U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
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 July 28, 1997, there were 992,328 outstanding 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 (UNAUDITED)
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 13
Item 1. Legal Proceedings 13
Item 4. Submission of matters to vote of security holders 14
Item 6. Exhibits and Reports on Form 8-K 14
FORM 10-QSB SIGNATURE PAGE 15
<PAGE 3>
Part I. Financial Information
Item 1. Consolidated Financial Statements
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
ASSETS JUNE 30, 1997 DEC 31, 1996
(UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 651 $ 618
Interest-bearing deposits 2,075 2,644
Federal funds sold 525 4,800
Investment in dollar denominated mutual funds 1,571 547
----- -----
TOTAL CASH AND CASH EQUIVALENTS 4,822 8,609
Investment securities available-for-sale 26,964 24,426
Mortgage-backed securities held-to-maturity 6,694 7,465
Loans receivable, net of allowance for loan
losses of $208 at June 30, 1997 and
at December 31, 1996 77,448 73,378
Accrued interest receivable 1,145 1,025
Premises and equipment, net 1,062 1,061
Stock in Federal Home Loan Bank of Chicago 1,390 1,205
Other assets 61 304
------- -------
TOTAL ASSETS $119,586 $117,473
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts $ 71,633 $73,611
Borrowed funds 27,800 24,100
Advance payments by borrowers for
taxes and insurance 1,309 1,203
Other liabilities 1,932 736
------ ------
TOTAL LIABILITIES 102,674 99,650
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,
994,585 outstanding at June 30, 1997 and
1,057,950 outstanding at December 31, 1996 14 14
Additional paid-in capital 13,612 13,688
Retained earnings, substantially restricted 11,141 10,988
Treasury stock at cost (442,916 shares at
June 30, 1997 and 379,551 shares at
December 31, 1996) (6,651) (5,340)
Unrealized loss on securities
available for sale, net of tax effect (454) (678)
Additional pension liability, net of tax (108) (108)
Common stock acquired by Employee Stock
Ownership Plan (611) (667)
Deferred compensation (31) (74)
------ ------
TOTAL STOCKHOLDERS' EQUITY 16,912 17,823
------ ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $119,586 $117,473
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE 4>
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)
(IN THOUSANDS)
<TABLE>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $1,487 $1,248 $2,936 $2,381
Interest-bearing deposits and federal funds sold 34 66 82 152
Investment securities available for sale 512 635 977 1,123
Investment securities held-to-maturity - - - 2
Mortgage-backed securities available for sale - - - 90
Mortgage-backed securities held-to-maturity 121 133 246 292
Dollar denominated mutual funds 18 12 52 32
Dividends on FHLB of Chicago stock 23 16 45 29
----- ----- ----- -----
TOTAL INTEREST INCOME 2,195 2,110 4,338 4,101
----- ----- ----- -----
INTEREST EXPENSE
Deposit accounts 779 855 1,552 1,686
Borrowed funds 446 335 847 595
----- ----- ----- -----
TOTAL INTEREST EXPENSE 1,225 1,190 2,399 2,281
----- ----- ----- -----
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 970 920 1,939 1,820
PROVISION FOR LOAN LOSSES - - - 8
----- ----- ----- -----
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 970 920 1,939 1,812
----- ----- ----- -----
NON-INTEREST INCOME
Gain on sale of investment securities available for sale 6 9 54 8
Fees and service charges 57 42 103 87
Other 5 6 9 12
----- ----- ----- -----
TOTAL NON-INTEREST INCOME 68 57 166 107
----- ----- ----- -----
NON-INTEREST EXPENSE
Compensation and benefits 418 342 812 677
Occupancy expense 117 103 230 201
Professional fees 48 62 86 103
Data processing 43 32 85 59
Advertising and promotion 32 66 63 97
Federal deposit insurance premium 11 52 23 104
Recognition and retention plan 23 18 42 37
Other 104 93 201 156
----- ----- ----- -----
TOTAL NON-INTEREST EXPENSE 796 768 1,542 1,434
----- ----- ----- -----
INCOME BEFORE TAXES 242 209 563 485
INCOME TAX EXPENSE 67 76 159 165
----- ----- ----- -----
NET INCOME $ 175 $ 133 $ 404 $ 320
===== ===== ===== =====
EARNINGS PER SHARE PRIMARY $.18 $.12 $.40 $.28
EARNINGS PER SHARE FULLY DILUTED $.18 $.12 $.40 $.28
WEIGHTED AVERAGE SHARES OUTSTANDING 997,689 1,109,206 1,013,424 1,146,736
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE 5>
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1996
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 404 $ 320
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 57 38
Provision for loan losses - 8
Deferred loan fees, net of amortization (7) (80)
Amortization of premiums and discounts 15 90
Amortization of cost of stock benefit plans 99 93
Gain on sale of investment securities
available for sale (54) (8)
Changes in assets and liabilities:
Increase in accrued interest receivable (120) (202)
Decrease in other assets, net 243 257
Increase in other liabilities 1,071 743
Net cash provided by operating activities 1,708 1,259
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities
available-for-sale (5,225) (14,893)
Proceeds from sales of investment securities
available for sale 3,001 1,000
Proceeds from sales of mortgage-backed
securities available for sale - 6,496
Maturities of investment securities
available-for-sale - 6,500
Maturities of investment securities
held-to-maturity - 500
Loan originations (9,036) (15,658)
Loan repayments 4,973 5,606
Repayments of mortgage-backed securitie 769 1,420
Purchase of Federal Home Loan Bank of Chgo Stock (185) (463)
Purchase of premises and equipment (58) (146)
Decrease in payable to brokers - (1,000)
Increase in receivable from brokers - (1,000)
Net cash used in investing activities (5,761) (11,638)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit accounts (1,978) 378
Increase in advance payments by borrowers
for taxes and insurance 106 175
Increase in borrowings 3,700 10,000
Purchase of treasury stock (1,311) (1,846)
Exercise of stock options // //
Dividends paid (251) (238)
Net cash provided by financing activities 266 8,469
Net decrease in cash and cash equivalents (3,787) (1,910)
Cash and cash equivalents at beginning of period 8,609 8,293
Cash and cash equivalents at end of period $4,822 $ 6,383
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments during the period for:
Interest 1,530 1,500
Income taxes - 35
</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 unaudited 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-X. 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 audited and unaudited consolidated
financial statements contain all adjustments (which are normal and recurring
in nature) necessary for a fair presentation of the financial condition as
of June 30, 1997 and December 31, 1996 and results of operations for the
three month and six month periods ended June 30, 1997 and June 30, 1996, but
are not necessarily indicative of the results which may be expected for the
entire year.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses
for the period. Actual results could differ significantly from those
estimates. Estimates that are particularly susceptible to significant change
relate to the determination of the allowance for possible loan losses.
(2) Principles of Consolidation
The accompanying unaudited 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 and six
months ended June 30, 1997 and June 30, 1996. 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 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 January 21, 1997, the Company announced a stock repurchase program of
100,000 shares or approximately 9.5% of its outstanding shares of Common
Stock. Shares have been repurchased in open market transactions or in
privately negotiated transactions since that date. As of July 15, 1997, the
Company had repurchased 90,342 shares. On July 15, 1997 the Company
announced another stock repurchase program which will amount to 50,000 shares
or approximately 5% of the outstanding issue, to commence as soon as the
January 21, 1997 program is completed. Management continues to believe that
stock repurchase programs provide enhanced value to both the Stockholders and
the Company.
(5) Reclassifications
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation.
(6) Commitments and Contingencies
At June 30, 1997 the Bank had outstanding commitments to originate
mortgage loans in the amount of $1.1 million.
<PAGE 7>
As a credit enhancement, the Bank had 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, which included retail space
on the ground floor of the building. On May 21, 1997, the Bank transferred
$1.0 million in cash to the Trustee, thereby redeeming the securities
previously pledged for the project. The Bank received $840,000 in cash as
its pro-rata payment on the redemption of the underlying bonds. The Bank had
allocated $160,000 to a specific reserve for the project based on the
proposed repurchase of the outstanding bonds at a discount and thereby
incurred no additional expense at redemption. The Bank has no further
commitment to the Arlington Heights credit enhancement.
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 an independent 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, or 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 federal agency mortgage
- -backed securities, U. S. Government and agency securities, investment grade
securities, common stocks, 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 $4.0 million or 5.4% from
$73.4 million at December 31, 1996 to $77.4 million at June 30, 1997. The
Bank is currently focusing its marketing efforts on both owner occupied and
non-owner occupied one-to-four unit dwellings, small apartment buildings, and
home equity loans. In order to more effectively compete for loan originations
in its market area, the Bank offers 80% financing on non-owner occupied
properties with a cash out feature. The Bank also offers low down payment
mortgages to homebuyers accompanied with appropriate mortgage insurance. The
Bank, which has a First Time Homebuyer Program for purchases within its
assessment area, acquires loans from mortgage brokers or purchases loans or
participations from other financial institutions. For the six months ended
June 30, 1997 the Bank originated $9.0 million in mortgage, consumer and
commercial loans of which $4.5 million or 50.0% were adjustable rate or
balloon type mortgages. Approximately 53% of these loans are located within
the Bank's CRA assessment area.
<PAGE 8>
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
June 30, 1997 and December 31, 1996, there were no loans delinquent 90 days
or more. The allowance for loan losses at June 30, 1997 remains at $208,000.
FORWARD-LOOKING STATEMENTS
When used in this 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 to a limited extent, 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 June 30
, 1997 the Bank's liquidity ratio was 7.5% compared with 15.6% at December 31
, 1996. 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 4.4% at June
30, 1997 compared with 12.4% at December 31, 1996. The decrease in liquidity
is related to the funding of loans that do not qualify as liquidity.
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 and agency securities.
The Company's loan origination marketing efforts and mortgage broker
relationships have maintained adequate loan demand. Management believes that
adequate liquidity will be available to fund any increased loan demand. The
Company does not have the same regulatory restrictions on investments as the
Bank and makes investments in debt and equity securities of financial service
firms.
<PAGE 9>
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 June 30, 1997, the Bank exceeded its
regulatory capital standards. At such date, the Bank's tangible capital,
core capital and risk-based capital of $14.3 million, $14.3 million and $14.5
million, respectively, exceeded the applicable minimum requirements by $12.5
million or 10.71%, $10.7 million or 9.15% and $14.5 million or 24.31%,
respectively.
CHANGES IN FINANCIAL CONDITION
Total assets increased $2.1 million or 1.8% from $117.5 million at
December 31, 1996 to $119.6 million at June 30, 1997. The increase was
primarily attributable to a $6.6 million increase in net loans receivable and
investment securities, partially offset by a $3.8 million decrease in cash
and cash equivalents.
Net loans receivable increased $4.0 million or 5.4% from $73.4 million
at December 31, 1996 to $77.4 million at June 30, 1997. The Company
originated $9.0 million in mortgage, consumer and commercial loans during the
six months ended June 30, 1997. Repayments of loans during the six months
ended June 30, 1997 amounted to $5.0 million.
Investment securities increased $2.6 million or 10.7% from $24.4 million at
December 31, 1996 to $27.0 million at June 30, 1997. The increase was
primarily attributable to the purchase of $5.2 million in investment
securities, which included a $3.7 million U. S. Government callable security
leveraged with a Federal Home Loan Bank advance, partially offset by the sale
of $3.0 million of available-for-sale securities. Transactions such as this
increase income at little or no risk by using FHLB advances to purchase U. S.
government securities, with a comparable duration, at an attractive interest
rate spread.
Deposit accounts decreased $2.0 million or 2.7% from $73.6 million at
December 31, 1996 to $71.6 million at June 30, 1997. The decrease can be
attributed to customers seeking higher returns on their investments in the
equity and mutual fund markets that have in the past year achieved all time
highs.
Borrowed funds increased by $3.7 million or 15.4% from $24.1 million at
December 31, 1996 to $27.8 million at June 30, 1997. The $3.7 million
increase was used in a leveraged securities transaction at an interest rate
spread of 1.80% to the maturity of the advance.
Other liabilities increased by $1.2 million, or 163.0% from $736,000 at
December 31, 1996 to $1.9 million at June 30, 1997. The increase was
primarily attributable to accrued interest payable on certificates of deposit
that pay interest annually on December 31st of each year and outstanding
checks.
Stockholders' equity totaled $16.9 million or 14.1% of total assets at
June 30, 1997. Retained earnings increased by $153,000 from $11.0 million at
December 31, 1996 to $11.1 million at June 30, 1997, a result of $404,000 in
net earnings for the six months ended June 30, 1997, offset by $251,000 in
dividend payments. A total of $454,000 in unrealized losses, net of related
tax effect, on securities available for sale at June 30, 1997 have been
recorded as a component of Stockholders' equity. Treasury stock increased by
$1.3 million or 24.5% from $5.3 million at December 31, 1996 to $6.6 million
at June 30, 1997, due to the repurchase of 81,142 shares at an average cost
of $17.48 per share, partially offset by the exercise of 17,777 options and
the issuance of treasury shares.
<PAGE 10>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND
JUNE 30, 1996
GENERAL. Net income increased $42,000 or 31.6% from $133,000 for the
three months ended June 30, 1996 to $175,000 for the three months ended June
30, 1997. Earnings per primary share increased $.06 or 50.0% from $.12 per
share for the three months ended June 30, 1996 to $.18 for the three months
ended June 30, 1997. The increase was primarily attributable to a $50,000
increase in net interest income before provision for loan losses and a
reduction in the total number of outstanding shares.
INTEREST INCOME. Interest income increased $85,000 or 4.0% from $2.1
million for the three months ended June 30, 1996 to $2.2 million for the
three months ended June 30, 1997. The increase was primarily attributable
to a $239,000 increase in interest on loans receivable, primarily due to an
increase in average loan balances, partially offset by a $155,000 decrease in
interest on investment securities, interest-bearing deposits, and federal
funds, primarily due to a decrease in average balances. In addition, there
was an increase in the annualized yield on average interest-earning assets
from 7.40% for the three months ended June 30, 1996 to 7.50% for the three
months ended June 30, 1997. Management believes the Company will continue to
experience modest increases in interest income during 1997 compared with 1996
as a result of the reallocation of lower yielding investments into mortgage,
consumer and commercial loans.
INTEREST EXPENSE. Interest expense increased $35,000 or 2.9% for the
period ended June 30, 1997. The increase was attributable to a $111,000
increase in interest on borrowed funds as a result of $10.0 million in
leveraged securities transactions using Federal Home Loan Bank advances,
conducted during 1996 and an additional $3.7 million during the first quarter
of 1997. This increase was offset by a $76,000 decrease in interest on
deposit accounts. The decrease in interest on deposit accounts reflects the
shift in deposit accounts from higher cost certificates of deposit to non-
interest bearing checking accounts, lower cost money market accounts and a
$4.5 million decrease in the total average outstanding balances of interest-
bearing deposit accounts. In addition, there was a decrease in the
annualized average cost of interest-bearing liabilities from 5.04% for the
three months ended June 30, 1996 to 4.96% for the three months ended June 30,
1997, due to the refinance of a $5.0 million FHLB advance at a reduced
interest rate and a $4.7 million decrease in the average outstanding balance
of certificate accounts.
PROVISION FOR LOAN LOSSES. The Company did not add to its allowance for
loan losses for the three months ended June 30, 1997 or during the three
months ended June 30, 1996. The allowance for loan losses to net loans
receivable amounted to .27% at June 30, 1997, however, there were no loans
delinquent 90 days or more at June 30, 1997. 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 increased $11,000 or 19.3%
from $57,000 for the three months ended June 30, 1996 to $68,000 for the
three months ended June 30, 1997. The increase was primarily attributable to
a $15,000 increase in 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.
NON-INTEREST EXPENSE. Non-interest expense increased by $28,000 or 3.6%
from $768,000 for the three months ended June 30, 1996 to $796,000 for the
three months ended June 30, 1997. The increase was primarily attributable to
a $90,000 increase in compensation and benefits expense, and occupancy
expense, partially offset by a $75,000 decrease in advertising and federal
deposit insurance premium expense. The increase in compensation and benefits
expense is primarily attributable to a $49,000 increase in ESOP expense
related to an increase in the value of shares being allocated to the ESOP. In
addition, there was an increase in staff related to expansion of the Bank's
hours of operation at the Chicago office. Although the company is required
to record compensation expense for the increase in the value of the ESOP
shares, an offsetting entry to additional paid in capital is recorded on the
consolidated statements of financial condition and therefore total
stockholders' equity is unaffected.
<PAGE 11>
INCOME TAX EXPENSE. The allocation for federal and state income taxes
decreased by $9,000 from $76,000 for the three months ended June 30, 1996 to
$67,000 for the three months ended June 30, 1997 for an effective tax rate of
27.7%. The effective tax rate is less that the expected rate of 34%, due to
the utilization of capital losses to which the Company had not previously
been able to record as a benefit.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
JUNE 30, 1996
GENERAL. Net income increased by $84,000 or 26.3% from $320,000 for the
six months ended June 30, 1996 to $404,000 for the six months ended June 30,
1997. Earnings per primary share increased $.12 or 42.9% from $.28 for the
six months ended June 30, 1996 to $.40 for the six months ended June 30, 1997
. The increase was primarily attributable to a $127,000 increase in net
interest income after provision for loan losses, and a $59,000 increase in
non-interest income, partially offset by a $108,000 increase in non-interest
expenses. In addition, there was a decrease in the total number of
outstanding shares.
INTEREST INCOME. Interest income increased $237,000 or 5.8% from $4.1
million for the six months ended June 30, 1996 to $4.3 million for the six
months ended June 30, 1997. The increase was primarily attributable to
a $555,000 increase in interest on loans receivable, partially offset by a
$354,000 decrease in interest on mortgage-backed securities, investment
securities, and interest-bearing deposits. In addition, there was an
increase in the annualized yield on average interest-earning assets from
7.34% for the six months ended June 30, 1996 to 7.42% for the six months
ended June 30, 1997. Management believes the Company will continue to
experience modest increases in interest income during 1997 compared with 1996
as a result of the reallocation of lower yielding investments into mortgage,
consumer and commercial loans.
INTEREST EXPENSE. Interest expense increased by $118,000 or 5.1% from
$2.3 million for the six months ended June 30, 1996 to $2.4 million for the
six months ended June 30, 1997. The increase was primarily attributable to a
$6.3 million or 6.9% increase in average interest-bearing liabilities from
$91.7 million for the six months ended June 30, 1996 to $98.0 million for the
six months ended June 30, 1997. The average cost of interest-bearing
liabilities decreased from 4.97% for the six months ended June 30, 1996 to
4.90% for the six months ended June 30, 1997.
PROVISION FOR LOAN LOSSES. The Company did not add to its allowance for
loan losses for the six months ended June 30, 1997 compared with a provision
of $8,000 during the six months ended June 30, 1996. The allowance for loan
losses to total loan receivable amounted to .27% at June 30, 1997, however
there were no loans 90 days or more delinquent as of June 30, 1997. 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 increased by $59,000 or 55.1%
from $107,000 for the six months ended June 30, 1996 to $166,000 for the six
months ended June 30, 1997. The increase was primarily attributable to a
$46,000 increase in gains on the sale of investment securities, available for
sale, and a $16,000 increase in 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.
<PAGE 12>
NON-INTEREST EXPENSE. Non-interest expense increased by $108,000 or
7.7% from $1.4 million for the six months ended June 30, 1996 to $1.5 million
for the six months ended June 30, 1997. The increase was primarily
attributable to a $135,000 increase in compensation and benefits expense, a
$45,000 increase in other expense and a $29,000 increase in occupancy expense
, partially offset by a $81,000 decrease in federal deposit insurance premium
expense. The increase in compensation expense was due primarily to an
increase in ESOP expense related to the value of the stock being allocated
under the ESOP and increased staff related to expansion of the Bank's hours of
operation. The increase in occupancy expense related to deferred maintenance
and increased real estate taxes on the Chicago office building, and the
increase in other expense was primarily due to a $34,000 allocation to a
specific reserve for the Arlington Heights Credit Enhancement charged in the
first quarter of 1997. See Item 6, Commitments and Contingencies in the
Notes to Unaudited Consoidated Financial Statements.
INCOME TAX EXPENSE. The allocation for federal and state income taxes
decreased by $6,000 from $165,000 for the six months ended June 30, 1996 to
$159,000 for the six months ended June 30, 1997 for an effective tax rate of
28.2%. The effective tax rate is less than the expected rate of 34%, due to
the utilization of capital losses to which the Company had not previously
been able to record as a benefit.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND OTHER REGULATORY ISSUES
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. Statement 125 provides standards to determine
whether transfers of financial assets are to be accounted for as sales or
secured borrowings. This statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after
December 31, 1996. In December 1996, the FASB issued SFAS No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125." This
statement is effective December 31, 1996 and amends FASB Statement No. 125 by
delaying for one year the effective date for the following types of transfers
of financial assets: secured borrowings and collateral, repurchase
agreements, dollar-rolls and securities lending. The Company adopted both
Statements on January 1, 1997 without a material effect on the Company's
financial position or results of operations.
In February 1997, FASB Statement No. 128, "Earnings Per Share"
(Statement 128), was issued. Statement 128 supersedes APB Opinion No. 15,
Earnings Per Share and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock. Statement 128 was issued to simplify
the computation of EPS and to make the U. S. standard more compatible with
the EPS standards of other countries and that of the International Accounting
Standards Committee. It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB 15.
Statement 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted (although pro forma EPS disclosure in the footnotes for periods
prior to required adoption is permitted). After adoption, all prior-period
EPS data presented shall be restated to conform with Statement 128. The
Company does not expect adoption of Statement 128 to have a significant
impact on the Company's financial statements.
<PAGE 13>
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
, which is effective for fiscal years beginning after December 15, 1997.
This statement establishes standards for reporting and display of
comprehensive income and its components (revenue, espenses, gains and losses)
in a full set of general-purpose financial statements. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers.
Legislation has been introduced in Congress that would eliminate the
federal thrift charter by requiring each federal thrift to convert to a
national bank or a state bank or thrift. The pending legislation would allow
savings and loan holding companies, such as the Company, to continue to
engage in any activity they are currently allowed, provided they remain
"qualified bank holding companies." A thrift institution which is a
subsidiary of a qualified bank holding company must continue to satisfy the
qualified thrift lender test and comply with certain investment limitations.
If a savings and loan holding company failed to meet these tests it would
become subject to certain restrictions applicable to bank holding companies.
In addition, the Congress is also considering expanding the authority of bank
holding companies to engage in securities and insurance activities.
Management cannot predict or determine the ultimate form of this legislation
or the impact such final legislation would have on the operations of the
Company or the Bank.
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.
<PAGE 14>
Item 4. Submission of Matters to a Vote of Security Holders
On April 23, 1997 the annual meeting of stockholders was held. At
the meeting, James L. Ferstel was elected to serve as a director
with term expiring in 2000. Continuing on as directors were Mary
Ann Hass and Joseph A. Graber whose terms will expire in 1998 and
Robert H. Rusher, Elmer L. Hass and Michael J. Perri, whose terms
will expire in 1999. The Stockholders ratified the appointment of
KPMG Peat Marwick LLP as the Company's auditors for the fiscal year
ending December 31, 1997. The Stockholders rejected a stockholder
proposal concerning the creation of a special committee of the
Board of Directors.
The voting on each item presented at the annual meeting was as
follows:
Election of Directors For Withheld
James L. Ferstel 824,549 166,201
Ratification of the
appointment of KPMG
Peat Marwick LLP as the
Company's auditors for For Against Abstain
the fiscal year ending
December 31, 1997 899,793 71,102 19,855
The creation of a special
committee of the Board
of Directors 269,736 547,841 8,440
There were 164,733 broker non-votes recorded.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
EX-27 Financial Data Schedule
(B) Form 8-K dated April 14, 1997, Registrant issued press release
dated April 14, 1997 regarding first quarter 1997 earnings,
and a regular quarterly dividend.
<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 August 8, 1997 /S/ Joseph A. Graber
Joseph A. Graber
President
Date August 8, 1997 /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 June 30, 1997 (unaudited) and the
Consolidated Statement of Operations for the six months ended June 30, 1997
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
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<INVESTMENTS-HELD-FOR-SALE> 27,744
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