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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
0-27672
(Commission File Number)
NORTH CENTRAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Iowa 421449849
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
c/o First Federal Savings Bank of Iowa
825 Central Avenue, Fort Dodge, Iowa 50501
(Address of Principal Executive Offices) (Zip Code)
(515) 576-7531
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports), and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of March 19,2000, there were issued and outstanding 2,057,242 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of March 1, 2000 was $27,526,539.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Shareholders are incorporated by reference into Items 10, 11, 12 and 13 of
Part III hereof.
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PART I
ITEM 1. BUSINESS
Forward Looking Statements
This Annual Report on Form 10-K contains certain 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 and market conditions; 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; and depositor and borrower preferences.
General
North Central Bancshares, Inc. (the "Holding Company"), an Iowa
corporation, is the holding company for First Federal Savings Bank of Iowa (the
"Bank"), a federally chartered savings bank. Collectively, the Holding Company
and the Bank are referred to herein as the "Company." The Holding Company was
organized on December 5, 1995 at the direction of the Board of Directors of the
Bank for the purpose of acquiring all of the capital stock to be issued by the
Bank in connection with the conversion and reorganization of the Bank and North
Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding
company structure (these transactions are collectively referred to as the
"Conversion"). On March 20, 1996, upon completion of the Conversion, the
Holding Company issued an aggregate of 4,011,057 shares of its Common Stock, par
value $0.01 per share, of which 1,385,590 shares were issued in exchange for all
of the Bank's issued and outstanding shares, except for shares owned by the MHC
which were cancelled, and 2,625,467 shares were sold in Subscription and
Community Offerings at a price of $10.00 per share, with gross proceeds
amounting to $26,254,670. At this time, the Holding Company conducts business
as a unitary savings and loan holding company and the principal business of the
Holding Company consists of the operation of its wholly-owned subsidiary, the
Bank.
The Holding Company's executive offices are located at the home office of
the Company at 825 Central Avenue, Fort Dodge, Iowa. The Holding Company's
telephone number is (515) 576-7531.
First Federal Savings Bank of Iowa
The Bank is a federally chartered savings bank that conducts its operations
from its main office located in Fort Dodge, Iowa and seven branch offices
located in Iowa. Four of the Bank's branches are located in north central Iowa
in the cities of Fort Dodge, Nevada, Ames and Perry. On January 30, 1998, the
Bank completed the acquisition of Valley Financial Corp., an Iowa corporation
and the holding company for Valley Savings Bank, FSB (the "Acquisition"). See
"Acquisition of Valley Financial Corp." As a result of the Acquisition, the
Bank also has three branches in southeastern Iowa in the cities of Burlington
and Mount Pleasant. The Bank is the successor to First Federal Savings and Loan
Association of Fort Dodge, which was chartered originally in 1954, and on May 7,
1987 became a federally chartered savings bank. The Bank adopted its present
name on February 27, 1998.
The Bank is a community-oriented savings institution that is primarily
engaged in the business of attracting deposits from the general public in the
Bank's market areas and investing such deposits in one- to four-family
residential real estate mortgages, multi-family and commercial mortgages and, to
a lesser extent, secured and unsecured consumer loans, with emphasis on second
mortgage loans. The Bank's deposits are insured by the FDIC under the Savings
Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal
Home Loan Bank ("FHLB") System since 1954. At December 31, 1999, the Bank had
total assets of $367.6 million, total deposits of $271.8 million, and total
shareholders' equity of $36.8 million.
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The Bank's principal executive office is located at 825 Central Avenue,
Fort Dodge, Iowa and its telephone number at that address is (515) 576-7531.
Acquisition of Valley Financial Corp.
As of the close of business on January 30, 1998, the Bank completed the
Acquisition of Valley Financial Corp. ("Valley Financial"), pursuant to an
Agreement and Plan of Merger, dated as of September 18, 1997, (the "Merger
Agreement"). The Acquisition resulted in the merger of Valley Financial's
wholly owned subsidiary, Valley Savings Bank, FSB ("Valley Savings") with and
into the Bank, with the Bank as the resulting financial institution (the "Bank
Merger"). Valley Savings, formerly headquartered in Burlington, Iowa, was a
federally-chartered stock savings bank with three branch offices located in
southeastern Iowa.
In connection with the Acquisition, each share of Valley Financial's common
stock, par value $1.00 per share, issued and outstanding (other than shares held
as treasury stock of Valley Financial) was cancelled and converted automatically
into the right to receive $525.00 per share in cash pursuant to the terms and
conditions of the Merger Agreement. As a result of the Acquisition,
shareholders of Valley Financial were paid a total of $14,726,250 in cash. The
source of funds for the Acquisition consisted of the Bank's accumulation of its
cash flow from the maturity of short-term liquid investments, principal and
interest on loans, sale of other investment securities, other cash receipts, net
of operating expenses and other projected disbursements.
Market Area and Competition
The Company is an independent savings and loan company serving its primary
market area of Webster, Story, Dallas, Henry and Des Moines Counties, which are
located in the central, north central and south eastern parts of the State of
Iowa. The Company's market area is influenced by agriculture as well as retail
sales, professional services and public education. The Company is headquartered
in Fort Dodge, the Webster County seat, where it operates two Company locations.
The Company's Nevada branch operates in the city of Nevada, Iowa, the county
seat for Story County. Nevada is located close to Ames, the location of Iowa
State University, and is also located 35 miles from Des Moines, the state
capital. The Company's Ames branch operates in the city of Ames, Iowa and is
also located 30 miles from Des Moines. Burlington, the county seat of Des
Moines County, is a strong retail center for southeastern Iowa. Mount Pleasant
is the county seat of Henry County.
The unemployment rate for Webster County as of December 1999 was 2.2%,
compared to the national rate of 4.1% and the State of Iowa rate of 2.2%. The
unemployment rate for Story County was 1.8%, for Des Moines County was 1.9%, for
Henry County was 2.2% and for Dallas County was 1.5%.
The Nevada, Iowa and Ames, Iowa markets have been a source of loan and
depositor growth for the Company in recent periods, and the Company expects to
continue to pursue lending and deposit growth opportunities in these markets, as
well as the markets in Burlington, Mount Pleasant and Perry, Iowa. However, due
to the loan demand in the Company's overall market area, increased competition,
and the Company's decision to diversify its loan portfolio, the Company has
originated and purchased loans (primarily multi-family and commercial real
estate loans) from out of state. The Company intends to continue such
originations and purchases pursuant to its underwriting standards for Company-
originated loans.
The Company faces strong and increasing competition both in making loans
and in attracting savings deposits. The Company's competition for loans comes
principally from commercial banks, savings banks, other savings and loan
associations, mortgage banking companies, finance companies and credit unions.
The Company's most direct competition for savings deposits historically has come
from commercial banks, savings banks, other savings and loan associations and
credit unions. In addition, the Company faces increasing competition for
savings deposits from non-bank institutions such as brokerage firms, insurance
companies, money market mutual funds, other mutual funds (such as corporate and
government securities funds) and annuities. Many such institutions have greater
financial and marketing resources available to them than does the Company.
Trends toward the consolidation of the banking industry, especially after
enactment of the
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Gramm-Leach-Bliley Act, and the lifting of interstate banking and branching
restrictions may make it more difficult for relatively smaller institutions,
such as the Bank, to compete effectively with large national and regional
financial institutions.
While the Company is subject to competition from other financial
institutions which may have greater financial and marketing resources, the
Company believes that it benefits from its community bank orientation and can
compete with other institutions by offering customers a high level of personal
service and a wide range of competitively priced financial products. Further,
management believes that the variety, depth and stability of the communities in
which the Company is located support the service and lending activities
conducted by the Bank.
Lending Activities
Loan Portfolio Composition. The principal components of the Company's loan
portfolio are fixed- and adjustable-rate first mortgage loans secured by one- to
four-family owner-occupied residential real estate, fixed- and adjustable-rate
first mortgage loans secured by multi-family residential real estate and, to a
lesser extent, secured and unsecured consumer loans, with emphasis on second
mortgage loans. At December 31, 1999, the Company's loans receivable totalled
$291.8 million, of which $164.1 million, or 56.3%, were one- to four-family
residential real estate first mortgage loans and $91.1 million, or 31.2%, were
other first mortgage loans, primarily multi-family and commercial real estate
loans purchased by the Company. Consumer loans, consisting primarily of
automobile loans and second mortgage loans, totalled $36.6 million, or 12.5%, of
the Company's loan portfolio.
Savings associations, such as the Bank, are generally subject to the same
limits on loans to one borrower as are imposed on national banks. Generally,
under these limits, a savings association may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of the association's
unimpaired capital and surplus. Additional amounts may be lent, in the
aggregate not exceeding 10% of unimpaired capital and surplus, if any such loan
or extension of credit is fully secured by readily-marketable collateral. Such
collateral is defined to include certain debt and equity securities and bullion,
but generally does not include real estate. For the year ended December 31,
1999, it was the Company's policy to limit loans to one borrower to $2.5
million. At December 31, 1999, the Company's largest aggregate outstanding loan
to one borrower was $2.5 million and the second largest borrower had an
aggregate balance of $2.0 million. All such loans were first mortgage multi-
family residential real estate loans and were performing as of that date.
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Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Company's loan portfolio by type of loan as of the dates
indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
At December 31,
----------------------------------------------------------------------------------
1999 1998 1997
---------------------------- --------------------------- -------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------ -------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
First mortgage loans:
One- to four-family residential(1)..... $164,057 56.23% $148,992 57.46% $115,763 59.48%
Multi-family........................... 73,417 25.16 64,895 25.02 51,345 26.38
Commercial............................. 17,723 6.07 11,396 4.39 3,800 1.95
-------- ------ -------- ------ -------- ------
Total first mortgage loans............ 255,197 87.47 225,283 86.87 170,908 87.81
-------- ------ -------- ------ -------- ------
Consumer loans:
Automobiles............................ $ 8,003 2.74% $ 7,348 2.83% $ 4,696 2.41%
Second mortgage(2)..................... 23,604 8.09 20,784 8.01 16,226 8.34
Other(3)............................... 4,956 1.70 5,946 2.29 2,796 1.44
-------- ------ -------- ------ -------- ------
Total consumer loans.................. 36,563 12.53 34,078 13.13 23,718 12.19
-------- ------ -------- ------ -------- ------
Total loans receivable................ $291,760 100.00% $259,361 100.00% $194,626 100.00%
Less:
Undisbursed portion of
construction loans.................... $ 1,982 0.68% $ 2,025 0.78% $ 453 0.23%
Unearned loan discount................. 136 0.05 312 0.12 424 0.22
Net deferred loan origination fee...... 106 0.04 316 0.12 349 0.18
Allowance for loan losses.............. 2,777 0.95 2,676 1.03 2,151 1.11
-------- ------ -------- ------ -------- ------
Total loans receivable, net........... $286,759 98.29% $254,032 97.95% $191,249 98.26%
-------- ------ -------- ------ -------- ------
<CAPTION>
1996 1995
---------------------------------------------------------
Percent Percent
Amount of Total Amount of Total
---------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
First mortgage loans:
One- to four-family residential(1)........ $107,168 63.44% $ 84,203 65.48%
Multi-family.............................. 34,488 20.42 21,474 16.70
Commercial................................ 5,225 3.09 6,163 4.79
-------- ------ ---------- ------
Total first mortgage loans............... 146,881 86.95 111,840 86.97
-------- ------ ---------- ------
Consumer loans:
Automobiles............................... $ 4,155 2.46% $ 2,889 2.25%
Second mortgage(2)........................ 15,303 9.06 10,735 8.35
Other(3).................................. 2,582 1.53 3,127 2.43
-------- ------ ---------- ------
Total consumer loans..................... 22,040 13.05 16,751 13.03
-------- ------ ---------- ------
Total loans receivable................... $168,921 100.00% $ 128,591 100.00%
Less:
Undisbursed portion of
construction loans....................... $ 371 0.22% $ 1,048 0.81%
Unearned loan discount.................... 525 0.31 1,013 0.79
Net deferred loan origination fee......... 241 0.14 203 0.16
Allowance for loan losses................. 1,953 1.16 1,543 1.20
-------- ------ ---------- ------
Total loans receivable, net.............. $165,831 98.17% $ 124,784 97.04%
======== ====== ========== ========
</TABLE>
_______________________
(1) Includes interest-only construction loans that convert to permanent loans.
(2) Second mortgage loans included $1.5 million, $1.4 million, $1.1 million,
$862,000 and $724,000 (in actual dollars) of nonowner-occupied residential
first mortgage loans at December 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
(3) Other consumer loans included $1.6 million, $2.3 million, $269,000,
$213,000 and $299,000 (in actual dollars) of commercial mortgage loans at
December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
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Loan Maturity Schedule. The following table sets forth the maturity or
period to repricing of the Company's loan portfolio at December 31, 1999.
Overdraft lines of credit are reported as due in one year or less. Adjustable-
rate loans are included in the period in which interest rates are next scheduled
to adjust rather than in which they contractually mature, and fixed rate loans
are included in the period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
At December 31, 1999
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Within 1-3 3-5 5-10 10-20 Beyond 20
1 Year Years Years Years Years Years Total
----------- -------- -------- -------- -------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One- to four-family
residential(1)......... $31,786 $17,799 $42,215 $63,060 $ 8,297 $900 $164,057
Multi-family............. 31,862 14,816 15,065 11,670 4 -- 73,417
Commercial............... 3,040 2,262 6,225 4,411 1,785 -- 17,723
Consumer loans (2)............ 4,865 9,699 20,789 1,190 20 -- 36,563
------- ------- ------- ------- ------- ---- --------
Total.................. $71,553 $44,576 $84,294 $80,331 $10,106 $900 $291,760
======= ======= ======= ======= ======= ==== ========
</TABLE>
________________________
(1) One- to four-family loans include $93.5 million of 7 year fixed rate loans
that convert to adjustable rates at the beginning of the eighth year and
are annually adjustable thereafter. $50.5 million of these loans with
repricing periods greater than 5 years have been classified as fixed rate
loans. $43.0 million of these loans with repricing periods less than 5
years have been classified as adjustable rate loans.
(2) Includes second mortgage loans of $23.6 million at December 31, 1999.
The following table sets forth the dollar amounts of all fixed rate and
adjustable rate loans in each loan category at December 31, 1999 due after
December 31, 2000.
<TABLE>
<CAPTION>
Due After December 31, 2000
----------------------------------
Fixed Adjustable Total
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
First mortgage loans:
One- to four-family residential(1)............. $ 70,906 $ 61,365 $132,271
Multi-family................................... 6,498 35,057 41,555
Commercial..................................... 7,321 7,362 14,683
Consumer loans (2)............................... 31,343 355 31,698
-------- -------- --------
Total........................................... $116,068 $104,139 $220,207
======== ======== ========
</TABLE>
________________________
(1) One- to four-family loans include $86.8 million of 7 year fixed rate loans
that convert to adjustable rates at the beginning of the eighth year and
are annually adjustable thereafter. $50.5 million of these loans with
repricing periods greater than 5 years have been classified as fixed rate
loans. $36.3 million of these loans with repricing periods less than 5
years have been classified as adjustable rate loans.
(2) Includes second mortgage loans of $21.2 million at December 31, 1999.
One- to four-family Residential Real Estate Loans. Traditionally, the
Company's primary lending activity consists of the origination of fixed- and
adjustable-rate one- to four-family owner-occupied residential first mortgage
loans, substantially all of which are collateralized by properties located in
the Company's market area. The Company also originates one- to four-family,
interest only construction loans that convert to permanent loans after an
initial construction period that generally does not exceed nine months. At
December 1999, 43.5% of the Company's residential real estate loans had fixed
rates, and 56.5% had adjustable rates.
The Company originates loans for portfolio and sells loans in the secondary
mortgage market. However, the Company's one- to four-family, fixed-rate,
residential real estate loans originated for portfolio are generally originated
and underwritten according to standards that qualify such loans to be included
in Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA") purchase and guarantee programs and that otherwise
permit resale in the secondary mortgage market. The Bank has sold fixed-rate
loans with maturities equal to or in excess of 15 years in the secondary
mortgage market.
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For the year ended December 31, 1999, the Bank sold $475,000 of mortgage loans
consisting of seven one- to four-family residential mortgage loans. One- to
four-family loans are underwritten and originated according to policies approved
by the Board of Directors. First Iowa Mortgage, Inc., the Bank's wholly owned
mortgage banking subsidiary, sold $19.6 million of mortgage loans consisting of
207 one- to four-family residential mortgage loans.
Originations of one- to four-family fixed-rate first mortgage loans are
monitored on an ongoing basis and are affected significantly by the level of
market interest rates, the Company's interest rate gap position, and loan
products offered by the Company's competitors. The Company's one- to four-family
fixed-rate first mortgage loans amortize on a monthly basis with principal and
interest due each month. To make the Company's fixed-rate loan portfolio more
interest rate sensitive, the Company currently emphasizes the origination of
fixed-rate loans with terms of 15 years or less to be held in portfolio. The
Company also offers 5 and 7-year fixed-rate first mortgage loans that convert to
adjustable-rate loans that adjust on an annual basis after the initial fixed-
rate term. The overall maturity of these loans may be up to 30 years. The
Company determines whether a customer qualifies for these loans based upon the
initial fixed interest rate.
The Company's adjustable rate mortgage loans, or "ARM loans," are generally
originated for terms of up to 30 years, with interest rates that adjust
annually. The Company establishes various annual and life-of-the-loan caps on
ARM loan interest rate adjustments. Currently, the Company offers ARM loans with
annual rate caps of 1.5% and maximum life-of-loan caps of 11.95%. Prior to 1995,
the Company's ARM loans originated for retention in its portfolio generally were
based on the 11th District Cost of Funds Index, a lagging market index. At
present, the interest rate on its ARM loans is calculated by using the weekly
average yield on United States Treasury Securities adjusted to a constant
maturity of one year. The Company currently offers one-year ARM loans with
initially discounted rates, often known as "teaser rates." The Company
determines whether a borrower qualifies for an ARM loan based on the fully
indexed rate of the ARM loan at the time the loan is originated, rather than the
introductory or "teaser" rate or the maximum life-of-the rate to which the loan
could adjust. In addition, the Company establishes floors for each loan
originated below which the loan may not adjust. One- to four-family residential
ARM loans totalled $92.7 million, or 32.3%, of the Company's total net loan
portfolio at December 31, 1999.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, that during periods
of rising interest rates, the risk of default on ARM loans may increase due to
the upward adjustment of interest costs to the borrower. Management believes
that the Company's credit risk associated with its ARM loans is reduced because
of the annual and lifetime interest rate adjustment limitations on such loans,
although such limitations do create an element of interest rate risk. See
"Discussion of Market Risk-- Interest Rate Sensitivity Analysis."
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings institution may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. See "Regulation--
Regulation of Federal Savings Associations--Real Estate Lending Standards." The
Company's lending policies limit the maximum loan-to-value ratio on mortgage
loans without private mortgage insurance to 80% of the lesser of the appraised
value or the purchase price of the property to serve as collateral for the loan.
The Company generally makes one- to four-family first real estate loans with
loan-to-value ratios of up to 90%; however, for one- to four-family real estate
loans with loan-to-value ratios greater than 80%, the Company requires the loan
amount to be covered by private mortgage insurance. The Company requires fire
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and casualty insurance, flood insurance, where applicable, an abstract of title,
and a title opinion on all properties securing real estate loans originated by
the Company.
Multi-family Residential and Commercial Real Estate Loans. The Company's
loan portfolio contains loans secured by multi-family residential and commercial
real estate. Such loans constituted approximately $91.1 million, or 31.8%, of
the Company's total net loan portfolio at December 31, 1999. Of such loans,
$83.6 million, or 91.8%, were purchased or originated by the Company and were
secured by properties outside the State of Iowa (the "out of state" properties).
There was no multi-family or commercial real estate loan more than 90 days past
due at December 31, 1999. These loans are primarily secured by multi-family
residences such as apartment buildings, and by commercial facilities, such as
office buildings and retail buildings. Multi-family residential real estate
loans are offered with fixed- and adjustable-rates and are structured in a
number of different ways depending upon the circumstances of the borrower and
the type of multi-family project. Fixed- rate loans generally amortize over 15
to 30 years, and generally contain call provisions permitting the Company to
require that the entire principal balance be repaid at the end of five to
fifteen years. Such loans are priced as five to fifteen year loans with maximum
loan-to-value ratios of 80%. See "-- Purchased or Out of State Originated
Loans."
All purchased or out of state originated loans in excess of $200,000 are
approved by the Chief Executive Officer, Chief Operating Officer and the Board
of Directors and are subject to the same underwriting standards as for loans
originated by the Company. All purchased or out of state originated loans less
than $200,000 are approved by the Chief Executive Officer and Chief Operating
Officer and ratified by the Board of Directors and are subject to the same
underwriting standards as loans originated by the Company. Before a loan is
purchased, the Company obtains a copy of the original loan application,
certified rent rolls, the original title insurance policy and personal financial
statements of any guarantors of the loan. An executive officer or director of
the Company also makes a personal inspection of the property securing the loan.
Such purchases are made without recourse to the seller. The originating
financial institution or mortgage banker may continue service the loans,
remitting principal and interest to the Company. As of December 31, 1999, $21.5
million purchased or out of state originated loans were serviced by the Bank and
$72.4 million were serviced by the originating financial institution or mortgage
banker. The Company has a $2.5 million limit on the aggregate size of multi-
family and commercial loans to any one borrower. Any exceptions to the limit
must be specifically approved by the Board of Directors on a loan-by-loan basis
within the Company's legal lending limit. See "Regulation -- Regulation of
Federal Savings Associations -- Loans to One Borrower."
Loans secured by multi-family and commercial real estate generally involve
a greater degree of credit risk than single-family residential mortgage loans
and typically, such loans also have larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate property. If the cash
flow from such real estate projects are reduced, the borrower's ability to repay
the loan may be impaired.
Consumer Loans, Including Second Mortgage Loans. The Company also
originates consumer loans, which primarily include second mortgage loans. As of
December 31, 1999, second mortgage loans totalled $23.6 million, or 8.2%, of the
Company's net total loan portfolio. The Company's second mortgage loans have
fixed interest rates and are generally for terms of 3 to 5 years. The Company's
second mortgage loans are secured by the borrower's principal residence
generally with a maximum loan-to-value ratio, including the principal balances
of both the first and second mortgage loans, of generally no more than 80%. The
average principal amount of the Company's second mortgage loans is approximately
$13,000. The Company also offers home equity lines of credit secured by second
mortgage loans.
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To a lesser extent, the Company also originates loans secured by
automobiles, with fixed rates generally on a 80% loan-to-value basis for new
cars. All of the Company's automobile loans were originated by the Company and
generally have terms of up to five years.
In addition, the Company also makes other types of consumer loans,
primarily unsecured signature loans for various purposes. The minimum loan
amount for such loans is $1,000, the maximum loan amount for such loans is
$7,500, and the average balance of such loans is approximately $2,500.
The Company originates a limited number of commercial business loans, which
the Company includes with its consumer loan portfolio for reporting purposes.
Such loans may be unsecured and are originated for any business purpose, such as
for the purchase of computers and business equipment. The maximum loan amount
for such unsecured loans is $7,500.
The Company's business plan calls for an increase in consumer lending for
the foreseeable future, particularly second mortgage lending. The Company
generally expects consumer loan demand will come from its mortgage loan
customers. Consumer loans generally provide for shorter terms and higher yields
as compared to residential first mortgage loans, but generally carry higher
risks of default. At December 31, 1999, $102,000, or 0.28%, of the Company's
consumer loan portfolio was on nonaccrual status.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate agent
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by the Company appraises the real estate
intended to collateralize the proposed loan. An underwriter in the Company's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. Pursuant to the Company's written loan
policies, all first mortgage loans originated prior to 1998 were approved by the
Chief Executive Officer. Beginning in 1998, the Chief Executive Officer approves
all first mortgage loans greater than $150,000. All first mortgage loans less
than $150,000 are approved by two members of senior management. The Loan
Committee of the Board of Directors meets monthly to review a sampling of all
loans originated in the month.
After a loan is approved, a loan commitment letter is promptly issued to
the borrower. The commitment letter specifies the terms and conditions of the
proposed loan including the amount of the loan, interest rate, amortization
term, a brief description of the required collateral, and required insurance
coverage. Commitments are typically issued for 60-day periods in the case of
loans to refinance, loans to purchase existing real estate, and construction
loans. The borrower must provide proof of fire and casualty insurance on the
property serving as collateral, which insurance must be maintained during the
full term of the loan. An abstract of title along with an attorney's title
opinion is required on all first mortgage loans secured by real property in
Iowa. At December 31, 1999, the Company had outstanding commitments to originate
$1.4 million of loans. This amount does not include commitments to purchase
loans, the undisbursed overdraft loan privileges or the unfunded portion of
loans in process.
Purchased or Out of State Originated Loans. The Company's loan portfolio
contains $94.0 million of loans secured by out of state properties. These loans
represented 32.2% of the Company's total loan portfolio at December 31, 1999.
Substantially all of the multi-family residential and commercial real estate
loans in the Company's loan portfolio are purchased or originated out of state
by the Company without recourse to the seller. The Company's investment in
properties located in Wisconsin totalled $36.0 million and was primarily
distributed between the Milwaukee and Madison areas. The Company's investment in
properties in Colorado totalled $22.7 million and was primarily distributed
between the Colorado Springs and Denver areas. At December 31, 1999, the
Company's investment in properties located in California totalled $15.0 million
and was distributed primarily in southern California. The remainder of the
Company's purchased or out of state originated loans are distributed in various
states. At December 31, 1999, the Company's multi-family residential and
commercial real estate loans had an average balance of $410,000 and the largest
loan had a principal
-9-
<PAGE>
balance of $2.5 million. As of December 31, 1999 there were no multi-family or
commercial real estate loan that was more than 90 days past due or on a
nonaccrual status.
To supplement its origination of one- to four-family first mortgage loans,
the Company also purchases loans secured by one- to four-family residences out
of state. At December 31, 1999, $10.3 million, or 3.5%, of the Company's total
loan portfolio consisted of purchased one- to four-family loans, of which $4.5
million were secured by properties located in Missouri and $1.9 million were
secured by properties in Wisconsin. As of December 31, 1999 there were no
purchased one- to four-family first mortgage loans that were on a nonaccrual
status.
Loans purchased by the Company entail certain risks not necessarily
associated with loans the Company originates. The Company's purchased loans are
generally acquired without recourse with servicing retained by the seller or
originator of the loans. Although the Company reviews each purchased loan using
the Company's underwriting criteria for originations and a Company officer or
director performs an on-site inspection of each purchased loan, the Company is
dependent on the servicer of the loan for ongoing collection efforts and
collateral review. In addition, the Company purchases loans with a variety of
terms, including maturities, interest rate caps and indices for adjustment of
interest rates that may differ from those offered at the time by the Company in
connection with loans the Company originates. Finally, the market areas in which
the properties which secure the purchased loans are located are subject to
economic and real estate market conditions that may significantly differ from
those experienced in the Company's market areas. If economic conditions continue
to limit the Company's opportunities to originate loans in its market areas, the
Company may increase its investment in out of state mortgage loans. There can be
no assurance, however, that economic conditions in these out of state areas will
not deteriorate in the future resulting in increased loan delinquencies and loan
losses among the loans secured by property in these areas.
In an effort to reduce the risk of loss on out of state purchased loans,
the Company only purchases loans that meet the underwriting policies for loans
originated by the Company although specific rates and terms may differ from the
rates and terms offered by the Company. The Company also requires appropriate
documentation, and personal inspections of the underlying real estate collateral
by an executive officer or director prior to purchase. The servicers of the
loans generally conduct annual inspections of the underlying real estate
collateral and copies of the reports of such inspections are typically provided
to the Company.
-10-
<PAGE>
Set forth below is a table of the Company's purchased or out of state
originated loans by state of origin (including multi-family residential,
commercial real estate and one- to four-family first mortgage loans) as of
December 31, 1999.
Balance as of
State December 31, 1999
----- -----------------
(In thousands)
Arizona $ 1,204
California 14,976
Colorado 22,708
Florida 289
Georgia 69
Illinois 249
Indiana 813
Kansas 817
Michigan 19
Minnesota 332
Missouri 5,406
Montana 101
Nebraska 556
Nevada 655
New Mexico 75
North Carolina 737
North Dakota 80
Ohio 806
Oregon 2,716
South Carolina 122
Tennessee 196
Texas 1,818
Utah 1,185
Virginia 47
Washington 1,942
Wisconsin 36,037
-------
Total $93,955
=======
-11-
<PAGE>
Origination, Purchase and Sale of Loans. The table below shows the
Company's originations, purchases and sales of loans for the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Total loans receivable at beginning of period........ $259,361 $194,626 $168,921
-------- -------- --------
Originations:
First mortgage loans:
One- to four-family residential................. 60,811 58,120 25,001
Multi-family.................................... 700 -- --
Commercial...................................... -- 1,100 50
Consumer loans:
Automobile...................................... 6,912 6,349 3,698
Second mortgage................................. 16,141 14,493 9,642
Other........................................... 2,301 2,595 1,591
-------- -------- --------
Total originations:........................... 86,865 82,657 39,982
Effect of Valley Financial Acquisition.......... -- 58,911 --
Loan Purchases:
First mortgage -- one- to four-family........... 5,870 3,159 51
First mortgage -- multi-family.................. 23,332 21,315 22,313
First mortgage -- commercial.................... 11,142 --
Loan Sales:
First mortgage -- one- to four-family........... 20,117 26,411 815
Transfer of mortgage loans to
foreclosed real estate.......................... 212 373 175
Repayments........................................... 74,481 74,523 35,651
-------- -------- --------
Net loan activity.................................... 33,399 63,734 25,705
-------- -------- --------
Total loans receivable at end of period....... $291,760 $259,361 $194,626
======== ======== ========
</TABLE>
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Company generally receives fees in connection with loan originations.
Such loan origination fees, net of costs to originate, are deferred and
amortized using an interest method over the contractual life of the loan. Fees
deferred are recognized into income immediately upon prepayment of the related
loan. At December 31, 1999, the Company had $106,000 of deferred loan
origination fees, net. Such fees vary with the type of loans and commitments
made. The Company typically charges a document preparation fee on fixed- and
adjustable-rate first mortgage loans. In addition to loan origination fees, the
Company also receives other fees, service charges (such as overdraft fees), and
other income that consist primarily of deposit transaction account service
charges and late charges. The Company recognized fees and service charges of
$1.5 million, $1.2 million and $657,000 for the fiscal years ended December 31,
1999, 1998 and 1997, respectively.
-12-
<PAGE>
Investment Activities
At December 31, 1999, the Company's investment portfolio is comprised of
United States Treasury securities, United States Government agencies, municipal
obligations, mortgage-backed securities, equity securities consisting of FHLMC
preferred stock, FNMA preferred stock, FHLB stock, other common and preferred
stocks and interest-earning deposits. At December 31, 1999, $4.5 million, or
11.8%, of the Company's investment portfolio, excluding equity securities, was
scheduled to mature in one year or less, and $13.1 million, or 34.7%, was
scheduled to mature within one to five years.
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short term demand for funds to be used in the Company's loan origination and
other activities. In addition, the Company's liquidity levels are affected by
the level and source of its borrowed funds.
Investment Portfolio. The following table sets forth the carrying value of
the Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
(In thousands)
Investment securities:
U.S. Treasury notes.................. $ 4,260 $ 9,410 $11,046
U.S. Government agencies............. 18,799 18,884 --
Mortgage-backed securities........... 9,955 7,508 --
State and local obligations.......... 4,772 4,378 --
FHLB stock........................... 3,035 2,379 1,550
Equity securities.................... 8,872 7,323 7,220
------- ------- -------
Total investment securities........ 49,693 49,882 19,816
Interest-earning deposits............ 4,127 13,201 2,463
------- ------- -------
Total investments.................. $53,820 $63,083 $22,279
======= ======= =======
</TABLE>
-13-
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and weighted average yields
for the Company's investment portfolio at December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------------------------------------------------
One Year or Less Over Five Years Over Five Years Total
-------------------------------------------------------------------------------------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Market
Value Yield Value Yield Value Yield Value Value
-------- ----------- --------- ----------- --------- ----------- --------- ---------
(Dollars in thousands)
Investment securities:
U.S. Treasury notes............ $3,757 5.67% $ 503 6.81% $ 0 0.00% $ 4,260 $ 4,260
U.S. Government agencies(1).... 324 5.84 17,478 6.01 998 7.18 18,800 18,800
Mortgage-backed securities..... 507 5.48 1,869 5.73 7,579 6.16 9,955 9,955
State and local obligations.... -- -- 1,664 5.31 3,108 5.07 4,772 4,772
FHLB stock..................... -- -- -- -- -- -- 3,035 3,035
Common Stock................... -- -- -- -- -- -- 457 457
Preferred stock-other.......... -- -- -- -- -- -- -- --
Preferred stock-FNMA........... -- -- -- -- -- -- 5,157 5,157
Preferred stock-FHLMC.......... -- -- -- -- -- -- 3,257 3,257
------ ------- ------- ------- -------
Total....................... $4,588 5.66% $21,514 5.95% $11,685 5.96% $49,693 $49,693
Interest-bearing deposits
at the FHLB.................. 4,127 4.91 -- -- -- -- 4,127 4,127
------ ------- ------- ------- -------
Total investments........... $8,715 5.30% $21,514 5.95% $11,685 5.96% $53,820 $53,820
====== ======= ======= ======= =======
<CAPTION>
Annualized
Average Weighted
Life in Average
Years Yield
------- -----------
<S> <C> <C>
Investment securities:
U.S. Treasury notes.............. 1 5.77%
U.S. Government agencies(1)...... 5 6.05
Mortgage-backed securities....... 4 5.92
State and local obligations...... 5 4.65
FHLB stock....................... 6.35
Common Stock..................... 4.65
Preferred stock-other............ --
Preferred stock-FNMA............. 6.53
Preferred stock-FHLMC............ 5.77
Total....................... 5.90%
Interest-bearing deposits
at the FHLB.................... 4.91
Total investments........... 5.83%
</TABLE>
___________________
(1) Certain securities have call features which allows the issuer to call the
security prior to maturity date.
-14-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from FHLB advances, the amortization and prepayment of loans, the maturity
of investment securities and operations. Scheduled loan principal repayments
are a relatively stable source of funds, while deposit inflows and outflows and
loan prepayments are influenced significantly by general interest rates and
market conditions. The Company may use borrowings on a short-term basis to
compensate for reductions in the availability of funds from other sources or on
a longer term basis for general business purposes.
Deposits. During 1999, consumer and commercial deposits were attracted
principally from within the Company's market area through the offering of a
broad selection of deposit instruments including NOW accounts, savings accounts,
money market savings, certificates of deposit and individual retirement
accounts. The Company also offers these products in its new market area which
it now serves as a result of the Acquisition. See "--Acquisition of Valley
Financial Corp." Deposit account terms vary according to the minimum balance
required, the period of time during which the funds must remain on deposit, and
the interest rate, among other factors. The maximum rate of interest which the
Company may pay is not established by regulatory authority. The Company
regularly evaluates its internal cost of funds, surveys rates offered by
competing institutions, reviews the Company's cash flow requirements for lending
and liquidity, and executes rate changes when deemed appropriate. During 1999,
the Company became a more active bidder for public funds in the State of Iowa.
As a result, public fund deposits totalled $20.5 million at December 31, 1999.
The Company does not obtain retail funds through brokers by solicitation of
funds, nor by offering negotiated rates on certificates of deposit in excess of
$100,000.
Deposit Portfolio. Deposits with the Company as of December 31, 1999 were
represented by the various types of deposit programs described below.
<TABLE>
<CAPTION>
Weighted Percentage
Average Checking and Minimum of Total
Interest Rate Original Term Savings Deposits Balance Balances Deposits
- --------------- --------------- -------------------- --------- ------------ ------------
(Dollars in
thousands)
<S> <C> <C> <C> <C> <C>
0.00% None Noninterest-bearing demand $ 50 $ 6,412 2.37%
1.25 None NOW accounts 50 30,096 11.10
2.00 None Savings accounts 25 25,830 9.53
3.61 None Money Market savings 2,500 17,464 6.44
Certificates of Deposit
-----------------------
4.78 1-3 months Fixed term, fixed rate $1,000 $ 1,328 0.49
4.84 4-6 months Fixed term, fixed rate 1,000 5,426 2.00
5.58 7-9 months Fixed term, fixed rate 1,000 5,757 2.12
5.12 10-12 months Fixed term, fixed rate 1,000 18,731 6.91
5.25 13-24 months Fixed term, fixed rate 1,000 84,465 31.17
5.48 25-36 months Fixed term, fixed rate 1,000 24,138 8.91
5.85 37-48 months Fixed term, fixed rate 1,000 1,488 0.55
6.09 49-60 months Fixed term, fixed rate 1,000 48,926 18.05
6.16 61 months or greater Fixed term, fixed rate 1,000 827 0.31
3.50 Various Variable rate 100 143 0.05
-------- ------
Total certificates of deposit $271,031 100.00%
======== ======
</TABLE>
-15-
<PAGE>
The following table sets forth the change in dollar amount of deposits in the
various types of deposit accounts offered by the Company between the dates
indicated.
<TABLE>
<CAPTION>
Increase Increase Increase Increase
Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance
12/31/99 % $ 12/31/98 % $ 12/31/97
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Noninterest-bearing demand........ $ 6,412 17.48% $ 954 $ 5,458 73.55% $ 2,313 $ 3,145
NOW............................... 30,096 (2.63) (813) 30,909 113.80 16,452 14,457
Savings account................... 25,830 (1.03) (269) 26,099 52.45 8,979 17,120
Money market savings.............. 17,464 (11.92) (2,364) 19,828 121.34 10,870 8,958
Certificates of deposit
that mature:
within 12 months.............. 117,515 44.55 36,220 81,295 99.44 40,533 40,762
within 12-36 months........... 52,707 (18.86) (12,255) 64,962 53.20 22,558 42,404
beyond 36 months.............. 21,007 15.81 2,868 18,139 27.04 3,861 14,278
--------- -------- --------- -------- ---------
Total...................... $ 271,031 9.87% $ 24,341 $ 246,690 74.80% $105,566 $ 141,124
========= ======== ========= ======== =========
<CAPTION>
Increase Increase Increase Increase
Balance (Decrease) (Decrease) Balance (Decrease) (Decrease) Balance
12/31/97 % $ 12/31/96 % $ 12/31/95
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Noninterest-bearing demand........ $ 3,145 38.24% $ 870 $ 2,275 0.04% $ 8 $ 2,267
NOW............................... 14,457 22.27 2,633 11,824 3.39 388 11,436
Passbook savings.................. 17,120 (3.58) (636) 17,756 (5.85) (1,104) 18,860
Money market savings.............. 8,958 23.05 1,678 7,280 29.38 1,653 5,627
Certificates of deposit
that mature:
within 12 months.............. 40,762 10.25 3,790 36,972 22.37 6,759 30,213
within 12-36 months........... 42,404 33.24 10,578 31,826 (6.77) (2,311) 34,137
beyond 36 months.............. 14,278 (34.47) (7,511) 21,789 (9.71) (2,343) 24,132
--------- ------- --------- ------- ---------
Total...................... $ 141,124 8.79% $11,402 $ 129,722 2.41% $ 3,050 $ 126,672
========= ======= ========= ======= =========
</TABLE>
-16-
<PAGE>
The following table sets forth the certificates of deposit in the Company
classified by rates as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
(In thousands)
Rate
- ----
3.99% or less........ $ 688 $ 232 $ 91
4.00-5.99%........... 154,231 110,152 45,749
6.00-7.99%........... 36,300 53,829 51,585
8.00 or greater...... 10 183 19
--------- -------- -------
$191,229 $164,396 $97,444
========= ======== =======
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1999.
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------------
Less
Than 1 1-2 2-3 3-4 4-5 After 5
Year Years Years Years Years Years Total
--------- -------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Rate
- ----
3.99% or less........... $ 688 $ -- $ -- $ -- $ -- $ -- $ 688
4.00-5.99%.............. 100,804 29,711 4,709 8,853 10,025 130 154,232
6.00-7.99%.............. 16,023 11,069 7,208 1,796 6 197 36,299
8.00 or greater......... -- -- 10 -- -- -- 10
-------- ------- ------- ------- ------- ---- --------
$117,515 $40,780 $11,927 $10,649 $10,031 $327 $191,229
======== ======= ======= ======= ======= ==== ========
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity at December 31,
1999. This amount does not include savings accounts of greater than $100,000,
which totalled approximately $981,000 at December 31, 1999.
<TABLE>
<CAPTION>
Certificates
of Deposit over
Remaining Maturity $100,000
------------------------------------ -----------------
<S> <C>
(In thousands)
Three months or less................ $ 3,395
Three through six months............ 12,886
Six through twelve months........... 6,580
Over twelve months.................. 9,355
--------
Total............................. $ 32,216
========
</TABLE>
-17-
<PAGE>
The following table sets forth the savings activities of the Company for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
(In thousands)
Net increase (decrease) before interest
credited and deposits acquired................ $15,582 $ (2,943) $ 6,132
Effect of Valley Financial Acquisition......... -- 99,269 --
Interest credited.............................. 8,758 9,240 5,270
------- -------- -------
Net increase in deposits................... $24,340 $105,566 $11,402
======= ======== =======
</TABLE>
Borrowings
Deposits are the Company's primary source of funds. The Company may also
obtain funds from the FHLB. FHLB advances are collateralized by selected assets
of the Company. Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank, for purposes other than meeting withdrawals, fluctuates from time to time
in accordance with the policies of the OTS and the FHLB. The maximum amount of
FHLB advances to a member institution generally is reduced by borrowings from
any other source.
<TABLE>
<CAPTION>
For the
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
(Dollars in thousands)
Weighted average rate paid on: (1)
FHLB advances.......................... 5.62% 5.81% 5.94%
FHLB advances:
Maximum balance........................ $60,691 $42,550 $29,800
Average balance........................ 43,711 33,980 23,672
Weighted average rate paid on:
Other borrowings....................... 1.00% 1.00% 9.00%
Other borrowings:
Maximum balance........................ $ 38 $ 42 $ 35
Average balance........................ 36 40 7
</TABLE>
________________________
(1) Calculated using monthly weighted average interest rates.
Title Abstract Business
A component of the Company's operating strategy is to increase noninterest
income through the expansion of its abstract company business conducted by First
Iowa Title Services Inc. ("First Iowa"), a wholly owned subsidiary of the
Company. On December 28, 1996, First Iowa purchased the assets of two abstract
companies located in Webster and Calhoun Counties in Iowa. The abstract company
in Calhoun County was subsequently sold on March 30, 1997. First Iowa currently
provides real estate title abstracting services in Webster, Boone and Jasper
Counties. These services include researching recorded documents at the county
courthouse and providing a history of those documents as they pertain to
specific parcels of real estate. This information is used to determine who owns
specific parcels of real estate and what encumbrances are on those specific
parcels. The abstract business performed by First Iowa replaces a significant
portion of the function of a title insurance company. Iowa law prohibits Iowa
insurance companies or companies authorized to do business in Iowa from issuing
title insurance or insurance against loss or
-18-
<PAGE>
damage by reason of defective title, encumbrance or otherwise. Institutions can
purchase title insurance, for their own protection or to sell loans on the
secondary market, but the cost of this insurance may not be passed on to the
borrower. First Iowa had 19 employees as of December 31, 1999.
Insurance, Annuity and Mutual Fund Business
The Company has another wholly-owned subsidiary, First Federal Investment
Services, Inc., ("First Federal Investment") formerly known as First Financial
Service Corporation, which the Company began in 1971. On February 25, 2000,
First Financial's name was changed to First Federal Investment Services, Inc.
First Federal Investment's activities include the sale of life insurance on
mortgage loans, and credit life, accident and health insurance on consumer loans
made by the Company. In addition, First Federal Investment sells life insurance
annuity products and mutual funds. First Federal Investment also originates
leases for equipment such as computers, office equipment, light industrial
equipment and commercial cleaning equipment. First Federal Investment has no
employees. The subsidiary has executed a management agreement with the Company
which provides its management and staff.
Mortgage Company Business
First Iowa Mortgage, Inc. (formerly known as Hearthstone Mortgage Company,
Inc., "FIM") was acquired by the Company as part of the Acquisition and is a
wholly-owned subsidiary of the Bank. FIM originates first mortgage loans and
subsequently sells these loans and the mortgage servicing rights to investors.
FIM currently operates in Ames, Iowa and at December 31, 1999 had 3 employees.
Multi-family Apartment Building
On July 13, 1995, the Company formed the Northridge Apartments Limited
Partnership with the Fort Dodge Housing Corporation ("FDHC"), a non-profit Iowa
corporation formed to acquire, develop and manage low- and moderate-income
housing for residents of the Fort Dodge area. The FDHC is controlled by the
Fort Dodge Municipal Housing Agency, an agency chartered by the City of Fort
Dodge. The Northridge Partnership is a low-income housing tax credit project
for certain federal tax purposes. A 44-unit apartment complex was completed on
February 1, 1997. The tax credits for the year ended December 31, 1999 are
approximately $154,000. The tax credits will continue for a seven-year period.
Personnel
At December 31, 1999, the Company had 106 full-time and 23 part-time
employees (including the 19 employees of First Iowa and the 3 employees at FIM).
None of the Company's employees is represented by a collective bargaining group.
The Company believes its relationship with its employees to be good.
-19-
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The following is a general discussion of material tax matters and
does not purport to be a comprehensive description of the tax rules applicable
to the Holding Company or the Bank. The Bank has not been audited in the last
five years. For federal income tax purposes, the Holding Company and the Bank
will be eligible to file consolidated income tax returns and report their income
on a calendar year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's tax reserve for bad debts,
discussed below.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an
adjusted tax basis of $500 million or less) is permitted to maintain a reserve
for bad debts with respect to "qualifying loans," which, in general, are loans
secured by certain interests in real property, and to make, within specified
formula limits, annual additions to the reserve which are deductible for
purposes of computing the Bank's taxable income. Pursuant to the Small Business
Job Protection Act of 1996, the Bank is now recapturing (taking into income)
over a multi-year period a portion of the balance of its bad debt reserve as of
December 31, 1995.
Distributions. To the extent that the Company makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Company's "base year reserve," i.e. its reserve as "of
December 31, 1987, to the extent thereof and then from its supplemental reserve
for losses on loans, and an amount based on the amount distributed will be
included in the Company's taxable income. Nondividend distributions include
distributions in excess of the Company's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Company's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not constitute nondividend distributions and, therefore, will not be
included in the Company's income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.
Corporate Alternative Maximum Tax. The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
Only 90% of AMTI can be offset by net operating losses. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by
which the Company's adjusted current earnings exceeds its AMTI (determined
without regard to this adjustment and prior to reduction for net operating
losses). The Company does not expect to be subject to the AMT.
Dividends-Received Deduction. The Holding Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding Company and the Bank will not file a consolidated tax
return, except that if the Holding Company or the Bank owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
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State and Local Taxation
Iowa Taxation. The Holding Company and the Bank's subsidiaries will file
Iowa corporation tax returns and the Bank will file an Iowa franchise tax
return. The Bank currently files an Iowa franchise tax return, and the Holding
Company and the Bank's subsidiaries file Iowa corporation tax returns, on a
calendar year basis.
The State of Iowa imposes a tax on the Iowa franchise taxable income of
thrift institutions at the rate of 5%. Iowa franchise taxable income is
generally similar to federal taxable income except that interest from state and
municipal obligations is taxable, and no deduction is allowed for state
franchise taxes. The net operating loss carryback and carryforward rules are
similar to the federal rules.
The state corporation income tax rate ranges from 6% to 12% depending upon
Iowa corporation taxable income. Interest from federal securities is not
deductible for purposes of the Iowa corporation income tax.
REGULATION
General
The Bank is subject to regulation, examination and supervision by the OTS,
as its chartering agency, and the Federal Deposit Insurance Corporation
("FDIC"), as its deposit insurer. The Bank must file reports with the OTS and
the FDIC concerning its activities and financial condition, and it must obtain
regulatory approvals prior to entering into certain transactions, such as
mergers with or acquisitions of other depository institutions. The OTS and the
FDIC conduct periodic examinations to assess the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a savings association can engage
and is intended primarily for the protection of the insurance fund and
depositors. The Holding Company, as a savings and loan holding company, files
certain reports with, and otherwise complies with, the rules and regulations of
the OTS and of the Securities and Exchange Commission (the "SEC") under the
federal securities laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
Regulation of Savings and Loan Holding Companies
The Holding Company is a savings and loan holding company and is subject to
OTS regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over the Holding Company and any of
its non-savings association subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the financial safety, soundness or stability of a subsidiary
savings association.
The Home Owners' and Loan Act ("HOLA"), as amended, prohibits a savings and
loan holding company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings association or holding company
thereof, without prior written approval of the OTS; acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary savings association, a non-
subsidiary holding company or a non-subsidiary company engaged in activities
other than those permitted by HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating an
application by a holding company to acquire a savings association, the OTS must
consider the financial and managerial resources and future prospects of the
company and savings association
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involved, the effect of the acquisition on the risk to the insurance funds, the
convenience and needs of the community and competitive factors.
As a unitary savings and loan holding company "grandfathered" under the
Gramm-Leach-Bliley Act, the Holding Company generally is not restricted under
existing laws as to the types of business activities in which it may engage,
provided that the Bank continues to satisfy the QTL test. Upon any
nonsupervisory acquisition by the Company of another savings association or
savings bank that meets the QTL test and is deemed to be a savings association
by the OTS and that will be held as a separate subsidiary, the Holding Company
would become a multiple savings and loan holding company and would be subject to
limitations on the types of business activities in which it could engage. HOLA
limits the activities of a multiple savings and loan holding company and its
non-insured association subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act
(the "BHC Act"), subject to the prior approval of the OTS, and to other
activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings associations in
more than one state, subject to two exceptions: an acquisition of a savings
association in another state (i) in a supervisory transaction, and (ii) pursuant
to authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of requiring
that the laws of both the state in which the acquiring holding company is
located (as determined by the location of its subsidiary savings association)
and the state in which the association to be acquired is located, have each
enacted legislation allowing its savings associations to be acquired by out-of-
state holding companies on the condition that the laws of the other state
authorize such transactions on terms no more restrictive than those imposed on
the acquiror by the state of the target association. Some of these states also
impose regional limitations, which restrict such acquisitions to states within a
defined geographic region. Other states allow full nationwide banking without
any condition of reciprocity. Some states do not authorize interstate
acquisitions of savings associations.
Regulation of Federal Savings Associations
Business Activities. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of debt
securities, and certain other assets. The Bank may also establish service
corporations that may engage in activities not otherwise permissible for the
Bank, including certain real estate equity investments and securities and
insurance brokerage. These investment powers are subject to various
limitations, including: (i) a prohibition against the acquisition of any
corporate debt security that is not rated in one of the four highest rating
categories; (ii) a limit of 400% of an association's capital on the aggregate
amount of loans secured by nonresidential real estate property; (iii) a limit of
20% of an association's assets on commercial loans with the amount of commercial
loans in excess of 10% of assets being limited to small business loans; (iv) a
limit of 35% of an association's assets on the aggregate amount of consumer
loans and acquisitions of certain debt securities; (v) a limit of 5% of assets
on non-conforming loans (loans in excess of the specific limitations of HOLA);
and (vi) a limit of the greater of 5% of assets or an association's capital on
certain construction loans made for the purpose of financing what is or is
expected to become residential property.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, in the aggregate not exceeding 10% of unimpaired capital and surplus, if
any such loan or extension of credit is fully secured by readily-marketable
collateral. Such collateral is defined to include certain debt and equity
securities and bullion, but generally does not include real estate. For the
year ended December 31, 1999, the Bank generally imposed a $2.5 million limit on
the aggregate size of loans to any one borrower. Any exception to the limit
must be specifically approved by the Board of Directors on a loan-by-loan basis
within the Bank's legal lending limit. At December 31, 1999, the Bank's largest
aggregate amount of loans to one
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borrower was $2.5 million, and the second largest borrower had an aggregate
balance of $2.0 million. The Bank is in compliance with all applicable
limitations on loans to one borrower.
QTL Test. HOLA requires a savings association to meet a qualified thrift
lender, or "QTL" test. Under the QTL test, a savings association is required to
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least 9 months of the most recent 12-month period.
"Portfolio assets" means, in general, an association's total assets less the sum
of (i) specified liquid assets up to 20% of total assets, (ii) goodwill and
other intangible assets, and (iii) the value of property used to conduct the
association's business. "Qualified thrift investments" includes various types
of loans made for residential and housing purposes, investments related to such
purposes, including certain mortgage-backed and related securities, consumer
loans, small business loans, education loans and credit card loans. A savings
association may also satisfy the QTL test by qualifying as a "domestic building
and loan association" as defined in the Internal Revenue Code of 1986. At
December 31, 1999, the Bank maintained 91.4% of its portfolio assets in
qualified thrift investments, and it had more than 65% of its portfolio assets
in qualified thrift investments in the requisite number of the prior 12 months.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The
initial restrictions include prohibitions against (i) engaging in any new
activity not permissible for a national bank, (ii) paying dividends not
permissible under national bank regulations, (iii) obtaining new advances from
any FHLB, and (iv) establishing any new branch office in a location not
permissible for a national bank in the association's home state. In addition,
within one year of the date a savings association ceases to meet the QTL test,
any company controlling the association would have to register under, and become
subject to the requirements of, the BHC Act. If the savings association does
not requalify under the QTL test within the three-year period after it failed
the QTL test, it would be required to terminate any activity and to dispose of
any investment not permissible for a national bank and would have to repay as
promptly as possible any outstanding advances from an FHLB. A savings
association that has failed the QTL test may requalify under the QTL test and be
free of such limitations, but it may do so only once.
Capital Requirements. The OTS regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets, and a risk-
based capital ratio requirement of 8% of total risk-based capital to total risk-
weighted assets. In determining compliance with the risk-based capital
requirement, a savings association must compute its risk-weighted assets by
multiplying its assets and certain off balance sheet items by risk weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks the OTS believes are
inherent in the type of asset. Tangible capital is defined, generally, as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related earnings and minority interests in equity
accounts of fully consolidated subsidiaries, less intangibles (other than
certain purchased mortgage servicing rights) and investments in an loans to
subsidiaries engaged in activities not permissible for a national bank. Core
capital is defined similarly to tangible capital, but core capital also includes
certain qualifying supervisory goodwill and certain purchased credit card
relationships. Supplementary capital currently includes cumulative and other
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS and the other federal banking agencies are required to take into
account interest rate risk ("IRR") in their risk-based capital standards. The
OTS adopted regulations, effective January 1, 1994, that set forth the
methodology for calculating an IRR component to be incorporated into the OTS
risk-based capital regulations. The OTS has indefinitely deferred the
implementation of the IRR component in the computation of an institution's risk-
based capital requirement. The OTS continues to monitor the IRR of individual
institutions and retains the right to impose additional capital on individual
institutions. At December 31, 1999, the Bank was not required to maintain any
additional risk-based capital under this regulation.
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At December 31, 1999, the Bank met each of its capital requirements, in
each case on a fully phased-in basis. The table below presents the Bank's
regulatory capital as compared to the OTS regulatory capital requirements at
December 31, 1999:
<TABLE>
<CAPTION>
Bank Capital Requirements Excess Capital
Amount Percent Amount Percent Amount Percent
-------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Tangible capital............... $30,685 8.5% $ 5,416 1.5% $25,269 7.0%
Core capital................... 30,685 8.5 10,833 3.0 19,852 5.5
Risk-based capital............. 33,168 16.7 15,870 8.0 17,298 8.7
</TABLE>
A reconciliation between regulatory capital and GAAP capital at December
31, 1999 in the accompanying financial statements is presented below:
<TABLE>
<CAPTION>
Tangible Capital Core Capital Risk-based Capital
----------------- ------------- -------------------
(In thousands)
<S> <C> <C> <C>
GAAP capital........................................... $36,766 $36,766 $36,766
Intangible assets...................................... (6,842) (6,842) (6,842)
Unrealized loss on certain available for sale
assets............................................... 761 761 761
Allowance for loan losses includable
in supplementary capital............................. -- -- 2,483
------- ------- -------
Regulatory capital..................................... $30,685 $30,685 $33,168
======= ======= =======
</TABLE>
Limitation on Capital Distributions. Effective April 1, 1999, the OTS
amended its capital distribution regulations to reduce regulatory burdens on
savings associations. Under the amendments adopted by the OTS, certain savings
associations will be permitted to pay capital distributions during a calendar
year that do not exceed the association's net income for that year plus it
retained net income for the prior two years, without notice to, or the approval
of the OTS. However, a savings association subsidiary of a savings and loan
holding company, such as the Bank, will continue to have to file a notice unless
the specific capital distribution requires an application. In addition, the OTS
can prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that a proposed distribution by an
association would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Bank would be prohibited from
making any capital distribution if, after the distribution, the Bank failed to
meet its minimum capital requirements, as described above. See"--Prompt
Corrective Regulatory Action."
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4%. OTS regulations also require each
savings association to maintain an average daily balance of short-term liquid
assets at a specified percentage of the total of its net withdrawable deposit
account and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet these liquidity requirements. At December 31, 1999,
the Bank's liquidity position was $31.7 million, or 10.84% of liquid assets,
compared to $45.7 million or 17.58% at December 31, 1998. The Bank has never
been subject to monetary penalties for failure to meets its liquidity
requirements.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. The OTS adopted
amendments to its regulations, effective January 1, 1999, that are intended to
assess savings associations on a more equitable basis. The new regulations base
the assessment for an individual
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savings association on three components: the size of the association, on which
the basic assessment would be based; the association's supervisory condition,
which would result in an additional assessment based on a percentage of the
basic assessment for any savings institution with a composite rating of 3, 4 or
5 in its most recent safety and soundness examination; and the complexity of the
association's operations, which would result in an additional assessment based
on a percentage of the basic assessment for any savings association that managed
over $1 billion in trust assets, serviced for others loans aggregating more than
$1 billion, or had certain off-balance sheet assets aggregating more than $1
billion. In order to avoid a disproportionate impact on the smaller savings
institutions, which are those whose total assets never exceeded $100 million,
the new regulations provide that the portion of the assessment based on assets
size will be the lesser of the assessment under the amended regulations or the
regulations before the amendment. Management believes that the change in its
rate of OTS assessments under the amended regulations was not material.
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (i) in states that expressly authorize branches of savings
associations located in another state and (ii) to an association that qualifies
as a "domestic building and loan association" under the Code, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "-- QTL Test." The authority for a federal savings association
to establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received an "Outstanding" CRA rating
in its most recent examination.
The CRA regulations establish an assessment system that bases an
association's rating on its actual performance in meeting community needs. In
particular, the assessment system focuses on three tests: (i) a lending test, to
evaluate the institution's record of making loans in its service areas; (ii) an
investment test, to evaluate the institution's record of investing in community
development projects, affordable housing and programs benefitting low or
moderate income individuals and businesses; and (iii) a service test, to
evaluate the institution's delivery of services through its branches, ATMs and
other offices.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding the Bank's
subsidiaries other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (i) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the BHC Act and (ii) from purchasing the
securities of any affiliate other than a subsidiary. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings association and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
association as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies.
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<PAGE>
The Bank's authority to extend credit to its directors, executive officers
and 10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve Board (the "FRB") thereunder. Among
other things, these provisions require that extensions of credit to insiders (i)
be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features and (ii)
not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in
excess of certain limits must be approved by the association's board of
directors.
Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"), the
OTS has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders and
certain written agreements and conditions continue, up to $1,000,000 per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes
include fines of up to $10 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to its capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance. Under
the FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings association.
If action is not taken by the Director of the OTS, the FDIC has authority to
take such action under certain circumstances.
Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the
Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Community Development Act"), the OTS and the federal bank regulatory agencies
have adopted a set of guidelines prescribing safety and soundness standards.
The guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings, and
compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the risks
and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
stockholder. In addition, the OTS adopted regulations that authorize, but do
not require, the OTS to order an institution that has been given notice by the
OTS that it is not satisfying any of such safety and soundness standards to
submit a compliance plan. If, after being so notified, an institution fails to
submit an acceptable compliance plan or fails in any material respect to
implement an accepted compliance plan, the OTS must issue an order directing
action to correct the deficiency and may issue an order directing other actions
of the types to which an undercapitalized association is subject under the
"prompt corrective action" provisions of FDICIA. If an institution fails to
comply with such an order, the OTS may seek to enforce such order in judicial
proceedings and to impose civil money penalties.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (i) are secured by real estate or (ii) are made for the purpose of
financing the construction of improvements on real estate. The OTS regulations
require each savings association to establish and maintain written internal real
estate lending standards that are consistent with safe and sound banking
practices and appropriate to the size of the association and the nature and
scope of its real estate lending activities. The standards also must be
consistent with accompanying OTS guidelines, which include loan-to-value ratios
for the different types of real estate loans. Associations are also permitted
to make a limited amount of loans that do not
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<PAGE>
conform to the proposed loan-to-value limitations so long as such exceptions are
reviewed and justified appropriately. The guidelines also list a number of
lending situations in which exceptions to the loan-to-value standards are
justified.
Prompt Corrective Regulatory Action. FDICIA establishes a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the banking regulators are required to take certain
supervisory actions against undercapitalized institutions, based upon the five
categories of institutions established by FDICIA: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized," which are categories defined by the
institution's regulatory capital ratios. Generally, a capital restoration plan
must be filed with the OTS within 45 days of the date an association receives
notice that it is "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." In addition, various mandatory supervisory
actions become immediately applicable to any undercapitalized institution,
including restrictions on growth of assets and other forms of expansion. The
OTS could also take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior
executive officers and directors. Generally, subject to a narrow exception,
FDICIA requires the applicable banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. Under the
OTS regulations, generally, a federally chartered savings association is treated
as well capitalized if its total risk-based capital ratio is 10% or greater, its
Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5%
or greater, and it is not subject to any order or directive by the OTS to meet a
specific capital level. As of December 31, 1999, the Bank met the criteria for
being considered "well capitalized" by the OTS.
When appropriate, the OTS can impose corrective action by a savings and
loan holding company under the "prompt corrective action" provisions of FDICIA.
Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established a
risk-based assessment system for determining the deposit insurance assessments
to be paid by insured depositary institutions. Under the assessment system, the
FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of
(i) well capitalized, (ii) adequately capitalized, or (iii) undercapitalized.
The FDIC also assigns an institution to one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information that the FDIC determines
to be relevant to the institution's financial condition and the risk posed to
the deposit insurance funds. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%. As a result of the
Deposit Insurance Funds Act of 1996 (the "1996 Funds Act"), both the BIF and the
SAIF currently satisfy the reserve ratio requirement. If the FDIC determines
that assessment rates should be increased, institutions in all risk categories
could be affected. The FDIC has exercised this authority several times in the
past and could raise insurance assessment rates in the future. If such action
is taken by the FDIC, it could have an adverse effect on the earnings of the
Bank.
The 1996 Funds Act also provides that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank has not been so classified by the FDIC or the
OTS.
In addition, the 1996 Funds Act expanded the assessment base for the
payments on the FICO bonds. Beginning January 1, 1997, the deposits of both
BIF- and SAIF-insured institutions were assessed for the payments on the FICO
bonds. Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The
-27-
<PAGE>
annual rate of assessments for the payments on the FICO bonds for the first,
second, third and fourth quarters of the fiscal year 1999 were 0.0610%, 0.0588%,
0.0580% and 0.0592%, respectively.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Privacy Protection. The OTS has recently proposed regulations implementing
the privacy protection provisions of the Gramm-Leach-Bliley Act (the "GLB Act").
The proposed regulations would require each financial institution to adopt
procedures to protect customers' and consumers' "nonpublic personal information"
by November 13, 2000. The Bank would be required to disclose its privacy
policy, including identifying with whom the Bank shares "nonpublic personal
information," to customers at the time of establishing the customer relationship
and annually thereafter. In addition, the Bank would be required to provide its
customers with the ability to "opt-out" of having to share their personal
information with unaffiliated third parties. The Bank intends to have a privacy
protection policy in place prior to when the regulations are adopted in final
form.
The GLB Act also provides for the ability of each state to enact
legislation that is more protective of consumers' personal information.
Currently, there are no privacy bills pending in the Iowa legislature. If any
such bills are considered by the Iowa legislature, the Bank cannot predict what
impact, if any, these bills would have.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des
Moines, which is one of the regional FHLBs composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as a member of the FHLB of Des Moines, has been required to acquire and
hold shares of capital stock in the FHLB of Des Moines in an amount at least
equal to the greater of 1.0% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each year
or 1/20 of its advances (borrowings) from the FHLB of Des Moines. The Bank was
in compliance with this requirement with an investment in FHLB of Des Moines
stock at December 31, 1999 of $3.0 million. Any advances from a FHLB must be
secured by specified types of collateral, and all long-term advances were
required to be obtained only for the purpose of providing funds for residential
housing finance.
Pursuant to the GLB Act, the foregoing minimum share ownership requirements
will be replaced by regulations to be promulgated by the Federal Housing Finance
Board. The GLB Act specifically provides that the minimum requirements in
existence immediately prior to adoption of the GLB Act shall remain in effect
until such regulations are adopted. Formerly, federal savings associations,
such as the Bank, were also required to be members of the FHLB System. The new
law removed the mandatary membership requirement and authorized voluntary
membership for federal savings associations as is the case for all other
eligible institutions.
In addition to changes to the membership and share ownership requirements,
the GLB Act removed certain requirements governing advances made by FHLBs.
Greater stock purchases required of non-QTL FHLB members when they receive
advances were eliminated, as was the requirement that such members only apply
for advances for housing finance purposes. A priority for making advances to
QTL members and a 30% limit on total advances to non-QTL members was also
removed. Further, the new law eliminated restrictions on obtaining new advances
and having to repay advances after three years applicable to savings
associations that are not QTLs.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced.
Federal Reserve System. The Bank is subject to provisions of the FRA and
the FRB's regulations pursuant to which depositary institutions may be required
to maintain noninterest-earning reserves against their deposit accounts
-28-
<PAGE>
and certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3% of
the aggregate of transaction accounts up to $46.5 million. The amount of
aggregate transaction accounts in excess of $46.5 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.9 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a noninterest-bearing account at a Federal Reserve Bank, or a pass-
through account as defined by the FRB, the effect of this reserve requirement is
to reduce the Bank's interest-earning assets. The balances maintained to meet
the reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS. FHLB System members are also authorized to
borrow from the Federal Reserve "discount window," but FRB regulations require
such institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
Federal Securities Law
The Holding Company is registered with the SEC under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
-29-
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business through its main office located in Fort
Dodge, Iowa and seven full-service offices located in Fort Dodge, Nevada, Ames,
Perry, Burlington and Mount Pleasant, Iowa. The following table sets forth
certain information concerning the main office and each branch office of the
Company and the offices of First Iowa Title Services and First Iowa Mortgage,
Inc. at December 31, 1999. All of the offices of the Company are owned. In
addition to the properties listed below, First Federal Investment Services, Inc.
owns land in Fort Dodge, Iowa with a net book value of $99,000 and Northridge
Apartments Limited Partnership owns a multi-family apartment building with a net
book value of $1.8 million at December 31, 1999. The aggregate net book value
of the Company's premises and equipment, on a consolidated basis was $5.4
million at December 31, 1999.
<TABLE>
<CAPTION>
Lease
Location Opening Date Expiration Date Net Book Value
- -------- ------------ ---------------- --------------
<S> <C> <C> <C>
Main Office:
825 Central Avenue 1973 N/A $1,042,286
Fort Dodge, Iowa
Branch Offices:
201 South 25th Street 1977 N/A $ 237,037
Fort Dodge, Iowa
404 Lincolnway 1977 N/A $ 529,970
Nevada, Iowa
107 Main Street 1977 N/A $ 368,051
Ames, Iowa
1111-141st Street 1999 N/A $ 946,903
Perry, Iowa
321 North Third Street 1953 N/A $ 578,092
Burlington, Iowa
1010 North Roosevelt 1975 N/A $ 329,675
Burlington, Iowa
102 South Main 1991 N/A $ 235,414
Mount Pleasant, Iowa
First Iowa Offices:
805 Central Avenue 1982 2001 (1) $ 42,464
Fort Dodge, Iowa
814 8th Street 1996 2003 (2) $ 15,424
Boone, Iowa
200 1st Street South 1996 2003 (2) $ 8,011
Newton, Iowa
First Iowa Mortgage Office: 1998 2003 $ 30,110
415 South Duff
Ames, Iowa
Construction in Process:
316 South Duff N/A N/A $ 992,660
Ames, Iowa
</TABLE>
_____________________
(1) Does not include option to renew for an additional 3 years.
(2) Does not include option to renew for an additional 5 years.
-30-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Registrant is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Registrant's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1999.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information required by this Item is incorporated herein by reference
to page 65 of the Company's 1999 Annual Report to Shareholders under the heading
"Shareholder Information," which section is included in Exhibit 13.1 to this
Report.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
At December 31, (11)
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial
Condition Data:
Total assets.......................... $367,433 $336,690 $221,954 $203,093 $179,930
Cash (noninterest-bearing)............ 8,542 2,435 982 963 709
Loans receivable, net:(1)
First mortgage loans secured
by one- to four-family
residences........................ 161,547 145,967 114,286 106,053 93,438
First mortgage loans secured
by multi-family properties........ 71,503 63,285 49,895 33,015 30,070
First mortgage loans secured
by commercial properties.......... 17,470 11,168 3,724 5,068 5,650
Consumer loans...................... 36,239 33,612 23,344 21,695 18,714
-------- -------- -------- -------- --------
Total loans receivable, net....... 286,759 254,032 191,249 165,831 147,872
Investment securities(2).............. 53,820 63,084 22,279 29,577 26,156
Deposits.............................. 271,031 246,690 141,124 129,722 126,672
Borrowed funds........................ 55,715 38,832 28,550 22,335 21,940
Total shareholders' equity............ 38,127 48,207 50,417 49,235 29,900
For the Year Ended December 31,
1999 1998 1997 1996 1995
-------- -------- -------- ------- --------
(In thousands)
Selected Operating Data:
Interest income....................... $24,556 $23,602 $16,205 $15,090 $13,148
Interest expense...................... 13,604 12,869 7,900 6,929 7,079
------- ------- ------- ------- -------
Net interest income before
provision for loan losses........ 10,952 10,733 8,305 8,161 6,069
Provision for loan losses............. 120 210 240 240 250
------- ------- ------- ------- -------
Net interest income after
provision for loan losses........ 10,832 10,523 8,065 7,921 5,819
------- ------- ------- ------- -------
Noninterest income:
Fees and service charges......... 1,485 1,243 657 580 445
Abstract fees.................... 1,421 1,584 1,222 931 794
Other income..................... 1,157 1,088 658 382 463
------- ------- ------- ------- -------
Total noninterest income....... 4,063 3,915 2,537 1,893 1,702
------- ------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits... 4,026 3,482 2,209 2,004 1,681
Premises and equipment........... 931 812 444 421 382
Data processing.................. 522 553 258 244 236
One-time SAIF special assessment. -- -- -- 817 --
SAIF deposit insurance
premiums....................... 147 143 85 279 287
Goodwill........................... 472 436 28 29 30
Other expenses................... 2,356 2,146 1,553 1,144 1,042
------- ------- ------- ------- -------
Total noninterest expense...... 8,454 7,572 4,577 4,938 3,658
------- ------- ------- ------- -------
Income before income taxes............ 6,441 6,866 6,025 4,876 3,863
Income tax expense.................... 2,241 2,481 2,108 1,744 1,403
------- ------- ------- ------- -------
Net income......................... $ 4,200 $ 4,385 $ 3,917 $ 3,132 $ 2,460
======= ======= ======= ======= =======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Key Financial Ratios and Other Data:
Performance Ratios: (%)
Net interest rate spread (difference between
average yield on interest-earning
assets and average cost of interest-
bearing liabilities)....................... 2.86% 2.81% 2.87% 3.01% 2.75%
Net interest margin (net interest income
as a percentage of average interest-
earning assets)............................ 3.35 3.50 4.06 4.33 3.66
Return on average assets (net income
divided by average total assets)........... 1.21 1.35 1.86 1.62 1.45
Return on average equity (net income
divided by average equity)................. 9.51 8.73 7.94 6.30 8.54
Noninterest income to average assets......... 1.21 1.21 1.20 0.98 1.00
Efficiency ratio(3).......................... 56.30 51.69 42.21 49.11 47.07
Noninterest expense to average assets........ 2.45 2.34 2.17 2.56 2.16
Net interest income after provision for
loan losses to noninterest expenses........ 128.13 138.97 176.22 160.40 159.07
Financial Condition Ratios: (%) (4)
Equity to assets at period end............... 10.38 14.32 22.72 24.24 16.62
Tangible equity to tangible assets
at period end (5) (6)...................... 8.68 12.42 22.32 23.80 16.09
Average shareholders' equity divided by
average total assets....................... 12.77 15.52 23.38 25.73 16.99
Average tangible shareholders equity divided
by average tangible total assets (5) (6)... 10.94 13.71 22.96 25.29 16.42
Average interest-earning assets to average
interest-bearing liabilities............... 112.05 116.28 130.97 136.02 121.37
Asset Quality Ratios: (%) (4)
Nonaccrual loans to total net loans.......... 0.07 0.38 0.08 0.11 0.12
Nonperforming assets to total assets(7)...... 0.20 0.34 0.10 0.15 0.23
Allowance for loan losses as a percent of
total loans receivable at end of period.... 0.95 1.03 1.10 1.16 1.15
Allowance for loan losses to nonaccrual
loans...................................... 1,301.13 279.72 1,468.33 1,059.35 960.20
Per Share Data:
Book value per share......................... $ 16.86 $ 16.26 $ 15.43 $ 14.36 $ 8.72
Tangible book value per share(5)............. 13.83 13.79 15.09 14.01 8.39
Basic earnings per share (8)................. 1.64 1.44 1.23 0.82 0.63
Diluted earnings per share (9)............... 1.60 1.40 1.21 0.82 0.63
Dividends declared per share................. 0.40 0.32 0.25 0.28 0.60
Dividend payout ratio........................ 0.24 0.22 0.20 0.34 0.95
Key Financial Ratios Excluding
SAIF Assessment: (%) (10)
Return on average assets (net income divided
by average total assets)................... 1.21% 1.35% 1.86% 1.89% 1.45%
Return on average equity (net income
divided by average equity)................. 9.51 8.73 7.94 7.34 8.54
Efficiency ratio (3)......................... 56.30 51.69 42.21 40.99 47.07
Noninterest expense to average assets........ 2.45 2.34 2.17 2.13 2.16
Net interest income after provision for
loan losses to noninterest expenses.......... 128.13 138.97 176.22 192.21 159.07
Other Data:
Cash earnings (12)........................... $ 4,672 $ 4,821 $ 3,945 $ 3,161 $ 2,490
Cash earnings per share diluted (9) (12)..... 1.78 1.54 1.22 0.83 0.64
Cash return on average assets (12)........... 1.35 1.49 1.87 1.64 1.47
Cash return on average equity (12)........... 10.58 9.60 7.99 6.77 8.64
</TABLE>
_______________________
(Notes on following page)
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<PAGE>
(1) Loans receivable, net represents total loans less discounts, loans in
process, net deferred loan fees and allowance for loan losses. The
allowance for loan losses at December 31, 1999, 1998, 1997, 1996 and 1995
was $2.8 million, $2.7 million, $2.2 million, $2.0 million and $1.7
million, respectively.
(2) Includes interest-bearing deposits with the Federal Home Loan Bank of Des
Moines (the "FHLB").
(3) Efficiency ratio represents noninterest expense divided by the sum of net
interest income before provision for loan losses plus noninterest income.
(4) Asset Quality Ratios are end of period ratios. With the exception of end
of period ratios, all ratios are based on average monthly balances during
the indicated periods and are annualized where appropriate.
(5) Tangible equity consists of stockholders' equity less goodwill and title
plant. Goodwill and title plant at December 31, 1999, 1998, 1997, 1996 and
1995 was $6.8 million, $7.3 million, $1.1 million, $1.2 million and $1.1
million, respectively.
(6) Tangible assets consists of total assets less goodwill and title plant.
Goodwill and title plant at December 31, 1999, 1998, 1997, 1996 and 1995
was $6.8 million, $7.3 million, $1.1 million, $1.2 million and $1.1
million, respectively.
(7) Nonperforming assets consists of nonaccrual loans, foreclosed real estate
and other nonperforming assets.
(8) Basic earnings per share information is calculated by dividing net income
by the weighted average number of shares outstanding. The weighted average
number of shares outstanding for basic earnings per share computation for
1999, 1998, 1997, 1996 and 1995 were 2,562,940, 3,048,148, 3,184,269,
3,818,273 and 3,919,488, respectively.
(9) Diluted earnings per share information is calculated by dividing net income
by the weighted average number of shares outstanding, adjusted for the
effect of dilutive potential common shares outstanding which consists of
stock options granted. The weighted average number of shares outstanding
for diluted earnings per share computation for 1999, 1998, 1997, 1996 and
1995 were 2,621,542, 3,132,833, 3,241,069, 3,818,273 and 3,919,488,
respectively.
(10) For 1996, excludes the one-time $817,000 (pre-tax) special assessment for
the recapitalization of the Savings Association Insurance Fund ("SAIF").
(11) As of the close of business on January 30, 1998, the Company completed the
Acquisition of Valley Financial Corp. Subsequent to January 30, 1998, the
information contained in the Financial Selected Data tables reflect the
effect of the Acquisition. Financial data prior to January 30, 1998, does
not reflect the Acquisition and is based upon historical figures.
(12) Cash earnings excludes from net income the amortization of goodwill.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by reference
to pages 7 through 30 of the Company's 1999 Annual Report to Shareholders under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which section is included in Exhibit 13.1 to this
Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated herein by reference
to pages 12 through 14 of the Company's 1999 Annual Report to Shareholders under
the heading "Discussion of Market Risk--Interest Rate Sensitivity Analysis,"
which section is included in Exhibit 13.1 to this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
to pages 31 through 63 of the Company's 1999 Annual Report to Shareholders under
the headings "Independent Auditor's Report," "Consolidated Financial Statements"
and "Notes to Consolidated Financial Statements," which section are included in
Exhibit 13.1 to this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors and Executive Officers of the Registrant is
included under the headings "Information with Respect to Nominees and Continuing
Directors," "Nominees for Election as Directors," "Continuing Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 28,2000, which has been filed with the SEC and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is included under the
headings "Executive Compensation" (excluding the Stock Performance Graph and the
Compensation Committee Report) and "Directors' Compensation" in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held on April 28,
2000, which has been filed with the SEC and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and
management is included under the headings "Principal Shareholders of the
Company" and "Security Ownership of Management" in the Company's Proxy Statement
for its Annual Meeting of Shareholders to be held on April 28, 2000, which has
been filed with the SEC and is incorporated herein by reference.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
included under the heading "Transaction with Certain Related Persons" in the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held on
April 28, 2000, which has been filed with the SEC and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. The consolidated balance sheets of North Central Bancshares, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, equity and cash flows for the years ended December
31, 1999, 1998 and 1997, together with the related notes and the
independent auditor's report of McGladrey & Pullen, LLP, independent
certified public accounts.
2. Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
3. See Exhibit Index on following page.
(b) Reports on Form 8-K filed during the last quarter of 1999
None.
-36-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Articles of Incorporation of North Central Bancshares, Inc.*
3.2 Bylaws of North Central Bancshares, Inc.*
4.1 Federal Stock Charter of First Federal Savings Bank of Iowa*
4.2 Bylaws of First Federal Savings Bank of Iowa*
4.3 Specimen Stock Certificate of North Central Bancshares, Inc.*
10.1 Employee Stock Ownership Plan of First Federal Savings Bank of Iowa and ESOP Trust
Agreement (incorporating Amendments 1 and 2)*****
10.2 ESOP Loan Documents, dated September 3, 1996****
10.3 Employee Retention Agreements between First Federal Savings Bank of Iowa and certain executive officers**
10.4 Employment Agreement between First Federal Savings Bank of Iowa and David M.
Bradley, effective as of August 31, 1994*
10.5 Form of Employment Agreement between First Federal Savings Bank of Iowa and David M. Bradley*
10.6 Form of Employment Agreement between North Central Bancshares, Inc. and David M. Bradley*
10.8 North Central Bancshares, Inc. 1996 Stock Option Plan***
10.9 Amendment No. 1 to the North Central Bancshares, Inc. 1996 Stock Option Plan*****
13.1 Annual Report to security holders
21.1 Subsidiaries of the Registrant*
23.1 Consent of McGladrey & Pullen, LLP
27.1 Financial Data Schedule
99.1 Proxy Statement for Annual Meeting of Shareholders of North Central Bancshares, Inc. filed with the Securities and
Exchange Commission
99.2 Press release dated October 29, 1999 (regarding stock repurchase program)
99.3 Press release dated November 19, 1999 (regarding declaration of dividend)
99.4 Press release dated January 18, 2000 (regarding fourth quarter and year end 1999 earnings)
</TABLE>
-37-
<PAGE>
* Incorporated herein by reference to Registration Statement No. 33-80493
on Form S-1 of North Central Bancshares, Inc. (the "Registrant") filed
with the Securities and Exchange Commission, (the "Commission") on
December 18, 1995, as amended.
** Incorporated herein by reference to the Exhibits to the Annual Report on
Form 10-K filed by Registrant for fiscal year 1995, filed with the
Commission on March 29, 1996.
*** Incorporated herein by reference to the Amended Schedule 14A of
Registrant filed with the Commission on August 19, 1996.
**** Incorporated herein by reference to the Annual Report on Form 10-K of the
Registrant filed with the Commission on March 31, 1997.
***** Incorporated herein by reference to the Annual Report on Form 10-K of
the Registrant filed with the Commission on March 31, 1998.
-38-
<PAGE>
Conformed
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant and has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
North Central Bancshares, Inc.
Date: March 27, 2000 /s/ David M. Bradley
------------------------
By: David M. Bradley
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ David M. Bradley President, Chief Executive Officer, March 27, 2000
- ---------------------------
David M. Bradley Director, and Chairman of the Board
(principal executive officer)
/s/ John L. Pierschbacher Treasurer March 27, 2000
- ---------------------------
John L. Pierschbacher (principal accounting and
financial officer)
/s/ Robert H. Singer, Jr. Director March 27, 2000
- ---------------------------
Robert H. Singer, Jr.
/s/ KaRene Egemo Director March 27, 2000
- ---------------------------
KaRene Egemo
/s/ Howard A. Hecht Director March 27, 2000
- ---------------------------
Howard A. Hecht
/s/ Melvin R. Schroeder Director March 27, 2000
- ---------------------------
Melvin R. Schroeder
/s/ Mark M. Thompson Director March 27, 2000
- ---------------------------
Mark M. Thompson
</TABLE>
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<PAGE>
NORTH CENTRAL BANCSHARES, INC.
Holding Company for First Federal
Savings Bank of Iowa
1999 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
MESSAGE OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER........... 3
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA........................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 7
INDEX TO FINANCIAL STATEMENTS............................................ 31
QUARTERLY RESULTS OF OPERATIONS (Unaudited).............................. 63
MANAGEMENT OF THE HOLDING COMPANY AND THE BANK........................... 64
SHAREHOLDER INFORMATION.................................................. 65
</TABLE>
This Annual Report to Shareholders contains certain forward looking
statements consisting of estimates with respect to the financial condition,
results of operations (including noninterest expense and availability of
potential tax credits) and business of 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 and market
conditions, 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, and changes in depositor preferences for financial
products.
<PAGE>
March 27, 2000
MESSAGE OF THE CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Dear Shareholders:
We are pleased to report to you the operating results of North Central
Bancshares, Inc. ("North Central Bancshares" or the "Company") for the year
ended December 31, 1999. North Central Bancshares is the holding company for
First Federal Savings Bank of Iowa (the "Bank").
For the year ended December 31, 1999, North Central Bancshares' net income
was $4.2 million, or $1.60 diluted earnings per share, as compared to $4.4
million, or $1.40 diluted earnings per share, for the year ended December 31,
1998. Some of our achievements during the past year include:
1999 HIGHLIGHTS
. Total assets, loans, deposits and earnings per share reached new
Company highs.
. Total assets reached a high of $367.4 million
. Total net loans increased by 12.9% or $32.7 million.
. Total deposits grew to $271.0 million.
. Earnings per share reached a high of $1.60, a 14.3% increase over
the prior year.
. Repurchased a total of 702,707 shares or 23.7% of outstanding stock
for the year ended December 31, 1999.
. Increased quarterly dividends in April, 1999 to $0.10 per share, a 25%
increase.
. Opened a new office in Perry, Iowa.
. Began construction on a new larger branch office building in Ames,
Iowa.
. Began offering mutual funds and variable annuities through the Bank's
wholly owned subsidiary, First Federal Investment Services, Inc.,
formerly known as First Financial Services Corporation.
. Successfully completed all computer and operational preparations for
the year 2000 rollover.
I want to thank our loyal and valued staff who helped make 1999 a
successful year for it is truly our people who make the difference. The
directors, officers and staff of North Central Bancshares, Inc. and its
subsidiary, First Federal Savings Bank of Iowa, wish to thank you for your
continued interest and support. We pledge to continue our efforts to increase
the overall financial return to you, our shareholders.
Sincerely,
David M. Bradley
Chairman, President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of North Central
Bancshares, Inc. set forth below is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes thereto
presented elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial
Condition Data:
Total assets............................... $367,433 $336,690 $221,954 $203,093 $179,930
Cash (noninterest-bearing)................. 8,542 2,435 982 963 709
Loans receivable, net:(1)
First mortgage loans secured
by one- to four-family
residences............................. 161,547 145,967 114,286 106,053 93,438
First mortgage loans secured
by multi-family properties............. 71,503 63,285 49,895 33,015 30,070
First mortgage loans secured
by commercial properties............... 17,470 11,168 3,724 5,068 5,650
Consumer loans........................... 36,239 33,612 23,344 21,695 18,714
-------- -------- -------- -------- --------
Total loans receivable, net............ 286,759 254,032 191,249 165,831 147,872
Investment securities(2)................... 53,820 63,084 22,279 29,577 26,156
Deposits................................... 271,031 246,690 141,124 129,722 126,672
Borrowed funds............................. 55,715 38,832 28,550 22,335 21,940
Total shareholders' equity................. 38,127 48,207 50,417 49,235 29,900
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income............................ $24,556 $23,602 $16,205 $15,090 $13,148
Interest expense........................... 13,604 12,869 7,900 6,929 7,079
------- ------- ------- ------- -------
Net interest income before
provision for loan losses............. 10,952 10,733 8,305 8,161 6,069
Provision for loan losses.................. 120 210 240 240 250
------- ------- ------- ------- -------
Net interest income after
provision for loan losses............. 10,832 10,523 8,065 7,921 5,819
------- ------- ------- ------- -------
Noninterest income:
Fees and service charges.............. 1,485 1,243 657 580 445
Abstract fees......................... 1,421 1,584 1,222 931 794
Other income.......................... 1,157 1,088 658 382 463
------- ------- ------- ------- -------
Total noninterest income............ 4,063 3,915 2,537 1,893 1,702
------- ------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits........ 4,026 3,482 2,209 2,004 1,681
Premises and equipment................ 931 812 444 421 382
Data processing....................... 522 553 258 244 236
One-time SAIF special assessment...... -- -- -- 817 --
SAIF deposit insurance
premiums............................ 147 143 85 279 287
Goodwill............................ 472 436 28 29 30
Other expenses........................ 2,356 2,146 1,553 1,144 1,042
------- ------- ------- ------- -------
Total noninterest expense........... 8,454 7,572 4,577 4,938 3,658
------- ------- ------- ------- -------
Income before income taxes................. 6,441 6,866 6,025 4,876 3,863
Income tax expense......................... 2,241 2,481 2,108 1,744 1,403
------- ------- ------- ------- -------
Net income.............................. $ 4,200 $ 4,385 $ 3,917 $ 3,132 $ 2,460
======= ======= ======= ======= =======
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Key Financial Ratios and Other Data:
Performance Ratios: (%)
Net interest rate spread (difference between
average yield on interest-earning
assets and average cost of interest-
bearing liabilities).................................. 2.86% 2.81% 2.87% 3.01% 2.75%
Net interest margin (net interest income
as a percentage of average interest-
earning assets)....................................... 3.35 3.50 4.06 4.33 3.66
Return on average assets (net income
divided by average total assets)...................... 1.21 1.35 1.86 1.62 1.45
Return on average equity (net income
divided by average equity)............................ 9.51 8.73 7.94 6.30 8.54
Noninterest income to average assets.................... 1.21 1.21 1.20 0.98 1.00
Efficiency ratio(3)..................................... 56.30 51.69 42.21 49.11 47.07
Noninterest expense to average assets................... 2.45 2.34 2.17 2.56 2.16
Net interest income after provision for
loan losses to noninterest expenses................... 128.13 138.97 176.22 160.40 159.07
Financial Condition Ratios: (%) (4)
Equity to assets at period end.......................... 10.38 14.32 22.72 24.24 16.62
Tangible equity to tangible assets
at period end (5) (6)............................... 8.68 12.42 22.32 23.80 16.09
Average shareholders' equity divided by
average total assets.................................. 12.77 15.52 23.38 25.73 16.99
Average tangible shareholders equity divided
by average tangible total assets (5) (6)............ 10.94 13.71 22.96 25.29 16.42
Average interest-earning assets to average
interest-bearing liabilities.......................... 112.05 116.28 130.97 136.02 121.37
Asset Quality Ratios: (%) (4)
Nonaccrual loans to total net loans..................... 0.07 0.38 0.08 0.11 0.12
Nonperforming assets to total assets(7)................. 0.20 0.34 0.10 0.15 0.23
Allowance for loan losses as a percent of
total loans receivable at end of period............... 0.95 1.03 1.10 1.16 1.15
Allowance for loan losses to nonaccrual
loans................................................. 1,301.13 279.72 1,468.33 1,059.35 960.20
Per Share Data:
Book value per share.................................... $ 16.86 $ 16.26 $ 15.43 $ 14.36 $ 8.72
Tangible book value per share(5)........................ 13.83 13.79 15.09 14.01 8.39
Basic earnings per share (8)............................ 1.64 1.44 1.23 0.82 0.63
Diluted earnings per share (9).......................... 1.60 1.40 1.21 0.82 0.63
Dividends declared per share............................ 0.40 0.32 0.25 0.28 0.60
Dividend payout ratio................................... 0.24 0.22 0.20 0.34 0.95
Key Financial Ratios Excluding
SAIF Assessment: (%) (10)
Return on average assets (net income divided
by average total assets).............................. 1.21% 1.35% 1.86% 1.89% 1.45%
Return on average equity (net income
divided by average equity)............................ 9.51 8.73 7.94 7.34 8.54
Efficiency ratio (3).................................... 56.30 51.69 42.21 40.99 47.07
Noninterest expense to average assets................... 2.45 2.34 2.17 2.13 2.16
Net interest income after provision for
loan losses to noninterest expenses................. 128.13 138.97 176.22 192.21 159.07
Other Data:
Cash earnings (12)...................................... $ 4,672 $ 4,821 $ 3,945 $ 3,161 $ 2,490
Cash earnings per share diluted (9) (12)................ 1.78 1.54 1.22 0.83 0.64
Cash return on average assets (12)...................... 1.35 1.49 1.87 1.64 1.47
Cash return on average equity (12)...................... 10.58 9.60 7.99 6.77 8.64
</TABLE>
______________________
(Notes on following page)
-5-
<PAGE>
(1) Loans receivable, net represents total loans less discounts, loans in
process, net deferred loan fees and allowance for loan losses. The
allowance for loan losses at December 31, 1999, 1998, 1997, 1996 and 1995
was $2.8 million, $2.7 million, $2.2 million, $2.0 million and $1.7
million, respectively.
(2) Includes interest-bearing deposits with the Federal Home Loan Bank of Des
Moines (the "FHLB").
(3) Efficiency ratio represents noninterest expense divided by the sum of net
interest income before provision for loan losses plus noninterest income.
(4) Asset Quality Ratios are end of period ratios. With the exception of end
of period ratios, all ratios are based on average monthly balances during
the indicated periods and are annualized where appropriate.
(5) Tangible equity consists of stockholders' equity less goodwill and title
plant. Goodwill and title plant at December 31, 1999, 1998, 1997, 1996
and 1995 was $6.8 million, $7.3 million, $1.1 million, $1.2 million and
$1.1 million, respectively.
(6) Tangible assets consists of total assets less goodwill and title plant.
Goodwill and title plant at December 31, 1999, 1998, 1997, 1996 and 1995
was $6.8 million, $7.3 million, $1.1 million, $1.2 million and $1.1
million, respectively.
(7) Nonperforming assets consists of nonaccrual loans, foreclosed real estate
and other nonperforming assets.
(8) Basic earnings per share information is calculated by dividing net income
by the weighted average number of shares outstanding. The weighted
average number of shares outstanding for basic earnings per share
computation for 1999, 1998, 1997, 1996 and 1995 were 2,562,940,
3,048,148, 3,184,269, 3,818,273 and 3,919,488, respectively.
(9) Diluted earnings per share information is calculated by dividing net
income by the weighted average number of shares outstanding, adjusted for
the effect of dilutive potential common shares outstanding which consists
of stock options granted. The weighted average number of shares
outstanding for diluted earnings per share computation for 1999, 1998,
1997, 1996 and 1995 were 2,621,542, 3,132,833, 3,241,069, 3,818,273 and
3,919,488, respectively.
(10) For 1996, excludes the one-time $817,000 (pre-tax) special assessment for
the recapitalization of the Savings Association Insurance Fund ("SAIF").
(11) As of the close of business on January 30, 1998, the Company completed
the Acquisition of Valley Financial Corp. Subsequent to January 30, 1998,
the information contained in the Financial Selected Data tables reflect
the effect of the Acquisition. Financial data prior to January 30, 1998,
does not reflect the Acquisition and is based upon historical figures.
(12) Cash earnings excludes from net income the amortization of goodwill.
-6-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
North Central Bancshares, Inc. (the "Holding Company"), an Iowa
corporation, is the holding company for First Federal Savings Bank of Iowa (the
"Bank"), a federally-chartered savings bank. Collectively, the Holding Company
and the Bank are referred to herein as the "Company." The Holding Company was
organized on December 5, 1995 at the direction of the Board of Directors of the
Bank for the purpose of acquiring all of the capital stock to be issued by the
Bank in connection with the conversion and reorganization of the Bank and North
Central Bancshares, M.H.C. (the "MHC") from the mutual to the stock holding
company structure (these transactions are collectively referred to as the
"Conversion"). On March 20, 1996, upon completion of the Conversion, the Holding
Company issued an aggregate of 4,011,057 shares of its common stock, par value
$0.01 per share ("Common Stock"), of which 1,385,590 shares were issued in
exchange for all of the Bank's issued and outstanding shares, except for shares
owned by the MHC which were cancelled, and 2,625,467 shares of which were sold
in Subscription and Community Offerings at a price of $10.00 per share, with
gross proceeds amounting to $26,254,670. At this time, the Holding Company
conducts business as a unitary savings and loan holding company and the
principal business of the Holding Company consists of the operation of its
wholly-owned subsidiary, the Bank.
The profitability of the Company depends primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of loans and investment
securities, and the interest paid on interest-bearing liabilities, which
primarily consist of deposits and advances from the FHLB. Net interest income is
a function of the Company's interest rate spread, which is the difference
between the average yield on interest-earning assets and the average rate paid
on interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. The
Company's net income is affected by its level of noninterest income which
primarily consists of service fees and charges and abstract fees, and
noninterest expense, which primarily consists of compensation and employee
benefit expenses, premises and equipment and data processing. Net income also
is affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Company.
Acquisition of Valley Financial Corp.
As of the close of business on January 30, 1998 (the "Effective Time"), the
Company completed the acquisition ( the "Acquisition") of Valley Financial
Corp., ("Valley Financial"), pursuant to an Agreement and Plan of Merger, dated
as of September 18, 1997, (the "Merger Agreement"). The Acquisition resulted in
the merger of Valley Financial's wholly owned subsidiary, Valley Savings Bank,
("Valley Savings") with and into the Bank, with the Bank as the resulting
financial institution. Valley Savings, headquartered in Burlington, Iowa, was a
federally-chartered stock savings bank with three branch offices located in
southeastern Iowa.
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.
SAIF Recapitalization
In response to the disparity in deposit insurance assessment rates that
existed between banks insured by the Bank Insurance Fund ("BIF") and thrifts
insured by the SAIF, the Deposits Funds Insurance Act of 1996 (the "Funds Act")
was enacted on September 30, 1996. The Funds Act authorized the Federal Deposit
Insurance Corporation ("FDIC") to impose a special assessment on all
institutions with SAIF-assessable deposits
-7-
<PAGE>
in the amount necessary to recapitalize the SAIF. The Company's special SAIF
assessment of $817,000 before taxes (and $512,000 net of taxes) was charged
against income in the third quarter of 1996 and paid in November 1996 (the "SAIF
Assessment"). In view of the recapitalization of the SAIF, the FDIC reduced the
assessment rates for SAIF-assessable deposits. For the fiscal years ended
December 31, 1999, 1998 and 1997, the Bank incurred $147,000, $143,000 and
$85,000, respectively, in deposit insurance premiums and for the interest
payments on the FICO bonds issued by the Financing Corporation to recapitalize
the now defunct Federal Savings and Loan Insurance Corporation.
Business Strategy
The Company's current business strategy is to operate the Bank as a well-
capitalized, profitable and independent community-oriented savings bank
dedicated to providing quality customer service. Generally, the Company has
sought to implement this strategy primarily by using deposits and advances from
the FHLB as its source of funds and maintaining a substantial part of its assets
in loans secured by one- to four-family residential real estate, multi-family
residential real estate and commercial real estate located both inside and
outside the Company's market area, consumer and other loans and in other liquid
investment securities. Specifically, the Company's business strategy
incorporates the following elements: (1) operating as a community-oriented
financial institution, maintaining a strong core customer base by providing
quality service and offering customers the access to senior management and
services that a locally-headquartered institution can offer; (2) maintaining
high asset quality by emphasizing investment in residential mortgage loans
(including the purchase of qualifying multi-family and commercial real estate
loans) and securities issued or guaranteed by the United States Government or
agencies thereof and mortgage-backed securities; (3) maintaining capital in
excess of regulatory requirements and growing only to the extent that adequate
capital levels can be maintained; (4) controlling noninterest expenses; (5)
managing interest rate risk exposure while achieving desirable levels of
profitability; and (6) increasing noninterest income through (i) abstract
company business conducted through a wholly owned subsidiary, (ii)mortgage
banking business conducted through a wholly owned subsidiary (iii)sale of fixed
and variable rate annuities and mutual funds conducted through a wholly owned
subsidiary and (iv)other increases in fees and service charges.
Highlights of the Company's business strategy are as follows:
Community-Oriented Institution. The Company is committed to meeting the
financial needs of the communities in which it operates. Based in part on its
participation in several different programs designed to facilitate residential
lending to low- and moderate-income households, the Bank has received an
"Outstanding" Community Reinvestment Act rating. The Company believes it is
large enough to provide a full range of personal and business financial services
and yet is small enough to be able to provide such services on a personalized
and efficient basis. Management believes that the Company can be more effective
in servicing its customers than many of its competitors which are not
headquartered locally. Such proximity allows senior management of the Bank to
quickly and personally respond to customer needs and inquiries.
Strong Retail Deposit Base. In 1999, the Company had a relatively strong
and stable retail deposit base drawn from its offices located in Fort Dodge,
Ames, Nevada, Perry, Burlington and Mount Pleasant, Iowa. The stability of the
Company's deposit base has been enhanced by the Company's offering of
certificates of deposit with original terms longer than one year (which comprise
$160.0 million, or 59.0%, of total deposits at December 31, 1999) at attractive
interest rates, and programs tying low-cost checking account services to the
maintenance of specified certificate of deposit balances or loan balances. At
December 31, 1999, 29.4% of the deposit base, or $79.8 million, consisted of
core deposits, which included money market accounts, savings accounts, NOW
accounts, and noninterest-bearing demand accounts. Core deposits are considered
to be a more stable and lower cost source of funds than certificates of deposit
or outside borrowings. The Company will continue to emphasize retail deposits by
providing quality customer service, offering competitive rates on deposit
accounts, and providing depositors with a full range of accounts.
-8-
<PAGE>
Asset Quality and Emphasis on Residential Mortgage Lending. The Company
has historically emphasized residential real estate financing, and has been
primarily a portfolio lender. The Company expects to continue its commitment to
financing the purchase or improvement of residential real estate in its market
area. At December 31, 1999, 44.0% of the Company's total assets consisted of
one- to four-family residential first mortgage loans. To supplement local
mortgage loan originations and to diversify its mortgage loan portfolio
geographically, the Company has purchased loans in the secondary mortgage
market, with an emphasis on multi-family and commercial real estate loans
secured by properties outside the State of Iowa (the "out of state properties").
At December 31, 1999, the Company's portfolio of loans which were either
originated or purchased by the Company and secured by out of state properties
consisted of $10.3 million of one- to four-family residential mortgage loans, or
3.5% of the Company's total loan portfolio, and $83.6 million of multi-family
and commercial loans, or 28.7% of the Company's total loan portfolio. At
December 31, 1999, the Company's ratio of nonperforming assets to total assets
was 0.20%. The Company also invests in United States Treasury securities,
United States Government agencies, state and local obligations, mortgage-backed
securities, interest-earning deposits, equity securities and FHLB stock.
Generally, the yield on mortgage loans originated and purchased by the
Company is greater than that of securities purchased by the Company. Future
economic conditions and continued strong banking competition could result in
diminished lending opportunities. If new loan originations are reduced in the
future, the Company may increase its investment in securities and in purchased
mortgage loans outside its market area.
Capital Strength and Controlled Internal Growth. Total equity increased
from $29.9 million at December 31, 1995 to $38.1 million at December 31, 1999,
an increase of 27.5%. Total assets have increased by $187.5 million, or 104.2%,
since December 31, 1995. As a result, the ratio of total equity to total assets
has decreased from 16.6% at December 31, 1995 to 10.4% at December 31, 1999. The
Company's growth can be attributed to the Acquisition and the Company's emphasis
on the origination and purchase of residential mortgage loans and the purchase
of multi-family and commercial mortgage loans. The Company's growth has been
funded through a combination of the use of proceeds from the stock offerings
held in 1994 and 1996, FHLB advances and deposit growth. The Company intends to
maintain strong levels of total equity and capital ratios by controlling growth
to the extent that adequate capital levels can be maintained.
Acquisition Strategy. With the consummation of the Acquisition in 1998,
the Company has grown through the purchase of another financial institution.
The Acquisition resulted in an increase in total assets of approximately 42%,
making effective use of the Company's excess capital. The Company intends to
continue evaluating the possibility of acquiring branch offices and other
financial institutions, which involves executing confidentiality agreements and
conducting due diligence. Such evaluations by the Company provide no indication
of the likelihood that the Company will enter into any agreement to engage in an
acquisition transaction as, in many instances, such transactions are subject to
competitive bidding and, in every instance, are subject to extensive arm's
length negotiations once the Company's evaluation is complete.
Increasing Noninterest Income. The Company has attempted to increase its
level of noninterest income from both new and traditional lines of business to
supplement net interest income. The Company currently owns an abstract company
which operates in Webster, Boone and Jasper counties in Iowa, through First Iowa
Title Services, Inc. ("First Iowa"), the Bank's wholly owned subsidiary. The
abstract business performed by First Iowa replaces the function of a title
insurance company. The Company believes that First Iowa can continue to be an
excellent source of fee income. Noninterest income from such business for the
year ended December 31, 1999 was $1.4 million, offset by noninterest expense
attributable to First Iowa. The Company also owns a mortgage banking company in
Ames, Iowa, First Iowa Mortgage, Inc. ("First Iowa Mortgage"), the Bank's wholly
owned subsidiary. On January 30, 1998, the Company acquired First Iowa Mortgage
as a part of the Acquisition of Valley Financial. Non-interest income for such
business for the year ended December 31, 1999 was $368,000, offset by non-
interest expense attributable to First Iowa Mortgage.
Liquidity and Interest Rate Risk Management. Management seeks to manage
the Company's interest rate risk exposure by monitoring the levels of interest
rate sensitive assets and liabilities while maintaining an
-9-
<PAGE>
acceptable interest rate spread. At December 31, 1999, total interest-bearing
liabilities maturing or repricing within one year exceeded total interest-
earning assets maturing or repricing in the same period by $60.4 million,
representing a one-year gap to total assets ratio of negative 16.5% as compared
to a positive 3.0% at December 31, 1998. To reduce the potential volatility of
the Company's earnings in a changing interest rate environment, the Company has
emphasized the origination of 7-year fixed rate mortgage loans that convert to
adjustable rates at the conclusion of their initial terms and have overall
maturities of up to 30 years, adjustable-rate loans, investment in short to
medium term United States Treasury notes, U. S. Government agencies, mortgage-
backed securities and has sought to lengthen the terms of its deposits through
its pricing strategies with respect to longer term certificates of deposit. See
"-- Discussion of Market Risk --Interest Rate Sensitivity Analysis".
Liquidity and Capital Resources
Office of Thrift Supervision ("OTS") regulations require that thrift
institutions such as the Bank maintain an average daily balance of liquid assets
(cash, certain time deposits, banker's acceptances and specified United States
Government, state or federal agency obligations) equal to a monthly average of
not less than 4% of its net withdrawable deposits plus short-term borrowings.
At December 31, 1999, the amount of the Bank's liquid assets were $31.7 million,
resulting in a liquidity ratio of 10.8%.
The Company's primary sources of funds are deposits, amortization and
prepayment of loans, maturities of securities and other investments, and
earnings and funds provided from operations. While scheduled principal
repayments on loans are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Company manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Company invests in short-
to medium-term interest-earning assets, which provide liquidity to meet lending
requirements. At December 31, 1999, $4.5 million, or 11.8%, of the Company's
investment portfolio, excluding equity securities, was scheduled to mature in
one year or less; $12.6 million, or 33.3%, was scheduled to mature in one to
five years and $20.8 million, or 54.9%, was scheduled to mature in more than
five years. Certificates of deposit scheduled to mature in less than one year,
at December 31, 1999, totalled $117.5 million. Based on prior experience,
management believes that a significant portion of such deposits will remain with
the Company. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. The amount of eligible collateral for blanket lien pledges from
the FHLB is $151.9 million as of December 31, 1999. For additional information
about cash flows from the Company's operating, financing and investing
activities, see the Statements of Cash Flows included in the Consolidated
Financial Statements.
At December 31, 1999, the Company had outstanding loan commitments of $5.4
million. This amount does not include undisbursed overdraft loan privileges and
the unfunded portion of loans in process.
The main sources of liquidity for the Holding Company are net proceeds from
the sale of stock and payments from the Bank in the form of dividends and loan
repayments. The main cash outflows are payments of dividends to shareholders
and funds used to repurchase the Common Stock. During 1999, the Holding Company
repurchased 702,707 shares of its Common Stock, pursuant to repurchase programs
which were approved by the OTS. The Holding Company's ability to pay dividends
to shareholders depends substantially on dividends and loan payments received
from the Bank. The Bank may not declare or pay cash dividends on or repurchase
any of its shares of common stock if the effect thereof would cause equity to be
reduced below applicable regulatory capital requirements or the amount required
to be maintained for the liquidation account. For a description of the
liquidation account, see Notes 16 and 17 to the Consolidated Financial
Statements. Unlike the Bank, the Holding Company is not subject to OTS
regulatory restrictions on the payment of dividends to its shareholders,
however, it is subject to the requirements of Iowa law. Iowa law generally
prohibits the Holding Company from paying a dividend if, after giving it effect,
either of the following would result: (a) the Holding Company would not be able
to pay its debts as they become due in the usual course of business; or (b) the
Holding Company's total assets would be less than the sum of its total
liabilities, plus the amount that would be needed, if the Holding Company were
to be dissolved at the time of distribution, to satisfy
-10-
<PAGE>
the preferential rights upon dissolution of shareholders whose preferential
rights are superior to those receiving the distribution.
The primary investing activities of the Company are the origination and
purchase of mortgage and other loans and the purchase of securities. During the
years ended December 31, 1999, 1998 and 1997, the Company's disbursements for
loan originations and purchases totaled $91.7 million, $85.2 million and $62.3
million, respectively. These activities were funded primarily by net deposit
inflows, principal repayments on loans, proceeds from the sale of securities and
FHLB advances. Net cash flows used in investing activities amounted to $37.2
million, $2.2 million and $19.1 million for the years ended December 31, 1999,
1998 and 1997, respectively. Net cash flows provided by financing activities
amounted to $28.0 million, $9.4 million and $14.3 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
OTS regulations require savings associations, such as the Bank, to meet
three minimum capital standards: a tangible capital ratio requirement of 1.5% of
total assets as adjusted under the OTS regulations; a leverage ratio requirement
of 3% of core capital to such adjusted total assets; and a risk-based capital
ratio requirement of 8% of core and supplementary capital to total risk-based
assets. The Bank satisfied these minimum capital standards at December 31, 1999
with tangible and leverage capital ratios of 8.5% and a total risk-based capital
ratio of 16.7%. In determining the amount of risk-weighted assets for purposes
of the risk-based capital requirement, a savings association must compute its
risk-based assets by multiplying its assets and certain off-balance sheet items
by risk-weights, which range from 0% for cash and obligations issued by the
United States Government or its agencies to 100% for consumer and commercial
loans, as assigned by the OTS capital regulations. These capital requirements,
which are applicable to the Bank only, do not consider additional capital held
at the Holding Company level, and require certain adjustments to shareholder's
equity to arrive at the various regulatory capital amounts.
The table below presents the Bank's regulatory capital amounts as compared
to the OTS regulatory capital requirements at December 31, 1999:
<TABLE>
<CAPTION>
Capital Excess
Amount Requirements Capital
-------- -------------- --------
(In thousands)
<S> <C> <C> <C>
Tangible capital........... $ 30,685 $ 5,416 $ 25,269
Core capital............... 30,685 10,833 19,852
Risk-based capital......... 33,168 15,870 17,298
</TABLE>
-11-
<PAGE>
Discussion of Market Risk--Interest Rate Sensitivity Analysis
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Bank's assets and liabilities, and the market value of all interest-earning
assets, other than those which possess a short term to maturity. Since all of
the Company's interest-bearing liabilities and virtually all of the Company's
interest-earning assets are located at the Bank, virtually all of the Company's
interest rate risk management procedures are performed at the Bank level. Based
upon the Bank's nature of operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank's real estate loan
portfolio, within Iowa, is subject to risks associated with the local economy.
The Company has sought to diversify its loan portfolio by purchasing loans
secured by properties outside of Iowa. At December 31, 1999, 32.2% of the
Company's loan portfolio was secured by properties outside the State of Iowa,
located in twenty-six states. See "Asset Quality." The Bank does not own any
trading assets. At December 31, 1999, neither the Holding Company nor the Bank
had any hedging transactions in place, such as interest rate swaps and caps.
The Company seeks to manage its interest risk by monitoring and controlling
the variation in repricing intervals between its assets and liabilities. To a
lesser extent, the Company also monitors its interest rate sensitivity by
analyzing the estimated changes in market value of its assets and liabilities
assuming various interest rate scenarios. As discussed more fully below, there
are a variety of factors which influence the repricing characteristics of any
given asset or liability.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The "interest rate
sensitivity gap" is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income while a positive gap would tend to positively affect net interest income.
Similarly, during a period of falling interest rates, a negative gap would tend
to positively affect net interest income while a positive gap would tend to
adversely affect net interest income.
The Company's policy in recent years has been to manage its exposure to
interest rate risk generally by focusing on the maturities of its interest rate
sensitive assets and by emphasizing adjustable-rate mortgage loans, and
maintaining a level of liquidity by investing in short- to medium-term United
States Treasury notes, U. S. Government agencies, mortgage-backed securities and
short-term interest-earning deposits. The Company generally offers competitive
rates on deposit accounts and prices certificates of deposit to provide
customers with incentives to choose certificates of deposit with longer terms.
At December 31, 1999, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $60.4 million, representing a one-year gap ratio
of negative 16.5%, compared to a one-year gap ratio of positive 3.0% at December
31, 1998. The Chief Executive Officer regularly meets with the Bank's senior
executive officers to review trends in deposits as well as mortgage and consumer
lending. The Chief Executive Officer also regularly meets with the investment
committee to review the investment portfolio. The Chief Executive Officer
reports quarterly to the Board of Directors on interest rate risks and trends,
as well as liquidity and capital ratios and requirements.
-12-
<PAGE>
Gap Table. The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at December 31, 1999 which
are expected to reprice or mature, based upon certain assumptions, in each of
the future time periods shown. Except as stated below, the amounts of assets
and liabilities shown that reprice or mature during a particular period were
determined in accordance with the earlier of term of repricing or the
contractual terms of the asset or liability. Certain assumptions used in
preparing the table are set forth in the following table. Management believes
that these assumptions approximate actual experience and considers them
appropriate and reasonable.
<TABLE>
<CAPTION>
At December 31, 1999 (1)
---------------------------------------------------------------------------------
Within 1-3 3-5 5-10 10-20 Over 20
1 Year Years Years Years Years Years Total
--------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
First mortgage loans
Adjustable (2).......................... $ 63,686 $ 54,069 $ 28,788 $ -- $ -- $ -- $146,543
Fixed (2).............................. 27,833 31,498 27,157 30,380 2,011 24 118,903
Consumer and other loans.................. 14,911 15,258 5,844 515 34 1 36,563
Investment securities(3) (4).............. 13,235 5,457 14,093 10,355 432 -- 43,572
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets.......... $119,665 $106,282 $ 75,882 $ 41,250 $ 2,477 $ 25 $345,581
======== ======== ======== ======== ======== ======== ========
Rate sensitive liabilities:
Savings accounts.......................... $ 4,391 $ 6,670 $ 4,595 $ 6,166 $ 3,386 $ 622 $ 25,830
NOW accounts.............................. 11,136 11,435 4,538 2,691 293 3 30,096
Money market accounts..................... 13,797 3,667 -- -- -- -- 17,464
Certificate accounts...................... 117,503 52,719 20,680 327 -- -- 191,229
Noninterest-bearing deposits.............. 6,412 -- -- -- -- -- 6,412
FHLB advances and other liabilities....... 26,872 18,414 10,412 17 -- -- 55,715
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities..... $180,111 $ 92,905 $ 40,225 $ 9,201 $ 3,679 $ 625 $326,746
======== ======== ======== ======== ======== ======== ========
Interest sensitivity gap..................... $(60,446) $ 13,377 $ 35,657 $ 32,049 $ (1,202) $ 600
Cumulative interest sensitivity gap.......... $(60,446) $(47,069) $(11,412) $ 20,637 $ 19,435 $ 20,035
Interest sensitivity gap to total assets..... -16.45% 3.64% 9.70% 8.72% -0.33% -0.16%
Cumulative interest-sensitivity gap to
total assets.............................. -16.45% -12.81% -3.10% 5.61% 5.29% 5.45%
Ratio of interest-earning assets to
interest-bearing liabilities.............. 66.44% 114.40% 188.64% 448.32% 67.33% 4.00% 107.88%
Cumulative ratio of interest-earning
assets to interest-bearing liabilities.... 66.44% 82.76% 96.36% 106.40% 105.96% 105.76% 105.76%
Total assets................................. $367,562 $367,562 $367,562 $367,562 $367,562 $367,562 $367,562
Cumulative interest-bearing assets........... $119,665 $225,947 $301,829 $343,079 $345,556 $345,581 $345,581
Cumulative interest sensitive liabilities.... $180,111 $273,016 $313,241 $322,442 $326,121 $326,746 $326,746
</TABLE>
(1) The following assumptions were used in regard to prepayment speed for loans:
(i) one- to four-family first mortgage residential properties will prepay at
15 percent per year, (ii) multi-family mortgage and commercial mortgage
properties will prepay at 12 percent per year, (iii) all other loans
including second mortgage residential properties, mortgage-backed securities
and other consumer loans will prepay at 20 percent per year. Besides
prepayment assumptions, the chart above also includes normal principal
payments based upon the loan contractual agreements. Savings accounts are
assumed to be withdrawn at an annual rate of 17 percent. NOW accounts are
assumed to be withdrawn at an annual rate of 37 percent. Money Market
accounts are assumed to be withdrawn at 79% percent during the first year
with the balance being withdrawn within the one - to three - year category.
These assumptions are annual percentages based on remaining balances and
should not be regarded as indicative of the actual prepayments and
withdrawals that may be experienced by the Company. Certain short comings
are inherent in the analysis presented by the foregoing table.
(2) Includes $492,000 and $9.2 million in mortgage-backed securities in
adjustable and fixed first mortgage loans, respectively.
(3) Includes other equity securities, interest-bearing deposits and FHLB stock,
all of which are shown in the within-one-year category. Components include
interest-bearing deposits of $4.1 million and securities available for sale
of $39.5 million.
(4) Includes FHLMC preferred stock and FNMA preferred stock, which are included
in the appropriate repricing category based upon their call dates.
Certain shortcomings are inherent in the method of analysis presented in
the Gap Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets and liabilities may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features which restrict changes in interest rates
both on a short-term basis and over the life of the asset. Further, in the
event of changes in interest rates, prepayment and early withdrawal levels would
-13-
<PAGE>
likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their adjustable-rate loans
may decrease in the event of an interest rate increase.
NPV Analysis. As part of its efforts to maximize net interest income and
manage the risks associated with changing interest rates, management uses the
"market value of portfolio equity" ("NPV") methodology which the OTS has adopted
as part of its capital regulations.
Under this methodology, interest rate risk exposure is assessed by
reviewing the estimated changes in Net Interest Income ("NII") and NPV which
would hypothetically occur if interest rates rapidly rise or fall along the
yield curve. Projected values of NII and NPV at both higher and lower
regulatory defined rate scenarios are compared to base case values (no change in
rates) to determine the sensitivity to changing interest rates.
Presented below, as of December 31, 1999, is an analysis of the Company's
interest rate risk ("IRR") as measured by changes in NPV and NII for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. Such limits have been established with consideration of the
impact of various rate changes and the Company's current capital position.
<TABLE>
<CAPTION>
Interest Rate Sensitivity of Net Portfolio Value (NPV)(1)
Net Portfolio Value NPV as % of PV of Assets
---------------------------------------------------------------- ------------------------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+300 bp 26,369 -9,917 -27 7.63 -234bp
+200 bp 30,044 -6,242 -17 8.54 -144bp
+100 bp 33,607 -2,678 -7 9.38 -59bp
0 bp 36,286 -- -- 9.97 --
-100 bp 37,931 1,646 5 10.30 32bp
-200 bp 38,767 2,481 7 10.41 44bp
-300 bp 39,065 2,780 8 10.40 42bp
</TABLE>
_____________________
(1) Denotes rate shock used to compute interest rate risk capital component.
As is the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV Table presented assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV Table provides
an indication of the Company's interest rate risk exposure at a particular point
in time, such measurements are not intended to, and do not provide, a precise
forecast of the effect of changes in market interest rates on the Company's net
interest income and will differ from actual results.
Asset Quality
Delinquencies. The Company's collection procedures provide that when a loan
is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge for mortgage loans. If
delinquency continues, on the 20th day past due, a telephone call is made to the
borrower seeking payment. If the loan is 30 days past due, a delinquent notice
is mailed along with a letter advising that the mortgagors are in violation of
the terms of their mortgage contract. If a loan becomes 60 days past due, the
loan becomes subject to possible legal action. After 90 days, if satisfactory
payment terms are not reached with the borrower, foreclosure proceedings are
initiated. To the extent required by the Department of Housing and Urban
Development ("HUD") regulations, generally within 45 days of delinquency, a
Section 160 HUD notice is given to the borrower which provides access to
consumer counseling services.
It is sometimes necessary and desirable to arrange special repayment
schedules with mortgagors to prevent foreclosure or filing for bankruptcy. The
mortgagors are required to submit a written repayment
-14-
<PAGE>
schedule which is closely monitored for compliance. Under these terms, the
account is brought to date, usually within a few months.
Nonperforming Assets. Loans are reviewed on a regular basis and are placed
on nonaccrual status when, in the opinion of management, the collection of
additional interest is doubtful. Mortgage loans and consumer loans are placed on
nonaccrual status generally when either principal or interest is more than 90
days past due. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is deemed foreclosed real estate until such time as it is
sold. In general, the Company considers collateral for a loan to be in substance
foreclosed if: (i) the borrower has little or no equity in the collateral; (ii)
proceeds for repayment of the loan can be expected to come only from the
operation or sale of the collateral; and (iii) the borrower has either formally
or effectively abandoned control of the collateral to the Company, or retained
control of the collateral but is unlikely to be able to rebuild equity in the
collateral or otherwise repay the loan in the foreseeable future.
When foreclosed real estate is acquired or otherwise deemed foreclosed real
estate, it is recorded at the lower of the unpaid principal balance of the
related loan or its estimated fair value, less estimated selling expenses.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations. At December 31, 1999, the Company's
foreclosed real estate consisted of ten properties with an aggregate value of
$503,000.
Delinquent Loans, Nonaccrual Loans and Nonperforming Assets. The following
table sets forth information regarding loans on nonaccrual status and foreclosed
real estate of the Company at the dates indicated. At the dates indicated, the
Company did not have any material restructured loans within the meaning of SFAS
No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings,
and did not have any loans that were ninety days past due and still accruing
interest.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------
1999 1998 1997 1996 1995
------ -------- ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and nonperforming
assets:
First mortgage loans:
One- to four-family residential.......... $ 111 $ 403 $ 122 $ 149 $ 137
Multi-family and commercial
properties (1)......................... -- 423 -- -- --
Consumer loans:............................. 102 130 25 35 44
----- ------ ----- ----- -----
Total nonaccrual loans................... 213 956 147 184 181
Total foreclosed real estate(2)............. 503 187 67 128 128
Other nonperforming assets.................. -- 1 -- 2 109
----- ------ ----- ----- -----
Total nonperforming assets............... $ 716 $1,144 $ 214 $ 314 $ 418
===== ====== ===== ===== =====
Total nonaccrual loans to net loans
receivable............................... 0.07% 0.38% 0.08% 0.11% 0.12%
Total nonaccrual loans to total assets...... 0.06 0.28 0.07 0.09 0.10
Total nonperforming assets to total
assets................................... 0.20 0.34 0.10 0.15 0.23
</TABLE>
________________________
(1) Includes a purchased loan which was secured by a commercial property that
was 90 days past due in the amount of $364,636 (in actual dollars). This
loan was repaid in March, 1999.
(2) Represents the net book value of property acquired by the Company through
foreclosure or deed in lieu of foreclosure. Upon acquisition, this property
is recorded at the lower of cost or fair value less estimated selling
expenses.
-15-
<PAGE>
The following table sets forth information with respect to loans delinquent
60-89 days in the Company's portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 60-89 days:
First mortgage loans:
One- to four-family residential........ $ 521 $1,070 $ 275 $ 323 $ 311
Multi-family and commercial properties 491 22 -- -- --
Consumer loans............................ 198 270 135 51 28
------ ------ ----- ----- -----
Total past due 60-89 days............ $1,210 $1,362 $ 410 $ 374 $ 339
====== ====== ===== ===== =====
</TABLE>
The following table sets forth information with respect to the Company's
delinquent loans and other problem assets at December 31, 1999
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------
Balance Number
-------------- --------------
(Dollars in Thousands)
<S> <C> <C>
One- to four-family first mortgage loans:
Loans 60 to 89 days delinquent......................... $521 19
Loans 90 days or more delinquent....................... 111 4
Multi-family and commercial first mortgage loans:
Loans 60 to 89 days delinquent...................... 491 1
Loans 90 days or more delinquent.................... --
Consumer Loans:
Loans 60 to 89 days delinquent...................... 198 22
Loans 90 days or more delinquent.................... 102 25
Foreclosed real estate................................. 503 10
Other nonperforming assets............................. -- --
Loans to facilitate sale of foreclosed real estate..... 162 4
Special mention loans.................................. 761 29
</TABLE>
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payments, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. At December 31, 1999,
the Company had $761,000 of special mention loans, consisting of thirteen loans
secured by one- to four-family residences, one commercial property and fifteen
consumer loans.
-16-
<PAGE>
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
At December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ --------
(In Thousands)
Substandard assets.......... $ 689 745 (2) $ 208 $ 311 1,134 (1)
Doubtful assets............. -- -- -- -- --
Loss assets................. 60 35 18 9 --
----- ------- ----- ----- -------
Total classified assets.... $ 749 $ 780 $ 226 $ 320 $ 1,134
===== ======= ===== ===== =======
- ---------------------
(1) Includes one purchased loan which was secured by a multi-family property
that was 30 days past due in the amount of $791,000 (in actual dollars).
This loan was repaid in January, 1996.
(2) Includes one purchased loan which was secured by a commercial property that
was 90 days past due in the amount of $364,636 (in actual dollars). This
loan was repaid in March, 1999.
Allowance for Loan Losses. It is management's policy to provide an
allowance for estimated losses on the Company's loan portfolio based on
management's evaluation of the prior loss experience, industry standards, past
due loans, economic conditions, the volume and type of loans in the Company's
portfolio, which includes a significant amount of multi-family loans,
substantially all of which are purchased and are collateralized by properties
located outside of the Company's market area, and other factors related to the
collectibility of the Company's loan portfolio. The Company regularly reviews
its loan portfolio, including problem loans, to determine whether any loans
require classification or the establishment of appropriate reserves or
allowances for losses. Such evaluation, which includes a review of all loans of
which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated fair value of the
underlying collateral. During the years ended December 31, 1999, 1998 and 1997,
the Company's provision for loan losses were $120,000, $210,000 and $240,000,
respectively. The Company's allowance for loan losses totalled $2.8 million,
$2.7 million and $2.2 million at December 31, 1999, 1998 and 1997, respectively.
Management believes that the allowances for losses on loans and foreclosed
real estate are adequate. While management uses available information to
recognize losses on loans and foreclosed real estate, future additions to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for loan losses. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
-17-
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
For The Year Ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding................... $ 291,760 $259,360 $ 194,626 $ 168,921 $151,310
Average net loans outstanding............. 265,553 246,510 175,284 156,708 137,068
Allowance balances (at beginning of
period)................................ 2,676 2,151 1,953 1,736 1,543
--------- -------- --------- --------- --------
Provisions for losses:
First mortgage loans................... 105 135 190 150 200
Consumer loans......................... 15 75 50 90 50
Effect of
Valley Financial Corp................ -- 343 -- -- --
Charge-Offs:
First mortgage loans................... 5 6 21 5 2
Consumer loans......................... 23 23 31 19 56
Recoveries:
First mortgage loans................... -- -- -- -- --
Consumer loans......................... 8 1 10 1 1
--------- -------- --------- --------- --------
Net charge-offs........................ 20 28 42 23 57
--------- -------- --------- --------- --------
Allowance balance (at end of period)...... $ 2,776 $ 2,676 $ 2,151 $ 1,953 $ 1,736
========= ======== ========= ========= ========
Allowance for loan losses as a percent
of total loans receivable at end of
period................................. 0.95% 1.03% 1.10% 1.16% 1.15%
Net loans charged off as a percent of
average net loans outstanding.......... 0.01 0.01 0.02 0.01 0.04
Ratio of allowance for loan losses to
total nonaccrual loans at end of
period................................. 1,301.13 279.72 1,468.33 1,059.35 960.20
Ratio of allowance for loan losses to
total nonaccrual loans and foreclosed
real estate at end of period........... 387.78 233.95 1,006.96 621.31 562.15
</TABLE>
-18-
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation for loan losses by loan category for the periods indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996
----------------------- ----------------------- ----------------------- ----------------------
% of Loans % of Loans % of Loans % of Loans
In Each In Each In Each In Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
-------- ----------- -------- ----------- -------- ----------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
One- to four-family residential
mortgage loans................ $ 726 56.23% $ 684 57.45% $ 675 59.48% $ 503 63.44%
Multi-family
residential mortgage loans... 1,332 25.17 1,298 25.02 1,026 26.38 948 20.42
Commercial mortgage loans...... 252 6.07 228 4.39 76 1.95 157 3.09
Consumer loans................. 466 12.53 466 13.14 374 12.19 345 13.05
------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses................ $2,776 100.00% $2,676 100.00% $2,151 100.00% $1,953 100.00%
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
-----------------------------
1995
-----------------------------
% of Loans
In Each
Category to
Amount Total Loans
-------- -----------------
<S> <C> <C>
Balance at end of period
applicable to:
One- to four-family residential
mortgage loans................ $ 418 62.70%
Multi-family
residential mortgage loans... 870 20.90
Commercial mortgage loans...... 175 3.85
Consumer loans................. 273 12.55
------ ------
Total allowance for
loan losses................ $1,736 100.00%
====== ======
</TABLE>
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. For purposes of this table, average balances were computed on a
monthly basis.
-19-
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------
At December 31, 1999 1999 1998
------------------------ ----------------------------------- ----------------------------------
Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
--------- --------- ----------- ---------- ---------- ----------- ----------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
First mortgage loans(1)............ $ 252,897 7.72% $ 233,457 $18,104(8) 7.75% $ 216,914 $17,318(8) 7.98%
Consumer loans(1).................. 36,639 8.74 34,831 3,111 8.93 32,173 3,014 9.37
Investment securities.............. 55,295(4) 5.83 58,666(5) 3,341 5.69 57,826(6) 3,270 5.65
--------- ------ --------- ------- ------ --------- ------- ------
Total interest-earning
assets....................... 344,831 7.52% 326,954 24,556 7.51% 306,913 23,602 7.69%
=======
Noninterest-earning assets........ 22,602 18,750 16,847
--------- --------- ---------
Total assets.................... $ 367,433 $ 345,704 $ 323,760
========= ========= =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market
savings.......................... $ 47,560 2.12% $ 47,551 $ 1,088 2.29% $ 44,622 $ 1,351 3.03%
Savings........................... 25,830 2.00 27,189 562 2.07 25,591 594 2.32
Certificates of Deposit........... 191,229 5.48 173,329 9,463 5.46 159,701 8,948 5.60
Borrowed funds.................... 55,715 5.71 43,711 2,491 5.62 34,020 1,976 5.81
--------- ------ --------- ------- ------ --------- ------- ------
Total interest-bearing
liabilities.................. $ 320,334 4.64% $ 291,780 $13,604 4.65% $ 263,934 $12,869 4.88%
Noninterest-bearing
liabilities...................... 8,972 9,776 9,587
--------- --------- ---------
Total liabilities............... $ 329,306 $ 301,556 $ 273,521
Equity.............................. 38,127 44,148 50,239
--------- --------- ---------
Total liabilities and equity.... 367,433 345,704 323,760
========= ========= =========
Net interest income $10,952 $10,733
======= =======
Net interest rate spread(2)......... 2.88% 2.86% 2.81
====== ====== ======
Net interest margin (3)............. 3.21 3.35 3.50
====== ====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities............... 107.65 112.05 116.28
====== ====== ======
<CAPTION>
-------------------------------------
1997
-------------------------------------
Average
Average Yield/
Balance Interest Cost
------------ ---------- ---------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
First mortgage loans(1)...................... $ 154,227 $12,433(8) 8.06%
Consumer loans(1)............................ 23,138 2,201 9.51
Investment securities........................ 27,102(7) 1,571 5.79
--------- ------- ------
Total interest-earning
assets................................. $ 204,467 $16,205 7.93
=======
Noninterest-earning assets.................. 6,645
---------
Total assets $ 211,112
=========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market
savings.................................... $ 21,777 $ 632 2.90%
Savings..................................... 17,425 392 2.25
Certificates of Deposit..................... 93,239 5,470 5.87
Borrowed funds.............................. 23,679 1,406 5.94
--------- -------
Total interest-bearing
liabilities............................ $ 156,120 $ 7,900 5.06%
=======
Noninterest-bearing
liabilities................................ 5,634
---------
Total liabilities......................... $ 161,754
Equity........................................ 49,358
---------
Total liabilities and equity.............. $ 211,112
=========
Net interest income........................... $ 8,305
=======
Net interest rate spread(2)................... 2.87%
======
Net interest margin (3)....................... 4.06
======
Ratio of average interest-earning
assets to average interest-
bearing liabilities......................... 130.97
======
</TABLE>
_________________________
(1) Balance is net of deferred loan fees, loan discounts and loans in process.
Nonaccrual loans are included in the balances.
(2) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average total
interest-earning assets.
(4) Includes interest-bearing deposits of $4,127,000 and securities available
for sale of $51,168,000.
(5) Includes interest-bearing deposits of $7,309,000 and securities available
for sale of $51,357,000.
(6) Includes interest-bearing deposits of $8,235,000 and securities available
for sale of $49,590,000.
(7) Includes interest-bearing deposits of $3,912,000, securities available for
sale of $22,440,000 and securities held to maturity of $750,000.
(8) Includes loan fee amortization of $(9,000), $(29,000) and $(35,000) for the
years ended December 31, 1999, 1998 and 1997.
-20-
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in average volume); and (iv) the net
change.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
Compared to Compared to
Year Ended Year Ended
December 31, 1998 December 31, 1997
--------------------------------------------- -----------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
------------------------------- ---------------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
-------- ------ -------- ------------ -------- ------ --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
First mortgage loans......... $1,320 $(496) $(38) $ 786 $5,054 $(120) $ (49) $4,885
Consumer loans............... 249 (140) (12) 97 859 (33) (13) 813
Investment securities........ 77 6 (12) 71 1,770 (83) 12 1,699
------ ----- ---- ----- ------ ----- ----- ------
Total interest-earning
assets................... $1,646 $(630) $(62) $ 954 $7,683 $(236) $ (50) $7,397
====== ===== ==== ===== ====== ===== ===== ======
Interest expense:
NOW and money market
savings..................... $ 89 $(330) $(22) $(263) $ 663 $ 27 $ 29 $ 719
Savings...................... 37 (65) (4) (32) 184 13 6 203
Certificate of deposits...... 763 (228) (19) 516 3,897 (246) (175) 3,476
Borrowed funds............... 563 (38) (11) 514 614 (30) (13) 571
------ ----- ---- ----- ------ ----- ----- ------
Total interest-bearing
liabilities.............. $1,452 $(661) $(56) $ 735 $5,358 $(236) $(153) $4,969
Net change in net interest ====== ===== ==== ===== ====== ===== ===== ======
income......................... $ 194 $ 31 $ (6) $ 219 $2,325 $ -- $ 103 $2,428
====== ===== ==== ===== ====== ===== ===== ======
</TABLE>
-21-
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
The unaudited pro forma consolidated statement of income is based on the
historical financial statements of the Company and Valley Financial. The
unaudited pro forma consolidated statement of income for the year ended December
31, 1998 was prepared as if the Acquisition had occurred as of the beginning of
the period for purposes of the combined consolidated statements of income. The
income statement for the year ended December 31, 1998 would therefore include
the month ended January 31, 1998 for Valley Financial.
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.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
ACTUAL AND PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
Actual Pro forma Pro forma
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest income.................................................. $24,556,267 $24,223,861 $23,955,770
Interest expense................................................. 13,603,841 13,319,040 13,401,812
----------- ----------- -----------
Net interest income........................................... 10,952,426 10,904,821 10,553,958
Provision for loan losses........................................ 120,000 210,000 140,000
----------- ----------- -----------
Net interest income after provision for
loan losses.................................................. 10,832,426 10,694,821 10,413,958
----------- ----------- -----------
Noninterest income:
Fees and service charges...................................... 1,484,962 1,279,153 1,139,663
Abstract fees................................................. 1,420,955 1,583,773 1,221,807
Gain on sale of securities
available for sale, net.................................... 61,564 51,362 263,870
Other income.................................................. 1,095,565 1,054,151 769,602
----------- ----------- -----------
Total noninterest income................................... 4,063,046 3,968,439 3,394,942
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits................................ 4,025,744 3,650,905 3,463,118
Premises and equipment........................................ 930,988 846,223 739,524
Data processing............................................... 522,122 583,111 429,843
SAIF deposit insurance premiums............................... 147,243 148,226 135,206
Goodwill amortization......................................... 472,290 472,290 473,875
Other expenses................................................ 2,356,024 2,277,600 2,201,702
----------- ----------- -----------
Total noninterest expense.................................. 8,454,411 7,978,355 7,443,268
----------- ----------- -----------
Income before income taxes....................................... 6,441,061 6,684,905 6,365,632
Provision for income taxes....................................... 2,240,886 2,439,432 2,343,256
----------- ----------- -----------
Net Income....................................................... $ 4,200,175 $ 4,245,473 $ 4,022,376
=========== =========== ===========
</TABLE>
<PAGE>
Comparison of Financial Condition as of December 31, 1999, December 31, 1998 and
December 31, 1997
Total assets increased $30.7 million, or 9.1%, from $336.7 million at
December 31, 1998 to $367.4 million at December 31, 1999. Interest-bearing cash
decreased $9.1 million, or 68.7%, from $13.2 million at December 31, 1998 to
$4.1 million at December 31, 1999. Noninterest-bearing cash increased $6.1
million, or 250.7%, from $2.4 million at December 31, 1998 to $8.5 million at
December 31, 1999. Customer-focused preparations for the Year 2000 resulted in
increased noninterest-bearing cash. Noninterest-bearing cash has decreased to
historical numbers since December 31, 1999. Securities available for sale
decreased $190,000, or 0.4%, primarily due to the sales, calls, payments and
maturities on U.S. Treasury notes, U.S. Government agencies and mortgage-backed
securities, partially offset by the purchase of U.S. Government agencies and
mortgage-backed securities. Total loans receivable, net, increased by $32.7
million, or 12.9%, from $254.0 million at December 31, 1998 to $286.8 million at
December 31, 1999, primarily due to the origination of $60.8 million of first
mortgage loans secured by one- to four-family residences, purchases and
originations of first mortgage loans primarily secured by one- to four-family
residences, multi-family residences and commercial real estate loans of $40.3
million, and originations of $16.1 million of second mortgage loans. These
originations and purchases were offset in part by payments, prepayments and
sales of loans during the year ended December 31, 1999. Deposits increased $24.3
million, or 9.9%, from $246.7 million at December 31, 1998 to $271.0 million at
December 31, 1999, primarily reflecting increases in certificates of deposit
accounts, due to an increase in deposits of certain public funds. Other
borrowings, primarily FHLB advances, increased $16.9 million, from $38.8 million
at December 31, 1998 to $55.7 million at December 31, 1999. Total shareholders'
equity decreased $10.1 million from $48.2 million at December 31, 1998 to $38.1
million at December 31, 1999, primarily due to dividends paid to shareholders
and funds used for repurchases of Common Stock less, net income and increased
unrealized losses.
The pro forma statement of financial condition as of December 31, 1997 was
compared with the December 31, 1998 statement of financial condition in order to
more clearly present the changes in financial condition.
Total assets increased $2.2 million, or 0.6%, from $334.5 million at
December 31, 1997 to $336.7 million at December 31, 1998. Interest-bearing cash
increased $6.7 million, or 103.7%, from $6.5 million at December 31, 1997 to
$13.2 million at December 31, 1998. Securities available for sale decreased $8.9
million, or 15.1%, primarily due to the sales, calls, payments and maturities on
U.S. Treasury notes, U.S. Government agencies and mortgage-backed securities,
partially offset by the purchase of U.S. Government agencies and mortgage-backed
securities. Total loans receivable, net, increased by $3.3 million, or 1.3%,
from $250.7 million at December 31, 1997 to $254.0 million at December 31, 1998,
primarily due to the origination of $58.1 million of first mortgage loans
secured by one- to four-family residences, purchases and originations of first
mortgage loans primarily secured by multi-family residences located out of state
of $24.5 million, and originations of $14.5 million of second mortgage loans.
These originations and purchases were offset in part by payments, prepayments
and sales of loans during the year ended December 31, 1998. Deposits increased
$6.0 million, or 2.5%, from $240.7 million at December 31, 1997 to $246.7
million at December 31, 1998, primarily reflecting increases in NOW accounts and
money market accounts. Other borrowings, primarily FHLB advances, decreased $1.4
million, from $38.8 million at December 31, 1997 to $37.9 million at December
31, 1998. Total shareholders' equity decreased $2.2 million from $48.2 million
at December 31, 1997 to $50.4 million at December 31, 1998, primarily due to
dividends paid to shareholders and funds used for repurchases of Common Stock
less, net income and increased unrealized gains.
Comparison of Results of Operations for the Years Ended December 31, 1999 and
1998
The actual statement of income for the year ended December 31, 1999 was
compared to the pro forma statement of income for the years ended December 31,
1998 for comparison purposes in order to more clearly present the changes in the
results of operations.
-23-
<PAGE>
Interest Income. Interest income increased by $332,000 to $24.6 million
for the year ended December 31, 1999 compared to $24.2 million for the year
ended December 31, 1998. The increase in interest income was primarily due to a
$11.9 million increase in average interest-earning assets to $327.0 million for
the year ended December 31, 1999, from $315.1 million for 1998. The increase in
the average balances of interest-earning assets primarily reflects increases in
the average balances of first and second mortgage loans, partially offset by
decreases in securities available for sale. These increases were primarily
derived from originations of $60.8 million of first mortgage loans secured by
one- to four-family residences, purchases and originations of first mortgage
loans secured by one- to four-family residences, multi-family residences and
commercial real estate of $40.3 million and originations of $16.1 million of
second mortgage loans, which originations and purchases were offset in part by
payments, prepayments and sales of loans during the year ended December 31,
1999. The increase in average interest-earning assets reflects the Company's
continued emphasis on residential lending. See "Business Strategy." The
decreases in available for sale securities were primarily due to the sales,
calls, payments and maturities on U.S. Treasury Notes, U.S. Government agencies
and mortgage-backed securities, partially offset by the purchase of U.S.
Government agencies, mortgage-backed securities and certain equities. The impact
of the increase in average interest-earning assets was offset in part by a
decrease in the average yields. The average yield on interest-earning assets
decreased to 7.51% for the year ended December 31, 1999 from 7.69% for the year
ended December 31, 1998, primarily due to a general decrease in market interest
rates.
Interest Expense. Interest expense increased by $285,000 to $13.6 million
for the year ended December 31, 1999 compared to $13.3 million for the year
ended December 31, 1998. The increase in interest expense was primarily due to a
$18.5 million increase in the average balance of interest-bearing liabilities to
$291.8 million for the year ended December 31, 1999, from $273.3 million for
1998. The increase in the average balance of interest-bearing liabilities
primarily reflects an increase in the certificates of deposit and borrowed
funds. The increases in certificates of deposit is primarily due to an increase
in deposits of certain public funds. The increase in borrowed funds was due to
the borrowing of funds in part to fund the corresponding asset growth and stock
repurchases. The impact of the increase in the average balances of interest-
bearing liabilities was offset in part by a decrease in the average cost of
interest-bearing liabilities. The average cost of interest-bearing liabilities
decreased to 4.65% for the year ended December 31, 1999 from 4.87% for the year
ended December 31, 1998. The decrease in the average cost of funds is due to the
general decrease in market interest rates.
Net Interest Income. Net interest income before provision for loan losses
increased by $47,000 to $11.0 million for the year ended December 31, 1999 from
$10.9 million for the year ended December 31, 1998. The increase is primarily
due to the decreases in the average yield on the average interest-bearing assets
being less than the decrease in the cost of the average interest-bearing
liabilities. This was offset in part by a decrease in the excess of average
interest-earning assets over the average balances of interest-bearing
liabilities. The interest rate spread (i.e., the difference in the average yield
on assets and average cost of liabilities) increased to 2.86% for the year ended
December 31, 1999 from 2.82% for the year ended December 31, 1998. The increase
in the spread reflects the general decline in the overall costs on interest-
bearing liabilities in excess of the decline in yields on the interest-earning
assets offset, in part, by the increase in the average interest-bearing
liabilities in excess of the increase in the interest-earning assets.
-24-
<PAGE>
The following table sets forth certain information relating to the
Company's actual and pro forma average balance sheets and reflects the actual
and pro forma average yield on assets and the actual and pro forma average cost
of liabilities for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
For Years Ended December 31,
------------------------------------------------------------------
Actual Pro Forma
1999 1998
------------------------------- --------------------------------
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................................... $268,288 $21,215 7.91% $253,863 $20,737 8.17%
Securities available for sale........... 51,357 2,998 5.84 53,138 3,106 5.85
Interest-bearing cash................... 7,309 343 4.69 8,103 381 4.70
-------- ------- ------ -------- ------- ------
Total interest-earning assets......... 326,954 24,556 7.51% 315,104 $24,224 7.69%
------- ------
Noninterest-earning assets................... 18,750 18,299
-------- --------
Total assets.......................... $345,704 $333,403
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings............ $ 47,551 $ 1,088 2.29% $ 46,457 $ 1,416 3.05%
Savings................................. 27,189 562 2.07 26,329 616 2.34
Certificates of deposit................. 173,329 9,463 5.46 165,207 9,236 5.59
Borrowed funds.......................... 43,711 2,491 5.62 35,275 2,051 5.81
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities........ $291,780 $13,604 4.65% $273,268 $13,319 4.87%
------- ------ ------- ------
Noninterest-bearing liabilities........... 9,776 9,896
-------- --------
Total liabilities..................... 301,556 283,164
Equity.................................... 44,148 50,239
-------- --------
Total liabilities and equity.......... $345,704 $333,403
======== ========
Net interest income.......................... $10,952 $10,905
======= =======
Net interest rate spread..................... 2.86% 2.82%
====== ======
Net interest margin.......................... 3.35% 3.46%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities...... 112.05% 115.31%
====== ======
</TABLE>
Provision for Loan Losses. The Company's provision for loan losses was
$120,000 and $210,000 for years ended December 31, 1999 and December 31, 1998,
respectively. The Company establishes provisions for loan losses, which are
charged to operations, in order to maintain the allowance for loan losses at a
level which is deemed to be appropriate based upon an assessment of prior loss
experience, industry standards, past due loans, economic conditions, the volume
and type of loans in the Company's portfolio, which includes a significant
amount of multi-family loans, substantially all of which are purchased and are
secured by properties located out of state, and other factors related to the
collectibility of the Company's loan portfolio. The net charge offs were $20,000
for the year ended December 31, 1999 as compared to $28,000 for the year ended
December 31, 1998. The resulting allowance for loan loss was $2.8 million at
December 31, 1999 as compared to $2.7 million at December 31, 1998.
The increase in the allowance is primarily due to the increase in total
loans from $259.4 million at December 31, 1998 to $291.8 million at December 31,
1999. The allowance for loan losses as a percentage of total loans receivable
decreased to 0.95% at December 31, 1999 from 1.03% at December 31, 1998. The
level of nonperforming loans has decreased to $213,000 at December 31, 1999 from
$956,000 at December 31, 1998. See "Asset Quality."
Management believes that the allowance for loan losses is adequate. While
management estimates loan losses using the best available information, such as
independent appraisals for significant collateral properties, no assurance can
be made that future adjustments to the allowance will not be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding no problem loans, identification of additional problem loans,
and other factors, both within and outside of management's control.
-25-
<PAGE>
Noninterest Income. Total noninterest income increased by $95,000, or
2.4%, to $4.1 million for the year ended December 31, 1999 from $4.0 million for
the year ended December 31, 1998. The increase is due to increases in fees and
service charges, partially offset by a decrease in abstract fees. Fees and
service charges increased $206,000 due to increases in overdraft fees on NOW
accounts, service charges on NOW and savings accounts, service charges on
ATM/debit cards and loan prepayment fees. Abstract fees decreased $163,000 due
to decreased sales volume. Sales volume decreased in part due to a general
decline in real estate activity. Noninterest income for the year ended December
31, 1999 also reflects gains on the sales of securities available for sale of
$62,000, as compared to gains on the sale of such securities of $51,000 for the
1998 comparable period. See "--Business Strategy--Increased Noninterest Income."
Noninterest Expense. Total non-interest expense increased by $476,000 to
$8.5 million for the year ended December 31, 1999 from $8.0 million for the year
ended December 31, 1998. The increase is primarily due to an increase in the
employee salaries and benefits and premises and equipment, offset in part by a
decrease in data processing. The increase in salaries and benefits was primarily
a result of normal salary increases, increased personnel due to the opening of a
branch located in Perry, Iowa, an increase in the number of employees and
related insurance costs and payroll taxes. The increase in premises and
equipment was primarily due to an increase in depreciation expense relating to
the purchase of computer equipment and software, ATM's, the opening of a branch
located in Perry, Iowa and normal cost increases. The decrease in data
processing is primarily due to the signing of a multi-year data processing
contract in 1999, offset in part by additional data processing services utilized
by the Bank due to the Acquisition, upgrading the Bank's operating systems and
Year 2000 costs. The Company's efficiency ratio for the year ended December 31,
1999 and 1998 were 56.30% and 53.64%, respectively. The Company's ratio of
noninterest expense to average assets for the year ended December 31, 1999 and
1998 were 2.45% and 2.39%, respectively.
Income Taxes. Income taxes decreased by $199,000 to $2.2 million for the
year ended December 31, 1999 as compared to $2.4 million for the year ended
December 31, 1998. The decrease was principally due to a decrease in pre-tax
earnings during the 1999 period as compared to the 1998 period.
Net Income. Net income totalled $4.2 million for the year ended December
31, 1999 compared to $4.2 million for the same period in 1998.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
The pro forma statements of income for the years ended December 31, 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 increased by $268,000 to $24.2 million for
the year ended December 31, 1998 compared to $24.0 million for the year ended
December 31, 1997. The increase in interest income was primarily due to a $5.4
million increase in average interest-earning assets to $315.1 million for the
year ended December 31, 1998 from $309.7 million for 1997. The increase in the
average balances of interest-earning assets primarily reflects increases in the
average balances of first and second mortgage loans, partially offset by
decreases in securities available for sale. These increases were primarily
derived from originations of $58.1 million of first mortgage loans secured by
one- to four-family residences, purchases and originations of first mortgage
loans secured by multi-family residences located outside of the State of Iowa of
$24.5 million and originations of $14.5 million of second mortgage loans, which
originations and purchases were offset in part by payments, prepayments and
sales of loans during the year ended December 31, 1998. The increase in average
interest-earning assets reflects the Company's continued emphasis on residential
lending. See "Business Strategy." The decreases in available for sale securities
were primarily due to the sales, calls, payments and maturities on U.S. Treasury
Notes, U.S. Government agencies and mortgage-backed securities, partially offset
by the purchase of U.S. Government agencies and mortgage-backed securities. The
average yield on interest-earning assets decreased to 7.69% for the year ended
December 31, 1998 from 7.74% for the year ended December 31, 1997, primarily due
to a general decrease in market interest rates.
-26-
<PAGE>
Interest Expense. Interest expense decreased by $83,000 to $13.3 million
for the year ended December 31, 1998 compared to $13.4 million for the year
ended December 31, 1997. The decrease in interest expense was primarily due to a
decrease in the average cost of NOW and money market accounts, savings accounts
and borrowed funds and a decrease in the average balance of borrowed funds. The
decrease in the average cost of funds is due to the general decrease in market
interest rates. The decrease in the average balance of borrowed funds was
partially due to the utilization of excess cash funds to repay certain
borrowings. This decrease was partially offset by an increase in the average
balances of interest-bearing-liabilities of $3.1 million from $270.2 million for
the year ended December 31, 1997, compared to $273.3 million for the year ended
December 31, 1998. The increase in the average balances of interest-bearing
liabilities reflects an increase in the average balances of NOW accounts and
money market accounts and certificates of deposit, consistent with the Company's
strategy of controlled internal growth. The average cost of interest-bearing
liabilities decreased from 4.96% for the year ended December 31, 1997 to 4.87%
for the year ended December 31, 1998, reflecting changes in the distribution of
NOW and money market savings accounts and borrowing of funds with longer
maturities and, to a lesser extent, decreases in the average cost of NOW and
money market savings accounts and borrowed funds.
Net Interest Income. Net interest income before provision for loan losses
increased by $351,000 to $10.9 million for the year ended December 31, 1998 from
$10.6 million for the year ended December 31, 1997. The increase is primarily
due to the increases in the average interest-earning assets and decreases in the
cost of interest-bearing liabilities, offset in part by decreases in the average
interest-bearing liabilities and decreases in the average yield on interest-
bearing assets. The interest rate spread (i.e., the difference in the average
yield on assets and average cost of liabilities) increased from 2.78% for the
year ended December 31, 1997 to 2.82% for the year ended December 31, 1998. The
increase in the spread reflects the general decline in the overall costs on
interest-bearing liabilities in excess of the decline in yields on the interest-
earning assets combined with the increase in the average interest-bearing assets
in excess of the increase in the interest-bearing liabilities.
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 years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
For Years Ended December 31,
------------------------------------------------------------------
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......................................... $253,863 $20,737 8.17% $238,973 $19,768 8.27%
Securities available for sale................. 53,138 3,106 5.85 65,556 3,914 5.97
Interest-bearing cash......................... 8,103 381 4.70 5,167 274 5.31
-------- ------- ------ -------- ------- ------
Total interest-earning assets............... 315,104 $24,224 7.69% 309,696 $23,956 7.74%
------- ------ ------- ------
Noninterest-earning assets........................ 18,299 18,215
-------- --------
Total assets................................ $333,403 $327,911
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings.................. $ 46,457 $ 1,416 3.05% $ 42,295 $ 1,325 3.13%
Savings....................................... 26,329 616 2.34 26,465 650 2.46
Certificates of deposit....................... 165,207 9,236 5.59 161,888 9,070 5.60
Borrowed funds................................ 35,275 2,051 5.81 39,512 2,357 5.96
-------- ------- ------ -------- ------- ------
Total interest-bearing liabilities................ 273,268 $13,319 4.87% 270,160 $13,402 4.96%
------- ------ ------- ------
Noninterest-bearing liabilities................... 9,896 8,394
-------- --------
Total liabilities........................... 283,164 278,554
Equity............................................ 50,239 49,357
-------- --------
Total liabilities and equity................ $333,403 $327,911
======== ========
Net interest income................................ $10,905 $10,554
======= =======
Net interest rate spread........................... 2.82% 2.78%
====== ======
Net interest margin................................ 3.46% 3.41%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities............ 115.31% 114.63%
====== ======
</TABLE>
-27-
<PAGE>
Provision for Loan Losses. The Company's provision for loan losses was
$210,000 and $140,000 for the years ended December 31, 1998 and December 31,
1997, respectively. The Company establishes provisions for loan losses, which
are charged to operations, in order to maintain the allowance for loan losses at
a level which is deemed to be appropriate based upon an assessment of prior loss
experience, industry standards, past due loans, economic conditions, the volume
and type of loans in the Company's portfolio, which includes a significant
amount of multi-family loans, substantially all of which are purchased and are
secured by properties located out of state, and other factors related to the
collectibility of the Company's loan portfolio. The net charge offs were $28,000
for the year ended December 31, 1998 as compared to $124,000 for the year ended
December 31, 1997. The resulting allowance for loan loss was $2.7 million at
December 31, 1998 as compared to $2.5 million at December 31, 1997.
The increase in the allowance is primarily due to the increase in total
loans from $253.8 million at December 31, 1997 to $259.4 million at December 31,
1998. The allowance for loan losses as a percentage of total loans receivable
increased to 1.03% at December 31, 1998 from 0.99% at December 31, 1997. The
level of nonperforming loans has increased to $956,000 at December 31, 1998 from
$317,000 at December 31, 1997. See "Asset Quality."
Management believes that the allowance for loan losses is adequate. While
management estimates loan losses using the best available information, such as
independent appraisals for significant collateral properties, no assurance can
be made that future adjustments to the allowance will not be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding no problem loans, identification of additional problem loans,
and other factors, both within and outside of management's control.
Noninterest Income. Total noninterest income increased by $573,000, or
16.9%, to $4.0 million for the year ended December 31, 1998 from $3.4 million
for the year ended December 31, 1997. The increase is due to increases in fees
and service charges, abstract fees and other income, partially offset by a
decrease in the gain on the sale of investments. Fees and service charges
increased $139,000 due to increases in overdraft fees on NOW accounts, service
charges on NOW and savings accounts and loan prepayment fees. Abstract fees
increased $362,000 due to increased sales volume. Sales volume increased in part
due to a general decline in market interest rates. Other income increased by
$285,000, primarily due to an increase in loan origination and commitment fee
from First Iowa Mortgage, an increase in insurance sales, the rental income from
the Bank's investment in the Northridge Apartment Limited Partnership, offset in
part by a decrease in annuity sales. Noninterest income for the year ended
December 31, 1998 also reflects gains on the sales of securities available for
sale of $51,000, as compared to gains on the sale of such securities of $264,000
for the 1997 comparable period due to a substantial portion of the Holding
Company's available for sale securities being sold in 1997. See "--Business
Strategy--Increased Noninterest Income."
Noninterest Expense. Total non-interest expense increased by $535,000 to
$8.0 million for the year ended December 31, 1998 from $7.4 million for the year
ended December 31, 1997. The increase is primarily due to an increase in the
employee salaries and benefits, premises and equipment, data processing and SAIF
deposit insurance premiums. The increase in salaries and benefits was primarily
a result of the expenses associated with the ESOP, normal salary increases, an
increase in the number of employees and one time costs associated with the
acquisition of Valley Financial. The increase in premises and equipment was
primarily a result of purchases of computer equipment for the Bank and one time
costs associated with the acquisition of Valley Financial. The increase in data
processing is due to normal annual increases and one time costs associated with
the acquisition of Valley Financial. The increase in SAIF deposit insurance
premiums were due to a corresponding increase in the deposits at the Bank. The
Company's efficiency ratio for the year ended December 31, 1998 and 1997 were
53.64% and 53.36%, respectively. The Company's ratio of noninterest expense to
average assets for the year ended December 31, 1998 and 1997 were 2.39% and
2.27%, respectively.
Income Taxes. Income taxes increased by $96,000 to $2.4 million for the
year ended December 31, 1998 as compared to $2.3 million for the year ended
December 31, 1997. The increase was principally due to an increase in pre-tax
earnings during the 1998 period as compared to the 1997 period, offset in part
by an increase in the tax credits recognized from the Bank's investment in the
Northridge Apartments Limited Partnership in 1998 as compared to 1997.
Net Income. Net income totalled $4.2 million for the year ended December
31, 1998 compared to $4.0 million for the same period in 1997.
-28-
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities are monetary. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" (SFAS No. 133) which, as amended by SFAS No.
137, is required to be adopted in years beginning after June 15, 2000. SFAS No.
133 establishes accounting and reporting standards for derivatives instruments,
including certain derivative instruments embedded in other contracts, and for
hedging contracts. It requires that an entity recognize all derivatives as
either assets or liabilities, and measures those instruments at fair value. It
also sets forth the proper accounting for hedging activities, which is
determined by the intended use of the derivative and how that use is designated
by the entity. Earlier application is permitted and should not be applied
retroactively to financial statements of prior periods. Since the Company is not
currently holding any derivative instruments (as defined) and is not engaged in
hedging activities, the adoption of SFAS No. 133 is expected to have no effect
on the Company's financial condition or results of operations.
Year 2000
Based on a review of the Company's business since January 1, 2000, the
Company has not experienced any material effects of the Year 2000 problem.
Although the Company has not been informed of any material risks associated with
the Year 2000 problem from third parties, there can be no assurance that the
Company will not be impacted in the future. The Company will continuously
monitor its business applications and maintain contact with its third party
vendors and key business partners to resolve any Year 2000 problems that may
arise in the future.
Monitoring and managing the Year 2000 project has resulted in direct and
indirect costs to the Company. The Company currently estimates that the total
costs will not exceed $100,000 and does not believe that such costs will have a
material effect on results of operations. Both direct and indirect costs of
addressing the Year 2000 problem have been charged to earnings as incurred.
Impact of Enactment of the Gramm-Leach-Bliley Act
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act (the "GLB Act"), which among other things, establishes a
comprehensive framework to permit affiliations among commercial banks, insurance
companies and securities firms. Generally, the new law (i) repeals the historic
restrictions and eliminates many federal and state law barriers to affiliations
among banks, securities firms, insurance companies and other financial service
providers, (ii) provides a uniform framework for the activities of banks,
savings institutions and their holding companies, (iii) broadens the activities
that may be conducted by subsidiaries of national banks and state banks, (iv)
provides an enhanced framework for protecting the privacy of information
gathered by financial institutions regarding their customers and consumers, (v)
adopts a number of provisions related to the capitalization, membership,
corporate governance and other measures designed to modernize the Federal Home
Loan Bank System, (vi) requires public disclosure of certain agreements relating
to funds expended in connection with an institution's compliance with the
Community Reinvestment Act, and (vii) addresses a variety of other legal and
regulatory issues affecting both day-to-day operations and long-term activities
of financial institutions, including the functional regulation of bank
securities and insurance activities.
-29-
<PAGE>
The GLB Act also restricts the powers of new unitary savings and loan
holding companies. Unitary savings and loan holding companies that are
"grandfathered," i.e., unitary savings and loan holding companies in existence,
or with applications filed with the OTS, on or before Mary 4, 1999, such as the
Holding Company, retain their authority under prior law to engage in any type of
commercial or other non-financial activity so long as their thrift subsidiary
meets the Qualified Thrift Lender test. All other unitary savings and loan
holding companies are limited to financially related activities permissible for
bank holding companies, as defined under the GLB Act. The GLB Act also prohibits
non-financial companies, from acquiring grandfathered unitary savings and loan
holding companies.
Further, the new law requires financial institutions to disclose (a) on ATM
machines any non-customer fees and (b) to their customers upon the issuance of
an ATM card any fees that may be imposed by the institution on ATM on ATM users.
For older ATMs, the new law gives financial institutions until December 31, 2004
to provide such notices.
Under the GLB Act, bank holding companies are permitted to engage in a
wider variety of financial activities than permitted under the prior law,
particularly with respect to insurance and securities activities. In addition,
in a change from the prior law, bank holding companies are in a position to be
owned, controlled or acquired by any company engaged in financially related
activities.
Management does not believe that the new law will have a material adverse
affect upon the Company's operations in the near-term. However, to the extent
that the new law permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
This type of consolidation could result in a growing number of larger financial
institutions that offer a wider variety of financial services than the Company
currently offers and that can aggressively compete in the markets that the
Company currently serves.
-30-
<PAGE>
NORTH CENTRAL BANCSHARES, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------
INDEPENDENT AUDITOR'S REPORT............................................... 32
- --------------------------------------------
FINANCIAL STATEMENTS
Consolidated statements of financial condition........................... 33
Consolidated statements of income........................................ 34
Consolidated statements of shareholders' equity.......................... 35
Consolidated statements of cash flows.................................... 36
Notes to consolidated financial statements............................... 38
-31-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
North Central Bancshares, Inc.
Fort Dodge, Iowa
We have audited the accompanying consolidated statements of financial condition
of North Central Bancshares, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for the three years ended December 31, 1999, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North Central
Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the three years ended
December 31, 1999, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
February 8, 2000
-32-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks:
Interest-bearing $ 4,127,153 $ 13,201,437
Noninterest-bearing 8,541,525 2,435,439
Securities available-for-sale (Notes 3 and 9) 49,692,857 49,882,544
Loans receivable, net (Notes 4, 5, 9 and 15) 286,759,101 254,032,497
Loans held for sale 335,564 1,681,017
Accrued interest receivable (Note 6) 2,082,598 1,933,237
Foreclosed real estate 503,150 186,931
Premises and equipment, net (Note 7) 5,356,097 3,616,438
Rental real estate 1,846,134 1,945,851
Title plant 925,256 925,256
Goodwill 5,915,381 6,387,671
Deferred taxes (Note 10) 921,057 13,490
Prepaid expenses and other assets 426,772 448,331
-----------------------------------------
Total assets $ 367,432,645 $ 336,690,139
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 8) $ 271,030,791 $ 246,690,313
Borrowed funds (Note 9) 55,715,289 38,832,239
Advances from borrowers for taxes and insurance (Note 5) 1,204,025 1,066,025
Dividend payable 226,174 237,133
Income taxes payable 74,214 199,224
Accrued expenses and other liabilities 1,055,228 1,458,391
-----------------------------------------
Total liabilities 329,305,721 288,483,325
-----------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 17)
STOCKHOLDERS' EQUITY (Notes 12 and 18)
Common stock, $.01 par value, authorized 15,500,000 shares;
issued and outstanding 1999 and 1998 4,011,057 shares 40,111 40,111
Preferred stock, $.01 par value, authorized 3,000,000 shares;
issued and outstanding 1999 and 1998 none - -
Additional paid-in capital 38,278,872 38,135,817
Retained earnings, substantially restricted (Note 10) 30,290,488 27,084,907
Unearned shares, employee stock ownership plan (Note 11) (825,484) (1,013,284)
Accumulated other comprehensive income (loss) (921,138) 358,666
Less cost of treasury stock, 1999 1,749,315 shares;
1998 1,046,608 shares (28,735,925) (16,399,403)
-----------------------------------------
Total stockholders' equity 38,126,924 48,206,814
-----------------------------------------
Total liabilities and stockholders' equity $ 367,432,645 $ 336,690,139
=========================================
</TABLE>
See Notes to Consolidated Financial Statements.
-33-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable:
First mortgage loans $ 18,104,426 $ 17,317,988 $ 12,432,797
Consumer loans 3,111,402 3,013,947 2,200,965
Securities and cash deposits 3,340,439 3,269,617 1,570,932
---------------------------------------------------------
24,556,267 23,601,552 16,204,694
---------------------------------------------------------
Interest expense:
Deposits (Note 8) 11,113,533 10,893,081 6,493,931
Other borrowed funds 2,490,308 1,975,879 1,405,679
---------------------------------------------------------
13,603,841 12,868,960 7,899,610
---------------------------------------------------------
Net interest income 10,952,426 10,732,592 8,305,084
Provision for loan losses (Note 4) 120,000 210,000 240,000
---------------------------------------------------------
Net interest income after provision
for loan losses 10,832,426 10,522,592 8,065,084
---------------------------------------------------------
Noninterest income:
Fees and service charges 1,484,962 1,243,248 656,695
Abstract fees 1,420,955 1,583,773 1,221,807
Mortgage banking fees 367,696 339,397
Gain on sale of securities available-for-sale, net 61,564 51,362 248,526
Other income 727,869 696,919 409,968
---------------------------------------------------------
Total noninterest income 4,063,046 3,914,699 2,536,996
---------------------------------------------------------
Noninterest expense:
Salaries and employee benefits (Note 11) 4,025,744 3,482,210 2,208,807
Premises and equipment 930,988 811,725 444,231
Data processing 522,122 553,288 258,250
SAIF deposit insurance premiums 147,243 142,932 84,742
Goodwill amortization 472,290 435,817 27,947
Other expenses (Note 13) 2,356,024 2,145,854 1,552,675
---------------------------------------------------------
Total noninterest expense 8,454,411 7,571,826 4,576,652
---------------------------------------------------------
Income before income taxes 6,441,061 6,865,465 6,025,428
Provision for income taxes (Note 10) 2,240,886 2,480,620 2,108,304
---------------------------------------------------------
Net income $ 4,200,175 $ 4,384,845 $ 3,917,124
=========================================================
Basic earnings per common share (Note 19) $ 1.64 $ 1.44 $ 1.23
Earnings per common share - assuming dilution (Note 19) 1.60 1.40 1.21
Dividends declared per common share (Note 12) 0.40 0.32 0.25
</TABLE>
See Notes to Consolidated Financial Statements.
-34-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS" EQUITY
Years Ended December 31, 1999,1998 and 1997
<TABLE>
<CAPTION>
Additional
Comprehensive Common Paid-in Retained
Income Stock Capital Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 40,111 $ 37,796,611 $ 20,531,604
Comprehensive income:
Net income $ 3,917,124 - - 3,917,124
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax (Note 3) 281,684 - - -
-----------------
Total comprehensive income $ 4,198,808
=================
Purchase of treasury stock - - -
Dividends on common stock - - (787,764)
Effect of contribution to employee
stock ownership plan - 147,968 -
Effect of stock options exercise - 5,019 -
--------------------------------------------------
Balance, December 31, 1997 40,111 37,949,598 23,660,964
Comprehensive income:
Net income $ 4,384,845 - - 4,384,845
Other comprehensive income,
unrealized gains on securities, -
net of reclassification adjustment,
net of tax (Note 3) 3,885 - - -
-----------------
Total comprehensive income $ 4,388,730
=================
Purchase of treasury stock - - -
Dividends on common stock - - (960,902)
Effect of contribution to employee
stock ownership plan - 206,636 -
Effect of stock options exercised - (20,417) -
--------------------------------------------------
Balance, December 31, 1998 40,111 38,135,817 27,084,907
Comprehensive income:
Net income $ 4,200,175 - - 4,200,175
Other comprehensive (loss),
unrealized (losses) on securities,
net of reclassification adjustment,
net of tax (Note 3) (1,279,804) - - -
-----------------
Total comprehensive income $ 2,920,371
=================
Purchase of treasury stock - - -
Dividends on common stock - - (994,594)
Effect of contribution to employee
stock ownership plan - 143,055 -
--------------------------------------------------
Balance, December 31, 1999 $ 40,111 $ 38,278,872 $ 30,290,488
==================================================
<CAPTION>
Employee Accumulated
Stock Other Total
Ownership Comprehensive Treasury Stockholders'
Plan Income (Loss) Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ (1,416,955) $ 73,097 $ (7,789,661) $ 49,234,807
Comprehensive income:
Net income - - - 3,917,124
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax (Note 3) - 281,684 - 281,684
Total comprehensive income - -
Purchase of treasury stock - - (2,706,750) (2,706,750)
Dividends on common stock - - - (787,764)
Effect of contribution to employee
stock ownership plan 206,514 - - 354,482
Effect of stock options exercise - 118,474 123,493
----------------------------------------------------------------------
Balance, December 31, 1997 (1,210,441) 354,781 (10,377,937) 50,417,076
Comprehensive income: - - -
Net income 4,384,845
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax (Note 3) - 3,885 - 3,885
Total comprehensive income
Purchase of treasury stock - - (6,164,419) (6,164,419)
Dividends on common stock - - - (960,902)
Effect of contribution to employee
stock ownership plan 197,157 - - 403,793
Effect of stock options exercised - - 142,953 122,536
----------------------------------------------------------------------
Balance, December 31, 1998 (1,013,284) 358,666 (16,399,403) 48,206,814
Comprehensive income:
Net income - - 4,200,175
Other comprehensive (loss),
unrealized (losses) on securities,
net of reclassification adjustment,
net of tax (Note 3) - (1,279,804) - (1,279,804)
Total comprehensive income
Purchase of treasury stock - - (12,336,522) (12,336,522)
Dividends on common stock - - - (994,594)
Effect of contribution to employee
stock ownership plan 187,800 - - 330,855
----------------------------------------------------------------------
Balance, December 31, 1999 $ (825,484) $ (921,138) $ (28,735,925) $ 38,126,924
======================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
-35-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,200,175 $ 4,384,845 $ 3,917,124
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120,000 210,000 240,000
Depreciation 596,815 488,989 298,927
Amortization and accretion 483,546 539,878 74,219
Deferred taxes (141,678) (164,846) (80,591)
Effect of contribution to employee stock
ownership plan 330,855 403,793 354,482
(Gain) on sale of foreclosed real estate and
loans, net (28,827) (4,726) (7,499)
(Gain) on sale of securities available-for-sale (61,564) (51,362) (248,526)
Loss on disposal of equipment 19,270 9,191 3,321
Proceeds from sales of loans held for sale 20,146,594 26,334,791 458,622
Originations of loans held for sale (18,801,141) (28,015,808) (458,622)
Change in assets and liabilities:
Accrued interest receivable (149,361) 386,631 27,238
Prepaid expenses and other assets 21,559 453,985 (301,190)
Income taxes payable (125,010) 25,036 29,211
Accrued expenses and other liabilities (403,163) (41,121) 3,950
-------------------------------------------------------
Net cash provided by operating activities 6,208,070 4,959,276 4,310,666
-------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans 7,376,603 20,168,334 (3,298,056)
Purchase of loans (40,343,689) (24,644,011) (22,363,597)
Proceeds from sale of securities available-for-sale 438,915 4,445,868 3,204,196
Purchase of securities available-for-sale (18,922,917) (18,371,558) (2,777,723)
Proceeds from maturities of securities
available-for-sale 16,512,369 25,460,742 3,500,000
Proceeds from maturities of securities
held-to-maturity - - 3,500,000
Purchase of premises, equipment and rental real
estate (2,259,834) (776,473) (981,010)
Proceeds from sale of equipment 3,807 58 31,325
Proceeds from sale of title plant - - 45,000
Cash paid in connection with acquisition of Valley
Financial Corporation net of cash received - (8,568,743) -
Other (975) 69,974 62,925
-------------------------------------------------------
Net cash (used in) investing activities (37,195,721) (2,215,809) (19,076,940)
-------------------------------------------------------
</TABLE>
(Continued)
-36-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 24,340,478 $ 6,297,514 $ 11,401,663
Net increase (decrease) in advances from
borrowers for taxes and insurance 138,000 (154,127) 72,881
Net change in short-term borrowings 14,000,000 (3,000,000)
Proceeds from other borrowed funds 8,000,000 16,542,000 21,250,000
Payments of other borrowed funds (5,116,950) (6,259,761) (12,035,000)
Purchase of treasury stock (12,336,522) (6,164,419) (2,706,750)
Proceeds from issuance of treasury stock 114,963 105,781
Dividends paid (1,005,553) (927,924) (813,953)
---------------------------------------------------------
Net cash provided by financing activities 28,019,453 9,448,246 14,274,622
---------------------------------------------------------
Net increase (decrease) in cash (2,968,198) 12,191,713 (491,652)
CASH
Beginning 15,636,876 3,445,163 3,936,815
---------------------------------------------------------
Ending $ 12,668,678 $ 15,636,876 $ 3,445,163
=========================================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 11,181,280 $ 10,989,646 $ 6,479,044
Interest paid on borrowings 2,414,957 1,975,691 1,477,850
Income taxes 2,507,574 2,628,003 2,180,268
</TABLE>
See Notes to Consolidated Financial Statements.
-37-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Organization, nature of business and basis of presentation: North Central
- ----------------------------------------------------------
Bancshares, Inc., (the Company), an Iowa corporation, is a unitary savings and
loan holding company that owns 100% of the outstanding stock of First Federal
Savings Bank of Iowa (the Bank), which is a federally chartered stock savings
bank that conducts its operations from its main office located in Fort Dodge,
Iowa, and seven branch offices located in Fort Dodge, Nevada, Ames, Perry,
Burlington and Mt. Pleasant, Iowa.
Comprehensive income: Statement No. 130 requires unrealized gains and losses on
- --------------------
the Bank's available-for-sale securities to be included in comprehensive income.
Principles of consolidation: The consolidated financial statements, as
- ---------------------------
described above, include the accounts of the Company and its wholly-owned
subsidiary, the Bank and the Bank's wholly-owned subsidiaries, First Financial
Investment Services, Inc., formerly First Financial Service Corporation (which
sells insurance, annuity products, mutual funds and originates equipment
leases), First Iowa Title Services, Inc. (which provides real estate abstracting
services), Northridge Apartments Limited Partnership (which owns a multifamily
apartment building) and First Iowa Mortgage, Inc. (which originates and sells
mortgage loans in the secondary market). All significant intercompany balances
and transactions have been eliminated in consolidation.
Accounting estimates and assumptions: The preparation of financial statements
- ------------------------------------
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for loan losses.
Securities available-for-sale: Securities classified as available-for-sale are
- -----------------------------
those debt and equity securities the Company intends to hold for an indefinite
period of time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors.
Securities available-for-sale are reported at fair value with unrealized gains
or losses reported as a separate component of other comprehensive income, net of
the related deferred tax effect. The amortization of premiums and accretion of
discounts is computed by the interest method over their contractual lives.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Loans held for sale: Loans held for sale are those loans held with the intent
- -------------------
to sell in the foreseeable future. They are carried at the lower of aggregate
cost or market value. Sales are made without recourse and any gain or loss is
recognized at the settlement date.
-38-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
Loans receivable: Loans receivable are stated at unpaid principal balances, less
- ----------------
the allowance for loan losses, net deferred loan origination fees and unearned
discounts.
Discounts on first mortgage loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral
and current economic conditions. While management uses the best information
available to make its evaluation, future adjustments to the allowance may be
necessary if there are significant changes in economic conditions.
Uncollectible interest on loans that are contractually past due is charged-off
or an allowance is established based on management's periodic evaluation,
generally when loans become 90 days past due. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is no longer in doubt, in which case the loan is
returned to accrual status.
Loan origination fees and related costs: Loan fees and certain direct loan
- ---------------------------------------
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for estimated prepayments based on the Bank's
historical prepayment experience.
Foreclosed real estate: Real estate properties acquired through loan foreclosure
- ----------------------
are initially recorded at the lower of cost or fair value less selling costs at
the date of foreclosure. Costs relating to development and improvement of
property are capitalized, whereas costs relating to the holding of property are
expensed.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to income if the carrying value of a property exceeds
its fair value less estimated selling costs.
Premises and equipment: Premises and equipment are stated at cost, net of
- ----------------------
accumulated depreciation. Depreciation is computed primarily by straight-line
and double-declining balance methods over the estimated useful lives of the
assets.
Rental real estate: Rental real estate is comprised of a low-income housing,
- ------------------
multifamily apartment building and equipment which is stated at cost, net of
accumulated depreciation. Depreciation is computed primarily by the straight-
line and double-declining balance methods over the estimated useful lives of the
assets.
Title plant: Title plant is carried at cost and, in accordance with FASB
- -----------
Statement No. 61, is not depreciated. Costs incurred to maintain and update the
title plant are expensed as incurred.
-39-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
Goodwill: Goodwill is stated at cost, net of accumulated amortization and is
- --------
being amortized over 10 - 15 years using the straight-line method.
Income taxes: Deferred taxes are provided on a liability method whereby
- ------------
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
difference between the reported amounts of assets and liabilities and their
income tax bases. Income taxes are allocated to the Company and its subsidiaries
based on each entity's income tax liability as if it filed a separate return.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of the deferred
tax assets, will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Earnings per share: Basic earnings per share and earnings per common share -
- ------------------
assuming dilution were computed using the methodology prescribed by FASB
Statement No. 128 Earnings per Share. The basic earnings per common share
amounts were computed using the weighted average number of shares outstanding
during the periods presented. The earnings per common share amounts - assuming
dilution were computed using the weighted average number of shares outstanding
during the periods presented, adjusted for the effect of dilutive potential
common shares outstanding which consists of stock options granted. In accordance
with Statement of Position 93-6, shares owned by the ESOP that have not been
committed to be released are not considered to be outstanding for the purpose of
computing earnings per share.
Stock-option plan: SFAS No. 123, Accounting for Stock-Based Compensation,
- -----------------
establishes a fair value based method for financial accounting and reporting for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
However, the standard allows compensation to continue to be measured by using
the intrinsic value based method of accounting prescribed by APB No. 25,
Accounting for Stock Issued to Employees, but requires expanded disclosures. The
Company has elected to apply the intrinsic value based method of accounting for
stock options issued to employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
Fair value of financial instruments: FASB Statement No. 107, Disclosures About
- -----------------------------------
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheets, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instruments. Statement No.
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
-40-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash: The carrying amount of cash represents the fair value.
----
Securities: Fair values for all securities are based on quoted market prices,
----------
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and have experienced no
-----
significant change in credit risk, fair values are based on carrying values.
Fair values for all other loans are estimated based on discounted cash flows,
using interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality.
Deposits: Fair values disclosed for demand, NOW, savings and money market
--------
savings deposits equal their carrying amounts, which represent the amount
payable on demand. Fair values for certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregate expected monthly maturities
on time deposits.
Borrowed funds: The fair value of borrowed funds is estimated based on
--------------
discounted cash flows using currently available borrowing rates.
Accrued interest receivable and payable: The fair values of both accrued
---------------------------------------
interest receivable and payable are their carrying amounts.
Commitments to extend credit: The fair values of commitments to extend credit
----------------------------
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and creditworthiness of the
counterparties. At December 31, 1999 and 1998, the carrying amount and fair
value of the commitments were not significant.
Note 1. Business Combination
As of the close of business on January 30, 1998, the Bank completed the
acquisition of Valley Financial Corp. ("Valley Financial") pursuant to an
Agreement and Plan of Merger, dated as of September 19, 1997. 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 branches of the Bank.
-41-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
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 canceled 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 $14,726,250 in cash. The excess of the
total acquisition cost over the fair value of the net assets acquired of
$6,627,859 is being amortized over 15 years by the straight-line method. 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 operating results of the Company from the date of acquisition.
The following is a summary of the assets acquired and liabilities assumed in
connection with the acquisition of Valley Financial Corporation:
<TABLE>
<S> <C>
Cash $ 6,157,507
Securities 41,818,057
Loans 58,567,364
Accrued interest receivable 1,019,373
Premises and equipment 1,081,890
Goodwill 6,627,859
Prepaid expenses and other assets 228,785
Deposits (99,269,092)
Advances from borrowers for taxes and insurance (301,783)
Deferred income taxes (262,738)
Accrued taxes payable 12,565
Accrued expenses and other liabilities (953,537)
-------------
Cash paid 14,726,250
Less: cash received (6,157,507)
-------------
Cash paid, net of cash received $ 8,568,743
=============
</TABLE>
Unaudited pro forma consolidated results of operations for the years ended
December 31, 1998 and 1997, as though Valley Savings Bank had been acquired as
of January 1, 1997, follow:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Net interest income $ 10,904,821 $ 10,553,958
Net income 4,245,473 4,022,376
Basic earnings per common share 1.39 1.26
Earnings per common share - assuming dilution 1.36 1.24
</TABLE>
-42-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
Note 3. Securities
Securities available-for-sale as of December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities:
Federal Home Loan Bank
stock $ 3,034,600 $ - $ - $ 3,034,600
FHLMC preferred stock 3,499,375 - (241,875) 3,257,500
FNMA preferred stock 5,134,375 37,625 (15,000) 5,157,000
Other 499,283 16,300 (58,478) 457,105
---------------------------------------------------------------------------
12,167,633 53,925 (315,353) 11,906,205
---------------------------------------------------------------------------
Debt securities:
U.S. Treasury notes 4,270,840 (10,410) 4,260,430
U.S. Government agencies 19,582,382 (782,856) 18,799,526
State and political
subdivisions 4,866,505 5,657 (100,165) 4,771,997
Mortgage-backed securities 10,280,363 (325,664) 9,954,699
---------------------------------------------------------------------------
39,000,090 5,657 (1,219,095) 37,786,652
---------------------------------------------------------------------------
$ 51,167,723 $ 59,582 $(1,534,448) $ 49,692,857
===========================================================================
</TABLE>
Securities available-for-sale as of December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains (Losses) Fair Value
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities:
Federal Home Loan Bank
stock $ 2,379,400 $ $ $ 2,379,400
FHLMC preferred stock 975,000 20,748 995,748
FNMA preferred stock 5,134,375 268,661 5,403,036
Other 861,509 92,573 (29,376) 924,706
-----------------------------------------------------------------------------
9,350,284 381,982 (29,376) 9,702,890
-----------------------------------------------------------------------------
Debt securities:
U.S. Treasury notes 9,325,175 84,919 9,410,094
U.S. Government agencies 18,859,431 48,583 (23,939) 18,884,075
State and political
subdivisions 4,282,940 95,195 (182) 4,377,953
Mortgage-backed securities 7,493,887 27,042 (13,397) 7,507,532
-----------------------------------------------------------------------------
39,961,433 255,739 (37,518) 40,179,654
-----------------------------------------------------------------------------
$ 49,311,717 $ 637,721 $ (66,894) $ 49,882,544
=============================================================================
</TABLE>
-43-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and fair value of debt securities as of December 31, 1999, by
contractual maturity are shown below. Certain securities have call features
which allow the issuer to call the security prior to maturity. Maturities may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary:
<TABLE>
<CAPTION>
Securities Available-for-Sale
----------------------------------------
Amortized
Cost Fair Value
----------------------------------------
<S> <C> <C>
Due in one year or less $ 4,468,390 $ 4,453,582
Due from one to five years 13,098,750 12,572,362
Due from five to ten years 10,333,202 9,988,141
Due after ten years 819,385 817,868
Mortgage-backed securities 10,280,363 9,954,699
----------------------------------------
$ 39,000,090 $ 37,786,652
========================================
</TABLE>
Gross gains of $61,564, $71,923 and $248,526 were realized on the sale of
available-for-sale securities in 1999, 1998 and 1997, respectively. Gross losses
of none, $20,561 and none were realized on the sale of available-for-sale
securities in 1999, 1998 and 1997, respectively.
The components of other comprehensive income (loss) - net unrealized gains
(losses) on securities for the years ended December 31, 1999, 1998 and 1997,
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during the period $ (1,984,129) $ 57,558 $ 697,783
Less reclassification adjustment for net gains
realized in net income 61,564 51,362 248,526
--------------------------------------------------------------
Net unrealized gains (losses)
before tax (expense) benefit (2,045,693) 6,196 449,257
Tax (expense) benefit 765,889 (2,311) (167,573)
--------------------------------------------------------------
Other comprehensive income (loss) -
net unrealized gains (losses) on
securities $ (1,279,804) $ 3,885 $ 281,684
==============================================================
</TABLE>
-44-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Loans Receivable
Loans receivable at December 31, 1999 and 1998, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------
<S> <C> <C>
First mortgage loans (principally conventional)
Principal balances:
Secured by one-to-four family residences $ 159,970,037 $ 144,777,159
Secured by:
Multifamily properties 73,416,278 64,895,056
Commercial properties 17,723,455 11,396,311
Construction loans 4,087,495 4,213,903
-----------------------------------------
Total first mortgage loans 255,197,265 225,282,429
-----------------------------------------
Consumer loans
Principal balances:
Automobile 8,003,907 7,348,369
Second mortgage 23,603,060 20,784,380
Other 4,955,638 5,946,051
-----------------------------------------
Total consumer loans 36,562,605 34,078,800
-----------------------------------------
Total loans 291,759,870 259,361,229
Less:
Undisbursed portion of construction loans (1,981,962) (2,023,859)
Unearned discounts (135,953) (312,381)
Net deferred loan origination fees (106,315) (316,054)
Allowance for loan losses (2,776,539) (2,676,438)
-----------------------------------------
$ 286,759,101 $ 254,032,497
=========================================
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 2,676,438 $ 2,150,587 $ 1,952,887
Provision charged to income 120,000 210,000 240,000
Effect of acquisition of Valley Financial
Corporation 343,418
Loans charged-off (28,032) (28,422) (52,724)
Recoveries 8,133 855 10,424
--------------------------------------------------------------
Balance, ending $ 2,776,539 $ 2,676,438 $ 2,150,587
==============================================================
</TABLE>
Nonaccrual loans totaled approximately $213,394 and $955,835, at December 31,
1999 and 1998, respectively. The amount of interest related to nonaccrual loans
for 1999 and 1998, is insignificant.
-45-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, executive
officers and their immediate families (commonly referred to as related parties),
all of which have been, in the opinion of management, on the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others.
Activity in loans receivable from certain executive officers and directors of
the Bank consisted of the following for the years ended December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 1,075,964 $ 1,045,188 $ 1,203,613
New loans 825,200 166,701 221,983
Repayments (216,063) (135,925) (380,408)
--------------------------------------------------------------
Ending balance $ 1,685,101 $ 1,075,964 $ 1,045,188
==============================================================
</TABLE>
Note 5. Loan Servicing
Mortgage loans serviced for FHLMC and other banks are not included in the
accompanying consolidated statements of financial condition. The unpaid
principal balances of these loans at December 31, 1999 and 1998, are $6,673,921
and $7,742,415, respectively. Custodial escrow balances maintained in connection
with the foregoing loan servicing were approximately $53,000 at December 31,
1999 and 1998.
Note 6. Accrued Interest Receivable
Accrued interest receivable at December 31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------
<S> <C> <C>
Securities $ 467,804 $ 515,681
Loans receivable 1,642,479 1,449,004
----------------------------------------
2,110,283 1,964,685
Less allowance for uncollectible interest 27,685 31,448
----------------------------------------
$ 2,082,598 $ 1,933,237
========================================
</TABLE>
-46-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Premises and Equipment
Premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------
<S> <C> <C>
Land $ 1,696,695 $ 501,680
Buildings and improvements 4,236,326 3,765,208
Leasehold improvements 15,546 15,546
Furniture, fixtures and equipment 2,020,593 1,639,447
Vehicles 87,968 65,956
----------------------------------------
8,057,128 5,987,837
Less accumulated depreciation 2,701,031 2,371,399
----------------------------------------
$ 5,356,097 $ 3,616,438
========================================
</TABLE>
Note 8. Deposits
Deposits at December 31, were as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Rate at 1999 Rate at 1998
December --------------------------- December ----------------------------
Nature of Deposit 31, 1999 Amount Percentage 31, 1998 Amount Percentage
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand and NOW accounts:
Noninterest bearing - % $ 6,411,709 2.4% - % $ 5,458,374 2.2%
Interest-bearing 1.25 30,096,432 11.1 1.50 30,909,378 12.5
Savings accounts 2.00 25,829,919 9.5 2.25 26,098,591 10.6
Money market savings 3.61 17,463,869 6.4 3.90 19,828,064 8.0
-------------------------- ----------------------------
79,801,929 29.4 82,294,407 33.3
-------------------------- ----------------------------
Certificates of deposit:
Less than 4.0% 3.65 687,639 0.3 3.41 231,825 0.1
4.0% - 4.9% 4.65 30,875,083 11.4 4.68 15,922,939 6.5
5.0% - 5.9% 5.44 123,356,192 45.5 5.52 94,229,132 38.2
6.0% - 6.9% 6.24 30,506,154 11.3 6.22 46,652,259 18.9
7.0% - 7.9% 7.09 5,793,434 2.1 7.08 7,176,955 2.9
More than 8.0% 8.00 10,360 0.0 8.45 182,796 0.1
-------------------------- ----------------------------
191,228,862 70.6 164,395,906 66.7
-------------------------- ----------------------------
4.42% $ 271,030,791 100.0% 4.54% $ 246,690,313 100.0%
=========================== =============================
</TABLE>
-47-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1999, scheduled maturities of certificates of deposit were as
follows:
<TABLE>
<CAPTION>
One year One to Two to Three to Four to
or less two years three four years five years Thereafter
years
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Less than 4.0% $ 687,639 $ - $ - $ - $ - $ -
4.0 - 4.9% 21,710,708 8,099,734 1,036,035 28,606 - -
5.0 - 5.9% 79,093,258 21,611,011 3,672,943 8,824,616 10,024,831 129,533
6.0 - 6.9% 10,496,354 11,017,213 7,203,107 1,783,492 5,988
7.0 - 7.9% 5,526,882 51,994 4,633 12,293 6,030 191,602
More than 8.0% 10,360
-------------------------------------------------------------------------------------------------
$ 117,514,841 $ 40,779,952 $ 11,927,078 $ 10,649,007 $ 10,030,861 $ 327,123
=================================================================================================
</TABLE>
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 419,878 $ 554,031 $ 253,210
Savings 562,178 594,276 392,064
Money market savings 668,340 797,372 378,981
Certificates of deposit 9,463,137 8,947,402 5,469,676
------------------------------------------------------------
$ 11,113,533 $ 10,893,081 $ 6,493,931
============================================================
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more was
$32,215,908 and $9,899,375 as of December 31, 1999 and 1998, respectively.
Note 9. Borrowed Funds
Borrowed funds at December 31, 1999, included miscellaneous borrowings of
$33,703 and borrowings from Federal Home Loan Bank of Des Moines (FHLB) as
follows:
<TABLE>
<CAPTION>
Weighted-
Stated Average
Maturity Interest Rate Amount Features
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 4.23% $ 5,000,000 Open line of credit
2000 5.82 20,000,000 $4,000,000 callable February 2000
2001 5.93 9,300,000
2002 6.06 6,000,000
2003 5.13 1,000,000
2004 5.51 1,000,000
2008 5.31 9,000,000 All callable, various dates 2001 to 2003
2009 5.44 2,000,000 Callable October 2000
2013 5.25 2,381,586 15-year amortizing, repayable 2003
----------------------------------
5.59% $ 55,681,586
==================================
</TABLE>
-48-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Borrowed funds at December 31, 1999, included miscellaneous borrowings of
$37,759 and borrowings from the FHLB of $38,794,480. Such borrowings carried a
weighted-average interest rate of 5.62% with maturities ranging from 1999
through 2013.
The Bank has an open line of credit of $10,000,000 at the FHLB which matures on
March 15, 2000. The term borrowings and open line of credit are collateralized
by the FHLB stock and qualifying first mortgage loans representing 125% of the
total borrowings outstanding.
Note 10. Income Taxes and Retained Earnings
Under previous law, the provisions of the IRS and similar sections of Iowa Law
Code permitted the Bank to deduct from taxable income an allowance for bad debts
based on 8% of taxable income before such deduction or actual loss experience.
Legislation passed in 1996 eliminated the percentage of taxable income method as
an option for computing bad debt deductions for 1996, and in all future years.
The Bank is recapturing its tax bad debt reserves which have accumulated since
1987, amounting to approximately $1,659,000. The tax associated with the
recaptured reserves is approximately $615,000 and is being paid in years
beginning in 1996 and ending in 2003. Deferred income taxes have been
established for the taxes associated with the recaptured reserves.
Deferred taxes have been provided for the difference between tax bad debt
reserves and the loan loss allowances recorded in the financial statements
subsequent to December 31, 1987. However, at December 31, 1999, retained
earnings contain certain historical additions to bad debt reserves for income
tax purposes of approximately $2,445,000 as of December 31, 1987, for which no
deferred taxes have been provided because the Bank does not intend to use these
reserves for purposes other than to absorb losses. If these amounts which
qualified as bad debt deductions are used for purposes other than to absorb bad
debt losses or adjustments arising from the carryback of net operating losses,
income taxes may be imposed at the then existing rates. The approximate amount
of unrecognized tax liability associated with these historical additions is
$929,000.
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Current $ 2,382,564 $ 2,645,466 $ 2,188,895
Deferred (141,678) (164,846) (80,591)
--------------------------------------------------------------
$ 2,240,886 $ 2,480,620 $ 2,108,304
==============================================================
</TABLE>
-49-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred tax assets and liabilities consisted of the following components as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------------
<S> <C> <C>
Deferred tax assets:
Unearned shares, employee stock ownership plan $ 40,000 $ 30,000
Allowance for loan losses 668,000 526,000
Deferred directors fees and compensation 52,000 57,000
Deposit acquired - 23,000
Unrealized losses on securities available-for-sale 551,000 -
Other 133,894 96,044
-------------------------------
Total gross deferred tax assets 1,444,894 732,044
-------------------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividend 47,000 41,000
Unrealized gain on securities available-for-sale - 214,000
Loan costs 43,000 -
Premises and equipment 75,000 76,000
Title plant 99,000 67,000
Loans acquired 129,000 188,000
Investments acquired 63,000 111,000
Deferred directors' fees and compensation 60,000 21,000
Other 7,837 554
-------------------------------
Total gross deferred tax liabilities 523,837 718,554
-------------------------------
Net deferred tax assets $ 921,057 $ 13,490
===============================
</TABLE>
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rates of 34% to income before income taxes as a result
of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes $ 2,189,961 34.0% $ 2,334,258 34.0% $ 2,048,646 34.0%
Nontaxable dividends (109,022) (1.7) (105,296) (1.5) (119,550) (2.0)
State income taxes, net of
federal income tax benefit 233,647 3.6 226,613 3.1 174,621 2.9
Municipal interest income (62,762) (1.0) (54,286) (0.8) - -
Low income housing tax credit (153,680) (2.4) (148,867) (2.1) (97,894) (1.6)
Goodwill amortization 145,546 2.3 137,536 2.1 - -
Other (2,804) 0.0 90,662 1.3 102,481 1.7
-------------------------------------------------------------------------------------
$ 2,240,886 34.8% $ 2,480,620 36.1% $ 2,108,304 35.0%
=====================================================================================
</TABLE>
-50-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Employee Benefit Plans
Retirement plans: The Bank participates in a multiemployer defined benefit
- ----------------
pension plan covering substantially all employees. This is a multiemployer plan
and information as to actuarial valuations and net assets available for benefits
by participating institutions is not available. There was no pension expense for
the years ended December 31, 1999, 1998 and 1997.
The Bank has a defined contribution plan covering substantially all employees.
As of July 31, 1996, the Bank no longer contributes to this plan.
Employee Stock Ownership Plan (ESOP): In conjunction with the Bank's conversion
- ------------------------------------
to stock ownership, the Bank established an ESOP for eligible employees. All
employees of the Bank as of January 1, 1994, were eligible to participate
immediately and employees of the Bank hired after January 1, 1994, are eligible
to participate after they attain age 21 and complete one year of service during
which they work at least 1,000 hours. The ESOP borrowed funds in the amount of
$960,000 to purchase 104,075 shares of common stock issued in the conversion in
1994 and $840,000 to purchase 84,000 shares of common stock issued in the
reorganization and conversion in 1996. These funds are borrowed from the
Company.
The Bank makes contributions to the ESOP equal to the ESOP's debt service less
dividends received by the ESOP. Dividends on unallocated ESOP shares are used to
pay debt service. Contributions to the ESOP and shares released from the
suspense account in an amount proportional to the repayment of the ESOP loan are
allocated among ESOP participants on the basis of compensation in the year of
allocation. Benefits generally become 100% vested after five years of credited
service. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits may be payable in
the form of stock or cash upon termination of employment. If the Bank's stock is
not traded on an established market at the time of an ESOP participant's
termination, the terminated ESOP participant has the right to require the Bank
to purchase the stock at its current fair market value. Bank management believes
there is an established market for the Bank's stock and therefore the Bank
believes there is no potential repurchase obligation at December 31, 1999 and
1998.
As shares are released, the Bank reports compensation expense equal to the
current market price of the shares. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings. Dividends on unallocated ESOP
shares are recorded as a reduction of debt and accrued interest. ESOP
compensation expense was $330,855, $403,793 and $354,482 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Shares of the Company's common stock held by the ESOP, at December 31, 1999 and
1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Allocated shares 98,626 80,254
Unreleased (unearned) shares 85,507 105,098
-----------------------
184,133 185,352
=======================
Fair market value of unreleased (unearned) shares $ 1,282,605 $1,773,529
=======================
</TABLE>
-51-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stock option plan: In 1996, the stockholders of the Company ratified the 1996
- -----------------
Incentive Option Plan (the Plan). The Plan provides for the grant of options at
an exercise price equal to the fair market value on the date of grant. The Plan
is intended to promote stock ownership by directors and selected officers and
employees of the Company to increase their proprietary interest in the success
of the Company and to encourage them to remain in the employment of the Company
or its subsidiaries. Awards granted under the Plan may include incentive stock
options, nonqualified stock options and limited rights which are exercisable
only upon a change in control of the Bank or the Company. All awards to date are
nonqualified stock options.
The Plan authorizes the granting of stock options for a total of 401,105 shares
of common stock or 10% of the shares issued in the 1996 conversion. All options
are granted at an exercise price which was the market price of the common stock
on the grant date.
Options granted to officers and directors become exercisable in five equal
annual installments commencing on the first anniversary of the grant date and
continuing on each anniversary date thereafter. The options granted to officers
expire ten years from the date of grant unless an earlier expiration date is
triggered by death, disability, retirement or termination, as described in the
Plan. A person who becomes a director after September 21, 1996, receives an
annual grant of options to purchase 2,000 shares of common stock. Options
granted to directors expire ten years from the date of grant, unless an earlier
expiration date is triggered by removal for cause.
The table below reflects option activity for the period indicated:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Number Price per
of Shares Share
---------------------------------
<S> <C> <C>
Outstanding, December 31, 1996 237,000 $ 12.38
Granted 3,500 15.44
Forfeited (1,000) 12.38
Exercised (8,500) 12.45
---------------------------------
Outstanding, December 31, 1997 231,000 12.42
Granted 62,000 19.32
Forfeited
Exercised (10,290) 12.38
---------------------------------
Outstanding, December 31, 1998 282,710 13.93
Granted 12,000 15.76
Forfeited
Exercised
---------------------------------
Outstanding, December 31, 1999 294,710 $ 14.01
=================================
Options exercisable 142,110 $ 13.26
=================================
Remaining shares available for grant 86,605
=================================
</TABLE>
-52-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As of December 31, 1999, the 294,710 options outstanding under the Plan have
exercise prices between $12.375 and $20.00. The weighted average fair value per
option of options granted during the years ended December 31, 1999, 1998 and
1997, were $4.68, $5.96 and $5.75, respectively.
Had compensation cost for the Plan been determined based on the grant date fair
values of awards (the method described in FASB Statement No. 123), the
approximate 1999, 1998 and 1997, reported net income and earnings per common
share would have been decreased to the pro forma amounts shown below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 4,200,175 $ 4,384,845 $ 3,917,124
Pro forma 4,011,266 4,202,056 3,780,710
Earnings per common share:
As reported 1.64 1.44 1.23
Pro forma 1.57 1.38 1.19
Earnings per common share - assuming dilution:
As reported 1.60 1.40 1.21
Pro forma 1.53 1.34 1.17
</TABLE>
The fair values of the grants are estimated at the grant date using the Black-
Scholes option-pricing model with the following weighted-average assumptions for
grants in 1999, 1998 and 1997, respectively: dividend rate of 2.4%, 1.3% and
1.6%, price volatility of 25%, 17% and 24%, risk-free interest rates of 4.64%,
5.65% and 6.59% and expected lives of eight years for all years.
Employment agreements: The Company and the Bank have entered into employment
- ---------------------
agreements with a key officer. Under the terms of the agreements, the officer is
entitled to additional compensation in the event of certain conditions of
involuntary termination. The agreements extend for up to 36 months.
The Bank has entered into certain employment retention agreements with key
officers. Under the terms of the agreements, the employees are entitled to
additional compensation in the event of a change of control of the Bank or the
Company and the employees are involuntarily terminated within the remaining
unexpired employment period, up to 36 months. A change in control is generally
triggered by the acquisition or control of 20% or more of the common stock.
-53-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Stockholder's Equity
Regulatory capital requirements: The Bank is subject to various regulatory
- -------------------------------
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possible
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), of Tier I capital (as defined) to average assets
(as defined) and tangible capital to adjusted assets. Management believes, as of
December 31, 1999, the Bank meets all capital adequacy requirements to which it
is subject.
The Bank's actual capital amounts and ratios are also presented in the following
table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to risk
weighted assets) $ 33,168 16.7% $ 15,870 8.0% $ 19,837 10.0%
Tier 1 Capital (to risk
weighted assets) 30,685 15.4 7,935 4.0 11,902 6.0
Tier I (Core) Capital
(to adjusted assets) 30,685 8.5 10,833 3.0 18,054 5.0
Tangible Capital (to
adjusted assets) 30,685 8.5 5,416 1.5 - -
As of December 31, 1998:
Total Capital (to risk
weighted assets) $ 40,509 23.8% $ 13,614 8.0% $ 17,018 10.0%
Tier 1 Capital (to risk
weighted assets) 38,245 22.5 6,807 4.0 10,211 6.0
Tier I (Core) Capital
(to adjusted assets) 38,245 11.7 9,834 3.0 16,390 5.0
Tangible Capital (to
adjusted assets) 38,245 11.7 4,917 1.5 - -
</TABLE>
-54-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Limitations on Dividends and Other Capital Distributions: OTS regulations
- ---------------------------------------------------------
impose limitations on dividends and other capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's shares, payments to
stockholders of another institution in a cash out merger and other distributions
charged against capital. The rule establishes three tiers of institutions. An
institution such as the Bank that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
Association") may, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year up to the higher of (i) 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its surplus capital at the beginning of the calendar year or (ii) 75%
of its net income over the most recent four-quarter period, subject to certain
limitations and restrictions as described in the regulations. Any additional
capital distributions would require prior regulatory approval. A savings
institution that does not meet its current regulatory capital requirement before
or after payment of a proposed capital distribution may not make any capital
distributions without the prior approval of the OTS. At December 31, 1999, the
Bank was considered a Tier 1 Association.
Note 13. Other Noninterest Expense
Other noninterest expense amounts are summarized as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Advertising and promotion $ 191,828 $ 168,105 $ 147,605
Professional fees 207,211 171,761 249,617
Printing, postage, stationery and supplies 441,243 369,877 215,332
Checking account charges 328,380 299,530 158,512
Insurance 80,400 85,987 81,056
OTS general assessment 73,168 80,337 49,326
Telephone 108,292 91,900 45,069
ATM costs 111,982 82,285 37,580
Other 813,520 796,072 568,578
---------------------------------------
$ 2,356,024 $ 2,145,854 $ 1,552,675
=======================================
</TABLE>
Note 14. Financial Instruments With Off-Statement of Financial Condition Risk
The Bank is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist primarily of commitments to
extend credit. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as they do for on-statement of financial condition instruments.
-55-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Bank does require collateral, or other security, to support financial
instruments with credit risk.
A summary of the contract amount of the Bank's exposure to off-statement of
financial condition risk for commitments to extend credit is as follows:
<TABLE>
<CAPTION>
Contract or Notional Amount
---------------------------------
December 31,
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
Mortgage loans (including one-to-four family and multifamily
loans) $ 5,440,249 $ 4,788,000
Undisbursed overdraft loan privileges and undisbursed home
equity lines of credit 952,000 770,000
</TABLE>
At December 31, 1998, the mortgage loan commitments above were comprised of
variable-rate commitments carrying a weighted-average interest rate of 7.73% and
fixed-rate commitments carrying a weighted-average interest rate of 7.97%.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts above do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but normally includes
real estate and personal property.
Note 15. Lending Activities and Concentrations of Credit Risk
Most of the Bank's lending activity is with customers located within the state
of Iowa. The Bank generally originates single family residential loans within
its primary lending area of Webster, Story, Des Moines and Henry counties. The
Bank's underwriting policies require such loans to be 80% loan to value based
upon appraised values unless private mortgage insurance is obtained.
Approximately 36% of the Bank's first mortgage loan portfolio at December 31,
1999, consisted of loans purchased or originated outside the state of Iowa,
generally multifamily residential loans. Approximately $30,200,000 of loans
purchased at December 31, 1999, were purchased from a bank in Wisconsin. These
loans are secured by the underlying properties. The properties securing these
loans are physically inspected. The loans are subject to the same underwriting
guidelines as loans originated locally. The Bank is also active in originating
secured consumer loans to its customers, primarily automobile and second
mortgage loans. Collateral for substantially all consumer loans are security
agreements and/or Uniform Commercial Code filings on the purchased asset.
-56-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 16. Fair Values of Financial Instruments
The carrying amount and fair value of the Company's financial instruments as of
December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- ----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------------------------------
(nearest 000) (nearest 000)
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 12,668,678 $ 12,669,000 $ 15,636,876 $ 15,637,000
Securities 49,692,857 49,693,000 49,882,544 49,883,000
Loans, net 286,759,101 285,004,000 254,032,497 258,001,000
Accrued interest receivable 2,082,598 2,083,000 1,933,237 1,933,000
Financial liabilities:
Deposits 271,030,791 270,849,000 246,690,313 249,040,000
Borrowed funds 55,715,289 54,860,000 38,832,239 39,183,000
Accrued interest payable 431,750 432,000 423,958 424,000
</TABLE>
Note 17. 1994 Reorganization and Conversion to Stock Ownership
Effective August 31, 1994, First Federal Savings Bank of Iowa (a mutual savings
bank) reorganized such that its assets and liabilities were transferred to a
newly formed stock savings bank and a federal mutual holding company was formed
under the name of North Central Bancshares, Inc. The stock savings bank issued
approximately 65% of its shares of stock to the mutual holding company and the
remainder were sold in a public offering.
Persons who had membership or liquidation rights with respect to the mutual
savings bank as of the date of reorganization shall, as long as they remain
depositors of the Bank, continue to have such rights solely with respect to the
mutual holding company after the reorganization (see Note 18).
Note 18. The 1996 Reorganization and Conversion
Effective March 20, 1996, the mutual holding company and the Bank executed a
Plan of Conversion and Agreement and Plan of Reorganization (the Plan). The
Company became an Iowa corporation owning 100% of the stock of the Bank and
offered shares to the public. The mutual holding company ceased to exist.
-57-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Plan provided that when the conversion was completed, a "Liquidation
Account" would be established in an amount equal to the amount of any dividends
waived by the mutual holding company (totaling approximately $1,897,000), plus
65.5% of the Bank's total stockholders' equity, as reflected in its latest
statement of financial condition in the final prospectus utilized in the
conversion. The Liquidation Account is established to provide a limited priority
claim to the assets of the Bank to qualifying depositors as of specified dates
(Eligible Account Holders and Supplemental Eligible Account Holders) who
continue to maintain deposits in the Bank after the conversion. In the unlikely
event of a complete liquidation of the Bank, and only in such an event, Eligible
Account Holders and Supplemental Eligible Account Holders would receive from the
Liquidation Account a liquidation distribution based on their proportionate
share of the then total remaining qualifying deposits.
Note 19. Earnings Per Common Share
Presented below is the reconciliation of the numerators and denominators of the
computations for earnings per common share and earnings per common share -
diluted, for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Numerator, income available to common
stockholders $ 4,200,175 $ 4,384,845 $ 3,917,124
===================================================
Denominator:
Weighted-average shares outstanding 2,660,629 3,166,041 3,323,346
Less unallocated ESOP 97,689 117,894 139,077
----------------------------------------------------
Weighted-average shares outstanding-basic 2,562,940 3,048,147 3,184,269
Dilutive effect of stock options 58,602 84,684 56,800
----------------------------------------------------
Weighted-average shares outstanding-diluted 2,621,542 3,132,831 3,241,069
====================================================
Basic earnings per common share 1.64 1.44 1.23
Earnings per common share-assuming dilution 1.60 1.40 1.21
</TABLE>
Note 20. Pending Accounting Pronouncements and Regulations
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivatives
Instruments and Hedging Activities (SFAS No. 133) which, as amended by SFAS No.
137, is required to be adopted in years beginning after June 15, 2000. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging contracts. It requires an entity recognize all derivatives as either
assets or liabilities, and measures those instruments at fair value. It also
sets forth the proper accounting for hedging activities, which is determined by
the intended use of the derivative and how that use is designated by the entity.
Earlier application is permitted and should not be applied retroactively to
financial statements of prior periods. Since the Company is not currently
holding any derivative instruments (as defined) and is not engaged in hedging
activities, the adoption of SFAS No. 133 is expected to have no effect on the
Company's financial condition or results of operations.
-58-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 21. North Central Bancshares, Inc. (Parent Company Only) Financial
Information
STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------------------------------
<S> <C> <C>
ASSETS
Cash $ 190,106 $ 409,397
Securities available-for-sale 457,105 924,706
Loan receivables, net 951,000 1,261,000
Investment in First Federal Savings Bank of Iowa 36,765,460 45,876,022
Income taxes receivable 30,809 28,490
Prepaid expenses and other assets 11,549 10,586
---------------------------------
Total assets $ 38,406,029 $ 48,510,201
=================================
LIABILITIES AND EQUITY
LIABILITIES
Dividend payable $ 226,174 $ 237,133
Accrued expenses and other liabilities 32,639 47,129
Deferred taxes 20,292 19,125
---------------------------------
Total liabilities 279,105 303,387
---------------------------------
EQUITY
Common stock 40,111 40,111
Additional paid-in capital 38,278,872 38,135,817
Retained earnings 30,290,488 27,084,907
Unearned shares, employee stock ownership plan (825,484) (1,013,284)
Accumulated other comprehensive income (921,138) 358,666
Treasury stock at cost (28,735,925) (16,399,403)
---------------------------------
Total equity 38,126,924 48,206,814
---------------------------------
Total liabilities and equity $ 38,406,029 $ 48,510,201
=================================
</TABLE>
-59-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Operating income:
Equity in net income of subsidiary $ 4,173,425 $ 4,393,955 $ 3,802,303
Interest income 286,915 200,055 334,775
Gain on sale of securities available-for-sale, net 61,564 71,923 248,526
-----------------------------------------------------
4,521,904 4,665,933 4,385,604
-----------------------------------------------------
Operating expenses:
Salaries and employee benefits 45,750 45,000 39,950
Other 267,979 265,088 351,480
-----------------------------------------------------
313,729 310,088 391,430
-----------------------------------------------------
Income before income taxes 4,208,175 4,355,845 3,994,174
Provision for income taxes 8,000 (29,000) 77,050
-----------------------------------------------------
Net income $ 4,200,175 $ 4,384,845 $ 3,917,124
=====================================================
</TABLE>
-60-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Comprehensive Common Paid-in Retained
Income Stock Capital Earnings
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 40,111 $ 37,796,611 $ 20,531,604
Comprehensive income:
Net income $ 3,917,124 - - 3,917,124
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax (Note 3) 281,684 - - -
--------------
Total comprehensive income $ 4,198,808
==============
Purchase of treasury stock - - -
Dividends on common stock - - (787,764)
Effect of contribution to employee
stock ownership plan - 147,968 -
Effect of stock options exercise - 5,019 -
---------------------------------------------------
Balance, December 31, 1997 40,111 37,949,598 23,660,964
Comprehensive income:
Net income $ 4,384,845 - - 4,384,845
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax (Note 3) 3,885 - - -
--------------
Total comprehensive income $ 4,388,730
==============
Purchase of treasury stock - - -
Dividends on common stock - - (960,902)
Effect of contribution to employee
stock ownership plan - 206,636 -
Effect of stock options exercised - (20,417) -
---------------------------------------------------
Balance, December 31, 1998 40,111 38,135,817 27,084,907
Comprehensive income:
Net income $ 4,200,175 - - 4,200,175
Other comprehensive (loss),
unrealized (losses) on securities,
net of reclassification adjustment,
net of tax (Note 3) (1,279,804) - - -
--------------
Total comprehensive income $ 2,920,371
==============
Purchase of treasury stock - - -
Dividends on common stock - - (994,594)
Effect of contribution to employee
stock ownership plan - 143,055 -
---------------------------------------------------
Balance, December 31, 1999 $ 40,111 $ 38,278,872 $ 30,290,488
===================================================
<CAPTION>
Employee Accumulated
Stock Other Total
Ownership Comprehensive Treasury Stockholders'
Plan Income (Loss) Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ (1,416,955) $ 73,097 $ (7,789,661) $ 49,234,807
Comprehensive income:
Net income - - - 3,917,124
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax (Note 3) - 281,684 - 281,684
Total comprehensive income
Purchase of treasury stock - - (2,706,750) (2,706,750)
Dividends on common stock
stock ownership plan - - - (787,764)
Effect of contribution to employee 206,514 - - 354,482
Effect of stock options exercise - 118,474 123,493
-----------------------------------------------------------------------
Balance, December 31, 1997 (1,210,441) 354,781 (10,377,937) 50,417,076
Comprehensive income:
Net income - - - 4,384,845
Other comprehensive income,
unrealized gains on securities,
net of reclassification adjustment,
net of tax (Note 3) - 3,885 - 3,885
Total comprehensive income
Purchase of treasury stock - - (6,164,419) (6,164,419)
Dividends on common stock - - - (960,902)
Effect of contribution to employee
stock ownership plan 197,157 - - 403,793
Effect of stock options exercised - - 142,953 122,536
-----------------------------------------------------------------------
Balance, December 31, 1998 (1,013,284) 358,666 (16,399,403) 48,206,814
Comprehensive income:
Net income - - - 4,200,175
Other comprehensive (loss),
unrealized (losses) on securities,
net of reclassification adjustment,
net of tax (Note 3) - (1,279,804) - (1,279,804)
Total comprehensive income
Purchase of treasury stock - - (12,336,522) (12,336,522)
Dividends on common stock - - - (994,594)
Effect of contribution to employee
stock ownership plan 187,800 - - 330,855
-----------------------------------------------------------------------
Balance, December 31, 1999 $ (825,484) $ (921,138) $ (28,735,925) $ 38,126,924
=======================================================================
</TABLE>
-6-
<PAGE>
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,200,175 $ 4,384,845 $ 3,917,124
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of First Federal Savings
Bank of Iowa (4,173,425) (4,393,955) (3,802,303)
Dividends received from First Federal Savings
Bank of Iowa 12,398,262 3,295,694 10,000,000
(Gain) on sale of securities available-for-sale (61,564) (71,923) (248,526)
Change in deferred income taxes 43,318 (485) 4,021
Change in assets and liabilities:
Income taxes receivable (2,319) (20,917) -
Prepaid expenses and other assets (963) 2,191 13,499
Income taxes payable - (2,723) 11,913
Accrued expenses and other liabilities (14,490) 5,836 8,297
---------------------------------------------------------
Net cash provided by operating activities 12,388,994 3,198,563 9,904,025
---------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans 310,000 8,680,000 (6,120,000)
Proceeds from sale of securities available-for-sale 438,915 128,550 1,270,447
Purchase of securities available-for-sale (15,125) (361,058) (1,103,749)
Capital contributions to First Federal Savings Bank - (5,000,000) -
---------------------------------------------------------
Net cash provided by (used in) investing
activities 733,790 3,447,492 (5,953,302)
---------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (12,336,522) (6,164,419) (2,706,750)
Proceeds from issuance of treasury stock - 114,963 105,781
Dividends paid (1,005,553) (927,924) (813,875)
---------------------------------------------------------
Net cash (used in) financing activities (13,342,075) (6,977,380) (3,414,844)
---------------------------------------------------------
Net increase (decrease) in cash (219,291) (331,325) 535,879
CASH
Beginning 409,397 740,722 204,843
---------------------------------------------------------
Ending $ 190,106 $ 409,397 $ 740,722
=========================================================
SUPPLEMENTAL SCHEDULE OF CASH
FLOW INFORMATION
Cash payment (receipts) for income taxes $ (32,998) $ 82,158 $ 105,781
</TABLE>
-62-
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income........................................... $5,967 $6,005 $6,129 $6,455
Interest expense.......................................... 3,200 3,235 3,390 3,779
------ ------ ------ ------
Net interest income....................................... 2,767 2,770 2,739 2,676
Provision for loan losses................................. 30 30 30 30
------ ------ ------ ------
Net interest income after provision for
loan losses.............................................. 2,737 2,740 2,709 2,646
Noninterest income: ------ ------ ------ ------
Fees and service charges................................ 361 334 378 412
Abstract fees........................................... 343 383 372 323
Other income............................................ 216 338 379 224
------ ------ ------ ------
Total noninterest income............................. 920 1,055 1,129 959
Noninterest expense:
Salaries and employee benefits......................... 973 1,007 1,033 1,013
Premises and equipment................................. 207 216 236 272
Data Processing........................................ 148 149 111 114
SAIF deposit insurance premiums........................ 37 36 36 38
Goodwill............................................... 118 118 118 118
Other.................................................. 571 631 594 560
------ ------ ------ ------
Total noninterest expense............................ 2,054 2,157 2,128 2,115
------ ------ ------ ------
Income before income taxes................................ 1,603 1,638 1,710 1,490
Provision for income tax expense.......................... 545 564 622 510
------ ------ ------ ------
Net Income................................................ $1,058 $1,074 $1,088 $ 980
====== ====== ====== ======
Basic earnings per share.................................. $ 0.37 $ 0.39 $ 0.44 $ 0.44
====== ====== ====== ======
Diluted earnings per share................................ $ 0.36 $ 0.38 $ 0.43 $ 0.43
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income.......................................... $5,465 $6,050 $6,045 $6,042
Interest expense......................................... 2,873 3,291 3,318 3,387
------ ------ ------ ------
Net interest income...................................... 2,592 2,759 2,727 2,655
Provision for loan losses................................ 60 60 60 30
------ ------ ------ ------
Net interest income after provision for
loan losses............................................. 2,532 2,699 2,667 2,625
Noninterest income: ------ ------ ------ ------
Fees and service charges.............................. 238 312 335 358
Abstract fees......................................... 361 401 399 423
Other income.......................................... 216 261 295 316
------ ------ ------ ------
Total noninterest income............................ 815 974 1,029 1,097
------ ------ ------ ------
Noninterest expense:
Salaries and employee benefits........................ 771 874 916 921
Premises and equipment................................ 153 182 223 254
Data Processing....................................... 99 121 181 152
SAIF deposit insurance premiums....................... 32 37 37 37
Goodwill.............................................. 80 117 121 118
Other................................................. 499 564 538 545
------ ------ ------ ------
Total noninterest expense........................... 1,634 1,895 2,016 2,027
------ ------ ------ ------
Income before income taxes............................... 1,713 1,778 1,680 1,695
Provision for income tax expense......................... 607 662 606 606
------ ------ ------ ------
Net income............................................... $1,106 $1,116 $1,074 $1,089
====== ====== ====== ======
Basic earnings per share................................. $ 0.35 $ 0.36 $ 0.36 $ 0.37
====== ====== ====== ======
Diluted earnings per share............................... $ 0.34 $ 0.35 $ 0.35 $ 0.36
====== ====== ====== ======
</TABLE>
-63-
<PAGE>
MANAGEMENT OF THE HOLDING COMPANY AND THE BANK
The Board of Directors of the Holding Company is divided into three
classes, each of which contains one-third of the Board. The Bylaws of the
Holding Company currently authorize six directors. Currently, all directors of
the Holding Company are also directors of the Bank.
Directors
David M. Bradley is Chairman of the Board, President and Chief Executive
Officer of the Holding Company and the Bank.
Howard A. Hecht is a retired insurance executive who was a Vice President
with Principal Mutual Life Insurance Company in Des Moines, Iowa.
Melvin R. Schroeder is Vice President of Instruction at Iowa Central
Community College in Fort Dodge, Iowa.
KaRene Egemo is the owner of Egemo Realty, Inc. in Fort Dodge, Iowa.
Robert H. Singer, Jr. is the co-owner of Calvert, Singer & Kelley Insurance
Services, Inc., an insurance agency in Fort Dodge, Iowa.
Mark Thompson is the owner of Mark Thompson, CPA, P.C. since 1984 and has
been a certified public accountant since 1978.
Executive Officers Who are Not Directors
C. Thomas Chalstrom is Chief Operating Officer of the Bank and Executive
Vice President of the Holding Company and the Bank.
Jean L. Lake is Secretary of the Holding Company and the Bank.
John L. Pierschbacher, CPA is Treasurer of the Holding Company and the
Bank.
Kirk A. Yung is Senior Vice President of the Bank.
-64-
<PAGE>
SHAREHOLDER INFORMATION
Price Range of the Company's Common Stock
The Company's Common Stock trades on The Nasdaq National Market System
under the symbol "FFFD." The following table shows the high and low per share
sales prices of the Company's Common Stock as reported by Nasdaq and the
dividends declared per share during the periods indicated. Such quotations
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Price Range
--------------
Dividends Declared
Quarter Ended High Low Per Share
- ------------------- ------ ------ ------------------
<S> <C> <C> <C>
1998
- ----
First Quarter..................... 22.875 18.750 0.08
Second Quarter.................... 24.875 21.188 0.08
Third Quarter..................... 21.250 15.000 0.08
Fourth Quarter.................... 18.313 15.406 0.08
1999
- ----
First Quarter..................... 17.250 16.250 0.10
Second Quarter.................... 18.750 16.000 0.10
Third Quarter..................... 17.625 16.188 0.10
Fourth Quarter.................... 17.000 15.000 0.10
</TABLE>
- ------------------------
The Company's Common Stock was traded at $12.875 as of March 13, 2000.
Information Relating to the Company's Common Stock
As of March 13, 2000, the Company had 1,796 shareholders of record, which
does include the number of persons or entities who hold their Common Stock in
nominee or "street" name through various brokerage firms. As of such date
2,057,242 shares of the Common Stock were outstanding.
The Company's current quarterly dividend is $0.125 per share. The Board of
Directors of the Company plans to maintain a regular quarterly dividend in the
future and will continue to review the dividend payment amount in relation to
the Company's earnings, financial condition and other relevant factors (such as
regulatory requirements).
The Bank will not be permitted to pay dividends to the Holding Company on
its capital stock if its shareholders' equity would be reduced below the amount
required for the liquidation account. For information concerning federal
regulations which apply to the Bank in determining the amount of proceeds which
may be retained by the Company and regarding a savings institution's ability to
make capital distributions including payment of dividends to its holding
company, see Note 11 to the Consolidated Financial Statements.
Unlike the Bank, the Holding Company is not subject to OTS regulatory
restrictions on the payment of dividends to its shareholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Holding Company and earnings thereon and may be dependent, in part, upon
dividends from the Bank. The Holding Company is subject to the requirements of
Iowa law, which prohibit the Holding Company from paying a dividend if, after
giving it effect, either of the following would result: (a) the Holding Company
would not be able to pay its debts as they become due in the usual course of
business; or (b) the Holding Company's total assets would be less than the sum
of its total liabilities plus the amount that would be needed, if the Holding
Company were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution.
-65-
<PAGE>
Annual Meeting
The Annual Meeting of Shareholders of the Company will be held at 10:00
a.m., Friday, April 28, 2000 at the Country Inn, 3259 5th Avenue South, Fort
Dodge, Iowa.
Stockholders and General Inquiries
<TABLE>
<S> <C>
David M. Bradley
North Central Bancshares, Inc.
c/o First Federal Savings Bank of Iowa
825 Central Avenue
Fort Dodge, Iowa 50501
(515) 576-7531
General Counsel Independent Auditor
Johnson, Erb, Bice, McGladrey & Pullen, LLP
Kramer, Good & Mulholland, P.C. 400 Locust Street, Suite 640
809 Central Avenue Des Moines, Iowa 50309
Fort Dodge, Iowa 50501
Transfer Agent
Special Counsel American Securities Transfer and Trust, Inc.
Thacher Proffitt & Wood 12039 West Alameda Parkway
1700 Pennsylvania Avenue, N.W., Suite 800 Lakewood, Colorado 80228
Washington, D.C. 20006 (303) 986-5400
email: www.asttrust.com
</TABLE>
Annual Report on Form 10-K
A copy of the Company's Form 10-K (without exhibits) for the fiscal year
ended December 31, 1999 will be furnished without charge to shareholders as of
March 13, 2000 upon written request to Jean L. Lake, Corporate Secretary, North
Central Bancshares, Inc., c/o First Federal Savings Bank of Iowa, 825 Central
Avenue, Fort Dodge, Iowa 50501.
-66-
<PAGE>
EXHIBIT 23.1
Exhibit 23.1 Consent of McGladrey & Pullen, LLP
To the Board of Directors
North Central Bancshares, Inc.
Fort Dodge, Iowa
We consent to the incorporation by reference in the North Central Bancshares,
Inc. Registration Statement on Form S-8 of North Central Bancshares, Inc.,
pertaining to the North Central Bancshares, Inc. 1996 Stock Option Plan, of our
report dated February 8, 2000, which appears in the annual report on Form 10-K
of North Central Bancshares, Inc. and subsidiaries for the year ended December
31, 1999.
/s/ McGladrey & Pullen, LLP
-----------------------------
McGladrey & Pullen, LLP
Des Moines, Iowa
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL CONDITION AND THE CONSOLIDATED
CONDENSED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,127,153
<INT-BEARING-DEPOSITS> 8,541,525
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,692,857
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 286,759,101
<ALLOWANCE> 2,776,539
<TOTAL-ASSETS> 367,432,645
<DEPOSITS> 271,030,791
<SHORT-TERM> 27,000,000
<LIABILITIES-OTHER> 2,559,641
<LONG-TERM> 28,715,289
0
0
<COMMON> 40,111
<OTHER-SE> 38,086,813
<TOTAL-LIABILITIES-AND-EQUITY> 367,432,645
<INTEREST-LOAN> 21,215,828
<INTEREST-INVEST> 3,340,439
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,556,267
<INTEREST-DEPOSIT> 11,113,533
<INTEREST-EXPENSE> 13,603,841
<INTEREST-INCOME-NET> 10,952,426
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 61,564
<EXPENSE-OTHER> 8,454,411
<INCOME-PRETAX> 6,441,061
<INCOME-PRE-EXTRAORDINARY> 6,441,061
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,200,175
<EPS-BASIC> 1.64
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 7.51
<LOANS-NON> 213,394
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,676,438
<CHARGE-OFFS> 28,032
<RECOVERIES> 8,133
<ALLOWANCE-CLOSE> 2,776,539
<ALLOWANCE-DOMESTIC> 2,776,539
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
North Central Bancshares, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
<PAGE>
North Central Bancshares, Inc.
825 Central Avenue . PO Box 1237
Fort Dodge, Iowa 50501-1237
========================================
March 27, 2000
Dear Shareholders:
You are cordially invited to attend the 2000 Annual Meeting of Shareholders
(the "Annual Meeting") of North Central Bancshares, Inc. (the "Company"), which
will be held on April 28, 2000 at 10:00 a.m., Central Time, at the Country Inn,
located at 3259 5th Avenue South, Fort Dodge, Iowa. Enclosed are a Notice of
Annual Meeting, Proxy Statement, Proxy Card and 1999 Annual Report to
Shareholders.
The attached Notice of Annual Meeting of Shareholders and Proxy Statement
describe the formal business to be transacted at the Annual Meeting. In
addition, management will report on the operations and activities of the Company
and there will be an opportunity for you to ask questions about the Company's
business.
Your vote is important regardless of the number of shares you own. Whether
or not you plan to attend the Annual Meeting, the Board of Directors urges you
to sign, date and return your Proxy Card as soon as possible in the enclosed
postage-paid envelope. This will not prevent you from voting in person at the
Annual Meeting, but will assure that your vote is counted if you are unable to
attend. If you are a shareholder whose shares are not registered in your own
name, you will need additional documentation from your record holder to attend
and to vote personally at the Annual Meeting. Examples of such documentation
would include a broker's statement, letter or other document that will confirm
your ownership of shares of the Company.
On behalf of the Board of Directors and all of the employees of the
Company and the First Federal Savings Bank of Iowa, I wish to thank you for your
continued support.
Sincerely,
/s/ David M. Bradley
David M. Bradley
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
North Central Bancshares, Inc.
825 Central Avenue
Fort Dodge, Iowa 50501
(515) 576-7531
________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on April 28, 2000
NOTICE IS HEREBY GIVEN that the 2000 Annual Meeting of Shareholders (the
"Annual Meeting") of North Central Bancshares, Inc. (the "Company") will be held
on April 28, 2000 at 10:00 a.m., Central Time, at the Country Inn, located at
3259 5th Avenue South, Fort Dodge, Iowa, for the following purposes:
1. To elect two directors to hold office until the annual meeting of
shareholders to be held in 2003 and until their respective successors
have been duly elected and qualified;
2. To ratify the appointment by the Board of Directors of the firm of
McGladrey & Pullen, LLP as independent auditors for the Company for
the fiscal year ending December 31, 2000; and
3. To transact such other business as may properly come before the Annual
Meeting or any adjournment or postponement thereof. As of the date
hereof, management is not aware of any other such business.
Pursuant to the Bylaws of the Company, the Board of Directors has fixed
March 13, 2000 as the record date for the determination of shareholders entitled
to notice of and to vote at the Annual Meeting and at any adjournment or
postponement thereof. A list of shareholders entitled to vote at the Annual
Meeting will be available for inspection at 825 Central Avenue, Fort Dodge, Iowa
50501, beginning on March 29, 2000 and will also be available at the Annual
Meeting.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER
OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
By Order of the Board of Directors,
/s/ Jean L. Lake
Jean L. Lake
Secretary
Fort Dodge, Iowa
March 27, 2000
<PAGE>
North Central Bancshares, Inc.
825 Central Avenue
Fort Dodge, Iowa 50501
(515) 576-7531
________________________
PROXY STATEMENT FOR THE
2000 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 28, 2000
=================================
GENERAL INFORMATION
=================================
General
This Proxy Statement and the accompanying Proxy Card are being mailed to
shareholders of North Central Bancshares, Inc. ("North Central Bancshares" or
the "Company") on or about March 27, 2000 in connection with the solicitation by
the Board of Directors of the Company of proxies to be used at the 2000 Annual
Meeting of Shareholders (the "Annual Meeting") and at any adjournment or
postponement thereof. The Annual Meeting will be held on April 28, 2000 at 10:00
a.m., Central Time, at the Country Inn, located at 3259 5th Avenue South, Fort
Dodge, Iowa.
As more fully described in this Proxy Statement, the purposes of the Annual
Meeting are (1) to elect two directors, each to serve for a three-year term
expiring in 2003 ("Proposal 1"); (2) to ratify the appointment of McGladrey &
Pullen, LLP as independent auditors for the Company for the fiscal year ending
December 31, 2000 ("Proposal 2"); and (3) authorization of the Board of
Directors, in its discretion, to direct the vote of proxies upon such matters
incident to the conduct of the Annual Meeting, as may properly come before the
Annual Meeting, and any adjournment or postponement thereof, including, without
limitation, a motion to adjourn the Annual Meeting ("Proposal 3").
Record Date and Voting
The Board of Directors of the Company has fixed the close of business on
March 13, 2000 as the record date (the "Record Date") for the determination of
the holders of the Company's common stock, par value $.01 per share (the "Common
Stock"), entitled to notice of and to vote at the Annual Meeting. Only holders
of record of Common Stock at the close of business on that date will be entitled
to vote at the Annual Meeting and at any adjournment or postponement thereof.
At the close of business on the Record Date, there were 2,057,242 shares of
Common Stock outstanding.
Each holder of shares of Common Stock outstanding on the Record Date will
be entitled to one vote for each share held of record upon each matter properly
submitted at the Annual Meeting and at any adjournment or postponement thereof.
The presence, in person or by proxy, of the holders of at least a majority of
the total number of outstanding shares of Common Stock entitled to vote at the
Annual Meeting is necessary to constitute a quorum thereat.
<PAGE>
As provided in the Company's Articles of Incorporation, record holders of
Common Stock who beneficially own in excess of 10% of the outstanding shares of
Common Stock ("Excess Shares") shall be entitled to cast one one-hundredth of
one vote per share for each Excess Share. A person or entity is deemed to
beneficially own shares owned by an affiliate as well as persons acting in
concert with such person or entity. The Company's Articles of Incorporation
authorize the Board of Directors to interpret and apply the provisions of the
Articles of Incorporation and Bylaws governing Excess Shares, and to determine
on the basis of information known to them after reasonable inquiry all facts
necessary to ascertain compliance with the Articles of Incorporation, including,
without limitation, (i) the number of shares of Common Stock beneficially owned
by any person or purported owner, (ii) whether a person or purported owner is an
affiliate or associate of, or is acting in concert with, any other person or
purported owner and (iii) whether a person or purported owner has an agreement
or understanding with any person or purported owner as to the voting or
disposition of any shares of Common Stock.
If the enclosed Proxy Card is properly executed and received by the Company
in time to be voted at the Annual Meeting, the shares represented thereby will
be voted in accordance with the instructions marked thereon. Executed proxies
with no instructions indicated thereon will be voted FOR each of the nominees
for election as Directors and FOR each of the other proposals set forth in the
accompanying Notice of Annual Meeting.
Management is not aware of any matters other than those set forth in the
Notice of Annual Meeting that may be brought before the Annual Meeting. If any
other matters properly come before the Annual Meeting, the persons named in the
accompanying proxy will vote the shares represented by all properly executed
proxies on such matters in such manner as shall be determined by a majority of
the Board of Directors of the Company.
Vote Required
Directors are elected by a plurality of the votes cast in person or by
proxy at the Annual Meeting. The holders of Common Stock may not vote their
shares cumulatively for the election of directors. Approval of Proposals 2 and
3 requires the affirmative vote of the holders of a majority of the outstanding
shares of Common Stock represented in person or by proxy at the Annual Meeting
and entitled to vote thereon. Shares as to which the "ABSTAIN" box has been
selected on the Proxy Card with respect to any of Proposals 2 or 3 will be
counted as present and entitled to vote and will have the effect of a vote
against such proposal. In contrast, shares underlying broker non-votes will not
be counted as present and entitled to vote and will have no effect on the votes
for Proposals 2 and 3.
Revocability of Proxies
The presence of a shareholder at the Annual Meeting will not automatically
revoke such shareholder's proxy. However, a shareholder may revoke a proxy at
any time prior to its exercise by (1) filing a written notice of revocation with
the Secretary of the Company, (2) delivering to the Secretary of the Company
prior to the Annual Meeting a duly executed proxy bearing a later date or (3)
attending the Annual Meeting, filing a written notice of revocation with the
secretary of the meeting and voting in person. If you are a shareholder whose
shares are not registered in your own name, you will need additional
documentation from your record holder to attend and to vote personally at the
Annual Meeting. Examples of such documentation would include a broker's
statement, letter or other document that will confirm your ownership of shares
of the Company.
2
<PAGE>
Solicitation of Proxies
The Company will bear the cost of soliciting proxies from its shareholders.
Proxies may be solicited personally or by telephone or telegraph by directors,
officers and employees of the Company or its subsidiaries, without additional
compensation. The Company also will provide persons, firms and corporations
holding shares in their names, or in the name of their nominees, which are
beneficially owned by others, proxy material for transmittal to such beneficial
owners, and will reimburse such record holders for their reasonable expenses
incurred in connection therewith.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders of the Company
The following table sets forth, as of January 31, 2000, certain information
as to the Common Stock beneficially owned by persons owning in excess of 5% of
the outstanding shares of Common Stock. Management knows of no person, except as
listed below, who beneficially owned more than 5% of the Company's outstanding
shares of Common Stock as of January 31, 2000. Except as otherwise indicated,
the information provided in the following table was obtained from filings with
the Securities and Exchange Commission (the "SEC") and with the Company pursuant
to the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Addresses provided are those listed in the filings as the address of the person
authorized to receive notices and communications. For purposes of the table
below and the table set forth under "Security Ownership of Management," in
accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the
beneficial owner, for purposes of this table, of any shares of Common Stock (1)
over which such person has or shares, directly or indirectly, voting or
investment power, or (2) of which such person has the right to acquire
beneficial ownership at any time within 60 days after January 31, 2000. As used
herein, "voting power" is the power to vote or direct the voting of shares and
"investment power" includes the power to dispose or direct the disposition of
such shares.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent(5)
---------------- -------------------- ----------
<S> <C> <C>
Wellington Management Company, LLP 225,700(1) 10.05%
75 State Street
Boston, MA 02109
Brandes Investment Partners, L.P. 162,237(2) 7.22%
12750 High Bluff Drive
San Diego, CA 92130
Dimensional Fund Advisors, Inc. 157,100(3) 6.99%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Employee Stock Ownership Plan of 184,133(4) 8.20%
First Federal Savings Bank of Iowa
825 Central Avenue
Fort Dodge, IA 50501
</TABLE>
- -------------------
(1) Based on a Schedule 13G/A, dated December 31, 1999, and filed with the SEC
on February 11, 2000 by Wellington Management Company, LLP ("Wellington").
Wellington is an investment advisor which may be deemed to beneficially own
the 225,700 shares of the Company's Common Stock which are held of record by
clients of Wellington, which clients are entitled to receive, or have the
power to direct the receipt of, dividends from, or the proceeds from the
sale of, such shares. Wellington has shared voting power over 188,700
shares and has shared investment power over 225,700 shares of the Company's
Common Stock.
(footnotes continued on following page)
3
<PAGE>
(2) Based on Schedule 13G/A, dated December 31, 1999, and filed with the SEC on
February 14, 2000 by Brandes Investment Partners, L.P. ("Brandes"). Brandes
is an investment adviser which may be deemed to beneficially own the 162,237
shares of the Company's Common Stock. Brandes has shared voting and
investment power over the 162,237 shares of the Company's Common Stock.
(3) Based on a Schedule 13G, dated December 31, 1999, and filed with the SEC on
February 3, 2000 by Dimensional Fund Advisors, Inc. ("Dimensional").
Dimensional is an investment adviser which may be deemed to beneficially own
the 157,100 shares of the Company's Common Stock. Dimensional disclaims
beneficial ownership of such shares.
(4) The Employee Stock Ownership Plan ("ESOP") is administered by a committee of
the Company's Board of Directors (the "ESOP Committee"). The ESOP's assets
are held in a trust (the "ESOP Trust"), for which First Bankers Trust
Company, N.A. serves as trustee (the "ESOP Trustee"). The ESOP Trust
purchased these shares with funds borrowed from the Company, initially
placed these shares in a suspense account for future allocation and intends
to allocate them to employees over a period of years as its acquisition debt
is retired. The terms of the ESOP Trust Agreement provide that, subject to
the ESOP Trustee's fiduciary responsibilities under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), the ESOP Committee will
vote, tender or exchange shares of Common Stock held in the ESOP Trust in
accordance with the following rules. The ESOP Committee will vote, tender or
exchange shares of Common Stock allocated to participants' accounts in
accordance with instructions received from the participants. As of December
31, 1999, 98,625 shares held by the ESOP Trust have been allocated. The ESOP
Committee will vote allocated shares as to which no instructions are
received and any shares that have not been allocated to participants'
accounts in the same proportion as allocated shares with respect to which
the ESOP trustee receives instructions are voted. The ESOP Trustee will
tender or exchange any shares in the suspense account or that otherwise have
not been allocated to participants' accounts in the same proportion as
allocated shares with respect to which the ESOP Trustee receives
instructions are tendered or exchanged. With respect to allocated shares as
to which no instructions are received, the ESOP Trustee will be deemed to
have received instructions not to tender or exchange such shares. Except as
described above, the ESOP Committee of the Company's Board of Directors has
sole investment power, but no voting power over the Common Stock held in the
ESOP Trust.
(5) Percentages with respect to each person or group of persons have been
calculated based upon 2,246,742 shares of Common Stock, the number of shares
outstanding as of January 31, 2000.
4
<PAGE>
Security Ownership of Management
The following table sets forth information with respect to the shares of
Common Stock beneficially owned by each director of the Company, by each Named
Executive Officer of the Company identified in the Summary Compensation Table
included elsewhere herein and all directors and executive officers of the
Company or the Company's wholly owned subsidiary, First Federal Savings Bank of
Iowa (the "Bank") as a group as of January 31, 2000.
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Common
Beneficial Stock
Name Title (1) Ownership(2)(3)(4) Outstanding(5)
- ---- --------- ------------------ --------------
<S> <C> <C> <C>
David M. Bradley Chairman of the Board, 55,282 (6) 2.43%
President and Chief
Executive Officer
KaRene Egemo Director 30,382 (7) 1.35
Howard A. Hecht Director 32,064 (8) 1.42
Melvin R. Schroeder Director 19,504 (9) 0.86
Mark M. Thompson Director 6,500 (10) 0.29
Robert H. Singer, Jr. Director 12,312 (11) 0.55
All directors and executive 403,791 17.02
officers as a group
(10 persons)(12)
</TABLE>
- -------------------------
(1) Titles are for both the Company and the Bank.
(2) See "Principal Shareholders of the Company" for a definition of "beneficial
ownership." All persons shown in the above table have sole voting and
investment power, except as otherwise indicated.
(3) The figure shown for all directors and executive officers as a group
includes all 184,133 shares held in the ESOP as to which the members of the
Company's ESOP Committee (consisting of Directors Hecht, Egemo and
Schroeder) may be deemed to have sole investment power, except in limited
circumstances, thereby causing each such Committee member to be deemed a
beneficial owner of such shares. Each of the members of the ESOP Committee
disclaims beneficial ownership of such shares and, accordingly, such shares
are not attributed to the members of the ESOP Committee individually.
(4) The figures shown include shares held pursuant to First Federal Savings Bank
of Iowa Employees' Savings and Profit Sharing Plan and Trust that have been
allocated as of December 31, 1999 to all executive officers as a group,
3,342 shares. Such persons have sole voting power and sole investment power
as to such shares.
(5) Percentages with respect to each person or group of persons have been
calculated as though the number of outstanding shares of Common Stock was
2,246,742, the number of shares of Common Stock outstanding as of January
31, 2000, plus in the case of each individual and the group, the number of
additional shares of Common Stock which would be issued upon the exercise of
all options by such individuals or group, respectively, within 60 days after
January 31, 2000.
(6) Includes 7,740 shares over which Mr. David M. Bradley has shared voting and
investment power. The figure shown includes 11,083 shares held in trust
pursuant to the ESOP that have been allocated as of January 31, 2000 to Mr.
Bradley's individual account. Mr. Bradley has voting power (subject to the
legal duties of the ESOP Trustee) but no investment power, except in limited
circumstances, as to such shares. The figure shown for Mr. Bradley does not
include 85,508 shares held in trust pursuant to the ESOP that have not been
allocated to any individual's account and as to which Mr. Bradley shares
voting power with other ESOP participants. Includes 32,000 shares which may
be acquired upon the exercise of stock options within 60 days of January 31,
2000.
(footnotes continued on following page)
5
<PAGE>
(7) Includes 19,762 shares over which Ms. KaRene Egemo has shared voting and
investment power. Includes 10,710 shares which may be acquired upon the
exercise of stock options within 60 days of January 31, 2000.
(8) Includes 7,264 shares over which Mr. Howard A. Hecht has shared voting and
investment power. Includes 12,000 shares which may be acquired upon the
exercise of stock options within 60 days of January 31, 2000.
(9) Includes 7,504 shares over which Mr. Melvin R. Schroeder has shared voting
and investment power. Includes 12,000 shares which may be acquired upon the
exercise of stock options within 60 days of January 31, 2000.
(10) Includes 2,000 shares which may be acquired upon the exercise of stock
options within 60 days of January 31, 2000.
(11) Includes 4,812 shares over which Mr. Robert H. Singer, Jr. has shared
voting and investment power. Includes 7,500 shares which may be acquired
upon the exercise of stock options within 60 days of January 31, 2000.
(12) Includes 43,334 shares over which the directors and executive officers
share voting power, 43,334 shares over which the directors and executive
officers share investment power and an aggregate of 125,810 shares which
may be acquired upon the exercise of stock options within 60 days after
January 31, 2000.
=================================
PROPOSAL ONE
ELECTION OF DIRECTORS
=================================
General
The Articles of Incorporation of the Company provide that the Board of
Directors shall be divided into three classes, each class to contain, as near as
may be possible, one-third of the entire number of the Board. The directors of
each class serve for a term of three years, with one class elected each year. In
all cases, directors serve until their successors are elected and qualified.
The Nominating Committee, composed of Directors Hecht, Schroeder and Egemo,
with Mr. Hecht as Chairman, has nominated two candidates for election as
directors at the Annual Meeting, each to serve for a three-year term ending in
2003. Each nominee has consented to being named in this Proxy Statement and to
serve, if elected. However, if any nominee should become unable to serve, the
proxies received in response to this solicitation that were voted in favor of
such nominee will be voted for the election of such other person as shall be
designated by the Board of Directors of the Company, unless the Board of
Directors shall determine to further reduce the number of directors pursuant to
the Bylaws of the Company. In any event, proxies cannot be voted for a greater
number of persons than the two nominees named.
Information with Respect to Nominees and Continuing Directors
The following table sets forth certain information with respect to each
nominee for election as a director and each director whose term does not expire
at the Annual Meeting ("Continuing Director"). There are no arrangements or
understandings between the Company and any director or nominee pursuant to which
such person was elected or nominated to be a director of the Company. For
information with respect to security ownership of directors, see "General
Information -- Security Ownership of Certain Beneficial Owners and Management --
Security Ownership of Management."
6
<PAGE>
<TABLE>
<CAPTION> End of Director
Name Age(1) Term Position Held with Company Since(2)
- ---- ------ ------ ------------------------------------ -----------
<S> <C> <C> <C> <C>
Nominees for a Three-Year
Term Expiring in 2003
David M. Bradley 48 2003 Chairman of the Board, President and 1989
Chief Executive Officer
Robert H. Singer, Jr. 51 2003 Director 1997
Continuing Directors
Howard A. Hecht 72 2001 Director 1990
Melvin R. Schroeder 63 2001 Director 1992
KaRene Egemo 63 2002 Director 1993
Mark M. Thompson 48 2002 Director 1999
</TABLE>
- ------------------------
(1) At March 27, 2000.
(2) Includes terms as directors of the Bank prior to the incorporation of the
Company on December 5, 1995.
The principal occupation and business experience of each nominee for
election as director and of each continuing director are set forth below.
Nominees for Election as Directors
David M. Bradley has been President of the Bank since 1990 and Chief
Executive Officer of the Bank since 1992. He has been affiliated with the Bank
since 1982. Mr. Bradley became Chairman of the Board of the Company and the Bank
as of January 1, 1997.
Robert H. Singer, Jr. has been the co-owner of Calvert, Singer & Kelley
Insurance Services, Inc., an insurance agency, in Fort Dodge, Iowa, since 1988.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
APPROVAL OF BOTH NOMINEES FOR ELECTION AS DIRECTORS.
Continuing Directors
Howard A. Hecht is a retired insurance executive. He was employed for 39
years as Vice President with Principal Mutual Life Insurance Company, Des
Moines, Iowa.
Melvin R. Schroeder is Vice President of Instruction at Iowa Central
Community College in Fort Dodge, Iowa. He has been employed with the College
since 1967.
KaRene Egemo has been the owner of Egemo Realty, Inc. in Fort Dodge, Iowa
since 1978.
Mark M. Thompson has been the owner of Mark Thompson CPA, P.C. since 1984
and has been a certified public accountant since 1978.
Board and Committee Meetings
The Company's Board of Directors held 14 meetings during 1999. During 1999,
all directors of the Company attended at least 75% of the total meetings held
during the period of their service on the Board of Directors and committees
thereof. The Board of Directors maintains committees, the nature and composition
of which are described below.
7
<PAGE>
Examining and Audit Committee. The Examining and Audit Committee recommends
the selection of the Company's independent accountants to the Board and meets
with the accountants to discuss the scope and to review the results of the
annual audit. It is comprised of Directors Schroeder (Chairman), Egemo and
Thompson. The Examining and Audit Committee of the Company met 2 times during
the year ended December 31, 1999.
Personnel and Compensation Committee. The Personnel and Compensation
Committee meets periodically to review the performance of and to make
recommendations to the Board regarding the compensation of the Company's
officers. The Personnel and Compensation Committee of the Company is comprised
of Directors Hecht (Chairman), Egemo and Schroeder. The Personnel and
Compensation Committee met two times during the year ended December 31, 1999.
Nominating Committee. The Nominating Committee discusses director
nominations prior to each Annual Meeting of the Company. It is comprised of
Directors Hecht (Chairman), Schroeder and Egemo. The Nominating Committee met 1
time during the year ended December 31, 1999.
The Nominating Committee met on January 28, 2000 to select the nominees for
election as directors at the Annual Meeting. In accordance with the Bylaws of
the Company, no nominations for election as directors, except those made by the
Nominating Committee, shall be voted upon at the Annual Meeting unless properly
made by a shareholder. No nominations for directors were received from
shareholders for the elections to be held at the Annual Meeting. To be timely,
notice of a shareholder's nomination for an annual meeting must be delivered to
or received by the Corporate Secretary of the Company not less than 60 days
prior to the date of the meeting if such meeting is to be held on a day which is
within 30 days preceding the anniversary of the previous year's annual meeting,
not less than 90 days prior to the date of the meeting if such meeting is to be
held on or after the anniversary of the previous year's annual meeting, or, with
respect to an annual meeting held at any other time, not more than 10 days
following the date on which notice of such meeting is first given to
shareholders.
Executive Officers
The following individuals are executive officers of the Company and the
Bank and hold the offices set forth below opposite their names.
Name Position Held with the Company and the Bank
---- -------------------------------------------
C. Thomas Chalstrom Executive Vice President
Jean L. Lake Secretary
John L. Pierschbacher Treasurer
Name Position Held with the Bank
---- ---------------------------
C. Thomas Chalstrom Chief Operating Officer
Kirk A. Yung Senior Vice President
The executive officers of the Company and the Bank are elected annually and
hold office until their respective successors have been elected and qualified,
or until death, resignation, or removal by the Boards of Directors of each of
the Company and the Bank.
Biographical information of executive officers of the Company and the Bank
is set forth below.
C. Thomas Chalstrom, age 36, has been employed with the Bank since 1985,
was named Executive Vice President in December 1994. Mr. Chalstrom was named
Chief Operating Officer of the Bank in December 1998.
Jean L. Lake, age 57, has been employed with the Bank since 1972 and was
named Secretary in 1987. Ms. Lake serves as Board Secretary and is in charge of
marketing.
8
<PAGE>
John L. Pierschbacher, CPA, age 40, has been employed with the Bank since
1992. Mr. Pierschbacher was named Treasurer of the Bank in January 1994. He is
the Bank and the Company's chief financial officer and is in charge of the
accounting functions of the Bank and the Company. Mr. Pierschbacher was employed
in public accounting for nine years at the public accounting firm of McGladrey &
Pullen, LLP prior to joining the Bank.
Kirk A. Yung, age 37, has been employed with the Bank since 1990, was named
Senior Vice President in January 1995 and is in charge of consumer lending. Mr.
Yung had five years of experience in various positions with financial
institutions before joining the Bank.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Directors' Compensation
Fee Arrangements. Currently, non-employee directors receive monthly fees
of $450 and an additional director's fee of $300 for each monthly meeting
attended.
Stock Option Plan. Directors of the Company are eligible to receive grants
of Options pursuant to the Company's Option Plan. See "-- Stock Option Plan."
Under the Stock Option Plan, individuals who were non-employee directors
("Eligible Directors") on September 21, 1996, (the "Effective Date") received an
initial grant of an option to purchase 20,000 shares of Common Stock. All such
options are exercisable in five equal installments beginning one year from the
date of grant. Individuals who became an Eligible Director after the Effective
Date, but before January 1, 1998, were granted on each of January 1, 1997 and
1998, an option to purchase 500 shares and on January 23, 1998, an additional
option to purchase 3,000 shares of Common Stock. Such options were immediately
exercisable upon grant. Such Eligible Directors and any individuals who become
an Eligible Director after January 1, 1998, will be granted on each January 1
after 1998, an option, which will be immediately exercisable upon grant, to
purchase 2,000 shares of Common Stock, provided the Plan is still in effect and
the Eligible Director is still serving as such on the date of grant. All options
granted to Eligible Directors under the Stock Option Plan have an exercise price
per share equal to the fair market value of a share of Common Stock on the date
of the option grant.
Executive Compensation
The Report of the Company's Personnel and Compensation Committee and the
Performance Graph included in this section are provided in accordance with the
rules and regulations of the SEC. Pursuant to such rules and regulations, the
Report and the Graph shall not be deemed "soliciting material," filed with the
SEC, subject to Regulation 14A or 14C of the SEC or subject to the liabilities
of section 18 of the Exchange Act.
Compensation Committee Report.
The 1999 compensation programs described in this Proxy Statement were
established by the Personnel and Compensation Committee of the Company's Board
of Directors. The Committee is comprised entirely of non-employee directors.
The Company's compensation program was designed to create and sustain high
performance, to attract and retain the people necessary to grow the business,
and to induce employees to act as shareholders of the business and to become
personally accountable for their own individual actions and the overall
Company's success. The program was designed to be highly sensitive to
performance and reflect both short and long term performance.
The 1999 compensation program consists of three components: (1) base
salary; (2) annual bonus; and (3) long term incentives, e.g., stock options and
fringe benefits. These elements are intended to provide an overall compensation
package that is commensurate with the Company's financial resources, that is
appropriate to assure the retention of experienced management personnel,
especially in these times of great competition for skilled personnel, and align
their financial interests with those of the Company's
9
<PAGE>
shareholders, and that is responsive to the immediate and long-term needs of
executive officers and their families.
During 1999, base salaries were set at levels determined, in the subjective
judgment of the Compensation Committee, to be commensurate with the executive
officers' customary respective duties and responsibilities and to enable them to
maintain appropriate standards of living within their communities. Discretionary
bonuses for 1999 were determined, in the subjective judgment of the Compensation
Committee, with the intention of rewarding effort, performance and results at
levels above and beyond those assumed in establishing base salary rates. Fringe
benefit plans, consisting of a pension plan, 401(k) plan, and group insurance
coverages, are designed to provide for the health and welfare of the executives
and their families as well as for their long-term financial needs. In addition,
all executive officers participate in the Bank's Employee Stock Ownership Plan
(the "ESOP"). Each executive officer has an individual account within the ESOP
Trust which is invested primarily in employer securities, with the result that a
portion of each executive officer's long-term retirement savings is tied to the
performance of the Bank and the Company.
The Chief Executive Officer's base salary for 1999 was $175,000; and he was
awarded a $5,101 bonus for 1999.
Personnel and Compensation
Committee of North Central
Bancshares, Inc.
Howard A. Hecht, Chairman
KaRene Egemo, Member
Melvin R. Schroeder, Member
Compensation Committee Interlocks and Insider Participation. There are no
interlocks, as defined under the rules and regulations of the SEC, between the
Personnel and Compensation Committee and corporate affiliates of members of the
Personnel and Compensation Committee or otherwise.
10
<PAGE>
Performance Graph.
Pursuant to the regulations of the SEC, the graph below compares the
performance of the Bank with that of the Nasdaq Composite Index (U.S. Companies)
and the Nasdaq Bank Composite Index (banks and bank holding companies, over 99%
of which are based in the United States) from December 31, 1995 through December
31, 1999. On March 20, 1996, the Bank completed a reorganization from the
mutual holding company form of organization to the stock holding company form of
organization. In connection with this reorganization, each outstanding share of
the Bank's common stock was converted into 1,385,590 shares of the Company's
common stock and the Company sold and issued 2,625,467 additional shares of its
common stock at a subscription price of $10.00 per share. At that time, the
Company replaced the Bank as the issuer listed by The Nasdaq Stock Market.
Accordingly, the graph below presents performance of the Bank's stock through
March 20, 1996 and the Company's stock through December 31, 1999. The graph
assumes the reinvestment of dividends in additional shares of the same class of
equity securities as those below.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Legend
<S> <C> <C> <C> <C> <C> <C>
Symbol CRSP Total Returns Index for: 12/1994 12/1995 12/1996 12/1997 12/1998 12/1999
- ------ ----------------------------- ------- ------- ------- ------- ------- -------
______ North Central Bancshares, Inc. 100.0 140.6 169.0 251.4 217.1 197.6
...__. * Nasdaq Stock Market (US Companies) 100.0 141.3 173.9 213.1 300.2 545.7
- ----- Nasdaq Financial Stocks 100.0 145.7 187.0 286.1 277.7 274.0
SIC 6000-6799 US & Foreign
Notes:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 12/30/1994.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
There can be no assurance that stock performance will continue into the future
with the same or
similar trends depicted in the graph above.
11
<PAGE>
Summary Compensation Table.
The following Summary Compensation Table includes individual compensation
information on the Chief Executive Officer (the "Named Executive Officer") for
services rendered in all capacities to the Company and the Bank during the
fiscal years ended December 31, 1999, 1998 and 1997. No other officer received
total salary and bonus in excess of $100,000 in fiscal 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
----------------------
Annual Compensation Awards
--------------------- ----------------------
Securities
Underlying
Options/ All Other
Name and Principal Salary Bonus SARS Compensation
Positions Year ($)(1) ($) (#) ($)(2)
- ---------------------- ---- ---------- ------- ---------------------- -----------------
<S> <C> <C> <C> <C> <C>
David M. Bradley 1999 175,000 5,101 -- 21,503
Chairman of the Board, 1998 165,000 101 20,000 38,595
President and Chief Executive 1997 140,000 10,101 -- 46,806
Officer
</TABLE>
- --------------------
(1) Amount shown is gross earnings, including amounts contributed by Mr.
Bradley on an after-tax basis to the Bank's Thrift Plan.
(2) Includes allocations under the ESOP of 1,434, 2,173 and 2,355 shares of the
Company's Common Stock for 1999, 1998 and 1997 with a total market value of
$21,503, $38,595 and $46,806, respectively, as of their respective
allocation dates of December 31, 1999, 1998 and 1997, based on the closing
sales prices for shares of the Company's common stock on The Nasdaq Stock
Market on such dates.
Employment Agreements.
Effective as of March 20, 1996, the Company entered into an employment
agreement with Mr. Bradley, and the Bank entered into an amended and restated
employment agreement with Mr. Bradley (collectively, the "Employment
Agreements"). The Employment Agreements establish the duties and compensation
of Mr. Bradley and are intended to ensure that the Bank and the Company will be
able to maintain a stable and competent management base.
The Employment Agreements with Mr. Bradley provide for a three-year term.
The Bank Employment Agreement provides that, commencing on the first anniversary
date and continuing each anniversary date thereafter, the Board of Directors
may, with Mr. Bradley's concurrence and after conducting a performance
evaluation, extend this term for an additional year, so that the remaining term
shall be three years. The Company Employment Agreement provides for automatic
daily extensions such that the term of the Company Employment Agreement shall be
a rolling period of three years unless written notice of non-renewal is given by
the Company's Board of Directors or Mr. Bradley. Mr. Bradley's base salary will
be reviewed annually by the Personnel and Compensation Committee of the Board.
Subject to such review, Mr. Bradley's base salary may be increased on the basis
of his job performance and the overall performance of the Bank and the Company.
In addition to base salary, the Employment Agreements provide for, among other
things, entitlement to participation in stock, retirement and welfare benefit
plans and eligibility for fringe benefits applicable to executive personnel such
as a company car and fees for club and organization memberships deemed
appropriate by the Bank or the Company and Mr. Bradley. The Employment
Agreements provide for termination by the Bank or the Company at any time for
"cause" as defined in the Employment Agreements. In the event the Bank or the
Company chooses to terminate Mr. Bradley's employment for reasons other than for
cause, or in the event of Mr. Bradley's resignation from the Bank and the
Company upon: (i) failure to re-appoint, elect or re-elect him to his current
offices; (ii) a material change in his functions, duties or responsibilities;
(iii) a relocation of his principal place of employment outside
12
<PAGE>
Webster County, Iowa without his consent; (iv) liquidation or dissolution of the
Bank or the Company; (v) a change of control; or (vi) a breach of the Employment
Agreement by the Bank or the Company, Mr. Bradley or, in the event of death, his
beneficiary, would be entitled to a lump sum cash payment in an amount equal to
the present value of the remaining base salary and bonus payments due to him and
the additional contributions or benefits that would have been earned under any
employee benefit plans of the Bank or the Company during the remaining terms of
the Employment Agreements. The Bank and the Company would also continue Mr.
Bradley's life, health and disability insurance coverage for the remaining term
of the Employment Agreements.
In general, for purposes of the Employment Agreements and the plans
maintained by the Company or the Bank, a "change in control" will generally be
deemed to occur when a person or group of persons acting in concert acquires
beneficial ownership of 20% or more of any class of equity security, such as
Common Stock of the Company or the Bank, or in the event of a tender offer,
exchange offer, merger or other form of business combination, sale of assets or
contested election of directors which results in a change in control of the
majority of the Board of Directors of the Company or the Bank.
Payment under the Company Agreement would be made by the Company. In
addition, payments to Mr. Bradley under the Bank Agreement will be guaranteed by
the Company in the event that payments or benefits are not paid by the Bank.
However, to the extent that payments under the Company Agreement and the Bank
Agreement are duplicative, payments due under the Company's Employment Agreement
would be offset by amounts actually paid by the Bank. The Employment Agreements
also provide that Mr. Bradley would be entitled to reimbursement of certain
costs incurred in negotiating, interpreting or enforcing the Employment
Agreements. Mr. Bradley would also be indemnified by the Bank and the Company to
the fullest extent allowable under federal and Iowa law, respectively.
Cash and benefits paid to Mr. Bradley under the Employment Agreements
together with payments under other benefit plans following a "change in control"
of the Bank or the Company may constitute an "excess parachute" payment under
Section 280G of the Internal Revenue Code (the "Code"), resulting in the
imposition of a 20% excise tax on the recipient and the denial of the deduction
for such excess amounts to the Company and the Bank. In such an event, payments
under the Employment Agreements will be limited to the lesser of: (i) 2.99 times
Mr. Bradley's average total compensation (whether or not taxable) for the period
of five taxable years ending immediately prior to his termination of employment,
or (ii) after provision for the excise tax, if any, imposed under section 4999
of the Code, the greater of an amount 2.99 times Mr. Bradley's average taxable
compensation for the period of five taxable years ending immediately prior to
his termination of employment or the maximum amount which may be paid to Mr.
Bradley under the Employment Agreements without giving rise to such tax.
The Employment Agreements also generally provide that for a period of one
year following termination for cause, Mr. Bradley agrees not to compete with the
Bank or Company in any city, town or county in which the Bank or Company
maintains an office or has filed an application to establish an office. The
Employment Agreements also provide that Mr. Bradley agrees to keep any material
document or information obtained from the Bank or Company confidential. In
addition, the Employment Agreements provide that for a period of one year
following termination, Mr. Bradley agrees not to solicit or offer employment to
any officer or employee of the Bank or Company or solicit their respective
customers.
Pension Plan.
The Bank participates in a multiple-employer noncontributory tax-qualified
defined benefit plan (the "Retirement Plan") for eligible employees. As
required, the Bank annually contributes an amount to the Retirement Plan
necessary to satisfy the actuarially determined minimum funding requirements in
accordance with the ERISA.
13
<PAGE>
Pension Plan Table.
The following table sets forth the estimated annual benefits payable upon
retirement at age 65 under the Bank's Retirement Plan based on the Retirement
Plan provisions at December 31, 1999. The amounts are expressed in the form of a
single life annuity available at various levels of compensation and years of
benefit service:
<TABLE>
<CAPTION>
Years of Service and
Benefit Payable at Retirement
-------------------------------------------------------
Highest Average
Salary 15 20 25 30 35
- ----------------- ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
$100,000 27,521 36,694 45,868 55,041 64,215
125,000 35,021 46,694 58,368 70,041 81,715
150,000 42,521 56,694 70,868 85,041 99,215
175,000(1) 50,021(1) 66,694(1) 83,368(1) 100,041(1) 116,715(1)
</TABLE>
- ----------------
(1) Under section 401(a)(17) of the Code, a participant's compensation in
excess of $170,000 (as adjusted to reflect cost-of-living increases) is
disregarded for purposes of determining highest average salary for benefit
accruals in plan years beginning in or after 1994.
These annual benefit amounts are subject to adjustments for Social Security
benefits. At December 31, 1999, David M. Bradley had 16 years of credited
service under the Retirement Plan and his highest average salary was $160,000.
Compensation recognized for purposes of retirement plan benefits consists of
salary as reported in the "Salary" column of the Summary Compensation Table.
Stock Option Plan.
The Option Plan was approved by the Company's shareholders at a Special
Meeting of Shareholders held on September 21, 1996. The Option Plan provides for
the grant of Options to certain officers, employees and outside directors of the
Company. The Option Plan is not subject to ERISA. The purpose of the Option Plan
is to promote the growth and profitability of the Company; to provide certain
key officers; employees and directors of the Company and its affiliates with an
incentive to achieve corporate objectives, to attract and retain individuals of
outstanding competence and to provide such individuals with an equity interest
in the Company.
14
<PAGE>
The following table provides information with respect to the number of
shares of Common Stock represented by outstanding options held by Mr. Bradley on
December 31, 1999 and the value for such options that are "in-the-money"
options. The value for "in-the-money" options represents the positive spread
between the exercise price of any such option and the year-end price of the
Common Stock, which was $15.00 per share.
1999 Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Fiscal Options/SARs at Fiscal
Year-end Year-end
(#) ($)
Name (1) Exercisable/Unexercisable Exercisable/Unexercisable
- -------- -------------------------- --------------------------
<S> <C> <C>
David M. Bradley 32,000/28,000 63,000/42,000
Chairman of the Board, President and
Chief Executive Officer
</TABLE>
- -----------------------
(1) Mr. Bradley did not exercise options during the fiscal year ended December
31, 1999.
Transactions With Certain Related Persons
From time to time the Bank makes loans to its and the Company's officers
and directors, which loans are made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve more than the normal risk of collectibility or present other unfavorable
features.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
certain officers, and persons who own more than ten percent of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the SEC. Officers, directors and greater than ten
percent shareholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of copies of such reports of ownership furnished
to the Company or the Bank, or written representations that no forms were
necessary, the Company believes that, during the last fiscal year, all filing
requirements applicable to its officers, directors and greater than ten percent
shareholders of the Company and the Bank were complied with.
15
<PAGE>
===========================
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
===========================
The Board of Directors has appointed the firm of McGladrey & Pullen, LLP to
continue as independent auditors for the Company for the fiscal year ending
December 31, 2000, subject to ratification of such appointment by the Company's
shareholders. Representatives of McGladrey & Pullen, LLP are expected to be
present at the Annual Meeting. They will have an opportunity to make a statement
if they desire to do so and will be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THE RATIFICATION OF THE APPOINTMENT OF
MCGLADREY & PULLEN, LLP AS INDEPENDENT AUDITORS
FOR THE COMPANY.
===========================
PROPOSAL THREE
AUTHORIZATION OF THE BOARD OF DIRECTORS, IN ITS DISCRETION, TO DIRECT
THE VOTE OF THE PROXIES UPON SUCH OTHER MATTERS INCIDENT TO THE
CONDUCT OF THE ANNUAL MEETING AS MAY PROPERLY COME
BEFORE THE ANNUAL MEETING, AND ANY ADJOURNMENT OR POSTPONEMENT
THEREOF, INCLUDING, WITHOUT LIMITATION, A MOTION TO ADJOURN
THE ANNUAL MEETING
===========================
The Board of Directors is not aware of any other business that may properly
come before the Annual Meeting. The Board seeks the authorization of the
shareholders of the Company, in the event matters incident to the conduct of the
Annual Meeting properly come before the Meeting, including, but not limited to,
the consideration of whether to adjourn the Annual Meeting once called to order,
to direct the manner in which those shares represented at the Annual Meeting by
proxies solicited pursuant to this Proxy Statement shall be voted. As to all
such matters, the Board intends that it would direct the voting of such shares
in the manner determined by the Board, in its discretion, and in the exercise of
its duties and responsibilities, to be in the best interests of the Company and
its shareholders, taken as a whole.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
AUTHORIZATION OF THE BOARD OF DIRECTORS OF NORTH CENTRAL BANCSHARES, INC., IN
ITS DISCRETION, TO DIRECT THE VOTE OF THE PROXIES UPON SUCH OTHER MATTERS
INCIDENT TO THE CONDUCT OF THE ANNUAL MEETING AS MAY PROPERLY COME BEFORE THE
ANNUAL MEETING, AND ANY ADJOURNMENT OR POSTPONEMENT THEREOF, INCLUDING, WITHOUT
LIMITATION, A MOTION TO ADJOURN THE ANNUAL MEETING.
16
<PAGE>
ADDITIONAL INFORMATION
Date for Submission of Shareholder Proposals
Any shareholder proposal intended for inclusion in the Company's proxy
statement and proxy card relating to the Company's 2001 Annual Meeting of
Shareholders must be received by the Company by November 27, 2000, pursuant to
the proxy soliciting regulations of the SEC. Nothing in this paragraph shall be
deemed to require the Company to include in its proxy statement and proxy card
for such meeting any shareholder proposal which does not meet the requirements
of the SEC in effect at the time. Any such proposal will be subject to 17 C.F.R.
(S)240.14a-8 of the Rules and Regulations promulgated by the SEC under the
Exchange Act.
Notice of Business to be Conducted at the Annual Meeting
The Bylaws of the Company provide an advance notice procedure for a
shareholder to properly bring business before an annual meeting or to nominate
any person for election to the Board of Directors. The shareholder must be a
shareholder of record and have given timely notice thereof in writing to the
Secretary of the Company. To be timely, a shareholder's notice must be delivered
to or received by the Secretary not later than the following dates: (i) with
respect to an annual meeting of shareholders, sixty (60) days in advance of such
meeting if such meeting is to be held on a day which is within thirty (30) days
preceding the anniversary of the previous year's annual meeting, or ninety (90)
days in advance of such meeting if such meeting is to be held on or after the
anniversary of the previous year's annual meeting; and (ii) with respect to an
annual meeting of shareholders held at a time other than within the time periods
set forth in the immediately preceding clause (i), the close of business on the
tenth (10th) day following the date on which notice of such meeting is first
given to shareholders. Notice shall be deemed to first be given to shareholders
when disclosure of such date of the meeting of shareholders is first made in a
press release reported to Dow Jones News Services, Associated Press or
comparable national news service, or in a document publicly filed by the Company
with the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act. A
shareholder's notice to the Secretary shall set forth such information as
required by the Bylaws of the Company. Nothing in this paragraph shall be deemed
to require the Company to include in its proxy statement and proxy card relating
to an annual meeting any shareholder proposal or nomination which does not meet
all of the requirements for inclusion established by the SEC in effect at the
time such proposal or nomination is received. See "Date For Submission of
Shareholder Proposals."
Other Matters Which May Properly Come Before the Annual Meeting
As of the date of this Proxy Statement, management does not know of any
other matters to be brought before the shareholders at the Annual Meeting. If,
however, any other matters not now known are properly brought before the Annual
Meeting, the persons named in the accompanying proxy will vote the shares
represented by all properly executed proxies on such matters in such manner as
shall be determined by a majority of the Board of Directors.
17
<PAGE>
FINANCIAL STATEMENTS
A copy of the Annual Report to Shareholders for the year ended December 31,
1999, containing financial statements as of December 31, 1999 and 1998 and for
each of the years in the three-year period ended December 31, 1999, prepared in
conformity with generally accepted accounting principles, accompanies this Proxy
Statement. The consolidated financial statements have been audited by McGladrey
& Pullen, LLP whose report thereon appears in the Annual Report. The Annual
Report serves as the Bank's Annual Disclosure Statement for purposes of the
regulations of the Federal Deposit Insurance Corporation. An additional copy of
the Annual Report will be promptly furnished without charge to shareholders upon
request.
The Company will file an annual report on Form 10-K for its fiscal year
ended December 31, 1999 with the SEC. Shareholders may obtain, free of charge, a
copy of such annual report (excluding exhibits) by writing to Ms. Jean L. Lake,
Secretary, North Central Bancshares, Inc., c/o First Federal Savings Bank of
Iowa, 825 Central Avenue, Fort Dodge, Iowa 50501.
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL
MEETING, PLEASE SIGN, DATE AND PROMPTLY RETURN
THE ACCOMPANYING PROXY CARD IN THE
POSTAGE-PAID ENVELOPE PROVIDED.
A-1
<PAGE>
NORTH CENTRAL BANCSHARES, INC. REVOCABLE PROXY
825 Central Avenue
Fort Dodge, Iowa 50501
This proxy is solicited on behalf of the Board of Directors of North Central
Bancshares, Inc.
for the Annual Meeting of Shareholders to be held on April 28, 2000
The undersigned shareholder of North Central Bancshares, Inc. hereby appoints
Howard A. Hecht, Melvin R. Schroeder and KaRene Egemo, or any of them, with
full powers of substitution, to represent and to vote as proxy, as designated,
all shares of common stock of North Central Bancshares, Inc. held of record by
the undersigned on March 13, 2000, at the Annual Meeting of Shareholders (the
"Annual Meeting") to be held on April 28, 2000 at 10:00 a.m., Central Time, at
the Country Inn, located at 3259 5th Avenue South, Fort Dodge, Iowa, or at any
adjournment or postponement thereof. The undersigned hereby revokes all prior
proxies.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is given, this Proxy
will be voted FOR the election of nominees listed in Item 1 and FOR the
proposals in Items 2 and 3. In their discretion, the proxies are authorized to
vote upon such other business as may properly come before the Annual Meeting or
any adjournment or postponement thereof. As of the date of the Proxy Statement
for the Annual Meeting, the Board of Directors is not aware of any such other
business.
PLEASE MARK, SIGN AND DATE THIS PROXY ON THE REVERSE SIDE AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
The Board of Directors of North Central I Will Attend the
Bancshares, Inc. unanimously recommends a Annual Meeting [_]
vote "FOR" all nominees in Item 1 and "FOR" Please Mark Your
the proposals in Items 2 and 3. Choice Like This [X]
in Blue or Black Ink.
- --------------------------------------------------------------------------------
1. Election of Directors to a Three Year Term. For Withhold
Nominees: David M. Bradley and Robert H. Singer, Jr. all for all
Nominees Nominees
[_] [_]
Instruction: To withhold authority for any individual
nominee, write that nominee's name in the space
provided: _______________________________________________
- --------------------------------------------------------------------------------
2. Ratification of appointment of For Against Abstain
McGladrey & Pullen LLP as [_] [_] [_]
independent auditors for the
Company for the fiscal year
ending December 31, 2000.
- --------------------------------------------------------------------------------
3. Authorization of the Board of For Against Abstain
Directors, in its discretion, to [_] [_] [_]
direct the vote of proxies upon
such matters incident to the
conduct of the Annual Meeting as
may properly come before the
Annual Meeting, and any
adjournment or postponement
thereof, including, without
limitation, a motion to adjourn
the Annual Meeting.
- --------------------------------------------------------------------------------
The undersigned hereby acknowledges
receipt of the Notice of Annual
Meeting of Shareholders and the Proxy
Statement for the Annual Meeting.
--------------------------------------
--------------------------------------
Signature(s)
Dated:_________________________ , 2000
Please sign exactly as your name
appears on this Proxy. Joint owners
should each sign personally. If
signing as attorney, executor,
administrator, trustee or guardian,
please include your full title.
Corporate or partnership proxies
should be signed by an authorized
officer.
<PAGE>
[LETTERHEAD OF FIRST FEDERAL SAVINGS BANK OF IOWA]
March 27, 2000
To: All Participants in the First Federal Savings Bank of Iowa
Employee Stock Ownership Plan (the "ESOP")
Re: Annual Meeting of Shareholders to be held on April 28, 2000
-----------------------------------------------------------
In connection with the Annual Meeting of Shareholders of North Central
Bancshares, Inc. (the "Company") to be held on April 28, 2000, enclosed are the
following documents:
1. Confidential Voting Instruction Card;
2. Proxy Statement dated March 27, 2000, including a Notice of Annual
Meeting of Shareholders; and
3. a postage-paid return envelope addressed to American Securities
Transfer, Incorporated ("American Securities Transfer"). American
Securities Transfer is the Confidential Voting Instruction tabulator
for the ESOP.
As a participant in the ESOP, you have the right to direct the trustee of
the ESOP (the "ESOP Trustee") how to vote the shares of the Company's common
stock ("Shares") held by the ESOP trust as of March 13, 2000, the record date
for the Annual Meeting ("Record Date"). Your rights will vary depending on
whether the matter being voted on is an "Anticipated Proposal" or an
"Unanticipated Proposal."
Anticipated Proposals.
Under the terms of the ESOP, each participant has the right to instruct the
ESOP Trustee how to vote the Shares allocated to such participant's account
under the ESOP as of the Record Date. In general, the ESOP Trustee will be
instructed to vote such Shares held by the ESOP trust and awarded to you by
casting votes FOR and AGAINST each proposal as specified by you on the
Confidential Voting Instruction Card accompanying this letter. The number of
shares allocated to your account under the ESOP is shown on the enclosed
Confidential Voting Instruction Card.
The ESOP generally states that if you do not direct the ESOP Trustee how to
vote the Shares allocated to your account, such Shares, as well as unallocated
Shares held under the ESOP, will be voted by the ESOP Trustee, to the extent
consistent with its fiduciary duties, in a manner calculated to most accurately
reflect the instructions received from other participants regarding allocated
Shares. The ESOP Trustee's fiduciary duties require it to vote any shares as to
which it receives no
<PAGE>
voting instructions, as well as any unallocated Shares, in a manner determined
by it to be prudent and solely in the interest of the participants and
beneficiaries. To be considered by the ESOP Trustee in determining how to vote
the Shares held by the ESOP trust, your voting instruction must be received by
American Securities Transfer not later than April 24, 2000.
Unanticipated Proposals.
It is possible, although very unlikely, that proposals other than those
specified on the Confidential Voting Instruction Card will be presented for
shareholder action at the 2000 Annual Meeting of Shareholders. If this should
happen, the ESOP Trustee will vote upon such matters in its discretion, or cause
such matters to be voted upon in the discretion of the individuals named in any
proxies executed by it.
* * * * *
Your voting instruction is very important. You are encouraged to review
the enclosed materials carefully and to complete, sign and date the enclosed
Confidential Voting Instruction Card to signify your direction to the ESOP
Trustee. You should then seal the card in the enclosed envelope and return it
--------------------------------------------------------------------
to American Securities Transfer. To direct the voting of Shares within the
- -------------------------------
ESOP, the Confidential Voting Instruction Card must be received by American
Securities Transfer no later than April 24, 2000.
Please note that the voting instructions of individual participants are to
be kept confidential by American Securities Transfer, who has been instructed
not to disclose them to anyone at First Federal Savings Bank of Iowa or the
Company.
This memorandum is subject in its entirety to the information set forth in
the enclosed Proxy Statement, which you are encouraged to read and study
thoroughly. If you have questions regarding the terms of the ESOP or the voting
procedure, please call Mr. C. Thomas Chalstrom at (515) 576-7531.
Very truly yours,
The ESOP Committee of
First Federal Savings Bank of Iowa
Enclosures
<PAGE>
NORTH CENTRAL BANCSHARES, INC.
CONFIDENTIAL VOTING INSTRUCTION
SOLICITED BY THE EMPLOYEE STOCK OWNERSHIP PLAN COMMITTEE
OF NORTH CENTRAL BANCSHARES, INC.
FOR THE FIRST FEDERAL SAVINGS BANK OF IOWA
EMPLOYEE STOCK OWNERSHIP PLAN
The undersigned participant, former participant or beneficiary of a
deceased former participant in the First Federal Savings Bank of Iowa Employee
Stock Ownership Plan (the "ESOP") hereby provides the voting instructions
specified to the trustee of the ESOP (the "Trustee"), which instructions shall
be taken into account by the Trustee in voting, in person, by limited or general
power of attorney, or by proxy, the shares and fractional shares of common stock
of North Central Bancshares, Inc. that are held by the Trustee, in its capacity
as Trustee of the ESOP, as of March 13, 2000 at the 2000 Annual Meeting of
Shareholders of North Central Bancshares, Inc. to be held on April 28, 2000 at
10:00 a.m., Central Time, at the Country Inn, located at 3259 5th Avenue
South, Fort Dodge, Iowa, and at any adjournment or postponement thereof.
As to the proposals listed on the reverse side, which are more particularly
described in the Proxy Statement dated March 27, 2000, the Trustee will vote the
common stock of North Central Bancshares, Inc. held by the ESOP trust to reflect
the voting instructions on this Confidential Voting Instruction, in the manner
described in the accompanying letter from the ESOP Committee dated March 27,
2000.
RETURN THIS SHEET TO AMERICAN SECURITIES TRANSFER ON OR BEFORE APRIL 24,
2000.
(Continued on the reverse side. Please complete, sign and date on the
reverse side and promptly return in the enclosed postage-paid envelope.)
<PAGE>
The Board of Directors of North Central Bancshares, Inc. recommends a vote
"FOR" all nominees in Proposal No. 1 and "FOR" Proposals No. 2 and No. 3. If
this Confidential Voting Instruction is signed but no direction is given, this
voting instruction sheet will be deemed to instruct votes "FOR" all nominees in
Proposal No. 1, and "FOR" Proposals No. 2 and No. 3. The directions, if any,
given in this Confidential Voting Instruction will be kept confidential from all
directors, officers and employees of North Central Bancshares, Inc.
<TABLE>
<CAPTION>
Please mark your votes like this
[X]
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
1. Election of two Directors for terms of three years each. FOR all nominees WITHHOLD as to all nominees
Nominees: David M. Bradley and Robert H. Singer, Jr. (except as otherwise indicated) [_]
[_]
To withhold authority to vote FOR any individual nominee, write that
nominee's name in the space provided:________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- -----------------------------------------------------------------------------------------------------------------------------------
2. Ratification of the appointment of McGladrey & Pullen, LLP as [_] [_] [_]
independent auditors of North Central Bancshares, Inc. for the
fiscal year ending December 31, 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
3. Authorization of the Board of Directors, in its discretion, to [_] [_] [_]
direct the vote of proxies upon such other business as may come
before the Annual Meeting or any adjournment or postponement thereof
or to cause such matters to be voted upon in the discretion of the
individuals named in any proxies executed by the Trustee.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All proposals listed above in this Confidential Voting Instruction were
proposed by North Central Bancshares, Inc.
The undersigned hereby instructs the Trustee to vote in accordance with the
voting instruction indicated above and hereby acknowledges receipt, prior to the
execution of this Confidential Voting Instruction, of a Voting Instruction
Letter, a Notice of Annual Meeting of Shareholders of North Central Bancshares,
Inc., a Proxy Statement dated March 27, 2000 for the Annual Meeting and a 1999
Annual Report to Shareholders.
Please sign and date below and return promptly in the enclosed postage-paid
envelope. Your Confidential Voting Instruction must be received no later than
April 24, 2000.
Date
-----------------------------------------------
Signature
-----------------------------------------------
Signature of participant, former participant or
designated beneficiary of deceased former
participant. Please sign name exactly as it
appears herein. When signing as attorney,
executor, administrator, trustee or guardian,
please give your full title as such.
<PAGE>
[LETTERHEAD OF FIRST FEDERAL SAVINGS BANK OF IOWA]
March 27, 2000
To: All Participants in the First Federal Savings Bank of Iowa
Employees' Savings and Profit Sharing Plan and Trust (the "401(k) Plan")
Re: Annual Meeting of Shareholders to be held on April 28, 2000
-----------------------------------------------------------
As you have been advised, the 401(k) Plan of the First Federal Savings Bank
of Iowa (the "Bank") contains an investment alternative to purchase stock of the
Bank's parent company, North Central Bancshares, Inc. (the "Company") using
funds from your 401(k) Plan account (the "401(k) Plan Stock Fund"). These
shares are held by The Bank of New York, as trustee (the "Trustee") for the
401(k) Plan. Interests in shares that you have purchased in the 401(k) Plan
Stock Fund are being held by the Trustee for your benefit. The 401(k) Plan
allows participants (including former participants and beneficiaries) to have
certain voting rights at the Company's shareholder meetings.
In connection with the Annual Meeting of Shareholders of the Company to be
held on April 28, 2000, enclosed are the following documents:
1. Confidential Voting Instruction Card;
2. Proxy Statement dated March 27, 2000, including a Notice of Annual
Meeting of Shareholders; and
3. a postage-paid return envelope addressed to American Securities
Transfer, Incorporated ("American Securities Transfer"). American
Securities Transfer is the Confidential Voting Instruction tabulator
for the 401(k) Plan.
As a participant in the 401(k) Plan, you have the right to direct the
voting of your shares in the 401(k) Plan Stock Fund as of March 13, 2000, the
record date for the Annual Meeting ("Record Date"), on the proposals to be voted
by the Company's shareholders. Your rights as a participant in the 401(k) Plan
will vary depending on whether the matter being voted on is an "Anticipated
Proposal" or an "Unanticipated Proposal."
Anticipated Proposals.
In general, 401(k) Plan participants have the right to direct how their
shares in the 401(k) Plan Stock Fund are to be voted. The Named Fiduciary of
the 401(k) Plan ("Named Fiduciary") will
<PAGE>
direct the Trustee to vote FOR and AGAINST each proposal specified on the
Confidential Voting Instruction Card in the same proportions as instructions to
cast votes FOR and AGAINST such proposal are given by 401(k) Plan participants
entitled to give voting instructions. The instructions given by each 401(k) Plan
participant will be weighted according to the value of his or her respective
interest in the 401(k) Plan Stock Fund as of the Record Date. For purposes of
the 401(k) Plan, if you ABSTAIN as to a proposal, or if you do not return your
Confidential Voting Instruction Card for the 401(k) Plan to American Securities
Transfer by April 24, 2000, your instructions will not be counted.
If you do not have any shares of Company stock allocated to your 401(k)
Plan Stock Fund as of the Record Date, there will be no Confidential Voting
Instruction Card for the 401(k) Plan enclosed with this letter.
Unanticipated Proposals.
It is possible, although very unlikely, that proposals other than those
specified on the Confidential Voting Instruction Card will be presented for
shareholder action at the 2000 Annual Meeting of Shareholders. If this should
happen, the Named Fiduciary will direct the Trustee how to vote on such matters
in the Named Fiduciary's discretion, or cause such matters to be voted upon in
the discretion of the individuals named in any proxies executed by the Trustee
at the Named Fiduciary's discretion.
* * * * *
Your voting instruction is very important. You are encouraged to review
the enclosed material carefully and to complete, sign and date the enclosed
Confidential Voting Instruction Card to signify your direction to the Named
Fiduciary. You should then seal the completed card in the enclosed envelope and
--------------------------------------------------------------------
return it directly to American Securities Transfer using the postage-paid return
- --------------------------------------------------------------------------------
envelope provided. The Confidential Voting Instruction Card must be received by
- -----------------
American Securities Transfer no later than April 24, 2000.
Please note that the voting instructions of individual participants are to
be kept confidential by American Securities Transfer and the Trustee, who have
been instructed not to disclose them to anyone at the Bank or the Company.
<PAGE>
This memorandum is subject in its entirety to the information set forth in
the enclosed Proxy Statement, which you are encouraged to read and study
thoroughly. If you have questions regarding the terms of the 401(k) Plan or the
voting procedure, please call Mr. C. Thomas Chalstrom at (515) 576-7531.
Very truly yours,
The Personnel and Compensation Committee
of First Federal Savings Bank of Iowa
Enclosures
<PAGE>
NORTH CENTRAL BANCSHARES, INC.
CONFIDENTIAL VOTING INSTRUCTION
SOLICITED BY THE PERSONNEL AND COMPENSATION COMMITTEE
OF NORTH CENTRAL BANCSHARES, INC.
FOR THE FIRST FEDERAL SAVINGS BANK OF IOWA
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN AND TRUST
The undersigned participant, former participant or beneficiary of a
deceased former participant in the First Federal Savings Bank of Iowa Employees'
Savings and Profit Sharing Plan and Trust (the "401(k) Plan") hereby provides
the voting instructions specified to the Named Fiduciary of the 401(k) Plan (the
"Named Fiduciary"), which instructions shall be taken into account by the Named
Fiduciary in directing the Trustee of the 401(k) Plan ("Trustee") in voting, in
person, by limited or general power of attorney, or by proxy, the shares and
fractional shares of common stock of North Central Bancshares, Inc. that are
held by the Trustee, in its capacity as Trustee of the 401(k) Plan, as of March
13, 2000 at the 2000 Annual Meeting of Shareholders of North Central Bancshares,
Inc. to be held on April 28, 2000 at 10:00 a.m., Central Time, at the Country
Inn, located at 3259 5th Avenue South, Fort Dodge, Iowa, and at any
adjournment or postponement thereof.
As to the proposals listed on the reverse side, which are more particularly
described in the Proxy Statement dated March 27, 2000, the Trustee will vote the
common stock of North Central Bancshares, Inc. held by the 401(k) Plan trust to
reflect the voting instructions on this Confidential Voting Instruction, in the
manner described in the accompanying letter from the Personnel and Compensation
Committee dated March 27, 2000.
RETURN THIS SHEET TO AMERICAN SECURITIES TRANSFER ON OR BEFORE APRIL 24,
2000.
(Continued on the reverse side. Please complete, sign and date on the
reverse side and promptly return in the enclosed postage-paid envelope.)
<PAGE>
The Board of Directors of North Central Bancshares, Inc. recommends a vote
"FOR" all nominees in Proposal No. 1 and "FOR" Proposals No. 2 and No. 3. If
this Confidential Voting Instruction is signed but no direction is given, this
voting instruction sheet will be deemed to instruct votes "FOR" all nominees in
Proposal No. 1, and "FOR" Proposals No. 2 and No. 3. The directions, if any,
given in this Confidential Voting Instruction will be kept confidential from all
directors, officers and employees of North Central Bancshares, Inc.
<TABLE>
<CAPTION>
Please mark your votes like this
[X]
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
1. Election of two Directors for terms of three years each. FOR all nominees WITHHOLD as to all nominees
Nominees: David M. Bradley and Robert H. Singer, Jr. (except as otherwise indicated) [_]
[_]
To withhold authority to vote FOR any individual nominee, write that
nominee's name in the space provided:_______________________________
- ------------------------------------------------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- ------------------------------------------------------------------------------------------------------------------------------------
2. Ratification of the appointment of McGladrey & Pullen, LLP as [_] [_] [_]
independent auditors of North Central Bancshares, Inc. for the
fiscal year ending December 31, 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
3. Authorization of the Board of Directors, in its discretion, to [_] [_] [_]
direct the vote of proxies upon such other business as may come
before the Annual Meeting or any adjournment or postponement thereof
or to cause such matters to be voted upon in the discretion of the
individuals named in any proxies executed by the Trustee.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All proposals listed above in this Confidential Voting Instruction were
proposed by North Central Bancshares, Inc.
The undersigned hereby instructs Named Fiduciary to direct the Trustee to
vote in accordance with the voting instruction indicated above and hereby
acknowledges receipt, prior to the execution of this Confidential Voting
Instruction, of a Voting Instruction Letter, a Notice of Annual Meeting of
Shareholders of North Central Bancshares, Inc., a Proxy Statement dated March
27, 2000 for the Annual Meeting and a 1999 Annual Report to Shareholders.
Please sign and date below and return promptly in the enclosed postage-paid
envelope. Your Confidential Voting Instruction must be received no later than
April 24, 2000.
Date
-------------------------------------------------------
Signature
-------------------------------------------------------
Signature of participant, former participant or
designated beneficiary of deceased former participant.
Please sign name exactly as it appears herein. When
signing as attorney, executor, administrator, trustee
or guardian, please give your full title as such.
<PAGE>
Exhibit 99.2 Press Release
PRESS RELEASE
October 29, 1999
For further information contact:
David M. Bradley
Chairman, President and Chief Executive Officer
North Central Bancshares, Inc.
825 Central Avenue
Fort Dodge, Iowa 50501
515-576-7531
NORTH CENTRAL BANCSHARES, INC. ANNOUNCES
STOCK REPURCHASE PROGRAM
Fort Dodge, Iowa, October 29, 1999 - North Central Bancshares, Inc. (Nasdaq:
"FFFD") (the "Company"), the holding company for First Federal Savings Bank of
Iowa, announced that it will commence a stock repurchase program beginning on or
about November 4, 1999. The program authorizes the Company to repurchase up to
6.36% or 150,000 shares of its 2,357,242 outstanding shares of common stock
during the next twelve months. The repurchases will be made from time to time,
in open market transactions, at the discretion of management.
North Central Bancshares, Inc., with over $367 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 8 full service locations in Fort Dodge, Nevada, Ames, Burlington, Mt.
Pleasant, and Perry, Iowa. First Federal's deposits are insured by the Federal
Deposit Insurance Corporation.
<PAGE>
Exhibit 99.3 Press Release
PRESS RELEASE
November 19, 1999 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 today that the Company
declared a regular quarterly cash dividend of $0.10 per share on the Company's
common stock for the fiscal quarter ended December 31, 1999. The dividend will
be payable to all stockholders of record as of December 20, 1999 and will be
paid on January 6, 2000.
North Central Bancshares, Inc. serves north central and southeastern Iowa at 8
full service locations in Fort Dodge, Nevada, Ames, Burlington, Mount Pleasant
and Perry, 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".
<PAGE>
Exhibit 99.4 Press Release
PRESS RELEASE
January 18,2000 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 FOURTH QUARTER
AND YEAR END 1999 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 $0.43 diluted earnings per share for the fourth quarter
of 1999, compared to diluted earnings per share of $0.36 for the fourth quarter
of 1998, an increase of 19.4%. In dollars, the Company earned $981,000 for the
fourth quarter of 1999, compared to $1,089,000 for the fourth quarter of 1998.
For the year ended December 31, 1999, the Company's net earnings were $4.2
million, or diluted earnings per share of $1.60, as compared to $4.4 million, or
diluted earnings per share of $1.40, for the corresponding period a year ago, an
increase in diluted earnings per share of 14.3%.
Total assets at December 31, 1999 were $367.4 million as compared to $336.7
million at December 31, 1998. The increase in assets resulted primarily from
increases in loans and premises and equipment, offset by a decrease in cash.
Cash decreased $3.1 million, or 19.0%, from $15.6 million at December 31, 1998
to $12.7 million at December 31, 1999. Loans increased by $32.8 million, or
12.9 %, to $286.8 million at December 31, 1999 from $254.0 million at December
31, 1998. Premises and equipment increased $1.7 million, or 48.1%, to $5.4
million at December 31, 1999 from $3.6 million at December 31, 1998.
Deposits increased $24.3 million, or 9.9%, to $271.0 million at December 31,
1999 from $246.7 million at December 31, 1998. Other borrowed funds increased
$16.9 million, or 43.5%, to $55.7 million at December 31, 1999 from $38.8
million at December 31, 1998.
On January 30, 1998, the Bank completed the acquisition of Valley Financial
Corp., headquartered in Burlington, Iowa. The acquisition resulted in the
merger of Valley Financial's wholly owned subsidiary, Valley Savings Bank, FSB,
into First Federal Savings Bank of Iowa. Valley Savings was a federally-charted
stock savings bank with three branch offices located in southeastern Iowa, with
assets of approximately $110 million.
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 December 31, 1998. Therefore, the comparison between periods is
significantly impacted by this acquisition.
- MORE -
<PAGE>
The unaudited pro forma consolidated statement of income for the year ended
December 31, 1998, presented in this press release is based on the historical
financial statements of the Company and Valley Financial and was prepared as if
the acquisition had occurred as of the beginning of the period for the purposes
of the combined consolidated statement of income.
The pro forma financial statement of income is 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.
Nonperforming assets were 0.20% of total assets as of December 31, 1999 compared
to 0.34% of total assets as of December 31, 1998. The allowance for loan losses
was $2.8 million or 0.95% of total loans at December 31, 1999, compared to $2.7
million or 1.03% of total loans at December 31, 1998.
The net interest spread for the year ended December 31, 1999 of 2.86% was
increased from the pro forma net interest spread of 2.81% for the year ended
December 31, 1998. The net interest margin for the year ended December 31, 1999
of 3.35% was a decrease from the pro forma net interest margin of 3.46% for the
year ended December 31, 1998. Net interest income for the year ended December
31, 1999 was $11.0 million, compared to pro forma net interest income of $10.9
million for the corresponding period a year ago.
The Bank's provision for loan losses was $120,000 for the year ended December
31, 1999, compared to a pro forma provision for loan loss of $210,000 for the
corresponding period a year ago. 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 Bank's
portfolio, and other factors related to the collectibility of the Bank's loan
portfolio.
Stockholders' equity was $38.1 million at December 31, 1999, compared to $48.2
million at December 31, 1998. Book value, or stockholders' equity, per share at
December 31, 1999 was $16.86 and was $16.26 at December 31, 1998. The ratio of
stockholders' equity to total assets was 10.4% at December 31, 1999, as compared
to 14.3% for the corresponding date in 1998.
Stockholders of record on December 20, 1999, received a quarterly cash dividend
of $0.10 per share on January 6, 2000.
The Bank opened a newly constructed 3,000 square foot branch office on June 1,
1999 in Perry, Iowa in Dallas County. Also on October 1, 1999, the Bank began
construction on a new 8,000 square foot branch office in Ames, Iowa. When
completed during the summer of 2000, the Bank's current Ames branch office will
relocate to this new site.
North Central Bancshares, Inc. serves north central and southeastern Iowa at 8
full service locations in Fort Dodge, Nevada, Ames, Perry, 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>
(Dollars in Thousands, except per share and share data) December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 12,669 $ 15,637
Securities available for sale 49,693 49,883
Loans (net of allowance of loan loss of $2.8
million and $2.7 million, respectively) 286,838 254,032
Goodwill 5,915 6,388
Other assets 12,318 10,750
----------- -----------
Total Assets $ 367,433 $ 336,690
========== ==========
Liabilities
Deposits $ 271,031 $ 246,690
Other borrowed funds 55,715 38,832
Other liabilities 2,560 2,961
---------- ----------
Total Liabilities 329,306 288,483
Stockholders' Equity 38,127 48,207
---------- ----------
Total Liabilities and Stockholders' Equity $ 367,433 $ 336,690
========== ==========
Stockholders' equity to total assets 10.38% 14.32%
========== ==========
Book value per share $ 16.86 $ 16.26
========== ==========
Total shares outstanding 2,261,742 2,964,449
========== ==========
</TABLE>
Condensed Consolidated Statements of Income
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Year
Ended December 31, Ended December 31,
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest income $6,455 $6,041 $24,556 $23,602
Interest expense 3,778 3,387 13,604 12,869
------ ------ ------- -------
Net interest income 2,677 2,654 10,952 10,733
Provision for loan loss 30 30 120 210
------ ------ ------- -------
Net interest income after provision for loan loss 2,647 2,624 10,832 10,523
Noninterest income 959 1,125 4,002 3,864
Gain on the sale of securities available for sale -- -- 61 51
Noninterest expense 2,115 2,055 8,454 7,572
Income before income taxes ------ ------ ------- -------
1,491 1,694 6,441 6,866
Income taxes 510 605 2,241 2,481
------ ------ ------- -------
Net income $ 981 $1,089 $ 4,200 $ 4,385
====== ====== ======= =======
Basic earnings per share $ 0.44 $ 0.37 $1.63 $1.44
====== ====== ======= =======
Diluted earnings per share $ 0.43 $ 0.36 $1.60 $1.40
====== ====== ======= =======
</TABLE>
Selected Financial Ratios
<TABLE>
<CAPTION>
For the Three Months For the Year
Ended December 31, Ended December 31,
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Performance ratios: Actual
Net interest spread 2.79% 2.80% 2.86% 2.81%
Net interest margin 3.11% 3.38% 3.35% 3.50%
Return on average assets 1.07% 1.30% 1.21% 1.35%
Return on average equity 10.07% 8.77% 9.51% 8.73%
Efficiency ratio (noninterest expense divided by the
sum of net interest income before provision for
loan losses plus noninterest income) 58.17% 54.39% 56.30% 51.69%
</TABLE>
<PAGE>
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Year
Ended December 31,
Actual Pro Forma*
1999 1998
-------- ---------
<S> <C> <C>
Interest income $24,556 $24,224
Interest expense 13,604 13,319
------- -------
Net interest income 10,952 10,905
Provision for loan loss 120 210
------- -------
Net interest income after provision for loan loss 10,832 10,695
Noninterest income 4,002 3,917
Gain on the sale of securities available for sale 61 51
Noninterest expense 8,454 7,978
------- -------
Income before income taxes 6,441 6,685
Income taxes 2,241 2,440
------- -------
Net income $ 4,200 $ 4,245
======= =======
</TABLE>
*See explanatory note below.
Selected Financial Ratios
<TABLE>
<CAPTION>
For the Year
Ended December 31,
Actual Pro Forma *
1999 1998
------- -------
<S> <C> <C>
Performance ratios
Net interest spread 2.86% 2.81%
Net interest margin 3.35% 3.46%
Return on average assets 1.21% 1.27%
Return on average equity 9.51% 8.45%
Efficiency ratio (noninterest expense divided by the
sum of net interest income before provision for
loan losses plus noninterest income) 56.30% 53.64%
</TABLE>
*See explanatory note below.
*Pro Forma Consolidated Condensed Statement of Income (Unaudited)
The above unaudited pro forma consolidated statement of income presented is
based on the historical financial statements of the Company and Valley
Financial. The unaudited pro forma consolidated statement of income for the
year ended December 31, 1998 was prepared as if the acquisition had occurred as
of the beginning of the respective period for purposes of the combined
consolidated statement of income.
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.
