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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 $9.0 million in gross income for the year ended December
31, 1997.
As of March 2, 1998, there were issued and outstanding 1,300,286 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 2, 1998 was approximately $16,508,162. (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, 1997
PART III of Form 10-KSB--Portions of Proxy Statement for the Annual Meeting of
Stockholders for the fiscal year ended December 31, 1997.
<PAGE>
INDEX
PART I PAGE
Item 1. Business 2
Item 2. Properties 36
Item 3. Legal Proceedings 36
Item 4. Submission of Matters
to a Vote of Security Holders 36
PART II
Item 5. Market for Registrant's
Common Equity and Related
Stockholders Matters 36
Item 6. Management's Discussion and
Analysis or Plan of Operation 36
Item 7. Financial Statements 37
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures 37
Item 9. Directors, Executive Officers, Promoters
and Control Person; Compliance with
Section 16 (a) of the Exchange Act 37
Item 10. Executive Compensation 38
Item 11. Security Ownership of Certain
Beneficial Owners and Management 38
Item 12. Certain Relationships and
Related Transaction 38
Item 13. Exhibits and Reports on Form 8-K 39
SIGNATURES 41
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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 the Bank's holding
company. The Company owns all of the capital stock of the Bank which was issued
on December 21, 1993 in connection with 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. On
December 29, 1997, the Company's Common Stock was split three-for-two in the
form of a 50% stock dividend. There were 1,429,812 shares of common stock
outstanding at December 31, 1997. 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, 1997,
the Company had total assets of $123.1 million, deposits of $75.0 million, and
stockholders' equity of $16.4 million.
The Company has been, and intends to continue to be, an independent
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. 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
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<PAGE>
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. The Bank maintains a Web page at
http://www.northfederal.com.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-KSB, 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.
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, 1997, the Bank's gross mortgage
loans outstanding totaled $79.3 million, of which $71.8 million, or 90.5% were
one- to four-family residential mortgage loans. Of the one- to four-family
mortgage loans outstanding at that date, 70.7% were fixed-rate loans (63.9% of
total gross loans receivable), including balloon loans, and 29.3% were
adjustable-rate loans (26.6% of total gross loans receivable). At that same
date, multi-family residential mortgage loans totaled $6.5 million, of which
$5.9 million were fixed-rate balloon loans.
3
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At December 31, 1997, the balance of the Bank's loans included of $1.1
million in consumer and commercial loans, which represented 1.37% of the Bank's
gross loan portfolio.
The Bank also invests in mortgage-backed securities. At December 31,
1997, mortgage-backed securities totaled $5.8 million or 4.7% 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, 1997, 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,
1997, the maximum amount which the Bank could have lent under this limit to any
one borrower and the borrower's related entities was approximately $2.5 million.
At December 31, 1997, 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, 1997 was a $912,000 participation in a $2.0
million loan, on a multi-unit apartment building, with a local financial
institution. The Bank's next three largest lending relationships to a single
borrower or a group of related borrowers totaled $851,000, $806,000 and
$708,000, respectively. Each of these is a loan or group of 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, 1997.
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<TABLE>
<CAPTION>
Loan Portfolio Composition. The table below sets forth 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) as of the dates
indicated.
AT DECEMBER 31,
1993 1994 1995 1996
--------------------- -------------------- -------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family.......... $26,714 88.11% $42,402 92.80% $51,217 90.63% $67,542 91.73%
Multi-family................. 3,366 11.10 3,126 6.84 5,012 8.87 5,057 6.87
------- ------ ------- ------ ------ ------ -------- ------
Total real estate loans... 30,080 99.21 45,528 99.64 56,229 99.50 72,599 98.60
------- ------ ------- ------ ------- ------ ------- ------
CONSUMER LOANS:
Deposit account.............. 104 0.35 93 0.20 136 0.24 110 0.15
Automobile................... --- --- --- --- --- --- 6 0.01
Home equity and home
improvement.................. 134 0.44 73 0.16 148 0.26 123 0.17
------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans 238 0.79 166 0.36 284 0.50 239 0.33
------- ------ ------- ------ ------- ------ ------- ------
COMMERCIAL LOANS............. --- --- --- --- --- --- 790 1.07
------- ------ ------- ------ ------- ------ ------- ------
Total loans receivable.... 30,318 100.00% 45,694 100.00% 56,513 100.00% 73,628 100.00%
======= ====== ======= ====== ======= ====== ======= ======
LESS:
Deferred fees and discounts.. 500 246 152 42
Allowance for loan losses.... 106 160 200 208
------- ------- ------- -------
Total loans receivable, net $29,712 $45,288 $56,161 $73,378
======= ======= ======= =======
MORTGAGE-BACKED
SECURITIES:
FNMA......................... 1,973 9.21 1,553 9.11 1,396 8.52 1,092 14.67
GNMA......................... 910 4.25 707 4.15 651 3.98 229 3.08
FHLMC........................ 18,546 86.54 14,794 86.74 14,324 87.50 6,123 82.25
------- ------ ------- ------ ------- ------ -------- ------
Total mortgage-backed
securities............... 21,429 100.00% 17,054 100.00% 16,371 100.00% 7,444 100.00%
====== ====== ====== =======
Net premiums and discounts.... (50) (39) (25) 21
------- -------- ------- --------
Net mortgage-backed $21,379 $17,015 $16,346 $ 7,465
======= ======= ======= =======
securities...................
<CAPTION>
AT DECEMBER 31,
1997
----------------------------
AMOUNT PERCENT
<S> <C> <C>
REAL ESTATE LOANS:
One- to four-family.......... $71,770(1) 90.49%
Multi-family................. 6,459(2) 8.14
------- -----
Total real estate loans... 78,229 98.63
------- ------
CONSUMER LOANS:
Deposit account.............. 127 0.16
Automobile................... 1 0.00
Home equity and home 154 0.19
-------- -----
improvement..................
Total consumer loans 282 0.35
-------- -------
COMMERCIAL LOANS............. 806 1.02
-------- -------
Total loans receivable.... 79,317 100.00%
-------- =======
LESS:
Deferred fees and discounts.. 78
Allowance for loan losses.... 208
--------
Total loans receivable, net $79,031
========
MORTGAGE-BACKED
SECURITIES:
FNMA......................... 934 16.06
GNMA......................... 182 3.13
FHLMC........................ 4,699 80.81
-------- ------
Total mortgage-backed 5,815 100.00%
securities............... ======
Net premiums and discounts.... 26
--------
Net mortgage-backed $ 5,841
securities................... ========
<FN>
(1) This amount includes a total of $8.3 million of 5, 7 and 10 year balloon loans.
(2) This amount includes a total of $5.9 million of 5, 7 and 10 year balloon loans.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
The following table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rates at the dates indicated.
AT DECEMBER 31,
-------------------------------------------------------------------------
1995 1996 1997
---------------------- -------------------- ---------------------
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....................... $40,179 71.10% $49,480 67.2 $50,707(1) 63.93%
Multi-family.............................. 5,012 8.87 5,057 6.87 6,459(2) 8.14
------- ------ ------ -------- ------ ------
Total fixed-rate real estate loans....... 45,191 79.97 54,537 74.07 57,166 72.07
Consumer.................................. 284 0.50 239 0.33 282 0.35
Commercial................................ --- --- 790 1.07 806 1.02
------- ------ ------ -------- ------ ------
Total fixed-rate loans................... 45,475 80.47 55,566 75.47 58,254 73.44
------- ------ ------- -------- ------ ------
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family....................... 11,038 19.53 18,062 24.53 21,063 26.56
------- ------ ------- ------- ------- -------
Total loans............................. 56,513 100.00% 73,628 100.00% 79,317 100.00%
====== ====== =======
LESS:
Deferred fees and discounts................ 152 42 78
Allowance for loan losses.................. 200 208 208
-------- -------- ------
Total loans, net.......................... $56,161 $73,378 $79,031
======= ======= =======
<FN>
(1) This amount includes a total of $8.3 million of 5, 7 and 10 year balloon loans.
(2) This amount includes a total of $5.9 million of 5, 7 and 10 year balloon loans.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1997. 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, 1997 which
have a pre-determined interest rate is $58.3 million, while the amount of loans
due after such date with floating rates is $21.1 million.
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Periods Ending
December 31,
1998(1).................... $ 72 6.67% $ 127 10.50% $ 12 7.36% $ 806 10.00% 1,017 9.80%
1999....................... 945 6.85 108 8.25 64 7.66 --- 0.00 1,117 7.03
2000....................... 1,110 7.95 1,686 8.35 10 4.79 --- 0.00 2,806 8.18
2001 and 2002.............. 5,639 7.57 2,863 8.10 121 7.23 --- 0.00 8,623 7.74
2003 to 2007............... 7,656 7.98 1,675 9.17 23 9.00 --- 0.00 9,354 8.20
2008 to 2012............... 7,006 7.65 --- 0.00 52 8.89 --- 0.00 7,058 7.66
2013 and following......... 49,342 7.67 --- 0.00 --- --- --- 0.00 49,342 7.67
------ ---- -------- ---- ------ ------- ------ ---- ------ ----
$71,770 7.69% $6,459 8.49% $282 8.14% $806 10.00% $79,317 7.78%
======= ===== ====== ===== ==== ===== ==== ====== ======= =====
<FN>
(1) Includes demand loans, loans having no stated maturity, and past due loans.
</FN>
</TABLE>
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 and non-owner- occupied, one- to four-family residences.
Typically, such homes are single family detached houses, condominiums, townhomes
and two- to four-family dwellings. At December 31, 1997, $71.8 million, or
90.5%, 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 fixed rate balloon loans.
During 1997, 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, 1997, the total balance of one- to four-family
ARMs was $21.1 million, or 26.6% 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. The risk associated with these types of loans is similar to that of
owner-occupied one- to four-family loans because 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 1997 and
expects to continue to do so in 1998. The Bank originated thirty-three of these
loans totaling $7.3 million during 1997.
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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.
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, 1997, the
Bank had multi-family real estate loans totaling $6.5 million, or 8.1% of the
Bank's gross loan portfolio. The largest multi-family loan at December 31, 1997
was $1.0 million and represented a 50% participation with a local financial
institution. At December 31, 1997, the Bank had no multi-family real estate
loans which were over 30 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, which are loans that exceed
the parameters of a home improvement loan due to the extent of the remodeling,
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, 1997, only $282,000 or .35% 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,
1997, the Bank had $92,000 of home equity loans outstanding, or .12% of the
Bank's gross loan portfolio.
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<PAGE>
The Bank's home equity line of credit loans, which were introduced in
the third quarter of 1997, are underwritten such that the total commitment
amount, when combined with the first mortgage lien, may not exceed 80% of the
appraised value of the property. These loans are written with a maximum maturity
of five years and an interest rate that will adjust to the prime rate. At
December 31, 1997, the Bank has $55,000 of outstanding line of credit loans and
$157,000 in unused credit line commitments. The Bank marketed these loans to its
current customer base during 1997 and anticipates expanding that effort during
1998.
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
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 no delinquent consumer loans at December 31, 1997, although there can
be no assurance that delinquencies will not increase in the future.
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, 1997,
the outstanding line of credit balance was $806,000. The line of credit carries
a fixed rate of interest on a one-year renewable basis and was current as of
December 31, 1997. In January 1998, the Bank increased the authorized line of
credit to $1.0 million.
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.
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<PAGE>
MORTGAGE-BACKED SECURITIES
The Bank purchases mortgage-backed securities to complement its
mortgage lending activities, when loan demand is low. At December 31, 1997,
mortgage-backed securities totaled $5.8 million, or 4.7% of the Bank's total
assets. For information regarding the amortized cost and market values of North
Federal's mortgage-backed securities portfolio, see Note 3 of the Notes to
Consolidated Financial Statements contained in the Annual Report to Stockholders
filed as Exhibit 13 hereto.
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 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, 1997,
mortgage-backed securities totaled $5.8 million and were all classified as
held-to-maturity. Of the $5.8 million, $1.4 million or 24.1% 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 at
December 31, 1997 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>
<TABLE>
<CAPTION>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at December 31, 1997. Mortgage-backed securities
having adjustable interest rates are shown as maturing in the period during
which the security is repricing.
Due in December 31,
----------------------------------------------------------------------- 1997
6 Months 6 Months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Balance
or Less to 1 Year 3 Years Years Years Years Years Outstanding
-------- --------- ------- ------ ------- -------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $ 120 $1,629 --- $403 $1,503 $982 $59 $4,696
Federal National
Mortgage Association 963 --- --- --- --- --- --- 963
Government National
Mortgage Association --- --- --- 65 --- 117 --- 182
------- ------- ------- ------- ------- ------ ------- --------
Total $1,083 $1,629 --- $468 $1,503 $1,099 $59 $5,841
====== ======= ====== ======= ======= ======= ======= ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
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 Bank
maintains an approved seller/servicer status with FHLMC.
YEAR ENDED DECEMBER 31,
1995 1996 1997
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans receivable (gross) at beginning of period.............. $45,694 $56,513 $73,628
------- ------- -------
ORIGINATIONS AND PURCHASES BY TYPE:
Fixed rate:
Real estate - one- to four-family.......................... 16,378 23,930 15,219
- multi-family............................... 2,117 1,623 2,519
Non-real estate - consumer and commercial.................. 223 1,291 355
------- ------ ------
Total loans originated.................................. 18,718 26,844 18,093
Principal repayments......................................... 7,899 9,729 12,404
------- ------- -------
Total loans at end of period............................ $56,513 $73,628 $79,317
======= ======= =======
Mortgage-backed securities (net) at beginning of
period....................................................... 17,015 16,346 7,465
Purchases.................................................. 1,960 --- ---
Repayments................................................. 2,747 2,190 1,628
Sales...................................................... --- 6,600 ---
Unrealized gain on mortgage-backed securities
available-for-sale....................................... 93 (93) ---
Amortization of premiums and discounts..................... 25 2 4
------- ------- -------
Mortgage-backed securities (net) $16,346 $ 7,465 $5,841
at end of period....................................... ======= ======= ======
</TABLE>
13
<PAGE>
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. At December 31, 1997, the Bank had no loans
delinquent for 60days or more.
14
<PAGE>
<TABLE>
<CAPTION>
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.
DECEMBER 31,
1993 1994 1995 1996 1997
------- -------- -------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
One- to four-family.......................... $39 $30 $24 $-- $--
Consumer..................................... 8 2 -- 1 --
-- ---- --- ---- -----
Total non-performing assets............... $47 $32 $24 $ 1 $ --
=== === === === ====
Total as a percentage of total assets.......... 0.04% 0.03% 0.02% 0.00% 0.00%
==== ==== ==== ==== ====
</TABLE>
Other Loans of Concern. As of December 31, 1997, there were no loans
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, 1997.
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.
There were no classified assets at December 31, 1997.
15
<PAGE>
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 1997, 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 contained in the Annual Report to Stockholders
filed as Exhibit 13 hereto, and "Regulation." At December 31, 1997, the Bank had
an allowance for loan losses of $208,000, which was equal to .26% of net loans
receivable.
16
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............................. $34 $106 $160 $200 $208
Charge-offs:
One- to four-family....................................... --- --- --- --- ---
Consumer.................................................. --- --- --- --- ---
Recoveries.................................................. --- --- --- --- ---
--- --- --- --- ---
Net charge-offs............................................. --- --- --- --- ---
Additions charged to operations............................. 72 54 40 8 ---
--- --- --- -- -----
Balance at end of period.................................... $106 $160 $200 $208 $208
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
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:
AT DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Unallocated......................... $106 $160 $200 $208 $208
---- ---- ---- ---- ----
Total.......................... $106 $160 $200 $208 $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.
17
<PAGE>
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, 1997, the Company's interest-bearing deposits with
banks and dollar denominated money market accounts totaled $4.4 million, or 3.6%
of total assets. Investment securities, consisting of U.S. government
securities, federal agency obligations and FHLB stock, totaled $24.3 million, or
19.8% of total assets, and investment in federal funds sold totaled $6.0 million
or 4.9% of total assets. It is the Company's general policy to purchase
investment securities which are U.S. Government securities or federal agency
obligations. At December 31, 1997, the weighted average term to maturity or
repricing of the investment portfolio, excluding FHLB stock, equity securities
and mortgage-backed securities, was 3 months.
18
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth the composition of the Company's
investment portfolio, excluding its mortgage-backed securities, at the dates
indicated.
AT DECEMBER 31,
1995 1996 1997
-----------------------------------------------------------------
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......................................... $ 6,530 22.52% $ 2,237 8.73% --- 0.00%
U.S. Government agency securities........................... 21,008 72.43 21,844 85.22 22,630 90.69
FHLB stock.................................................. 624 2.15 1,205 4.70 1,705 6.83
Other....................................................... 598 2.06 100 0.39 200 0.80
Equity securities........................................... 244 0.84 245 0.96 420 1.68
------ ------- ------- ------ ------ ------
Total investment securities and FHLB stock................ $29,004 100.00% $25,631 100.00% $24,955 100.00%
======= ====== ======= ====== ======= ======
Other Interest-Earning Assets:
Interest-bearing deposits with banks........................ $ 2,634 $ 2,644 $ 2,937
Dollar denominated mutual funds............................. 1,127 547 1,477
Federal funds sold ......................................... 3,925 4,800 5,976
------- ------- -------
Total.................................................... $ 7,686 $ 7,991 $10,390
======= ======= =======
Average remaining life or term to repricing of investment
securities and other interest-earning assets, excluding
FHLB stock and equity securities............................. 9 mos. 14 mos. 3 mos.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
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.
AT DECEMBER 31, 1997
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. Government agency securities.......... $1,000 $4,000 $17,727 $22,727 $22,630
Other...................................... --- 100 100 200 200
------- ------- -------- ------- ------
Total investment securities............ $ 1,000 $4,100 $17,827 $22,927 $22,830
====== ====== ======= ======= =======
Weighted average yield(1).................. 4.98% 6.31% 7.14% 6.90%
====== ====== ======= ======
<FN>
(1) The weighted average yield is based upon the interest rate
in effect at December 31, 1997.
</FN>
</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.
20
<PAGE>
<TABLE>
<CAPTION>
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, 1997. See Note 7 of Notes to
Consolidated Financial Statements for weighted average nominal rates.
AT DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 1997
------------------------ -------------------- --------------------
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%............................... $17,380 23.1% $16,197 22.0% $15,282 20.4%
NOW Accounts 2.02%.................................. 7,000 9.3 8,298 11.3 8,429 11.2
Non-Interest Bearing Accounts......................... 184 0.3 998 1.3 1,208 1.6
Money Market Accounts
0.00% - 4.25%........................................ 5,637 7.5 6,233 8.5 5,544 7.4
----- ----- ------- ----- ------- -----
Total Non-Certificates................................ 30,201 40.2 31,726 43.1 30,463 40.6
------- ----- ------- ----- ------- -----
TOTAL CERTIFICATES:
0.00 - 4.99%........................................ 3,419 4.5 1,574 2.1 885 1.2
5.00 - 5.99%........................................ 18,764 25.0 25,304 34.4 30,775 41.0
6.00 - 6.99%........................................ 19,918 26.5 10,981 14.9 9,043 12.1
7.00 - 7.99%........................................ 2,341 3.1 3,779 5.1 3,764 5.0
8.00 - 8.99%........................................ 526 0.7 247 0.4 111 0.1
--- ---- ----- ----- ----- ---
Total Certificates.................................... 44,968 59.8 41,885 56.9 44,578 59.4
------- ----- ------- ------ ------- -----
Total Deposits........................................ $75,169 100.0% $73,611 100.0% $75,041 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
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.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Opening balance............................ $70,178 $ 75,169 $ 73,611
Deposits................................... 100,836 91,640 108,398
Withdrawals................................ 99,151 97,018 110,169
Interest credited.......................... 3,306 3,820 3,201
------- -------- --------
Ending balance............................. $75,169 $ 73,611 $ 75,041
======= ======== ========
Net increase (decrease).................... $4,991 $(1,558) $ 1,430
====== ============= ========
Percent increase (decrease)................ 7.11% (2.07)% 1.94%
==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
The following table shows rate and maturity information for the
Bank's certificates of deposit as of December 31, 1997.
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, 1998.............................. $ 743 $7,728 $2,999 $ 105 $--- $11,575 25.96%
June 30, 1998............................... 55 8,047 84 --- --- 8,186 18.36
September 30, 1998.......................... 6 3,254 32 20 --- 3,312 7.43
December 31, 1998........................... 17 2,499 12 --- --- 2,528 5.67
March 31, 1999.............................. 43 5,285 38 124 23 5,513 12.37
June 30, 1999............................... 21 1,458 538 --- --- 2,017 4.52
September 30, 1999.......................... --- 327 450 24 --- 801 1.80
December 31, 1999........................... --- 527 246 705 --- 1,478 3.32
March 31, 2000.............................. --- 149 108 1,303 --- 1,560 3.50
June 30, 2000............................... --- 165 475 1,446 --- 2,086 4.68
September 30, 2000.......................... --- 29 919 --- --- 948 2.13
December 31, 2000........................... --- 77 468 --- --- 545 1.22
Thereafter.................................. --- 1,230 2,674 37 88 4,029 9.04
------ ------- ------- ------ ------ -------- ------
Total.................................... $885 $30,775 $9,043 $3,764 $ 111 $44,578 100.00%
==== ========= ========== ====== ===== ======= ======
Percent of total......................... 1.99% 69.04% 20.29% 8.44% 0.25% 100.00%
===== ===== ===== ==== ===== ======
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1997.
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................................... $9,942 $6,517 $5,020 $16,962 $38,441
CERTIFICATES OF DEPOSIT OF $100,000 OR
GREATER.................................... 1,633 1,669 820 2,015 6,137
------ ------ ------- ------- -------
TOTAL CERTIFICATES OF DEPOSIT............... $11,575 $8,186 $5,840 $18,977 $44,578
======= ====== ====== ======= =======
</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, 1997 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 $9,706 at
December 31, 1997. For the year ended December 31, 1997, North Financial
Corporation had a net loss of $1,462.
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's deposits are insured by 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. 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.
23
<PAGE>
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, 1997, was $36,411.
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, 1997, the Bank's lending limit under this restriction was $2.5
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.
24
<PAGE>
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 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 provided 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.
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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 was established at
.657% of deposits by the FDIC and the Bank's 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.
All SAIF-insured institutions are required to pay an assessment for the
repayment of interest on obligations issued by a federally chartered corporation
to provide financing ("FICO") for resolving the thrift crisis in the 1980's, in
the amount equal to 6.48 basis points for each $100 in domestic deposits. As a
result of the recent legislation discussed above, BIF-insured institutions are
also required to pay an assessment for the repayment of interest on the FICO
bonds, in an amount equal to 1.52 basis points for each $100 in domestic
deposits. The assessment of SAIF-insured institutions is expected to be reduced
to 2.43 basic points for each $100 in domestic deposits no later than January 1,
2000, by which point BIF-insured institutions will participate fully in the FICO
bond interest repayment. These assessments, which may be revised based upon the
level of BIF and SAIF deposits, will continue until the bonds mature in 2017.
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, 1997, 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, 1997, the Bank had no material
subsidiary activity.
At December 31, 1997, the Bank had tangible capital of $11.6 million,
or 9.7% of adjusted total assets, which is approximately $9.7 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
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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, 1997, the
Bank had no intangibles which were subject to these tests.
At December 31, 1997, North Federal had core capital equal to $11.6
million, or 9.7% of adjusted total assets, which is $7.9 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, 1997, 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, 1997.
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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On December 31, 1997, North Federal had total capital of $11.8 million
(including $11.6 million in core capital and $208,000 in qualifying
supplementary capital) and risk-weighted assets of $46.4 million or total
capital of 25.4% of risk-weighted assets. This amount was $8.0 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
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reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
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 4%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At December 31, 1997, the Bank was in compliance with
the requirement, with a liquid asset ratio of 15.0%.
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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, 1997, 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
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of meeting the credit needs of its community and to take such record into
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, 1997, 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, 1997, the Bank had $1.7 million in FHLB
stock, which was in compliance with this requirement.
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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, 1997, dividends paid by the FHLB of
Chicago to North Federal totaled $100,000, which constitute a $29,000 increase
from the amount of dividends received in 1996. The $30,000 dividend received for
the quarter ended December 31, 1997 reflects an annualized rate of 7.00%, or
0.27% above the rate for 1996.
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 corporations with some exceptions,
such as the Bank's tax reserve for 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 at their taxable income. The Bank's deduction with respect to
"qualifying loans," which are generally loans secured by certain interests in
real property, could be computed using the "Experience Method" which would be
the greater of an amount based on a six-year moving average of the Bank's actual
loss experience or an amount which would increase the Bank's reserve for losses
on qualifying real property loans to the base year percentage, 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
has been 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 is 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
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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 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"
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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 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 files 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 it
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, 1997, the Company had a total of 37 employees,
including one part-time employee. Management considers its employee relations to
be excellent.
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, 1997.
Victor E. Caputo - Mr. Caputo, age 53, 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 22 years experience in the thrift
industry. He is a member of the American Institute of Certified Public
Accountants, the Financial Managers Society and the Illinois Society of
Certified Public Accountants.
Martin W. Trofimuk - Mr. Trofimuk, age 37, was appointed as Vice
President and Treasurer of the Company and the Bank in 1993. Mr. Trofimuk has
served in various capacities
35
<PAGE>
since joining the Bank in 1985. He is a past President of the Chicago Chapter of
the Financial Managers Society and a member of the Institute of Financial
Education.
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 18 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.
Karla A. Lauer - Ms. Lauer, age 30, rejoined the Bank as Vice President
in 1997. Ms. Lauer previously worked for the Bank as an Assistant Branch Manager
and a New Accounts Officer in 1994 and 1995. Ms. Lauer has served as a Branch
Manager for the Harris Bank and for Cragin Federal Savings and Loan Association.
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, 1997, the net book value of the Bank's investment
in premises, equipment and leaseholds was approximately $1,043,000.
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,
1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 47 of the Company's 1997 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
36
<PAGE>
Pages 4 through 16 of the Company's 1997 Annual Report to Stockholders
are herein incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 17 through 46 of the Company's 1997 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 Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1998, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Information concerning the Company's and the Bank's executive officers
who are not also directors is contained in Item 1 of this report under
"Executive Officers who are not Directors."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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, 1997, the
Registrant complied with all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners.
37
<PAGE>
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 1998, 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 1998, 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 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
38
<PAGE>
<TABLE>
<CAPTION>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
REFERENCE TO
PRIOR FILING
OR EXHIBIT
REGULATION NUMBER
S-B EXHIBIT ATTACHED
NUMBER DOCUMENT HERETO
----------- --------------------------------------------------- --------------
<S> <C> <C>
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3(i) Certificate of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of holders, *
including indentures
9 Voting trust agreement None
10.1 1993 Stock Option and Incentive Plan ***
10.2 Recognition and Retention Plan ***
10.3 Supplemental Employee Stock Retirement *
Plan
10.4 Form of employment agreement with Mary *
Ann Hass, Joseph A. Graber, Victor E.
Caputo and Martin W. Trofimuk
11 Statement regarding computation of per share None
earnings
13 Annual report to security holders 13
16 Letter on change in certifying accountant None
18 Letter on change in accounting principles None
21 Subsidiaries of Registrant **
22 Published report regarding matters submitted None
to vote
23 Consents of independent accountants 23
24 Power of attorney Not required
27 Financial data schedule 27
28 Information from reports furnished to state None
insurance regulatory authorities
99 Additional exhibits Not required
<FN>
* 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.
*** Filed as an exhibit to the Registrant's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1997 and incorporated herein by
reference.
</FN>
</TABLE>
39
<PAGE>
(b) REPORTS ON FORM 8-K
The Company filed reports on Form 8-K on October 15, 1997 regarding the
release of earnings for September 30, 1997, a quarterly dividend, Nasdaq listing
requirements, and the election of a Director, on November 24, 1997 regarding a
three-for-two stock split, and on December 29, 1997 regarding the rejection of
an unsolicited offer to purchase.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH BANCSHARES, INC.
By:/S/ MARY ANN HASS
Mary Ann Hass, Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/S/ MARY ANN HASS
- ----------------------------
Mary Ann Hass, Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: MARCH 31, 1998
/S/ JAMES L. FERSTEL
- -----------------------------
James L. Ferstel, Director
Date: MARCH 31, 1998
/S/ ROBERT H. RUSHER
- -----------------------------
Robert H. Rusher, Director
Date: MARCH 31, 1998
/S/ ELMER L. HASS
- --------------------------
Elmer L. Hass, Director
Date: MARCH 31, 1998
/S/ GREGORY W. ROSE
- ---------------------------
Gregory W. Rose, Director
Date: MARCH 31, 1998
/S/ MARTIN W. TROFIMUK
- --------------------------------
Martin W. Trofimuk, Vice President and
Treasurer
(Principal Financial and Accounting
Officer)
Date: MARCH 31, 1998
/S/ JOSEPH A. GRABER
- --------------------------------
Joseph A. Graber, President and Director
Date: MARCH 31, 1998
- -----------------------------------------------------------------------
1997 ANNUAL REPORT
- -----------------------------------------------------------------------
LOGO:
NORTH BANCSHARES, INC.
<PAGE>
TABLE OF CONTENTS
CHAIRMAN'S MESSAGE.................................... 1
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' EQUITY................................ 21
CONSOLIDATED STATEMENTS OF CASH FLOWS................. 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............ 24
STOCKHOLDER AND CORPORATE INFORMATION................. 46
<PAGE>
LOGO:
NORTH BANCSHARES, INC.
100 West North Avenue at Clark, Chicago, Illinois 60610-1399, (312) 664-4320
March 17, 1998
To Our Shareholders:
We are pleased to present the 1997 Annual Report of North Bancshares,
Inc. The information in this Annual Report is designed to provide a detailed
financial review of 1997 and our outlook for the future. We continue to make
progress in reaching our goals that are detailed in the report and we remain
committed to improving shareholder value by positioning the Company for future
earnings growth. A detailed summary of the targets and goals are outlined in the
"Management's Discussion and Analysis" section of the report.
On December 29, 1997, the Company's stock was split three-for-two. The
Board decided a stock split was in the best interests of the shareholders after
reviewing the increase in the price of the stock during 1997 and new Nasdaq
listing requirements. This split provided enough public float to allow the
Company to continue trading on the Nasdaq National Market system and has
provided more liquidity and value to our shareholders.
On January 22nd of this year we announced a $.10 per share quarterly
dividend which amounted to a 25% increase in the regular quarterly dividend paid
during 1997. We have recently completed our ninth stock repurchase program and
begun the tenth. We opened for business six days a week at our Chicago office in
July 1997 and we expanded the hours of operation at our branch in Wilmette. We
introduced a home equity line of credit account during 1997, and installed a new
ATM at the Gold Coast Multi-Plex on North Clark street. Our "Easy Retrieve"
telephone banking system is now answering approximately 1,500 calls per month
and we are looking into expanding the service to include a bill payment service.
The market has continued to react positively to these events, resulting
in a compounded annual rate of return to shareholders, from the date of the
conversion to December 31, 1997, of approximately 28%. We will continue to focus
on all the elements of our strategic plan in order to continue to improve the
value of the franchise
Sincerely,
/s/ Mary Ann Hass
Mary Ann Hass
Chairman of the Board
<PAGE>
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.
<TABLE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------------------------------------
(IN THOUSANDS)
=================================================================================================================================
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets $102,189 $106,959 $111,668 $117,473 $123,078
Loans receivable, net 29,712 45,288 56,161 73,378 79,031
Mortgage backed securities held 21,379 17,015 9,419 7,465 5,841
to maturity
Mortgage backed securities --- --- 6,927 --- ---
available for sale
Investment securities held to 2,999 3,493 498 --- ---
maturity
Investment securities available 15,802 24,695 27,882 24,426 23,250
for sale
Investment in mutual funds 10,602 7,796 --- --- ---
Deposit accounts 74,708 70,178 75,169 73,611 75,041
Borrowed funds --- 12,976 11,750 24,100 29,100
Stockholders' equity 22,889 21,602 21,028 17,823 16,448
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
SELECTED OPERATING DATA: 1993 1994 1995 1996 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $6,446 $6,310 $7,525 $8,468 $8,751
Total interest expense 3,160 2,880 4,144 4,640 4,973
-------------------------------------------------------------------------------
Net interest income before
provision for loan losses 3,286 3,430 3,381 3,828 3,778
Provision for loan losses 72 54 40 8 ---
-------------------------------------------------------------------------------
Net interest income after
provision 3,214 3,376 3,341 3,820 3,778
for loan losses
-------------------------------------------------------------------------------
Non-interest income (loss):
Fees & service charges 127 105 120 190 211
Gain on sale of investment
securities and mutual funds, --- 216 245 88 60
net
Decline in value of mutual --- (612) --- --- ---
funds
Other non-interest income 118 41 19 23 20
-------------------------------------------------------------------------------
Total non-interest income (loss) 245 (250) 384 301 291
Non-interest expense 2,312 2,728 2,776 3,464 3,070
-------------------------------------------------------------------------------
Income before taxes and
cumulative effect of 1,147 398 949 657 999
change in accounting principle
Income tax expense 429 353 253 165 363
-------------------------------------------------------------------------------
Income before cumulative effect
of change in accounting 718 45 696 492 636
principle
Cumulative effect of change in
accounting for income taxes 96 --- --- --- ---
-------------------------------------------------------------------------------
NET INCOME $622 $45 $696 $492 $636
===============================================================================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on assets (ratio of net
income to 0.69% 0.04% 0.64% 0.42% 0.53%
average total assets)
Interest rate spread
information:
Average during year 3.17 2.67 2.15 2.53 2.41
End of year 2.33 2.23 2.24 2.57 2.51
Net interest margin 3.72 3.54 3.19 3.36 3.19
Ratio of operating expenses to
average 2.56 2.75 2.57 2.98 2.54
total assets
Ratio of average
interest-earning assets to 115.31 129.40 126.61 120.61 118.65
average interest-bearing
liabilities
ASSET QUALITY RATIOS:
Non-performing assets to total
assets at end of period 0.04 0.03 0.02 N/A(1) N/A(1)
Allowance for loan losses to
non-performing loans 271.79 500.00 833.33 N/A(1) N/A(1)
Allowance for loan losses to
loans 0.36 0.35 0.36 0.28 0.26
receivable
CAPITAL RATIOS:
Stockholders' equity to total 22.40 20.20 18.83 15.17 13.36
assets
Average stockholders' equity 11.86 22.52 19.71 16.32 14.03
to average assets
Return on stockholders' equity
(ratio of net 5.81 .20 3.27 2.59 3.75
income to average equity)
NUMBER OF FULL SERVICE OFFICES 2 2 2 2 2
(1) Not applicable because the Company had no non-performing assets as of
December 31, 1996 and December 31, 1997.
</TABLE>
3
<PAGE>
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. On December 29, 1997, the
Company split the stock three-for-two. At December 31, 1997, there were
1,429,812 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.
FORWARD-LOOKING STATEMENTS
When used in this Annual Report, 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.
4
<PAGE>
MANAGEMENT STRATEGY
The Company's three year financial goals are to: (1) achieve a 7.5% to
10% return on equity (ROE) by the end of fiscal year 2000; (2) achieve a .85% to
1.00% return on assets (ROA) by the end of fiscal year 2000; (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 1997: (1) return on equity increased from 2.59% to 3.75%; (2)
return on assets increased from .42% to .53%; (3) interest-earning assets
increased by approximately 5.0% from $114.5 million to $120.2 million; (4) there
were no loans delinquent 60 days or more at December 31, 1997; (5) the loan to
assets ratio increased from 62.5% to 64.2%, with multi-family, consumer and
commercial loans increasing from 8.3% to 9.5% of the total portfolio; (6)
non-interest income , without the effect of securities gains, increased by 8.5%
from $213,000 to $231,000; (7) mortgage loan broker relationships are being
maintained with five companies although no new loan broker relationships were
established during 1997; (8) relationships with three local financial
institutions are being maintained for the purpose of purchasing whole loans or
participations within the community; (9) $8.3 million in leveraged securities
transactions were conducted during 1997 at an average spread of 1.80%; (10) the
quarterly dividend for 1997 was increased from $.06 per share in 1996 to $.08
per share for 1997; (11) two stock repurchase programs were initiated and one
was completed during 1997; and (12) operating expenses decreased by 11.4% from
$3.5 million for 1996 to $3.1 million for 1997, primarily due to the absence of
the SAIF special assessment.
Also during 1997, $158,000 in additional ESOP expense was recorded as
a result of an increase in the market price of the Company's stock that was
allocated under the Employer Stock Ownership Plan. This non-tax deductible
expense was added back to additional paid in capital and therefore stockholders'
equity was unaffected by the transaction.
In order to achieve these goals the Bank: (1) will expand consumer
lending to include manufactured housing loans and a broader based marketing of
home equity loans, accompanied by appropriate reserves for loan losses; (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
transaction volume customer businesses in order to place additional ATM
terminals off premises; (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; (8) will enter the secondary lending market by participating with the
Federal Home Loan Bank of Chicago in their Home Loan Program; (9) will expand
our marketing efforts in order to promote products to individuals and families
who move into the area, and will continue to promote our products and services
on the Bank's Internet Web page; (10) will continue a review of employee benefit
plans in order to achieve cost savings while providing more flexible and
attractive benefit programs; and (11) will proceed with a review of development
alternatives for the Bank's parking lot.
Management believes that although 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, it may experience a decrease
in its net interest margin due to historically low interest rates and an
accompanying surge in refinancing activity that began in the fourth quarter of
1997 and continues into 1998. See "Asset/Liability Management" for the Bank's
interest rate sensitivity ratios at December 31, 1997.
5
<PAGE>
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 with a negative interest rate sensitivity gap. At December 31,
1997, 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 $6.0 million,
representing a cumulative one year gap as a percentage of interest-earning
assets of a positive 4.94%.
The following table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1997
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 13.9% and such loans with a contractual maturity in excess of five years
are assumed to prepay at an annual rate of 11.1% per year. Consumer loans with
contractual maturities of less than five years are assumed to prepay at an
annual rate of 13.9% and such loans with contractual maturities of more than
five years are assumed to prepay at an annual rate of 11.1%. Mortgage-backed
securities with contractual maturities of less than five years are assumed to
prepay at an annual rate of 13.9% and those with maturities of more than five
years are assumed to prepay at an annual rate of 11.1%, 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>
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, 1997
-------------------------------------------------------------------------------------
Over 6
6 Months Months to Over 1-3 Over 3-5 Over
or less One Year Years 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
multi-family real estate loans $3,515 $3,135 $13,470 $12,068 $24,969 $57,157
Consumer and commercial loans 889 16 93 62 28 1,088
Mortgage-backed securities 1,352 1,708 601 694 1,486 5,841
Adjustable rate one-to-four family
and multi-family real estate loans 1,117 1,344 7,455 11,146 --- 21,062
Investment securities and other(1) 31,243 3,097 1,000 100 --- 35,440
------------------------------------------------------------------------------
Total interest-earning assets 38,116 9,300 22,619 24,070 26,483 120,588
------------------------------------------------------------------------------
Passbook accounts $1,299 $1,189 $3,980 $2,595 $6,219 $15,282
NOW accounts 1,559 1,271 3,010 805 1,784 8,429
Money market deposit accounts 2,190 352 1,129 704 1,169 5,544
Certificate accounts 19,761 5,804 14,948 4,019 10 44,578
Borrowed funds 5,000 3,000 3,000 18,100 --- 29,100
------------------------------------------------------------------------------
Total interest-bearing liabilities 29,809 11,652 26,067 26,223 9,182 102,933
------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities $8,307 ($2,352) ($3,448) ($2,153) $17,301 $17,655
-------------------------------------------------------------------============
Cumulative interest
rate sensitivity gap $8,307 $5,955 $2,507 $354 $17,655
=================================================================
Cumulative interest rate gap as a
percentage of total assets 6.75% 4.84% 2.04% 0.29% 14.34%
=================================================================
Cumulative interest
rate gap as a percentage of 6.89% 4.94% 2.08% 0.29% 14.64%
interest-earning assets
=================================================================
(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
</TABLE>
<PAGE>
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>
1995 1996 1997
---------------------------------------------------------------------------------------------
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> <C>
INTEREST-EARNING
ASSETS:
Loans receivable (1) $51,412 $4,184 8.14% $65,030 $5,168 7.95% $76,376 $5,968 7.81%
Investment 30,773 1,817 5.90 33,125 2,324 7.02 27,558 1,933 7.02
securities
Mortgage-backed 17,089 1,157 6.77 9,956 659 6.62 6,737 470 6.98
securities
Federal funds sold 3,769 233 6.18 3,087 165 5.34 3,627 207 5.71
Other 2,983 134 4.49 2,535 152 6.00 3,989 173 4.34
---------------------------------------------------------------------------------------------
Total interest-earning assets 106,026 7,525 7.10 113,733 8,468 7.45 118,287 8,751 7.40
---------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
MMDA & NOW accounts 12,409 310 2.50 13,775 336 2.44 13,928 372 2.67
Passbook accounts 17,862 492 2.75 16,790 459 2.73 15,495 426 2.75
Certificate accounts 42,344 2,513 5.93 43,954 2,490 5.67 42,082 2,403 5.71
Borrowed funds 11,127 829 7.45 19,776 1,355 6.86 28,192 1,772 6.29
---------------------------------------------------------------------------------------------
Total interest-bearing 83,742 4,144 4.95 94,295 4,640 4.92 99,697 4,973 4.99
liabilities
---------------------------------------------------------------------------------------------
Net interest income $3,381 $3,828 $3,778
----------- ---------- ----------
Net interest rate spread 2.15% 2.53% 2.41%
---------- ----------- ----------
Net earning assets $22,284 $19,438 $18,590
---------- ---------- ----------
Net yield on average
interest-earning assets
3.19% 3.36% 3.19%
---------- ----------- ----------
Average interest-earning assets
to average interest-bearing liabilities 126.61% 120.61% 118.65%
----------- ---------- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
</TABLE>
8
<PAGE>
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,
1995 1996 1997
------------------------------------------------------
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD ON:
Loans receivable 7.90% 7.81% 7.78%
Investment securities 6.50 6.76 6.90
Mortgage-backed securities 6.87 7.15 7.18
(1)
Federal funds 5.63 6.25 5.92
Other 5.66 6.09 5.80
------------------------------------------------------
Combined weighted average
yield 7.22 7.44 7.42
on interest-earning assets
------------------------------------------------------
WEIGHTED AVERAGE RATE PAID ON:
Passbook accounts 2.75 2.75 2.75
MMDA & NOW accounts 2.58 2.54 2.55
Certificate accounts 5.88 5.62 5.80
Borrowed funds 7.44 6.49 5.82
------------------------------------------------------
Combined weighted average rate paid
on interest-bearing liabilities 4.98 4.87 4.91
------------------------------------------------------
SPREAD 2.24% 2.57% 2.51%
======================================================
(1) Mortgage-backed securities are net of premiums and discounts
</TABLE>
9
<PAGE>
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,
1994 vs 1995 1995 vs 1996 1996 vs 1997
---------------------------------------------------------------------------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
---------------------------------------------------------------------------------------------
Increase Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate(Decrease)
---------------------------------------------------------------------------------------------
(In Thousands)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS:
Loans receivable (1) $1,335 $(74) $1,261 $1,082 $(98) $984 $887 $(87) $800
Investment (234) 261 27 165 342 507 (391) --- (391)
securities (2)
Mortgage-backed (125) (33) (158) (472) (26) (498) (225) 36 (189)
securities (3)
Federal funds sold (52) 118 66 (36) (32) (68) 31 11 42
Other (29) 48 19 (27) 45 18 63 (42) 21
---------------------------------------------------------------------------------------------
TOTAL 895 320 1,215 712 231 943 365 (82) 283
INTEREST-EARNING ASSETS
---------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
MMDA & NOW accounts (75) 27 (48) 33 (7) 26 4 32 36
Passbook accounts (71) 2 (69) (29) (4) (33) (36) 3 (33)
Certificate accounts 327 356 683 91 (114) (23) (106) 19 (87)
Borrowed funds 663 35 698 592 (66) 526 529 (112) 417
---------------------------------------------------------------------------------------------
TOTAL $844 $420 $1,264 $687 $(191) $496 $391 $(58) $333
INTEREST-BEARING LIABILITIES
---------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $(49) $447 $(50)
========== ========== ==========
(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.
</TABLE>
10
<PAGE>
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 local area network. During 1997, the Company initiated a review
and formed a committee to conduct an assessment of all hardware and software
systems to confirm they will function properly in the year 2000. To date, we
have not found anything material that would affect the operations of the Company
and 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. The costs associated with the compliance efforts have yet to be
determined but are not expected to have a significant impact on the Company's
ongoing results of operations.
FINANCIAL CONDITION
Total assets increased $5.6 million or 4.8% from $117.5 million on
December 31, 1996 to $123.1 million on December 31, 1997. The increase was
primarily attributable to a $5.6 million or 7.6% increase in net loans
receivable from $73.4 million on December 31, 1996 to $79.0 million on December
31, 1997 attributable to the marketing of one- to four-family investor property
loans through the bank's mortgage broker network.
Deposit accounts increased by $1.4 million or 1.9% from $73.6 million
at December 31, 1996 to $75.0 million at December 31, 1997. The increase was
primarily attributable to a certificate of deposit promotion during the second
and third quarters. Although the Bank promoted a "Bonus Certificate" for a short
time during the year it is still focusing its efforts on attracting non-interest
bearing checking and other low cost deposit accounts. The Bank will continue to
promote its "Free Checking" account and a small business checking account
product during 1998. In addition, the Bank is planning to introduce an enhanced
version of its Money Market Deposit Account during 1998.
Borrowed funds increased by $5.0 million or 20.7% from $24.1 million at
December 31, 1996 to $29.1 million at December 31, 1997. The increase in
borrowed funds was used to fund new loan originations and loan participations.
The Company anticipates a reduction in the average cost of borrowed funds during
1998 as a result of refinancing a $5.0 million FHLB advance in November 1997 at
a lower rate, the anticipated refinance, at lower rates, of $8.0 million in FHLB
advances during 1998, and lower borrowing costs in general due to the decline in
interest rates.
Stockholders' equity decreased $1.4 million or 7.9% from $17.8 million
on December 31, 1996 to $16.4 million at December 31, 1997. The decrease was
primarily attributable to a $2.4 million increase in treasury stock as a result
of $2.8 million in stock repurchased offset by $437,000 in stock options
exercised. In addition, there was a $622,000 decrease in unrealized losses on
securities available-for-sale, a $112,000 decrease in common stock acquired for
the ESOP resulting from the 1997 allocation, and $485,000 in dividend payments.
These decreases were partially offset by $636,000 in net income. Book value per
share increased from $11.23 at December 31,1996 to $11.50 at December 31, 1997.
11
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997
AND DECEMBER 31, 1996
GENERAL. Net income for the year ended December 31, 1997 increased by
$144,000 or 29.3% from $492,000 for the year ended December 31, 1996 to $636,000
for the year ended December 31, 1997. Basic earnings per share, after adjusting
for the three-for-two stock split, increased by $.14 from $.31 per share for the
year ended December 31, 1996 to $.45 per share for the year ended December 31,
1997.
INTEREST INCOME. Interest income for the year ended December 31, 1997
increased by $284,000 or 3.4% from $8.5 million for the year ended December 31,
1996 to $8.8 million for the year ended December 31, 1997. The increase was
attributable to a $4.6 million increase in average interest- earning assets from
$113.7 million for the year ended December 31, 1996 to $118.3 million for the
year ended December 31, 1997. The yield on average interest-earning assets
decreased from 7.45% for the year ended December 31, 1996 to 7.40% for the year
ended December 31, 1997. Management believes that the yield on average
interest-earning assets will continue to decline during 1998, if the decline in
long term interest rates that has spurred a large number of mortgage
refinancings continues .
INTEREST EXPENSE. Interest expense for the year ended December 31, 1997
increased by $333,000 or 7.2% from $4.6 million for the year ended December 31,
1996 to $5.0 million for the year ended December 31, 1997. The increase was
attributable to a $5.4 million increase in average interest-bearing liabilities
from $94.3 million for the year ended December 31, 1996 to $99.7 million for the
year ended December 31, 1997. In addition, there was an increase in the average
cost of interest-bearing liabilities from 4.92% for the year ended December 31,
1996 to 4.99% for the year ended December 31, 1997. Management believes that the
average cost of interest-bearing liabilities will decline during 1998 as
certificate of deposit accounts renew at lower rates and due to the anticipated
refinance of $8.0 million in FHLBB advances.
PROVISION FOR LOAN LOSSES. The Company did not make an allocation to
its provision for loan losses during 1997 compared with $8,000 for the year
ended December 31, 1996. The total allowance for loan losses amounted to
$208,000 at December 31, 1997 and at December 31, 1996. The allowance for loan
losses, at December 31, 1997, represented .26% 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 and composition 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 $10,000 or 3.3%
from $301,000 for the year ended December 31, 1996 to $291,000 for the year
ended December 31, 1997. The decrease was attributable to a $28,000 decrease in
gains on the sale of securities offset by a $18,000 increase in fees, service
charges and other non-interest income. The increase in fees and services
charges was attributable to an increase in the total number of transaction
accounts that produce fee income, interchange fees from foreign ATM
transactions and MasterCard(C) Master Money(TM) transactions and increased
safe deposit vault rentals.
NON-INTEREST EXPENSE. Non-interest expense decreased by $393,000 or
11.4% from $3.5 million for the year ended December 31, 1996 to $3.1 million for
the year ended December 31, 1997. The decrease was primarily attributable to the
absence of the $486,000 SAIF special assessment recorded during 1996 partially
offset by a $164,000 increase in compensation expense which was primarily
related to the increase in the market price of the Company's stock that was
allocated under the Employee Stock Ownership Plan, and to increases in staff as
a result of the Bank's expanded hours of operation. For 1997, the Company
recorded $158,000 in additional ESOP expense due to the increase in the market
price of the Company's stock during the year, compared with $62,000 for 1996. An
offsetting entry to additional paid in capital is recorded on the consolidated
statements of financial condition and therefore stockholders' equity is
unaffected.
12
<PAGE>
INCOME TAX EXPENSE. The allocation for federal and state income taxes
increased by $198,000 or 120.0% from $165,000 for the year ended December 31,
1996 to $363,000 for the year ended December 31, 1997. The effective tax rate
increased from 25.1% in 1996 to 36.3% in 1997. The reasons for the increase in
the effective tax rate are an increase in net income before taxes and a decrease
in capital gains generated during 1997, which are offset against a capital loss
carryforward recognized for tax purposes during 1995. A capital loss
carryforward of approximately $297,000 remains available, as of December 31,
1997 to offset future capital gains and will expire in the year 2000.
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.
Basic earnings per share for the year ended December 31, 1996, after
adjusting for the stock split, amounted to $.31 per share, a decrease of $.07
compared with $.38 for the year ended December 31, 1995. The decrease was due
primarily to the SAIF Special Assessment. Without the SAIF Special Assessment
per share earnings for the year ended December 31, 1996 would have increased by
$.10 per share or 26.3% from $.38 per share for the year ended December 31, 1995
to $.48 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.
13
<PAGE>
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.
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.
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 were 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 was still available as of
December 31, 1996 to be carried forward for an additional three 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, amortization and prepayment of loans, mortgage-backed
securities and sales, maturities of other investment securities, and
occasionally the use of reverse repurchase agreements. The Bank can also borrow
from its correspondent banks through the use of reverse federal funds. During
1997, the Bank borrowed an additional $5.0 million from the FHLB of Chicago.
Advances from the FHLB of Chicago at December 31, 1997 totaled $29.1 million.
Total deposits increased by $1.4 million during 1997. 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 4% of the sum of its average daily balance of net withdrawable
accounts and borrowings payable in one year or less. At December 31, 1997, the
Bank's liquidity ratio was 15.0% compared with 15.6% for the year ended December
31, 1996. The decrease in liquidity was the result of the redeployment of
shorter term, lower yielding liquid assets into longer term, higher yielding
mortgage loans.
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 U.S. government agency securities and
mortgage-backed securities. Management intends to continue to focus its lending
efforts on these type of properties, while expanding its consumer lending with a
home equity line of credit product and manufactured housing loans.
During the year ended December 31, 1997, the Company originated and
purchased $18.1 million in mortgage, consumer, and commercial loans compared
with $26.8 million during 1996. The Company also purchased $11.7 million of
securities, and repurchased $2.8 million in Company stock during 1997.
14
<PAGE>
At December 31, 1997, the Company had $1.1 million in outstanding loan
commitments and unused lines of credit.
Certificates of deposit scheduled to mature in one year or less at
December 31, 1997, totaled approximately $25.6 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 lower 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, 1995, 1996 and 1997.
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, 1997, the Bank exceeded its regulatory
capital standards. At such date, the Bank's tangible capital, core capital and
risk-based capital of $11.5 million, $11.5 million and $11.7 million,
respectively, exceeded the applicable minimum requirements by $9.7 million or
7.9%, $7.9 million or 6.5%, and $8.0 million or 17.6%, 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 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 does not expect
the adoption of this statement to have a material effect on the Company's
financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
does not expect the adoption of this statement to have a material effect on the
Company's financial statements.
15
<PAGE>
PROPOSED LEGISLATION
Legislation has been introduced in Congress that would eliminate the
federal thrift charter by requiring each federal thrift to convert to a national
bank or a state bank or thrift. The pending legislation would allow savings and
loan holding companies, such as the Company, to continue to engage in any
activity they are currently allowed, provided they remain "qualified bank
holding companies." A thrift institution which is a subsidiary of a qualified
bank holding company must continue to satisfy the qualified thrift lender test
and comply with certain investment limitations. If a savings and loan holding
company failed to meet these tests it would become subject to certain
restrictions applicable to bank holding companies. In addition, Congress is also
considering expanding the authority of bank holding companies to engage in
securities and insurance activities. Management cannot predict or determine the
ultimate form of this legislation or the impact such final legislation would
have on the operations of the Company or the Bank.
16
<PAGE>
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
February 13, 1998
17
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1996 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Assets 1996 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 618 $ 727
Interest-bearing deposits 2,644 2,937
Federal funds sold 4,800 5,976
Investment in dollar denominated mutual funds 547 1,477
- ------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,609 11,117
Investment securities available for sale, at fair value (note 2) 24,426 23,250
Mortgage-backed securities held to maturity, at amortized cost (note 3) 7,465 5,841
Stock in Federal Home Loan Bank of Chicago, at cost (note 8) 1,205 1,705
Loans receivable, net of allowance for loan losses of $208 (note 4) 73,378 79,031
Accrued interest receivable (note 5) 1,025 1,060
Premises and equipment, net (note 6) 1,061 1,043
Other assets 304 31
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 117,473 $ 123,078
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1996 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders Equity 1996 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deposit accounts (note 7) $ 73,611 75,041
Borrowed funds (note 8) 24,100 29,100
Advance payments by borrowers for taxes and
insurance 1,203 1,239
Accrued interest payable and other liabilities 736 1,250
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 99,650 106,630
- -------------------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value. Authorized 500,000 shares;
none outstanding -- --
Common stock, $.01 par value. Authorized 3,500,000 shares;
issued 1,914,105 shares 14 19
Additional paid-in capital 13,688 13,767
Retained earnings, substantially restricted 10,988 11,139
Treasury stock, at cost (379,551 and 484,293 shares in 1996 and 1997) (5,340) (7,706)
Unrealized loss on securities available for sale, net of
income taxes (678) (56)
Additional pension liability, net of tax (108) (160)
Common stock acquired by Employee Stock Ownership
Plan (note 13) (667) (555)
Deferred compensation (note 14) (74) --
- -------------------------------------------------------------------------------------------------------------------
Total stockholders equity 17,823 16,448
Commitments and contingencies (notes 3, 8 and 16)
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders equity $ 117,473 123,078
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1995, 1996, and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 4,184 5,168 5,968
Interest-bearing deposits and federal funds sold 328 246 280
Investment securities available for sale 1,630 2,301 1,832
Investment securities held to maturity 64 -- --
Mortgage-backed securities available for sale 479 77 --
Mortgage-backed securities held to maturity 678 582 470
Investment in mutual funds 123 23 101
Dividends on FHLB stock 39 71 100
- ----------------------------------------------------------------------------------------------------------------
Total interest income 7,525 8,468 8,751
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Deposit accounts 3,315 3,285 3,201
Borrowed funds 829 1,355 1,772
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 4,144 4,640 4,973
- ----------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 3,381 3,828 3,778
Provision for loan losses (note 4) 40 8
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,341 3,820 3,778
- ----------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sale of investment securities available for sale
and mutual funds, net 245 88 60
Fees and service charges 120 190 211
Other 19 23 20
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 384 301 291
- ----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and benefits (notes 11, 12 and 13) 1,418 1,438 1,602
Occupancy expense 429 424 474
Professional fees 158 166 149
Data processing 94 127 169
Advertising and promotion 102 156 133
Federal deposit insurance premium 199 200 47
SAIF assessment -- 486 --
Recognition and retention plan (note 14) 116 75 74
Other 260 392 422
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,776 3,464 3,070
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 949 657 999
Income tax expense (note 9) 253 165 363
- ----------------------------------------------------------------------------------------------------------------
Net income $ 696 492 636
- ----------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ .38 .31 .45
Diluted .38 .30 .42
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity
Years ended December 31, 1995, 1996, and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized
gain (loss)
Additional on securities
Common paid-in Retained Treasury available
stock capital earnings stock for sale, net
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 14 13,607 10,577 (950) (492)
Net income -- -- 696 -- --
Change in unrealized loss on securities available for sale, net -- -- -- -- 582
Payment on ESOP loan -- -- -- -- --
Market adjustment for common ESOP shares -- 22 -- -- --
Amortization of award of RRP Stock -- -- -- -- --
Purchase of treasury stock, 128,148 shares -- -- -- (1,649) --
Cash dividend ($0.17 per share) -- -- (324) -- --
Additional liability adjustment for employee pension plan, net -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 14 13,629 10,949 (2,599) 90
Net income -- -- 492 -- --
Change in unrealized loss on securities available for sale, net -- -- -- -- (768)
Payment on ESOP loan -- -- -- -- --
Market adjustment for common ESOP shares -- 62 -- -- --
Options exercised -- (3) -- 18 --
Amortization of award of RRP Stock -- -- -- -- --
Purchase of treasury stock, 175,916 shares -- -- -- (2,759) --
Cash dividend ($.27 per share) -- -- (453) -- --
Additional liability adjustment for employee pension plan, net -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 14 13,688 10,988 (5,340) (678)
Net income -- -- 636 -- --
Change in unrealized loss on securities available for sale, net -- -- -- -- 622
Payment on ESOP loan -- -- -- -- --
Market adjustment for common ESOP shares -- 158 -- -- --
Options exercised -- (74) -- 437 --
Amortization of award of RRP Stock -- -- -- -- --
Purchase of treasury stock, 134,350 shares -- -- -- (2,803) --
Cash dividend ($.32 per share) -- -- (485) -- --
Additional liability adjustment for employee pension plan, net -- -- -- -- --
3 for 2 stock split effected in the form of a stock dividend 5 (5) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 19 13,767 11,139 (7,706) (56)
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Common
Additional stock Deferred
pension acquired by compen-
liability ESOP sation Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 -- (889) (265) 21,602
Net income -- -- 696
Change in unrealized loss on securities available for sale, net -- -- -- 582
Payment on ESOP loan -- 111 -- 111
Market adjustment for common ESOP shares -- -- -- 22
Amortization of award of RRP Stock -- -- 116 116
Purchase of treasury stock, 128,148 shares -- -- -- (1,649)
Cash dividend ($0.17 per share) -- -- -- (324)
Additional liability adjustment for employee pension plan, net (128) -- -- (128)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 (128) (778) (149) 21,028
Net income -- -- -- 492
Change in unrealized loss on securities available for sale, net -- -- -- (768)
Payment on ESOP loan -- 111 -- 111
Market adjustment for common ESOP shares -- -- -- 62
Options exercised -- -- -- 15
Amortization of award of RRP Stock -- -- 75 75
Purchase of treasury stock, 175,916 shares -- -- -- (2,759)
Cash dividend ($.27 per share) -- -- -- (453)
Additional liability adjustment for employee pension plan, net 20 -- -- 20
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (108) (667) (74) 17,823
Net income -- -- -- 636
Change in unrealized loss on securities available for sale, net -- -- -- 622
Payment on ESOP loan -- 112 -- 112
Market adjustment for common ESOP shares -- -- -- 158
Options exercised -- -- -- 363
Amortization of award of RRP Stock -- -- 74 74
Purchase of treasury stock, 134,350 shares -- -- -- (2,803)
Cash dividend ($.32 per share) -- -- -- (485)
Additional liability adjustment for employee pension plan, net (52) -- -- (52)
3 for 2 stock split effected in the form of a stock dividend -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 (160) (555) -- 16,448
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1996, and 1997
(In thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 696 492 636
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 57 63 96
Provision for deferred income taxes 76 125 43
Provision for loan losses 40 8 --
Deferred loan fees, net of amortization (94) (110) 36
Amortization of premiums and discounts (76) (100) (43)
ESOP and RRP compensation expense 227 186 344
Gain on sale of investment securities available for sale
and mutual funds, net (245) (88) (60)
Federal Home Loan Bank of Chicago
stock dividend (8) -- --
Changes in assets and liabilities:
Increase in accrued interest receivable (29) (66) (35)
(Increase) decrease in other assets (21) (233) 273
Increase (decrease) in other liabilities, net 1,065 (418) 47
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,688 (141) 1,337
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of mutual funds available for sale 7,963 -- --
Maturities of investment securities available for sale 14,000 5,000 5,250
Maturities of investment securities held to maturity 4,500 500 --
Purchase of investment securities available for sale (22,251) (15,746) (11,694)
Purchase of investment securities held to maturity (1,469) -- --
Proceeds from sales of investment securities available for sale 6,005 12,180 8,780
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 (1,960) -- --
Repayments of mortgage-backed securities held to maturity 2,747 1,953 1,628
Loan originations (18,718) (26,844) (18,093)
Loan repayments 7,899 9,729 12,404
Purchase of Federal Home Loan Bank of
Chicago stock (113) (581) (500)
Purchase of premises and equipment (87) (290) (78)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (1,484) (7,262) (2,303)
- ----------------------------------------------------------------------------------------------------------------------------
22
<PAGE>
<CAPTION>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposit accounts $ 4,991 (1,558) 1,430
(Decrease) increase in borrowed funds (1,226) 12,350 5,000
(Decrease) increase in advance payments by
borrowers for taxes and insurance (88) 124 36
Payment of cash dividend (324) (453) (485)
Proceeds from stock options exercised -- 15 296
Purchase of treasury stock (1,649) (2,759) (2,803)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,704 7,719 3,474
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,908 316 2,508
Cash and cash equivalents at beginning of year 6,385 8,293 8,609
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,293 8,609 11,117
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash payments during the year for:
Interest $ 4,154 4,586 4,949
Income taxes 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>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1995, 1996, and 1997
- ------------------------------------------------------------------------------
(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 securities available for
sale are charged to operations. Gains and losses on the sale of
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.
Other than temporary declines in the market value of securities held to
maturity are charged to operations. The Company has the positive intent
and ability to hold such securities to maturity.
(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 funds. 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.
24
<PAGE>
(F) LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less net
deferred loan origination fees 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
interest 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.
Impaired loans are 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. Impaired
loans exclude homogenous loans that are collectively evaluated for
impairment, including one-to-four family mortgage loans and consumer
loans.
(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.
(I) 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.
25
<PAGE>
The Company adopted SFAS 128 at December 31, 1997. All earnings per
share amounts for prior years 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 YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data) 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $ 696 492 636
Denominator:
Basic earnings per share-weighted average
shares outstanding 1,811,996 1,603,879 1,424,476
Effect of dilutive stock options outstanding 37,699 61,158 77,084
Diluted earnings per share-adjusted weighted
average shares outstanding 1,849,695 1,665,037 1,501,560
Basic earnings per share .38 .31 .45
Diluted earnings per share .38 .30 .42
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(J) STOCK SPLIT
The Company declared a 3 for 2 common stock split on November 11, 1997,
effected in the form of a stock dividend payable December 29, 1997 to
stockholders of record on December 8, 1997. All references in the
consolidated financial statements and notes thereto as to the number of
shares, per share amounts and market prices of the Company's common
stock, excluding treasury stock, have been restated giving retroactive
recognition to the stock split.
(K) 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.
(L) 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.
(M) RECLASSIFICATION
Certain reclassifications of prior years' amounts have been made to
conform with the current year presentation.
26
<PAGE>
<TABLE>
(2) INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of investment securities
available for sale as of December 31, 1996 and 1997 are summarized as
follows:
- ---------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Amortized unrealized unrealized Estimated
cost gains losses fair value
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Government agency securities $ 22,727 6 (103) 22,630
- ---------------------------------------------------------------------------------------------------------------------------
Equity securities 418 5 (3) 420
- ---------------------------------------------------------------------------------------------------------------------------
Other 200 - - 200
$ 23,345 11 (106) 23,250
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of investment securities
available for sale by contractual maturity at December 31 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>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1997
--------------------------- ---------------------------
Amortized Estimated Amortized Estimated
cost fair value cost fair value
<S> <C> <C> <C> <C>
Due in less than one year $ 3,241 3,235 1,000 995
Due after one through five years 3,000 2,939 4,000 3,996
Due after five years through ten years 4,100 3,906 4,196 4,191
- ---------------------------------------------------------------------------------------------------------------------------
Due after ten years 15,000 14,101 13,731 13,648
- ---------------------------------------------------------------------------------------------------------------------------
No stated maturity - equity securities 240 245 418 420
- ---------------------------------------------------------------------------------------------------------------------------
$ 25,581 24,426 23,345 23,250
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
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.
Proceeds from sales of investment securities available for sale during
1997 were $8,780, with gross gains of $217, and gross losses of $157.
(3) 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,
1996 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses 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
Federal National Mortgage
- ---------------------------------------------------------------------------------------------------------------------------
Association 1,122 5 (32) 1,095
$ 7,465 142 (139) 7,468
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1997:
Government National Mortgage
Association $ 182 9 - 191
Federal Home Loan Mortgage
Corporation 4,696 155 (57) 4,794
Federal National Mortgage
- ---------------------------------------------------------------------------------------------------------------------------
Association 963 14 (26) 951
- ---------------------------------------------------------------------------------------------------------------------------
$ 5,841 178 (83) 5,936
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales of mortgage-backed securities held to maturity
during 1995, 1996, or 1997.
At December 31, 1996, the Savings Bank had pledged certain
mortgage-backed securities with an amortized cost of approximately
$1,250 as collateral for certain multifamily housing revenue bonds. This
commitment was settled during 1997, and there are no pledged securities
at December 31, 1997 for these revenue bonds.
28
<PAGE>
<TABLE>
<CAPTION>
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows as of December 31, 1996 and 1997:
- ---------------------------------------------------------------------------------------------------------------------------
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
One- to four-family $ 67,542 71,770
Multifamily 5,057 6,459
- ---------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 72,599 78,229
- ---------------------------------------------------------------------------------------------------------------------------
Commercial loans 790 806
- ---------------------------------------------------------------------------------------------------------------------------
Consumer loans 239 282
Total loans receivable 73,628 79,317
Less:
Deferred loan fees, net 42 78
Allowance for loan losses 208 208
- ---------------------------------------------------------------------------------------------------------------------------
$ 73,378 79,031
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 7.81% 7.78%
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Activity in the allowance for loan losses is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 160 200 208
Provision for loan losses 40 8 -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 200 208 208
- ---------------------------------------------------------------------------------------------------------------------------
Loans receivable delinquent three months or more at December 31, are as follows:
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Percentage
Number of total
of loans Amount loans
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 1 $ 24 .04%
1996 1 1 .00
1997 - - .00
</TABLE>
29
<PAGE>
The Company did not identify any loans considered to be impaired during
1995, 1996 or 1997.
Mortgage loans serviced for others amounted to approximately $144,
$137, and $129 at December 31, 1995, 1996, and 1997, respectively.
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows as of December 31,
1996 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans receivable $ 440 488
Mortgage-backed securities 86 68
Investment securities 480 504
Stock in Federal Home Loan Bank of Chicago 19 -
- ---------------------------------------------------------------------------------------------------------------------------
$ 1,025 1,060
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(6) PREMISES AND EQUIPMENT
The cost of premises and equipment, less accumulated depreciation and
amortization, is summarized as follows as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 280 280
Office building 1,134 1,134
Furniture, fixtures, and equipment 1,010 1,088
Leasehold improvements 87 87
- ---------------------------------------------------------------------------------------------------------------------------
2,511 2,589
Less accumulated depreciation and amortization 1,450 1,546
- ---------------------------------------------------------------------------------------------------------------------------
$ 1,061 1,043
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in occupancy expense is depreciation and amortization of
premises and equipment of $57, $63, and $96 for the years ended December
31, 1995, 1996, and 1997, respectively.
30
<PAGE>
<TABLE>
<CAPTION>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
- ----------------------------------------------------------------------------------------------------------------------------
(7) Deposit Accounts
Deposit accounts are summarized as follows as of December 31, 1996 and 1997:
- ----------------------------------------------------------------------------------------------------------------------------
1996 1997
----------------------------------- -----------------------------------
Weighted Weighted
average average
or stated or stated
rate Amount Percent rate Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook 2.75% $ 16,197 22.0% 2.75% $ 15,282 20.4%
Non-interest bearing demand accounts -- 998 1.3 -- 1,208 1.6
NOW accounts 2.02 8,298 11.3 2.02 8,429 11.2
Money market deposit accounts 3.30 6,233 8.5 3.35 5,544 7.4
- ----------------------------------------------------------------------------------------------------------------------------
31,726 43.1 30,463 40.6
- ----------------------------------------------------------------------------------------------------------------------------
Certificate accounts:
Fixed rate 5.75-8.11 457 .6 5.75-8.11 447 .6
Money market certificates:
91 day 4.75 863 1.2 4.90 736 1.0
Six month 5.16 7,699 10.4 5.43 7,423 9.9
One year 5.24 9,750 13.2 5.61 9,491 12.6
One and one-half year 5.84 4,312 5.9 5.85 8,002 10.7
Two year 5.74 2,785 3.8 5.55 2,722 3.6
Two and one-half year 5.65 1,219 1.7 5.74 1,093 1.5
Three, four, and five year 6.03 14,800 20.1 6.14 14,664 19.5
- ----------------------------------------------------------------------------------------------------------------------------
41,885 56.9 44,578 59.4
- ----------------------------------------------------------------------------------------------------------------------------
Total deposit accounts $ 73,611 100.% $ 75,041 100.%
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 4.35% 4.51%
- ----------------------------------------------------------------------------------------------------------------------------
Contractual maturity of
certificate accounts:
Under 12 months $ 23,778 56.8% $ 25,601 57.5%
12 to 36 months 11,437 27.3 14,948 33.5
Over 36 months 6,670 15.9 4,029 9.0
- ----------------------------------------------------------------------------------------------------------------------------
$ 41,885 100.0% $ 44,578 100.0%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certificates of deposit of $100 or more totaled $4,601, $5,780, and $6,137
at December 31, 1995, 1996, and 1997, respectively.
31
<PAGE>
<TABLE>
<CAPTION>
Interest expense for deposit accounts is summarized as follows for the
years ended December 31, 1995, 1996, and 1997:
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook $ 492 458 426
NOW Accounts 123 144 158
Money market deposit accounts 187 192 214
Certificate accounts 2,513 2,491 2,403
- ---------------------------------------------------------------------------------------------------------------------------
$ 3,315 3,285 3,201
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(8) BORROWED FUNDS
Borrowed funds are summarized as follows as of December 31, 1996 and 1997:
- ---------------------------------------------------------------------------------------------------------------------------
1996 1997
---------------------------- ----------------------------
Weighted Weighted
interest rate Amount interest rate Amount
<S> <C> <C> <C> <C>
Secured advances from
the FHLB of Chicago maturing:
1997 6.97% $ 10,000 - % $ -
1998 5.97 3,000 6.17 8,000
1999 6.11 3,000 6.11 3,000
2001 5.89 7,350 5.89 7,350
2002 5.89 750 5.43 10,750
- ---------------------------------------------------------------------------------------------------------------------------
6.49% $ 24,100 5.82% $ 29,100
- ---------------------------------------------------------------------------------------------------------------------------
</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.
32
<PAGE>
<TABLE>
<CAPTION>
(9) INCOME TAXES
Income tax expense (benefit) is comprised as follows for the years ended
December 31, 1995, 1996, and 1997:
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 228 91 336
Deferred 67 110 46
- ---------------------------------------------------------------------------------------------------------------------------
295 201 382
- ---------------------------------------------------------------------------------------------------------------------------
State:
Current (51) (51) (16)
Deferred 9 15 (3)
- ---------------------------------------------------------------------------------------------------------------------------
(42) (36) (19)
- ---------------------------------------------------------------------------------------------------------------------------
$ 253 165 363
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Income tax expense resulted in an effective tax rate of 26.7%, 25.1% and
36.4%, for the years ended December 31, 1995, 1996, and 1997,
respectively. The reasons for the difference between the effective tax
rate and the statutory Federal income tax rate are shown below.
- ---------------------------------------------------------------------------------------------------------------------------
Percentage of earnings
before income taxes
YEARS ENDED DECEMBER 31,
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<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 (3.3) (7.8) (1.0)
Utilization of capital loss carryforward (5.9) (4.2) (2.3)
Other, net 1.9 3.1 5.7
- ---------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 26.7% 25.1 36.4
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
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:
- ---------------------------------------------------------------------------------------------------------------------------
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Dividends received in stock, not recognized for tax purposes $ 33 33
Tax depreciation in excess of book depreciation 38 34
Excess of tax bad debt reserve over base year 156 156
Recognition and Retention Plan Section 83(b) election 17 -
- ---------------------------------------------------------------------------------------------------------------------------
Deferred loan fees 56 71
- ---------------------------------------------------------------------------------------------------------------------------
Pension expense 43 -
Gross deferred tax liabilities 343 294
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
State net operating loss carryforwards 113 104
Capital loss carryforward 141 115
Unrealized loss on securities available for sale 449 39
Pension expense - 66
Allowance for losses on loans 81 81
- ---------------------------------------------------------------------------------------------------------------------------
Other 3 -
- ---------------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 787 405
Less valuation allowance (141) (115)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 646 290
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability (asset) $ (303) 4
- ---------------------------------------------------------------------------------------------------------------------------
</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. A valuation allowance has been established to
offset the capital loss carryforward at December 31, 1996 and 1997.
Retained earnings at December 31, 1997 includes $3,137 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 $297 which will expire in
the year 2000, and net operating loss carryforwards for state income tax
purposes of approximately $2,371 which will expire in the year 2012.
34
<PAGE>
(10) CONVERSION TO STOCK FORM OF OWNERSHIP
On December 21, 1993, the Company issued 2,082,938 shares of $.01 par
value common stock at $6.67 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
166,635 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 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.
(11) 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.
35
<PAGE>
<TABLE>
<CAPTION>
The Company's pension plan data for the years ended December 31, 1996
and 1997 is shown below.
- ---------------------------------------------------------------------------------------------------------------------------
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations - accumulated benefit
obligation, including vested benefits of $2,663 and $2,862 at
December 31, 1996 and 1997, respectively $ 2,685 2,882
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value 2,524 2,702
Less projected benefit obligation for services
rendered to date 2,856 3,085
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets (332) (383)
Unrecognized prior service cost (12) (11)
Unrecognized net loss from past experience different from that assumed 389 502
Unrecognized net transition asset being recognized over 13 years (24) (20)
- ---------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost 21 88
Additional liability (182) (268)
- ---------------------------------------------------------------------------------------------------------------------------
Accrued pension cost $ (161) (180)
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Net pension cost for the years ended December 31, 1995, 1996, and 1997
includes the following components:
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned during the year $ 48 74 43
Interest cost on projected benefit obligation 197 208 219
Actual return on plan assets (172) (181) (187)
Net amortization and deferral (26) (13) (31)
- ---------------------------------------------------------------------------------------------------------------------------
$ 47 88 44
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation was determined using an assumed
weighted average discount rate of 7.5%, 8.0%, and 7.75% in 1995, 1996,
and 1997, respectively, and an assumed compensation increase of 4% in
1995, 1996, and 1997. The assumed weighted average long-term rate of
return on plan assets was assumed to be 9% in 1995, 1996, and 1997.
(12) 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 208,294, equal
to 10% of the total
36
<PAGE>
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, 1997, there were 19,247
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 and 1997 was
$2.11 and $1.99, respectively, on the dates of grant using the
Black-Scholes option pricing model. The following weighted average
assumptions were used for grants issued for the years ended December 31,
1995 and 1997, respectively: expected dividend yield of 2.5% for both
1995 and 1997; expected volatility factors of .05% and .04%; risk-free
interest rates of 7.2% and 5.4%; and expected lives of 8.8 and 6.5
years. There were no stock options granted in 1996.
Under SFAS No. 123, the Company is required to disclose pro forma net
income and earnings per share for 1995, 1996, and 1997 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 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 696 492 636
Pro forma 674 492 620
Earnings per share:
Basic:
As reported .38 .31 .45
Pro forma .37 .31 .44
Diluted:
As reported .38 .30 .42
Pro forma .36 .30 .41
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
A summary of the status of the Company's stock option transactions under
the Plan for the years ended December 31, 1995, 1996, and 1997 is
presented below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
--------------------- ------------------------- --------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options Shares price Shares price Shares price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 162,462 $ 6.67 176,631 $ 6.75 174,549 $ 6.75
Granted 14,169 7.75 - - 12,416 13.66
Exercised - - 2,082 6.67 44,412 6.67
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding and exercisable
at end of year 176,631 ` 6.75 174,549 6.75 142,553 7.39
Weighted average grant-date
fair value of options
granted during the year $30,000 $25,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $6.67 to $14.83
and 6 years, respectively.
(13) 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 166,635 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 $667 and $555 at December 31, 1996
and 1997, respectively. In 1996 and 1997, contributions to the ESOP
which were used to fund principal and interest payments on the ESOP
debt, totaled $170 and $161, respectively.
(14) 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 (83,318 shares)
may be granted to directors and executive officers of the Company.
Restricted stock awards for 73,314 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
38
<PAGE>
participants vest in the shares and the unamortized cost is reflected as
a reduction of stockholders' equity as deferred compensation. At
December 31, 1996 and 1997, respectively, 58,650 and 73,314 shares have
vested. The Company recorded compensation expense in 1995, 1996, and
1997 of $116, $75, and $74, respectively. The awards are fully vested as
of December 31, 1997.
(15) 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's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Savings Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the 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, 1997, that the Savings Bank
meets all capital adequacy requirements to which they are subject.
As of December 31, 1996 and 1997, 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.
The actual and minimum capital amounts and ratios of the Savings
Bank as of December 31, 1996 and 1997 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
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997:
Total capital (to risk weighted assets) 11,771 25.38 3,710 8.0
Tier I capital (to risk weighted assets) 11,563 24.93 N/A N/A
Tier I capital ( to average assets) 11,563 9.73 3,656 3.0
- ---------------------------------------------------------------------------------------------------------------------------
Tangible capital (to average assets) 11,563 9.73 1,828 1.5
</TABLE>
39
<PAGE>
(16) 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 and lines of credit and 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, 1996 and 1997 of $777 and
$957, 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, 1997 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.
(17) 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
40
<PAGE>
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, 1996 December 31, 1997
----------------------- ---------------------
Carrying Fair Carrying Fair
amount value amount value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 618 618 727 727
Interest-bearing deposits 2,644 2,644 2,937 2,937
Federal funds sold 4,800 4,800 5,976 5,976
Investment in dollar denominated mutual funds 547 547 1,477 1,477
Investment securities available for sale 24,426 24,426 23,250 23,250
Mortgage-backed securities held to maturity 7,465 7,468 5,841 5,936
Loans receivable 73,378 73,858 79,031 80,679
- ---------------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 1,025 1,025 1,060 1,060
- ---------------------------------------------------------------------------------------------------------------------------
$ 114,903 115,386 120,299 122,042
- ---------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Deposit accounts 73,611 74,431 75,041 75,215
Borrowed funds 24,100 23,993 29,100 28,703
Accrued interest payable 212 212 236 236
- ---------------------------------------------------------------------------------------------------------------------------
$ 97,923 98,636 104,377 104,154
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 prices.
(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.
41
<PAGE>
(d) LOANS RECEIVABLE
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 Savings Bank for similar loans. For loans that reprice
frequently at market rates, the carrying amount is a reasonable estimate
of fair value.
(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 Savings Bank for deposits of similar remaining maturities
at December 31.
(g) BORROWED FUNDS
The fair value of shorter term borrowings approximates carrying value
due to the relatively short periods of time between the origination of
the instruments and their expected payment.
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.
42
<PAGE>
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION
The condensed statements of financial condition as of December 31, 1996
and 1997 and the condensed statements of operations and cash flows for
each of the years in the three-year period ended December 31, 1997 for
the Parent Company only is presented below and should be read in
conjunction with other notes to the consolidated financial statements.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY)
- ---------------------------------------------------------------------------------------------------------------------------
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash held at Savings Bank $ 586 852
Interest-bearing deposits 130 141
Investment in dollar denominated mutual funds 83 581
Investment securities available for sale 345 620
Accrued interest receivable 7 8
Other assets 3,026 2,778
Investment in Savings Bank 13,643 11,507
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 17,820 16,487
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities - other liabilities (3) 39
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 14 19
Additional paid-in capital 13,688 13,767
Retained earnings 10,988 11,139
Treasury stock, at cost (5,340) (7,706)
Unrealized loss on securities available for sale, net of income taxes (678) (56)
Additional pension liability, net of tax (108) (160)
Common stock acquired by Employee Stock Ownership Plan (667) (555)
Deferred compensation (74) -
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,823 16,448
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 17,820 16,487
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY)
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in earnings of the Savings Bank $ 640 439 576
Interest income 296 157 181
Gain on sale of investment securities available for sale, net 5 81 67
Other income 2 4 -
Noninterest expense (229) (203) (195)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 714 478 629
Income tax benefit (expense) (18) 14 7
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 696 492 636
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 696 492 636
Adjustments to reconcile net income to net cash
from operating activities:
Amortization of premiums and discounts (3) 1 (2)
Amortization of cost of stock benefit plans 227 186 186
Decrease (increase) in accrued interest 3 63 (1)
(Decrease) increase in other liabilities (47) 20 108
(Increase) decrease in other assets (1) (3,025) 248
Gain on sale of investment securities
- ---------------------------------------------------------------------------------------------------------------------------
available for sale, net - (81) (67)
- ---------------------------------------------------------------------------------------------------------------------------
Equity in earnings of the Savings Bank (640) (439) (576)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 235 (2,783) 532
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of mutual funds available for sale 891 - -
Purchase of investment securities available for sale (1,345) (625) (2,994)
Maturities of investment securities available for sale 2,500 1,000 1,000
Proceeds from sale of investment securities
- ---------------------------------------------------------------------------------------------------------------------------
available for sale - 2,207 1,785
Net cash provided by (used in) investing activities $ 2,046 2,582 (209)
- ---------------------------------------------------------------------------------------------------------------------------
44
<PAGE>
<CAPTION>
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Cash dividend from Savings Bank $ 347 3,332 3,444
Payment of cash dividends (324) (453) (485)
Proceeds from stock options exercised - 15 296
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (1,649) (2,759) (2,803)
Net cash (used in) provided by financing activities (1,626) 135 452
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 655 (66) 775
Cash and cash equivalents at beginning of year 210 865 799
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 865 799 1,574
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(19) 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:
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Interest income $ 2,143 2,195 2,195 2,218
Interest expense 1,174 1,225 1,286 1,288
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 969 970 909 930
Provision for loan losses - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 969 970 909 930
Fees and service charges 46 57 53 55
Gain (loss) on sale of investment securities
and mutual funds 48 6 (1) 7
Other noninterest income 4 5 4 7
Noninterest expense 746 796 798 730
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 321 242 167 269
Income tax expense 92 67 55 149
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 229 175 112 120
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .16 .12 .08 .09
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .15 .12 .08 .08
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ .08 .08 .08 .08
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
BOARD OF DIRECTORS
MARY ANN HASS ELMER L. HASS GREGORY W. ROSE
Chairman of the Board Retired-Cragin Metals Director and
Chief Executive Officer Products, Inc. Managing Partner
Monarch Tool & Die Co.
JAMES L. FERSTEL JOSEPH A. GRABER ROBERT H. RUSHER
Attorney at Law President and Retired-President and
Chief Operating Officer Chief Operating Officer
CURRENT OFFICERS
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 CATHERINE HARPER SUSAN L. RODRIGUEZ
Assistant Secretary Assistant Vice President Assistant Secretary
North Federal Savings Bank North Federal Savings Bank
D. ROBERT HARLESS
Assistant Vice President
North Federal Savings Bank
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 1997 and 1996. The prices have been
adjusted to reflect a three-for-two stock split distributed on December 29,
1997. The Common Stock began trading on December 21, 1993. On March 2, 1998,
North Bancshares, Inc. had approximately 220 shareholders of record and 400
beneficial shareholders. As of such date, there were 1,300,281 shares of common
stock issued and outstanding.
<TABLE>
1997 1996
<CAPTION>
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter 13.167 10.500 10.833 9.167
Second Quarter 13.417 12.750 10.833 10.167
Third Quarter 16.333 12.833 10.833 10.167
Fourth Quarter 18.875 15.667 11.000 10.500
</TABLE>
46
<PAGE>
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 22, 1998, at the Chicago
Historical Society, 1601 N. Clark St., Chicago, Illinois:
STOCK TRANSFER AGENT AND REGISTRAR
Inquiries regarding stock transfer, registration, lost certificate, lost
dividend checks or changes in name and address should be directed to the stock
transfer agent and registrar by calling 312-360-5296 or 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
47
KPMG Peat Marwick LLP
The Board of Directors
Noeth 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 13, 1998, relating to the consolidated statements of financial
condition of North Bancshares, Inc. and subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period anded
December 31, 1997, which report appears in the December 31, 1997 annual report
on Form 10-KSB of North Bancshares, Inc.
/s/ KPMG Peat Marwick
Chicago, Illinois
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Condition at December 31, 1997 and the Consolidated
Statement of Operations for the twelve months ended December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 727
<INT-BEARING-DEPOSITS> 2,937
<FED-FUNDS-SOLD> 5,976
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,250
<INVESTMENTS-CARRYING> 24,955
<INVESTMENTS-MARKET> 23,250
<LOANS> 79,031
<ALLOWANCE> 208
<TOTAL-ASSETS> 123,078
<DEPOSITS> 75,041
<SHORT-TERM> 8,000
<LIABILITIES-OTHER> 2,489
<LONG-TERM> 21,100
0
0
<COMMON> 19
<OTHER-SE> 16,448
<TOTAL-LIABILITIES-AND-EQUITY> 123,078
<INTEREST-LOAN> 5,968
<INTEREST-INVEST> 2,582
<INTEREST-OTHER> 201
<INTEREST-TOTAL> 8,751
<INTEREST-DEPOSIT> 3,201
<INTEREST-EXPENSE> 4,973
<INTEREST-INCOME-NET> 3,778
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 60
<EXPENSE-OTHER> 3,070
<INCOME-PRETAX> 999
<INCOME-PRE-EXTRAORDINARY> 999
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 636
<EPS-PRIMARY> 45
<EPS-DILUTED> 42
<YIELD-ACTUAL> 375
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 208
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 208
<ALLOWANCE-DOMESTIC> 208
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
