=============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-22800
NORTH BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 36-3915073
(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification Number)
100 West North Avenue, Chicago, Illinois 60610-1399
(Address of Principal Executive Offices) (Zip Code)
(312) 664-4320
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
As of October 31, 1998, there were 1,272,893 outstanding shares of the
Registrant's Common Stock.
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
=============================================================================
<PAGE 2>
NORTH BANCSHARES, INC.
Table of Contents
Part I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Consolidated Financial Statements 3
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
FORM 10-QSB SIGNATURE PAGE 15
<PAGE 3>
Part I. Financial Information
Item 1. Consolidated Financial Statements
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPT 30, 1998 DEC 31, 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 691 $ 727
Interest-bearing deposits 2,227 2,937
Federal funds sold 4,997 5,976
Investment in dollar denominated mutual funds 358 1,477
- --------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 8,273 11,117
Investment securities available for sale 24,621 23,250
Mortgage-backed securities held to maturity 4,767 5,841
Mortgage-backed securities available for sale 5,100 -
Stock in Federal Home Loan Bank of Chicago 1,705 1,705
Loans receivable, net of allowance for loan
losses of $208 at September 30, 1998 and
December 31, 1997 78,488 79,031
Accrued interest receivable 879 1,060
Premises and equipment, net 1,013 1,043
Other assets 94 31
- --------------------------------------------------------------------------
TOTAL ASSETS 124,940 123,078
==========================================================================
LIABLITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------
Deposit accounts 73,342 75,053
Borrowed funds 34,100 29,100
Advance payments by borrowers for
taxes and insurance 572 1,239
Accrued interest payable and other liabilities 3,673 1,101
- -------------------------------------------------------------------------
TOTAL LIABILITIES 111,687 106,493
- -------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized
500,000 shares; none outstanding - -
Common stock, $.01 Par value. Authorized
3,500,000 shares; issued 1,914,075 shares 19 19
Additional paid in capital 13,502 13,767
Retained earnings, substantially restricted 11,077 11,139
Treasury stock at cost (643,382 shares at
September 30, 1998 and 484,293 shares at
December 31, 1997) (10,617) (7,706)
Accumulated other comprehensive income (256) (216)
Common stock acquired by Employee Stock
Ownership Plan (472) (555)
- --------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 13,253 16,448
- --------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $124,940 $123,078
==========================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE 4>
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $1,452 $1,497 $4,409 $4,433
Interest-bearing deposits and federal funds sold 113 82 364 164
Investment securities available for sale 480 443 1,262 1,420
Mortgage-backed securities held to maturity 88 119 264 365
mortgage-backed securities available for sale 1 - 1 -
Investment in mutual funds 7 29 47 81
Dividends on FHLB stock 32 25 94 70
- ------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 2,173 2,195 6,441 6,533
- ------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposit accounts 823 818 2,440 2,370
Borrowed funds 475 468 1,354 1,315
- ------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 1,298 1,286 3,794 3,685
- ------------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 875 909 2,647 2,848
PROVISION FOR LOAN LOSSES - - - -
- ------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 875 909 2,647 2,848
- ------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Gain (loss) on sale of investment securities
and loans available for sale, net 23 (1) 81 53
Gain on sale of loans available for sale 1 - 3 -
Fees and service charges 69 53 194 156
Other 6 4 15 13
- ------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 99 56 293 222
- ------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Compensation and benefits 428 409 1,312 1,221
Occupancy expense 122 131 374 361
Professional fees 52 32 205 118
Data processing 48 41 144 126
Advertising and promotion 50 49 113 112
Federal deposit insurance premium 12 13 35 36
Recognition and retention plan - 17 - 59
Other 85 106 236 307
- ------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 797 798 2,419 2,340
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 177 167 521 730
INCOME TAX EXPENSE 64 55 186 214
- ------------------------------------------------------------------------------------------
NET INCOME $113 112 335 516
==========================================================================================
EARNINGS PER SHARE:
Basic .09 .08 .27 .36
Diluted .09 .08 .26 .34
==========================================================================================
AVERAGE SHARES OUTSTANDING:
Basic 1,207,344 1,394,033 1,232,833 1,441,865
Diluted 1,267,476 1,478,939 1,301,197 1,518,435
============================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE 5>
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional other
Common paid-in Retained Treasury comprehensive
stock capital earnings stock income
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 14 13,688 10,988 (5,340) (786)
Comprehensive income:
Net Income - - 516 - -
Change in unrealized loss on securities
available for sale, net - - - - 532
Additional liability adjustment for employee
pension plan, net - - - - -
Comprehensive income - - - - -
Payment on ESOP loan - - - - -
Market adjustment for common ESOP shares - 107 - - -
Amortization of award of MRP stock - - - - -
Purchase of treasury stock, 120,800 shares - - - (2,457) -
Cash dividend ($.24 per share) - - (371) - -
Options exercised and reissuance of treasury
stock, 24,720 shares - (67) - 361 -
- --------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 14 13,728 11,133 (7,436) (254)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 19 13,767 11,139 (7,706) (216)
Comprehensive income:
Net income - - 335 - -
Change in unrealized loss on securities
available for sale, net - - - - (40)
Additional liability adjustment for employee
pension plan, net - - - - -
Comprehensive income - - - - -
Payment on ESOP loan - - - - -
Market adjustment for common ESOP shares - 119 - - -
Purchase of treasury stock, 194,948 shares - - - (3,656)
Cash dividend ($.30 per share) - - (397) -
Options exercised and reissuance of treasury
stock, 46,402 shares - (384) - 745 -
- -------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 19 13,502 11,077 (10,617) (256)
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Common
stock Deferred
acquired by compen-
ESOP sation Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 (667) (74) 17,823
Comprehensive income:
Net income - - 516
Change in unrealized loss on securities
available for sale, net - - 532
Additional liability adjustment for employee
pension plan, net - - -
--------
Comprehensive income - - 1,048
Payment on ESOP loan 84 - 84
Market adjustment for common ESOP shares - - 107
Amortization of award of MRP stock - 59 59
Purchase of treasury stock, 120,800 - - (2,457)
Cash dividend ($.24 per share) - - (371)
Options exercised and reissuance of tresury
stock, 24,720 shares - - 294
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 (583) (15) 16,587
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 (555) - 16,448
Comprehensive income:
Net income - - 335
Change in unrealized loss on securities
available for sale, net - - (40)
Additional liability adjustment for employee
pension plan, net - - -
-------
Comprehensive income - - 295
Payment on ESOP loan 83 - 83
Market adjustment for common ESOP shares - - 119
Purchase of treasury stock, 194,948 shares - - (3,656)
Cash dividend ($.30 per share) - - (397)
Options exercised and reissuance of treasury
stock, 46,402 shares - - 361
- -----------------------------------------------------------------------------------------------
Balance at September 30, 1998 (472) - 13,253
================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE 6>
NORTH BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<Cation>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 335 $ 516
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 66 76
Deferred loan costs (fees), net of amortization (64) (19)
Amortization of premiums and discounts (121) 30
ESOP and MRP compensation expense 202 250
Gain on sale of investment securities and
loans available for sale, net (84) (53)
Changes in assets and liabilities:
Decrease in accrued interest receivable 181 72
(Increase) decrease in other assets, net (63) 101
Increase in other liabilities 2,370 1,782
- -----------------------------------------------------------------------------
Net cash provided by operating activities 2,822 2,755
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Maturities of investment securities available
for sale 17,730 1,000
Purchase of investment securities available
for sale (24,610) (7,219)
Proceeds from sales of investment securities
and loans available for sale 5,386 6,001
Proceeds from sales of loans available for sale 233 -
Purchase of mortgage-backed securities
available for sale (5,000) -
Repayment of mortgage-backed securities held
to maturity 1,082 1,016
Loan originations (20,691) (12,121)
Loan repayments 21,298 9,139
Purchase of Federal Home Loan Bank of Chgo Stock - (435)
Purchase of premises and equipment (36) (79)
- ----------------------------------------------------------------------------
Net cash used in investing activities (4,608) (2,698)
- ----------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in deposit accounts (1,699) (486)
Increase in borrowed funds 5,000 5,000
Decrease in advance payments by borrowers for
taxes and insurance (667) (578)
Payment of cash dividend (397) (371)
Proceeds from stock options exercised 361 294
Purchase of treasury stock (3,656) (2,457)
- ----------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,058) 1,402
- ----------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,844) 1,459
Cash and cash equivalents at beginning of period 11,117 8,609
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of period $8,273 10,068
============================================================================
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $2,509 2,481
Taxes 315 -
============================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE 7>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and notes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, the unaudited consolidated financial
statements contain all adjustments (which are normal and recurring in nature)
necessary for a fair presentation of the financial condition as of September
30, 1998 and results of operations for the three and nine-month periods ended
September 30, 1998 and September 30, 1997, but are not necessarily indicative
of the results which may be expected for the entire year.
(2) Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of North Bancshares, Inc. (the "Company"), and its wholly-owned
subsidiary North Federal Savings Bank (the "Bank"), and its subsidiary North
Financial Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(3) Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share is calculated
by dividing income available to common stockholders by the weighted average
number of common shares outstanding. Diluted earnings per share is calculated
by dividing net income by the weighted average number of shares adjusted for
the dilutive effect of outstanding stock options.
The Company adopted SFAS 128 at December 31, 1997. All earnings per
share amounts for prior periods have been restated under the provisions of
SFAS 128. The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
(In thoudsands, except share data) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net Income $113 112 335 516
Denominator:
Basic earnings per share-weighted
average shares outstanding 1,207,344 1,394,033 1,232,833 1,441,865
Effect of dilutive stock options
outstanding 60,132 84,906 68,364 76,570
Diluted earnings per share-adjusted
weighted average shares outstanding 1,267,476 1,478,939 1,301,197 1,518,435
Basic earnings per share .09 .08 .27 .36
Diluted earnings per share .09 .08 .26 .34
=================================================================================
</TABLE>
<PAGE 8>
(4) Comprehensive income
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. The
Company adopted this statement effective January 1, 1998.
The following table sets forth the required disclosures of the
reclassification amounts as presented on the statement of changes in
stockholders' equity and the related tax effects allocated to each component
of other comprehensive income for the periods indicated.
<TABLE>
<CAPTION>
Before Tax Net
Tax (Expense) of Tax
(In thousands) Amount or Benefit Amount
- -----------------------------------------------------------------------------
Three months ended September 30, 1997
Disclosure of reclassification amount:
Unrealized holding gain on securities
arising during the period $468 (159) 309
Less: reclassification adjustment for
gain included in net income (1) - (1)
- -----------------------------------------------------------------------------
Change in net unrealized gain on securities $467 (159) 308
- -----------------------------------------------------------------------------
Three months ended September 30, 1998
Disclosure of reclassification amount:
Unrealized holding loss on securities
arising during the period $ (141) 48 (93)
Less: reclassification adjustment for
gain included in net income 23 (8) 15
- -----------------------------------------------------------------------------
Change in net unrealized loss on securities $ (118) 40 (78)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Nine months ended September 30, 1997
Disclosure of reclassification amount:
Unrealized holding gain on securities
arising during the period $ 753 (256) 497
Less: reclassification adjustment for
gain included in net income 53 (18) 35
- -----------------------------------------------------------------------------
Change in net unrealized gain on securities $ 806 (274) 532
- -----------------------------------------------------------------------------
Nine months ended September 30, 1998
Disclosure of reclassification amount:
Unrealized holding loss on securities
arising during the period $(141) 48 (93)
Less: reclassification adjustment for
gain included in net income 81 (28) 53
- -----------------------------------------------------------------------------
Change in net unrealized loss on securities $(60) 20 (40)
- -----------------------------------------------------------------------------
</TABLE>
<PAGE 9>
(5) Stock Repurchase Program
On May 18, 1998, the Company announced a 50,000 share stock repurchase
program to begin upon completion of the 75,000 share repurchase program
announced on February 4, 1998. The repurchase program amounts to
approximately 3.9% of the outstanding shares of the Company. The Company
completed the 75,000 share program on May 18, 1998 and at September 30, 1998,
23,473 shares had been repurchsed under the current program. Shares will be
repurchased in open market transactions or in privately negotiated
transactions over a one year period. Management continues to believe that
stock repurchase programs provide enhanced value to both the Company and its
stockholders.
(6) Dividend Declaration
On October 15, 1998, the Company announced that the Board of Directors
declared a quarterly dividend of $.10 per share, payable on November 16, 1998
to stockholders of record on November 2, 1998.
(7) Commitments and Contingencies
At September 30, 1998, the Bank had outstanding commitments to originate
mortgage loans in the amount of $2.1 million and unused equity lines of
credit totaling $616,000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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 or borrows funds and uses such funds to originate or
acquire one-to-four family residential mortgages, loans secured by small
apartment buildings or mixed use properties and equity lines of credit secured
by real estate. The Company also invests in U. S. Government and agency
securities, federal agency mortgage-backed securities, investment grade
securities, common stocks of other financial institutions and money market
accounts.
The Company's consolidated results of operations are primarily dependent
on net interest income, which is the difference between the interest income
earned on interest-earning assets and the interest paid on deposits and other
borrowings, and to a lesser degree on non-interest income less non-interest
expense and income taxes. The Company's operating expenses consist
principally of employee compensation and benefits, occupancy expenses 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.
All 1997 share and per share information has been adjusted to reflect a
three-for-two stock split effected in the form of a 50% stock dividend paid
on December 29, 1997 to stockholders of record on December 8, 1997.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, and in future filings by the Company with
the SEC, in the Company's press releases or other public or shareholder
communications, and in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties - including,
changes in economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any
current statements.
<PAGE 10>
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.
YEAR 2000 COMPLIANCE
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third-party data
processor and other software purchased which is operated on in-house personal
computers and a wide area network. During 1997, the Company initiated a
review and formed a committee to conduct an assessment of all hardware and
software systems to assess whether they will function properly in the year
2000. To date, we have not found anything material that would affect the
operations of the Company. The vendors who have been contacted have
indicated that their hardware and software is or will be Year 2000 compliant
during the time frames established by our regulators. In house and third
party data processor testing of mission critical and other hardware and
software systems is ongoing. A test of the Company's third-party data
processor's deposit and loan systems were conducted in August 1998. The
results of the tests, using various dates in the year 2000 indicated that all
the transactions tested were processed correctly. The third-party data
processor's general ledger system is scheduled to be tested in October 1998.
The final results of these tests are currently not available. A contingency
plan, which would involve conversion to an alternate data processing system,
is currently under review by management. The costs associated with the
compliance efforts are estimated to be approximately $25,000 to $40,000 in
total and are not expected to have a significant impact on the Company's
ongoing results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Banks's primary sources of funds are deposits, borrowings from the
FHLB of Chicago, amortization and prepayment of loans and mortgage-backed
securities, sales and maturities of other investment securities and
occasionally the use of reverse repurchase agreements. The Bank can also
borrow from its correspondent banks. The Bank uses its liquid resources to
fund loan commitments, to meet operating expenses, and 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 4% of the sum of its average daily balance of net
withdrawable accounts and borrowings payable in one year or less. At
September 30, 1998, the Bank's liquidity ratio was 7.8% compared with 12.5%
for the quarter ended September 30, 1997. The decrease in liquidity was the
result of funds reinvested into mortgage loans and mortgage-backed securities
from shorter term liquid assets.
The primary investing activities of the Company are lending on owner
occupied and non-owner occupied one-to four-family residential properties,
multi-family residential properties, and mixed use properties. Management
intends to continue to focus its lending efforts on these types of properties
while expanding its consumer lending to include manufactured housing loans.
The Company also purchases U.S. government agency securities and to a lesser
extent purchases mortgage backed securities.
Current regulatory standards impose the following capital requirements
on the Bank and other thrifts: a tangible capital ratio expressed as a
percentage of total adjusted assets, a leverage ratio of core capital to
total adjusted assets, and a risk-based capital standard expressed as a
percentage of risk-adjusted assets. At September 30, 1998, the Bank exceeded
all of its regulatory capital standards. At such date, the Bank's tangible
capital, core capital and risk-based capital of $11.9 million, $11.9 million
and $12.1 million, respectively, exceeded the applicable minimum requirements
by $10.0 million or 8.1%, $8.1 million or 6.6% and $8.3 million or 17.5%,
respectively.
<PAGE 11>
CHANGES IN FINANCIAL CONDITION
Total assets were $124.9 million at September 30, 1998, an increase of
$1.8 million from $123.1 million at December 31, 1997.
Net loans receivable amounted to $78.5 million at September 30, 1998, a
decline of $500,000 from $79.0 million at December 31, 1997. The Company
originated $20.7 million in mortgage, consumer and commercial loans during
the nine months ended September 30, 1998. Repayments of loans during the nine
months ended September 30, 1998 amounted to $21.3 million, primarily
attributable to the high level of mortgage loan prepayments that occured
during the period due to the decline in interest rates.
Investment securities amounted to $24.6 million at September 30, 1998, an
increase of $1.3 million from $23.3 million at December 31, 1997. The
increase was primarily attributable to mortgage loan prepayments reinvested
in short to medium term investment securities.
Mortgage-backed securities available for sale increased $5.1 million
during the period. Funds that were invested in lower yielding federal funds,
mutual funds and prepayments of mortgage-backed securities held to maturity
were reinvested into higher yielding mortgage-backed securities available for
sale.
Borrowed funds totaled $34.1 million at September 30, 1998, an increase
of $5.0 million from $29.1 million at December 31, 1997. The increase is
attributable to a $5.0 million FHLB advance used to purchase an investment
security at an interest rate spread of 135 basis points. These transactions
increase income at little interest rate risk by securing FHLB advances to
purchase U.S. government securities, in order to obtain an attractive
interest rate spread.
Deposit accounts amounted to $73.3 million at September 30, 1998, a
decrease of $1.7 million from $75.0 million at December 31, 1997. The
decrease was primarily attributable to a $4.4 million decrease in
certificates of deposit and passbook accounts, partially offset by a $2.8
million increase in checking and money market accounts. The decrease in
certificates can be primarily attributed to the maturity and withdrawal of
certificates that had been paid a bonus rate of interest and would have
renewed at a lower rate. The number of checking accounts increased by 5.9%
since December 31, 1997, as a result of the continued marketing of the Free
Checking Account product. The Bank introduced an enhanced version of it Money
Market Deposit Account on July 1, 1998, and has attracted $2.4 million into
the account. Management expects to experience additional deposit shifting
from interest-bearing accounts to the Money Market Deposit Account and to
non-interest bearing checking accounts as it continues to promote these
products.
Other liabilities amounted to $3.7 million at September 30, 1998, an
increase of $2.4 million from $1.3 million at December 31, 1997. The
increase is primarily attributable to outstanding checks issued for real
estate tax escrow disbursements and accrued interest on certificates of
deposit that pay interest one a year in December.
Stockholders' Equity totaled $13.3 million at September 30, 1998, a
decrease of $3.1 million from $16.4 million at December 31, 1997. The
reduction was primarily attributable to a $2.9 million increase in treausry
stock due to $3.7 million in stock repurchases offset by $745,000 in stock
options exercised. Retained earnings remained $11.1 million at September 30,
1998 and at December 31, 1997 due to dividend payments which offset net income
for the period.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997
GENERAL. Net income was $113,000 for the three months ended September
30, 1998, an increase of $1,000 from $112,000 for the three months ended
September 30, 1997. Diluted earnings per share amounted to $.09 for the
three months ended September 30, 1998 an increase of $.01 from $.08 per share
for the three months ended September 30, 1997. The increase was primarily
attributable to a decrease in the weighted average number of shares
outstanding.
INTEREST INCOME. Interest income amounted to $2.2 million for the three
months ended September 30, 1998 and September 30, 1997. There was a decrease
in the annualized yield on average interest-earning assets from 7.42% for the
three months ended September 30, 1997 to 7.22% for the three months ended
September 30, 1998. The decrease was primarily attributable to higher
yielding mortgage loans prepaid or refinanced at lower rates and higher
yielding securities called prior to maturity dates with the proceeds
temporarily reinvested at lower rates. The reduction in yield was partially
offset by an increase in average interest-earning assets to $120.4 million
for the three months ended September 30, 1998, an increase of $2.1 million
from $118.3 million for the three months ended September 30, 1997.
<PAGE 12>
INTEREST EXPENSE. Interest expense amounted to $1.3 million for the
three months ended September 30, 1998 and September 30, 1997. The annualized
average cost of interest-bearing liabilities for the three months ended
September 30, 1998 was 4.92%, an improvement from 5.16% for the three months
ended September 30, 1997. The improvement was due primarily to a decrease in
the average cost of borrowed funds from 6.58% for the three months ended
September 30, 1997 to 5.57% for the three months ended September 30, 1998,
attributable to refinancing higher cost FHLB advances at lower rates. The
average balance of interest-bearing deposit accounts was $71.5 million for
the three months ended September 30, 1998, an increase of $200,000 from $71.3
million for the three months ended September 30, 1997. The average balance
of borrowed funds was $34.1 million for the three months ended September 30,
1998, an increase of $5.6 million from $28.5 million for the three months
ended September 30, 1997.
PROVISION FOR LOAN LOSSES. The Company did not add to its allowance for
loan losses for the three months ended September 30, 1998 or September 30,
1997. The allowance for loan losses was $208,000 and amounted to .27% of
loans receivable at September 30, 1998and at September 30, 1997. There was
one loan delinquent 60 days or more at September 30, 1998 that amounted to
$24,000. No loans were delinquent 60 days or more at September 30, 1997.
Future additions to the Company's allowance for loan losses and any change in
the related ratio of the allowance for loan losses to non-performing loans
are dependent upon the performance and composition of the Company's loan
portfolio, the economy, changes in real estate values, interest rates, and
the view of the regulatory authorities toward reserve levels and inflation.
NON-INTEREST INCOME. Non-interest income amounted to $99,000 for the
three months ended September 30, 1998, an increase of $43,000 from $56,000
for the three months ended September 30, 1997. The increase was attributable
to a $25,000 increase in gain on the sale of investment securities and loans
available for sale and a $16,000 increase in fees and service charges. The
improvement in fees and service charges is related to a greater number of
transaction accounts that produce fee income in addition to increases in
interchange fees on foreign ATM transactions, debit card transaction fees and
increased safe deposit vault rentals.
NON-INTEREST EXPENSE. Non-interest expense amounted to $797,000 for the
three months ended September 30, 1998 compared with $798,000 for the three
months ended September 30, 1997. There was a $20,000 increase in professional
fees primarily related to increased audit, tax and accounting expenses
partially offset by a $17,000 reduction in recognition and retention plan
expense. The reduction in recognition and retention plan expense is due to
the expiration of the expense accrual period related to Company stock granted
under the benefit plan in December 1993.
INCOME TAX EXPENSE. The allocation for income taxes was $64,000 for the
three months ended September 30, 1998, an increase of $9,000 from $55,000 for
the three months ended September 30, 1997. The effective tax rate was 36.2%
for the three months ended September 30, 1998, an increase from 32.9% for the
three months ended September 30, 1997.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997.
GENERAL. Net income amounted to $335,000 for the nine months ended
September 30, 1998, a decrease of $181,000 from $516,000 for the nine months
ended September 30, 1997. Diluted earnings per share amounted to $.26 for
the nine months ended September 30, 1998, a decrease of $.08 from $.34 per
share for the nine months ended September 30, 1997. The decrease was
primarily attributable to a decline in net interest income and an increase in
non-interest expenses, partially offset by an increase in non-interest income
and a decrease in the weighted average number of shares outstanding.
INTEREST INCOME. Interest income was $6.4 million for the nine months
ended September 30, 1998, a $92,000 decrease from $6.5 million for the nine
months ended September 30, 1997. There was a decline in the annualized yield
on average interest-earning assets to 7.19% for the nine months ended
September 30, 1998 from 7.41% for the nine months ended September 30, 1997.
The decline was primarily attributable to the high level of loan prepayments
and higher yielding investment securities called prior to maturity. Average
interest-earning assets amounted to $119.4 million for the nine months ended
September 30, 1998, an improvement of $1.9 million from $117.5 million for
the nine months ended September 30, 1997, which partially offset the yield
reduction.
<PAGE 13>
INTEREST EXPENSE. Interest expense was $3.8 million for the nine months
ended September 30, 1998, an increase of $109,000 from $3.7 million for the
nine months ended September 30, 1997. The increase was attributable to a
$70,000 increase in interest on deposit accounts and a $39,000 increase in
interest on borrowed funds. The average balance of interest-bearing deposit
accounts was $72.1 million for the six months ended September 30, 1998, an
increase of $858,000 from $71.2 million for the nine months ended September
30, 1997. The average balance of borrowed funds amounted to $31.2 million
for the nine months ended September 30, 1998, an increase of $3.8 million
from $27.4 million for the nine months ended September 30, 1997. The
annualized average cost of interest-bearing liabilities was 4.86% for the
nine months ended September 30, 1998, an improvement from 4.98% for the nine
months ended September 30, 1997, due primarily to an improvement in the
average cost of borrowed funds from 6.39% for the nine months ended September
30, 1997 to 5.62% for the nine months ended September 30, 1998.
PROVISION FOR LOAN LOSSES. The Company did not add to its allowance for
loan losses for the nine months ended September 30, 1998 or September 30,
1997. The allowance for loan losses was $208,000 and amounted to .27% of
loans receivable at September 30, 1998 and September 30, 1997. There was one
loan delinquent 60 days or more at September 30, 1998 that amounted to $24,000
. No loans were delinquent 60 days or more at September 30, 1997. Future
additions to the Company's allowance for loan losses and any change in the
related ratio of the allowance for loan losses to non-performing loans are
dependent upon the performance and composition of the Company's loan
portfolio, the economy, changes in real estate values, interest rates and the
view of the regulatory authorities toward reserve levels and inflation.
NON-INTEREST INCOME. Non-interest income amounted to $293,000 for the
nine months ended September 30, 1998, an improvement of $71,000 from $222,000
for the nine months ended September 30, 1997. The increase was primarily
attributable to a $38,000 increase in fees and service charges and a $31,000
increase in gain on the sale of investment securities and loans available for
sale. The improvement in fees and service charges is related to a greater
number of transaction accounts that produce fee income in addition to
increases in interchange fees on foreign ATM transactions, debit card
transaction fees and increased safe deposit vault rentals.
NON-INTEREST EXPENSE. Non-interest expense amounted to $2.4 million for
the nine months ended September 30, 1998, an increase of $79,000 from $2.3
million for the nine months ended September 30, 1997. The increase was
primarily attributable to a $91,000 increase in compensation and benefits
expense related to staff increases and related benefits and a $87,000
increase in professional fees related to an unsuccessful hostile takeover
attempt and costs associated with shareholder proposals considered at the
annual shareholders meeting. These increases were partially offset by a
$71,000 reduction in other non-interest expense, related to a $34,000 decrease
in a specific reserve for losses and a $33,000 decrease in costs associated
with loan originations due to fees paid for loan modifications. In addition,
there was a $59,000 decrease in recognition and retention plan expense. There
was no recognition and retention plan expense for the nine months ended
September 30, 1998, due to the expiration of the expense accrual period
related to Company stock granted under the benefit plan in December 1993.
For the nine months ended September 30, 1998, a total of $119,000 in ESOP
expense, compared with $107,000 for the nine months ended September 30, 1997,
was recorded along with an offsetting entry to additional paid in capital, and
therefore stockholders' equity was unaffected by the transaction.
INCOME TAX EXPENSE. The allocation for income taxes was $186,000 for the
nine months ended September 30, 1998, a decrease of $28,000 from $214,000 for
the nine months ended September 30, 1997. The decrease was primarily
attributable to a decrease in income before taxes. The effective tax rate was
35.7% for the nine months ended September 30, 1998 compared with 29.3% for
the nine months ended September 30, 1997.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND OTHER REGULATORY ISSUES
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers
The Company does not expect the adoption of this statement will have a
material effect on the Comapny's financial statements.
<PAGE 14>
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits", which is effective for fiscal
years beginning after December 15, 1997. This statement amends the
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions,
SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions." The
statement standardizes the disclosure requirements of Statements No. 87 and
No. 106 to the extent practicable and recommends a parallel format for
presenting information about pensions and other postretirement benefits.
Statement 132 only addresses disclosure and does not change any of the
measurement or recognition provisions provided for in Statements No. 87, No.
88, or No. 106. This statement is not expected to have a material effect on
the Company's financial statements when adopted.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the first quarter
of the fiscal year beginning after June 15, 1999. The statement establishes
accounting and reporting standards for derivative instruments and requires
measuring and recording on the balance sheet, the change in fair value of
the hedged risk portion of a derivative investment. If the derivative does
not qualify as a hedge, the gains and losses are reported in earnings when
they occur. This statement is not expected to have a material effect on the
Comapny's financial statements when adopted.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending legal proceedings to which the Company or any of
its subsidiaries is a party other than ordinary routine litigation incidental
to their respective businesses.
<PAGE 15>
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
EX-27 Financial Data Schedule
(B) 1. Form 8-K dated July 15, 1998, Registrant issued press release dated
July 15, 1998 regarding second 1998 earnings and a regular quarterly
dividend.
2. Form 8-K dated September 14, 1998 regarding the appointment of Frank
J. Donati as a director of the Company and the Bank.
<PAGE 14>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NORTH BANCSHARES,INC.
(Registrant)
Date November 13, 1998 /S/ Joseph A. Graber
----------------- --------------------
Joseph A. Graber
President and
Chief Executive Officer
Date November 13, 1998 /S/ Martin W. Trofimuk
----------------- ----------------------
Martin W. Trofimuk
Vice President and
Treasurer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Condition at September 30, 1998 (unaudited) and the
Consolidated Statement of Operations for the nine months ended September 30,
1998 (unaudited) and is qualified in its entirety by reference to such
financial statements. Earnings per share amounts for prior periods have been
adjusted to reflect a three-for-two stock split payable in the form of a 50%
stock dividend on December 29, 1997 to stockholders of record on December 8,
1997.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<INT-BEARING-DEPOSITS> 2,227
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<INVESTMENTS-HELD-FOR-SALE> 29,721
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