 2.46
Certificates of deposit................... 164,489 6,865 5.56 161,200 6,673 5.53
Borrowed funds............................ 35,048 1,512 5.77 38,230 1,703 5.87
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities.......... 272,961 $ 9,931 4.86% 267,505 $ 9,828 4.90%
------- ------ ------- ------
Noninterest-bearing liabilities............. 9,343 8,442
-------- --------
Total liabilities....................... 282,304 275,947
Equity...................................... 50,436 49,128
-------- --------
Total liabilities and equity............ $332,740 $325,075
======== ========
Net interest income............................ $ 8,251 $ 7,926
======= =======
Net interest rate spread....................... 2.83% 2.82%
====== ======
Net interest margin............................ 3.49% 3.45%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 115.51% 114.65%
====== ======
</TABLE>
-13-
<PAGE>
RESULTS OF OPERATIONS (Continued)
Provision for Loan Losses. The Company's provision for loan losses was $60,000
for the three months ended September 30, 1998 and 1997. The Company's provision
for loan losses was $180,000 for the nine months ended September 30, 1998 and
$80,000 for the nine months ended September 30, 1997. 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 Bank's portfolio, which includes a significant amount of multifamily and
commercial real estate loans, substantially all of which are purchased and are
collateralized by properties located outside of the Bank's market area, and
other factors related to the collectibility of the Bank's loan portfolio. The
net charge offs were $13,000 for the nine months ended September 30, 1998 as
compared to net charge offs of $75,000 for the nine months ended September 30,
1997. The resulting allowance for loan losses was $2.7 million at September 30,
1998 as compared to $2.5 million at December 31, 1997 and $2.5 million at
September 30, 1997. The level of nonperforming loans increased to $542,000 at
September 30, 1998 from $296,000 at December 31, 1997 and from $319,000 at
September 30, 1997. 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 $216,000 to $1.0
million for the three months ended September 30, 1998 from $814,000 for the
three months ended September 30, 1997. The increase is due to increases in fees
and service charges, abstract fees and other income. Abstract fees increased
$75,000 due to increased sales volume, which is in part attributable to an
improved housing market and the current level of interest rates. Other fees and
service charges increased $35,000, primarily due to increases in overdraft fees
and loan prepayment fees. Other income increased $118,000, primarily due to
increases in insurance sales, income from the sale of loans and rental income
from the Bank's investment in the Northridge Apartments Limited Partnership,
which owns and operates a 44-unit apartment complex in Fort Dodge, Iowa, offset
by decreases in annuity sales. Noninterest income for the three months ended
September 30, 1998 reflects losses on sales of securities available for sale of
$(3,000), while the three months ended September 30, 1997 reflects gains on
sales of securities available for sale of $9,000.
Total noninterest income increased by $568,000 to $2.8 million for the nine
months ended September 30, 1998 from $2.3 million for the nine months ended
September 30, 1997. The increase is due to increases in all categories of
noninterest income. Abstract fees increased $275,000 due to increased sales
volume, which is in part attributable to an improved housing market and the
current level of interest rates. Other fees and service charges increased
$104,000, primarily due to increases in overdraft fees and loan prepayment fees.
Other income increased $148,000, primarily due to increases in insurance sales
and rental income from the Bank's investment in the Northridge Apartments
Limited Partnership, which owns and operates a 44-unit apartment complex in Fort
Dodge, Iowa, offset by decreases in annuity sales. Noninterest income for the
nine months ended September 30, 1998 reflects gains on sales of securities
available for sale of $51,000, while the nine months ended September 30, 1997
reflects gains on sales of securities available for sale of $9,000.
Noninterest Expense. Total noninterest expense increased by $179,000 to $2.0
million for the three months ended September 30, 1998 from $1.8 million for the
three months ended September 30, 1997. The increase is primarily due to
increases in premisses and equipment and data processing. The increases in
premises and equipment and data processing expenses were due to one time costs
incurred as a result of the data processing conversion of Valley Savings and
normal cost increases. The Company's efficiency ratio for the three months ended
September 30, 1998 and 1997 were 53.32% and 52.73%, respectively. The Company's
ratio of noninterest expense to average assets for the three moths ended
September 30, 1998 and 1997 were 2.39% and 2.21%, respectively.
Total noninterest expense increased by $510,000 to $5.9 million for the nine
months ended September 30, 1998 from $5.4 million for the nine months ended
September 30, 1997. The increase is primarily due to increases in salaries and
employee benefits, premises and equipment and data processing. The increase in
salaries and benefits was primarily a result of the increased costs associated
with the ESOP, normal salary increases, increased number of employees and one
time costs associated with the acquisition of Valley Financial. The increase in
premises and
-14-
<PAGE>
RESULTS OF OPERATIONS (Continued)
equipment and data processing expenses were due to one time costs incurred as a
result of the data processing conversion of Valley Savings and normal cost
increases. The Company's efficiency ratio for the nine months ended September
30, 1998 and 1997 were 53.39% and 53.06%, respectively. The Company's ratio of
noninterest expense to average assets for the nine months ended September 30,
1998 and 1997 were 2.37% and 2.22%, respectively.
Income Taxes. Income taxes increased by $24,000 to $606,000 for the three months
ended September 30, 1998 as compared to $582,000 for the three months ended
September 30, 1997. The increase was primarily due to an increase in pre-tax
earnings during the 1998 period as compared to the corresponding 1997 period.
Income taxes increased by $126,000 to $1.8 million for the nine months ended
September 30, 1998 as compared to $1.7 million for the nine months ended
September 30, 1997. The increase was primarily due to an increase in pre-tax
earnings during the 1998 period as compared to the corresponding 1997 period.
Net Income. Net income totaled $1.1 million for the three months ended September
30, 1998, compared to $1.0 million for the same period in 1997.
Net income totaled $3.2 million for the nine months ended September 30, 1998,
compared to $3.0 million for the same period in 1997.
Year 2000 Compliance. The Year 2000 "Y2K" issue is a serious operational problem
that is widespread and complex, affecting all industries. The problem consists
essentially of the risk that programming code in existing computer systems will
fail to properly recognize the new millennium when it occurs in the Year 2000.
Many computer programs and related hard-printed memory circuits were developed
with six-digit date fields. These programs and memory circuits were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. Because banks rely heavily on their computer
systems, the Federal Financial Institutions Examination council ("FFIEC") has
placed significant emphasis on the problems surrounding the year 2000 issues and
has required financial institutions to document the assessment, testing and
corrections made to ready their computer systems and programs for the year 2000
date change. The FFIEC and the OTS have strict regulations, guidelines and
milestones in place that each FDIC insured financial institution must follow in
order to remain operational. The Company's board of directors has remained
informed of the Company's position and progress in its year 2000 project.
In addition, noninformation technology systems, such as equipment like
telephones, copies and elevators may also contain embedded technology which
controls its operation and which may be effected by the Y2K problem. When the
Year 2000 arrives, systems, including some of those with embedded chips, may not
work properly because of the way they store date information. They may not be
able to deal with the date 01/01/00, and may not be able to deal with
operational 'cycles' such as 'do X every 100 days'. Thus, even noninformation
technology systems may affect the normal operations of the Company upon arrival
of the Year 2000.
In order to address the Y2K issue and to minimize its potential adverse impact,
management has begun a process to identify areas that will be affected by the
Y2K Problem, assess its potential impact on the operations of the Company,
monitor the progress of FIserv, Inc. of Milwaukee ("FIserv") and other third
party software vendors in addressing the matter, test changes provided by these
vendors, and develop contingency plans for all critical systems. An internal
committee of the Company, comprised of three officers, has been formed to
address the potential risks that Y2K poses for the Company. The Company's Y2K
committee has completed the awareness, inventory and assessment phases of Y2K.
The testing of the Company's internal computer system and software should be
completed by the end of the first quarter of 1999. The Company's most critical
exposure to Y2K system problems is with its data processing provider, FIserv.
FIserv plans to have all its systems Y2K compliant by December, 1998. During the
fourth quarter of 1998 and the first quarter of 1999, the Company intends to
complete the testing phase of Y2K. Management anticipates that the enhancements
necessary to prepare it's mission critical systems for the Y2K will be completed
during the second quarter of 1999. Although the effort to prepare for Y2K is
intended to address all Y2K issues, the Company's has developed a contingency
plan to address potential Y2K issues that arise from noncompliance.
-15-
<PAGE>
The Company anticipates that it has and will incur internal staff costs,
consulting costs, data processing costs, additional purchase of equipment and
other expenses related to the enhancements necessary to prepare its systems for
Y2K. The Company has replaced some equipment, software and incurred consulting
fees at a cost of approximately $40,000. Management anticipates the additional
costs associated with Year 2000 compliance will not exceed $100,000.
In addition to expenses related to its own computer systems, the Company is
aware of potential Y2K risks to third parties, including suppliers and creditors
(and to the extent appropriate, depositors and borrowers) and the possible
adverse impact on the Company resulting from failures by these parties to
adequately address the Y2K problem. The Company could incur losses if loan
payments are delayed due to Y2K problems affecting large employers in the
Company's market area. No assurances can be given by the Company as to the
adequacy of such plans or to the timeliness of their implementation.
The costs of the project and the date on which the Company plans to complete the
Y2K modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate all Y2K affected areas and
similar uncertainties. The Company has developed a contingency plan which would
be implemented in the unlikely event that the Company is not Y2K compliant.
FIserv has responded to the Company that renovation of its program is virtually
complete. The Company is scheduled to test the FIserv program with the Company's
applications in November, 1998. All transactions are to be tested using the
Company's data and procedures and any additional corrections are to be made on
or before December 31, 1998. FIserv has reported that the progress of the update
is on schedule. In the event that FIserv is unable to make the necessary
corrections to its programs to accommodate the Year 2000, the Company will
convert its data to one of the other FIserv programs that is able to operate in
the 2000 environment.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In management's opinion, there has not been a material change in market risk
from December 31, 1997 as reported in Item 7A of the Form 10-K.
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial data schedule. (Only submitted with filing in electronic
format.)
Exhibit 99.1 Press Release, dated August 6, 1998 (regarding the completion of a
stock repurchase program).
Exhibit 99.2 Press Release, dated August 31, 1998 (regarding the declaration of
a dividend).
Exhibit 99.3 Press Release, dated October 20, 1998 (regarding the issuance of
limited financial information for the three and nine months ended September 30,
1998).
(b) Reports of Form 8-K
None
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
NORTH CENTRAL BANCSHARES, INC.
DATE: November 13, 1998 BY: /s/ David M. Bradley
David M. Bradley, CPA
Chairman, President and
Chief Executive Officer
DATE: November 13, 1998 BY: /s/ John L. Pierschbacher
John L. Pierschbacher, CPA
Principal Financial Officer
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> This schedule contains summary financial information extracted from
the Balance Sheet/Income Statement and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,712,024
<INT-BEARING-DEPOSITS> 4,817,693
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,234,184
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 258,576,406
<ALLOWANCE> 2,661,210
<TOTAL-ASSETS> 334,718,424
<DEPOSITS> 245,659,068
<SHORT-TERM> 14,250,000
<LIABILITIES-OTHER> 2,236,078
<LONG-TERM> 22,837,759
<COMMON> 40,111
0
0
<OTHER-SE> 49,695,408
<TOTAL-LIABILITIES-AND-EQUITY> 334,718,424
<INTEREST-LOAN> 15,118,419
<INTEREST-INVEST> 2,441,673
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,560,092
<INTEREST-DEPOSIT> 8,044,700
<INTEREST-EXPENSE> 9,481,407
<INTEREST-INCOME-NET> 8,078,685
<LOAN-LOSSES> 180,000
<SECURITIES-GAINS> 51,362
<EXPENSE-OTHER> 5,516,834
<INCOME-PRETAX> 5,171,857
<INCOME-PRE-EXTRAORDINARY> 5,171,857
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,296,010
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 7.69
<LOANS-NON> 541,663
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,150,588
<CHARGE-OFFS> 13,651
<RECOVERIES> 855
<ALLOWANCE-CLOSE> 2,661,210
<ALLOWANCE-DOMESTIC> 2,661,210
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
Exhibit 99.1 Press Release
PRESS RELEASE
August 6, 1998
For further information contact:
David M. Bradley
President and Chief Executive Officer
North Central Bancshares, Inc.
825 Central Avenue
Fort Dodge, Iowa 50501
515-576-7531
NORTH CENTRAL BANCSHARES, INC. COMPLETES STOCK REPURCHASE
Fort Dodge, Iowa August 6, 1998 - North Central Bancshares, Inc. (Nasdaq:
"FFFD") announced that it has completed its fourth stock repurchase program on
August 5, 1998. The Company said it repurchased 163,324 shares of its
outstanding common stock, par value $.01 per share, at the aggregate cost of
$3,584,419, in open market transactions. The repurchase program began on March
11, 1998. Upon settlement of the last transaction on or about August 9, 1998,
there will be 3,103,159 shares of North Central Bancshares, Inc. common stock
outstanding.
North Central Bancshares, Inc., with over $330 million in assets, is the holding
company for First Federal Savings Bank of Iowa, a federally chartered stock
savings bank. First Federal is a community-oriented institution serving Iowa
through 7 full service locations in Fort Dodge, Nevada, Ames, Burlington and Mt.
Pleasant, Iowa. First Federal's deposits are insured by the Federal Deposit
Insurance Corporation.
<PAGE>
Exhibit 99.2 Press Release
PRESS RELEASE
August 31, 1998 For further information contact:
David M. Bradley
Chairman, President & Chief Executive Officer
North Central Bancshares, Inc.
825 Central Avenue
Fort Dodge, Iowa 50501
515-576-7531
NORTH CENTRAL BANCSHARES, INC. DECLARES DIVIDEND
David M. Bradley, Chairman, President and Chief Executive Officer of North
Central Bancshares, Inc. (the "Company") announced on August 28, 1998 that the
Company declared a regular quarterly cash dividend of $0.08 per share on the
Company's common stock for the fiscal quarter ended September 30, 1998. The
dividend will be payable to all stockholders of record as of September 15, 1998
and will be paid on October 5, 1998.
The Company's common stock trades on the Nasdaq Stock Market under the symbol
"FFFD". The Company's wholly owned subsidiary, First Federal Savings Bank of
Iowa, is a federally chartered savings bank headquartered in Fort Dodge, Iowa.
<PAGE>
Exhibit 99.3 Press Release
PRESS RELEASE
October 20, 1998 For further information contact:
David M. Bradley
Chairman, President and Chief Executive Officer
North Central Bancshares, Inc.
825 Central Avenue PO Box 1237
Fort Dodge, Iowa 50501
515-576-7531
NORTH CENTRAL BANCSHARES, INC.
ANNOUNCES THIRD QUARTER 1998 EARNINGS
(Nasdaq: FFFD)
Fort Dodge, Iowa -- North Central Bancshares, Inc., (the "Company") the holding
company for First Federal Savings Bank of Iowa (the "Bank"), announced today
that the Company earned $1,074,000, or diluted earnings per share of $0.35, for
the third quarter of 1998, compared to $973,000, or diluted earnings per share
of $0.31, during the third quarter of 1997. For the nine months ended September
30, 1998, the Company's net earnings were $3,296,000, or diluted earnings per
share of $1.04, as compared to $2,822,000, or diluted earnings per share of
$0.87, for the corresponding period a year ago.
As of the close of business on January 30, 1998, the Bank completed the
acquisition of Valley Financial Corp. pursuant to an Agreement and Plan of
Merger, dated as of September 18, 1997. The acquisition resulted in the merger
of Valley Financial's wholly owned subsidiary, Valley Savings Bank, FSB, with
and into the Bank, with the Bank as the resulting financial institution. Valley
Savings, headquartered in Burlington, Iowa, was a federally-charted stock
savings bank with three branch offices located in southeastern Iowa, with assets
of approximately $110 million. The former offices of Valley Savings are being
operated as a division of the Bank.
The acquisition was accounted for as a purchase transaction and therefore, the
operating results of the former offices of Valley Savings Bank are included in
the 1998 operating results of the Company only from the date of acquisition
through September 30, 1998. The operating results for the period ended
September 30, 1997 and the Company's balance sheet as of December 31, 1997 have
not been restated to include any Valley Savings Bank assets, liabilities or
operations. Therefore, the comparison between periods is significantly impacted
by this acquisition. Total assets at September 30, 1998 were $334.7 million as
compared to $222.0 million at December 31, 1997.
Nonperforming assets were 0.19% of total assets as of September 30, 1998
compared to 0.10% of total assets as of December 31, 1997. The allowance for
loan losses was $2.7 million, or 1.01% of total loans at September 30, 1998,
compared to $2.2 million, or 1.10% of total loans, at December 31, 1997.
The pro forma net interest spread for the quarter ended September 30, 1998 of
2.84% was only slightly changed from 2.83% for the quarter ended September 30,
1997. The pro forma net interest margin for the quarter ended September 30,
1998 of 3.46% was only slightly changed from 3.40% for the quarter ended
September 30, 1997. Pro forma net interest income for the quarter ended
September 30, 1998 was $2.7 million, compared to $2.7 million for the
corresponding quarter last year.
...MORE...
<PAGE>
The Company's provision for loan losses was $60,000 for the quarters ended
September 30, 1998 and 1997. The Company establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed to be appropriate based upon an assessment of
prior conditions, the volume and type of loans in the Company's portfolio, and
other factors related to the collectibility of the Company's loan portfolio.
Stockholders' equity was $49.7 million at September 30, 1998, as compared to
$50.4 million at December 31, 1997. Book value, or stockholders' equity, per
share at September 30, 1998 was $16.02, as compared to $15.43 at December 31,
1997. The ratio of stockholders' equity to total assets was 14.9% at September
30, 1998, as compared to a pro forma ratio of stockholders' equity of 15.1% at
December 31, 1997.
North Central Bancshares, Inc. serves north central and southeastern Iowa at 7
full service locations in Fort Dodge, Nevada, Ames, Burlington and Mount
Pleasant, Iowa through its wholly-owned subsidiary, First Federal Savings Bank
of Iowa, headquartered in Fort Dodge, Iowa. The Bank's deposits are insured by
the Federal Deposit Insurance Corporation. The Company's stock is traded on The
Nasdaq National Market under the symbol "FFFD".
For more information contact: David M. Bradley, President, 515-576-7531
<PAGE>
FINANCIAL HIGHLIGHTS OF NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
Actual Actual Pro Forma*
(Dollars in Thousands, except per share and share data) September 30, 1998 December 31, 1997 December 31, 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 6,530 $ 3,445 $ 8,517
Securities available for sale 51,234 19,816 58,892
Loans (net of allowance of loan loss of $2.7
million, $2.2 million and $2.5 million,
respectively) $ 258,576 191,249 250,701
Goodwill 6,506 196 6,735
Other assets 11,872 7,248 9,304
---------- ---------- ----------
Total Assets $ 334,718 $ 221,954 $ 334,149
========== ========== ==========
Liabilities
Deposits $ 245,659 $ 141,124 $ 240,635
Other borrowed funds 37,088 28,550 39,859
Other liabilities 2,236 1,863 3,238
---------- ---------- ----------
Total Liabilities 284,983 171,537 283,732
Stockholders' Equity $ 49,735 $ 50,417 $ 50,417
---------- ---------- ----------
Total Liabilities and Stockholders' Equity $ 334,718 $ 221,954 $ 334,149
========== ========== ==========
Stockholders' equity to total assets 14.86% 22.72% 15.09%
========== ========== ==========
Book value per share $ 16.02 $ 15.43 $ 15.43
========== ========== ==========
Total shares outstanding 3,104,159 3,266,483 3,266,483
========== ========== ==========
</TABLE>
* See explanatory note on following page.
Condensed Consolidated Statements of Income
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Interest income $6,045 $4,100 $17,560 $11,936
Interest expense 3,318 2,026 9,481 5,776
------ ------ ------- -------
Net interest income 2,727 2,074 8,079 6,160
Provision for loan loss 60 60 180 180
------ ------ ------- -------
Net interest income after provision for loan loss 2,667 2,014 7,899 5,980
Noninterest income 1,004 593 2,739 1,676
Gain (loss) on the sale of securities available for sale (3) -- 51 --
Noninterest expense 1,988 1,111 5,517 3,339
------ ------ ------- -------
Income before income taxes 1,680 1,496 5,172 4,317
Income taxes 606 523 1,876 1,495
------ ------ ------- -------
Net income $1,074 $ 973 $ 3,296 $ 2,822
====== ====== ======= =======
Basic earnings per share $ 0.36 $ 0.31 $ 1.07 $ 0.88
====== ====== ======= =======
Diluted earnings per share $ 0.35 $ 0.31 $ 1.04 $ 0.87
====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Performance ratios: Actual
Net interest spread 2.84% 2.85% 2.84% 2.87%
Net interest margin 3.46% 4.01% 3.54% 4.07%
Return on average assets 1.29% 1.82% 1.37% 1.81%
Return on average equity 8.68% 7.97% 8.71% 7.66%
Efficiency ratio (noninterest expense divided by the
sum of net interest income before provision for
loan losses plus noninterest income) 53.32% 41.65% 50.76% 42.62%
</TABLE>
<PAGE>
Pro Forma Condensed Consolidated Statements of Income*
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Interest income $6,045 $6,086 $18,182 $17,753
Interest expense 3,318 3,415 9,931 9,827
------ ------ ------- -------
Net interest income 2,727 2,671 8,251 7,926
Provision for loan loss 60 60 180 80
------ ------ ------- -------
Net interest income after provision for loan loss 2,667 2,611 8,071 7,846
Noninterest income 1,004 805 2,792 2,267
Gain (loss) on the sale of securities available for sale (3) 9 51 9
Noninterest expense 1,988 1,838 5,923 5,413
------ ------ ------- -------
Income before income taxes 1,680 1,587 4,991 4,709
Income taxes 606 582 1,834 1,709
------ ------ ------- -------
Net income $1,074 $1,005 $ 3,157 $ 3,000
====== ====== ======= =======
</TABLE>
*See explanatory note below.
Selected Financial Ratios
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
Performance ratios: Pro Forma*
Net interest spread 2.84% 2.83% 2.83% 2.82%
Net interest margin 3.46% 3.40% 3.49% 3.45%
Return on average assets 1.29% 1.21% 1.26% 1.29%
Return on average equity 8.68% 8.22% 8.34% 8.57%
Efficiency ratio (noninterest expense divided by the
sum of net interest income before provision for
loan losses plus noninterest income) 53.32% 52.73% 53.39% 53.06%
</TABLE>
*See explanatory note below.
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998 December 31, 1997
------------------- ------------- -----------------
<S> <C> <C> <C>
Asset Quality Ratios:
Nonaccrual loans to total net loans 0.21% 0.10% 0.08%
Nonperforming assets to total assets 0.19% 0.14% 0.10%
Allowance for loan losses as a percent
of total loans receivable 1.01% 1.02% 1.10%
</TABLE>
*Pro Forma Consolidated Condensed Financial Statements (Unaudited)
The above unaudited pro forma consolidated financial statements presented are
based on the historical financial statements of the Company and Valley
Financial. The unaudited pro forma consolidated statements of income for the
three and nine months ended September 30, 1998 and 1997 were prepared as if the
Acquisition had occurred as of the beginning of the respective periods for
purposes of the combined consolidated statements of income and as if such an
Acquisition had occurred at December 31, 1997 for purposes of the combined
consolidated statement of financial condition.
The pro forma financial statements are not necessarily indicative of the results
of operations that might have occurred had the Acquisition taken place at the
beginning of the period, or to project the Company' results of operations at any
future date or for any future period.
