<PAGE> 1
==============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-22800
NORTH BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 36-3915073
(State or other jurisdiction I.R.S. Employer
of Incorporation or organization) Identification Number
100 West North Avenue, Chicago, Illinois 60610-1399
(Address of Principal Executive Offices) (Zip Code)
(312) 664-4320
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
As of October 31, 1996, there were outstanding 1,066,631 shares of the
Registrant's Common Stock.
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
==============================================================================
<PAGE> 2
NORTH BANCSHARES, INC.
Table of Contents
Part I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II - OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8K 14
FORM 10QSB SIGNATURE PAGE 16
<PAGE> 3
Part I. Financial Information
Item 1. Consolidated Financial Statements
<TABLE>
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<CAPTION>
ASSETS SEPT 30, 1996 DEC 31, 1995
(UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 763 $ 607
Interest-bearing deposits 2,084 2,634
Investment in dollar denominated mutual funds 554 1,127
Federal funds sold 975 3,925
------ ------
TOTAL CASH AND CASH EQUIVALENTS 4,376 8,293
====== ======
Investment securities available for sale 31,243 27,882
Investment securities held-to-maturity - 498
Mortgage-backed securities available for sale - 6,927
Mortgage-backed securities held-to-maturity 7,908 9,419
Loans receivable, net of allowance for loan
losses of $208 at September 30, 1996 and
$200 at December 31, 1995 69,994 56,161
Accrued interest receivable 1,255 959
Premises and equipment, net 939 834
Stock in Federal Home Loan Bank of Chicago 1,087 624
Other assets 79 71
------- -------
TOTAL ASSETS $116,881 $111,668
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts $ 72,457 $75,169
Borrowed funds 23,748 11,750
Advance payments by borrowers for
taxes and insurance 585 1,079
Amounts due to broker for investments
purchased - 1,000
Other liabilities 2,405 1,642
------- -------
TOTAL LIABILITIES 99,195 90,640
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. 500,000
shares authorized; none outstanding - -
Common stock, $.01 Par value. 3,500,000
shares authorized; 1,437,501 shares issued,
1,072,131 outstanding at September 30, 1996 and
1,232,478 outstanding at December 31, 1995 14 14
Additional paid-in capital 13,625 13,629
Retained earnings, substantially restricted 10,583 10,949
Treasury stock at cost (365,370 shares at
September 30, 1996 and 205,023 shares at
December 31, 1995) (5,110) (2,599)
Unrealized gain (loss) on securities
available for sale, net of tax effect (781) 90
SFAS No. 87 adjustment, net of tax effect (128) (128)
Common stock acquired by Employee Stock
Ownership Plan (694) (778)
Deferred compensation (93) (149)
------- -------
TOTAL STOCKHOLDERS' EQUITY 17,686 21,028
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $116,881 $111,668
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 4
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $1,348 $1,068 $3,729 $3,066
Interest-bearing deposits and federal funds sold 94 77 246 234
Investment securities available for sale 593 416 1,748 1,096
Investment securities held-to-maturity - 6 2 131
Mortgage-backed securities available for sale - - 90 -
Mortgage-backed securities held-to-maturity 148 312 440 867
Investment in mutual funds - 21 - 158
Dividends on FHLB of Chicago stock 18 10 47 28
----- ----- ----- -----
TOTAL INTEREST INCOME 2,201 1,910 6,302 5,580
----- ----- ----- -----
INTEREST EXPENSE
Deposit accounts 817 846 2,503 2,469
Borrowed funds 377 193 972 628
----- ----- ----- -----
TOTAL INTEREST EXPENSE 1,194 1,039 3,475 3,097
----- ----- ----- -----
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 1,007 871 2,827 2,483
PROVISION FOR LOAN LOSSES - 9 8 33
----- ----- ----- -----
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,007 862 2,819 2,450
----- ----- ----- -----
NON-INTEREST INCOME
Gain on sale of investment securities
and mutual funds available for sale (1) 71 7 238
Fees and service charges 46 32 133 89
Other 18 10 30 19
----- ----- ----- -----
TOTAL NON-INTEREST INCOME 63 113 170 346
----- ----- ----- -----
NON-INTEREST EXPENSE
Compensation and benefits 362 329 1,039 1,037
Occupancy expense 106 96 307 292
Professional fees 22 37 125 125
Data processing 31 23 90 71
Advertising and promotion 26 26 123 76
Federal deposit insurance premium 538 50 642 147
Recognition and retention plan 19 18 56 97
Other 102 65 258 210
----- ----- ----- -----
TOTAL NON-INTEREST EXPENSE 1,206 644 2,640 2,055
----- ----- ----- -----
INCOME BEFORE TAXES (136) 331 349 741
INCOME TAX EXPENSE (68) 133 97 179
----- ----- ----- -----
NET INCOME $ (68) $ 198 $ 252 $ 562
===== ===== ===== =====
PRIMARY EARNINGS PER SHARE $(.06) $.16 $.22 $.46
FULLY DILUTED EARNINGS PER SHARE $(.06) $.16 $.22 $.46
WEIGHTED AVERAGE SHARES OUTSTANDING 1,065,277 1,215,610 1,119,323 1,229,255
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 5
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPT 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 252 $ 562
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 51 41
Provision for loan losses 8 33
Deferred loan fees, net of amortization (89) 33
Amortization of premiums and discounts 139 (16)
Amortization of cost of stock benefit plans 140 182
Gain on sale of investment securities and mutual
funds available for sale (7) (238)
Federal Home Loan Bank of Chicago stock dividend - (8)
Changes in assets and liabilities:
Increase in accrued interest receivable (296) 85
Increase in other assets (8) (34)
Increase in other liabilities, net 1,331 1,034
------ ------
Net cash provided by operating activities 1,521 1,494
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of dollar denominated mutual funds - (3,949)
Purchase of investment securities available for sale (14,893) (15,630)
Purchase of investment securities held-to-maturity - (1,000)
Proceeds from sales of mortgage-backed securities
available for sale 6,496 -
Proceeds from sales of investment securities and mutual
funds available for sale 3,500 11,131
Maturities of investment securities available for sale 6,600 11,500
Maturities of investment securities held-to-maturity 500 4,000
Purchase of mortgage-backed securities - (1,961)
Loan originations (21,681) (13,544)
Loan repayments 7,929 4,855
Repayments of mortgage-backed securities 1,797 2,055
Purchase of Federal Home Loan Bank of Chicago Stock (463) (113)
Purchase of premises and equipment (156) (89)
Decrease in payable to brokers (1,000) -
------ ------
Net cash (used in) investing activities (11,371) (745)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit accounts (2,712) 2,979
Increase (decrease) in advance payments by borrowers for
taxes and insurance (494) 468
Increase (decrease) in borrowings 11,998 (2,976)
Purchase of treasury stock (2,525) (1,283)
Exercise of stock options 14 -
Dividends paid (348) (324)
------ ------
Net cash provided by (used in) financing activities (5,933) (1,136)
------ ------
Net decrease in cash and cash equivalents (3,917) (387)
Cash and cash equivalents at beginning of period 8,293 6,385
------ ------
Cash and cash equivalents at end of period $ 4,376 $ 5,998
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments during the period for:
Interest 2,805 2,192
Income taxes 82 110
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 6
NORTH BANCSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10
of Regulation S-B Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the consolidated financial statements
contain all adjustments (which are normal and recurring in nature) necessary
for a fair presentation of the financial condition as of December 31, 1995
and September 30, 1996 and results of operations for the three-month period
ended September 30, 1996 and September 30, 1995 and the nine-month period
ended September 30, 1996 and September 30, 1995, but are not necessarily
indicative of the results which may be expected for the entire year.
(2) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of North Bancshares, Inc. (the "Company"), and its wholly-owned subsidiary
North Federal Savings Bank (the "Bank"), and its subsidiary North Financial
Corporation. All significant intercompany accounts and transactions have
been eliminated in consolidation.
(3) Earnings Per Share
Earnings per share of common stock have been determined by dividing net
income for the period by the weighted average number of shares of common stock
and common stock equivalents outstanding for the three months ended September
30, 1996 and September 30, 1995 and for the nine months ended September 30,
1996 and September 30, 1995. Stock options are treated as common stock
equivalents and are therefore considered in both primary and fully diluted
earnings per share calculations. Shares purchased by the Employee Stock
Ownership Plan in the conversion but not allocated to participants have been
excluded from the primary and fully diluted earnings per share calculation.
Common stock equivalents are computed using the treasury stock method and
committed ESOP shares are computed using the released shares outstanding
method.
(4) Stock Repurchase Program
On July 25, 1996, the Company announced its sixth stock repurchase
program of 5% or 55,681 of its outstanding shares. The shares will be
repurchased in open market transactions or in unsolicited privately negotiated
transactions. As of September 30, 1996, 41,500 shares had been repurchased at
an average cost of $16.05 per share. Management believes that stock
repurchase programs provide enhanced value to both the Stockholders and the
Company.
(5) Reclassifications
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
(6) Commitments and Contingencies
<PAGE> 7
At September 30, 1996 the Bank had outstanding commitments to originate
mortgage loans in the amount of $1.1 million.
As a credit enhancement, the Bank has guaranteed the repayment of $1.0
million of a $17.0 million municipal revenue bond secured by a first mortgage
loan on a 216 unit apartment building project in Arlington Heights, Illinois,
which includes retail space on the ground floor of the building. Currently
the Bank has pledged United States Treasury and agency securities with an
amortized cost of $1.2 million. Although the project has maintained a 90% to
95% occupancy rate, the above market interest costs on the bonds are barely
met by the cash flows of the project. During the quarter ended September 30,
1996, the Bank provided specific reserves of $29,000 for this project, and
has recorded $49,000 as of September 30, 1996 in other expense. Management
is currently reviewing a number of financial options recommended by the lead
lender in the project.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is a Delaware corporation which was organized in 1993 by the
Bank for the purpose of becoming a savings and loan holding company. The
Company owns all of the outstanding stock of the Bank issued on December 21,
1993, in connection with the completion of its conversion from the mutual to
the stock form of organization. The Company issued 1,388,625 shares of common
stock at $10.00 per share with an additional 48,876 shares of common stock
issued from authorized and unissued shares as part of a Management Recognition
and Retention Plan.
The primary business of the Company is that of a community-oriented
financial institution offering a variety of financial services to meet the
needs of the communities it serves. The Company attracts deposits from the
general public, borrows funds or enters into reverse repurchase agreements and
uses such funds to originate or acquire one- to-four family residential
mortgages and loans secured by small apartment buildings or mixed-use
properties. To a lesser extent, the Company originates consumer loans in its
primary market area. The Company also invests in mortgage-backed securities,
U. S. Government and agency securities, investment grade securities, common
stocks of other financial institutions and money market accounts.
The Company's consolidated results of operations are primarily dependent
on net interest income, which is the difference between the interest income
earned on interest-earning assets and the interest paid on deposits and other
borrowings, and to a lesser degree on non-interest income and non-interest
expense. The Company's operating expenses consist principally of employee
compensation and benefits, occupancy expenses, federal insurance premiums and
other general and administrative expenses. The Company's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
The Company's net loans receivable increased $13.8 million or 24.6% from
$56.2 million at December 31, 1995 to $70.0 million at September 30, 1996.
The Bank continues to develop relationships with mortgage brokers and focus
its marketing efforts on both owner occupied and non-owner occupied
one-to-four unit dwellings and small apartment buildings. In order to more
effectively compete for loan originations in its market area, the Company
offers low down payment mortgages to homebuyers accompanied with appropriate
mortgage insurance. The Bank has a First Time Homebuyer Program for purchases
within its delineated community, acquires loans from mortgage brokers,
participates with other lenders in large commercial property loans or
purchases loans from other financial institutions. For the nine months ended
September 30, 1996 the Bank originated $21.7 million in mortgage, consumer and
commercial loans of which $9.5 million or 43.8% are adjustable rate or balloon
<PAGE> 8
type mortgages. Approximately 55% of total originations in 1996 are located
within the Bank's CRA assessment areas. Of the $21.7 million in loans
originated during the nine months ended September 30, 1996, $14.4 million were
for the purchase of properties and $7.3 million were refinancings. $729,000
of the refinancings were from the Bank's existing portfolio.
The Company continues to believe that maintaining loan delinquencies at
the lowest possible levels is imperative to achieving adequate profitability,
and will continue its policy of underwriting loans that it originates and
acquires in what it believes is a conservative and consistent manner. At
September 30, 1996 there were no loans delinquent 90 days or more compared
with $24,000 as of December 31, 1995. The allowance for loan losses at
September 30, 1996 was $208,000 as compared with $200,000 at December 31,
1995. In addition, $49,000 has been recorded as a specific reserve for the
Credit Enhancement.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, and in future filings by the Company with
the SEC, in the company's press releases or other public or shareholder
communications, and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected
to", "will continue", "is anticipated", "estimate", "project" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties - including, changes
in economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made.
The Company wishes to advise readers that the factors listed above could
affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current statements.
The Company does not undertake -- and specifically disclaims any
obligation -- to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated
or unanticipated events.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, sales and maturities of
other investment securities, borrowings from the Federal Home Loan Bank of
Chicago and reverse repurchase agreements. The Company uses its liquid
resources to fund loan commitments, to meet operating expenses, to purchase
investment securities and to fund deposit withdrawals. Management believes
that these sources of funds will be adequate to meet the liquidity needs of
the Company for the balance of the fiscal year.
The OTS requires minimum levels of liquid assets. OTS regulations
currently require the Bank to maintain an average daily balance of liquid
assets equal to at least 5% of the sum of its average daily balance of net
withdrawable accounts and borrowings payable in one year or less. At
September 30, 1996 the Bank's liquidity ratio was 10.4%, compared with 24.1%
at December 31, 1995. In addition, the Bank is required to maintain short
term liquid assets equal to at least 1.0% of the average sum of net
withdrawable deposits and other borrowings. The Bank's short term liquidity
ratio was 4.1% at September 30, 1996 compared with 12.1% at December 31, 1995.
These levels should remain stable as longer term securities are sold and other
borrowings are used to fund new loan originations.
<PAGE> 9
The primary investing activities of the Company are lending on single
family and small multi-family residential properties, purchases of
mortgage-backed securities and the purchase of U.S. government agency
securities and bankers acceptances. The Company's loan origination marketing
efforts, mortgage broker relationships and participating interests with other
financial institutions have maintained adequate loan demand. Management
believes that adequate liquidity will be available to fund this demand. The
Company does not have the same regulatory restrictions on investments as the
Bank and makes investments in equity securities of financial service firms.
During the quarter ended September 30, 1996, the Company originated $6.0
million in mortgage and consumer loans. Also during the quarter ended
September 30, 1996, $2.6 million of investment securities were sold or
matured. The Company experienced a $2.7 million net savings deposit outflow
and repurchased 41,500 shares of its common stock at an average price of
$16.05 per share for a total cost of $666,000.
Current regulatory standards impose the following capital requirements on
the Bank and other thrifts: a tangible capital ratio expressed as a percentage
of total adjusted assets, a leverage ratio of core capital to total adjusted
assets, and a risk-based capital standard expressed as a percentage of
risk-adjusted assets. At September 30, 1996, the Bank exceeded its
regulatory capital standards. At such date, the Bank's tangible capital, core
capital and risk-based capital of $17.0 million, $17.0 million and $17.2
million, respectively, exceeded the applicable minimum requirements by $15.2
million or 13.0%, $13.5 million or 11.5% and $13.8 million or 32.1%,
respectively.
CHANGES IN FINANCIAL CONDITION
Total assets increased $5.2 million or 4.7% from $111.7 million at
December 31, 1995 to $116.9 million at September 30, 1996. The increase was
primarily attributable to a $17.2 million increase in net loans receivable and
investment securities partially offset by a $8.4 million decrease in
mortgage-backed securities and a $3.9 million decrease in cash and cash
equivalents.
Net loans receivable increased $13.8 million or 24.6% from $56.2 million
at December 31, 1995 to $70.0 million at September 30, 1996. The Company
originated $6.0 million in mortgage and consumer loans during the three months
ended September 30, 1996 and a total of $21.7 million for the nine months
ended September 30, 1996. Repayments of loans during the three months ended
September 30, 1996 amounted to $2.3 million and a total of $7.9 million for
the nine months ended September 30, 1996. The increase was funded primarily
from the sale and repayment of $8.3 million of mortgage-backed securities and
the sales and maturities of investment securities.
Investment securities increased $2.8 million or 9.9% from $28.4 million
at December 31, 1995 to $31.2 million at September 30, 1996. The increase was
primarily attributable to $14.9 million in purchases of investment securities
offset by $10.6 million in maturities and sales of investment securities.
Deposit accounts decreased $2.7 million or 3.6% from $75.2 million at
December 31, 1995 to $72.5 million at September 30, 1996. The decrease was
attributable to the maturity and withdrawal of $2.6 million of $5.5 million
in 18 month Anniversary Certificates that were paid a bonus rate of interest
when issued and $1.4 million in other certificates and passbook accounts,
partially offset by a $1.4 million increase in checking accounts. The total
number of checking accounts has increased by 30.8% since December 31, 1995.
The Company expects to continue to add to the number of checking accounts
during the next quarter but intense competition in the marketplace for these
lower cost liabilities and certificates of deposit will continue.
Borrowed funds increased by $12.0 million or 101.7% from $11.8 million at
December 31, 1995 to $23.8 million at September 30, 1996. The increase is
attributable to $10.0 million in leveraged U. S. Government agency securities
transactions conducted during the first six months of 1996 using FHLB
advances and a $2.0 million reverse repurchase agreement.
<PAGE> 10
Stockholders' Equity totalled $17.7 million or 15.1% of total assets at
September 30, 1996. Retained earnings decreased by $96,000 from $10.9 million
at December 31, 1995 to $10.8 million at September 30, 1996 as a result of
$252,000 in net earnings for the nine months ended September 30, 1996, offset
by $348,000 in dividend payments. A total of $781,000 in unrealized losses,
net of related tax effect, on securities available for sale at September 30,
1996 have been recorded as a component of Stockholders' Equity, a result of
increases in short and long term interest rates. The securities that have
unrealized losses are intermediate and long term securities that will not
produce a loss unless sold prior to maturity. Treasury stock increased by
$2.5 million or 96.2% from $2.6 million at December 31, 1995 to $5.1 million
at September 30, 1996 due to additional stock repurchases, partially offset
by the exercise of stock options.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
AND SPETEMBER 30, 1995
GENERAL. Net income decreased $266,000 or 134.3% from $198,000 for the
three months ended September 30, 1995 to a loss of $68,000 for the three
months ended September 30, 1996. Earnings per primary share decreased $.22
from $.16 per share for the three months ended September 30, 1995 to a loss of
$.06 for the three months ended September 30, 1996. The decrease in per share
earnings was attributable to the $285,000, net of tax, one-time FDIC-SAIF
special assessment recorded as of September 30, 1996. Without the FDIC-SAIF
special assessment, securities sales, and their related tax effects, core
income increased by $54,000 or 34.6% from $156,000 for the three months ended
September 30, 1995 to $210,000 or $.20 per primary share for the three months
ended September 30, 1996.
INTEREST INCOME. Interest income increased $291,000 or 15.3% from $1.9
million for the three months ended September 30, 1995 to $2.2 million for the
three months ended September 30, 1996. The increase was primarily
attributable to a $280,000 increase in interest on loans receivable. The
increase in interest income was primarily a result of an increase in the
annualized yield on average interest-earning assets from 7.23% for the three
months ended September 30, 1995 to 7.61% for the three months ended September
30, 1996 and an increase in average interest-earning assets from $105.6
million for the three months ended September 30,1995 to $115.8 million for
the three months ended September 30,1996. Management believes the Company
will continue to experience modest increases in interest income during the
last quarter of 1996 compared with 1995 as a result of the reallocation of
lower yielding investments into mortgage, consumer and commercial loans.
INTEREST EXPENSE. Interest expense increased $155,000 or 15.5% from $1.0
million for the three months ended September 30, 1995 to $1.2 million for the
three months ended September 30, 1996. The increase was primarily
attributable to a $184,000 increase in interest on borrowed funds, partially
offset by a $29,000 decrease in interest on deposit accounts. The increase in
interest on borrowed funds is a result of $10.0 million in leveraged
securities transactions conducted during the first six months of 1996 and a
$2.0 million reverse repurchase agreement executed during the third quarter.
Under the reverse repurchase agreement, the Company sold certain investment
securities classified available for sale, with an agreement to repurchase the
same securities at a future date. The sale is treated as a financing with the
securities maintained on the balance sheet and the corresponding borrowing
recorded in borrowed funds. The decrease in interest on deposit accounts can be
attributed to a decrease in the annualized average cost of interest-bearing
liabilities from 5.00% for the three months ended September 30, 1995 to 4.93%
for the three months ended September 30, 1996. The decrease in the
annualized average cost of interest-bearing liabilities is the result of
longer term, higher rate certificates of deposit maturing and renewing at
lower rates or being withdrawn and, to a lesser degree a shift in the deposit
mix to lower cost checking and money market accounts. Management believes
that additional interest cost savings will be realized during the fourth
quarter of 1996 and during 1997 as $6.0 million in FHLB advances, at a
weighted average interest rate of 7.21%, are refinanced at lower rates.
<PAGE> 11
PROVISION FOR LOAN LOSSES. The Company recorded no provision for loan
losses for the three months ended September 30, 1996 compared with $9,000 for
the three months ended September 30, 1995. The allowance for loan losses to
total loans receivable amounted to .30% at September 30, 1996 compared with
.35% at September 20, 1995, however there were no loans delinquent 90 days or
more at September 30, 1996 or September 30, 1995. Future additions to the
Company's allowance for loan losses and any change in the related ratio of
the allowance for loan losses to non-performing loans are dependent upon the
performance of the Company's loan portfolio, the economy, changes in real
estate values, interest rates, and the view of the regulatory authorities
toward reserve levels and inflation.
NON-INTEREST INCOME. Non-interest income decreased by $50,000 or 44.2%
from $113,000 for the three months ended September 30, 1995 to $63,000 for the
three months ended September 30, 1996. The decrease was primarily
attributable to a $72,000 decrease in gains on the sale of investment
securities partially offset by a $22,000 increase in other income and fees and
service charges related to an increase in the total number of checking
accounts and interchange fees resulting from foreign ATM transactions and
MasterCard Master Money transactions. Without securities sales, non-interest
income increased by $22,000 or 52.4% for the three months ended September 30,
1996 compared with the three months ended September 30, 1995.
NON-INTEREST EXPENSE. Non-interest expense increased by $562,000 or
87.3% from $644,000 for the three months ended September 30, 1995 to $1.2
million for the three months ended September 30, 1996. The increase was
primarily attributable to the $485,000 FDIC-SAIF special assessment that was
signed into law on September 30, 1996 and an additional $29,000 reserve
charged to other expense for the credit enhancement.
INCOME TAX EXPENSE. The allocation for federal and state income taxes
decreased by $201,000 from $133,000 for the three months ended September 30,
1995 to a benefit of $68,000 for the three months ended September 30, 1996.
The decrease was primarily attributable to federal and state tax effects
associated with the recording of the FDIC-SAIF special assessment.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND SEPTEMBER 30, 1995
GENERAL. Net income decreased by $310,000 or 55.2% from $562,000 for the
nine months ended September 30, 1995 to $252,000 for the nine months ended
September 30, 1996. Earnings per primary share decreased $.24 from $.46 for
the nine months ended September 30, 1995 to $.22 for the nine months ended
September 30, 1996. The decrease was attributable to the $285,000, net of tax,
one time FDIC-SAIF special assessment. Without the FDIC-SAIF special
assessment and securities sales, and their related tax effect, net income
increased $214,000 or 64.5% from $332,000 for the nine months ended September
30, 1995 to $546,000 for the nine months ended September 30, 1996.
INTEREST INCOME. Interest income increased $772,000 or 12.9% from $5.6
million for the nine months ended September 30, 1995 to $6.3 million for the
nine months ended September 30, 1996. The increase was primarily attributable
to a $1.4 million increase in interest on loans receivable and investment
securities and mortgage-backed securities, available for sale, partially
offset by a $512,000 decrease in interest on investment securities and
mortgage-backed securities, held to maturity and interest on mutual funds.
This increase in interest income is primarily the result of an increase in
the annualized yield on average interest-earning assets from 7.05% for the
nine months ended September 30, 1995 to 7.44% for the nine months ended
September 30, 1996 and an increase in average interst-earning assets from
$105.6 million for the nine months ended September 30, 1995 to $113.0 million
for the nine months ended September 30, 1996. Management believes the
Company will continue to experience modest increases in interest income
during the last quarter of 1996 compared with 1995 as a result of the
reallocation of lower yielding investments into mortgage, consumer and
commercial loans.
<PAGE> 12
INTEREST EXPENSE. Interest expense increased by $378,000 or 12.2% from
$3.1 million for the nine months ended September 30, 1995 to $3.5 million for
the nine months ended September 30, 1996. The increase was primarily
attributable to a $344,000 increase in interest on borrowed funds from
$628,000 for the nine months ended September 30, 1995 to $972,000 for the nine
months ended September 30, 1996. This increase is attributable to an
additional $10.0 million in FHLB advances borrowed during the first six months
of 1996 and a $2.0 million reverse repurchase agreement. In addition, the
average cost of interest-bearing liabilities decreased from 4.96% for the
nine months ended September 30, 1995 to 4.88% for the nine months ended
September 30, 1996. Management believes that some interest cost savings will
be realized during the fourth quarter of 1996 and during 1997 as $6.0 million
in FHLB advances, at a weighted average interest rate of 7.21%, are refinanced
at lower rates.
PROVISION FOR LOAN LOSSES. The Company recorded $8,000 in provision for
loan losses for the nine months ended September 30, 1996 compared with $33,000
for the nine months ended September 30, 1995. The allowance for loan losses
to total loan receivable amounted to .30% at September 30, 1996 compared with
.35% at September 30, 1995, however there were no loans 90 days or more
delinquent as of September 30, 1996 or September 30, 1995. Future additions
to the Company's allowance for loan losses and any change in the related
ratio of the allowance for loan losses to non-performing loans are dependent
upon the performance of the Company's loan portfolio, the economy, changes in
real estate values, interest rates, and the view of the regulatory
authorities toward reserve levels and inflation.
NON-INTEREST INCOME. Non-interest income decreased by $176,000 or 50.9%
from $346,000 for the nine months ended September 30, 1995 to $170,000 for the
nine months ended September 30, 1996. The decrease was primarily attributable
to a $231,000 decrease in gains on the sale of investment securities and
mutual funds, partially offset by a $55,000 increase in fees and service
charges related to increases in the total number of checking accounts and in
interchange fees resulting from foreign ATM transactions and MasterCard Master
Money transactions.
NON-INTEREST EXPENSE. Non-interest expense increased by $585,000 or
27.9% from $2.1 million for the nine months ended September 30, 1995 to $2.6
million for the nine months ended September 30, 1996. The increase was
primarily attributable to the $485,000 SAIF special assessment recorded on
September 30, 1996. In addition, there was a $47,000 increase in advertising
and promotion expense related to the Bank's 110th Anniversary and the
introduction of new products and a $49,000 increase in other expense related
to the reserve established for the credit enhancement.
INCOME TAX EXPENSE. The allocation for federal and state income taxes
decreased by $82,000 from $179,000 for the nine months ended September 30,
1995 to $97,000 for the nine months ended September 30, 1996 for an effective
tax rate of 27.9%. The decrease was primarily attributable to the federal and
state tax effect associated with the recording of the FDIC-SAIF special
assessment.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND OTHER REGULATORY ISSUES
On May 12, 1995, the FASB issued a Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights (MSRs) (an
amendment to Statement No. 65)." SFAS 122 provides for capitalization of MSRs
when mortgage loans are either originated or purchased and the underlying loan
is sold or securitized with the MSR retained. The statement applies to
<PAGE> 13
servicing rights resulting from mortgage loans only and was effective for the
Company as of January 1, 1996. The Bank is currently not originating mortgage
loans for sale and therefore the adoption of SFAS 122 did not impact the
Company during the first three quarters of 1996.
During 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This Statement provides guidance for recognition and measurement of impairment
of long-lived assets, certain identifiable intangibles and goodwill related
both to assets to be held and used, and assets of which are to be disposed.
The Statement is effective for financial statements issued for fiscal years
beginning after December 31, 1995, and is not anticipated to have a
significant impact on the financial results of the Company.
During 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" which provides new accounting guidelines over the
treatment of employee stock options. The Statement gives entities a choice of
either adopting a new fair value method of accounting for employee stock
options and expensing any related compensation costs in the income statement,
or continuing to apply Accounting Principles Board Opinion No. 25 and provide
proforma disclosure of the effect of the fair value method within the
financial statements. The Statement is effective for financial statements
beginning after December 15, 1995. The Company currently intends to adopt the
disclosure method of the Statement.
In June 1996, FASB Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (Statement
125) was issued and is applicable to all entities, both public and non-public
. Statement 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based
on consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components
approach, after a transfer of financial assets, an entity recognizes all
financial and servicing assets it controls and liabilities it has incurred
and derecognizes financial assets it no longer controls and liabilities that
have been extinguished. The financial-components approach focuses on the
assets and liabilities that exist after the transfer. Many of these assets
and liabilities are components of financial assets that existed prior to the
transfer. If a transfer does not meet the criteria for a sale, the transfer
is accounted for as a secured borrowing with pledge of collateral. The
adoption of Statement 125 is not expected to have a significant impact on the
Company's financial position or results of operations.
RECAPITALIZATION OF FDIC
Legislation to recapitalize the Federal Deposit Insurance Corporation
(FDIC) Savings Association Insurance Fund (SAIF), that was signed into law on
September 30, 1996, resulted in the recording of a charge to the Bank's
earnings of $285,000, net of tax. The Bank's strong capital position was
minimally affected by this one time charge and an anticipated reduction in
the annual FDIC-SAIF premium assessment from $.23 to approximately $.065 per
$100 of deposits will help to improve the Bank's short and long term earnings
outlook and place the Bank in a more competitive position with commercial
banks. In addition, other pending legislation includes a requirement that
federally chartered thrifts convert to national banks or state chartered
institutions. Management cannot predict or determine the ultimate form of
any legislation or the impact such final legislation would have on the
Company and its operations.
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company
or any of its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27 Financial Data Schedule
(b) 1. Form 8-K dated July 16, 1996, Registrant issued press
release dated July 16, 1996 regarding second quarter
earnings and a quarterly dividend.
2. Form 8-K dated July 25, 1996, Registrant issued press
release dated July 25, 1996 regarding a stock repurchase
program.
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,thereunto
duly authorized.
NORTH BANCSHARES,INC.
(Registrant)
Date November 8, 1996 /S/ Mary Ann Hass
Mary Ann Hass
Chairman and
Chief Executive Officer
Date November 8, 1996 /S/ Martin W. Trofimuk
Martin W. Trofimuk
Vice President and
Treasurer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Condition at September 30, 1996 (unaudited) and the
Consolidated Statement of Operations for the nine months ended September 30,
1996 (unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 763
<INT-BEARING-DEPOSITS> 2,638
<FED-FUNDS-SOLD> 975
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,501
<INVESTMENTS-CARRYING> 32,593
<INVESTMENTS-MARKET> 40,501
<LOANS> 70,202
<ALLOWANCE> 208
<TOTAL-ASSETS> 116,881
<DEPOSITS> 72,457
<SHORT-TERM> 17,998
<LIABILITIES-OTHER> 2,990
<LONG-TERM> 5,750
O
0
<COMMON> 14
<OTHER-SE> 17,682
<TOTAL-LIABILITIES-AND-EQUITY> 116,881
<INTEREST-LOAN> 3,729
<INTEREST-INVEST> 2,280
<INTEREST-OTHER> 293
<INTEREST-TOTAL> 6,302
<INTEREST-DEPOSIT> 2,503
<INTEREST-EXPENSE> 3,475
<INTEREST-INCOME-NET> 2,827
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 2,640
<INCOME-PRETAX> 349
<INCOME-PRE-EXTRAORDINARY> 349
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 1.73
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 200
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 208
<ALLOWANCE-DOMESTIC> 208
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 208
</TABLE>
