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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
100 W. North Avenue, Chicago, Illinois 60610
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (312) 664-4320
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)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The Issuer had $8.8 million in gross income for the year ended December 31,
1996.
<PAGE> 2
As of March 3, 1997, there were issued and outstanding 1,050,950
shares of the Issuer's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Issuer, computed by reference to the
average of the closing bid and asked price of such stock on the Nasdaq National
Market as of March 3, 1997 was approximately $15,918,103. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Issuer that such person is an affiliate of the
Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-KSB--Portions of Annual Report to Stockholders for the
fiscal year ended December 31, 1996 PART III of Form 10-KSB--Portions of Proxy
Statement for the Annual Meeting of Stockholders for the fiscal year ended
December 31, 1996.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
North Bancshares, Inc. (the "Company" or "North Bancshares") is a
Delaware corporation which was organized in 1993 by North Federal Savings Bank
("North Federal" or 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
"Conversion"). The Company issued 1,437,501 shares of Common Stock at a price
of $10.00 per share in the Conversion. There were 1,057,950 shares of common
stock outstanding at December 31, 1996. The Bank was originally organized in
1886 and converted to a federal mutual savings bank in 1986. The Bank amended
its charter in December 1993 in connection with the Conversion to become a
federal stock savings bank. All references to the Company, unless otherwise
indicated, at or before December 21, 1993 refer to the Bank. The Company's
Common Stock is quoted on the Nasdaq National Market under the symbol "NBSI".
The Company and the Bank are subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision, Department of
the Treasury ("OTS") and by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its
deposits are backed by the full faith and credit of the United States
Government and are insured by the Savings Association Insurance Fund ("SAIF")
to the maximum extent permitted by the FDIC.
The Company serves the Chicago metropolitan area through its two
retail banking offices located in Chicago and Wilmette, Illinois. At December
31, 1996, the Company had total assets of $117.5 million, deposits of $73.6
million, and stockholders' equity of $17.8 million.
The Company has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities which it serves. The Company
attracts retail deposits from the general public or borrows funds from
available sources and invests those funds primarily in first mortgages on
owner-occupied one- to four-family residences, small apartment buildings, and
mortgage-backed and investment securities. To a lesser extent, but to a
greater degree than in the past, the Company also originates or participates in
nonowner-occupied one- to four-family, multi-family, consumer and commercial
loans.
The Company's revenues are derived principally from interest on
mortgage loans, investments, mortgage-backed securities, consumer loans,
commercial loans and income from service charges. The Company's operations are
affected by general economic conditions, competition in the Company's market
area, the monetary and fiscal policies of the federal government and the
policies of the various regulatory authorities, including the OTS and the Board
of Governors of the Federal Reserve System ("Federal Reserve Board"). Its
results of operations are largely dependent upon its net interest income, which
is the difference between the interest it receives on its loan portfolio and
its investment securities portfolio and the interest it pays on its deposit
accounts and borrowings.
The executive offices of the Company and the Bank are located at 100
W. North Avenue, Chicago, Illinois 60610- 1399. The telephone number at that
address is (312) 664-4320.
3
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LENDING ACTIVITIES
General. The Bank's loan portfolio consists primarily of
conventional, first mortgage loans secured by one- to four-family residences,
and to a lesser extent, multi-family residences. At December 31, 1996, the
Bank's gross mortgage loans outstanding totalled $73.6 million, of which $67.5
million or 91.7% were one- to four-family residential mortgage loans. Of the
one- to four-family mortgage loans outstanding at that date, 73.3% were
fixed-rate loans (67.2% of total gross loans receivable), including balloon
loans, and 26.7% were adjustable-rate loans (24.5% of total gross loans
receivable). At that same date, multi-family residential mortgage loans
totalled $5.1 million, of which $4.4 million were fixed-rate balloon loans.
At December 31, 1996, the balance of the Bank's loans consisted of
$1.0 million in consumer and commercial loans, which represented 1.4% of the
Bank's gross loan portfolio.
The Bank also invests in mortgage-backed securities. At December 31,
1996, mortgage-backed securities totalled $7.5 million or 6.4% of total assets.
At such date, all of the mortgage-backed securities portfolio was insured or
guaranteed by the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage
Corporation ("FHLMC"). At December 31, 1996, all of the mortgage-backed
securities were classified as held-to-maturity.
All loans must be approved by a committee comprised of officers and
directors of the Bank. Requests for loans greater than $800,000 are reviewed
and considered for approval by the Board of Directors on a case by case basis.
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
is generally the greater of 15% of unimpaired capital and surplus or $500,000.
See "Regulation - Federal Regulation of Savings Associations." At December 31,
1996, the maximum amount which the Bank could have lent under this limit to any
one borrower and the borrower's related entities was approximately $2.7
million. At December 31, 1996, the Bank had no loans or groups of loans to
related borrowers with outstanding balances in excess of this amount. The
Bank's largest lending relationship at December 31, 1996 was a credit
enhancement agreement with the city of Arlington Heights, Illinois, to
guarantee the repayment of a $1.0 million share of a $17.0 million municipal
revenue bond. The Bank has allocated $126,000 in a specifice reserve for this
credit enhancement as of December 31, 1996. See "- Credit Enhancement." At
that date, the Bank's next three largest lending relationships to a single
borrower or a group of related borrowers totalled $798,000, $790,000 and
$723,000, respectively. Each of these was a loan or loans secured by either a
first mortgage on real estate or a first lien on real property. Each of these
loans was current as of December 31, 1996.
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Loan Portfolio Composition. The following information concerning the
composition of the Bank's loan and mortgage-backed securities portfolios in
dollar amounts and in percentages (before deductions for loans in process,
deferred fees and discounts and allowances for losses) is as of the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------
1992 1993 1994
-------------------------- -------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------------- ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family . . . $34,358 87.67% $26,714 88.11% $42,402 92.80%
Multi-family . . . . . . . 4,321 11.02 3,366 11.10 3,126 6.84
------- ------ ------- ------ ------- ------
Total real estate loans 38,679 98.69 30,080 99.21 45,528 99.64
------- ------ ------- ------ ------- ------
CONSUMER LOANS:
Deposit account . . . . . 212 0.54 104 0.35 93 0.20
Automobile . . . . . . . . 3 0.01 --- --- ---
Home equity and home
improvement . . . . . . . 298 0.76 134 0.44 73 0.16
-------- ------ ------- ------ ------- ------
Total consumer loans 513 1.31 238 0.79 166 0.36
-------- ------ ------- ------ ------- ------
COMMERCIAL LOANS . . . . . --- --- --- --- --- ---
--- ----- ----- ---- --- ---
Total loans receivable 39,192 100.00% 30,318 100.00% 45,694 100.00%
------ ======= ------ ======= ------ =======
LESS:
Deferred fees and discounts 549 500 246
Allowance for loan losses 34 106 160
-------- --------- ---------
Total loans receivable,
net . . . . . . . . . . . . $38,609 $29,712 $45,288
======= ======= =======
MORTGAGE-BACKED SECURITIES:
FNMA . . . . . . . . . . . 326 1.54 1,973 9.21 1,553 9.11
GNMA . . . . . . . . . . . 1,169 5.53 910 4.25 707 4.15
FHLMC . . . . . . . . . . 19,629 92.93 18,546 86.54 14,794 86.74
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities . . . . . . 21,124 100.00% 21,429 100.00% 17,054 100.00%
====== ====== ======
Net premiums and discounts (136) (50) (39)
--------- -------- ---------
Net mortgage-backed
securities . . . . . . . . $20,988 $21,379 $17,015
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1995 1996
------------------------ ----------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------------- ------- ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family . . . $51,217 90.63% $67,542(1) 91.73%
Multi-family . . . . . . . 5,012 8.87 5,057(2) 6.87
-------- ------ ------- -----
Total real estate loans 56,229 99.50 72,599 98.60
------- ------ ------- ------
CONSUMER LOANS:
Deposit account . . . . . 136 0.24 110 0.15
0.01
Automobile . . . . . . . . --- --- 6
Home equity and home
improvement . . . . . . . . 148 0.26 123 0.17
-------- ------- -------- -------
Total consumer loans 284 0.50 239 0.33
-------- ------- -------- -------
COMMERCIAL LOANS . . . . . --- --- 790 1.07
--- ---- ---- ----
Total loans receivable 56,513 100.00% 73,628 100.00%
------ ======= ------ =======
LESS:
Deferred fees and discounts 152 42
Allowance for loan losses 200 208
------- --------
Total loans receivable,
net . . . . . . . . . . . . $56,161 $73,378
======= =======
MORTGAGE-BACKED SECURITIES:
FNMA . . . . . . . . . . . 1,396 8.52 1,092 14.67
GNMA . . . . . . . . . . . 651 3.98 229 3.08
FHLMC . . . . . . . . . . 14,324 87.50 6,123 82.25
------- ------ ------- ------
Total mortgage-backed
securities . . . . . . 16,371 100.00% 7,444 100.00%
====== ======
Net premiums and discounts (25) 21
------- --------
Net mortgage-backed
securities . . . . . . . . $16,346 7,465
======= =====
</TABLE>
__________________________
(1) This amount includes $9.9 million of 5, 7 or 10 year balloon loans.
(2) This amount includes $4.4 million of 5, 7 or 10 year balloon loans.
5
<PAGE> 6
The following table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rates at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1994 1995 1996
--------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- --------- --------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
One- to four-family . . . . . . . . . . $34,202 74.85% $40,179 71.10% $49,480(1) 67.20%
Multi-family . . . . . . . . . . . . . 3,126 6.84 5,012 8.87 5,057(2) 6.87
------- ------ ------- ------ ------- ------
Total fixed-rate real estate loans . . 37,328 81.69 45,191 79.97 54,537 74.07
Consumer . . . . . . . . . . . . . . . 166 0.36 284 0.50 239 0.33
------- ------ ------- ------ ------ ------
Commercial . . . . . . . . . . . . . . --- --- --- --- 790 1.07
------- ----- ------- ------ ------ -------
Total fixed-rate loans . . . . . . . . 37,494 82.05 45,475 80.47 55,566 75.47
------- ------ ------- ------ ------- -------
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family . . . . . . . . . . 8,200 17.95 11,038 19.53 18,062 24.53
------- ------ ------- ------ ------ -------
Total loans . . . . . . . . . . . . . 45,694 100.00% 56,513 100.00% 73,628 100.00%
====== ====== ======
LESS:
Deferred fees and discounts . . . . . . 246 152 42
Allowance for loan losses . . . . . . . 160 200 208
-------- -------- ------
Total loans, net . . . . . . . . . . . $45,288 $56,161 $73,378
======= ======= =======
</TABLE>
__________________________
(1) This amount includes $9.9 million of 5, 7 or 10 year balloon loans.
(2) This amount includes $4.4 million of 5, 7 or 10 year balloon loans.
6
<PAGE> 7
The following schedule illustrates the interest rate sensitivity of
the Bank's loan portfolio at December 31, 1996. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which
the contract is due rather than when interest rates are next subject to change.
The schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. The total amount of loans due after
December 31, 1996 which have a pre-determined interest rate is $55.5 million,
while the amount of loans due after such date with floating rates is $18.1
million.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------
One- to four-family Multi-family Consumer Commercial Total
-------------------- ------------------ -------------------- ------------------ -----
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ -------- -------- --------
(Dollars in Thousands)
Due During Periods
Ending December 31,
- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1) . . . . . . . . 30 6.95% $ 218 9.67% $ 6 5.69% $ 790 10.00% 1,044 9.82%
1998 . . . . . . . . . 125 6.86 130 10.50 18 7.84 --- 0.00 273 8.66
1999 . . . . . . . . . 1,393 7.02 833 8.03 97 7.46 --- 0.00 2,323 7.40
2000 and 2001 . . . . . 6,880 7.64 2,608 8.35 13 8.25 --- 0.00 9,501 7.84
2002 to 2006 . . . . . 6,571 8.11 1,268 9.44 48 9.00 --- 0.00 7,887 8.33
2007 to 2011 . . . . . 10,729 7.73 -- 0.00 32 9.00 --- 0.00 10,761 7.73
2012 and following . . 41,814 7.69 -- 0.00 25 8.75 --- 0.00 41,839 7.69
------ ---- ------ ---- ----- ---- ---- ---- ------ ------
$67,542 7.72% $5,057 8.68% $239 8.14% $790 10.00% $73,628 7.81%
======= ===== ====== ===== ==== ===== ==== ====== ======= =====
</TABLE>
__________________________
(1) Includes demand loans, loans having no stated maturity, and past due
loans.
7
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ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
The cornerstone of the Bank's lending program has been the origination
of permanent loans, to be held in its portfolio, secured by mortgages on
owner-occupied, one- to four-family residences. Typically, such homes are
single family detached houses, condominiums, townhomes and, to a lesser extent
two- to four-family dwellings. At December 31, 1996, $67.5 million, or 91.7%,
of the Banks gross loan portfolio consisted of permanent loans secured by one-
to four- family residences. More than 95% of these loans were located in the
Bank's market area. The Bank emphasizes the origination of a variety of
residential loans, including conventional 10, 15, 20 and 30 year fixed-rate
loans, one, three and five year adjustable-rate mortgage loans ("ARMs") and 5,
7 and 10 year balloon loans.
During 1996 the Bank emphasized loans on non-owner occupied, one- to
four-family properties due to the higher yields offered by such loans, as well
as customer demand. The Bank offers a broad range of lending products to
respond to customer preferences, market dynamics and changes in asset/liability
management objectives.
The Bank offers one- to four-family residential ARMs which are fully
amortizing loans with contractual maturities of up to 30 years. The interest
rates on all of the ARMs originated by the Bank are subject to adjustment at
one year intervals after the initial loan period. The Bank's ARM products
generally carry interest rates which are reset to a stated margin over an
independent index. Increases or decreases in the interest rate of the Bank's
ARMs are generally limited to 2.0% at any adjustment date and 6.0% over the
life of the loan. The Bank's ARMs are not convertible into fixed-rate loans,
are not assumable, do not contain prepayment penalties and do not produce
negative amortization. At December 31, 1996, the total balance of one- to
four-family ARMs was $18.1 million, or 24.5% of the Bank's gross loan
portfolio.
The Bank evaluates both the borrower's ability to make principal and
interest payments and the value of the property that will secure the loan.
North Federal will verify a borrower's employment history and the source of the
downpayment. The Bank is a qualified FHLMC seller/servicer.
The Bank originates residential mortgage loans with loan-to-value
ratios up to 90%. On mortgage loans exceeding an 80% loan-to-value ratio at
the time of origination, North Federal requires private mortgage insurance in
an amount intended to reduce the Bank's exposure to 80% of the appraised value.
Property securing real estate loans made by North Federal is appraised by
independent appraisers. The Bank requires evidence of marketable title and
lien position on all loans secured by real property and requires hazard or fire
and extended coverage and vandalism and malicious mischief casualty insurance
in amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank also
requires flood insurance to protect the property securing its interest, should
it be determined that the property is located in a flood zone.
The Bank also offers loans secured by nonowner-occupied one- to
four-family residences and has a limited amount of these types of loans in its
portfolio. These loans are underwritten using similar criteria as loans
secured by owner-occupied one- to four-family residences, but are provided at
higher rates of interest than owner-occupied loans. The Bank placed more
emphasis on these types of loans during 1996 and expects to continue to do so
in 1997.
Residential mortgage loan originations are derived from a number of
sources, including mortgage brokers, advertising, real estate broker referrals,
existing borrowers and depositors, builders and walk-in customers. Loan
applications are accepted at both of the Bank's offices.
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<PAGE> 9
MULTI-FAMILY REAL ESTATE LENDING
In order to enhance the yield on its assets, North Federal originates
permanent loans secured by multi-family real estate. At December 31, 1996, the
Bank had multi-family real estate loans totalling $5.1 million, or 6.9% of the
Bank's gross loan portfolio. The largest multi-family loan at December 31,
1996 was $798,000 and represented a 50% participation with a local financial
institution. At December 31, 1996, the Bank had no multi-family real estate
loans which were over 90 days delinquent.
Permanent multi-family real estate loans currently originated by the
Bank have a maximum maturity of 10 years, with most having maturities ranging
from 5 to 10 years. Most of the loans amortize over a 25 year period. Rates
on permanent loans are fixed, based on competitive factors. Multi-family real
estate loans are generally written in amounts of up to 75% of the appraised
value of the property, and borrowers are personally liable for all of the
indebtedness.
Appraisals on properties securing multi-family loans are performed by
independent appraisers designated by the Bank at the time the loan is made.
All appraisals on multi-family loans are reviewed by the Bank's loan committee.
In addition, the Bank's current underwriting procedures require verification of
the borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property.
Multi-family loans generally present a higher level of risk than loans
secured by one- to four-family residences. This greater risk is due to 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
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced (for
example, if leases are not obtained or renewed, or a bankruptcy court modifies
a lease term), the borrower's ability to repay the loan may be impaired.
CONSUMER LENDING
The Bank originates a variety of different types of consumer loans,
including home equity loans, rehabilitation loans, direct automobile loans,
deposit account loans and home improvement loans. Although North Federal has
attempted to place increased emphasis on consumer loans, particularly home
equity and rehabilitation loans because of their attractive yields, shorter
terms to maturity, and community need, at December 31, 1996, only $239,000 or
.33% of the Bank's gross loan portfolio, consisted of consumer loans.
The Bank's home equity loans are underwritten such that the total
commitment amount, when combined with the balance of the first mortgage lien,
may not exceed 80% of the appraised value of the property. These loans are
written with fixed terms and carry fixed rates of interest. At December 31,
1996, the Bank had $123,000 of home equity loans outstanding, or .17% of the
Bank's gross loan portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
the ability to meet existing obligations and payments on the proposed loan.
Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security,
if any, in relation to the proposed loan amount. While consumer loans other
than
9
<PAGE> 10
home equity loans generally involve a higher level of credit risk than one- to
four-family residential loans, consumer loans are typically made at higher
interest rates or for shorter terms. The shorter term of consumer loans
increases the interest rate sensitivity of the lending institution's portfolio.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
The Bank had only one delinquent consumer loan with a balance of less than
$1,000 at December 31, 1996, although there can be no assurance that
delinquencies will not increase in the future.
The Bank plans to introduce a new home equity line of credit product
in 1997 in order to enhance its consumer loan portfolio.
COMMERCIAL LENDING
In order to further enhance the yield on its assets, the Bank issued a
commercial line of credit to a manufactured housing developer to finance the
period of time between the delivery of a unit to closing. This period is
usually between 60 to 90 days. The line of credit is collateralized by a
secured interest in the individual units and any related sales contracts. In
addition, the line of credit is personally guaranteed by the developer. Loan
to value ratios will range between 50% to 60% at any given time. At December
31, 1996, the outstanding line of credit balance was $790,000. The line of
credit carries a fixed rate of interest on a one-year renewable basis and was
current as of December 31, 1996.
Commercial loans generally carry a higher rate of interest and are
made for shorter periods of time than fixed- rate or adjustable rate one- to
four-family residential loans. Commercial loans are usually larger and carry a
greater degree of risk, in part because the borrower's ability to repay the
debt may be largely dependent on the cash flow from the underlying business.
The Bank analyzes the financial condition of the property and the borrower in
determining whether to extend credit, and generally requires a personal
guarantee from the borrower. The Bank intends to expand its commercial lending
activities, subject to customer demand and the existence of qualified
borrowers.
MORTGAGE-BACKED SECURITIES
The Bank purchases mortgage-backed securities to complement its
mortgage lending activities, when demand is low. At December 31, 1996,
mortgage-backed securities totaled $7.5 million, or 6.4% of the Bank's total
assets. For information regarding the amortized cost and market values of
North Federal's mortgage-backed securities portfolio, see Notes 4 and 5 of the
Notes to Consolidated Financial Statements.
In November 1995, the Financial Accounting Standards Board issued a
special report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," which afforded an entity a
one- time opportunity to reassess the appropriateness of the classifications of
all securities held at that time and to account for any
10
<PAGE> 11
resulting reclassification at fair value in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), Accounting for Certain
Investments in Debt and Equity Securities. The Company transferred $6.8
million of mortgage-backed securities on December 31, 1995 from
held-to-maturity to available-for-sale in accordance with the guide and sold
those securities during the first quarter of 1996 to fund new loan
originations. At December 31, 1996, mortgage backed securities totaled $7.5
million and were all classified as held-to-maturity.
Historically, most of the Bank's mortgage-backed securities were long
term, fixed-rate federal agency securities. In recent years, the Bank has
purchased other types of mortgage-backed securities consistent with its
asset/liability management objectives. In this regard, the Bank emphasizes the
purchase of adjustable-rate or short- to intermediate-term fixed-rate
mortgage-backed securities for asset/liability management purposes and in order
to supplement the Bank's origination of ARM loans. At December 31, 1996, $1.6
million or 21.6% of the Bank's mortgage- backed securities carried adjustable
rates of interest.
Under the OTS' risk-based capital requirements, GNMA mortgage-backed
securities have a zero percent risk- weighting and FNMA, FHLMC and AA- or
higher rated mortgage-backed securities have a 20% risk-weighting, in contrast
to the 50% risk-weighting carried by one- to four-family performing residential
mortgage loans. None of the mortgage- backed securities held by the Bank had a
risk-weight for regulatory capital purposes above 20%.
All of the Bank's mortgage-backed securities are backed by federal
agencies. Accordingly, management believes that the Bank's mortgage-backed
securities are generally resistant to credit problems.
11
<PAGE> 12
The following table sets forth the contractual maturities of the
Bank's mortgage-backed securities at December 31, 1996. Mortgage-backed
securities having adjustable interest rates are shown as maturing in the period
during which the security is repricing.
<TABLE>
<CAPTION>
DECEMBER 31,
DUE IN 1996
----------------------------------------------------------------
6 MONTHS 6 MONTHS 1 TO 3 3 TO 5 5 TO 10
OR LESS TO 1 YEAR YEARS YEARS YEARS
-------- --------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation . . . . . . . . $ 144 $ 873 $1,460 $119 $587
Federal National
Mortgage Association . . . . . . . . 1,122 --- --- --- ---
Government National
Mortgage Association . . . . . . . . --- --- --- --- 85
------- ------- ------- ------- -----
Total . . . . . . . . . . . . . . $1,266 $873 $1,460 $119 $672
====== ====== ====== ===== ====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
DUE IN 1996
------------------------------------------
10 TO 20 OVER 20 BALANCE
YEARS YEARS OUTSTANDING
-------- ------- -----------
<S> <C> <C> <C>
Federal Home Loan
Mortgage Corporation . . . . . . . . $2,631 $300 $6,114
Federal National
Mortgage Association . . . . . . . . --- --- 1,122
Government National
Mortgage Association . . . . . . . . 144 --- 229
------ ------ -------
Total . . . . . . . . . . . . . . $2,775 $300 $7,465
====== ==== ======
</TABLE>
12
<PAGE> 13
CREDIT ENHANCEMENT
In 1985, the Bank, in participation with other financial institutions,
entered into a credit enhancement agreement with the city of Arlington Heights,
Illinois to guarantee the repayment of a $17.0 million municipal revenue bond
(the "Bond") secured by a first mortgage on a 216-unit apartment building
project, which includes retail space on the ground floor of the building. The
Bank's share of the guarantee amounted to $1.0 million. To secure its
guarantee of the Bond, the Bank had pledged at December 31, 1996, U. S.
Government securities with an amortized cost of $1.3 million. The project
conforms with the requirement that a certain minimum number of dwelling units
be set aside for occupancy by low- and moderate-income families. See Notes 5
and 18 of the Notes to Consolidated Financial Statements.
Pursuant to an agreement among the owner of the apartment project and
the financial institutions providing the Bond guarantees, the enhancement fees
owed to the financial institutions since 1990 have not been paid. While income
of the project has improved as a result of improved occupancy over the past
several years (94% at December 31, 1996), the project has not yet generated
sufficient operating income to meet debt service and pay the deferred
enhancement fees. The Bank has classified the guarantee as substandard. See
"Asset Quality - Classified Assets."
In the event of a default on the Bond, the Bank's maximum liability is
the amount of its credit guarantee, and if the Bank does not act to meet its
agreed upon obligations the pledged collateral may be liquidated and the
proceeds used to repay the Bond. The Bank's position in the case of a default
would be secured by a first mortgage lien on the apartment project and a lien
against all income derived therefrom.
The credit enhancers have filed a foreclosure suit based on
non-payment of fees and are awaiting the filing of responses. The Bank and the
other credit enhancers have reviewed an offer by the owners to buy the
outstanding bonds at a discount, thereby removing the enhancers from the
project. At December 31, 1996 the Partnership had not made a final proposal
and have indicated they are still negotiating financing. The Bank has
allocated $126,000 in a specific reserve for this project as of December 31,
1996.
13
<PAGE> 14
LOAN ORIGINATION AND REPAYMENT ACTIVITIES
The following table shows the Bank's loan originations, loan and
mortgage-backed securities purchases, sales and principal repayments for the
periods indicated. The Bank has not sold any loans in recent years. The last
package of loans sold in the secondary market to FHLMC was in 1987. The Bank
maintains an approved seller/servicer status with FHLMC. The Bank purchased a
50% participating interest in two loans totaling $1,500,000 during 1996 from a
local financial institution.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1995 1996
-------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans receivable (gross) at beginning of period . . . . . $30,318 $45,694 $56,513
------- ------- -------
Originations and purchases by type:
----------------------------------
Fixed rate:
Real estate - one- to four-family . . . . . . . . . . . 21,920 16,378 23,930
- multi-family . . . . . . . . . . . . . . 687 2,117 1,623
Non-real estate - consumer and commercial . . . . . . . 440 223 1,291
------- ------- ------
Total loans originated . . . . . . . . . . . . . . . 23,047 18,718 26,844
Principal repayments . . . . . . . . . . . . . . . . . . 7,671 7,899 9,729
------- ------- --------
Total loans at end of period . . . . . . . . . . . . $45,694 $56,513 $73,628
======= ======= =======
Mortgage-backed securities (net) at beginning of period . 21,379 17,015 16,346
Purchases . . . . . . . . . . . . . . . . . . . . . . . 688 1,960 ---
Repayments . . . . . . . . . . . . . . . . . . . . . . 5,059 2,747 2,190
Sales . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 6,600
Unrealized gain on mortgage-backed securities
available-for-sale . . . . . . . . . . . . . . . . . --- 93 (93)
Amortization of premiums and discounts . . . . . . . . 7 25 2
------- ------- -------
Mortgage-backed securities (net)
at end of period . . . . . . . . . . . . . . . . . $17,015 $16,346 $7,465
======= ======= ======
</TABLE>
14
<PAGE> 15
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the delinquency by contacting the borrower. In the case of
residential loans, a late notice is sent not later than 30 days after the due
date. Additional written and verbal contacts may be made with the borrower
between 30 and 90 days after the due date. If the delinquency continues for a
period of 60 days, the Bank usually sends a default letter to the borrower and,
after 90 days, institutes appropriate action to foreclose on the property. If
foreclosed, the property is sold at public auction and may be purchased by the
Bank. Delinquent consumer loans are handled in a generally similar manner.
The Bank's procedures for repossession and sale of consumer collateral are
subject to various requirements under Illinois consumer protection laws. The
Bank has historically had few foreclosed assets and, as set forth at "-
Non-Performing Assets" below, has had none during the past five years.
Accordingly, the Bank has not charged-off any loans during the past five years.
Delinquent Loans. The following table sets forth information
concerning delinquent loans at December 31, 1996, in dollar amounts and as a
percentage of the Bank's total loan portfolio. The amounts presented represent
the total remaining principal balances of the related loans, rather than the
actual payment amounts which are overdue.
<TABLE>
<CAPTION>
LOANS DELINQUENT FOR:
-------------------------------------------------------
TOTAL
90 DAYS DELINQUENT
60-89 DAYS AND OVER LOANS
-----------------------------------------------------------------------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
------------- ---------------------------- --------------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
$--
One- to four-family . . . . . . . . . . 1 $83 --- 1 $83
1
---
Consumer . . . . . . . . . . . . . . . . --- --- 1 1 $ 1
--- --- -- --- ---
Total . . . . . . . . . . . . . . . . 1 $83 $ 1 1 2 $84
==== ==== === == === ===
Delinquent loans to total loans . . . . 0.12% 0.00% 0.12%
</TABLE>
15
<PAGE> 16
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
placed on non-accrual status when the collection of principal or interest
becomes doubtful. For all periods presented, the Bank has had no troubled debt
restructurings. Foreclosed assets are assets acquired in settlement of loans.
There were no foreclosed assets at the dates presented.
<TABLE>
<CAPTION>
December 31,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family . . . . . . . . . . . $31 $39 $30 $24 $--
Consumer . . . . . . . . . . . . . . . . --- 8 2 --- 1
---- ---- --- ---- ----
Total non-performing assets . . . . . $31 $47 $32 $24 $ 1
=== === === === ===
Total as a percentage of total assets . . . 0.03% 0.04% 0.03% 0.02% 0.00%
==== ==== ==== ==== ====
</TABLE>
Other Loans of Concern. As of December 31, 1996, there were no other
loans in addition to the non-performing assets set forth in the table above
with respect to which known information about the possible credit problems of
the borrowers or the cash flows of the security properties have caused
management to have concerns as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories. Management has taken this
into consideration in determining the adequacy of the allowance for losses on
loans as of December 31, 1996.
Classified 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. 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 insured 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.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When an insured institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of that portion of the asset so
classified or to charge off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the OTS and the FDIC, who may order the establishment of
additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the problem assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. Total
classified assets at December 31, 1996 amounted to less than $1,000 and are
included in
16
<PAGE> 17
the table of non-performing assets above. An additional exposure of concern is
described under the caption "- Credit Enhancement" above.
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of
all loans of which full collectibility may not be reasonably assured, considers
among other matters, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate loan loss allowance.
Allowances also are established for loans considered to be impaired. The
calculation of reserve levels for impaired loans is based upon the discounted
present value of expected cash flows received from the debtor or other measures
of value such as market prices or collateral values. As the Company did not
identify any loans considered impaired in 1996, no additional allowance was
required. Although management believes it uses the best information available
to make such determinations, future adjustments to reserves may be necessary,
and net income could be significantly affected, if circumstances differ
substantially from the assumptions used in making the initial determinations.
See Note 1(f) and Note 6 of the Notes to Consolidated Financial Statements and
"Regulation." At December 31, 1996, the Bank had an allowance for loan losses
of $208,000, which was equal to .28% of net loans receivable.
17
<PAGE> 18
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period . . . . . . . . . . . . . $ 22 $ 34 $106 $160 $200
Charge-offs:
One- to four-family . . . . . . . . . . . . . . . . . . --- --- --- --- ---
Consumer . . . . . . . . . . . . . . . . . . . . . . . --- --- --- --- ---
Recoveries . . . . . . . . . . . . . . . . . . . . . . . --- --- --- --- ---
--- --- --- --- ---
Net charge-offs . . . . . . . . . . . . . . . . . . . . . --- --- --- --- ---
Additions charged to operations . . . . . . . . . . . . . 12 72 54 40 8
---- ---- ---- ---- ----
Balance at end of period . . . . . . . . . . . . . . . . $ 34 $106 $160 $200 $208
==== ==== ==== ==== ====
</TABLE>
When the Bank repossesses property it is thereafter classified as real
estate owned. Any gains or losses (realized or reserved for) thereafter are
treated as real estate owned activity. The Bank had no real estate owned as of
the dates presented.
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Unallocated . . . . . . . . . . . $34 $106 $160 $200 $208
--- ---- ---- ---- ----
Total . . . . . . . . . . . $34 $106 $160 $200 $208
=== ==== ==== ==== ====
</TABLE>
INVESTMENT ACTIVITIES
North Federal must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has maintained
liquid assets at levels significantly above the minimum requirements imposed by
the OTS regulations and above levels believed adequate to meet the requirements
of normal operations, including potential deposit outflows. Cash flow
projections are regularly reviewed and updated to assure that adequate
liquidity is maintained. See "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial
paper, investment grade corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly.
18
<PAGE> 19
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's
asset/liability and interest rate risk management policies, concern for the
highest investment quality, liquidity needs and performance objectives.
At December 31, 1996, the Company's interest-bearing deposits with banks
and dollar denominated money market accounts totaled $3.2 million, or 2.7% of
total assets. Investment securities, consisting of U.S. government securities,
federal agency obligations and FHLB stock, totaled $25.3 million, or 21.5% of
total assets, and investment in federal funds sold totaled $4.8 million or 4.1%
of total assets. It is the Company's general policy to purchase investment
securities which are U.S. Government securities or federal agency obligations
or mutual funds which invest in such securities or mortgage-backed securities
originated by such agencies. At December 31, 1996, the weighted average term
to maturity or repricing of the investment portfolio, excluding FHLB stock,
equity securities and mortgage-backed securities, was 14 months.
The Company's investment in mutual funds was carried at fair value with
any unrealized gain or loss in value reflected as a component of Stockholder's
Equity. Other than temporary declines in the market value of mutual funds in
the amount of $612,000 were charged to operations during 1994. The Company
disposed of its mutual fund investment in February 1995. At December 31, 1996,
the Company's dollar denominated mutual fund portfolio totaled $547,000.
19
<PAGE> 20
The following table sets forth the composition of the Company's
investment portfolio, excluding its mortgage-backed securities, at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------
1994 1995 1996
---------------------- -----------------------------------------------------
CARRYING % OF CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
--------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury notes . . . . . . . . . . . . . . $14,177 38.85% $ 6,530 22.52% $ 2,237 8.73%
U.S. Government agency securities . . . . . . . 13,511 37.03 21,008 72.43 21,844 85.22
FHLB stock . . . . . . . . . . . . . . . . . . 503 1.38 624 2.15 1,205 4.70
Other . . . . . . . . . . . . . . . . . . . . . 500 1.37 598 2.06 100 0.39
Equity securities . . . . . . . . . . . . . . . --- --- 244 0.84 245 0.96
Mutual funds . . . . . . . . . . . . . . . . . 7,796 21.37 --- --- --- ---
------- ------ ------- ------ ------- ------
Total investment securities and FHLB stock . $36,487 100.00% $29,004 100.00% $25,631 100.00%
======= ====== ======= ====== ======= ======
Other Interest-Earning Assets:
Interest-bearing deposits with banks . . . . . $ 2,016 $ 2,634 $ 2,644
Dollar denominated mutual funds . . . . . . . . ---- 1,127 547
Federal funds sold . . . . . . . . . . . . . . 3,800 3,925 4,800
------- ------- -------
Total . . . . . . . . . . . . . . . . . . . $ 5,816 $ 7,686 $ 7,991
======= ======= =======
Average remaining life or term to repricing of investment
securities and other interest-earning assets, excluding
FHLB stock and equity securities . . . . . . . . . . . . 16 mos. 9 mos. 14 mos.
</TABLE>
20
<PAGE> 21
The composition and contractual maturities of the investment portfolio,
excluding mortgage-backed securities, equity securities and FHLB of Chicago
stock, are indicated in the following table.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------------------------------------------
TOTAL
ONE YEAR 1 THRU 5 OVER 5 INVESTMENT
OR LESS YEARS YEARS SECURITIES
----------- --------- -------- ---------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR
COST COST COST COST VALUE
------------ ---------- ---------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Notes . . . . . . . . . . . $2,241 $ --- $ --- $ 2,241 $ 2,237
U.S. Governemnt agency securities . . . . 1,000 3,000 19,000 23,000 21,844
Other . . . . . . . . . . . . . . . . . . --- --- 100 100 100
Total investment securities . . . . . $3,241 $3,000 $19,100 $25,341 $24,181
====== ====== ======= ======= =======
Weighted average yield(1) . . . . . . . . 5.47% 5.70% 7.16% 6.76%
====== ====== ======= =======
_______________________
(1) The weighted average yield is based upon theinterest rate in effect at December 31, 1996.
</TABLE>
SOURCES OF FUNDS
General. The Bank's primary sources of funds are deposits, borrowings,
reverse repurchase agreements, amortization and prepayment of loan principal,
maturities and sale of investment securities, short-term investments and funds
provided from operations.
Deposits. North Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of
passbook accounts, NOW and non-interest-bearing checking accounts, money market
accounts and certificate accounts. The Bank relies primarily on advertising,
competitive pricing policies and customer service to attract and retain these
deposits. North Federal solicits deposits from its market area only.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability and interest rate risk management, profitability and growth
objectives and has traditionally attempted to retain longer term deposits for
asset/liability and interest rate risk management purposes. Based on its
experience, the Bank believes that its passbook, NOW and non-interest-bearing
checking accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
21
<PAGE> 22
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank for the dates
indicated and the rates offered as of December 31, 1996. See Note 9 of Notes
to Consolidated Financial Statements for weighted average nominal rates.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------
1994 1995 1996
------------------------- -------------------------- -------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------------- ----------- ------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TRANSACTION AND SAVINGS DEPOSITS:
--------------------------------
Passbook Accounts 2.75% . . . . . . . . . . . . $19,336 27.6% $17,380 23.1% $16,299 22.1%
NOW and Non-Interest Bearing
Accounts 0.00% - 2.02% . . . . . . . . . . . . 6,882 9.8 7,184 9.6 9,194 12.5
Money Market Accounts
0.00% - 4.25% . . . . . . . . . . . . . . . . 7,240 10.3 5,637 7.5 6,233 8.5
----- ----- ------- ----- ------- -----
Total Non-Certificates . . . . . . . . . . . . 33,458 47.7 30,201 40.2 31,726 43.1
------- ----- ------- ----- ------- -----
TOTAL CERTIFICATES:
------------------
0.00 - 3.99% . . . . . . . . . . . . . . . . 5,659 8.1 --- --- --- ---
4.00 - 4.99% . . . . . . . . . . . . . . . . 13,546 19.3 3,419 4.5 1,574 2.1
5.00 - 5.99% . . . . . . . . . . . . . . . . 7,029 10.0 18,764 25.0 28,198 38.3
6.00 - 6.99% . . . . . . . . . . . . . . . . 3,590 5.1 19,918 26.5 10,981 14.9
7.00 - 7.99% . . . . . . . . . . . . . . . . 2,514 3.6 2,341 3.1 885 1.2
8.00 - 8.99% . . . . . . . . . . . . . . . . 4,382 6.2 526 0.7 247 0.4
----- ---- ----- ----- ----- ---
Total Certificates . . . . . . . . . . . . . . 36,720 52.3 44,968 59.8 41,885 56.9
------- ------ ------- ------ ------- -----
Total Deposits . . . . . . . . . . . . . . . . $70,178 100.0% $75,169 100.0% $73,611 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
22
<PAGE> 23
The following table sets forth the savings flows at the Bank during the
periods indicated. Net increase refers to the amount of deposits during a
period less the amount of withdrawals during the period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Opening balance . . . . . . . . . . . . $ 74,708 $ 70,178 $ 75,169
Deposits . . . . . . . . . . . . . . . 93,726 100,836 91,640
Withdrawals . . . . . . . . . . . . . . 101,001 99,151 97,018
Interest credited . . . . . . . . . . . 2,745 3,306 3,820
-------- -------- --------
Ending balance . . . . . . . . . . . . $70,178 $ 75,169 $ 73,611
======== ======== ========
Net increase (decrease) . . . . . . . . $ (4,530) $ 4,991 $ (1,558)
======== ======== ========
Percent increase (decrease) . . . . . . (6.06)% 7.11% (2.07)%
======== ========= ========
</TABLE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
0.00- 5.00- 6.00- 7.00- 8.00% OR PERCENT
4.99% 5.99% 6.99% 7.99% GREATER TOTAL OF TOTAL
------- ------- ------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending :
- ----------------------------
March 31, 1997 . . . . . . . . . . . . . $ 1,172 $ 6,864 $ 701 $--- $ 10 $ 8,748 20.89%
June 30, 1997 . . . . . . . . . . . . . . 164 7,716 953 11 --- 8,844 21.12
September 30, 1997 . . . . . . . . . . . 123 2,557 1,037 --- --- 3,717 8.87
December 31, 1997 . . . . . . . . . . . . 48 2,155 262 4 --- 2,469 5.90
March 31, 1998 . . . . . . . . . . . . . 35 1,225 3,129 98 --- 4,486 10.71
June 30, 1998 . . . . . . . . . . . . . . --- 1,269 84 --- --- 1,353 3.23
September 30, 1998 . . . . . . . . . . . --- 818 37 20 --- 875 2.09
December 31, 1998 . . . . . . . . . . . . --- 574 5 --- --- 579 1.38
March 31, 1999 . . . . . . . . . . . . . --- 1,147 36 35 141 1,359 3.24
June 30, 1999 . . . . . . . . . . . . . . 20 548 623 --- --- 1,191 2.84
September 30, 1999 . . . . . . . . . . . --- 1 501 21 1 524 1.25
December 31, 1999 . . . . . . . . . . . . --- 72 302 696 --- 1,070 2.55
Thereafter . . . . . . . . . . . . . . . 12 3,252 3,311 --- 95 6,670 15.93
------- ------- ------- ---- ----- ------- ------
Total . . . . . . . . . . . . . . . . $ 1,574 $28,198 $10,981 $885 $ 247 $41,885 100.00%
======= ======= ======= ==== ===== ======= ======
Percent of total . . . . . . . . . . . 3.76% 67.32% 26.22% 2.11% 0.59% 100.00%
======= ======= ======= ==== ===== =======
</TABLE>
23
<PAGE> 24
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1996.
<TABLE>
<CAPTION>
MATURITY
----------------------------------------------------
OVER OVER
3 MONTHS 3 TO 6 6 TO 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
------------- ----------- ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Certificates of deposit of less than
$100,000 . . . . . . . . . . . . . . . . $7,784 $6,939 $5,059 $16,323 $36,105
Certificates of deposit of $100,000 or
greater . . . . . . . . . . . . . . . . 964 1,905 1,127 1,784 5,780
------ ------ ------ ------- -------
Total certificates of deposit . . . . . . $8,748 $8,844 $6,186 $18,107 $41,885
====== ====== ====== ======= =======
</TABLE>
SUBSIDIARY AND OTHER ACTIVITIES
As a federally chartered savings bank, North Federal is permitted by OTS
regulations to invest up to 2% of its assets in the stock of, or unsecured
loans to, service corporation subsidiaries. North Federal may invest an
additional 1% of its assets in service corporations where such additional funds
are used for inner-city or community development purposes.
At December 31, 1996 North Federal had one active subsidiary, North
Financial Corporation, which provides general insurance services to the
customers of the Bank. The Bank's investment in its subsidiary was $9,838 at
December 31, 1996. For the year ended December 31, 1996 North Financial
Corporation had a net loss of $2,539.
REGULATION
GENERAL
North Federal is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a member
of the FHLB of Chicago and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As
the savings and loan holding company of North Federal, the Company also is
subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings
associations. North Federal is a member of the Savings Association Insurance
Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the
two deposit insurance funds administered by the FDIC, and the deposits of North
Federal are insured by the FDIC. As a result, the FDIC has certain regulatory
and examination authority over North Federal.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
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FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The OTS has extensive authority over the operations of savings
associations. As part of this authority, North Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the
OTS and the FDIC. The last regular OTS and FDIC examinations of North Federal
were as of September 30, 1996 and November 10, 1990, respectively. Under
agency scheduling guidelines, it is likely that another examination will be
initiated in the near future. When examinations are conducted by the OTS and
the FDIC, the examiners may require an association to provide for higher
general or specific loan loss reserves. All savings associations are subject
to a semi-annual assessment, based upon the savings association's total assets,
to fund the operations of the OTS. North Federal's OTS assessment for the
fiscal year ended December 31, 1996, was $34,099.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions, including misleading or untimely
reports filed with the OTS, may provide the basis for enforcement action.
Except under certain circumstances, public disclosure of final enforcement
actions by the OTS is required.
In addition, the investment, lending and branching authority of North
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally
authorized to branch nationwide. North Federal is in compliance with the noted
restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At December 31, 1996, the Bank's lending limit under this restriction was $2.7
million. North Federal is in compliance with the loans-to-one-borrower
limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to
comply with an approved plan will subject the institution to further
enforcement action. The OTS and the other federal banking agencies have also
proposed additional guidelines on asset quality and earnings standards. No
assurance can be given as to whether or in what form the proposed regulations
will be adopted.
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<PAGE> 26
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
North Federal is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the SAIF
or the BIF. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier
1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all
insured institutions will be made by the FDIC for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio to
that designated reserve level, or such higher reserve ratio as established by
the FDIC. The FDIC may also impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching
its statutory reserve ratio the FDIC revised the premium schedule for BIF
insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as
discussed below), the SAIF would not attain its designated reserve ratio until
the year 2002. As a result, SAIF insured members would continue to be
generally subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio.
In order to eliminate this disparity and any competitive disadvantage between
BIF and SAIF member institutions with respect to deposit insurance premiums,
legislation to recapitalize the SAIF was enacted in 1996. The legislation
provides for a one-time assessment to be imposed on all deposits assessed at
the SAIF rates as of March 31, 1995, in order to recapitalize the SAIF. It
also provides for the merger of the BIF and the SAIF on January 1, 1999 if no
savings associations then exist. The special assessment rate has been
established at .657% of deposits
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<PAGE> 27
by the FDIC and the resulting assessment of $486,000 was paid in November 1996.
This special assessment significantly increased noninterest expense and
adversely affected the Bank's results of operations for the quarter ended
September 30, 1996. As a result of the special assessment, the Bank's deposit
insurance premium was reduced to zero based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for
resolving the thrift crisis in the 1980s. Although the FDIC has proposed that
the SAIF assessment be equalized with the BIF assessment schedule, effective
October 1, 1996, SAIF-insured institutions will continue to be subject to a
FICO assessment as a result of this continuing obligation. Although the
legislation also now requires assessments to be made on BIF-assessable deposits
for this purpose, effective January 1, 1997, that assessment will be limited to
20% of the rate imposed on SAIF assessable deposits until the earlier of
December 31, 1999 or when no savings association continues to exist, thereby
imposing a greater burden on SAIF member institutions such as the Bank.
Thereafter, however, assessments on BIF-member institutions will be made on the
same basis as SAIF-member institutions. The rates to be established by the
FDIC to implement this requirement for all FDIC-insured institutions is
uncertain at this time, but are anticipated to be about a 6.5 basis points
assessment on SAIF deposits and 1.5 basis points on BIF deposits until BIF
insured institutions participate fully in the assessment.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings associations, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable
to such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS
is also authorized to impose capital requirements in excess of these standards
on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At December 31, 1996, the Bank
did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At December 31, 1996, the Bank had no material
subsidiary activity.
At December 31, 1996, the Bank had tangible capital of $14.3 million, or
12.4% of adjusted total assets, which is approximately $12.5 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
27
<PAGE> 28
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets, including a limited amount of purchased credit
card relationships. As a result of the prompt corrective action provisions
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At December
31, 1996, the Bank had no intangibles which were subject to these tests.
At December 31, 1996, North Federal had core capital equal to $14.3
million, or 12.4% of adjusted total assets, which is $10.8 million above the
minimum leverage ratio requirement of 3.0% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk- weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent of
core capital. The OTS is also authorized to require a savings association to
maintain an additional amount of total capital to account for concentration of
credit risk and the risk of non-traditional activities. At December 31, 1996,
the Bank had $208,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. North Federal had no
such exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to
50% of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease
in interest rates (whichever results in a greater decline). Net portfolio
value is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may
be completed. Any savings association with less than $300 million in assets
and a total capital ratio in excess of 12%, such as North Federal, is exempt
from this requirement unless the OTS determines otherwise. This new rule is
not expected to have any material adverse effect on the Bank.
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<PAGE> 29
On December 31, 1996, North Federal had total capital of $14.5 million
(including $14.3 million in core capital and $208,000 in qualifying
supplementary capital) and risk-weighted assets of $45.2 million (including
$1.0 million in converted off-balance sheet assets); or total capital of 32.0%
of risk-weighted assets. This amount was $10.8 million above the 8.0%
requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to
meet their capital requirements. The OTS is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to
those applicable to significantly undercapitalized associations. In addition,
the OTS must appoint a receiver (or conservator with the concurrence of the
FDIC) for a savings association, with certain limited exceptions, within 90
days after it becomes critically undercapitalized.
Any undercapitalized association is also subject to the general
enforcement authority of the OTS and the FDIC, including the appointment of a
conservator or receiver. The OTS is also generally authorized to reclassify an
association into a lower capital category and impose the restrictions
applicable to such category if the institution is engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on North
Federal may have a substantial adverse effect on the Bank's operations and
profitability. The Company's shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue
additional shares of Common Stock, such issuance may result in the dilution in
the percentage of ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions on savings associations with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
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<PAGE> 30
Generally, savings associations, such as the Bank, that before and after
the proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain
OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net
income to date during the calendar year. A savings association may not make a
capital distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
LIQUIDITY
All savings associations, including North Federal, are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of
all savings associations. At the present time, the minimum liquid asset ratio
is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short- term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily
balance of net withdrawable deposit accounts and current borrowings. Penalties
may be imposed upon associations for violations of either liquid asset ratio
requirement. At December 31, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 15.6% and a short-term
liquid assets ratio of 12.4%.
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<PAGE> 31
ACCOUNTING
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with Generally Accepted
Accounting Principles. Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation. North Federal
is in compliance with these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP by
the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial
reports must incorporate any other accounting regulations or orders prescribed
by the OTS.
QUALIFIED THRIFT LENDER TEST
All savings associations, including North Federal, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of
its portfolio assets (as defined by regulation) in qualified thrift investments
on a monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701 (a) (19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At December 31, 1996, the Bank met the test and has always
met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after
the failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe
and sound banking practices 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 the
examination of North Federal, to assess the institution's record of meeting the
credit needs of its community and to take such record into
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<PAGE> 32
account in its evaluation of certain applications, such as a merger or the
establishment of a branch, by the Bank. An unsatisfactory rating may be used
as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the
CRA in the past few years, the Bank may be required to devote additional funds
for investment and lending in its local community. The Bank received a
satisfactory CRA rating on its most recent CRA compliance examination.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of the Bank include the Company and any
company which is under common control with North Federal. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Bank's subsidiary is not deemed an affiliate, however, the OTS
has the discretion to treat subsidiaries of savings associations as affiliates
on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Holding Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of
another savings association as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of the Company
and any of its subsidiaries (other than North Federal or any other SAIF-insured
savings association) would become subject to such restrictions unless such
other associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If North Federal fails the QTL test, the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its
other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In
addition, within one year of such failure the Company must register as, and
will become subject to, the restrictions applicable to bank holding companies.
The activities authorized for a bank holding company are more limited than are
the activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."
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The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
FEDERAL SECURITIES LAW
The Common Stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
is subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public
information requirements, each affiliate of the Holding Company is able to sell
in the public market, without registration, a limited number of shares in any
three- month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1996, North Federal was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "-Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
North Federal is a member of the FHLB of Chicago, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures,
established by the board of directors of the FHLB, which are subject to the
oversight of the Federal Housing Finance Board. All advances from the FHLB are
required to be fully secured by sufficient collateral as determined by the
FHLB. In addition, all long- term advances are required to provide funds for
residential home financing.
As a member, North Federal is required to purchase and maintain stock in
the FHLB of Chicago. At December 31, 1996, the Bank had $1.2 million in FHLB
stock, which was in compliance with this requirement. Over the past five
calendar years, such dividends have averaged 5.89% and were 6.73% for calendar
year 1996.
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<PAGE> 34
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in North Federal's capital.
For the year ended December 31, 1996, dividends paid by the FHLB of
Chicago to North Federal totaled $71,000, which constitute a $32,000 increase
from the amount of dividends received in 1995. The $20,000 dividend received
for the quarter ended December 31, 1996 reflects an annualized rate of 7.00%,
or 0.05% below the rate for 1995.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following is a discussion of material tax matters and does
not purport to be a comprehensive description of the tax rules applicable to
the Bank or the company. The Company and Bank have not been audited by the IRS
during the last 12 years. For federal income tax purposes, the Company and the
Bank file consolidated income tax returns and report their income on a calendar
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other coprorations and with some
exceptions, including particularly the Bank's tax reserve bor bad debts,
discussed below.
RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES
Prior to the enactment, on august 20, 1996, of the Small business Job
Protection Act of 1996 (the "Small business Act"), for federal income tax
purposes, thrift institutions such as the Bank, which met certain definitional
tests primarily relating to their assets and nature of their business, were
permitted to establish tax reserves for bad debts and to make annual additions
thereto, which additions could, within specified limitations, be deducted in
arriving atheir taxable income. The Bank's deduction with respect to
"qualifying loans," which are generallyt loans secured by certain interests in
real property, could be computed using an amount based on a six-year moving
average of the Bank's actual loss experience (the "Experience Method"), or a
percentage equal to 8.0% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications and
reduced by the amount of any permitted addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the Bank
will be required to use the Experience Method of computing additions to its bad
debt reserve for taxable years beginning with the Bank's taxable year beginning
January 1, 1996. In addition, the Bank will be required to recapture (i.e.,
take into taxable income) over six-year period, beginning with the Bank's
taxable year beginning January 1, 1996, the excess of the balance of its bad
debt reserves (other than the supplemental reserve) as of December 31, 1995
over the greater of (a) its "base year reserve," i.e., the balance of such
reserves as of December 31, 1987 or (b) an amount that would have been the
balance of such reserves as of December 31, 1995 had the Bank always computed
the additions to its reserves using the Experience Method. However, under the
Small Business Act such recapture requirements will be suspended for each of
the two successive taxable years beginning January 1, 1996 in which the Bank
originates a minimum amount of certain residential loans during such years that
is not less than the average of the
34
<PAGE> 35
principal amounts of such loans made by the Bank during its six taxable years
preceding January 1, 1996.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve 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 Bank's taxable income.
Nondividend distributions include distributions in excess of the Bank'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 Association'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 Bank's income.
The amount of additional taxable income created from a nondividend
distribution is equal to the lesser of the Bank's base year reserve and
supplemental reserve for losses on loans; or 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 nondivided distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
federal corporate income tax rate.
Corporate Alternative Minimum Tax. the Internal Revenue Code of 1986, as
amended (the "Code"), imposes a tax ("AMT") on alternative minimum taxable
income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Bank currently has none. 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 Bank's AMTI is increased by an amount equal to 75% of
the amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). In addition, for taxable years beginning after December 31,
1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of
AMTI (with certain modifications) over $2 million is imposed on corporations,
including the Bank, whether or not an AMT is paid. Under pending legislative
proposals, the environmental tax would be extended to taxable years beginning
before January 1, 2007. The Bank does not expect to be subject to the AMT, but
may be subject to the environmental tax liability.
Elimination of Dividends; Dividends Received Deduction. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. A 70% dividends received deduction
generally applies with respect to dividends received from domestic corporations
that are not members of such affiliated group, except that an 80% dividends
received deduction applies if the Company and the Bank own more than 20% of the
stock of a corporation paying a dividend. Under pending legislative proposals,
the 70% dividends received deduction would be reduced to 50% with respect to
dividends paid after enactment of such legislation.
STATE AND LOCAL TAXATION
STATE OF ILLINOIS. The Company and the Bank file a combined unitary
Illinois income tax return. For Illinois income tax purposes the Company and
the Bank are taxed at an effective rate equal to 7.3% of Illinois Taxable
Income. For these purposes, "Illinois Taxable Income" generally means federal
taxable income, subject to certain adjustments (including the addition of
interest income on state and municipal obligations and the exclusion of
interest income on
35
<PAGE> 36
United States Treasury obligations). The exclusion of income on United States
Treasury obligations has the effect of reducing the Illinois Taxable Income of
the Company and the Bank.
As a Delaware holding company, the Company has registered as a foreign
corporation authorized to transact business in Illinois. As such, it file an
Illinois Foreign Corporation Annual Report and pays an annual franchise tax to
the State of Illinois.
STATE OF DELAWARE. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
files an annual report with and pays an annual franchise tax to the State of
Delaware.
COMPETITION
North Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other savings institutions, commercial banks,
credit unions and mortgage bankers making loans secured by real estate located
in the Bank's market area. Other savings institutions, commercial banks and
credit unions provide vigorous competition in consumer lending.
The Bank attracts all of its deposits through its main and branch office,
primarily from the communities in which those offices are located; therefore,
competition for those deposits is principally from other savings institutions,
commercial banks, mutual funds and credit unions located in the same
communities. The Bank competes for these deposits by offering a variety of
deposit accounts at highly competitive rates, convenient business hours, with
interbranch deposit and withdrawal privileges at each and access to automated
teller machines.
EMPLOYEES
At December 31, 1996, the Company had a total of 35 employees, including
two part-time employees. Management considers its employee relations to be
excellent.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank owns its main office building and leases space for its branch
office. The Bank also owns a parking lot at 1635 N. Clark St., Chicago,
Illinois. As of December 31, 1996, the net book value of the Bank's investment
in premises, equipment and leaseholds was approximately $1,061,000.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiary are involved as plaintiff or defendant
in various legal actions arising in the normal course of their businesses.
While the ultimate outcome of the various legal proceedings involving the
Company and its subsidiary cannot be predicted with certainty, it is the
opinion of management, after consultation with counsel, that the resolution of
these legal actions should not have a material effect on the Company's
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
36
<PAGE> 37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 47 of the Company's 1996 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Pages 4 through 16 of the Company's 1996 Annual Report to Stockholders
are herein incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 17 through 46 of the Company's 1996 Annual Report to
Stockholders and herein incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following is a description of the Company and the Bank's executive
officers who are not also directors as of December 31, 1996.
Victor E. Caputo - Mr. Caputo, age 52, joined the Bank as Senior Vice
President for Operations in January 1995. He was appointed Executive Vice
President and Corporate Secretary of the Company and the Bank in April 1995.
Mr. Caputo formerly was Senior Vice President and Chief Operations Officer of
Argo Federal Savings Bank. Mr. Caputo has also served as an audit supervisor at
KPMG Peat Marwick LLP in Chicago. He has over 20 years experience in the
thrift industry. He is a member of the American Institute of Certified Public
37
<PAGE> 38
Accountants, the Financial Managers Society and the Illinois Society of
Certified Public Accountants.
Martin W. Trofimuk - Mr. Trofimuk, age 36, was appointed as Vice
President and Treasurer of the Company and the Bank in 1993. Mr. Trofimuk has
served in various capacities since joining the Bank in 1985. He is President
of the Chicago Chapter of the Financial Managers Society and a member of the
Institute of Financial Education.
Larry R. Harvey - Mr. Harvey, age 56, joined the Bank as Vice
President in 1992. Mr. Harvey is a certified financial planner and a member of
the International Association of Financial Planners. He also serves as
Treasurer and Trustee of the Chicago Savings and Trust Forum and as an elder of
the First Presbyterian Church in Highland Indiana.
John K. Taylor - Mr. Taylor, age 44, joined the Bank as Loan
Department Manager in March 1993. He was promoted to Vice President in April
1994. Mr. Taylor has 17 years of banking experience. He is a graduate of
Kelly College, in England and is a member of the Society of Mortgage
Professionals. He is also a member of the parish Council and lector of St.
Germaine Church in Oak Lawn.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, the
Registrant complied with all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10 percent beneficial owners.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
38
<PAGE> 39
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE NUMBER
REFERENCE TO WHERE ATTACHED
PRIOR FILING EXHIBITS ARE
OR EXHIBIT LOCATED IN
REGULATION NUMBER THIS
S-B EXHIBIT ATTACHED FORM 10-KSB
NUMBER DOCUMENT HERETO REPORT
---------------- ---------------------------------------------------------------------- ---------------------
<S> <C> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None Not applicable
liquidation or succession
3(i) Certificate of Incorporation * Not applicable
3(ii) By-Laws * Not applicable
4 Instruments defining the rights of holders, * Not applicable
including indentures
9 Voting trust agreement None Not applicable
10.1 1993 Stock Option and Incentive Plan * Not applicable
10.2 Recognition and Retention Plan * Not applicable
10.3 Supplemental Employee Stock Retirement Plan * Not applicable
10.4 Form of employment agreement with Mary Ann Hass, * Not applicable
Joseph A. Graber, Victor E. Caputo and Martin W.
Trofimuk
11 Statement regarding computation of per share None Not applicable
earnings
13 Annual report to security holders 13 Page 43
16 Letter on change in certifying accountant None Not applicable
18 Letter on change in accounting principles None Not applicable
21 Subsidiaries of Registrant ** Not applicable
22 Published report regarding matters submitted to vote None Not applicable
23 Consents of experts and counsel 23 Page 93
24 Power of attorney Not required Not applicable
27 Financial data schedule 27 Page 94
28 Information from reports furnished to state None Not applicable
insurance regulatory authorities
99 Additional exhibits Not required Not applicable
</TABLE>
_________________
* Filed as exhibits to the Registrant's Form S-1 registration statement
(File No. 33-69444) and incorporated herein by reference.
** Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1996 and incorporated herein by
reference.
39
<PAGE> 40
(B) REPORTS ON FORM 8-K
The Company filed reports on Form 8-K on October 15, 1996 regarding
the release of earnings for September 30, 1996 and a quarterly dividend and
November 27, 1996 in connection with the completion of a stock repurchase
program.
40
<PAGE> 1
___________________________________________________________________
1996 ANNUAL REPORT
___________________________________________________________________
NORTH
BANCSHARES, INC.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- ----------------------------------------------------------------------
<S> <C>
CHAIRMAN'S 1
MESSAGE...................................................................
SELECTED CONSOLIDATED FINANCIAL INFORMATION.......................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 4
INDEPENDENT AUDITORS' REPORT.................................................... 17
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION..................... 18
CONSOLIDATED STATEMENTS OF OPERATIONS................................... 20
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' 21
EQUITY................................................................
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................. 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................... 24
STOCKHOLDER AND CORPORATE INFORMATION................................... 47
</TABLE>
<PAGE> 3
LOGO
100 West North Avenue at Clark -- Chicago, Illinois 60610-1399 -- (312)
664-4320
March 13, 1997
To Our Shareholders:
We are pleased to present the 1996 Annual Report of North Bancshares, Inc.
The information in this Annual Report is designed to provide a detailed
financial review of 1996 and our outlook for the future. Last year we set some
aggressive but realistic goals and targets for the future. We have made good
progress in reaching those goals and have updated our plan and set our sights
even higher. We are committed to improving shareholder value by continuing to
develop niche markets for mortgage lending, developing new deposit and loan
products and services, expanding our electronic banking network, and initiating
new relationships with residential and commercial loan originators and brokers.
A detailed summary of the targets and goals are outlined in the Management's
Discussion and Analysis section of the report.
On January 21st of this year we announced a 20% increase in the regular
quarterly dividend from $.10 per share to $.12 per share, our seventh stock
repurchase program which will amount to approximately 9.5% of the outstanding
shares, and that our 1996 fourth quarter net income increased 73% over the same
period in 1995. The market reacted positively to these events, resulting in
our stock now trading at an all time high. We will continue to focus on all
the elements of our strategic plan in order to continue to improve the value of
the franchise.
The FDIC SAIF Special Assessment is finally behind us. The Director of
the Office of Thrift Supervision, Nicolas Retsinas, is quoted as saying, "I
believe it is a clear indication of the underlying strength of the thrift
industry that it was able to absorb the one-time assessment in a single
quarter. The important fact is that the one-time charge is history, and with
the SAIF fully capitalized, the insurance premium for thrifts is more in line
with what banks pay." Although it meant a pre-tax charge of $486,000 to 1996
earnings, it will mean approximately $125,000 in additional pre-tax earnings
during 1997 and in subsequent years.
We closed a record number of loans during 1996, with $26.8 million in
originations and participations purchased. We introduced a "Free Checking
Account" and a small business checking account this past year, and as a result
the number of checking accounts increased by 37% during 1996. We introduced
"Easy Retrieve", our telephone banking system. We have established our
presence on the internet with a Web page at http://www.northfederal.com. We
installed a local area network bank management system that will provide
efficiencies for all departments and more convenience for our customers.
We will continue to work hard to position the Company for future earnings
growth and to be a competitive force in our marketplace.
Sincerely,
/s/ Mary Ann Hass
Mary Ann Hass
Chairman and
Chief Executive Officer
<PAGE> 4
Set forth below is selected financial data of the Company. This financial data
is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements and the Notes thereto of the Company.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
- ----------------------------------
Total assets $89,997 $102,189 $106,959 $111,668 $117,473
Loans receivable, net 38,609 29,712 45,288 56,161 73,378
Mortgage backed securities-held to maturity 20,988 21,379 17,015 9,419 7,465
Mortgage backed securities-available for sale --- --- --- 6,927 ---
Investment securities-held to maturity 2,994 2,999 3,493 498 ---
Investment securities-available for sale --- 15,802 24,695 27,882 24,426
Investment securities-held for sale 10,391 --- --- --- ---
Investment in mutual funds 9,386 10,602 7,796 --- ---
Deposit accounts 78,265 74,708 70,178 75,169 73,611
Borrowed funds --- --- 12,976 11,750 24,100
Stockholders' equity 9,868 22,889 21,602 21,028 17,823
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
SELECTED OPERATING DATA: 1992 1993 1994 1995 1996
- ------------------------ -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $7,369 $6,446 $6,310 $7,525 $8,468
Total interest expense 3,909 3,160 2,880 4,144 4,640
------------------------------------------------------------------
Net interest income before
provision for loan losses 3,460 3,286 3,430 3,381 3,828
Provision for loan losses 12 72 54 40 8
------------------------------------------------------------------
Net interest income after provision
for loan losses 3,448 3,214 3,376 3,341 3,820
Non-interest income (loss):
Fees & service charges 141 127 105 120 190
Gain on sale of investment
securities and mutual funds 118 --- 216 245 88
Decline in value of mutual funds --- --- (612) --- ---
Other non-interest income (expense) (69) 118 41 19 23
------------------------------------------------------------------
Total non-interest income (loss) 190 245 (250) 384 301
Non-interest expense 2,151 2,312 2,728 2,776 3,464
------------------------------------------------------------------
Income before taxes and cumulative effect of
change in accounting principle 1,487 1,147 398 949 657
Income tax expense 499 429 353 253 165
-----------------------------------------------------------------
Income before cumulative effect
of change in accounting principle 988 718 45 696 492
Cumulative effect of change in
accounting for income taxes --- 96 --- --- ---
NET INCOME ------------------------------------------------------------------
$988 $622 $45 $696 $492
==================================================================
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
- -----------------------------------------
PERFORMANCE RATIOS:
Return on assets (ratio of net income to
average total assets) 1.10% 0.69% 0.04% 0.64% 0.42%(1)
Interest rate spread information:
Average during year 3.34 3.17 2.67 2.15 2.53
End of year 3.12 2.33 2.23 2.24 2.57
Net interest margin 3.93 3.72 3.54 3.19 3.36
Ratio of operating expenses to average
total assets 2.39 2.56 2.75 2.57 2.98 (1)
Ratio of average interest-earning assets to
average interest-bearing liabilities 113.44 115.31 129.40 126.61 120.61
ASSET QUALITY RATIOS:
Non-performing assets to total assets at end
of period 0.03 0.04 0.03 0.02 N/A (2)
Allowance for loan losses to non-performing
loans 109.68 271.79 500.00 833.33 N/A (2)
Allowance for loan losses to loans
receivable (net) 0.09 0.36 0.35 0.36 0.28
CAPITAL RATIOS:
Stockholders' equity to total assets 10.96 22.40 20.20 18.83 15.12
Average stockholders' equity to average 10.48 11.86 22.52 19.71 16.32
assets
Return on stockholders' equity (ratio of net
income to average equity) 10.49 5.81 .20 3.27 2.59 (1)
NUMBER OF FULL SERVICE OFFICES 2 2 2 2 2
</TABLE>
<TABLE>
<S><C> <C> <C>
(1) Return on assets without FDIC SAIF Special Assessment .67
Ratio of operating expenses to average total assets without FDIC SAIF Special Assessment 2.56
Return on stockholders' equity without FDIC SAIF Special Assessment 4.09
(2) Not applicable because the Company had no non-performing assets
as of December 31, 1996.
</TABLE>
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
North Bancshares, Inc. (the "Company") was organized on September 23, 1993
under Delaware law as the holding company for North Federal Savings Bank (the
"Bank"). In connection with the Bank's conversion from a federally chartered
mutual savings bank to a stock savings bank, the Bank issued all of its common
stock to the Company for approximately 50% of the net proceeds of the
conversion. The Company sold 1,388,625 shares of common stock at $10.00 on
December 21, 1993, thereby completing the conversion. At December 31, 1996
there were 1,057,950 outstanding shares of common stock. The Company's common
stock trades on The Nasdaq Stock Market under the symbol: "NBSI."
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 to mid-size
apartment buildings or mixed use properties. To a lesser extent, the Company
purchases participating interests in multi-family apartment building loans,
originates consumer loans in its primary market area and has established a
commercial line of credit with a manufactured housing developer. The Company
also invests in federal agency mortgage-backed securities, U. S. Government
and agency securities, investment grade securities, common stock 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 earned on
interest-earning assets and the interest paid on deposits and borrowings and,
to a lesser degree on non-interest income and non-interest expense. The
Company's operating expenses consist principally of employee compensation,
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.
MANAGEMENT STRATEGY
The Company's financial goals are to: (1) achieve a 7.5% to 10% return on
equity (ROE) by the end of fiscal year 1999; (2) achieve a .85% to 1.00%
return on assets (ROA) by the end of fiscal year 1999; (3) increase
interest-earning assets by approximately 5% to 7% per year; (4) maintain the
Company's record of high asset quality; (5) improve the loan to assets ratio to
between 70% to 75%, of which 10% to 15% would be consumer, multi-family and
commercial loans; (6) increase non-interest income by approximately 10% to 15%
annually; (7) develop new residential and commercial loan broker
relationships; (8) develop relationships with other financial institutions for
the purchase of loans within the Bank's market area; (9) conduct leveraged
transactions using Federal Home Loan Bank ("FHLB") advances or other borrowings
at a minimum spread of 1%; (10) review quarterly the payment of a regular
dividend; (11) continue to evaluate stock repurchase programs in light of
current book value and the effect on earnings per share; and (12) keep
operating expenses under control.
During 1996, the Company's return on equity decreased from 3.27% to 2.59%.
Return on assets decreased from .64% to .42%. Return on equity without the
FDIC SAIF special assessment increased from 3.27% to 4.09% and return on assets
increased from .64% to .67%. Interest earning assets increased by 6.1% from
$109.0 million to $115.6 million. The loan to assets ratio increased from
50.3% to 62.5%. Non-interest income, without securities gains, increased by
53% from $139,000 to $213,000. The Bank entered into a participation agreement
with a local financial institution to purchase interests in multi-family
apartment building loans, located in the community, and funded $1.5 million of
these loans during 1996. The Company conducted $10.0 million in leveraged
securities transactions at an average spread of 1.65%.
4
<PAGE> 7
The Company has reviewed this strategy with investment bankers and outside
counsel and determined that in order to consistently improve shareholder value
and maintain its status as an independent community financial institution, a
growth strategy that encompasses the above goals must be implemented and
carried forward. The Board of Directors (the "Board") has been reviewing the
progress management has made in the implementation of this strategy on a
quarterly basis. The revised goals, which included an increase from 7% to 7.5%
for return on equity and from .80% to .85% for return on assets, outlined above
have been incorporated into the Company's three year business plan. Each
quarter the Asset Liability-Risk Management Committee will report to the Board
on the progress of the plan and the Board will make changes or adjust the
plan's goals and targets as appropriate.
In order to achieve these goals the Bank: (1) will continue to develop
relationships with residential and commercial mortgage loan brokers and
financial institutions; (2) will continue to develop new niche market loan
products for conforming and non- conforming mortgage loans on both
owner-occupied and non-owner occupied properties; (3) will continue to develop
and introduce new products and services such as "Free Checking", "Easy
Retrieve", the Bank's conversant voice response banking system, the North
Federal Banking Card, small business checking, and a home equity line of
credit; (4) will continue to focus on shifting liabilities from higher cost
certificates of deposit to lower cost, fee generating transaction accounts;
(5) will continue to develop relationships with local high volume customer
businesses in order to place off premises ATM terminals; (6) will continue to
evaluate deposit acquisitions and new branch locations; (7) will continue to
develop relationships with other financial institutions in order to participate
in multi-family apartment lending; and (8) will expand our marketing efforts to
include a "New Mover" program, which involves a cooperative effort with the
Chamber of Commerce and a local magazine to promote products to individuals and
families who move into the area, and the promotion of our products and services
on the Bank's internet Web page.
The Company continues to believe that maintaining loan delinquencies at the
lowest possible level is imperative to achieving adequate profitability, and
will continue its policy of underwriting loans that it originates and purchases
in a consistent and conservative manner. The result of this consistent policy
is that only $84,000 in loans were sixty days or more delinquent at December
31, 1996.
Management believes that the Company is less vulnerable to adverse changes
in interest rates as a result of the reallocation of its assets into shorter
term and adjustable-rate mortgages. The Company's one year cumulative interest
rate sensitivity gap as a percentage of interest-earning assets at December 31,
1996 was a positive 1.23%. See "Asset/Liability Management" for the Bank's
current interest rate sensitivity ratios.
ASSET/LIABILITY MANAGEMENT
A key component of successful asset/liability management is the monitoring
and management of interest rate risk sensitivity, which includes the repricing
and maturity of interest-earning assets and interest-bearing liabilities. The
Bank has an Asset Liability-Risk Management Committee that is composed of the
Bank's Chairman, President, Executive Vice President, and Vice
President/Treasurer. The committee meets on a regular basis to review the
business plan and assess the Bank's investment portfolio and deposit pricing,
and meets quarterly to assess economic conditions and consider methods of
managing the Bank's asset and liability mix and overall sensitivity to interest
rates.
A financial institution with a positive interest rate sensitivity gap for
a given period means that the amount of its interest- earnings assets maturing
or otherwise repricing within such period exceeds the amount of its
interest-bearing liabilities maturing or otherwise repricing within the same
period. Accordingly, in an increasing interest rate environment, financial
institutions with a positive interest rate sensitivity gap generally will
experience greater increases in the yield of their interest-earnings assets
than the cost of their interest-bearing liabilities. Conversely, in an
environment of decreasing interest rates the yield on their interest-earning
assets generally will decrease more quickly than the cost of their
interest-bearing liabilities. Changes in interest rates generally will have
the opposite effect on financial institutions
5
<PAGE> 8
with a negative interest rate sensitivity gap. At December 31, 1996, based on
management assumptions for loans, mortgage-backed securities, investment
securities and other interest-earning assets, total interest-earning assets
maturing or repricing within one year exceeded total interest-bearing
liabilities maturing or repricing in the same period by $1.4 million,
representing a cumulative one year gap as a percentage of interest-earning
assets of a positive 1.23%.
The following table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1996
and the Company's interest rate sensitivity gap percentages at the dates
indicated. The interest rate sensitivity gap is defined as the amount by which
assets repricing within the respective periods exceed liabilities repricing
within such periods. One- to four-family fixed-rate mortgage loans with a
contractual maturity of less than five years are assumed to prepay at an annual
rate of 14.2% and such loans with a contractual maturity in excess of five
years are assumed to prepay at an annual rate of 11.7% per year. Consumer
loans with contractual maturities of less than five years are assumed to prepay
at an annual rate of 14.2% and such loans with contractual maturities of more
than five years are assumed to prepay at an annual rate of 11.7%.
Mortgage-backed securities with contractual maturities of less than five years
are assumed to prepay at an annual rate of 14.2% and those with maturities of
more than five years are assumed to prepay at an annual rate of 11.7%,
depending on the stated interest rate. Passbook accounts are assumed to be
withdrawn at annual rates of 17.0%, 17.0%, 17.0%, 16.0% and 33.0%,
respectively, during the periods shown. Money market deposit accounts are
assumed to be withdrawn at annual rates of 79.0% in the first six months and
21.0% during the subsequent periods. Finally, transaction accounts are assumed
to be withdrawn at annual rates of 37.0% during the first year, 32.0% between
one and three years, 17.0% between three and five years and 14.0% for over five
years. All prepayment and liability repricing assumptions are those selected
by management for the purpose of assessing the interest rate sensitivity.
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and can be repriced within each of the periods
specified. Such repricing can occur in one of three ways: (1) the rate of
interest to be paid on an asset or liability may adjust periodically on the
basis of an index; (2) an asset or liability such as a mortgage loan may
amortize, permitting reinvestment of cash flows at the then prevailing interest
rates; or (3) an asset or liability may mature, at which time the proceeds can
be reinvested at current market rates.
6
<PAGE> 9
For purposes of this gap analysis loans are reduced by loans in process,
but are not reduced by deferred loan fees or allowance for loan losses.
Investment securities and mortgage-backed securities are shown at amortized
cost.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------------
Over 6
6 Months to Over 1-3 Over 3-5 Over
or less One Year Years 5 Years Total
-----------------------------------------------------------------------------
Amount Amount Amount Amount Amount Amount
-----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed rate one-to-four family and $3,401 $3,325 $13,732 $13,444 $20,635 $54,537
multi-family real estate loans
Consumer and commercial loans 807 20 122 24 56 1,029
Mortgage-backed securities 1,660 1,122 2,015 653 2,015 7,465
Adjustable rate one-to-four family
and multi-family real estate loans 881 1,100 4,924 11,157 --- 18,062
Investment securities and other(1) 28,196 3,241 2,000 1,000 100 34,537
Total interest-earning assets -----------------------------------------------------------------------------
34,945 8,808 22,793 26,278 22,806 115,630
-----------------------------------------------------------------------------
Passbook accounts $1,385 $1,268 $4,245 $2,768 $6,633 $16,299
NOW accounts 1,676 1,366 3,234 865 1,917 9,058
Money market deposit accounts 2,462 396 1,269 792 1,314 6,233
Certificate accounts 17,592 6,186 11,437 6,588 82 41,885
Borrowed funds 5,000 5,000 6,000 7,350 750 24,100
-----------------------------------------------------------------------------
Total interest-bearing 28,115 14,216 26,185 18,363 10,696 97,575
----------------------------------------------------------------------------
liabilities
Interest-earning assets less
interest-bearing liabilities $6,830 ($5,408) ($3,392) $7,915 $12,110 $18,055
-------------------------------------------------------------- =======
Cumulative interest rate
sensitivity gap $6,830 $1,422 ($1,970) $5,945 $18,055
=============================================================
Cumulative interest rate gap as a
percentage of total assets 5.81% 1.21% -1.68% 5.06% 15.37%
============================================================
Cumulative interest rate gap as a
percentage of interest-earning 5.91% 1.23% -1.70% 5.14% 15.61%
=============================================================
assets
</TABLE>
_______________________________________________________________________________
(1) Includes investment securities available for sale, FHLB stock and other
interest-earning assets.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing 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 may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
mortgage loans (ARMs), have features which restrict changes in interest rates
on a short term basis and over the life of the asset. Further, in the event of
a change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally,
the ability of many borrowers to service their debt may decrease in the event
of an interest rate increase.
7
<PAGE> 10
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. No tax equivalent
adjustments were made. All average balances are monthly average balances.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
1994 1995 1996
--------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned\ Yield\ Outstanding Earned\ Yield\ Outstanding Earned\ Yield\
Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable (1) $35,010 $2,923 8.35% $51,412 $4,184 8.14% $65,030 $5,168 7.95%
Investment securities (2) 34,731 1,790 5.15 30,773 1,817 5.90 33,125 2,324 7.02
Mortgage-backed securities 18,942 1,315 6.94 17,089 1,157 6.77 9,956 659 6.62
Federal funds sold 4,610 167 3.62 3,769 233 6.18 3,087 165 5.34
Other 3,641 115 3.16 2,983 134 4.49 2,535 152 6.00
Total interest-earning --------------------------------------------------------------------------------------------
assets 96,934 6,310 6.51 106,026 7,525 7.10 113,733 8,468 7.45
--------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
MMDA & NOW accounts 15,408 358 2.32 12,409 310 2.50 13,775 336 2.44
Passbook accounts 20,437 561 2.75 17,862 492 2.75 16,790 459 2.73
Certificate accounts 36,840 1,830 4.97 42,344 2,513 5.93 43,954 2,490 5.67
Borrowed funds 2,225 131 5.89 11,127 829 7.45 19,776 1,355 6.86
Total interest-bearing --------------------------------------------------------------------------------------------
liabilities 74,910 2,880 3.84 83,742 4,144 4.95 94,295 4,640 4.92
--------------------------------------------------------------------------------------------
Net interest income $3,430 $3,381 $3,828
------ ------ ------
Net interest rate spread 2.67% 2.15% 2.53%
---- ---- ----
Net earning assets $22,024 $22,284 $19,438
------- ------- -------
Net yield on average 3.54% 3.19% 3.36%
interest-earning assets ---- ---- ----
129.40% 126.61% 120.61%
Average interest-earning assets ------ ------ ------
to average interest-bearing
liabilities
</TABLE>
__________________
(1) Calculated net of deferred loan fees, loan discounts, loans
in process and allowance for loan losses.
(2) Includes mutual funds for 1994.
8
<PAGE> 11
WEIGHTED AVERAGE YIELD ANALYSIS
The following table presents the yields received on loans, mortgage-backed
securities, investment securities, federal funds and other and the rates paid
on deposits and borrowed funds and the resultant interest rate spreads at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1994 1995 1996
------------------------------------------
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD ON:
Loans receivable 7.92% 7.90% 7.81%
Investment securities (1) 5.37 6.50 6.76
Mortgage-backed securities (2) 6.88 6.87 7.15
Federal funds 6.00 5.63 6.25
Other 6.05 5.66 6.09
Combined weighted average yield ------------------------------------------
on interest-earning assets 6.75 7.22 7.44
------------------------------------------
WEIGHTED AVERAGE RATE PAID ON:
Passbook accounts 2.75 2.75 2.75
MMDA & NOW accounts 2.66 2.58 2.54
Certificate accounts 5.23 5.88 5.62
Borrowed funds 7.17 7.44 6.49
Combined weighted average rate paid
on interest-bearing liabilities 4.52 4.98 4.87
------------------------------------------
SPREAD 2.23% 2.24% 2.57%
==========================================
</TABLE>
_________________________
(1) Includes mutual funds for 1994.
(2) Mortgage-backed securities are net of premiums and discounts
9
<PAGE> 12
RATE AND VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
changes in outstanding balances (volume) and that due to changes in interest
rates (rates). For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (i.e., changes in volume multiplied by current rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). Changes
attributable to both rate and volume which cannot be segregated have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1993 vs 1994 1994 vs 1995 1995 vs 1996
-----------------------------------------------------------------------------------------
Increase (Decrease) Total Increase (Decrease) Total Increase (Decrease) Total
Due to Due to Due to
----------------------------------------------------------------------------------------
Volume Rate Increase Volume Rate Increase Volume Rate Increase
(Decrease) (Decrease) (Decrease)
----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable (1) $43 $(272) $(229) $1,335 $(74) $1,261 $1,082 $(98) $984
Investment securities (2) 353 (131) 222 (234) 261 27 165 342 507
Mortgage-backed securities (3) (101) (139) (240) (125) (33) (158) (472) (26) (498)
Federal funds sold 54 (3) 51 (52) 118 66 (36) (32) (68)
Other 39 21 60 (29) 48 19 (27) 45 18
------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING 388 (524) (136) 895 320 1,215 712 231 943
ASSETS ------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
MMDA & NOW accounts 25 (30) (5) (75) 27 (48) 33 (7) 26
Passbook accounts (34) (44) (78) (71) 2 (69) (29) (4) (33)
Certificate accounts (186) (142) (328) 327 356 683 91 (114) (23)
Borrowed funds 131 --- 131 663 35 698 592 (66) 528
------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING $(64) $(216) $(280) $844 $420 $1,264 $687 $(191) $496
------------------------------------------------------------------------------------
LIABILITIES
CHANGE IN NET INTEREST INCOME $144 $(49) $447
==== ===== ====
</TABLE>
________________________________________________________________________________
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
(2) Includes investments classified as available for sale and held to maturity.
(3) Includes mortgage-backed securities classified as available for sale and
held to maturity.
10
<PAGE> 13
FORWARD-LOOKING STATEMENTS
When used in this Annual Report, 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.
FINANCIAL CONDITION
Total assets increased $5.8 million or 5.2% from $111.7 million on
December 31, 1995 to $117.5 million on December 31, 1996. The increase was
primarily attributable to a $17.2 million increase in net loans receivable
partially offset by a $8.9 million decrease in mortgage-backed securities and a
$4.0 million decrease in investment securities.
Net loans receivable increased by $17.2 million or 30.6% from $56.2
million on December 31, 1995 to $73.4 million on December 31, 1996. The
increase was attributable to expanded mortgage broker activity, two
multi-family apartment building loan participations, and continued marketing of
a mini-jumbo loan product designed for one- to four-family properties.
Management believes that because of intense competition it will be more
difficult to retain higher yielding quality mortgage loans in 1997 even with an
aggressive marketing and mortgage broker program.
Deposit accounts decreased by $1.6 million or 2.1% from $75.2 million at
December 31, 1995 to $73.6 million at December 31, 1996. The decrease was
primarily attributable to the maturity and withdrawal of $2.6 million out of
$5.2 million in 18 month Anniversary certificates of deposit that were issued
with a bonus rate of interest in February 1995. The total number of checking
accounts increased 37% during 1996 with checking account balances increasing
$2.5 million or 34%. The increase was attributable to the introduction of a
"Free Checking" account product, the modification of the terms of a small
business checking account product and the closing of two competitor Bank's
branch offices in the area. Passbook savings, money market and checking
accounts account for 43.1% of total deposits as of December 31, 1996, compared
with 40.2% at December 31, 1995.
Borrowed funds increased by $12.3 million or 104.2% from $11.8 million at
December 31,1995 to $24.1 million at December 31, 1996. The increase in
borrowed funds was used to fund new loan originations, loan participations, and
leveraged securities transactions. The Company conducted $10.0 million in
leveraged securities transactions during 1996 at an average spread of 1.65%.
Stockholders' equity decreased $3.2 million or 15.2% from $21.0 million on
December 31, 1995 to $17.8 million at December 31, 1996. The decrease was
primarily attributable to a $2.7 million increase in treasury stock as a result
of stock repurchase programs conducted during 1996 and dividend payments of
$453,000.
11
<PAGE> 14
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL. Net income for the year ended December 31, 1996 amounted to
$492,000 compared with $696,000 for the year ended December 31, 1995. This
represented a decrease of $204,000 or 29.3%. The decrease was primarily
attributable to a $285,000 after- tax charge for the FDIC SAIF Special
Assessment. Without the FDIC SAIF Special Assessment, net income would have
increased by $81,000 or 11.6% from $696,000 for the year ended December 31,
1995 to $777,000 for the year ended December 31, 1996.
Primary and fully diluted earnings per share for the year ended December
31, 1996 amounted to $.44 per share, a decrease of $.12 compared with $.56 for
the year ended December 31, 1995. The decrease was due primarily to the FDIC
SAIF Special Assessment. Without the FDIC SAIF Special Assessment per share
earnings for the year ended December 31, 1996 would have increased by $.14 per
share or 25.0% from $.56 per share for the year ended December 31, 1995 to $.70
per share for the year ended December 31, 1996.
INTEREST INCOME. Interest income for the year ended December 31, 1996
increased by $1.0 million or 13.3% from $7.5 million for the year ended
December 31, 1995 to $8.5 million for the year ended December 31, 1996. The
increase was attributable to a $7.7 million increase in average interest
earning assets from $106.0 million for the year ended December 31, 1995 to
$113.7 million for the year ended December 31, 1996 accompanied by an increase
in the overall yield on the Bank's interest-earning assets as a result of a
reallocation of lower yielding shorter term investment securities into mortgage
loans. The yield on average interest-earning assets increased from 7.10% for
the year ended December 31, 1995 to 7.45% for the year ended December 31, 1996.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1996
increased by $496,000 or 12.1% from $4.1 million for the year ended December
31, 1995 to $4.6 million for the year ended December 31, 1996. The increase
was attributable to a $10.6 million increase in average interest-bearing
liabilities from $83.7 million for the year ended December 31, 1995 to $94.3
million for the year ended December 31, 1996. The increase in interest expense
was partially offset by a slight decrease in the average cost of
interest-bearing liabilities from 4.95% for the year ended December 31, 1995 to
4.92% for the year ended December 31, 1996.
PROVISION FOR LOAN LOSSES. The Company allocated $8,000 to its provision
for loan losses during 1996 compared with $40,000 for the year ended December
31, 1995, a decrease of $32,000. The total allowance for loan losses amounted
to $208,000 on December 31, 1996 compared with $200,000 at December 31, 1995.
The increase in the total allowance was attributable to the increase in net
loans receivable. The allowance for loan losses, at December 31, 1996,
represented .28% of the Company's net loans receivable. At that date the
Company had no non-performing loans. Management continuously evaluates the
adequacy of its allowance for loan losses, based on past loan experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of the underlying collateral, and
current and prospective market conditions. Future additions to the Bank's
allowance for loan losses are dependent upon the performance of the Bank's loan
portfolio, the economy, changes in real estate values and interest rates, and
the view of the regulatory authorities toward reserve levels and inflation.
NON-INTEREST INCOME. Non-interest income decreased by $83,000 or 21.6%
from $384,000 for the year ended December 31, 1995 to $301,000 for the year
ended December 31, 1996. The decrease was primarily attributable to a $157,000
decrease in gains on the sales of securities from $245,000 for the year ended
December 31, 1995 to $88,000 for the year ended December 31, 1996, due
primarily to a one-time gain of $167,000 on the sale of mutual funds recorded
during 1995. Fees and service charges and other non-interest income increased
by $74,000 or 53.2% from $139,000 for the year ended December 31, 1995 to
$213,000 for the year ended December 31, 1996. The increase was attributable
to increased fees from checking accounts and interchange fees from foreign ATM
transactions and MasterCard(C) Master Money(TM) transactions, resulting from
a 37% increase in the number of checking accounts.
12
<PAGE> 15
NON-INTEREST EXPENSE. Non-interest expense increased by $688,000 or 24.6%
from $2.8 million for the year ended December 31, 1995 to $3.5 million for the
year ended December 31, 1996. The increase was primarily attributable to the
FDIC SAIF Special Assessment which amounted to $486,000. In addition,
advertising expenses increased by $54,000, which was related to the Bank's
110th Anniversary promotions and $126,000 was added to a specific reserve
established for the Arlington Heights Credit Enhancement. See Notes 5 and 18
in the Notes to Consolidated Financial Statements.
INCOME TAX EXPENSE. The allocation for federal and state income taxes
decreased by $88,000 or 34.8% from $253,000 for the year ended December 31,
1995 to $165,000 for the year ended December 31, 1996. The effective tax rate
decreased from 26.7% in 1995 to 25.1% in 1996. The reasons for the decrease in
the effective tax rate is a decrease in net income before taxes related to the
FDIC SAIF special assessment and capital gains generated during 1996 were
offset against a capital loss carryforward recognized for tax purposes during
1995. A capital loss carryforward of approximately $356,000 is still available
to be carried forward for an additional three years to offset future capital
gains.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
GENERAL. Net income for the year ended December 31, 1995 amounted to
$696,000 compared with $45,000 for the year ended December 31, 1994. This
represented a increase of $651,000. The increase was primarily attributable to
a $612,000 decline in value of mutual funds that was recorded during the fourth
quarter of 1994.
Primary and fully diluted earnings per share for the year ended December
31, 1995 amounted to $.56 per share, an increase of $.53 compared with $.03 for
the year ended December 31, 1994. The increase was due to a $634,000 increase
in non-interest income resulting primarily from a $612,000 recognition of an
other than temporary decline in value of mutual funds recognized during the
fourth quarter of 1994. In addition the average outstanding number of shares
decreased during 1995 as a result of stock repurchase programs.
INTEREST INCOME. Interest income for the year ended December 31, 1995
increased by $1.2 million or 19.3% from $6.3 million for the year ended
December 31, 1994 to $7.5 million for the year ended December 31, 1995. The
increase was attributable to a $9.1 million increase in average interest
earning assets from $96.9 million for the year ended December 31, 1994 to
$106.0 million for the year ended December 31, 1995 accompanied by an increase
in the overall yield on the Bank's interest-earning assets as a result of a
reallocation of lower yielding shorter term investment securities into mortgage
loans. The yield on average interest-earning assets increased from 6.51% for
the year ended December 31, 1994 to 7.10% for the year ended December 31, 1995.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1995
increased by $1.3 million or 43.9% from $2.9 million for the year ended
December 31, 1994 to $4.1 million for the year ended December 31, 1995. The
increase was attributable to a $8.8 million increase in average
interest-bearing liabilities accompanied by an increase in the average cost of
interest-bearing liabilities from 3.84% for the year ended December 31, 1994 to
4.95% for the year ended December 31, 1995.
PROVISION FOR LOAN LOSSES. The Company allocated $40,000 to its provision
for loan losses during 1995 compared with $54,000 for the year ended December
31, 1994, a decrease of $14,000 or 25.9%. The total allowance for loan losses
amounted to $200,000 on December 31, 1995 compared with $160,000 at December
31, 1994. The increase in the total allowance was attributable to the increase
in net loans receivable. The allowance for loan losses, at December 31, 1995,
represents .36% of the Company's net loans receivable. Total non-performing
loans represents .02% of total assets at December 31, 1995. The allowance for
loan losses represents 833.33% of total non-performing loans. Management
continuously evaluates the adequacy of its allowance for loan losses, based on
past loan experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated
13
<PAGE> 16
value of the underlying collateral, and current and prospective market
conditions. Future additions to the Bank's allowance for loan losses are
dependent upon the performance of the Bank's loan portfolio, the economy,
changes in real estate values and interest rates, the view of the regulatory
authorities toward reserve levels and inflation.
NON-INTEREST INCOME. Non-interest income increased by $634,000 from a
loss of $250,000 for the year ended December 31, 1994 to $384,000 for the year
ended December 31, 1995. The increase was primarily attributable to a $612,000
decline in value of mutual funds, available for sale recorded during 1994.
NON-INTEREST EXPENSE. Non-interest expense increased by $48,000 or 1.8%
from $2.7 million for the year ended December 31, 1994 to $2.8 million for the
year ended December 31, 1995. The increase was attributable to a $58,000 or
4.3% increase in compensation and benefits expense.
INCOME TAX EXPENSE. The allocation for federal and state income taxes
decreased by $100,000 or 28.3% from $353,000 for the year ended December 31,
1994 to $253,000 for the year ended December 31, 1995. The effective tax rate
decreased from 88.7% in 1994 to 26.7% in 1995. The primary reason for the
decrease in the effective tax rate is that capital gains generated during 1995
were offset against a capital loss carryforward recognized for tax purposes
during 1995. A capital loss carryforward of approximately $437,000 can be
carried forward for up to five years to offset future capital gains.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary source of funds are deposits, borrowings from the FHLB
of Chicago, the use of reverse repurchase agreements, amortization and
prepayment of loans, mortgage-backed securities and sales and maturities of
other investment securities. The Bank can also borrow from one of its
correspondent banks, the Harris Bank, through the use of reverse federal funds.
During 1996, the Bank borrowed an additional $12.3 million from the FHLB of
Chicago. Advances from the FHLB of Chicago at December 31, 1996 totaled $24.1
million. At December 31, 1996, the Bank had the ability to borrow a total of
$39 million from the FHLB of Chicago. Total deposits decreased by $1.6 million
during 1996. The decrease was primarily attributable to the maturity and
withdrawal of Anniversary Certificates of Deposit that were issued in 1995.
The Bank uses its liquid resources to fund loan commitments, meet operating
expenses, to invest and to fund deposit withdrawals. Management believes that
loan repayments and the other sources of funds will be adequate to meet the
liquidity needs of the Bank.
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 December
31, 1996 the Bank's liquidity ratio was 15.6% compared with 24.1% for the year
ended December 31, 1995. The decrease in liquidity was the result of
redeploying funds shorter term, lower yielding liquid assets into longer term,
higher yielding mortgage loans. In addition, the Bank is required to maintain
short term liquid assets equal to 1.0% of the average sum of net withdrawable
deposits and other borrowings. The Bank's short term liquidity ratio was 12.4%
on December 31, 1996 as compared with 12.1% at December 31, 1995.
The primary investing activities of the Bank are lending on owner occupied
and non-owner occupied single family, condominium and multi-family residential
properties, and purchasing of mortgage backed securities and U.S. government
agency securities. Management will continue to focus its lending efforts on
these type of properties while expanding consumer lending by marketing a new
equity line of credit product to its existing customer base and to the general
market.
During the year ended December 31, 1996, the Company originated and
purchased $26.8 million in mortgage, consumer, and commercial loans compared
with $18.7 million during 1995. The Company purchased $15.7 million of
securities, and repurchased $2.7 million in Company stock.
14
<PAGE> 17
At December 31, 1996 the Company had $777,000 in outstanding loan
commitments.
Certificates of deposit scheduled to mature in one year or less at
December 31, 1996, totaled approximately $23.8 million. Management believes,
based on its ability to adjust rates on those accounts to market levels, that a
significant portion of such deposits will remain with the Company. The Company
will continue to focus on shifting its liability mix from higher cost
certificates of deposit to low cost transaction accounts that produce fee
income.
The Company's liquidity, represented by cash and cash equivalents, is a
combination of its operating, investing and financing activities. These
activities are summarized in the Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1995 and 1996.
CAPITAL REQUIREMENTS
Current regulatory standards impose the following capital requirements on
the Bank and other thrifts: a risk-based capital standard expressed as a
percentage of risk-adjusted assets, a leverage ratio of core capital to total
adjusted assets, and a tangible capital ratio expressed as a percentage of
total adjusted assets. As of December 31, 1996, 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 10.6%, $10.8 million or 9.2%, and $10.9 million or 23.9%,
respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto have been prepared
in accordance with generally accepted accounting principles, which generally
requires the measurement of financial position and operating results without
considering the change in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, nearly all of the assets and
liabilities of the Company 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 prices of goods and services.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 intends to adopt both
Statements in 1997 and does not expect them to have a material effect on the
Company's financial position or results of operations.
15
<PAGE> 18
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.
16
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Board of Directors
North Bancshares, Inc.
Chicago, Illinois:
We have audited the accompanying consolidated statements of financial
condition of North Bancshares, Inc. and subsidiary (Company) as of December
31, 1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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
Bancshares, Inc. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 7, 1997
17
<PAGE> 20
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1995 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1995 1996
------- -------
<S> <C> <C>
Cash and due from banks $ 607 618
Interest-bearing deposits 2,634 2,644
Federal funds sold 3,925 4,800
Investment in dollar denominated mutual funds 1,127 547
Total cash and cash equivalents 8,293 8,609
Investment securities available-for-sale, at fair value (note 2) 27,882 24,426
Investment securities held-to-maturity, at amortized cost (note 3) 498 -
Mortgage-backed securities available-for-sale, at fair value (note 4) 6,927 -
Mortgage-backed securities held-to-maturity,
at amortized cost (note 5) 9,419 7,465
Stock in Federal Home Loan Bank of Chicago, at cost 624 1,205
Loans receivable, net of allowance for loan losses of
$200 in 1995 and $208 in 1996 (note 6) 56,161 73,378
Accrued interest receivable (note 7) 959 1,025
Premises and equipment, net (note 8) 834 1,061
Other assets 71 304
--------- -------
Total assets $ 111,668 117,473
--------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1995 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposit accounts (note 9) $ 75,169 73,611
Borrowed funds (note 10) 11,750 24,100
Advance payments by borrowers for taxes and
insurance 1,079 1,203
Amounts due to broker for investments purchased 1,000 -
Accrued interest payable and other liabilities 1,642 736
----------------------------------------------------------------------------------------------------------
Total 90,640 99,650
----------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value. Authorized 500,000 shares;
none outstanding - -
Common stock, $.01 par value. Authorized 3,500,000 shares;
issued 1,437,501 shares 14 14
Additional paid-in capital 13,629 13,688
Retained earnings, substantially restricted 10,949 10,988
Treasury stock, at cost (205,023 and 379,551 shares in 1995 and 1996) (2,599) (5,340)
Unrealized gain (loss) on securities available-for-sale, net
income taxes 90 (678)
Additional pension liability, net of tax (128) (108)
Common stock acquired by Employee Stock Ownership
Plan (note 15) (778) (667)
Deferred compensation (note 16) (149) (74)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 21,028 17,823
Commitments and contingencies (note 18)
-----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 111,668 117,473
-----------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
NORTH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1994 1995 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $2,923 $4,184 $5,168
Interest-bearing deposits and federal funds sold 253 328 246
Investment securities available-for-sale 1,159 1,630 2,301
Investment securities held-to-maturity 106 64 --
Mortgage-backed securities available-for-sale -- 479 77
Mortgage-backed securities held-to-maturity 1,315 678 582
Investment in mutual funds 525 123 23
Dividends on FHLB stock 29 39 71
------ ------ ------
Total interest income 6,310 7,525 8,468
------ ------ ------
Interest expense:
Deposit accounts 2,749 3,315 3,285
Borrowed funds 131 829 1,355
------ ------ ------
Total interest expense 2,880 4,144 4,640
------ ------ ------
Net interest income before provision for loan losses 3,430 3,381 3,828
Provision for loan losses (note 6) 54 40 8
------ ------ ------
Net interest income after provision for loan losses 3,376 3,341 3,820
------ ------ ------
Noninterest income (loss):
Gain on sale of investment securities and mutual funds 216 245 88
Decline in value of mutual funds (612) -- --
Fees and service charges 105 120 190
Other 41 19 23
------ ------ ------
Total noninterest income (loss) (250) 384 301
------ ------ ------
Noninterest expense:
Compensation and benefits 1,360 1,418 1,438
Occupancy expense 385 429 424
Professional fees 234 158 166
Data processing 75 94 127
Advertising and promotion 109 102 156
Federal deposit insurance premium 206 199 200
SAIF assessment -- -- 486
Recognition and retention plan (note 16) 126 116 75
Other 233 260 392
------ ------ ------
Total noninterest expense 2,728 2,776 3,464
------ ------ ------
Income before income taxes 398 949 657
Income tax expense (note 11) 353 253 165
------ ------ ------
Net income $ 45 $ 696 $ 492
====== ====== ======
Earnings per share:
Primary $ .03 $ .56 $ .44
Fully diluted .03 .56 .44
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
NORTH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
UNREALIZED COMMON
GAIN (LOSS) STOCK
ADDITIONAL ON SECURITIES ADDITIONAL ACQUIRED BY DEFERRED
COMMON PAID-IN RETAINED TREASURY AVAILABLE FOR PENSION EMPLOYEE COMPEN-
STOCK CAPITAL EARNINGS STOCK SALE, NET LIABILITY STOCK SATION TOTAL
OWNERSHIP
PLAN (ESOP)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993.... $ 14 13,518 10,532 -- 215 -- (999) (391) 22,889
Net income...................... -- -- 45 -- -- -- -- -- 45
Change in unrealized loss on
securities available for sale,
net........................... -- -- -- -- (707) -- -- -- (707)
Payment on ESOP loan............ -- -- -- -- -- -- 110 -- 110
Market adjustment for common
ESOP shares................... -- 16 -- -- -- -- -- -- 16
Amortization of award of RRP
Stock......................... -- -- -- -- -- -- -- 126 126
Purchase of treasury stock,
76,785 shares................. -- -- -- (950) -- -- -- -- (950)
Over accrual of expenses related
to stock conversion........... -- 73 -- -- -- -- -- -- 73
--- ------ ------ ------- ----- ----- ----- ----- -------
BALANCE AT DECEMBER 31, 1994.... 14 13,607 10,577 (950) (492) -- (889) (265) 21,602
Net income...................... -- -- 696 -- -- -- -- -- 696
Change in unrealized loss on
securities available for sale,
net........................... -- -- -- -- 582 -- -- -- 582
Payment on ESOP loan............ -- -- -- -- -- -- 111 -- 111
Market adjustment for common
ESOP shares................... -- 22 -- -- -- -- -- -- 22
Amortization of award of RRP
Stock......................... -- -- -- -- -- -- -- 116 116
Purchase of treasury stock,
128,418 shares................ -- -- -- (1,649) -- -- -- -- (1,649)
Cash dividend ($0.25 per
share)........................ -- -- (324) -- -- -- -- -- (324)
Additional liability adjustment
for employee pension plan,
net........................... -- -- -- -- -- (128) -- -- (128)
--- ------ ------ ------- ----- ----- ----- ----- -------
BALANCE AT DECEMBER 31, 1995.... 14 13,629 10,949 (2,599) 90 (128) (778) (149) 21,028
Net income...................... -- -- 492 -- -- -- -- -- 492
Change in unrealized loss on
securities available for sale,
net........................... -- -- -- -- (768) -- -- -- (768)
Payment on ESOP loan............ -- -- -- -- -- -- 111 -- 111
Market adjustment for common
ESOP shares................... -- 62 -- -- -- -- -- -- 62
Options exercised............... -- (3) -- 18 -- -- -- -- 15
Amortization of award of RRP
Stock......................... -- -- -- -- -- -- -- 75 75
Purchase of treasury stock,
175,916 shares................ -- -- -- (2,759) -- -- -- -- (2,759)
Cash dividend ($0.40 per
share)........................ -- -- (453) -- -- -- -- -- (453)
Additional liability adjustment
for employee pension plan,
net........................... -- -- -- -- -- 20 -- -- 20
--- ------ ------ ------- ----- ----- ----- ----- -------
BALANCE AT DECEMBER 31, 1996.... $ 14 13,688 10,988 (5,340) (678) (108) (667) (74) 17,823
=== ====== ====== ======= ===== ===== ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
NORTH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
- ----------------------------------------------------------------------------------------------------
(in thousands)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 45 $ 696 $ 492
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 50 57 63
Provision for deferred income taxes 98 76 125
Provision for loan losses 54 40 8
Decline in value of mutual funds 612 -- --
Deferred loan fees, net of amortization (254) (94) (110)
Amortization of premiums and discounts (10) (76) (100)
Amortization of cost of stock benefit plans 236 227 186
Gain on sale of investment securities and mutual funds (216) (245) (88)
Federal Home Loan Bank of Chicago stock dividend -- (8) --
Changes in assets and liabilities:
Increases in accrued interest receivable (286) (29) (66)
Increase in other assets (8) (21) (233)
Increase (decrease) in other liabilities, net (2,062) 1,065 (418)
---------- -------- --------
Net cash provided by (used in) operating activities (1,741) 1,688 (141)
---------- -------- --------
Cash flows from investing activities:
Purchase of mutual funds (891) -- --
Proceeds from sales of mutual funds available-for-sale 3,075 7,963 --
Maturities of investment securities available-for-sale 2,000 14,000 5,000
Maturities of investment securities held-to-maturity 3,000 4,500 500
Purchase of investment securities available-for-sale (18,520) (22,251) (15,746)
Purchase of investment securities held-to-maturity (3,480) (1,469) --
Proceeds from sales of investment securities
available-for-sale 6,688 6,005 12,180
Proceeds from sales of mortgage-backed securities
available-for-sale -- -- 6,600
Repayments of mortgage-backed securities available-for-sale -- -- 237
Purchase of mortgage-backed securities held-to-maturity (688) (1,960) --
Repayments of mortgage-backed securities held-to-maturity 5,059 2,747 1,953
Loan originations (23,047) (18,718) (26,844)
Loan repayments 7,671 7,899 9,729
Redemption (purchase) of Federal Home Loan Bank of Chicago
stock 229 (113) (581)
Purchase of premises and equipment (12) (87) (290)
---------- -------- --------
Net cash used in investing activities $ (18,916) $ (1,484) $ (7,262)
---------- -------- --------
</TABLE>
22
<PAGE> 25
NORTH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposit accounts........................ $(4,530) $ 4,991 $(1,558)
Increase (decrease) in borrowed funds.......................... 12,976 (1,226) 12,350
Increase (decrease) in advance payments by borrowers for taxes
and insurance............................................... 111 (88) 124
Payment of cash dividend....................................... -- (324) (453)
Proceeds from stock options exercised.......................... -- -- 15
Purchase of treasury stock..................................... (950) (1,649) (2,759)
------- ------- -------
Net cash provided by financing activities........................ 7,607 1,704 7,719
------- ------- -------
Net increase (decrease) in cash and cash equivalents............. (13,050) 1,908 316
Cash and cash equivalents at beginning of year................... 19,435 6,385 8,293
------- ------- -------
Cash and cash equivalents at end of year......................... $ 6,385 $ 8,293 $ 8,609
======= ======= =======
Supplemental disclosures of cash flow information:
Cash payments during the year for:
Interest.................................................... $ 2,768 $ 4,154 $ 4,586
Income taxes................................................ 155 175 136
Noncash activities -- transfer of mortgage-backed securities
held-to-maturity to mortgage-backed securities
available-for-sale.......................................... -- 6,834 --
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
________________________________________________________________________________
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
North Bancshares, Inc. (the Company) was incorporated in August 1993 as
a holding company to purchase 100% of the common stock of North Federal
Savings Bank (Savings Bank) and subsidiary. The Savings Bank converted
from the mutual form to a stock form institution, and North Bancshares,
Inc. completed its initial public offering on December 21, 1993 at which
time it purchased all of the outstanding shares of the Savings Bank.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practice within
the thrift industry.
The following is a description of the more significant of those policies
which the Company follows in preparing and presenting its consolidated
financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, the Savings Bank, and its wholly owned subsidiary, North
Financial Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
(B) MANAGEMENT ESTIMATES
In order to prepare the consolidated financial statements in conformity
with generally accepted accounting principles, management is required to
make certain estimates that affect the amounts reported in the
consolidated financial statements and accompanying notes. These
estimates may differ from actual results.
(C) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
Investment and mortgage-backed securities available-for-sale are
securities which may be sold in the future and are recorded at estimated
fair value. Unrealized gains and losses are included as a separate
component of stockholders' equity, net of related tax effects. Other
than temporary declines in the market value of investment securities
available-for-sale are charged to operations. Gains and losses on the
sale of such securities are determined using the specific identification
method.
(D) INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
Investment and mortgage-backed securities held-to-maturity are carried
at amortized cost, adjusted for amortization of premium or accretion of
discount over the term of the security using the straight-line method.
The Company has the positive intent and ability to hold such securities
to maturity. Gains and losses on the sale of securities are determined
using the specific identification method.
(E) INVESTMENT IN MUTUAL FUNDS
The investment in mutual funds is carried at estimated market value.
Market value is based on the month-end net asset value as provided by
the fund. Other than temporary declines in the market value of mutual
funds are charged to operations. Cost of securities sold is determined
on the basis of average cost.
(Continued)
24
<PAGE> 27
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
(F) LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less net
deferred loan origination fees, loans in process, and allowance for loan
losses. Loan origination fees and certain direct costs associated with
loan originations are deferred. The net amount deferred is accreted to
income using the interest method over the contractual life of the loan.
The allowance for losses on loans is increased by charges to operations
and decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on past loan loss
experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrowers' ability to repay, estimated
value of underlying collateral, and current and prospective market
conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Savings
Bank's allowance for losses on loans. Such agencies may require the
Savings Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their
examination. In the opinion of management, the allowance, when taken as
a whole, is adequate to absorb foreseeable losses. Interest income on
loans is not recognized on loans which are 90 days or greater delinquent
or on loans which management believes are uncollectible.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition Disclosures," effective January 1, 1995. SFAS No. 114
requires that impaired loans be measured at the present value of
expected future cash flows discounted at the loan's effective interest
rate, or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. Homogenous loans that are collectively evaluated for
impairment, including one-to-four family mortgage loans and consumer
loans, are excluded from the provisions of SFAS No. 114.
(G) PREMISES AND EQUIPMENT
Depreciation of office property and equipment is accumulated primarily
on the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the lesser of
the estimated useful life of the asset or the remaining term of the
lease.
(H) INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to the temporary differences existing between
the financial statement carrying amounts of assets and liabilities and
their respective tax bases, as well as operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized as an increase or decrease in income tax
expense in the period such change is enacted.
(Continued)
25
<PAGE> 28
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
(I) EARNINGS PER SHARE
Earnings per share of common stock has been determined by dividing net
income by the weighted average number of shares of common stock and
common stock equivalents outstanding for the year. Stock options are
treated as common stock equivalents and are therefore considered in both
primary and fully diluted earnings per share calculations. Common stock
equivalents are computed using the treasury stock method. ESOP shares
are considered outstanding for earnings per share calculations when they
are committed to be released. The weighted average number of shares
outstanding during the years ended December 31, 1994, 1995 and 1996 was
1,331,120, 1,233,150, and 1,109,833, respectively.
(J) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks, interest-bearing deposits,
dollar denominated mutual funds, and federal funds sold.
(K) EMPLOYEE STOCK OWNERSHIP (ESOP)
Compensation expense under the ESOP is equal to the fair value of common
shares released or committed to be released annually to participants in
the ESOP. Common stock purchased by the ESOP and not committed to be
released to participants is included in the consolidated statements of
financial condition at cost as a reduction of stockholders' equity.
(2) INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of investment securities
available-for-sale as of December 31, 1995 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
<S> <C> <C> <C> <C>
----------------------------------------------------------
December 31, 1995:
U.S. Treasury notes $ 6,504 26 - 6,530
U.S. Government agency securities 20,979 68 (39) 21,008
Equity securities 248 - (4) 244
Other 100 - - 100
-----------------------------------------------------------
$27,831 94 (43) 27,882
</TABLE>
(Continued)
26
<PAGE> 29
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996:
U.S. TREASURY NOTES $ 2,241 - (4) 2,237
U.S. Government agency securities 23,000 - (1,156) 21,844
Equity securities 240 5 - 245
Other 100 - - 100
----------------------------------------------------------
$ 25,581 5 (1,160) 24,426
----------------------------------------------------------
</TABLE>
THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT SECURITIES
AVAILABLE-FOR-SALE BY CONTRACTUAL MATURITY ARE SHOWN BELOW. ACTUAL
MATURITIES MAY DIFFER FROM CONTRACTUAL MATURITIES BECAUSE THE BORROWERS
MAY HAVE THE RIGHT TO CALL OR PREPAY OBLIGATIONS WITH OR WITHOUT
PREPAYMENT PENALTIES.
<TABLE>
<CAPTION>
1995 1996
-------------------------- ---------------------------
Amortized Estimated Amortized Estimated
cost fair value cost fair value
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
DUE IN LESS THAN ONE YEAR $ 2,000 2,002 3,241 3,235
DUE AFTER ONE THROUGH FIVE YEARS 11,509 11,502 3,000 2,939
Due after five years through ten years 4,091 4,104 4,100 3,906
Due after ten years 9,983 10,030 15,000 14,101
No stated maturity 248 244 240 245
---------------------------------------------------------
$ 27,831 27,882 25,581 24,426
---------------------------------------------------------
</TABLE>
PROCEEDS FROM SALES OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE DURING
1994 WERE $6,688, WITH GROSS GAINS OF $191, AND GROSS LOSSES OF $4.
PROCEEDS FROM SALES OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE DURING
1995 WERE $6,005, WITH GROSS GAINS OF $74, AND GROSS LOSSES OF $1.
PROCEEDS FROM SALES OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE DURING
1996 WERE $12,180, WITH GROSS GAINS OF $97, AND GROSS LOSSES OF $9.
(Continued)
27
<PAGE> 30
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
(3) INVESTMENT SECURITIES HELD-TO-MATURITY
THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF INVESTMENT SECURITIES
HELD-TO-MATURITY ARE SUMMARIZED AS FOLLOWS AS OF DECEMBER 31, 1995:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
-------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
Bankers acceptances $ 498 - - 498
-------------------------------------------------------
$ 498 - - 498
-------------------------------------------------------
</TABLE>
THE COMPANY DID NOT SELL ANY INVESTMENT SECURITIES HELD-TO-MATURITY
DURING 1994, 1995, OR 1996.
(4) MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF MORTGAGE-BACKED
SECURITIES AVAILABLE-FOR-SALE ARE SUMMARIZED AS FOLLOWS AS OF DECEMBER
31, 1995:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses fair value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage
Association $ 355 23 - 378
Federal Home Loan Mortgage
Corporation 6,479 135 (65) 6,549
------------------------------------------------------
$ 6,834 158 (65) 6,927
------------------------------------------------------
</TABLE>
THE FINANCIAL ACCOUNTING STANDARDS BOARD APPROVED A ONE TIME TRANSFER OF
SECURITIES FROM HELD-TO-MATURITY TO THE AVAILABLE- FOR-SALE
CLASSIFICATION DURING THE PERIOD FROM NOVEMBER 15, 1995 TO DECEMBER 31,
1995, WITH NO RECOGNITION OF ANY RELATED UNREALIZED GAIN OR LOSS IN
CURRENT EARNINGS. ON DECEMBER 31, 1995, MORTGAGE-BACKED SECURITIES WITH
AN AMORTIZED COST OF $6,834 WERE TRANSFERRED TO THE AVAILABLE-FOR-SALE
CLASSIFICATION. THE UNREALIZED GAIN RELATED TO THE TRANSFERRED
SECURITIES WAS $94 AND WAS RECOGNIZED AS A COMPONENT OF STOCKHOLDER'S
EQUITY.
PROCEEDS FROM THE SALES OF MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
DURING 1996 WERE $6,600, WITH GROSS GAINS OF $94 AND GROSS LOSSES OF
$94. THERE WERE NO SALES DURING 1994 OR 1995.
(Continued)
28
<PAGE> 31
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
(5) MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY
THE AMORTIZED COST AND ESTIMATED FAIR VALUE OF MORTGAGE-BACKED
SECURITIES HELD-TO-MATURITY ARE SUMMARIZED AS FOLLOWS AS OF DECEMBER 31,
1995 AND 1996:
<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
cost gains losses value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION $ 273 12 - 285
FEDERAL HOME LOAN MORTGAGE
CORPORATION 7,718 161 (17) 7,862
FEDERAL NATIONAL MORTGAGE
Association 1,428 _ (16) 1,412
----------------------------------------------------------
$ 9,419 173 (33) 9,559
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
cost gains losses fair value
<S> <C> <C> <C> <C>
DECEMBER 31, 1996:
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION $ 229 12 (1) 240
FEDERAL HOME LOAN MORTGAGE
CORPORATION 6,114 125 (106) 6,133
Association 1,122 5 (32) 1,095
---------------------------------------------------------
$ 7,465 142 (139) 7,468
---------------------------------------------------------
</TABLE>
THE COMPANY DID NOT SELL ANY SECURITIES HELD-TO-MATURITY DURING 1994,
1995, OR 1996.
THE SAVINGS BANK HAS PLEDGED CERTAIN SECURITIES WITH AN AMORTIZED COST
OF APPROXIMATELY $1,505 AND $1,250 AT DECEMBER 31, 1995 AND 1996,
RESPECTIVELY, AS COLLATERAL FOR CERTAIN MULTIFAMILY HOUSING REVENUE
BONDS (NOTE 18).
(Continued)
29
<PAGE> 32
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________________________________________________________________
(6) LOANS RECEIVABLE
Loans receivable are summarized as follows as of December 31, 1995 and 1996:
<TABLE>
<CAPTION>
---------------------
1995 1996
---------------------
<S> <C> <C>
MORTGAGE LOANS:
ONE- TO FOUR-FAMILY $ 51,217 67,542
Multifamily 5,012 5,057
TOTAL MORTGAGE LOANS 56,229 72,599
Commercial loans - 790
Consumer loans 284 239
TOTAL LOANS RECEIVABLE 56,513 73,628
LESS:
DEFERRED LOAN FEES, NET 152 42
Allowance for loan losses 200 208
----------------------
$ 56,161 73,378
----------------------
Weighted average interest rate 7.90% 7.81%
----------------------
</TABLE>
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES IS SUMMARIZED AS FOLLOWS:
<TABLE>
<CAPTION>
--------------------------------
1994 1995 1996
---------------------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 106 160 200
Provision for loan losses 54 40 8
--------------------------------
Balance at end of year $ 160 200 208
--------------------------------
</TABLE>
LOANS RECEIVABLE DELINQUENT THREE MONTHS OR MORE AT DECEMBER 31 ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
Percentage
Number of total
of loans Amount loans
-------------------------------------------------
<S> <C> <C> <C>
1994 2 $ 32 .07%
1995 1 24 .04
1996 1 1 .00
-------------------------------------------------
</TABLE>
(Continued)
30
<PAGE> 33
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
AS DISCUSSED IN NOTE 1, THE COMPANY ADOPTED SFAS NOS. 114
AND 118 ON JANUARY_1, 1995. THESE STATEMENTS ESTABLISH PROCEDURES FOR
DETERMINING THE APPROPRIATE ALLOWANCE FOR LOAN LOSSES FOR LOANS DEEMED
IMPAIRED. THE CALCULATION OF RESERVE LEVELS IS BASED UPON THE
DISCOUNTED PRESENT VALUE OF EXPECTED CASH FLOWS RECEIVED FROM THE DEBTOR
OR OTHER MEASURES OF VALUE SUCH AS MARKET PRICES OR COLLATERAL VALUES.
THE COMPANY DID NOT IDENTIFY ANY LOANS CONSIDERED TO BE IMPAIRED DURING
1995 OR 1996.
MORTGAGE LOANS SERVICED FOR OTHERS AMOUNTED TO APPROXIMATELY $149, $144,
AND $137 AT DECEMBER 31, 1994, 1995, AND 1996, RESPECTIVELY.
(7) ACCRUED INTEREST RECEIVABLE
ACCRUED INTEREST RECEIVABLE IS SUMMARIZED AS FOLLOWS AS OF DECEMBER 31,
1995 AND 1996:
<TABLE>
<CAPTION>
1995 1996
--------------------
<S> <C> <C>
LOANS RECEIVABLE $ 402 440
MORTGAGE-BACKED SECURITIES 180 86
INVESTMENT SECURITIES 377 480
Stock in Federal Home Loan Bank of Chicago _ 19
--------------------
$ 959 1,025
--------------------
</TABLE>
(8) PREMISES AND EQUIPMENT
THE COST OF PREMISES AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND
AMORTIZATION, IS SUMMARIZED AS FOLLOWS AS OF DECEMBER 31, 1995 AND 1996:
<TABLE>
<CAPTION>
1995 1996
--------------------
<S> <C> <C>
LAND $ 280 280
OFFICE BUILDING 1,134 1,134
FURNITURE, FIXTURES, AND EQUIPMENT 854 1,010
Leasehold improvements 87 87
--------------------
2,355 2,511
Less accumulated depreciation and amortization 1,521 1,450
--------------------
$ 834 1,061
--------------------
</TABLE>
INCLUDED IN OCCUPANCY EXPENSE IS DEPRECIATION AND AMORTIZATION OF
PREMISES AND EQUIPMENT OF $50, $57, AND $73 FOR THE YEARS ENDED DECEMBER
31, 1994, 1995, AND 1996, RESPECTIVELY.
(Continued)
31
<PAGE> 34
NORTH BANCSHARES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(9) DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows as of December 31, 1995 and
1996:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
1995 1996
-------------------------------------- --------------------------------------
WEIGHTED WEIGHTED
AVERAGE OR AVERAGE OR
STATED RATE AMOUNT PERCENT STATED RATE AMOUNT PERCENT
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook 2.75% $17,380 23.1% 2.75% $16,299 22.1%
NOW accounts 2.02 7,184 9.6 2.02 9,194 12.5
Money market deposit accounts 3.30 5,637 7.5 3.30 6,233 8.5
------- ----- ------- -----
30,201 40.2 31,726 43.1
------- ----- ------- -----
Certificate accounts:
Fixed rate 5.75-8.11 460 .6 5.75-8.11 457 .6
Money market certificates:
Ninety-one day 4.75 862 1.2 4.75 863 1.2
Six month 5.31 7,024 9.3 5.16 7,699 10.4
One year 5.87 9,851 13.1 5.24 9,750 13.2
One and one-half year 6.15 7,420 9.9 5.84 4,312 5.9
Two year 5.25 2,881 3.8 5.74 2,785 3.8
Two and one-half year 5.35 1,271 1.7 5.65 1,219 1.7
Three, four, and five year 6.20 15,199 20.2 6.03 14,800 20.1
------- ----- ------- -----
44,968 59.8 41,885 56.9
------- ----- ------- -----
Total deposit accounts $75,169 100.0% $73,611 100.0%
======= ===== ======= =====
Weighted average interest rate 4.59% 4.35%
======== ========
Contractual maturity of
certificate accounts:
Under 12 months $28,812 64.1% $23,778 56.8%
12 to 36 months 7,862 17.5 11,437 27.3
Over 36 months 8,294 18.4 6,670 15.9
------- ----- ------- -----
$44,968 100.0% $41,885 100.0%
======= ===== ======= =====
</TABLE>
Certificates of deposit of $100 or more totaled $3,486, $4,601, and $5,780
at December 31, 1994, 1995, and 1996, respectively.
32
<PAGE> 35
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
INTEREST EXPENSE FOR DEPOSIT ACCOUNTS IS SUMMARIZED AS FOLLOWS FOR THE
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996:
<TABLE>
<CAPTION>
1994 1995 1996
------- ----- -----
<S> <C> <C> <C>
PASSBOOK $ 561 492 458
NOW ACCOUNTS 126 123 144
MONEY MARKET DEPOSIT ACCOUNTS 232 187 192
Certificate accounts 1,830 2,513 2,491
------- ----- -----
$2,749 3,315 3,285
====== ===== =====
</TABLE>
(10) BORROWED FUNDS
BORROWED FUNDS ARE SUMMARIZED AS FOLLOWS AS OF DECEMBER 31, 1995 AND
1996:
<TABLE>
<CAPTION>
1995 1996
---------------------------- --------------------------
Weighted Weighted
interest rate Amount interest rate Amount
------------- ------- ------------- --------
<S> <C> <C> <C> <C>
SECURED ADVANCES FROM THE FHLB
OF CHICAGO MATURING:
1996 7.21% $ 6,000 - % $ -
1997 7.72 5,000 6.97 10,000
1998 - - 5.97 3,000
1999 - - 6.11 3,000
2001 - - 5.97 7,350
2002 5.89 750 5.89 750
----- ---- ----- ------
7.44% $11,750 6.49% $24,100
===== ======= ===== =======
</TABLE>
THE SAVINGS BANK HAS ADOPTED A COLLATERAL PLEDGE AGREEMENT WHEREBY IT
HAS AGREED TO AT ALL TIMES KEEP ON HAND, FREE OF ALL OTHER PLEDGES,
LIENS, AND ENCUMBRANCES, FIRST MORTGAGES WITH UNPAID PRINCIPAL BALANCES
AGGREGATING NO LESS THAN 167% OF THE OUTSTANDING SECURED ADVANCES FROM
THE FEDERAL HOME LOAN BANK OF CHICAGO (FHLB OF CHICAGO). ALL STOCK IN
THE FHLB OF CHICAGO IS PLEDGED AS ADDITIONAL COLLATERAL FOR THESE
ADVANCES.
(Continued)
33
<PAGE> 36
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
(11) INCOME TAXES
INCOME TAX EXPENSE IS COMPRISED AS FOLLOWS FOR THE YEARS ENDED DECEMBER
31, 1994, 1995, AND 1996:
<TABLE>
<CAPTION>
------------------------------
1994 1995 1996
------------------------------
<S> <C> <C> <C>
Federal:
Current tax expense $ 255 228 91
Deferred tax expense 89 67 110
------------------------------
344 295 201
------------------------------
State:
Current tax benefit - (51) (51)
Deferred tax expense 9 9 15
------------------------------
9 (42) (36)
------------------------------
$ 353 253 165
------------------------------
</TABLE>
INCOME TAX EXPENSE AMOUNTED TO $353, $253, AND $165 FOR THE YEARS ENDED
DECEMBER 31, 1994, 1995, AND 1996, RESPECTIVELY, FOR AN EFFECTIVE TAX
RATE OF 88.7%, 26.7% AND 25.1%, RESPECTIVELY. THE REASONS FOR THE
DIFFERENCE BETWEEN THE EFFECTIVE TAX RATE AND THE STATUTORY FEDERAL
INCOME TAX RATE ARE SHOWN BELOW.
<TABLE>
<CAPTION>
PERCENTAGE OF EARNINGS
BEFORE INCOME TAXES
----------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-----------------------------------
<S> <C> <C> <C>
FEDERAL INCOME TAX RATE 34.0% 34.0 34.0
ITEMS AFFECTING FEDERAL INCOME TAX RATE:
STATE INCOME TAX, NET OF FEDERAL BENEFIT .8 (3.3) (7.8)
CHANGE IN VALUE OF MUTUAL FUNDS 52.3 (5.9) (4.2)
Other, net 1.6 1.9 3.1
Effective income tax rate 88.7% 26.7 25.1
</TABLE>
(Continued)
34
<PAGE> 37
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
THE TAX EFFECTS OF EXISTING TEMPORARY DIFFERENCES THAT GIVE RISE TO
SIGNIFICANT PORTIONS OF THE DEFERRED TAX LIABILITIES AND DEFERRED TAX
ASSETS AT DECEMBER 31 ARE:
<TABLE>
<CAPTION>
1995 1996
----- ----
<S> <C> <C>
DEFERRED TAX LIABILITIES:
UNREALIZED GAIN ON SECURITIES AVAILABLE-FOR-SALE $ 54 -
DIVIDENDS RECEIVED IN STOCK, NOT RECOGNIZED FOR TAX PURPOSES 33 33
TAX DEPRECIATION IN EXCESS OF BOOK DEPRECIATION 29 38
EXCESS OF TAX BAD DEBT RESERVE OVER BASE YEAR 131 156
Management Recognition and Retention Plan Section 83(b) election 34 17
Deferred loan fees - 56
Pension expense - 43
---- -----
Gross deferred tax liabilities 281 343
---- -----
DEFERRED TAX ASSETS:
STATE NET OPERATING LOSS CARRYFORWARDS 36 113
DECLINE IN VALUE OF MUTUAL FUNDS 173 141
UNREALIZED LOSS ON SECURITIES AVAILABLE-FOR-SALE - 449
DEFERRED LOAN FEES 24 -
PENSION EXPENSE 69 -
General allowance for losses on loans 77 81
Other - 3
---- -----
GROSS DEFERRED TAX ASSETS 379 787
Less valuation allowance (173) (141)
----- -----
Net deferred tax assets 206 646
----- -----
Net deferred tax liability (asset) $ 75 (303)
----- -----
</TABLE>
THE COMPANY BELIEVES, EXCEPT AS STATED BELOW, THAT IT IS MORE LIKELY
THAN NOT THAT THE NET DEFERRED TAX ASSETS WILL BE REALIZED BASED ON
HISTORICAL TAXABLE INCOME LEVELS AND ANTICIPATED FUTURE EARNINGS AND
TAXABLE INCOME LEVELS. THE COMPANY ESTABLISHED A VALUATION ALLOWANCE OF
$252 AT DECEMBER_31, 1994 DUE TO UNCERTAINTY REGARDING REALIZATION OF
THE DEFERRED TAX ASSET ON THE DECLINE IN VALUE OF MUTUAL FUNDS. THE
VALUATION ALLOWANCE WAS REDUCED IN 1995 AND 1996 FOR THE EFFECTS OF
APPRECIATION IN MUTUAL FUNDS SOLD.
RETAINED EARNINGS AT DECEMBER 31, 1996 INCLUDES $4,435 FOR WHICH NO
PROVISION FOR FEDERAL INCOME TAX HAS BEEN MADE. THIS AMOUNT REPRESENTS
ALLOCATIONS OF INCOME TO BAD DEBT DEDUCTIONS FOR TAX PURPOSES ONLY.
REDUCTION OF AMOUNTS SO ALLOCATED FOR PURPOSES OTHER THAN TAX BAD DEBT
LOSSES WILL CREATE INCOME FOR TAX PURPOSES ONLY, WHICH WILL BE SUBJECT
TO THE THEN CURRENT CORPORATE INCOME TAX RATE.
THE COMPANY HAS A CAPITAL LOSS CARRYFORWARD OF $356 WHICH WILL EXPIRE IN
THE YEAR 2000, AND NET OPERATING LOSS CARRYFORWARDS FOR STATE INCOME TAX
PURPOSES OF APPROXIMATELY $800 WHICH WILL EXPIRE IN THE YEAR 2010.
(Continued)
35
<PAGE> 38
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
(12) CONVERSION TO STOCK FORM OF OWNERSHIP
ON DECEMBER 21, 1993, THE COMPANY ISSUED 1,388,625 SHARES OF $.01 PAR
VALUE COMMON STOCK AT $10 SHARE, AND BECAME THE PARENT COMPANY OF THE
SAVINGS BANK. NET PROCEEDS, AFTER DEDUCTING CONVERSION EXPENSES OF
$842, WERE $13,044. DURING 1994, THE COMPANY CREDITED ADDITIONAL
PAID-IN CAPITAL FOR THE OVERACCRUAL OF EXPENSES RELATED TO THE STOCK
CONVERSION IN THE AMOUNT OF $73. AS PART OF THE CONVERSION, THE ESOP
PURCHASED 111,090 SHARES OF COMMON STOCK WITH THE USE OF A LOAN FROM THE
COMPANY IN THE AMOUNT OF $1,111.
AS PART OF THE CONVERSION, THE COMPANY ESTABLISHED A LIQUIDATION ACCOUNT
FOR THE BENEFIT OF ELIGIBLE DEPOSITORS AS OF SEPTEMBER 30, 1992, THE
ELIGIBILITY DATE, WHO CONTINUE TO MAINTAIN DEPOSITS IN THE SAVINGS BANK
FOLLOWING THE CONVERSION. THE INITIAL BALANCE OF THE LIQUIDATION
ACCOUNT WAS EQUAL TO THE RETAINED EARNINGS OF THE SAVINGS BANK AS OF
JUNE 30, 1993, WHICH WAS $10,312. THE BALANCE IN THIS ACCOUNT DECREASES
EACH YEAR IN WHICH DEPOSIT BALANCES OF ELIGIBLE ACCOUNT HOLDERS DECLINE.
IN THE UNLIKELY EVENT OF A COMPLETE LIQUIDATION OF THE SAVINGS BANK,
EACH ELIGIBLE DEPOSITOR WHO HAS CONTINUED TO MAINTAIN DEPOSITS IN THE
SAVINGS BANK FOLLOWING THE CONVERSION WILL BE ENTITLED TO RECEIVE A
LIQUIDATION DISTRIBUTION FROM THE LIQUIDATION ACCOUNT, BASED ON THEIR
PROPORTIONATE SHARE OF THE THEN TOTAL REMAINING QUALIFYING DEPOSITS,
PRIOR TO ANY DISTRIBUTION TO THE COMPANY AS THE SOLE SHAREHOLDER OF THE
SAVINGS BANK. DIVIDENDS CANNOT BE PAID FROM RETAINED EARNINGS ALLOCATED
TO THE LIQUIDATION ACCOUNT.
(13) PENSION PLAN
THE COMPANY HAS A QUALIFIED NONCONTRIBUTORY PENSION PLAN COVERING
SUBSTANTIALLY ALL FULL-TIME EMPLOYEES EMPLOYED MORE THAN SIX MONTHS AND
OVER 20-1/2 YEARS OF AGE, INCLUDING PART-TIME EMPLOYEES WORKING OVER
1,000 HOURS PER YEAR. THE SAVINGS BANK'S FUNDING POLICY PROVIDES THAT
PAYMENTS TO THE PLAN SHALL BE CONSISTENT WITH THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974 USING THE FROZEN ENTRY AGE ACTUARIAL COST
METHOD.
(Continued)
36
<PAGE> 39
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
THE COMPANY'S PENSION PLAN DATA FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1996 IS SHOWN BELOW.
<TABLE>
<CAPTION>
1995 1996
--------------------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS - ACCUMULATED BENEFIT
OBLIGATION, INCLUDING VESTED BENEFITS OF $2,534 AND $2,135 AT
December 31, 1995 and 1996, respectively $ 2,568 2,685
--------------------
PLAN ASSETS AT FAIR VALUE 2,315 2,524
LESS PROJECTED BENEFIT OBLIGATION FOR SERVICES
rendered to date 2,831 2,856
--------------------
PROJECTED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS (516) (332)
UNRECOGNIZED PRIOR SERVICE COST (13) (12)
UNRECOGNIZED NET LOSS FROM PAST EXPERIENCE DIFFERENT FROM THAT ASSUMED 518 389
Unrecognized net transition asset being recognized over 13 years (28) (24)
--------------------
PREPAID (ACCRUED) PENSION COST (39) 21
Additional liability (214) (182)
---------------------
Accrued pension cost $ (253) (161)
---------------------
</TABLE>
NET PENSION COST FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
INCLUDES THE FOLLOWING COMPONENTS:
<TABLE>
<CAPTION>
1994 1995 1996
----------------------------
<S> <C> <C> <C>
SERVICE COST BENEFITS EARNED DURING THE YEAR $ 50 48 74
INTEREST COST ON PROJECTED BENEFIT OBLIGATION 168 197 208
ACTUAL RETURN ON PLAN ASSETS (163) (172) (181)
Net amortization and deferral (11) (26) (13)
----------------------------
$ 44 47 88
----------------------------
</TABLE>
THE PROJECTED BENEFIT OBLIGATION WAS DETERMINED USING AN ASSUMED
WEIGHTED AVERAGE DISCOUNT RATE OF 8.5%, 7.5% AND 8.0% IN 1994, 1995, AND
1996, RESPECTIVELY, AND AN ASSUMED COMPENSATION INCREASE OF 5% IN 1994
AND 1995 AND 4% IN 1996. THE ASSUMED WEIGHTED AVERAGE LONG-TERM RATE OF
RETURN ON PLAN ASSETS WAS ASSUMED TO BE 9% IN 1994, 1995, AND 1996,
RESPECTIVELY.
(Continued)
37
<PAGE> 40
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
(14) STOCK OPTION PLAN
IN 1993, THE COMPANY ADOPTED A STOCK OPTION PLAN (THE "PLAN") PURSUANT
TO WHICH THE COMPANY'S BOARD OF DIRECTORS MAY GRANT STOCK OPTIONS TO
DIRECTORS, OFFICERS AND EMPLOYEES OF THE COMPANY AND THE SAVINGS BANK.
THE NUMBER OF COMMON SHARES AUTHORIZED UNDER THE PLAN IS 138,862, EQUAL
TO 10% OF THE TOTAL NUMBER OF SHARES ISSUED IN THE INITIAL STOCK
OFFERING AND ARE 100% VESTED UPON DATE OF GRANT. THE EXERCISE PRICE IS
EQUAL TO THE FAIR VALUE OF THE COMMON STOCK AT THE DATE OF GRANT. THE
OPTION TERM CANNOT EXCEED 10 YEARS FROM THE COMMENCEMENT DATE OF THE
PLAN OF DECEMBER 21, 1993. AT DECEMBER 31, 1996, THERE WERE 21,108
ADDITIONAL SHARES AVAILABLE FOR GRANT UNDER THE PLAN.
AS OF DECEMBER 31, 1996, THE COMPANY ADOPTED THE DISCLOSURE PROVISIONS
OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 123, "ACCOUNTING
FOR STOCK-BASED COMPENSATION" (SFAS NO. 123). THE PER SHARE
WEIGHTED-AVERAGE FAIR VALUE OF STOCK OPTIONS GRANTED DURING 1995 WAS
$3.17 ON THE DATE OF GRANT USING THE BLACK SCHOLES OPTION PRICING MODEL
WITH THE FOLLOWING WEIGHTED-AVERAGE ASSUMPTIONS: AN EXPECTED DIVIDEND
YIELD OF 2.5%, EXPECTED VOLATILITY OF .05%, RISK-FREE INTEREST RATE OF
7.2% AND AN EXPECTED LIFE OF 8.8 YEARS. THERE WERE NO STOCK OPTIONS
GRANTED IN 1994 OR 1996.
UNDER SFAS NO. 123, THE COMPANY IS REQUIRED TO DISCLOSE PRO FORMA NET
INCOME AND EARNINGS PER SHARE BOTH FOR 1995 AND 1996 AS IF COMPENSATION
EXPENSE RELATIVE TO THE FAIR VALUE OF OPTIONS GRANTED HAD BEEN INCLUDED
IN EARNINGS. HAD THE COMPANY DETERMINED COMPENSATION COST BASED ON THE
FAIR VALUE AT THE GRANT DATE FOR ITS STOCK OPTIONS UNDER SFAS NO. 123,
THE COMPANY'S NET INCOME WOULD HAVE BEEN REDUCED TO THE PRO FORMA
AMOUNTS INDICATED BELOW:
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
NET INCOME:
AS REPORTED $ 696 492
PRO FORMA 674 492
EARNINGS PER SHARE:
PRIMARY:
AS REPORTED .56 .44
PRO FORMA .55 .44
FULLY DILUTED:
AS REPORTED .56 .44
Pro forma .55 .44
</TABLE>
(Continued)
38
<PAGE> 41
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
A SUMMARY OF THE STATUS OF THE COMPANY'S STOCK OPTION TRANSACTIONS UNDER
THE PLAN FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 IS PRESENTED
BELOW:
<TABLE>
<CAPTION>
1995 1996
----------------------- -----------------------
Weighted- Weighted-
average average
exercise exercise
Options Shares price Shares price
<S> <C> <C> <C> <C>
Outstanding at Beginning of Year 108,308 $ 10.00 117,754 $ 10.13
Granted 9,446 11.63 - -
Exercised - - 1,388 10.00
Outstanding at end of year 117,754 10.13 116,366 10.13
-------------------------------------------------
Exercisable at year end 117,754 116,366
-------------------------------------------------
Weighted-Average Grant-Date
Fair Value of Options
granted during the year $ 30,000 $ -
</TABLE>
AT DECEMBER 31, 1996, THE RANGE OF EXERCISE PRICES AND WEIGHTED-AVERAGE
REMAINING CONTRACTUAL LIFE OF OUTSTANDING OPTIONS WAS $10.00 TO $11.63
AND 7 YEARS, RESPECTIVELY.
AT DECEMBER 31, 1994, 1995 AND 1996, THE NUMBER OF OPTIONS EXERCISABLE
WAS 108,308, 117,754 AND 116,366, RESPECTIVELY. THE WEIGHTED-AVERAGE
EXERCISE PRICE WAS $10.00 AT DECEMBER 31, 1994 AND $10.13 AT DECEMBER
31, 1995 AND 1996.
(15) EMPLOYEE STOCK OWNERSHIP PLAN
IN CONJUNCTION WITH THE SAVINGS BANK'S CONVERSION, THE COMPANY FORMED AN
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). THE ESOP COVERS SUBSTANTIALLY ALL
EMPLOYEES WITH MORE THAN SIX MONTHS OF EMPLOYMENT WHO HAVE ATTAINED THE
AGE OF 20-1/2. THE PLAN WAS FUNDED BY A LOAN IN THE AMOUNT OF $1,111
FROM NORTH BANCSHARES, INC. TO THE ESOP TRUST AT A RATE OF 8% WITH
PRINCIPAL AND INTEREST PAYMENTS DUE QUARTERLY MATURING ON DECEMBER 31,
2002. THE LOAN IS SECURED BY THE SHARES OF NORTH BANCSHARES, INC.
PURCHASED WITH THE LOAN PROCEEDS. THE SAVINGS BANK HAS COMMITTED TO
MAKE CONTRIBUTIONS TO THE ESOP SUFFICIENT TO ALLOW THE ESOP TO FUND ITS
DEBT SERVICE REQUIREMENTS ON THE LOAN. THE ESOP PURCHASED 111,090
COMMON SHARES OF NORTH BANCSHARES, INC. IN THE CONVERSION WITH THE LOAN
PROCEEDS. IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES,
THE BALANCE OF THE ESOP LOAN HAS BEEN REPORTED AS A REDUCTION OF
STOCKHOLDERS' EQUITY ON THE COMPANY'S CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION IN THE AMOUNTS OF $778 AND $667 AT DECEMBER 31, 1995
AND 1996, RESPECTIVELY. IN 1995 AND 1996, RESPECTIVELY, CONTRIBUTIONS
TO THE ESOP WHICH WERE USED TO FUND PRINCIPAL AND INTEREST PAYMENTS ON
THE ESOP DEBT, TOTALED $187 AND $170.
(Continued)
39
<PAGE> 42
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
(16) RECOGNITION AND RETENTION PLAN
IN CONJUNCTION WITH THE SAVINGS BANK'S CONVERSION, THE COMPANY FORMED A
RECOGNITION AND RETENTION PLAN (RRP). PURSUANT TO THE RRP, RESTRICTED
STOCK AWARDS REPRESENTING UP TO 4% OF THE SHARES OF COMMON STOCK THAT
WOULD BE OUTSTANDING UPON COMPLETION OF THE CONVERSION (55,545 SHARES)
MAY BE GRANTED TO DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
RESTRICTED STOCK AWARDS FOR 48,876 SHARES WERE DISTRIBUTED FROM
AUTHORIZED BUT UNISSUED SHARES. THE AWARDS VEST AT A RATE OF 20% PER
YEAR, BEGINNING DECEMBER 31, 1993. THE COST OF COMMON SHARES AWARDED IS
AMORTIZED TO COMPENSATION EXPENSE AS THE PARTICIPANTS VEST IN THE SHARES
AND THE UNAMORTIZED COST IS REFLECTED AS A REDUCTION OF STOCKHOLDERS'
EQUITY AS DEFERRED COMPENSATION. AT DECEMBER 31, 1995 AND 1996,
RESPECTIVELY, 29,325 AND 39,100 SHARES HAVE VESTED. THE COMPANY
RECORDED COMPENSATION EXPENSE IN 1994, 1995, AND 1996 OF $126, $116, AND
$75, RESPECTIVELY.
(17) REGULATION AND SUPERVISION
THE SAVING 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 POSSIBLY
ADDITIONAL DISCRETIONARY - ACTIONS BY REGULATORS THAT, IF UNDERTAKEN,
COULD HAVE A DIRECT MATERIAL EFFECT ON THE SAVINGS BANK'S FINANCIAL
STATEMENTS. UNDER CAPITAL ADEQUACY GUIDELINES AND THE REGULATORY
FRAMEWORK FOR PROMPT CORRECTIVE ACTION, THE SAVINGS BANK MUST MEET
SPECIFIC CAPITAL GUIDELINES THAT INVOLVE QUANTITATIVE MEASURES OF THE
SAVINGS BANK ASSETS, LIABILITIES, AND CERTAIN OFF-BALANCE-SHEET ITEMS AS
CALCULATED UNDER REGULATORY ACCOUNTING PRACTICES. THE SAVINGS BANK
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 SAVINGS BANK TO MAINTAIN MINIMUM AMOUNTS AND RATIOS
(SET FORTH IN THE TABLE BELOW) OF TOTAL AND TIER I CAPITAL (AS DEFINED)
TO RISK-WEIGHTED ASSETS (AS DEFINED), TIER I CAPITAL (AS DEFINED) TO
AVERAGE ASSETS (AS DEFINED) AND TANGIBLE CAPITAL (AS DEFINED).
MANAGEMENT BELIEVES, AS OF DECEMBER 31, 1996, THAT THE SAVINGS BANK
MEETS ALL CAPITAL ADEQUACY REQUIREMENTS TO WHICH THEY ARE SUBJECT.
AS OF DECEMBER 31, 1996, THE MOST RECENT NOTIFICATION FROM THE OFFICE OF
THE THRIFT SUPERVISION CATEGORIZED THE SAVINGS BANK AS ADEQUATELY
CAPITALIZED UNDER THE REGULATORY FRAMEWORK FOR PROMPT CORRECTIVE ACTION.
TO BE CATEGORIZED AS ADEQUATELY CAPITALIZED THE SAVINGS BANK MUST
MAINTAIN MINIMUM TOTAL RISK-BASED, TIER I RISK-BASED, TIER I LEVERAGE,
AND TANGIBLE CAPITAL RATIOS AS SET FORTH IN THE TABLE. THERE ARE NO
CONDITIONS OR EVENTS SINCE THAT NOTIFICATION THAT MANAGEMENT BELIEVES
HAVE CHANGED THE INSTITUTION'S CATEGORY.
(Continued)
40
<PAGE> 43
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
THE ACTUAL AND MINIMUM CAPITAL AMOUNTS AND RATIOS OF THE SAVINGS BANK AS
OF DECEMBER 31, 1996 ARE PRESENTED IN THE TABLE BELOW.
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
-------------------- -----------------
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) $14,469 31.98% 3,620 8.0%
TIER I CAPITAL (TO RISK WEIGHTED ASSETS) 14,261 31.52 N/A N/A
Tier I capital ( to average assets) 14,261 12.43 3,443 3.0
Tangible capital (to average assets) 14,261 12.43 1,721 1.5
</TABLE>
(18) COMMITMENTS AND CONTINGENCIES AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK
THE COMPANY IS A PARTY TO FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK IN THE NORMAL COURSE OF ITS BUSINESS. THESE INSTRUMENTS INCLUDE
COMMITMENTS TO ORIGINATE LOANS. THESE INSTRUMENTS INVOLVE CREDIT AND
INTEREST RATE RISK IN EXCESS OF THE AMOUNT RECOGNIZED IN THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION. THE COMPANY EVALUATES
EACH CUSTOMER'S CREDITWORTHINESS ON A CASE-BY-CASE BASIS.
COMMITMENTS TO ORIGINATE LOANS AT DECEMBER 31, 1995 AND 1996 OF $608 AND
$777, RESPECTIVELY, REPRESENT AMOUNTS WHICH THE COMPANY PLANS TO FUND
WITHIN THE NORMAL COMMITMENT PERIOD OF 60 TO 90 DAYS. THE COMMITMENTS
TO ORIGINATE LOANS AT DECEMBER 31, 1996 REPRESENT COMMITMENTS FOR FIXED
RATE LOANS WITH AN AVERAGE INTEREST RATE OF 8.31%. BECAUSE THE
CREDITWORTHINESS OF EACH CUSTOMER IS REVIEWED PRIOR TO THE EXTENSION OF
THE COMMITMENT, THE COMPANY ADEQUATELY CONTROLS CREDIT RISK ON THESE
COMMITMENTS, AS IT DOES FOR LOANS RECORDED ON THE CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION. THE COMPANY CONDUCTS SUBSTANTIALLY
ALL OF ITS LENDING ACTIVITIES IN THE CHICAGOLAND AREA IN WHICH IT
SERVES.
AS DISCUSSED IN NOTE 5, THE COMPANY HAS PLEDGED CERTAIN SECURITIES AS
A CREDIT ENHANCEMENT FOR CERTAIN MULTIFAMILY HOUSING REVENUE BONDS. SIX
OTHER SAVINGS INSTITUTIONS PARTICIPATE IN THIS CREDIT ENHANCEMENT. THE
BONDS HAVE A TOTAL PRINCIPAL BALANCE OF $17,000 OF WHICH THE COMPANY HAS
AGREED TO COLLATERALIZE $1,000. THE OFFICE OF THRIFT SUPERVISION HAS
CLASSIFIED THE UNDERLYING COLLATERAL, A MULTIFAMILY HOUSING PROJECT
LOCATED IN ARLINGTON HEIGHTS, ILLINOIS, AS SUBSTANDARD. THE COMPANY HAS
ESTABLISHED A POSSIBLE LOSS RESERVE IN OTHER LIABILITIES FOR THIS CREDIT
ENHANCEMENT OF $126 AT DECEMBER 31, 1996.
(Continued)
41
<PAGE> 44
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
(19) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INVESTMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 107, "DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS" (STATEMENT 107), REQUIRES THE
DISCLOSURE OF ESTIMATED FAIR VALUES OF ALL ASSET, LIABILITY, AND
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. THE ESTIMATED FAIR VALUE
AMOUNTS UNDER STATEMENT 107 HAVE BEEN DETERMINED AS OF A SPECIFIC POINT
IN TIME UTILIZING VARIOUS AVAILABLE MARKET INFORMATION, ASSUMPTIONS, AND
APPROPRIATE VALUATION METHODOLOGIES. ACCORDINGLY, THE ESTIMATED FAIR
VALUES PRESENTED HEREIN ARE NOT NECESSARILY REPRESENTATIVE OF THE
UNDERLYING VALUE OF THE COMPANY. RATHER THE DISCLOSURES ARE LIMITED TO
REASONABLE ESTIMATES OF THE FAIR VALUE OF ONLY THE COMPANY'S FINANCIAL
INSTRUMENTS. THE USE OF ASSUMPTIONS AND VARIOUS VALUATION TECHNIQUES,
AS WELL AS THE ABSENCE OF SECONDARY ASSETS FOR CERTAIN FINANCIAL
INSTRUMENTS, WILL LIKELY REDUCE THE COMPARABILITY OF FAIR VALUE
DISCLOSURES BETWEEN FINANCIAL INSTITUTIONS. THE COMPANY DOES NOT PLAN
TO SELL MOST OF ITS ASSETS OR SETTLE MOST OF ITS LIABILITIES AT THESE
FAIR VALUES. THE ESTIMATED FAIR VALUES OF THE COMPANY'S FINANCIAL
INSTRUMENTS AS OF DECEMBER 31 ARE SET FORTH IN THE FOLLOWING TABLE.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1996
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
CASH AND DUE FROM BANKS $ 607 607 618 618
INTEREST-BEARING DEPOSITS 2,634 2,634 2,644 2,644
FEDERAL FUNDS SOLD 3,925 3,925 4,800 4,800
INVESTMENT IN DOLLAR DENOMINATED MUTUAL FUNDS 1,127 1,127 547 547
INVESTMENT SECURITIES AVAILABLE-FOR-SALE 27,882 27,882 24,426 24,426
INVESTMENT SECURITIES HELD-TO-MATURITY 498 498 - -
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE 6,927 6,927 - -
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY 9,419 9,559 7,465 7,468
Loans, net 56,161 56,586 73,378 73,858
Accrued interest receivable 959 959 1,025 1,025
-------- ------- ------- -------
$110,139 110,704 114,903 115,386
-------- ------- ------- -------
FINANCIAL LIABILITIES:
DEPOSIT ACCOUNTS 75,169 75,421 73,611 74,431
BORROWED FUNDS 11,750 12,039 24,100 23,993
Accrued interest payable 157 157 212 212
-------- ------- ------- -------
$ 87,076 87,617 97,923 98,636
-------- ------- ------- -------
</TABLE>
(Continued)
42
<PAGE> 45
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
THE FOLLOWING METHODS AND ASSUMPTIONS WERE USED BY THE COMPANY TO
ESTIMATE THE FAIR VALUE OF ITS FINANCIAL INSTRUMENTS.
(A) CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS, AND
FEDERAL FUNDS SOLD
FOR THESE SHORT-TERM INSTRUMENTS, THE CARRYING AMOUNT IS A REASONABLE
ESTIMATE OF FAIR VALUE.
(B) INVESTMENT IN DOLLAR DENOMINATED MUTUAL FUNDS
THE FAIR VALUE OF INVESTMENT IN DOLLAR DENOMINATED MUTUAL FUNDS IS BASED
ON QUOTED MARKET PRICE.
(C) INVESTMENT AND MORTGAGE-BACKED SECURITIES
THE FAIR VALUE OF INVESTMENT AND MORTGAGE-BACKED SECURITIES IS THE
QUOTED MARKET PRICE, IF AVAILABLE. IF A QUOTED MARKET PRICE IS NOT
AVAILABLE, FAIR VALUE IS ESTIMATED USING QUOTED MARKET PRICES FOR
SIMILAR SECURITIES.
(D) LOANS
FAIR VALUES ARE ESTIMATED FOR PORTFOLIOS OF PERFORMING LOANS WITH
SIMILAR FINANCIAL CHARACTERISTICS. FOR CERTAIN HOMOGENEOUS CATEGORIES
OF LOANS, SUCH AS SOME RESIDENTIAL REAL ESTATE MORTGAGES, FAIR VALUE IS
ESTIMATED USING QUOTED MARKET PRICES. IF NO QUOTED MARKET PRICE EXISTS
FOR A CATEGORY OF LOANS, FAIR VALUE IS ESTIMATED BASED ON CURRENT PRICES
OFFERED BY THE BANK FOR SIMILAR LOANS. FOR LOANS THAT REPRICE
FREQUENTLY AT MARKET RATES, THE CARRYING AMOUNT IS A REASONABLE ESTIMATE
OF FAIR VALUE, PROVIDED THERE IS NO SIGNIFICANT CHANGE IN THE CREDIT
RISK OF THOSE LOANS.
(E) ACCRUED INTEREST RECEIVABLE AND PAYABLE
THE CARRYING VALUE OF ACCRUED INTEREST RECEIVABLE AND PAYABLE
APPROXIMATES FAIR VALUE DUE TO THE RELATIVELY SHORT PERIOD OF TIME
BETWEEN ACCRUAL AND EXPECTED REALIZATION.
(F) DEPOSIT ACCOUNTS
THE FAIR VALUE OF DEPOSITS WITH NO STATED MATURITY, SUCH AS PASSBOOK,
NOW ACCOUNTS AND MONEY MARKET DEPOSIT ACCOUNTS IS EQUAL TO THE AMOUNT
PAYABLE ON DEMAND. THE FAIR VALUE OF FIXED MATURITY TIME DEPOSITS IS
BASED ON THE DISCOUNTED VALUE OF CONTRACTUAL CASH FLOWS USING THE RATES
OFFERED BY THE BANK FOR DEPOSITS OF SIMILAR REMAINING MATURITIES AT
DECEMBER 31.
(G) BORROWED FUNDS
THE FAIR VALUE OF SHORTER TERM BORROWINGS, WHICH INCLUDES VARIABLE RATE
BORROWINGS, APPROXIMATES CARRYING VALUE DUE TO THE RELATIVELY SHORT
PERIODS OF TIME BETWEEN THE ORIGINATION OF THE INSTRUMENTS AND EITHER
THEIR EXPECTED PAYMENT DATE OR VARIABLE RATE REPRICING DATE.
THE FAIR VALUE OF FIXED RATE BORROWINGS IS THE PRESENT VALUE OF THE
CONTRACTUAL CASH FLOWS, DISCOUNTED BY THE CURRENT RATE OFFERED FOR
SIMILAR REMAINING MATURITIES.
(Continued)
43
<PAGE> 46
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(20) PARENT COMPANY ONLY FINANCIAL INFORMATION
THE CONDENSED STATEMENTS OF FINANCIAL CONDITION AS OF DECEMBER 31, 1995
AND 1996 AND THE CONDENSED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR
EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1996 FOR
THE PARENT COMPANY ONLY IS PRESENTED BELOW AND SHOULD BE READ IN
CONJUNCTION WITH OTHER NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
-------------------------------------
1995 1996
--------------------------------------
<S> <C> <C>
ASSETS:
CASH HELD AT SAVINGS BANK $ 200 586
INTEREST-BEARING DEPOSITS 110 130
INVESTMENT IN DOLLAR DENOMINATED MUTUAL FUNDS 555 83
INVESTMENT SECURITIES AVAILABLE-FOR-SALE 2,848 345
ACCRUED INTEREST RECEIVABLE 70 7
OTHER ASSETS 1 3,026
Investment in Savings Bank 17,221 13,581
------------------------------------
Total assets 21,005 17,758
------------------------------------
Liabilities other liabilities (23) (3)
------------------------------------
STOCKHOLDERS' EQUITY:
COMMON STOCK 14 14
ADDITIONAL PAID-IN CAPITAL 13,629 13,626
RETAINED EARNINGS 10,949 10,988
TREASURY STOCK, AT COST (2,599) (5,340)
UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE,
NET OF INCOME TAXES 90 (678)
ADDITIONAL PENSION LIABILITY, NET OF TAX (128) (108)
COMMON STOCK ACQUIRED BY EMPLOYEE STOCK OWNERSHIP PLAN (778) (667)
Deferred compensation (149) (74)
------------------------------------
Total stockholders equity 21,028 17,761
------------------------------------
Total liabilities and stockholders equity $ 21,005 17,758
------------------------------------
</TABLE>
(Continued)
44
<PAGE> 47
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Equity in earnings of the Savings Bank $ 23 640 439
Interest income 269 296 157
Gain on sale of investment securities available-for-sale - 5 81
Other income - 2 4
Noninterest expense (245) (229) (203)
Income before income taxes 47 714 478
Income tax benefit (expense) (2) (18) 14
Net income $ 45 696 492
</TABLE>
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 45 696 492
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES:
AMORTIZATION OF PREMIUMS AND DISCOUNTS (2) (3) 1
AMORTIZATION OF COST OF STOCK BENEFIT PLANS 236 227 186
DECREASE (INCREASE) IN ACCRUED INTEREST (73) 3 63
INCREASE (DECREASE) IN OTHER LIABILITIES (12) (47) 20
INCREASE IN OTHER ASSETS - (1) (3,025)
Gain on sale of investment securities
available-for-sale - - (81)
Equity in earnings of the Savings Bank (23) (640) (439)
____ ____ ______
Net cash provided by (used in) operating activities 171 235 (2,783)
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF MUTUAL FUNDS AVAILABLE-FOR-SALE (891) - -
PROCEEDS FROM SALE OF MUTUAL FUNDS AVAILABLE-FOR-SALE - 891 -
PURCHASE OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE (4,990) (1,098) -
MATURITIES OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE 1,000 2,500 1,000
Proceeds from sale of investment securities
available-for-sale - - 2,207
Purchase of equity securities available-for-sale - (247) (625)
_____ ______ ______
Net cash provided by (used in) investing activities $(4,881) 2,046 2,582
</TABLE>
45
<PAGE> 48
NORTH BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
CASH DIVIDEND FROM SAVINGS BANK $ - 347 3,332
PAYMENT OF CASH DIVIDENDS - (324) (453)
Proceeds from stock options exercised - - 15
Purchase of treasury stock (950) (1,649) (2,759)
_________ ______ ______
Net cash provided by (used in) financing activities (950) (1,626) 135
_________ ______ ______
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,660) 655 (66)
Cash and cash equivalents at beginning of year 5,870 210 865
_________ ______ ______
Cash and cash equivalents at end of year $ 210 865 799
_________ ______ ______
</TABLE>
(21) Quarterly Results of Operations (Unaudited)
THE FOLLOWING TABLE SETS FORTH CERTAIN UNAUDITED INCOME AND EXPENSE AND
PER SHARE DATA ON A QUARTERLY BASIS FOR THE THREE MONTH PERIODS
INDICATED:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST INCOME $ 1,991 2,110 2,201 2,166
Interest expense 1,091 1,190 1,194 1,165
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 900 920 1,007 1,001
Provision for loan losses 8 - - -
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 892 920 1,007 1,001
FEES AND SERVICE CHARGES 45 42 46 50
GAIN (LOSS) ON SALE OF INVESTMENT SECURITIES
AND MUTUAL FUNDS (1) 9 (1) 81
OTHER NONINTEREST INCOME 6 6 18 -
Noninterest expense 666 768 1,206 824
_________ ______ ______ ____
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 276 209 (136) 308
Income tax expense (benefit) 89 76 (68) 68
_________ ______ ______ ____
Net income (loss) $ 187 133 (68) 240
_________ ______ ______ ____
Earnings (loss) per share $ .16 .12 (.06) .23
_________ ______ ______ ____
Cash dividends declared per share $ .10 .10 .10 .10
_________ ______ ______ ____
</TABLE>
46
<PAGE> 49
BOARD OF DIRECTORS
<TABLE>
<S> <C> <C>
Mary Ann Hass Elmer L. Hass Paul E. Rose
CHAIRMAN OF THE BOARD RETIRED-CRAGIN METALS, INC. RETIRED
CHIEF EXECUTIVE OFFICER GRASER LUMBER SALES CO.
James L. Ferstel Michael J. Perri Robert H. Rusher
ATTORNEY AT LAW RETIRED-SENIOR VICE PRESIDENT RETIRED-PRESIDENT AND
NORTH FEDERAL SAVINGS BANK CHIEF OPERATING OFFICER
Joseph A. Graber
PRESIDENT AND
CHIEF OPERATING OFFICER
</TABLE>
CURRENT OFFICERS
<TABLE>
<S> <C> <C>
Mary Ann Hass Joseph A. Graber Victor E. Caputo
CHIEF EXECUTIVE OFFICER PRESIDENT AND EXECUTIVE VICE PRESIDENT
CHIEF OPERATING OFFICER SECRETARY
Martin W. Trofimuk Karla A. Lauer John K. Taylor
VICE PRESIDENT AND VICE PRESIDENT-SERVICES VICE PRESIDENT-LOANS
TREASURER NORTH FEDERAL SAVINGS BANK NORTH FEDERAL SAVINGS BANK
Emilie V. Reiter
ASSISTANT SECRETARY
</TABLE>
CORPORATE INFORMATION
Stock Price Information
THE COMPANY'S COMMON STOCK TRADES ON THE NASDAQ STOCK MARKET UNDER THE SYMBOL:
NBSI. THE TABLE BELOW SHOWS THE HIGH AND LOW SALES PRICES OF THE COMMON STOCK
DURING THE PERIODS INDICATED IN FISCAL 1996 AND 1995. THE COMMON STOCK BEGAN
TRADING ON DECEMBER 21, 1993. ON MARCH 3, 1997, NORTH BANCSHARES, INC. HAD
APPROXIMATELY 220 SHAREHOLDERS OF RECORD AND 450 BENEFICIAL SHAREHOLDERS.
AS OF SUCH DATE, THERE WERE 1,050,950 SHARES OF COMMON STOCK ISSUED AND
OUTSTANDING.
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------
High Low High Low
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST QUARTER 16.250 13.375 12.750 11.000
SECOND QUARTER 16.250 15.250 13.250 11.500
THIRD QUARTER 16.250 15.250 14.000 13.000
FOURTH QUARTER 16.500 15.750 14.250 13.250
</TABLE>
(Continued)
47
<PAGE> 50
Investors Information
A COPY OF NORTH BANCSHARES, INC.'S ANNUAL REPORT ON FORM 10-KSB, TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, IS AVAILABLE WITHOUT CHARGE BY
WRITING OUR CORPORATE OFFICE:
Victor E. Caputo, Secretary
NORTH BANCSHARES, INC.
100 WEST NORTH AVENUE
CHICAGO, ILLINOIS 60610-1399
(312) 664-4320 E-MAIL: [email protected] HTTP://WWW.NORTHFEDERAL.COM
SHAREHOLDERS, INVESTORS AND ANALYSTS INTERESTED IN ADDITIONAL INFORMATION MAY
CONTACT THE ABOVE.
Annual Meeting of Shareholders
THE ANNUAL MEETING OF THE SHAREHOLDERS OF NORTH BANCSHARES, INC. WILL BE HELD
AT 10:00 A.M., APRIL 23, 1997, AT THE MAIN OFFICE AND ALL SHAREHOLDERS ARE
CORDIALLY INVITED TO ATTEND:
NORTH FEDERAL SAVINGS BANK
100 WEST NORTH AVENUE
CHICAGO, IL 60610-1399
Stock Transfer Agent and Registrar
INQUIRIES REGARDING STOCK TRANSFER, REGISTRATION, LOST CERTIFICATE OR CHANGES
IN NAME AND ADDRESS SHOULD BE DIRECTED TO THE STOCK TRANSFER AGENT AND
REGISTRAR BY WRITING:
Harris Trust and Savings Bank
POST OFFICE BOX 755
CHICAGO, IL 60690
ATTN: SHAREHOLDER SERVICES
Corporate Counsel/Washington,D.C.
SILVER, FREEDMAN & TAFF, L.L.P.
1100 NEW YORK AVENUE, N.W.
WASHINGTON, D.C. 20005-3934
Corporate Counsel/Chicago, IL
JOHN P. KOCH
100 WEST NORTH AVENUE
CHICAGO, IL 60610-1399
Independent Auditors
KPMG PEAT MARWICK LLP
PEAT MARWICK PLAZA
303 EAST WACKER DRIVE
CHICAGO, IL 60601-5255
48
<PAGE> 1
EXHIBIT 23
KPMG PEAT MARWICK LLP
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
North Bancshares, Inc.:
We consent to incorporation by reference in the Registration Statement (No.
33-82356) on Form S-8 of North Bancshares, Inc. of our report dated February 7,
1997, relating to the consolidated statements of financial condition of North
Bancshares, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996, which report appears in the December 31, 1996 annual report on Form
10-KSB of North Bancshares, Inc.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Condition at December 31, 1996 and the Consolidated
Statement of Operations for the twelve months ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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0
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