<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
January 30, 1998
NORTH CENTRAL BANCSHARES, INC.
(Exact name of Registrant as specified in its Charter)
IOWA 0-27672 42-1449849
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification Number)
FIRST FEDERAL SAVINGS BANK OF IOWA
825 CENTRAL AVENUE, FORT DODGE, IOWA 50501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 515-576-7531
N/A
- -----------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
As of the close of business on January 30, 1998 (the "Effective Time"),
North Central Bancshares, Inc., an Iowa corporation ("North Central"), and its
wholly owned subsidiary, First Federal Savings Bank of Iowa (formerly known as
First Federal Savings Bank of Fort Dodge), a federally chartered stock savings
bank ("First Federal"), completed the acquisition (the "Acquisition") of Valley
Financial Corp., an Iowa corporation ("Valley Financial") pursuant to the
Agreement and Plan of Merger, dated as of September 18, 1997, by and among North
Central, First Federal and Valley Financial (the "Merger Agreement"). This form
8-K/A includes as Exhibits certain financial information required under Item 7
which was not contained in the previously filed Form 8-K dated January 30, 1998.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Financial statements for Valley Financial Corp. as of and for the
years ended December 31, 1996 and 1995, are attached hereto as
Exhibit 99.1 are incorporated herein by reference.
Unaudited Statement of Financial Condition for Valley Financial
Corp. as of September 30, 1997. Unaudited Statements of Income and
Cash Flows for Valley Financial Corp. for the nine months ended
September 30, 1997 and 1996.
(b) UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Unaudited pro forma combined financial information consisting of:
Unaudited Pro Forma Combined Consolidated Balance Sheet as of
September 30, 1997 and related notes are herein attached as exhibit
99.2
Unaudited Pro Forma Combined Consolidated Statements of Income for
the nine months ended September 30, 1997 and the Unaudited Pro
Forma Combined Consolidated Statements of Income for the year ended
December 31, 1996 and the related notes to the above mentioned
Statements of Income are herein attached at exhibit 99.2
(c) EXHIBITS
2.1 Agreement and Plan of Merger, dated as of September 18,
1997, by and among North Central Bancshares, Inc., First
Federal Savings Bank of Fort Dodge and Valley Financial
Corp. (incorporated by reference from the Current Report on
Form 8-K filed by the registrant on September 26, 1997.
23.1 Consent of Marti, Lynch & Company dated March 27, 1998.
99.1 Financial statements for Valley Financial Corp. as of and
for the years ended December 31, 1996 and 1995. Valley
Financial Corp. Unaudited Statement of Financial Condition
as of September 30, 1997 and Unaudited Statements of Income
and Cash Flows for the nine months ended September 30, 1997
and 1996.
99.2 North Central Bancshares, Inc. and Valley Financial Corp.
Unaudited Pro Forma Combined Consolidated Balance Sheet as
of September 30, 1997 and Unaudited Pro Forma Combined
Consolidated Statements of Income for the year ended
December 31, 1996.
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSED OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
This Current Report and other written and oral statements made by or on
behalf of North Central contain, or may contain, certain "forward-looking
statements," including statements concerning plans, objectives and future events
or performance, and other statements which are other than statements of
historical fact. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, but are not
limited to, the following: (i) failure to fully realize or to realize within the
expected time frame expected cost savings from the Merger; (ii) lower than
expected income or revenues following the Merger, or higher than expected
operating costs; (iii) a significant increase in competitive pressure in the
banking and financial services industry; (iv) business disruption related to the
Merger; (v) greater than expected costs or difficulties related to the
integration of the Valley Financial employees into North Central; (vi)
litigation costs and delays caused by litigation; (vii) unanticipated regulatory
constraints arising from the Merger; (viii) reduction in interest margins due to
changes in the interest rate environment; (ix) poorer than expected general
economic conditions, including acquisition and growth opportunities, in the
states which North Central does business; (x) legislation or regulatory changes
which adversely affect the businesses in which North Central is engaged; and
(xi) other unanticipated occurrences which increase the costs related to the
Merger or decrease the expected financial benefits of the Merger.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH CENTRAL BANCSHARES, INC.
Date: March 27, 1998 By: /s/ David M. Bradley
------------------- -------------------------------------
David M. Bradley, Chairman, President
and Chief Executive Officer
<PAGE>
EXHIBIT 23.1
Exhibit 23.1 Consent of Marti, Lynch & Company
CONSENT OF MARTI, LYNCH & COMPANY
The Board of Directors
North Central Bancshares, Inc.
We consent to the incorporation by reference of our report dated February 7,
1997, relating to the consolidated statements of financial condition of Valley
Financial Corp. as of December 31, 1996 and 1995 and the related statements of
operations, stockholders' equity and cash flows for the years then ended, which
report appears in the Form 8-K/A filed on or about March 31, 1998 by North
Central Bancshares, Inc. related to the acquisition of Valley Financial Corp. by
North Central Bancshares, Inc., in the following Registration Statement of North
Central Bancshares, Inc.: No. 333-33089 on Form S-8.
/s/ Marti, Lynch & Company
-----------------------------
Marti, Lynch & Company
Burlington, Iowa
March 27, 1998
<PAGE>
EXHIBIT 99.1
Exhibit 99.1 Financial Statements for Valley Financial Corp.
CONTENTS
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flow 5
Notes to Consolidated Financial Statements 7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
VALLEY FINANCIAL CORP.
We have audited the accompanying consolidated statements of financial condition
of Valley Financial Corp. and its wholly-owned subsidiary, Valley Savings Bank,
FSB, as of December 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of Valley Financial Corp.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
Financial Corp. and its wholly-owned subsidiary, Valley Savings Bank, FSB, as
of December 31, 1996 and 1995 and the consolidated results of their operations
and cash flows for the years then ended in conformity with generally accepted
accounting principles.
February 7, 1997 /s/ Marti, Lynch & Company
-----------------------------
Marti, Lynch & Company
-1-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 5,929,792 $ 5,170,744
-------------- --------------
Investment securities:
Securities held-to-maturity (fair value of $691,800 in 1996 and 1995) 691,800 691,800
Securities available-for-sale, at fair value 27,914,542 19,978,099
-------------- --------------
Total investment securities (Notes 1, 2 & 3) 28,606,342 20,669,899
-------------- --------------
Mortgage-backed securities:
Securities available-for-sale, at fair value 8,423,607 6,553,072
-------------- --------------
Total mortgage-backed securities (Notes 1 & 2) 8,423,607 6,553,072
-------------- --------------
Inventory of loans, at cost -- 81,958
Loans receivable, net (Notes 1, 4 & 5) 61,180,347 60,447,448
Accounts receivable - loans sold (Notes 1 & 15) 128,579 252,152
Accrued interest receivable 842,503 703,052
Foreclosed real estate, net 3,052 24,541
Premises and equipment (Notes 1 & 7) 1,151,430 1,212,396
Deferred tax asset (Notes 1 & 11) 17,980 --
Other assets 143,889 124,470
-------------- --------------
TOTAL ASSETS $ 106,427,521 $ 95,239,732
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits (Notes 1 & 8) $ 97,554,754 $ 86,520,234
Borrowed funds (Note 9) 500,000 550,000
Advances from borrowers for taxes and insurance 244,580 263,338
Deferred tax liability (Notes 1 & 11) -- 74,513
Accrued expenses and other liabilities 1,075,032 983,548
-------------- --------------
Total liabilities 99,374,366 88,391,633
-------------- --------------
Commitments and contingencies (Note 13)
Stockholders' equity: (Note 12)
Common stock, $1 par value, 100,000 shares authorized;
31,900 issued; 28,050 outstanding 1996; 29,050 outstanding 1995 31,900 31,900
Additional paid-in capital 2,979,900 2,979,900
Retained earnings, substantially restricted (Note 12) 5,220,601 4,554,320
Unrealized gain on securities available-for-sale, net of
applicable deferred income taxes (Note 2) (50,546) 85,679
Less cost of shares acquired for the treasury:
1996, 3,850 shares; 1995, 2,850 shares (1,128,700) (803,700)
-------------- --------------
Total stockholders' equity 7,053,155 6,848,099
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 106,427,521 $ 95,239,732
============== ==============
See notes to consolidated financial statements.
</TABLE>
-2-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
INTEREST INCOME:
Loans receivable:
First-mortgage loans $ 4,787,517 $ 4,606,246
Consumer and other loans 676,537 670,950
Investment securities 1,568,599 1,335,204
Mortgage-backed and related securities 368,273 236,916
Other interest-earning assets 93,584 113,760
-------------- -------------
Total interest income 7,494,510 6,963,076
-------------- -------------
INTEREST EXPENSE:
Deposits (Note 8) 4,401,078 3,834,712
Borrowed funds (Note 9) 70,087 79,113
-------------- -------------
Total interest expense 4,471,165 3,913,825
-------------- -------------
Net interest income 3,023,345 3,049,251
Provision for loan losses (Notes 1 & 4) (6,000) (14,000)
-------------- -------------
Net interest income after provision for loan losses 3,017,345 3,035,251
-------------- -------------
NON-INTEREST INCOME:
Net realized gains on sales of available-for-sale securities (Note 2) 15,970 21,045
Loan origination and commitment fees (Note 1) 391,088 322,239
Service charges and fees 443,973 403,475
Other (Note 6) 219,446 204,983
-------------- -------------
Total non-interest income 1,070,477 951,742
-------------- -------------
NON-INTEREST EXPENSE:
General and administrative:
Compensation and benefits (Note 10) 1,252,330 1,119,579
Occupancy and equipment (Notes 7 & 14) 300,079 300,472
Deposit insurance premiums (Note 19) 754,180 189,940
Loss on foreclosed real estate 5,899 11,881
Other (Note 6) 775,307 778,542
-------------- -------------
Total non-interest expense 3,087,795 2,400,414
-------------- -------------
Net non-interest expense (2,017,318) (1,448,672)
-------------- -------------
Income Before Income Taxes 1,000,027 1,586,579
Income tax expense (Notes 1 & 11) 333,746 552,988
-------------- -------------
NET INCOME $ 666,281 $ 1,033,591
============== =============
NET INCOME PER SHARE OF COMMON STOCK $ 23.48 $ 35.58
============== =============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
on Securities Total
Additional Retained Available- Stockholders'
Capital Stock Paid-In Capital Earnings Treasury Stock For-Sale Equity
--------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ 31,900 $ 2,979,900 $ 3,520,729 $ (803,700) $ (365,437) $ 5,363,392
Net income for the year ended
December 31, 1995 -- -- 1,033,591 -- -- 1,033,591
Change in net unrealized
appreciation on securities
available-for-sale, net of
applicable deferred taxes
of $52,513 -- -- -- -- 451,116 451,116
--------------- ---------------- ---------------- ---------------- ---------------- ----------------
Balances at December 31, 1995 31,900 2,979,900 4,554,320 (803,700) 85,679 6,848,099
Net income for the year ended
December 31, 1996 -- -- 666,281 -- -- 666,281
Purchase of treasury stock -- -- -- (325,000) -- (325,000)
Change in net unrealized
depreciation on securities
available-for-sale, net of
applicable deferred taxes
of $30,980 -- -- -- -- (136,225) (136,225)
--------------- ---------------- ---------------- ---------------- ---------------- ----------------
BALANCES AT
DECEMBER 31, 1996 $ 31,900 $ 2,979,900 $ 5,220,601 $ (1,128,700) $ (50,546) $ 7,053,155
=============== ================ ================ ================ ================ ================
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 666,281 $ 1,033,591
-------------- --------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of excess of cost over fair value of net assets
acquired - goodwill 4,071 4,071
Deferred loan origination fees (355) (626)
Premiums and discounts on loans -- (8,161)
Amortization of premiums and discounts on investment securities 45,797 28,223
FHLB stock dividends included in income -- (13,600)
Provision for loan losses 6,000 2,000
Net gain on sales of investment and mortgage-backed securities (15,970) (21,045)
Depreciation of premises and equipment 81,710 82,223
(Increase) Decrease in:
Deferred taxes (9,000) 54,000
Prepaid expenses and other assets 6,275 (15,349)
Accrued interest receivable (139,451) (42,023)
Accounts receivable - loans sold 123,573 (51,865)
Income taxes receivable (29,765) 11,223
Inventory of loans 81,958 (81,958)
Increase (Decrease) in:
Accrued expenses and other liabilities 94,190 92,889
Income taxes payable (2,706) (1,802)
-------------- --------------
Total adjustments 246,327 38,200
-------------- --------------
Net Cash Provided by Operating Activities 912,608 1,071,791
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of treasury stock (325,000) --
Expenditures for premises and equipment (20,744) (24,043)
Loan originations and principal payment on loans (717,055) (4,228,182)
Principal payments on mortgage-backed and related securities,
net of discounts and premiums 1,304,575 785,385
Purchase of investment securities held-to-maturity -- (3,590,696)
Purchase of investment securities available-for-sale (17,826,100) (2,017,924)
Proceeds from sales of investment securities 250,000 515,390
Proceeds from maturities of invest securities available-for-sale 9,391,448 5,250,000
Proceeds from sales of mortgage-backed and related securities
available-for-sale 1,171,663 683,409
Purchase of mortgage-backed securities available-for-sale (4,348,109) (1,293,846)
-------------- --------------
Net Cash Used in Investing Activities (11,119,322) (3,920,507)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on bank loans (50,000) (1,800,000)
Net increase in demand deposits, NOW accounts, passbook savings
accounts and certificates of deposit 11,034,520 4,315,915
Net decrease in advance payments by borrowers for taxes and insurance (18,758) (1,748)
-------------- --------------
Net Cash Provided by Financing Activities 10,965,762 2,514,167
-------------- --------------
NET INCREASE (DECREASE) IN CASH 759,048 (334,549)
CASH AND DUE FROM BANKS, JANUARY 1 5,170,744 5,505,293
-------------- --------------
CASH AND DUE FROM BANKS, DECEMBER 31 $ 5,929,792 $ 5,170,744
============== ==============
</TABLE>
(Con't)
-5-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 and 1995
(Continued)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits, advances, and other borrowings $ 4,399,594 $ 3,782,125
Income taxes 375,217 498,901
Change in unrealized gain or loss on securities available-for-sale (219,718) 651,891
Deferred taxes applicable to investment securities available-for-sale 30,980 (52,513)
</TABLE>
There are no cash equivalents included in the statements of cash flows.
See notes to consolidated financial statements.
-6-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
Nature of Operations - Valley Savings Bank, FSB (the Bank) provides a full line
of banking services, including commercial and real estate lending, and provides
these services at three locations.
The activities of Valley Services, Inc. are selling credit life insurance and
acting as a broker in security transactions. Hearthstone Mortgage Company, Inc.
is in the business of originating and selling mortgage loans in the secondary
market. All operations are carried out from locations in eastern Iowa.
Basis of Consolidation - The accompanying consolidated financial statements for
1996 include the accounts of Valley Savings Bank, FSB (the Bank), a wholly-owned
subsidiary of Valley Financial Corp., and Hearthstone Mortgage Company, Inc. and
Valley Services, Inc., wholly-owned subsidiaries of Valley Savings Bank, FSB.
All material intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgements about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
Investment and Mortgage-Backed Securities - The Bank adopted Statement of
Financial Accounting Standards (SFAS) 115 and classified some investment and
mortgage-backed securities as available-for-sale at fair value. The net
appreciation or depreciation after deferred taxes is recorded in stockholders'
equity. Information relating to this is recorded in other notes to the financial
statements.
Investment Securities - Investment securities that management has the ability
and intent to hold to maturity are classified as held-to-maturity and carried at
cost, adjusted for amortization of premiums and accretion of discounts using
methods approximating the interest method. Other marketable securities are
classified as available-for-sale and are carried at fair value. Unrealized gains
and losses, net of tax, on securities available-for-sale are reported as a net
amount in a separate component of stockholders' equity until realized. Cost of
securities sold is recognized using the specific identification method.
Allowance for Losses - It is the policy of the Bank to provide valuation
allowances for estimated losses on loans and real estate when a significant and
permanent decline in value occurs. In providing valuation allowances, costs of
holding real estate (including the cost of capital) are considered.
-7-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Allowance for Losses - Continued
Major loans, real estate owned (including development projects), and major
lending areas are reviewed periodically to determine potential problems at an
early date. The Bank's experience has shown that foreclosures on loans result in
some loss. Therefore, in addition to allowances for specific loans, the Bank
makes provision for losses on properties based in part on experience and in part
on prevailing market conditions. Additions to allowances are charged to
earnings.
Management evaluates the carrying value of such assets at least annually and the
allowances are adjusted accordingly. While management uses the best information
available in establishing the allowances for losses, future adjustments may be
necessary if economic conditions differ substantially from the assumptions used
in making the evaluations.
Deferred Profit on Sale of Real Estate - Profit on sale of real estate owned is
deferred when the buyer's initial investment is not adequate for recognition of
profit by the full accrual method.
Savings Deposits - Savings deposits vary as to terms, with major differences
being minimum balances required, maturity, interest rates and the provision for
payment of interest.
Mortgage-Backed Securities - Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and serviced by
issuers of the securities. Mortgage-backed securities held to maturity are
carried at unpaid principal balances, adjusted for unamortized premiums and
unearned discounts. Premiums and discounts are amortized using methods
approximating the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments. Management intends and has the
ability to hold such securities to maturity. Should any be sold, cost of
securities sold is determined using the specific identification method.
All mortgage-backed securities are classified as available-for-sale and are
carried at fair value. Unrealized gains and losses on mortgage-backed securities
available-for-sale are recognized as direct increases or decreases in
stockholders' equity.
At December 31, 1996, the Bank had no outstanding commitments to sell
securities. The market value of its mortgage-backed securities portfolio is
disclosed in Note 2.
Loans Receivable - Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, and net deferred loan-origination fees and
discounts.
Discounts on first-mortgage loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Discounts on consumer loans are recognized over the
lives of the loans using methods that approximate the interest method.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
-8-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-- Continued
Loans Receivable - Continued
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgement, the borrower's
ability to make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status.
Loan-Origination Fees, Commitment Fees, and Related Costs - Loan fees are
accounted for and in accordance with FASB Statement No. 91, Accounting For
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases. Loan fees and certain direct loan origination
costs are deferred and the net fee or cost is recognized as an adjustment to
interest income using the interest method over the contractual life of the
loans, adjusted for estimated prepayments based on the Bank's historical
prepayment experience.
Commitment fees and costs relating to commitments, the likelihood of exercise of
which is remote, are recognized over the commitment period on a straight-line
basis. If the commitment is subsequently exercised during the commitment period,
the remaining unamortized commitment fee at the time of exercise is recognized
over the life of the loan as an adjustment of yield.
Foreclosed Real Estate - Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at the
date of foreclosure establishing a new cost basis. After foreclosure, valuations
are periodically performed by management and the real estate is carried at the
lower of carrying amount or fair value less cost to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in loss on
foreclosed real estate. The historical average holding period for such
properties is eighteen months.
Premises and Equipment - Land is carried at cost. Bank premises, furniture and
equipment, and leasehold improvements are carried at cost, less accumulated
depreciation and amortization computed principally by the straight-line method.
Mortgage Loans Funded For Sale - Mortgage loans funded for sale are carried at
the amount of purchase commitment received from the buyer. All loans granted
through Hearthstone Mortgage Company, Inc. have been pre-approved by the
purchaser.
Income Taxes - Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Net Income Per Share - Net income per share of common stock has been computed
using the weighted average number of common shares outstanding (28,379 shares in
1996; 29,050 in 1995).
-9-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 2: INVESTMENT SECURITIES--
The amortized cost and estimated market values of investments in securities
are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gain Losses Value
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
December 31, 1996:
- ------------------
Bonds, notes and debentures at amortized cost:
U.S. government and federal agencies $22,936,227 $ 66,461 $ 96,297 $22,906,391
State and local governments 4,500,092 59,511 40,297 4,519,306
Corporate debt securities 497,686 -- 8,841 488,845
Mortgage-backed securities 8,485,670 26,654 88,717 8,423,607
----------- -------- -------- -----------
$36,419,675 $152,626 $234,152 $36,338,149
=========== ======== ======== ===========
December 31, 1995:
- ------------------
Bonds, notes and debentures at amortized cost:
U.S. government and federal agencies $15,589,782 $108,962 $ 21,113 $15,677,631
State and local governments 2,992,274 70,731 14,837 3,048,168
Corporate debt securities 1,265,093 -- 12,793 1,252,300
Mortgage-backed securities 6,545,830 48,711 41,469 6,553,072
----------- -------- -------- -----------
$26,392,979 $228,404 $ 90,212 $26,531,171
=========== ======== ======== ===========
SECURITIES HELD-TO-MATURITY:
December 31, 1996:
- ------------------
Equity securities:
Stock in Federal Home Loan Bank, at cost $ 691,800 $ -- $ -- $ 691,800
=========== ======== ======== ===========
December 31, 1995:
- ------------------
Equity securities:
Stock in Federal Home Loan Bank, at cost $ 691,800 $ -- $ -- $ 691,800
=========== ======== ======== ===========
</TABLE>
Gross realized gains on sales of securities available-for-sale were:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
U.S. government & agency securities $ 9,277 $17,645
Mortgage-backed securities 6,693 3,400
------- -------
$15,970 $21,045
======= =======
</TABLE>
-10-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 2: INVESTMENT SECURITIES--Continued
Following is a summary of maturities of securities held-to-maturity and
available-for-sale as of December 31, 1996, excluding the Federal Home Loan Bank
stock. Mortgage-backed securities are not being allocated.
<TABLE>
<CAPTION>
Securities Available-For-Sale
-------------------------------
Amortized Cost Fair Value
-------------- -----------
<S> <C> <C>
Amounts maturing:
In one year or less $ 4,031,079 $ 4,043,049
After one year through five years 16,092,496 16,054,497
After five years through ten years 4,164,089 4,186,759
After ten years 3,646,341 3,630,237
----------- -----------
27,934,005 27,914,542
Mortgage-backed securities 8,485,670 8,423,607
----------- -----------
$36,419,675 $36,338,149
=========== ===========
</TABLE>
Included in investment securities are securities pledged with a market value
of $2,485,100 and $1,991,749 for 1996 and 1995, respectively, to secure
savings accounts.
Also included in investment securities are securities with a carrying value of
$997,071 and a market value of $991,406 for 1996, pledged to secure federal
funds purchases. There were no purchases outstanding on December 31, 1996.
NOTE 3: CAPITAL STOCK INVESTMENT--
The Bank is a member of the Federal Home Loan Bank system. As a member of this
system, the Bank is required to maintain an investment in capital stock of the
Federal Home Loan Bank. No ready market exists for suck stock; however, any
stock held in excess of the required balance is redeemable at par. The stock is
recorded at cost.
NOTE 4: LOANS RECEIVABLE--
The components of loans in the consolidated statements of financial condition
were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Commercial $ 3,672,549 $ 3,711,132
Real estate construction 1,103,363 1,017,395
Commercial real estate 16,099,716 17,409,694
Residential real estate 36,882,423 34,622,002
Mobile homes 904,241 1,104,414
Consumer 3,043,750 3,112,690
----------- -----------
61,706,042 60,977,327
Allowance for loan losses (525,695) (529,879)
----------- -----------
$61,180,347 $60,447,448
=========== ===========
</TABLE>
An analysis of the change in the allowance for losses follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance at January 1 $ 529,879 $ 620,265
Loans charged off (14,541) (110,595)
Recoveries 4,357 6,209
----------- -----------
Net loans charged off (10,184) (104,386)
Provision for loan losses 6,000 14,000
----------- -----------
Balance at December 31 $ 525,695 $ 529,879
=========== ===========
</TABLE>
-11-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 4: LOANS RECEIVABLE--Continued
In the ordinary course of business, the Bank has and expects to continue to have
transactions, including borrowings, with its officers, directors, stockholders,
and their affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time of comparable transactions with other persons and did not
involve more than a normal risk of collectibility or present any other
unfavorable features to the Bank. Loans to such borrowers totaled $638,371 and
$709,333 at December 31, 1996 and 1995, respectively.
NOTE 5: LOAN SERVICING--
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans at December 31, 1996 and 1995, were $1,452,996 and $2,673,195,
respectively.
There were no custodial escrow balances in connection with the foregoing loan
servicing at December 31, 1996 and 1995.
NOTE 6: OTHER NON-INTEREST INCOME AND EXPENSE--
Other non-interest income and expense amounts are summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Other non-interest income:
Office building rental $ 65,225 $ 65,364
Other 154,221 139,619
---------------- ----------------
$ 219,446 $ 204,983
================ ================
Other non-interest expense:
Advertising and promotion $ 76,255 $ 73,731
Data processing 223,983 211,739
Professional fees 120,344 120,725
Printing, postage, stationery,
and supplies 170,717 169,880
Telephone 29,623 31,996
Other 154,385 170,471
---------------- ----------------
$ 775,307 $ 778,542
================ ================
</TABLE>
NOTE 7: PREMISES AND EQUIPMENT--
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Cost:
Land $ 398,680 $ 398,680
Buildings 930,866 915,216
Furniture, fixtures & equipment 363,072 357,977
---------------- ----------------
1,692,618 1,671,873
Less accumulated depreciation 541,188 459,477
---------------- ----------------
$ 1,151,430 $ 1,212,396
================ ================
Depreciation $ 81,710 $ 82,223
================ ================
</TABLE>
-12-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 7: PREMISES AND EQUIPMENT--Continued
Valley Savings Bank, FSB, leases out portions of its office facilities under
several operating lease agreements. Rental income includes $65,224 and $65,364,
respectively, for the years ended December 31, 1996 and 1995. The leased
property is part of the buildings occupied by Valley Savings Bank, FSB; thus,
the carrying amount and accumulated depreciation of the leased property is not
easily segregated. The minimum future lease payments due to Valley Savings Bank,
FSB, under these lease agreements are as follows:
<TABLE>
<CAPTION>
December 31, Amount
-------------- --------------
<S> <C>
1997 $ 32,853
1998 3,466
--------------
Total $ 36,319
==============
</TABLE>
NOTE 8: DEPOSITS--
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $7,686,117 and $3,030,009 in
1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 13,318,727
1998 43,743,300
1999-2000 7,920,868
2001 and thereafter 4,086,139
---------------
$ 69,069,034
===============
</TABLE>
Interest expense on deposits for the years ended December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
<S> <C> <C>
Money market $ 337,505 $ 347,320
Passbook savings 264,260 279,289
NOW 190,655 170,783
Certificates of deposit:
Over $100,000 335,351 189,599
Under $100,000 3,273,307 2,847,721
----------------- -----------------
$ 4,401,078 $ 3,834,712
================= =================
</TABLE>
NOTE 9: BORROWED FUNDS--
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB and qualifying first-mortgage
loans. There were no advances from the FHLB for years ended December 31, 1996
and 1995. The Bank has a line of credit with the FHLB of $2,000,000 on December
31, 1996.
Interest expense on advances from the FHLB for the years ended December 31, 1996
and 1995, was $27,111 and $9,658, respectively.
Federal funds purchases usually mature within one to four days of the
transaction date. The Bank has a secured line of credit of $892,000 on December
31, 1996, based on pledged securities as collateral for federal fund
transactions. The Bank has pledged Federal Home Loan Bank securities to secure
transactions of this nature. On December 31,
-13-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 9: BORROWED FUNDS--Continued
1996, the combined book value of these securities is $997,071 and the market
value is $991,406. There were no outstanding federal funds transactions on
December 31, 1996.
During 1994, Valley Financial Corp. borrowed $850,000 for acquisition of
treasury stock. The note was due on October 1, 1996, and had an interest rate of
8.5%. The note was renewed in 1996 at 8.25% interest and matures on July 1,
1997.
Total interest paid on the note for the years ended December 31, 1996 and 1995,
was $42,079 and $69,455, respectively. Valley Financial Corp. pledged all
capital stock of Valley Savings Bank, FSB for the loan. The unpaid balance on
the note is $500,000 on December 31, 1996.
NOTE 10: PROFIT SHARING (401K) PLAN--
During 1996, the Company adopted a 401k plan. To participate in the plan and be
eligible for discretionary employer contributions, an employee must have
attained twenty one (21) years of age and completed twelve (12) months and one
thousand (1,000) hours of service. To be eligible for matching contributions,
the employee must meet all of the above requirements and make contributions to
the 401k plan. Maximum contribution by the employee is $9,500 for 1996. The
Company will match up to three percent (3%) of employee contributions, and
maximum combined contributions (employer and employee) cannot exceed the lessor
of $30,000 or twenty-five percent (25%) of the employee's annual salary.
Employees are automatically one-hundred percent (100%) vested in their Qualified
Non-Elective account. The vesting schedule for matching and discretionary
employer accounts is as follows:
Years of Service Percent Vested
---------------- --------------
Less than 2 0
2 but less than 3 20
3 but less than 4 40
4 but less than 5 60
5 but less than 6 80
6 or more 100
In 1994, the Bank had a qualified, non contributory defined-benefit pension plan
covering substantially all of its employees. The plan was with Financial
Institutions Retirement Fund and was funded through a tax qualified pension
trust. Effective October 1, 1995, the Bank terminated its participation in the
Financial Institutions Retirement Fund.
All employees who are members on the withdrawal date, including those on leaves
of absence, automatically become fully vested retirants of the Fund. Payment may
be commenced in accordance with the Regulations as of the first day of the month
of the employee's choice after attainment of age 45, or age 55 as previously
designated by the employer for all its retirants, regardless of whether or not
employment continues.
NOTE 11: INCOME TAXES--
In computing federal income taxes, the Bank was allowed the larger of a
statutory bad debt deduction of 8% of otherwise taxable income, or an amount
necessary to increase the year end balance in the reserve for losses or
qualifying real property loans to a specified percentage of defined eligible
loans, subject to limitations based on aggregate loans and savings balances. The
Bank used the percentage of taxable income method for 1995.
-14-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 11: INCOME TAXES--Continued
The 1996 Small Business Act repealed the percentage-of-income bad debt method
for thrift institutions effective for tax years beginning in 1996 and required
recapture of excess reserves over a six-year period beginning in 1996. The total
excess required to be recaptured and included in taxable income is approximately
$236,000, of which approximately $39,000 is includible in taxable income for
1996.
Consolidated returns/tax-sharing agreement: Valley Financial Corp. files a
consolidated federal income tax return with Valley Savings Bank, FSB and its
subsidiaries. Valley Financial Corp. has entered into a tax-sharing agreement
with Valley Savings Bank, FSB to allocate federal income taxes based on
applicable rates and to take into account benefits of each entity. The taxes are
to be computed on an entity-by-entity basis with payments and refund being
necessary so each party pays its pro rata share of the federal income taxes.
The provision for federal income taxes differs from that computed by applying
statutory rates because of bad debt expense, depreciation, tax-exempt interest
and Federal Home Loan Bank stock dividends.
Deferred tax assets or liabilities have been provided for taxable temporary
differences related to unrealized gains or losses on available-for-sale
securities upon adoption of Statement of Financial Accounting Standards (SFAS)
No. 115 in December of 1993.
Deferred tax assets have been provided for deductible temporary differences
related to the allowance for loan losses, accumulated depreciation, and Federal
Home Loan Bank stock dividends. The net deferred tax assets and liabilities in
the accompanying consolidating schedules of financial condition include the
following components:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 121,362 $ 115,468
Net unrealized depreciation on available-
for-sale securities 30,980 --
-------------- ---------------
152,342 115,468
============== ===============
Deferred tax liabilities:
Deferred loan fees $ (6,456) $ (3,525)
Accumulated depreciation (67,642) (70,277)
Federal Home Loan Bank stock (60,264) (63,666)
Net unrealized appreciation on available-
for-sale securities -- (52,513)
--------------- ---------------
(134,362) (189,981)
--------------- ---------------
Net deferred tax assets (liabilities) $ 17,980 $ (74,513)
=============== ===============
</TABLE>
Retained earnings at December 31, 1996 and 1995, include approximately $810,000
for which no deferred federal income tax liability has been recognized. These
amounts represent an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amounts was approximately $300,000 at December 31, 1996 and 1995.
-15-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 11: INCOME TAXES--Continued
Income tax expense for the years ended December 31, 1996 and 1995 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Federal:
Current $ 295,775 $ 423,608
Deferred (11,000) 46,000
--------------- ---------------
284,775 469,608
--------------- ---------------
State:
Current 46,971 75,380
Deferred 2,000 8,000
--------------- ---------------
48,971 83,380
--------------- ---------------
Total taxes $ 333,746 $ 552,988
=============== ===============
</TABLE>
Included in other assets are income taxes receivable of $48,263 for 1996 and
$18,498 for 1995.
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
Percent of
Pre-tax Income
------------------------
1996 1995
------ ------
<S> <C> <C>
Statutory rates 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income (3.6%) (1.2%)
State income taxes, net of Federal income
tax benefit 3.2% 3.5%
Other, net (.2%) (1.5%)
------ -------
33.4% 34.8%
====== =======
</TABLE>
NOTE 12: REGULATORY MATTERS--
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of Thrift Supervision (OTS). Failure
to meet the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under the regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines involving quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification under the prompt
corrective action guidelines are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of December 31, 1996, that the Bank meets all the
capital adequacy requirements to which it is subject.
-16-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 12: REGULATORY MATTERS--Continued
As of December 31, 1996, the most recent notification from the OTS categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as well capitalized, the Bank will have
to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as disclosed in the table below. There are no conditions or events since
the most recent notification that management believes have changed the Bank's
prompt corrective action category.
<TABLE>
<CAPTION>
For Capital Adequacy
Purposes And to Be
Adequately Capitalized
Under the Prompt
Corrective Action
Actual Provisions
---------------------- ---------------------
Amount Ratio Amount Ratio
-------------- ------- ------------- -------
<S> <C> <C> <C> <C>
As of December 31, 1996:
- ------------------------
Total Capital
(to Risk-Weighted Assets)
$ 7,589,817 15.69% $ 3,869,440 8.00%
Tier I Capital
(to Risk-Weighted Assets) 7,589,817 15.69 3,869,440 4.00
Tier I Capital
(to Average Assets) 7,589,817 7.62 3,985,084 4.00
As of December 31, 1995:
- ------------------------
Total Capital
(to Risk-Weighted Assets) $ 7,253,636 15.10% $ 3,844,160 8.00%
Tier I Capital
(to Risk-Weighted Assets) 7,253,636 15.10 3,844,160 4.00
Tier I Capital
(to Average Assets) 7,253,636 7.86 3,691,205 4.00
</TABLE>
-17-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13: COMMITMENTS AND CONTINGENCIES--
In the ordinary course of business, the Bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying
consolidated financial statements. At December 31, 1996, the Bank had
outstanding firm commitments to originate or purchase loans as follows:
<TABLE>
<CAPTION>
Fixed Rate Variable Rate Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Fixed-mortgage loans $ 35,000 $ 350,500 $ 385,500
Consumer/other loans -- -- --
----------- ----------- -----------
$ 35,000 $ 350,500 $ 385,500
=========== =========== ===========
</TABLE>
The Bank also had outstanding letters of credit totaling $76,400 at December
31, 1996.
NOTE 14: LEASE EXPENSE--
Lease expense for the year ended December 31, 1996 and 1995, was $42,583 and
$48,553, respectively, which includes building rental of $24,394 for Hearthstone
Mortgage Company, Inc. in 1996. Following is a schedule by years of future
minimum equipment lease payments required under existing operating leases:
December 31, 1997 $ 4,442
=========
NOTE 15: ACCOUNTS RECEIVABLE - LOANS SOLD--
Firm commitments to purchase loans had been received for all of the loans
carried in accounts receivable - loans sold. The carrying value is the total due
from the purchaser since the loans were closed and ready for sale.
NOTE 16: GOODWILL--
Goodwill recorded on the acquisition of Hearthstone Mortgage Company, Inc.
amounted to $40,710 and is being amortized over a ten-year period. Goodwill
amortization for 1996 and 1995 was $4,071 per year, leaving a balance of $20,355
on December 31, 1996.
NOTE 17: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK--
Most of the Bank's business activity, with the exception of mortgage loans, is
with customers located within Iowa and Illinois. The Bank uses another bank to
facilitate check collection and other bank activities. Due to the dollar volume
of these activities, it is necessary to maintain account balances in excess of
the FDIC insurance limit.
NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS--
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition, if it is cost effective to determine the fair values.
Management has determined that it is not cost effective to secure the
information on most of the financial instruments; however, the following
financial assets are carried at an amount which approximates fair value:
Cash
Investment securities available-for-sale
Mortgage-backed securities available-for-sale
Accounts receivable - loans sold
-18-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 18: FAIR VALUE OF FINANCIAL INSTRUMENTS--Continued
The carrying amounts of the financial assets listed above are included in the
Consolidated Statement of Financial Condition. Fair value of investment
securities and mortgage-backed securities is based on quoted market prices where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
NOTE 19: DEPOSIT INSURANCE PREMIUMS--
The Fiscal 1997 Spending Bill signed into law on September 30, 1996 imposed a
special assessment on Savings Association Insurance Fund (SAIF)-insured deposits
of financial institutions. Valley Savings Bank, FSB's one-time assessment
amounted to $551,449, which was paid in 1996 and is included in deposit
insurance premiums in 1996.
-19-
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash $ 3,364,164
Securities available-for-sale 38,311,112
Mortgage-backed securities 7,364,143
Loans receivable, net 60,039,484
Accrued interest receivable 991,964
Foreclosed real estate, net of allowance for losses 67,605
Premises and equipment 1,102,634
Other assets 144,325
--------------
TOTAL ASSETS $ 111,385,431
==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits $ 101,734,158
Borrowed funds 500,000
Advances from borrowers for taxes and insurance 97,996
Deferred taxes 108,156
Accrued expenses and other liabilities 773,576
--------------
Total liabilities 103,213,886
--------------
Stockholders' Equity:
Common stock 31,900
Additional paid-in capital 2,979,900
Retained earnings, substantially restricted 6,133,445
Unrealized gain on securities available-for-sale,
net of applicable income taxes 155,000
Treasury stock (1,128,700)
--------------
Total stockholders' equity 8,171,545
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 111,385,431
==============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
INTEREST INCOME:
Loans receivable:
First-mortgage loans $ 3,600,780 $ 3,631,251
Consumer and other loans 452,833 513,124
Investment securities 1,714,293 1,184,108
Mortgage-backed and related securities 301,881 270,584
Other interest-earning assets 43,406 61,344
----------- -----------
Total interest income 6,113,193 5,660,411
----------- -----------
INTEREST EXPENSE:
Deposits 3,663,083 3,262,695
Borrowed funds 41,255 46,324
----------- -----------
Total interest expense 3,704,338 3,309,019
----------- -----------
Net interest income 2,408,855 2,351,392
Provision for Loan losses (100,000) 6,000
----------- -----------
Net interest income after provision for loan losses 2,508,855 2,345,392
----------- -----------
NON-INTEREST INCOME:
Gain on sale of interest-earning assets, net 9,404 12,084
Loan origination and commitment fees 228,121 143,100
Service charges and fees 344,853 333,239
Other income 17,240 45,756
----------- -----------
Total non-interest income 599,618 534,179
----------- -----------
NON-INTEREST EXPENSE:
General and administrative:
Compensation and benefits 877,192 832,622
Occupancy and equipment 171,155 157,929
SAIF deposit insurance premiums 34,453 701,939
Loss on foreclosed real estate 4,180 5,925
Other expenses 655,431 569,954
----------- -----------
Total non-interest expense 1,742,411 2,268,369
----------- -----------
Income Before Income Taxes 1,366,062 611,202
Income tax expense 453,218 213,135
----------- -----------
NET INCOME $ 912,844 $ 398,067
=========== ===========
Net income per share of Common Stock $ 32.54 $ 13.97
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
VALLEY FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 912,844 $ 398,067
----------- -----------
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of excess of cost over fair value of net assets acquired - goodwill 3,053 3,053
Amortization of premiums and discounts on investment securities 42,650 33,348
Provision for loan losses (100,000) 6,000
Net gain on sales of investment and mortgage-backed securities (9,404) (12,084)
Depreciation of premises and equipment 55,022 61,282
(Increase) Decrease in:
Prepaid expenses and other assets (67,886) (240,519)
Accrued interest receivable (149,461) (158,640)
Inventory of loans -- 81,958
Increase (Decrease) in:
Accrued expenses and other liabilities (301,456) 226,611
----------- -----------
Total adjustments (527,482) 1,009
----------- -----------
Net Cash Provided by Operating Activities 385,362 399,076
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of treasury stock -- (325,000)
Expenditures for premises and equipment (6,226) (20,354)
Loan originations and principal payment on loans 1,369,442 (1,308,153)
Principal payments on mortgage-backed and related securities, net of discounts and premiums 1,177,412 855,512
Purchase of investment securities available-for-sale (17,477,112) (12,909,650)
Proceeds from sales of investment securities 996,875 --
Proceeds from maturities of invest securities available-for-sale 6,955,799 7,930,000
Proceeds from sales of mortgage-backed and related securities available-for-sale -- 819,148
Purchase of mortgage-backed securities available-for-sale -- (3,819,650)
----------- -----------
Net Cash (Used in) Investing Activities (6,983,810) (8,778,147)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in borrowed funds -- 2,150,000
Net increase in demand deposits, NOW accounts, passbook savings accounts and certificates of deposit 4,179,404 4,657,606
Net decrease in advance payments by borrowers for taxes and insurance (146,584) (166,239)
----------- -----------
Net Cash Provided by Financing Activities 4,032,820 6,641,367
----------- -----------
NET (DECREASE) IN CASH (2,565,628) (1,737,704)
CASH AND DUE FROM BANKS, BEGINNING 5,929,792 5,170,744
----------- -----------
CASH AND DUE FROM BANKS, ENDING $ 3,364,164 $ 3,433,040
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits and borrowed funds $ 3,664,943 $ 3,265,542
Income taxes 340,535 358,403
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
VALLEY FINANCIAL CORP. AND SUBSIDIARIES
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for the nine month period ended September
30, 1997 and 1996 are unaudited. In the opinion of the management of Valley
Financial Corp., these financial statements reflect all adjustments, consisting
only of normal recurring accruals, necessary to present fairly these
consolidated financial statements. The results of operations for the interim
periods are not necessarily indicative of results which may be expected for an
entire year. Certain information and footnote disclosure normally included in
complete financial statements prepared in accordance with generally accepted
accounting principles have been omitted in accordance with the requirements for
interim financial statements.
The consolidated financial statements include the accounts of Valley Financial
Corp. and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
NOTE 2. SUBSEQUENT EVENT - ACQUISITION OF VALLEY FINANCIAL CORP.
As of the close of business on January 30, 1998, North Central completed the
Acquisition of Valley Financial Corp., pursuant to an Agreement and Plan of
Merger, dated as of September 18, 1997. The Acquisition resulted in the merger
of Valley Financial's wholly-owned subsidiary, Valley Savings Bank, FSB with and
into First Federal with First Federal as the resulting financial institution.
In connection with the Acquisition, each share of Valley Financial's common
stock, par value $1.00 per share, issued and outstanding (other than shares held
as treasury stock of Valley Financial) was cancelled and converted automatically
into the right to receive $525.00 per share in cash pursuant to the terms and
conditions of the Merger Agreement. As a result of the Acquisition, shareholders
of Valley Financial were paid $14,726,250 in cash. The pricing reflects 190.6%
of Valley's June 30, 1997 book value and 13.0 times Valley's earnings for the
twelve months ended June 30, 1997, as adjusted for the one-time SAIF charge.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
VALLEY FINANCIAL CORP. AND SUBSIDIARIES
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for the nine month period ended September
30, 1997 and 1996 are unaudited. In the opinion of the management of Valley
Financial Corp., these financial statements reflect all adjustments, consisting
only of normal recurring accruals, necessary to present fairly these
consolidated financial statements. The results of operations for the interim
periods are not necessarily indicative of results which may be expected for an
entire year. Certain information and footnote disclosure normally included in
complete financial statements prepared in accordance with generally accepted
accounting principles have been omitted in accordance with the requirements for
interim financial statements.
The consolidated financial statements include the accounts of Valley Financial
Corp. and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
NOTE 2. SUBSEQUENT EVENT ACQUISITION OF VALLEY FINANCIAL CORP.
As of the close of business on January 30, 1998, North Central completed the
Acquisition of Valley Financial Corp., pursuant to an Agreement and Plan of
Merger, dated as of September 18, 1997. The Acquisition resulted in the merger
of Valley Financial's wholly-owned subsidiary, Valley Savings Bank, FSB with and
into First Federal with First Federal as the resulting financial institution.
In connection with the Acquisition, each share of Valley Financial's common
stock, par value $1.00 per share, issued and outstanding (other than shares held
as treasury stock of Valley Financial) was cancelled and converted automatically
into the right to receive $525.00 per share in cash pursuant to the terms and
conditions of the Merger Agreement. As a result of the Acquisition, shareholders
of Valley Financial were paid $14,726,250 in cash. The pricing reflects 190.6%
of Valley's June 30, 1997 book value and 13.0 times Valley's earnings for the
twelve months ended June 30, 1997, as adjusted for the one-time SAIF charge.
<PAGE>
EXHIBIT 99.2
Exhibit 99.2 UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
VALLEY FINANCIAL CORP. AND SUBSIDIARIES
The unaudited pro forma combined consolidated financial statements presented on
the following pages are based on the historical financial statements of North
Central and reflect the pro forma effects of the acquisition of Valley Financial
(the "Acquisition"). The Acquisition was accounted for under the purchase method
of accounting.
For purposes of the pro forma statements, the purchase price of Valley Financial
has been allocated to the acquired net assets based on information currently
available with regard to the values of such net assets. Pro forma adjustments
have been made only for those assets and liabilities which, based solely on
preliminary estimates, may have fair values significantly different from
historical amounts. As such, final adjustments to recorded amounts may differ
significantly from the pro forma adjustments presented herein.
The unaudited pro forma consolidated statements of income for the nine months
ended September 30, 1997 and the year ended December 31, 1996 were prepared as
if the Acquisition had occurred as of the beginning of the respective periods
for the purposes of the combined consolidated statements of income and as if
such an acquisition had occurred at the end of the period for purposes of the
combined consolidated balance sheet.
These pro forma financial statements are not necessarily indicative of the
results of operations that might have occurred had the acquisition taken place
at the beginning of the period, or to project the Company's results of
operations at any future date or for any future period. The pro forma statements
should be read in connection with the notes thereto.
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
VALLEY FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
at September 30, 1997
<TABLE>
<CAPTION>
North Valley Pro Forma
Central Financial Adjustments Combined
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 4,520,553 $ 3,364,164 $ -- $ 7,884,717
Securities available for sale 22,241,637 45,675,255 (3,417,490)(1) 64,499,402
Securities held to maturity -- -- -- --
Loans receivable, net 181,119,869 60,039,484 706,781 (2) 241,866,134
Accrued interest receivable 1,328,799 991,964 -- 2,320,763
Foreclosed real estate 231,814 67,605 -- 299,419
Premises and equipment, net 2,015,152 1,102,634 -- 3,117,786
Rental real estate 2,083,625 -- -- 2,083,625
Title plant 925,256 -- -- 925,256
Deferred taxes 74,000 -- (74,000)(3) --
Goodwill -- -- 6,821,989 (4) 6,821,989
Prepaid expenses and other assets 592,683 144,325 -- 737,008
------------- ------------- ----------- -------------
Total Assets $ 215,133,388 $ 111,385,431 $ 4,037,280 $ 330,556,099
============= ============= =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 139,254,875 $ 101,734,158 $ 410,165 (2) $ 241,399,198
Other borrowed funds 25,550,000 500,000 11,308,760 (1) 37,358,760
Advances from borrowers for taxes
and insurance 364,994 97,996 -- 444,990
Dividend payable 203,624 -- -- 203,624
Income taxes payable 118,930 -- -- 118,930
Deferred taxes -- 108,156 (17,100)(3),(5) 91,056
Accrued expenses and other liabilities 356,169 773,576 507,000 (5) 1,636,745
------------- ------------- ----------- -------------
Total Liabilities 165,830,592 103,213,886 12,208,825 281,253,303
------------- ------------- ----------- -------------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock 40,111 31,900 (31,900)(1) 40,111
Additional paid-in-capital 37,895,518 2,979,900 (2,979,900)(1) 37,895,518
Retained earnings, substantially restricted 22,760,386 6,133,445 (6,133,445)(1) 22,760,386
Unrealized gain on securities available
for sale, net of income taxes 364,532 155,000 (155,000)(1) 364,532
Treasury stock at cost (10,496,411) (1,128,700) 1,128,700 (1) (10,496,411)
Unearned shares, employee stock
ownership plan (1,261,340) -- -- (1,261,340)
------------- ------------- ----------- -------------
Total stockholders' equity 49,302,796 8,171,545 (8,171,545) 49,302,796
------------- ------------- ----------- -------------
Total Liabilities and Stockholders' Equity $ 215,133,388 $ 111,385,431 $ 4,037,280 $ 330,556,099
============= ============= =========== =============
</TABLE>
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
VALLEY FINANCIAL CORP AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA COMBINED CONSOLIDATED BALANCE SHEET
Pursuant to the Merger and consistent with generally accepted accounting
principles ("GAAP"), certain purchase method accounting adjustments relating to
Valley Financial will be recorded. The purchase method accounting adjustments
are preliminary estimates and are subject to revision as economic conditions
change or as more information becomes available. The purchase price was $14.7
million, consisting of 28,050 outstanding shares of Valley Financial stock, at
$525 per share. The following notes further explain the adjustments.
(1) Represents the planned sale of $3.4 million of securities available for
sale and borrowings of $11.3 million to fund the purchase and the
elimination of the stockholders' equity of Valley Financial under the
purchase method of accounting.
(2) Represents the mark-to-market adjustments to reflect the fair market value
of the Valley Financial assets acquired and liabilities assumed under the
purchase method of accounting. The following summarizes the net mark-to-
market premium or (discounts) established for the following asset and
liability categories:
Loans $ 706,781
Deposits (410,165)
--------------
Total $ 296,616
==============
(3) Represents the reclassification of deferred income taxes.
(4) Represents the excess of the purchase price paid for Valley Financial over
the fair market value of the tangible and identifiable assets acquired and
the fair value of the liabilities (goodwill) assumed under the purchase
method of accounting. Goodwill is assumed to amortize on a straight-line
basis over 15 years.
The merger consideration of $14.7 million was allocated as follows:
Net assets at fair value (note 1 & 2) $ 8,468,161
Professional fees (note 5) (363,000)
Other accrued liabilities (note 5) (144,000)
Goodwill 6,821,989
Net deferred tax liabilities (note 5) (56,900)
---------------
Purchase Price $ 14,726,250
===============
(5) Represents accruals for other Merger related costs such as professional
fees including investment banker, accountants and attorneys fees
($363,000), accruals for other liabilities ($144,000) and net deferred tax
liabilities of ($56,900).
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
VALLEY FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
North Valley Pro Forma
Central Financial Adjustment Combined
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable:
First mortgage loans $ 9,111,895 $ 3,600,780 $ (166,831)(1) $ 12,545,844
Consumer and other loans 1,623,475 452,833 -- 2,076,308
Securities and cash deposits 1,200,805 2,059,580 (279,334)(2) 2,981,051
------------- ------------- ----------- -------------
Total interest income 11,936,175 6,113,193 (446,165) 17,603,203
------------- ------------- ----------- -------------
INTEREST EXPENSE:
Deposits 4,795,481 3,663,083 (265,956)(3) 8,192,608
Borrowed funds 980,208 41,255 508,895 (4) 1,530,358
------------- ------------- ----------- -------------
Total interest expense 5,775,689 3,704,338 242,939 9,722,966
------------- ------------- ----------- -------------
Net interest income 6,160,486 2,408,855 (689,104) 7,880,237
Provision for loan losses 180,000 (100,000) -- 80,000
------------- ------------- ----------- -------------
Net interest income after loan losses 5,980,486 2,508,855 (689,104) 7,800,237
------------- ------------- ----------- -------------
NONINTEREST INCOME:
Fees and service charges 472,074 344,853 -- 816,927
Loan origination and commitment
fees -- 228,121 -- 228,121
Abstract fees 886,981 -- -- 886,981
Gain on sale of securities available
for sale -- 9,404 -- 9,404
Other income 317,371 17,240 -- 334,611
------------- ------------- ----------- -------------
Total noninterest income 1,676,426 599,618 -- 2,276,044
------------- ------------- ----------- -------------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,607,769 877,192 -- 2,484,961
Premises and equipment 316,908 171,155 -- 488,063
Data processing 191,224 129,896 -- 321,120
SAIF deposit insurance premiums 63,181 34,453 -- 97,634
Other expenses 1,160,676 529,715 341,100 (5) 2,031,491
------------- ------------- ----------- -------------
Total noninterest expense 3,339,758 1,742,411 341,100 5,423,269
------------- ------------- ----------- -------------
Income before income taxes 4,317,154 1,366,062 (1,030,204) 4,653,012
Provision for income taxes 1,495,563 453,218 (257,036) 1,691,745
------------- ------------- ----------- -------------
Net Income $ 2,821,591 $ 912,844 $ (773,168) $ 2,961,267
============= ============= =========== =============
Basic earnings per common share $ 0.88 $ 0.92
============= =============
Earnings per common share -
assuming dilution $ 0.87 $ 0.91
============= =============
</TABLE>
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
VALLEY FINANCIAL CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
North Valley Pro Forma
Central Financial Adjustment Combined
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable:
First mortgage loans $11,173,567 $4,787,517 $ (222,442)(1) $15,738,642
Consumer and other loans 2,007,185 676,537 -- 2,683,722
Securities and cash deposits 1,909,267 2,030,456 (372,445)(2) 3,567,278
----------- ---------- ----------- -----------
Total interest income 15,090,019 7,494,510 (594,887) 21,989,642
----------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits 6,217,234 4,401,078 (354,608)(3) 10,263,704
Borrowed funds 711,418 70,087 678,526 (4) 1,460,031
----------- ---------- ----------- -----------
Total interest expense 6,928,652 4,471,165 323,918 11,723,735
----------- ---------- ----------- -----------
Net interest income 8,161,367 3,023,345 (918,805) 10,265,907
Provision for loan losses 240,000 6,000 -- 246,000
----------- ---------- ----------- -----------
Net interest income after loan losses 7,921,367 3,017,345 (918,805) 10,019,907
----------- ---------- ----------- -----------
NONINTEREST INCOME:
Fees and service charges 579,999 443,973 -- 1,023,972
Loan origination and commitment
fees -- 391,088 -- 391,088
Abstract fees 931,031 -- -- 931,031
Gain on sale of securities available
for sale 13,774 15,970 -- 29,744
Other income 368,691 219,446 -- 588,137
----------- ---------- ----------- -----------
Total noninterest income 1,893,495 1,070,477 -- 2,963,972
----------- ---------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,003,701 1,252,330 -- 3,256,031
Premises and equipment 420,633 300,079 -- 720,712
Data processing 243,762 172,836 -- 416,598
SAIF deposit insurance premiums 1,095,838 754,180 -- 1,850,018
Other expenses 1,174,450 608,370 454,800 (5) 2,237,620
----------- ---------- ----------- -----------
Total noninterest expense 4,938,384 3,087,795 454,800 8,480,979
----------- ---------- ----------- -----------
Income before income taxes 4,876,478 1,000,027 (1,373,605) 4,502,900
Provision for income taxes 1,743,557 333,746 (342,714) 1,734,589
----------- ---------- ----------- -----------
Net Income $ 3,132,921 $ 666,281 $(1,030,891) $ 2,768,311
=========== ========== =========== ===========
Basic earnings per common share $ 0.82 $ 0.72
=========== ===========
Earnings per common share -
assuming dilution $ 0.82 $ 0.72
=========== ===========
</TABLE>
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
VALLEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
Pursuant to the Merger and consistent with GAAP, certain adjustments will
be recorded, primarily to accrue for specific, identified costs related to the
merger of Valley Financial. The amounts of the Merger related costs are
preliminary estimates and are subject to revisions as economic conditions change
or as more information become available.
North Central expects to achieve operating cost savings primarily through
the consolidation of back office functions, elimination of redundant
professional fees and elimination of some employee benefits. The operating cost
savings are expected to be achieved in various amounts at various times during
the years subsequent to the acquisition of Valley Financial and not ratably
over, or at the beginning or end of, such periods. No adjustment has been
reflected in the Unaudited Pro Forma Combined Consolidated Statement of Income
for the year ended December 31, 1996, or for the nine months ended September 30,
1997 for the anticipated cost savings.
(1) Represents amortization of Valley Financial mark-to-market adjustments
under the purchase method of accounting for loans.
(2) Represents amortization of Valley Financial mark-to-market adjustments
under the purchase method of accounting for securities, and the forgone
interest income resulting from the planned sale of $3.4 million of
securities, at a rate of 6.0%.
(3) Represents amortization of Valley Financial mark-to-market adjustments
under the purchase method of accounting for deposits.
(4) Represents the cost of borrowing $11.3 million to fund the Valley
Financial acquisition, at a rate of 6.0%.
(5) Represents amortization of goodwill.
