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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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, 1998.
As of March 1, 1999, there were issued and outstanding 1,258,585 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 1, 1999 was approximately $11,110,483. (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, 1998
PART III of Form 10-KSB--Portions of Proxy Statement for the Annual Meeting of
Stockholders for the fiscal year ended December 31, 1998.
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<PAGE>
INDEX
PART I PAGE
----
Item 1. Business 2
Item 2. Properties 32
Item 3. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters 33
Item 6. Management's Discussion and Analysis or Plan of Operation 33
Item 7. Financial Statements 33
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 33
PART III
Item 9. Directors, Executive Officers, Promoters and Control Person;
Compliance with Section 16 (a) of the Exchange Act 33
Item 10. Executive Compensation 34
Item 11. Security Ownership of Certain Beneficial Owners and Management 34
Item 12. Certain Relationships and Related Transaction 34
Item 13. Exhibits and Reports on Form 8-K 35
SIGNATURES 37
<PAGE>
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"). On December 29, 1997, the
Company's Common Stock was split three-for-two in the form of a 50% stock
dividend. There were 1,262,893 shares of common stock outstanding at December
31, 1998. The Bank was 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, 1998,
the Company had total consolidated assets of $125.8 million, deposits of $76.2
million, and stockholders' equity of $13.3 million.
The Company is 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 and non-owner occupied one- to four-family
residences, small apartment buildings, and mortgage-backed and investment
securities. The Company also originates or participates in, 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 various regulatory authorities, including the OTS and the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"). The Company's
results of operations are largely dependent upon net interest income, which is
the difference between the interest received on its loan and investment
securities portfolios and the interest paid 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 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
<PAGE>
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 results 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.
Year 2000 Readiness Disclosures
The Year 2000 issue arises from the inability of some computer systems
to recognize the year 2000. Many existing computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these programs and computers will recognize A00" as the year 1900 rather than
the year 2000.
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 are operated on in-house personal
computers and a wide area network. During 1997, the Company initiated a review
and formed a committee to conduct an assessment of all hardware and software
systems to assess whether they will function properly in the year 2000. To date,
the Company has not found anything material that would affect its operations.
Vendors who provide software and services which are material to the operations
of the Company have been contacted and indicated that their hardware or software
is or will be Year 2000 compliant during the time frames established by our
regulators. In-house and third party data processor testing of mission critical
and other hardware and software systems is ongoing. A test of the Company's
third-party data processor's deposit and loan system was conducted in August
1998. The results of the tests, using various dates in the year 2000, indicated
that all the transactions tested were processed correctly. The third-party data
processor's general ledger system was tested in October 1998. The third-party
data processor's item processing and image systems have been tested and are
believed to be compliant. The results of these tests indicated that all
transactions and statements were processed correctly.
A contingency plan, which would involve conversion to an alternate data
processing system, disaster recovery programs in the event of electrical
failures and additional cash requirements is currently under review by
management. The costs associated with the compliance efforts have been
approximately $25,000 to date. It is anticipated that total costs will not
exceed $40,000 and are not expected to have a significant impact on the
Company's ongoing results of operations.
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, 1998, the Bank's gross
<PAGE>
mortgage loans outstanding totaled $82.5 million, of which $73.6 million, or
89.2%, were one- to four-family residential mortgage loans. Of the one- to
four-family mortgage loans outstanding at that date, 79.2% were fixed-rate loans
(70.7% of total gross loans receivable), including balloon loans, and 20.8% were
adjustable-rate loans (18.5% of total gross loans receivable). At that same
date, multi-family residential mortgage loans totaled $7.1 million, of which
$6.7 million were fixed-rate balloon loans.
At December 31, 1998, the balance of the Bank's loans included of $1.8
million in consumer and commercial loans, which represented 2.2% of the Bank's
gross loan portfolio.
The Bank also invests in mortgage-backed securities. At December 31,
1998, mortgage-backed securities totaled $15.3 million or 12.2% of total assets.
At such date, all of the mortgage-backed securities portfolio was insured or
guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae. At December 31, 1998, $4.4
million of the mortgage-backed securities were classified as held-to-maturity
and $10.9 million were classified as available for sale.
All loans must be approved by a committee comprised of four officers,
one of whom is a director of the Bank. Requests for loans greater than
$1,000,000 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,
1998, the maximum amount which the Bank could have lent under this limit to any
one borrower and the borrower's related entities was approximately $1.9 million.
At December 31, 1998, 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, 1998 consisted of three loans to one
individual totaling $1.2 million. All three loans were secured by a first
mortgage on real estate. The Bank's next three largest lending relationships to
a single borrower or a group of related borrowers totaled $1.1 million, $1.0
million and $1.0 million, 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 and each of these loans was current as of December 31, 1998.
<PAGE>
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 deferred
fees and discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997 1996
------ ------ ------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One to four-family........... $73,568(1) 89.19% $71,770 90.49% $67,542 91.73%
Multi-family................. 7,098(2) 8.60 6,459 8.14 5,057 6.87
------- ------ ------- ------ ------- ------
Total real estate loans... 80,666 97.79 78,229 98.63 72,599 98.60
------- ------ ------- ------ ------- ------
CONSUMER LOANS:
Deposit account.............. 102 0.12 127 0.16 110 0.15
Automobile................... --- --- 1 --- 6 0.01
Home equity and home
improvement................. 714 0.87 154 0.19 123 0.17
------- ------ ------- ------ ------- ------
Total consumer loans......... 816 0.99 282 0.35 239 0.33
------- ------ ------- ------ ------- ------
COMMERCIAL LOANS............. 1,007 1.22 806 1.02 790 1.07
------- ------ ------- ------ ------- ------
Total loans receivable....... 82,489 100.00% 79,317 100.00% 73,628 100.00%
======= ====== ------- ====== ------- ======
LESS:
Deferred fees and discounts.. 152 78 42
Allowance for loan losses.... 214 208 208
------- ------- -------
Total loans receivable, net $82,123 $79,031 $73,378
======= ======= =======
MORTGAGE-BACKED SECURITIES:
FNMA......................... 1,638 10.69% 934 16.06% 1,092 14.67%
GNMA......................... 121 .79 182 3.13 229 3.08
FHLMC........................ 13,564 88.52 4,699 80.81 6,123 82.25
------- ------ ------ ------ ------ ------
Total mortgage-backed
securities................. 15,323 100.00% 5,815 100.00% 7,444 100.00%
====== ====== ======
Net premiums (discounts)..... 112 26 (21)
------- ------ ------
Net mortgage-backed
securities................. $15,435 $5,841 $7,465
======= ====== ======
</TABLE>
(1) This amount includes a total of $6.3 million of 5, 7 and 10 year
balloon loans.
(2) This amount includes a total of $6.7 million of 5, 7 and 10 year
balloon loans.
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997 1996
------ ------ ------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
One to four-family....... $58,312(1) 70.69% $50,707 63.93% $49,480 67.20%
Multi-family............. 7,098(2) 8.61 6,459 8.14 5,057 6.87
------- ------ ------- ------ ------- ------
Total fixed-rate real
estate loans.......... 65,410 79.30 57,166 72.07 54,537 74.07
Consumer................. 816 0.99 282 0.35 239 0.33
Commercial............... 1,007 1.22 806 1.02 790 1.07
------- ------ ------- ------ ------- ------
Total fixed-rate loans. 67,233 81.51 58,254 73.44 55,566 75.47
------- ------ ------- ------ ------- ------
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family...... 15,256 18.49 21,063 26.56 18,062 24.53
------- ------ ------- ------ ------- ------
Total loans............ 82,489 100.00% 79,317 100.00% 73,628 100.00%
====== ====== ======
LESS:
Deferred fees and discounts 152 78 42
Allowance for loan losses.. 214 208 208
------- ------- -------
Total loans, net........ $82,123 $79,031 $73,378
======= ======= =======
</TABLE>
(1) This amount includes a total of $6.3 million of 5, 7 and 10 year
balloon loans.
(2) This amount includes a total of $6.7 million of 5, 7 and 10 year
balloon loans.
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1998. 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, 1999 which
have a pre-determined interest rate is $65.5 million, while the amount of loans
due after such date with floating rates is $15.3 million.
<TABLE>
<CAPTION>
Real Estate
-------------------
One- to four-family Multi-family Consumer Commercial Total
------------------- ------------ -------- ---------- -----
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Periods
Ending December 31,
- -------------------
1999(1)............... $435 7.10% $106 8.25% $199 8.26% $1,007 10.00% $ 1,747 8.97%
2000.................. 750 7.83 1,127 8.40 11 4.79 --- 0.00 1,888 8.15
2001.................. 2,783 7.40 97 8.25 23 4.79 --- 0.00 2,903 7.41
2002 and 2003......... 1,252 7.89 2,370 8.09 479 7.72 --- 0.00 4,101 7.99
2004 to 2008.......... 7,309 7.60 3,398 7.94 36 8.13 --- 0.00 10,743 7.71
2009 to 2013.......... 7,215 7.18 --- 0.00 68 8.48 --- 0.00 7,283 7.19
2014 and following.... 53,824 7.31 --- 0.00 --- --- --- 0.00 53,824 7.31
------- ---- ------ ---- ---- ---- ------ ----- ------- ----
$73,568 7.34% $7,098 8.07% $816 7.81% $1,007 10.00% $82,489 7.44%
======= ==== ====== ==== ==== ==== ====== ===== ======= ====
</TABLE>
(1) Includes demand loans, loans having no stated maturity, and past due
loans.
<PAGE>
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, 1998, $73.6 million, or
89.2%, of the Banks gross loan portfolio consisted of permanent loans secured by
one- to four-family residences. 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.
The Bank's loans are designed to respond to customer preferences,
market dynamics and changes in asset/liability management objectives. During
1998, 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. 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 originated fifty-one of these
loans totaling $12.0 million during 1998 and plans to continue to emphasize this
type of lending during 1999.
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 adjustment 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, 1998, the total balance of one- to four-family
ARMs was $15.3 million, or 18.5% of the Bank's gross loan portfolio.
The Bank evaluates both the borrower's ability to make principal and
interest payments and the value of the property that will secure the loan. The
Bank verifies a borrower's employment history and the source of the down
payment. The Bank is a qualified Freddie Mac seller/servicer and is a qualified
mortgage originator in the Federal Home Loan Bank of Chicago's Mortgage
Partnership Finance program.
The Bank originates residential mortgage loans with a loan-to-value
ratio 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 a real estate loan 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 if the
property is located in a flood zone.
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, 1998, the
Bank had multi-family real estate loans totaling $7.1 million, or 8.6% of the
Bank's gross loan portfolio. The largest multi-family loan at December 31, 1998
was $1.1 million and represented a 50% participation with a local financial
institution. At December 31, 1998, 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 multi-family real estate 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.
<PAGE>
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 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. The
Bank placed increased emphasis on consumer loans during 1998 and plans to
continue to emphasize this type of lending during 1999, particularly home equity
and rehabilitation loans, because of their attractive yields, shorter terms to
maturity, and community need. At December 31, 1998, $816,000 or .99% of the
Bank's gross loan portfolio, consisted of consumer loans compared with $282,000
or .35% at December 31, 1997.
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,
1998, the Bank had $103,000 of home equity loans outstanding, or .12% of the
Bank's gross loan portfolio.
The Bank's home equity line of credit loans, which were first
introduced in the third quarter of 1997 and the Bank's investor equity line of
credit loans, introduced in the second quarter of 1998, 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 adjusts
with changes to the prime rate. At December 31, 1998, the Bank had $475,000 of
outstanding line of credit loans and $695,000 in unused credit line commitments
compared with $55,000 of outstanding line of credit loans and $157,000 in unused
credit line commitments at December 31, 1997. The Bank marketed these loans to
its current customer base during 1998 and anticipates expanding that effort
beyond its customer base during 1999.
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, 1998, 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
<PAGE>
related sales contracts. In addition, the line of credit is personally
guaranteed by the developer. The loan-to-value ratio will range between 50% to
60% at any given time. At December 31, 1998, the outstanding line of credit
amounted to $1.0 million and the balance was $1.0 million. The line of credit
carries a fixed rate of interest on a one-year renewable basis and was current
as of December 31, 1998. The interest is paid monthly and cannot be drawn from
the line of credit.
Commercial loans generally carry a higher rate of interest and are made
for shorter periods of time than fixed-rate or adjustable rate one- to
four-family residential loans. Commercial loans are usually larger and carry a
greater degree of risk, in part because the borrower's ability to repay the debt
may be largely dependent on the cash flow from the underlying business. The Bank
analyzes the financial condition of the property and the borrower in determining
whether to extend credit, and generally requires a personal guarantee from the
borrower. The Bank intends to expand its commercial lending activities, subject
to customer demand and the existence of qualified borrowers.
Mortgage-Backed Securities
The Bank purchases mortgage-backed securities to complement its
mortgage lending activities. At December 31, 1998, mortgage-backed securities
totaled $15.3 million, or 12.2% 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.
At December 31, 1998, $4.4 million of the Bank's mortgage-backed
securities were classified as held-to-maturity and $10.9 million were classified
as available-for-sale. $1.0 million or 6.4% of the Bank's mortgage-backed
securities carried adjustable rates of interest.
Under the OTS' risk-based capital requirements, Ginnie Mae
mortgage-backed securities have a zero percent risk-weighting and Fannie Mae,
Freddie Mac 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, 1998 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.
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at December 31, 1998. Mortgage-backed securities
having adjustable interest rates are shown as maturing in the period during
which the security is repricing.
<TABLE>
<CAPTION>
Due in December 31,
-------------------------------------------------------------- 1998
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>
Freddie Mac $ 90 $236 29 $246 $2,405 $10,617 $38 $13,661
Fannie Mae 656 --- --- --- --- 997 --- 1,653
Ginnie Mae --- --- --- 40 --- 81 --- 121
---- ---- --- ---- ------ ------- --- -------
Total $746 $236 29 $286 $2,405 $11,695 $38 $15,435
==== ==== === ==== ====== ======= === =======
</TABLE>
<PAGE>
LOAN ORIGINATION, MORTGAGE-BACKED SECURITIES PURCHASES AND SALES 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 maintains an approved seller/servicer status with
Freddie Mac and is a qualified participating financial institution with the
Illinois Housing Development Authority and is a participant in the FHLB of
Chicago's Mortgage Partnership Finance program.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Loans receivable (gross) at beginning of period.... $79,317 $73,628 $56,513
------- ------- -------
Originations and purchases by type:
- -----------------------------------
Fixed Rate:
Real estate - one- to four-family................ 23,889 8,746 13,701
- multi-family................ 3,106 2,519 1,623
Non-real estate - consumer and commercial.......... 1,221 355 1,291
------- ------- -------
Total fixed rate loans originated................. 28,216 11,620 16,615
Adjustable Rate:
Real estate - one- to four-family................ 2,828 6,473 10,229
------- ------- -------
Total adjustable rate loans originated.......... 2,828 6,473 10,229
Sales........................................... 230 --- ---
Principal repayments............................... 27,642 12,404 9,729
------- ------- -------
Total loans at end of period..................... $82,489 $79,317 $73,628
======= ======= =======
Mortgage-backed securities (net) at beginning of period 5,841 7,465 16,346
Purchases........................................ 11,097 --- ---
Repayments....................................... 1,354 1,628 2,190
Sales............................................ --- --- 6,600
Unrealized gain (loss) on mortgage-backed
securities available-for-sale................. 73 --- (93)
Amortization of premiums and discounts........... 76 4 2
------- ------- -------
Mortgage-backed securities (net) at end of period $15,435 $ 5,841 $ 7,465
======= ======= =======
</TABLE>
<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. The Bank has not
charged-off any loans during the past five years.
DELINQUENT LOANS. At December 31, 1998, the Bank had one loan in the
amount of $24,000 that was more than 90 days delinquent.
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,
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-performing loans:
One- to four-family.................... $24 $-- $-- $24 $30
Consumer............................... -- -- 1 -- 2
---- ---- ---- ---- ----
Total non-performing assets.......... $24 $-- $ 1 $24 $32
==== ==== ==== ==== ====
Total as a percentage of total assets.... 0.02% 0.00% 0.00% 0.02% 0.03%
==== ==== ==== ==== ====
OTHER LOANS OF CONCERN. As of December 31, 1998, 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, 1998.
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 additional general or
specific loss allowances.
<PAGE>
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, 1998.
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. This evaluation, which includes a review of all loans for 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. Although the Company did not identify any loans considered
impaired in 1998, an additional $6,000 allowance was recorded due to the
addition of more consumer loans to the portfolio. 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 5 of the Notes to
Consolidated Financial Statements contained in the Annual Report to Stockholders
filed as Exhibit 13 hereto, and "Regulation." At December 31, 1998, the Bank had
an allowance for loan losses of $214,000, which was equal to .26% of net loans
receivable.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period....... $208 $208 $200 $160 $106
Charge-offs:
One- to four-family................. --- --- --- --- ---
Consumer............................ --- --- --- --- ---
Recoveries........................... --- --- --- --- ---
- --- ---- ---- ---- ----
Net charge-offs...................... --- --- --- --- ---
Additions charged to operations...... 6 --- 8 40 54
---- ---- ---- ---- ----
Balance at end of period............. $214 $208 $208 $200 $160
==== ==== ==== ==== ====
Once the Bank repossesses property it is classified as real estate
owned. Any gains or losses (realized or reserved for) are treated as real estate
owned activity. The Bank had no real estate owned as of the dates presented.
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
At December 31,
---------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Unallocated................... $214 $208 $208 $200 $160
---- ---- ---- ---- ----
Total......................... $214 $208 $208 $200 $160
==== ==== ==== ==== ====
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.
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, 1998, the Company's interest-bearing deposits with
banks and dollar denominated money market accounts totaled $3.2 million, or 2.5%
of total assets. Investment securities, consisting of U.S. government
securities, federal agency obligations and FHLB stock, totaled $16.6 million, or
13.2% of total assets, and investment in federal funds sold totaled $5.7 million
or 4.5% 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, 1998, the weighted average term to maturity or
repricing of the investment portfolio, excluding FHLB stock, equity securities
and mortgage-backed securities, was three months.
<PAGE>
The following table sets forth the composition of the Company's
investment portfolio, excluding its mortgage-backed securities, at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997 1996
---- ---- ----
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury notes................ $ --- 0.00% $ --- 0.00% $ 2,237 8.73%
U.S. Government agency securities.. 13,922 83.95 22,630 90.69 21,844 85.22
FHLB stock......................... 1,705 10.28 1,705 6.83 1,205 4.70
Other.............................. 100 0.60 200 0.80 100 0.39
Equity securities.................. 858 5.17 420 1.68 245 0.96
------- ------ ------- ------ ------- ------
Total investment securities
and FHLB stock................. $16,585 100.00% $24,955 100.00% $25,631 100.00%
======= ====== ======= ====== ======= ======
Other Interest-Earning Assets:
Interest-bearing deposits
with banks................... $ 2,413 $ 2,937 $2,644
Dollar denominated mutual funds.. 801 1,477 547
Federal funds sold .............. 5,722 4,800 5,976
------- ------- ------
Total........................... $ 8,936 $10,390 $7,991
======= ======= ======
Average remaining life or term to
repricing of investment securities
and other interest-earning assets,
excluding FHLB stock and equity
securities........................ 3 mos. 3 mos. 14 mos.
</TABLE>
The composition and contractual maturities of the investment portfolio,
excluding mortgage-backed securities, equity securities and FHLB of Chicago
stock, are indicated in the following table.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------- 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 .. $ -- $ -- $ 13,948 $ 13,948 $ 13,922
Other .............................. -- 100 -- 100 100
--------- --------- --------- --------- ---------
Total investment securities ........ $ -- 100 $ 13,948 $ 14,098 $ 14,022
========= ========= ========= ========= =========
Weighted average yield(1) .......... --% 9.00% 6.71% 6.73%
========= ========= =========
</TABLE>
(1) The weighted average yield is based upon the interest rate in effect at
December 31, 1998.
Sources of Funds
GENERAL. The Bank's primary sources of funds are deposits, borrowings,
amortization and prepayment of loan principal, maturities and sales 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, MMDA, NOW and non-interest-bearing checking
<PAGE>
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.
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank during the dates
indicated and the rates offered as of December 31, 1998. See Note 8 of Notes to
Consolidated Financial Statements contained in the Annual Report to Stockholders
filed as Exhibit 13 hereto for weighted average nominal rates.
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997 1996
---- ---- ----
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and Savings Deposits:
- ---------------------------------
Passbook Accounts 2.75% .......... $13,642 17.9% $15,282 22.4% $16,197 22.0%
NOW Accounts 2.02% ............. 8,740 11.5 8,429 11.2 8,298 11.3
Non-Interest Bearing Accounts .... 1,789 2.3 1,208 1.6 998 1.3
Money Market Accounts 0.00% -4.75% 10,143 13.3 5,544 7.4 6,233 8.5
------ ---- ----- ---- ----- ----
Total Non-Certificates ........... 34,314 45.0 30,463 40.6 31,726 43.1
------ ---- ------ ---- ------ ----
Total Certificates:
- -------------------
0.00 - 4.99% ..................... 6,076 8.0 885 1.2 1,574 2.1
5.00 - 5.99% ..................... 24,714 32.4 30,775 41.0 25,304 34.4
6.00 - 6.99% ..................... 6,889 9.0 9,043 12.1 10,981 14.9
7.00 - 7.99% ..................... 3,919 5.2 3,764 5.0 3,779 5.1
8.00 - 8.99% ..................... 310 0.4 111 0.1 247 0.4
------- ----- ------- ----- ------- -----
Total Certificates ............... 41,908 55.0 45,578 59.4 41,885 56.9
------- ----- ------- ----- ------- -----
Total Deposits ................... $76,222 100.0% $75,041 100.0% $73,611 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Opening balance................... $ 75,041 $ 73,611 $ 75,169
Deposits.......................... 117,369 108,398 91,640
Withdrawals....................... 119,251 110,169 97,018
Interest credited................. 3,063 3,201 3,820
-------- -------- --------
Ending balance.................... $ 76,222 $ 75,041 $ 73,611
======== ======== ========
Net increase (decrease)........... $ 1,181 $1,430 $ (1,558)
======== ======== ========
Percent increase (decrease)....... 1.57% 1.94% (2.07)%
======== ======== ========
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1998.
<TABLE>
<CAPTION>
0.00- 5.00- 6.00- 7.00- 8.00% or Percent
4.99% 5.99% 6.99% 7.99% Greater Total of Total
----- ----- ----- ----- ------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending:
- -----------------------------
March 31, 1999................ $ 909 $11,511 $41 $-- $187 $12,648 30.18%
June 30, 1999................. 3,263 3,846 1,142 --- --- 8,251 19.69
September 30, 1999............ --- 3,715 467 --- 1 4,183 9.98
December 31, 1999............. 1,722 813 234 723 --- 3,492 8.33
March 31, 2000................ --- 1,138 --- 1,435 --- 2,573 6.14
June 30, 2000................. 66 639 347 1,583 --- 2,635 6.29
September 31, 2000............ --- 332 935 --- --- 1,267 3.02
December 31, 2000............. 116 110 462 --- --- 688 1.64
March 31, 2001................ --- 698 --- --- --- 698 1.67
June 30, 2001................. --- 435 12 13 11 471 1.12
September 30, 2001............ --- 113 192 --- --- 305 0.73
December 31, 2001............. --- 123 388 -- 5 516 1.23
Thereafter.................... --- 1,241 2,669 165 106 4,181 9.98
------ ------- ------ ------ ---- ------- ------
Total......................... $6,076 $24,714 $6,889 $3,919 $310 $41,908 100.00%
====== ======= ====== ====== ==== ======= ======
Percent of total.............. 14.50% 58.97% 16.44% 9.35% 0.74% 100.00%
====== ======= ====== ====== ==== =======
</TABLE>
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1998.
<TABLE>
<CAPTION>
Maturity
--------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit of less than
$100,000................................... $10,962 $6,594 $6,362 $11,729 $35,647
Certificates of deposit of $100,000 or
greater.................................... 1,686 1,657 1,313 1,605 6,261
------- ------ ------ ------- -------
Total certificates of deposit............... $12,648 $8,251 $7,675 $13,334 $41,908
======= ====== ====== ======= =======
</TABLE>
Borrowings
Although deposits are the bank's primary source of funds, the Bank's
policy has been to utilize borrowings, such as advances from the FHLB of Chicago
when they are a less costly source of funds or can be invested at a positive
rate of return.
The Bank obtains advances from the FHLB of Chicago secured by its
capital stock in the FHLB of Chicago and certain of its mortgage loans. Such
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB of Chicago will advance to member institutions, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with the policies of the OTS and the FHLB of Chicago. The maximum
amount of FHLB of Chicago advances to a member institution generally is reduced
by borrowings from any other source. At December 31, 1998, the Bank's FHLB of
Chicago advances totalled $34.1 million.
The following table sets forth certain information regarding borrowings
at and for the dates indicated:
At and For the Years Ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
(Dollars in Thousands)
FHLB of Chicago Advances
Average balance outstanding............... $ 32,792 28,192 19,776
Maximum amount outstanding at any month
end during the year................ 37,100 34,100 24,100
Balance outstanding at end of year........ 34,100 29,100 24,100
Weighted average interest rate during
the year........................... 5.61% 6.29% 6.86%
Weighted average interest rate at end
of year............................ 5.34% 5.82% 6.49%
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.
<PAGE>
At December 31, 1998 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 $11,483 at
December 31, 1998. For the year ended December 31, 1998, North Financial
Corporation had net income of $1,777.
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
Federal Reserve Board. As the savings and loan holding company of North Federal,
the Company also is subject to federal regulation and oversight.
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 March 31, 1998 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.
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.
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, 1998, the Bank's lending limit under this restriction was $3.3
million. North Federal is in compliance with the loans-to-one-borrower
limitation.
Insurance of Accounts and Regulation by the FDIC
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 action, and may terminate 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. At
December 31, 1998, we were classified as a well-capitalized institution.
<PAGE>
SAIF-insured institutions are also required to pay an assessment for
the repayment of interest on obligations issued by a federally chartered
corporation to provide financing (AFICO@) for resolving the thrift crisis in the
1980's, in the amount equal to 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment 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
All federally insured savings institutions are required to maintain
minimum capital standards, including a tangible capital, a leverage ratio (or
core capital) and a risk-based capital. 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). At December 31, 1998, the Bank
had tangible capital of $12.1 million, or 9.7% of adjusted total assets, which
is approximately $10.2 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date.
The capital standards also require core capital equal to at least 3% to
4% of adjusted total assets, depending on an institutions supervisory rating.
Core capital generally consists of tangible capital plus certain intangible
assets, including a limited amount of purchased credit card relationships. At
December 31, 1998, North Federal had core capital equal to $12.1 million, or
9.7% of adjusted total assets, which is $8.4 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.
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, 1998.
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 Fannie Mae or Freddie
Mac.
On December 31, 1998, North Federal had total capital of $12.3 million
(including $12.1 million in core capital and $214,000 in qualifying
supplementary capital) and risk-weighted assets of $50.1 million or total
capital of 24.6% of risk-weighted assets. This amount was $8.3 million above the
8.0% requirement in effect on that date.
The OTS is also authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case basis. Submission
of a capital restoration plan and various limitations on an institution's growth
and operation. In severe cases, the FDIC or the OTS may appoint a conservator or
receiver for the institution. The OTS is also generally authorized to reclassify
an institution 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.
<PAGE>
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Accounting
An OTS policy statement applicable to all savings associations requires
that the investment activities of a savings institution comply with approved and
documented investment policies and strategies, and 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
Generally Accepted Accounting Principles, 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 institutions are required to meet a qualified thrift lender
("QTL") test to avoid certain restrictions on their operations. This test
requires a savings institution 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
institution may maintain 60% of its assets in those assets specified in Section
7701 (a) (19) of the Internal Revenue Code. Under either test, these assets
primarily consist of residential housing related loans and investments. At
December 31, 1998, the Bank met the test and has always met the test since its
effectiveness.
Any savings institution that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and remains a QTL. If an
institution 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
institution has not yet requalified or converted to a national bank, its new
investments and activities are limited to those permissible for both a savings
institution and a national bank, and it is limited to national bank branching
rights in its home state. In addition, the institution is immediately ineligible
to receive any new FHLB borrowings and is subject to national bank limits for
payment of dividends. If the institutions has not requalified or converted to a
national bank within three years after the failure, it must get rid of all
investments and stop 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 institution 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 requires the OTS, in
connection with the examination of North Federal, to assess the institution's
record of meeting the credit needs of its community and to take 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 Bank received a
satisfactory CRA rating on its most recent CRA compliance examination.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. The Company is required to register and file
reports with the OTS and is subject to regulation and examination by the OTS.
<PAGE>
In addition, the OTS has enforcement authority over the 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 generally become subject to additional restrictions.
If North Federal fails the QTL test, within one year, the Company must
register as, and will become subject to, the significant restrictions applicable
to bank holding companies.
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.
Company stock held by persons who are affiliates (generally executive
officers, directors and 10% or more stockholders) of the Company may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the 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).
Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions 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
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. 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 must
be used 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, 1998, the Bank had $1.7 million in FHLB
stock, which was in compliance with this requirement.
For the year ended December 31, 1998, dividends paid by the FHLB of
Chicago to North Federal totaled $124,000. The $30,000 dividend received for the
quarter ended December 31, 1998 reflects an annualized rate of 6.63%, or 0.37%
below the rate for 1997.
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.
<PAGE>
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 AExperience 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 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 nondividend 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.
<PAGE>
State and Local Taxation
State of Illinois. The Company and the Bank file a combined unitary
Illinois income tax return. For Illinois income tax purposes the Company and the
Bank are taxed at an effective rate equal to 7.3% of Illinois Taxable Income.
For these purposes, "Illinois Taxable Income" generally means federal taxable
income, subject to certain adjustments (including the addition of interest
income on state and municipal obligations and the exclusion of interest income
on 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 two offices,
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, 1998, the Company had a total of 37 employees,
including two part-time employees. 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, 1998.
VICTOR E. CAPUTO - Mr. Caputo, age 54, 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. He
was appointed Chief Operating Officer in August 1998. 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 LLP in Chicago. He has
over 25 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 38, was appointed as Vice
President and Treasurer of the Company and the Bank in 1993. Mr. Trofimuk has
served in various capacities since joining the Bank in 1985. He is 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 45, 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 31, 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
<PAGE>
as a Branch Manager for the Harris Bank and for Cragin Federal Savings and Loan
Association. She is currently serving as Treasurer for the Old Town Chamber of
Commerce.
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, 1998, the net book value of the Bank's investment
in premises, equipment and leaseholds was approximately $1,020,706.
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,
1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 48 of the Company's 1998 Annual Report to Stockholders is
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 4 through 15 of the Company's 1998 Annual Report to Stockholders
are incorporated by reference.
Item 7. Financial Statements
Pages 16 through 46 of the Company's 1998 Annual Report to Stockholders
are 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 by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
<PAGE>
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, 1998, the
Registrant complied with all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1999, 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 by reference from the definitive Proxy Statement
for the Annual Meeting of Stockholders to be held in 1999, 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 by reference from the definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1999, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
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
------ -------- ------
2 Plan of acquisition, reorganization, arrangement, None
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 *
<PAGE>
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 earnings None
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 to vote None
23 Consents of independent accountants 23
24 Power of attorney Not required
27 Financial data schedule 27
28 Information from reports furnished to state insurance None
regulatory authorities
99 Additional exhibits Not required
* 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.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 15, 1998 regarding
the release of earnings for September 30, 1998 and a quarterly dividend.
<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
(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 /s/ James L. Ferstel
- ------------------------------------- --------------------------------
Mary Ann Hass, Chairman James L. Ferstel, Director
Date: March 31, 1999 Date: March 31, 1999
-------------- --------------
/s/ Robert H. Rusher /s/ Elmer L. Hass
- ------------------------------------- --------------------------------
Robert H. Rusher, Director Elmer L. Hass, Director
Date: March 31, 1999 Date: March 31, 1999
-------------- --------------
/s/ Gregory W. Rose /s/ Frank J. Donati
- ------------------------------------- --------------------------------
Gregory W. Rose, Director Frank J. Donati, Director
Date: March 31, 1999 Date: March 31, 1999
-------------- --------------
/s/ Joseph A. Graber /s/ Martin W. Trofimuk
- ------------------------------------- --------------------------------
Joseph A.Graber, President and Chief Martin W. Trofimuk,
Executive Officer and Director Vice President and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 31, 1999 Date: March 31, 1999
-------------- --------------
EXHIBIT 13
1998 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
Message from the Chairman and the President...................... 1
Selected Consolidated Financial Information...................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 4
Independent Auditors' Report..................................... 16
Consolidated Statements of Financial Condition................... 17
Consolidated Statements of Operations............................ 19
Consolidated Statements of changes in
Stockholders' Equity........................................... 20
Consolidated Statements of Cash Flows............................ 21
Notes to Consolidated Financial Statements....................... 23
Stockholder and Corporate Information............................ 47
<PAGE>
March 15, 1999
To Our Shareholders:
We are pleased to present the 1998 Annual Report of North
Bancshares, Inc. The information in this Annual Report is designed to provide a
detailed financial review of 1998 and our outlook for the future. A detailed
summary of the targets and goals are outlined in the "Management's Discussion
and Analysis" section of the report.
The year 1998 presented us with many challenges and opportunities.
The dramatic decline in interest rates prompted a record number of mortgage
prepayments and refinancings. We met that challenge head-on by restructuring our
loan portfolio and booking a record number of loans. We continued the process of
diversifying our portfolio of loans to include more higher yielding investment
property and consumer loans while reducing our reliance on higher cost
certificates of deposit as a funding source.
On January 19th of this year we announced an $.11 per share
quarterly dividend, which amounted to a 10% increase in the regular quarterly
dividend paid during 1998. This increase reflects our strong capital position,
our improved quarterly results, and our optimism for the future of the Company.
We expanded the Board this past year with the appointment of Frank
J. Donati. Mr. Donati's background is detailed in the proxy statement and we
believe his appointment will enhance and strengthen the quality of the Board
as we move into the 21st century.
The total compounded annual rate of return to shareholders, from
December 22, 1993, the date of conversion, to December 31, 1998, amounts to
approximately 15%. Our commitment has been and will always be long-term
shareholder value. We will do this by focusing on and responding to the needs of
the community and by offering products and services that meet those financial
needs.
Sincerely,
Mary Ann Hass
Chairman of the Board
Joseph A. Graber
President and Chief Executive Officer
<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 of the Company and the Notes thereto.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------
(IN THOUSANDS)
======================================================================================================================
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets $125,832 $123,078 $117,473 $111,668 $106,959
Loans receivable, net 82,123 79,031 73,378 56,161 45,288
Mortgage backed securities held to maturity 4,478 5,841 7,465 9,419 17,015
Mortgage backed securities available for sa 10,884 --- --- 6,927 ---
Investment securities held to maturity --- --- --- 498 3,493
Investment securities available for sale 14,880 23,250 24,426 27,882 24,695
Investment in mutual funds --- --- --- --- 7,796
Deposit accounts 76,222 75,041 73,611 75,169 70,178
Borrowed funds 34,100 29,100 24,100 11,750 12,976
Stockholders' equity 13,322 16,448 17,823 21,028 21,602
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SELECTED OPERATING DATA: 1998 1997 1996 1995 1994
- ------------------------ ---------------------------------------------------------------------------
Total interest income $8,644 $8,751 $8,468 $7,525 $6,310
Total interest expense 5,104 4,973 4,640 4,144 2,880
---------------------------------------------------------------------------
Net interest income before
provision for loan losses 3,540 3,778 3,828 3,381 3,430
Provision for loan losses 6 --- 8 40 54
---------------------------------------------------------------------------
Net interest income after provision
for loan losses 3,534 3,778 3,820 3,341 3,376
---------------------------------------------------------------------------
Non-interest income (loss):
Fees & service charges 263 211 190 120 105
Gain on sale of investment
securities and mutual funds, net 75 60 88 245 216
Gain on sale of loans 3 --- --- --- ---
Decline in value of mutual funds --- --- --- --- (612)
Other non-interest income 18 20 23 19 41
---------------------------------------------------------------------------
Total non-interest income (loss) 359 291 301 384 (250)
Non-interest expense 3,146 3,070 3,464 2,776 2,728
---------------------------------------------------------------------------
Income before taxes 747 999 657 949 398
Income tax expense 235 363 165 253 353
---------------------------------------------------------------------------
NET INCOME $512 $636 $492 $696 $45
===========================================================================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
- -------------------
<S> <C> <C> <C> <C> <C>
Return on assets (ratio of net income to
average total assets) 0.41% 0.53% 0.42% 0.64% 0.04%
Interest rate spread information:
Average during year 2.33 2.41 2.53 2.15 2.67
End of year 2.36 2.51 2.57 2.24 2.23
Net interest margin 2.94 3.19 3.36 3.19 3.54
Ratio of operating expenses to average
total assets 2.54 2.54 2.98 2.57 2.75
Ratio of average interest-earning assets to average
interest-bearing liabilities 114.43 118.65 120.61 126.61 129.40
ASSET QUALITY RATIOS:
- ---------------------
Non-performing assets to total assets at end of period 0.02 0.00 0.00 0.02 0.03
Allowance for loan losses to non-performing loans 891.67 N/A(1) N/A(1) 833.33 500.00
Allowance for loan losses to loans receivable 0.26 0.26 0.28 0.36 0.35
CAPITAL RATIOS:
- ---------------
Stockholders' equity to total assets 10.59 13.36 15.17 18.83 20.20
Average stockholders' equity to average assets 11.18 14.03 16.32 19.71 22.52
Return on stockholders' equity (ratio of net income to
average equity) 3.70 3.75 2.59 3.27 0.20
NUMBER OF FULL SERVICE OFFICES: 2 2 2 2 2
- -------------------------------
</TABLE>
(1) Not applicable because the Company had no non-performing loans as of
December 31, 1996 and 1997.
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. On December 29, 1997, the Company effected a three-for-two stock
split in the form of a 50% common stock dividend. At December 31, 1998, there
were 1,262,893 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 and uses such deposits as well as borrowed
funds to originate or acquire one- to four-family residential mortgages, loans
secured by small apartment buildings or mixed use properties. The Company has
recently begun originating equity lines of credit secured by real estate and has
purchased participating interests in multi-family apartment building loans. The
Company also originates consumer loans in its primary market area and has
established a commercial line of credit with a manufactured housing developer.
The Company invests primarily in federal agency securities, investment grade
securities, mortgage-backed 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 deposit 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 but not limited to, 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 results 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>
YEAR 2000 READINESS DISCLOSURES
The Year 2000 issue arises from the inability of some computer
systems to recognize the year 2000. Many existing computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these programs and computers will recognize "00" as the year 1900 rather than
the year 2000.
The Company utilizes and is dependent upon data processing systems
and software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third-party data
processor and other software purchased which is operated on in-house personal
computers and a wide area network. During 1997, the Company initiated a review
and formed a committee to conduct an assessment of all hardware and software
systems to assess whether they will function properly in the year 2000. To date,
we have not found anything material that would affect the operations of the
Company. The vendors who have been contacted have indicated that their hardware
and software is or will be Year 2000 compliant during the time frames
established by our regulators. In house and third party data processor testing
of mission critical and other hardware and software systems is ongoing. A test
of the Company's third-party data processor's deposit and loan system was
conducted in August 1998. The results of the tests, using various dates in the
year 2000 indicated that all the transactions tested were processed correctly.
The third-party data processor's general ledger system was tested in October
1998. The third-part data processor's item processing and image systems have
been tested are believed to be compliant. The results of these tests indicated
that all transactions and statements were processed correctly.
A contingency plan, which would involve conversion to an alternate
data processing system, disaster recovery programs in the event of electrical
failures and additional cash requirements is currently under review by
management. The costs associated with the compliance efforts have been
approximately $25,000 to date. It is anticipated that total costs will not
exceed $40,000 and are not expected to have a significant impact on the
Company's ongoing results of operations.
MANAGEMENT STRATEGY
THE COMPANY'S THREE YEAR FINANCIAL GOALS ARE TO:
* Achieve a 7.5% to 8.5% return on equity (ROE) by the end of fiscal year 2001;
* Achieve a .65% to .75% return on assets (ROA) by the end of fiscal year 2001;
* Increase interest-earning assets by approximately 5% to 7% per year;
* Maintain the Company's record of high asset quality;
* Improve the loan to assets ratio to between 65% to 75%, of which 10% to 15%
would be consumer, multi-family and commercial loans;
* Reduce certificates of deposit to 50% of total deposits;
* Increase non-interest income by approximately 10% to 15% annually;
* Maintain a high dividend payout ratio;
* Continue to evaluate stock repurchase programs in light of the effect on
earnings per share and stock options exercised;
* Improve efficiency ratio to 65% by the end of fiscal year 2001.
IN ORDER TO ACHIEVE THESE GOALS THE BANK:
* Will continue to expand consumer lending;
* Will continue to restructure the loan portfolio to include more investment
property loans;
5
<PAGE>
* Will continue to focus on shifting liabilities from higher cost certificates
of deposit to lower cost, fee generating transaction accounts;
* Will continue to develop relationships with other financial institutions in
order to participate in multi-family apartment lending;
* Will continue to develop relationships with local high transaction volume
customer businesses in order to place additional ATM terminals off
premises;
* 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;
* Will continue to review employee benefit plans and other non-interest
expenses in order to achieve additional cost savings;
* Will continue a review of development alternatives for the Bank's real
estate.
GOALS ACHIEVED:
* Achieved average loan growth of 16.3% per year from the end of 1994 to the end
of 1998;
* Diversified loan portfolio during 1998 with 69% of the loan production in
two-to four-family and multi family property loans;
* Management continued to develop business relationships with other financial
institutions and closed $2.5 million in multi-family participation loans
in 1998;
* Loans to assets ratio at the end of 1998 was 65.3%, of which 10.8% were
consumer, commercial and multi-family loans;
* The Company has maintained its high level of asset quality during 1998; only
one loan in the amount of $24,000 was delinquent 90 days or more at
December 31, 1998;
* Reduced certificates of deposit from 59.4% of total deposits at the end of
1997 to 54.9% at the end of 1998, increased non-interest bearing checking
accounts by 46.6% from January 1, 1998 to December 31, 1998 and increased
money market deposits by $4.6 million or 83.0% During 1998;
* Non-interest income improved 23% during 1998;
* Dividend payout ratio amounted to 100% of diluted earnings per share in 1998;
* Completed eleven stock repurchase programs totaling $10.7 million and the
Board of Directors recently approved the twelfth program to repurchase up
to 50,000 shares;
* Managing excess capital will continue to be a priority. The equity to assets
ratio has been reduced from 20.2% at the beginning of 1994 to 10.6% at the
end of 1998;
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 and an
Interest Rate Committee that are composed of the Bank's president, executive
vice president, vice president/treasurer, vice-president-services and assistant
vice president/controller. Both committees meet 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 has a negative interest rate sensitivity gap
for a given period if the amount of its interest-bearing liabilities maturing or
otherwise repricing within such period exceeds the amount of its
interest-earning assets maturing or otherwise repricing within the same period.
Accordingly, in a decreasing interest rate environment, financial institutions
with a negative interest rate sensitivity gap generally will experience greater
decreases in the cost of their interest-bearing liabilities than the yield of
their interest-earning assets. Conversely, in an environment of increasing
interest rates the cost of their interest-bearing liabilities generally will
increase more quickly than the yield of their interest-earnings assets. Changes
in interest rates generally will have the opposite effect on financial
institutions with a positive interest rate sensitivity gap. At December 31,
1998, based on management assumptions for passbook accounts, NOW accounts, money
market deposit accounts, certificates of deposit and borrowed funds, total
interest-bearing liabilities maturing or repricing within
6
<PAGE>
one year exceeded total interest-earning assets maturing or repricing in the
same period by $10.3 million, representing a cumulative one year gap as a
percentage of interest-earning assets of a negative 8.35%.
The following table sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1998
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 are assumed
to prepay at an annual rate of 24.1%. Consumer loans are also assumed to prepay
at an annual rate of 24.1%. Mortgage-backed securities with contractual
maturities of less than five years are assumed to prepay at an annual rate of
42.6% and those with maturities of more than five years are assumed to prepay at
an annual rate of 40.4%, 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.
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, 1998
-------------------------------------------------------------------------------------
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 $ 8,049 $ 7,128 $ 23,435 $ 12,435 $ 14,363 $ 65,410
Consumer and commercial loans 1,575 138 62 21 27 1,823
Mortgage-backed securities 3,717 2,517 5,941 2,122 1,138 15,435
Adjustable rate one-to-four family and
multi-family real estate loans 1,336 1,692 7,587 4,641 -- 15,256
Investment securities and other(1) 19,945 4,975 501 -- 100 25,521
------------------------------------------------------------------------------
Total interest-earning assets 34,622 16,450 37,526 19,219 15,628 123,445
------------------------------------------------------------------------------
Passbook accounts $ 1,160 $ 1,061 $ 3,553 $ 2,316 $ 5,552 $ 13,642
NOW accounts 1,617 1,318 3,121 835 1,849 8,740
Money market deposit accounts 4,006 644 2,065 1,289 2,139 10,143
Certificate accounts 20,899 7,675 9,153 4,181 -- 41,908
Borrowed funds 20,000 3,000 10,350 750 -- 34,100
------------------------------------------------------------------------------
Total interest-bearing liabilities 47,682 13,698 28,242 9,371 9,540 108,533
------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities ($13,060) $ 2,752 $ 9,284 $ 9,848 $ 6,088 $ 14,912
---------------------------------------------------------------------=========
Cumulative interest rate
sensitivity gap ($13,060) ($10,308) ($ 1,024) $ 8,824 $ 14,912
==============================================================================
Cumulative interest rate gap as a
percentage of total assets (10.38)% (8.19)% (0.81)% 7.01% 11.85%
=============================================================================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Cumulative interest rate gap as a
percentage of interest-earning assets (10.58)% (8.35)% (0.83)% 7.15% 12.08%
=============================================================================
</TABLE>
- ----------------------------
(1) Includes investment securities available for sale, FHLB stock and other
interest-earning assets.
Certain shortcomings are inherent in the method of analysis
presented in the foregoing table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate mortgage loans (ARMs), have features which restrict changes in
interest rates on a short term basis and over the life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their debt may decrease in the
event of an interest rate increase.
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>
--------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned\ Yield\ Outstanding Earned\ Yield\ Outstanding Earned\ Yield\
Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------------------------------------------------------------------------------------------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $ 77,962 $ 5,924 7.60% $ 76,376 $ 5,968 7.81% $ 65,030 $ 5,168 7.95%
Investment securities 23,291 1,643 7.05 27,558 1,933 7.02 33,125 2,324 7.02
Mortgage-backed securities 8,014 481 6.00 6,737 470 6.98 9,956 659 6.62
Federal funds sold 6,837 399 5.84 3,627 207 5.71 3,087 165 5.34
Other 4,274 197 4.61 3,989 173 4.34 2,535 152 6.00
-------------------------------------------------------------------------------------------------
Total interest-earning assets 120,378 8,644 7.18 118,287 8,751 7.40 113,733 8,468 7.45
-------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
MMDA & NOW accounts 15,492 468 3.02 13,928 372 2.67 13,755 336 2.44
Passbook accounts 14,439 397 2.75 15,495 426 2.75 16,790 459 2.73
Certificate accounts 42,472 2,401 5.65 42,082 2,403 5.71 43,954 2,490 5.67
Borrowed funds 32,792 1,838 5.61 28,192 1,772 6.29 19,776 1,355 6.86
-------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 105,195 5,104 4.85 99,697 4,973 4.99 94,295 4,640 4.92
-----------------------------------------------------------------------------------------------
Net interest income $ 3,540 $ 3,778 $ 3,828
-------- -------- -------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest rate spread 2.33% 2.41% 2.53%
---- ---- ----
Net earning assets $ 15,183 $ 18,590 $ 19,438
-------- -------- --------
Net yield on average interest-
earning assets 2.94% 3.19% 3.36%
---- ---- ----
Average interest-earning assets to
average interest-bearing liabilities 114.43% 118.65% 120.61%
------ ------ ------
</TABLE>
- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
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,
----------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD ON:
Loans receivable 7.44% 7.78% 7.81%
Investment securities 6.73 6.90 6.76
Mortgage-backed securities (1) 6.48 7.18 7.15
Federal funds 4.52 5.92 6.25
Other 4.83 5.80 6.09
----------------------------------------------------------------------
Combined weighted average yield on
interest-earning assets 7.05 7.42 7.44
----------------------------------------------------------------------
WEIGHTED AVERAGE RATE PAID ON:
Passbook accounts 2.75 2.75 2.75
MMDA & NOW accounts 2.97 2.55 2.54
Certificate accounts 5.58 5.80 5.62
Borrowed funds 5.34 5.82 6.49
----------------------------------------------------------------------
Combined weighted average rate paid on
interest-bearing liabilities 4.69 4.91 4.87
----------------------------------------------------------------------
SPREAD 2.36% 2.51% 2.57%
======================================================================
</TABLE>
- -------------------------
(1) Mortgage-backed securities are net of premiums and discounts
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,
---------------------------------------------------------------------------
1997 vs 1998 1996 vs 1997
---------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
---------------------------------------------------------------------------
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable (1) $121 $(165) $(44) $887 $(87) $800
Investment securities (2) (301) 9 (292) (391) --- (391)
Mortgage-backed securities (3) 77 (66) 11 (225) 36 (189)
Federal funds sold 187 5 192 31 11 42
Other 13 12 25 63 (42) 21
---------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 97 (205) (108) 365 (82) 283
---------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
MMDA & NOW accounts 47 49 96 4 32 36
Passbook accounts (29) --- (29) (36) 3 (33)
Certificate accounts 22 (24) (2) (106) 19 (87)
Borrowed funds 258 (193) 65 529 (112) 417
---------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $298 $(168) $130 $391 $(58) $333
---------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME ($238) $(50)
====== =====
</TABLE>
10
<PAGE>
- ---------------------
(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 available for sale and held
to maturity.
FINANCIAL CONDITION
Total assets increased $2.7 million, or 2.2%, to $125.8 million at
December 31, 1998 from $123.1 million at December 31, 1997. The increase was
primarily attributable to a $3.1 million, or 3.9%, increase in net loans
receivable to $82.1 at December 31, 1998 from $79.0 million on December 31,
1997. The increase in net loans receivable is attributable primarily to funding
approximately $2.5 million in multi-family loan participations with local
financial institutions.
Mortgage-backed securities available for sale amounted to $10.8
million at December 31, 1998. There were no mortgage-backed securities
classified available for sale at December 31, 1997. The increase was due
primarily to the Company's decision to reallocate certain shorter term
investment securities and liquid assets into higher yielding longer term
investments that are available for sale.
Deposit accounts increased by $1.2 million, or 1.6%, to $76.2
million on December 31, 1998 from $75.0 million on December 31, 1997. The
increase was primarily attributable to the introduction of an enhanced version
of the Bank's Money Market Deposit Account and the promotion of its "Free
Checking" account and a small business checking account.
Borrowed funds increased by $5.0 million, or 17.2%, to $34.1 million
at December 31, 1998 from $29.1 million at December 31, 1997. The increase in
borrowed funds was used primarily to fund loan originations and loan
participations. The Company anticipates a reduction in the average cost of
borrowed funds during 1999 compared with 1998 as a result of refinancing higher
rate FHLB advances during 1998.
Stockholders' equity decreased $3.1 million, or 18.9%, to $13.3
million at December 31, 1998 from $16.4 million at December 31, 1997. The
decrease was primarily attributable to a $3.0 million increase in treasury stock
as a result of $3.9 million in stock repurchases, partially offset by $910,000
in stock options being exercised. Retained earnings remained steady at $11.1
million due to dividend payments offsetting net income for the year.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
GENERAL. Net income amounted to $512,000 for the year ended December
31, 1998, a decrease of $124,000 from $636,000 for the year ended December 31,
1997. Diluted earnings per share amounted to $.40 for the year ended December
31, 1998, a decrease of $.02 from $.42 per share for the year ended December 31,
1997. The decrease was primarily attributable to a decline in net interest
income, partially offset by an increase in non-
11
<PAGE>
interest income and a decrease in the weighted average number of shares
outstanding.
INTEREST INCOME. Interest income was $8.6 million for the year ended
December 31, 1998, a $107,000 decrease from $8.8 million for the year ended
December 31, 1997. There was a decline in the annualized yield on average
interest-earning assets to 7.18% for the year ended December 31, 1998 from 7.40%
for the year ended December 31, 1997. The decline was due primarily to proceeds
from mortgage loan prepayments and higher yielding investment securities called
prior to maturity, which were temporarily reinvested in shorter term lower
yielding investments. Average interest earning assets amounted to $120.4 million
for the year ended December 31, 1998, an improvement of $2.1 million from $118.3
million for the year ended December 31, 1997, which partially offset the yield
reduction.
INTEREST EXPENSE. Interest expense was $5.1 million for the year
ended December 31, 1998, an increase of $131,000 from $5.0 million for the year
ended December 31, 1997. The increase was attributable to a $65,000 increase in
interest on deposit accounts and a $66,000 increase in interest on borrowed
funds. The average balance of interest-bearing deposit accounts was $72.4
million for the year ended December 31, 1998, an increase of $900,000 from $71.5
million for the year ended December 31, 1997. The average balance of borrowed
funds amounted to $32.8 million for the year ended December 31, 1998, an
increase of $4.6 million from $28.2 million for the year ended December 31,
1997. The annualized average cost of interest-bearing liabilities was 4.85% for
the year ended December 31, 1998, an improvement from 4.99% for the year ended
December 31, 1997, due primarily to a reduction in the average cost of borrowed
funds from 6.29% for the year ended December 31, 1997 to 5.61% for the year
ended December 31, 1998. The decrease in the average cost of borrowed funds is
primarily attributable to refinancing of higher cost FHLB advances at lower
rates.
PROVISION FOR LOAN LOSSES. The Company added $6,000 to its allowance
for loan losses for the year ended December 31, 1998 compared with no provision
for the year ended December 31, 1997. The increase is primarily attributable to
an increase in the amount of consumer loans in the loan portfolio. The allowance
for loan losses was $214,000 at December 31, 1998 and amounted to .26% of loans
receivable at December 31, 1998 and at December 31, 1997. There was one loan 90
days delinquent at December 31, 1998 which amounted to $24,000. No loans were
delinquent 90 days or more at December 31, 1997. Future additions to the
Company's allowance for loan losses and any change in the related ratio of the
allowance for loan losses to non-performing loans are dependent upon the
performance and composition of the Company's loan portfolio, the economy,
changes in real estate values, interest rates and the view of the regulatory
authorities toward reserve levels and inflation.
NON-INTEREST INCOME. Non-interest income amounted to $359,000 for
the year ended December 31, 1998, an improvement of $68,000 from $291,000 for
the year ended December 31, 1997. The increase was primarily attributable to a
$52,000 increase in fees and service charges related to a greater number of
transaction accounts that produce fee income in addition to increases in
interchange fees on foreign ATM transactions, debit card transaction fees and
increased safe deposit vault rentals.
NON-INTEREST EXPENSE. Non-interest expense amounted to $3.1 million
for the year ended December 31, 1998 and December 31, 1997. There was a $93,000
increase in compensation and benefits expense primarily related to increased
personnel and occupancy costs related to extending the hours of operation at the
Chicago office. In addition there was a $115,000 increase in professional fees
primarily related to an unsuccessful hostile takeover attempt and costs
associated with shareholder proposals considered at the annual shareholders
meeting. These increases were partially offset by a $92,000 reduction in other
non-interest expense, related to the establishment of a $34,000 specific reserve
for losses in 1997 which was not established in 1998 and a $74,000 decrease in
recognition and retention plan expense. There was no recognition and retention
plan expense for the year ended December 31, 1998 since all shares became fully
vested. For the year ended December 31, 1998, a total of $141,000 in ESOP
expense, compared with $158,000 for the year ended December 31, 1997 was
recorded along with an offsetting entry to additional paid in capital, and
therefore stockholders' equity was unaffected by the
12
<PAGE>
transaction.
INCOME TAX EXPENSE. The allocation for income taxes was $235,000 for
the year ended December 31, 1998, a decrease of $128,000 from $363,000 for the
year ended December 31, 1997. The decrease was primarily attributable to a
decrease in income before income taxes. The effective tax rate was 31.4% for the
year ended December 31, 1998 compared with 36.3% for the year ended December 31,
1997. The decrease in the effective tax rate is primarily attributable to an
Illinois state income tax refund.
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. Diluted earnings per share, after
adjusting for the three-for-two stock split, increased by $.12 to $42 per share
for the year ended December 31, 1997 from $.30 per share for the year ended
December 31, 1996.
INTEREST INCOME. Interest income for the year ended December 31,
1997 increased by $283,000 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.
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.
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 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 $394,000 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
13
<PAGE>
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 was
recorded on the consolidated statements of financial condition and therefore
stockholders' equity is unaffected.
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 were offset against a
capital loss carryforward recognized for tax purposes during 1995. A capital
loss carryforward of approximately $297,000 remained available, as of December
31, 1997 to offset future capital gains and will expire in the year 2000.
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
1998, the Bank borrowed an additional $5.0 million from the FHLB of Chicago.
Advances from the FHLB of Chicago at December 31, 1998 totaled $34.1 million.
Total deposits increased by $1.2 million during 1998. 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, 1998, the
Bank's liquidity ratio was 8.8% compared with 15.0% for the year ended December
31, 1997. 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 one-to- four family, condominium and
multi-family residential properties, and purchasing 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 equity line of credit products for homeowners and
investors.
During the year ended December 31, 1998, the Company originated and
purchased $30.3 million in mortgage, consumer, and commercial loans compared
with $18.1 million during 1997. The Company received $27.6 million in principal
repayments during 1998 compared with $7.9 million during 1997. The Company also
purchased $38.6 million of U. S. Government agency securities and
mortgage-backed securities, and repurchased $3.9 million in Company stock during
1998.
At December 31, 1998, the Company had $1.8 million in outstanding
loan commitments and unused lines of credit.
14
<PAGE>
Certificates of deposit scheduled to mature in one year or less at
December 31, 1998, totaled approximately $28.6 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 do not earn
interest and 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, 1998, 1997 and 1996.
CAPITAL REQUIREMENTS
Current regulatory standards impose the following capital
requirements on the Bank and other thrifts: a risk-based capital standard
expressed as a percentage of risk-adjusted assets, a leverage ratio of core
capital to total adjusted assets, and a tangible capital ratio expressed as a
percentage of total adjusted assets. As of December 31, 1998, the Bank exceeded
its regulatory capital standards. At such date, the Bank's tangible capital,
core capital and risk-based capital of $12.1 million, $12.1 million and $12.3
million, respectively, exceeded the applicable minimum requirements by $10.2
million or 8.2%, $8.4 million or 6.7%, and $8.3 million or 16.6%, 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, the Financial Accounting Standards Board ("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 determined it does not have
separate operating segments and disclosure requirements under this statement do
not apply.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", which is effective for fiscal
years beginning after December 15, 1997. This statement amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88,"
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". The statement
standardizes the disclosure requirements of Statements No. 87 and No. 106 to the
extent practicable and recommends a parallel format for presenting information
about pensions and other postretirement benefits. Statement 132 only addresses
disclosure and does not change any of the measurement or recognition provisions
provided for in Statements No. 87, No. 88, or No. 106. This adoption of this
statement did not have a material effect on the Company's financial statements.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the first quarter of
the fiscal year beginning after June 15, 1999. The statement establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and to hedging activities. This statement is not expected to have a
material effect on the Company's financial statements when adopted.
In October 1998, FASB issued SFAS No. 134, "Accounting for
mortgage-backed securities retained after the securitization of mortgage loans
held for sale by a Mortgage Banking Enterprise", which is effective for fiscal
years beginning after December 15, 1998. The statement requires that after
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or retained
interest based on its ability and intent to sell or hold those investments, as
discussed in SAS 115, "Accounting for Certain Investments in Debt and Equity
Securities." The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
15
<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, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Chicago, Illinois
February 12, 1999
16
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Cash and due from banks $ 810 727
Interest-bearing deposits 2,413 2,937
Federal funds sold 5,722 5,976
Investment in dollar denominated mutual funds 801 1,477
-------- --------
Total cash and cash equivalents 9,746 11,117
Investment securities available for sale, at fair value (note 2) 14,880 23,250
Mortgage-backed securities held to maturity,
at amortized cost (note 3) 4,478 5,841
Mortgage-backed securities available for sale, at fair value (note 4) 10,884 --
Stock in Federal Home Loan Bank of Chicago, at cost 1,705 1,705
Loans receivable, net of allowance for loan losses of $214
and $208 in 1998 and 1997 82,123 79,031
Accrued interest receivable (note 6) 849 1,060
Premises and equipment, net (note 7) 1,021 1,043
Other assets 146 31
-------- --------
Total assets $125,832 123,078
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
--------- --------
<S> <C> <C> <C>
Liabilities:
Deposit accounts (note 8) $ 76,222 75,041
Borrowed funds (note 9) 34,100 29,100
Advance payments by borrowers for taxes and
insurance 1,036 1,239
Accrued interest payable and other liabilities 1,152 1,250
--------- --------
Total liabilities 112,510 106,630
--------- --------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 500,000 shares;
none outstanding -- --
Common stock, $.01 par value. Authorized 3,500,000 shares;
issued 1,914,105 shares 19 19
Additional paid-in capital 13,437 13,767
Retained earnings, substantially restricted 11,127 11,139
Treasury stock, at cost (651,182 and 484,293 shares in 1998 and 1997) (10,664) (7,706)
Accumulated other comprehensive income (loss), net of tax (153) (216)
Common stock acquired by Employee Stock Ownership
Plan (note 14) (444) (555)
--------- --------
Total stockholders' equity 13,322 16,448
Commitments and contingencies
--------- --------
Total liabilities and stockholders' equity $ 125,832 123,078
========= ========
</TABLE>
18
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1998, 1997, and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Interest income:
Loans receivable $5,924 5,968 5,168
Interest-bearing deposits and federal funds sold 472 280 246
Investment securities available for sale 1,592 1,832 2,301
Mortgage-backed securities available for sale 141 -- 77
Mortgage-backed securities held to maturity 340 470 582
Investment in mutual funds 51 101 23
Dividends on FHLB stock 124 100 71
------ ------ ------
Total interest income 8,644 8,751 8,468
------ ------ ------
Interest expense:
Deposit accounts 3,266 3,201 3,285
Borrowed funds 1,838 1,772 1,355
------ ------ ------
Total interest expense 5,104 4,973 4,640
------ ------ ------
Net interest income before provision for loan losses 3,540 3,778 3,828
Provision for loan losses (note 5) 6 -- 8
------ ------ ------
Net interest income after provision for loan losses 3,534 3,778 3,820
------ ------ ------
Noninterest income:
Gain on sale of mortgage loans held for sale 3 -- --
Gain on sale of investment securities available for sale 75 60 88
Fees and service charges 263 211 190
Other 18 20 23
------ ------ ------
Total noninterest income 359 291 301
------ ------ ------
Noninterest expense:
Compensation and benefits 1,695 1,602 1,438
Occupancy expense 479 474 424
Professional fees 264 149 166
Data processing 194 169 127
Advertising and promotion 138 133 156
Federal deposit insurance premium 46 47 200
SAIF assessment -- -- 486
Recognition and retention plan (note 15) -- 74 75
Other 330 422 392
------ ------ ------
Total noninterest expense 3,146 3,070 3,464
------ ------ ------
Income before income taxes 747 999 657
Income tax expense (note 10) 235 363 165
------ ------ ------
Net income $ 512 636 492
====== ====== ======
Earnings per share:
Basic $ .42 .45 .31
Diluted .40 .42 .30
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 14 13,629 10,949 (2,599)
Net income -- -- 492 --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale -- -- -- --
Reclassification adjustments in gains included in net income -- -- -- --
Change in minimum pension liability -- -- -- --
------- ------- ------- -------
Comprehensive income (loss) -- -- 492 --
Payment on ESOP loan -- -- -- --
Market adjustment for common ESOP shares -- 62 -- --
Amortization of award for RRP stock -- -- -- --
Purchase of treasury stock, 175,916 shares -- -- -- (2,759)
Cash dividend ($.27 per share) -- -- (453) --
Options exercised and reissuance of treasury stock -- (3) -- 18
------- ------- ------- -------
Balance at December 31, 1996 14 13,688 10,988 (5,340)
Net income -- -- 636 --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale -- -- -- --
Reclassification adjustments for gains included in net income -- -- -- --
Change in minimum pension liability -- -- -- --
------- ------- ------- -------
Comprehensive income -- -- 636 --
Payment on ESOP loan -- -- -- --
Market adjustment for common ESOP shares -- 158 -- --
Amortization of award of RRP Stock -- -- -- --
Purchase of treasury stock, 134,350 shares -- -- -- (2,803)
Cash dividend ($.32 per share) -- -- (485) --
Options exercised and reissuance of treasury stock -- (74) -- 437
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)
Net income -- -- 512 --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale -- -- -- --
Reclassification adjustments for gains included in net income -- -- -- --
Change in minimum pension liability -- -- -- --
------- ------- ------- -------
Comprehensive income -- -- 512 --
Payment on ESOP loan -- -- -- --
Market adjustment for common ESOP shares -- 141 -- --
Purchase of treasury stock, 223,291 shares -- -- -- (3,868)
Cash dividend ($.40 per share) -- -- (524) --
Options exercised and resistance of treasury stock -- (471) -- 910
------- ------- ------- -------
Balance at December 31, 1998 $ 19 13,437 11,127 (10,664)
======= ======= ======= =======
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
ACCUMULATED COMMON
OTHER STOCK
COMPREHENSIVE ACQUIRED BY DEFERRED
INCOME (LOSS), NET ESOP COMPENSATION TOTAL
------------------ ----------- ------------ -------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 (38) (778) (149) 21,028
Net income -- -- -- 492
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale (821) -- -- (821)
Reclassification adjustments in gains included in net income 53 -- -- 53
Change in minimum pension liability 20 -- -- 20
------- ------- ------- -------
Comprehensive income (loss) (748) -- -- (256)
Payment on ESOP loan -- 111 -- 111
Market adjustment for common ESOP shares -- -- -- 62
Amortization of award for RRP stock -- -- 75 75
Purchase of treasury stock, 175,916 shares -- -- -- (2,759)
Cash dividend ($.27 per share) -- -- -- (453)
Options exercised and reissuance of treasury stock -- -- -- 15
------- ------- ------- -------
Balance at December 31, 1996 (786) (667) (74) 17,823
Net income -- -- -- 636
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale 582 -- -- 582
Reclassification adjustments for gains included in net income 40 -- -- 40
Change in minimum pension liability (52) -- -- (52)
------- ------- ------- -------
Comprehensive income 570 -- -- 1,206
Payment on ESOP loan -- 112 -- 112
Market adjustment for common ESOP shares -- -- -- 158
Amortization of award of RRP Stock -- -- 74 74
Purchase of treasury stock, 134,350 shares -- -- -- (2,803)
Cash dividend ($.32 per share) -- -- -- (485)
Options exercised and reissuance of treasury stock -- -- -- 363
3 for 2 stock split effected in the form of a stock dividend -- -- -- --
------- ------- ------- -------
Balance at December 31, 1997 (216) (555) -- 16,448
Net income -- -- -- 512
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale (146) -- -- (146)
Reclassification adjustments for gains included in net income 49 -- -- 49
Change in minimum pension liability 160 -- -- 160
------- ------- ------- -------
Comprehensive income 63 -- -- 575
Payment on ESOP loan -- 111 -- 111
Market adjustment for common ESOP shares -- -- -- 141
Purchase of treasury stock, 223,291 shares -- -- (3,868)
Cash dividend ($.40 per share) -- -- -- (524)
Options exercised and resistance of treasury stock -- -- -- 439
------- ------- ------- -------
Balance at December 31, 1998 (153) (444) -- 13,322
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 512 636 492
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 95 96 63
Provision for deferred income taxes 44 43 125
Provision for loan losses 6 -- 8
Deferred loan fees, net of amortization 74 36 (110)
Amortization of premiums and discounts (6) (43) (100)
ESOP and RRP compensation expense 252 344 186
Gain on sale of investment securities available for sale (75) (60) (88)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 211 (35) (66)
(Increase) decrease in other assets (115) 273 (233)
Increase (decrease) in other liabilities, net 87 47 (418)
-------- -------- --------
Net cash provided by (used in) operating activities 1,085 1,337 (141)
-------- -------- --------
Cash flows from investing activities:
Maturities of investment securities available for sale 29,335 5,250 5,000
Maturities of investment securities held to maturity -- -- 500
Purchase of investment securities available for sale (27,562) (11,694) (15,746)
Proceeds from sales of investment securities available for sale 6,596 8,780 12,180
Proceeds from sales of mortgage-backed securities
available for sale -- -- 6,600
Repayments of mortgage-backed securities
held to maturity 1,354 1,628 1,953
Repayments of mortgage-backed securities available for sale 138 -- 237
Purchase of mortgage-backed securities available for sale (11,097) -- --
Loan originations (31,044) (18,093) (26,844)
Loan repayments 27,872 12,404 9,729
Purchase of Federal Home Loan Bank of
Chicago stock -- (500) (581)
Purchase of premises and equipment (73) (78) (290)
-------- -------- --------
Net cash used in investing activities (4,481) (2,303) (7,262)
-------- -------- --------
</TABLE>
21 (Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in deposit accounts $ 1,181 1,430 (1,558)
Increase in borrowed funds 5,000 5,000 12,350
(Decrease) increase in advance payments by
borrowers for taxes and insurance (203) 36 124
Payment of cash dividend (524) (485) (453)
Proceeds from stock options exercised 439 296 15
Purchase of treasury stock (3,868) (2,803) (2,759)
-------- -------- --------
Net cash provided by financing activities 2,025 3,474 7,719
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,371) 2,508 316
Cash and cash equivalents at beginning of year 11,117 8,609 8,293
-------- -------- --------
Cash and cash equivalents at end of year $ 9,746 11,117 8,609
======== ======== ========
Supplemental disclosures of cash flow information -
cash payments during the year for:
Interest $ 5,094 4,949 4,586
Income taxes 370 -- 136
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
22 (Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
North Bancshares, Inc. (the Company) was incorporated in August 1993 as
a holding company to purchase 100% of the common stock of North Federal
Savings Bank (Savings Bank) and subsidiary. The Savings Bank converted
from the mutual form to a stock form institution, and North Bancshares,
Inc. completed its initial public offering on December 21, 1993 at which
time it purchased all of the outstanding shares of the Savings Bank. The
accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practice within the thrift
industry.
The following is a description of the more significant of those policies
which the Company follows in preparing and presenting its consolidated
financial statements.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, the Savings Bank, and its wholly owned subsidiary, North
Financial Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) MANAGEMENT ESTIMATES
In order to prepare the consolidated financial statements in
conformity with generally accepted accounting principles,
management is required to make certain estimates that affect the
amounts reported in the consolidated financial statements and
accompanying notes. These estimates may differ from actual
results.
(c) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Investment and mortgage-backed securities available for sale are
securities which may be sold in the future and are recorded at
estimated fair value. Unrealized gains and losses are included as
a separate component of stockholders' equity, net of related tax
effects. Other than temporary declines in the market value of
securities are charged to operations. Gains and losses on the sale
of securities are determined using the specific identification
method.
(d) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
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 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.
23 (Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(f) LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less
deferred loan 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 market conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Savings Bank's allowance for loan losses.
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 losses in the portfolio. 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.
24 (Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(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.
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) 1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Numerator -
net income $ 512 636 492
Denominator:
Basic earnings per share - weighted
average outstanding shares 1,230,678 1,424,476 1,603,879
Effect of dilutive stock options
outstanding 42,842 77,084 61,158
Diluted earnings per share - adjusted
weighted average shares outstanding 1,273,520 1,501,560 1,665,037
Basic earnings per share $ .42 .45 .31
Diluted earnings per share $ .40 .42 .30
</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.
25 (Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(m) FINANCIAL REPORTING OF SEGMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 establishes standards for the way public
business enterprises report information about operating segments
in annual financial statements. Operating segments are components
of an enterprise for which separate financial information is
available, and is evaluated regularly by management in deciding
how to allocate resources and in assessing performance. SFAS 131
establishes standards for related disclosures about products,
services, geographic areas, and major customers. The Company
operates as a single segment.
(n) RECLASSIFICATION
Certain reclassifications of prior year amounts have been made
to conform with the current year presentation.
(2) INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of investment securities
available for sale as of December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Government agency
securities $ 13,948 5 (31) 13,922
Equity securities 1,021 -- (163) 858
Other 100 -- -- 100
---------- ---------- ---------- ----------
$ 15,069 5 (194) 14,880
========== ========== ========== ==========
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
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>
26 (Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The amortized cost and estimated fair value of investment securities
available for sale by contractual maturity at December 31, 1998 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>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------- --------------
<S> <C> <C>
Due after five years through ten years $ 3,507 3,489
Due after ten years 10,541 10,533
No stated maturity - equity securities 1,021 858
------------- --------------
$ 15,069 14,880
============= ==============
</TABLE>
Proceeds from sales of investment securities available for sale during
1998 were $6,596, with gross gains of $90, and gross losses of $15.
Proceeds from sales of investment securities available for sale during
1997 were $8,780, with gross gains of $217, and gross losses of $157.
Proceeds from sales of investment securities available for sale during
1996 were $12,180, with gross gains of $97, and gross losses of $9.
(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,
1998 and 1997:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
December 31, 1998:
Government National Mortgage
Association $ 121 6 -- 127
Federal Home Loan Mortgage
Corporation 3,701 104 (41) 3,764
Federal National Mortgage
Association 656 1 (15) 642
--------- --------- --------- ---------
$ 4,478 111 (56) 4,533
========= ========= ========= =========
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- --------- --------- ---------
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>
27 (Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
There were no sales of mortgage-backed securities held to maturity
during 1998, 1997, or 1996.
(4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of mortgage-backed
securities available for sale are summarized as follows as of December
31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1998:
Federal Home Loan Mortgage
Corporation $ 9,960 -- (70) 9,890
Federal National Mortgage
Association 997 -- (3) 994
---------- ---------- ---------- ----------
$ 10,957 -- (73) 10,884
========== ========== ========== ==========
</TABLE>
There were no sales of mortgage-backed securities available for sale
during 1998, 1997, or 1996.
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Mortgage loans:
One-to-four-family $73,568 71,770
Multi family 7,098 6,459
------- ------
Total mortgage loans 80,666 78,229
Commercial loans 1,007 806
Consumer loans 816 282
------- ------
Total loans receivable 82,489 79,317
Less:
Deferred loan fees, net 152 78
Allowance for loan losses 214 208
------- ------
$82,123 79,031
======= ======
Weighted average interest rate 7.44% 7.78%
======= ======
</TABLE>
28 (Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Activity in the allowance for loan losses is summarized as follows:
1998 1997 1996
---- ---- ----
Balance at beginning of year $208 208 200
Provision for loan losses 6 -- 8
---- --- ---
Balance at end of year $214 208 208
==== === ===
Loans receivable delinquent three months or more at December 31, are as
follows:
PERCENTAGE
NUMBER OF TOTAL
OF LOANS AMOUNT LOANS
------------- -------------- -------------
1998 1 24 .03%
1997 -- -- .00
1996 1 1 .00
============= ============== =============
The Company did not have any loans considered to be impaired during
1998, 1997 or 1996.
Mortgage loans serviced for others amounted to approximately $82, $129,
and $137 at December 31, 1998, 1997, and 1996, respectively.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Loans receivable $ 487 488
Mortgage-backed securities 107 68
Investment securities 225 504
Stock in Federal Home Loan Bank of Chicago 30 --
------------ -----------
$ 849 1,060
============ ===========
</TABLE>
29 (Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(7) PREMISES AND EQUIPMENT
The cost of premises and equipment, less accumulated depreciation and
amortization, is summarized as follows as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Land $ 280 280
Office building 1,138 1,134
Furniture, fixtures, and equipment 1,120 1,088
Leasehold improvements 87 87
------------- ------------
2,625 2,589
1,604 1,546
------------- ------------
$ 1,021 1,043
============= ============
</TABLE>
Included in occupancy expense is depreciation and amortization of
premises and equipment of $95, $96, and $63 for the years ended December
31, 1998, 1997, and 1996, respectively.
30 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(8) DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 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% $ 13,642 17.9% 2.75% $15,282 20.4%
Non-interest bearing demand
accounts -- 1,789 2.3 -- 1,208 1.6
NOW accounts 2.02 8,740 11.5 2.02 8,429 11.2
Money market deposit accounts 3.78 10,143 13.3 3.35 5,544 7.4
--------- ----------- ------- ----------- ------- -----
34,314 45.0 30,463 40.6
----------- ------- ------- -----
Certificate accounts:
Fixed rate 5.75-8.11 459 .6 5.75-8.11 447 .6
Money market certificates:
91 day 4.34 814 1.1 4.90 736 1.0
Six month 4.82 6,993 9.2 5.43 7,423 9.9
One year 5.15 9,296 12.2 5.61 9,491 12.6
One and one-half year 5.43 2,388 3.1 5.85 8,002 10.7
Two year 5.60 2,772 3.6 5.55 2,722 3.6
Two and one-half year 5.70 824 1.1 5.74 1,093 1.5
Three, four, and five year 6.10 18,362 24.1 6.14 14,664 19.5
--------- ----------- ------- ---------- ------- -----
41,908 55.0 44,578 59.4
----------- ------- ------- -----
Total deposit accounts $ 76,222 100.0% $75,041 100.0%
=========== ======= ======= ======
Weighted average interest rate 4.34% 4.51%
======== ==========
Contractual maturity of certificate accounts:
Under 12 months $ 28,574 68.2% $25,601 57.5%
12 to 36 months 9,152 21.8 14,948 33.5
Over 36 months 4,182 10.0 4,029 9.0
---------- ------- ------- -----
$ 41,908 100% $44,578 100.0%
========== ======= ======= =====
</TABLE>
Certificates of deposit of $100 or more totaled $6,261, $6,137, and
$5,780 at December 31, 1998, 1997, and 1996, respectively.
31 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Interest expense for deposit accounts is summarized as follows for the
years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Passbook $ 397 426 458
NOW Accounts 159 158 144
Money market deposit accounts 309 214 192
Certificate accounts 2,401 2,403 2,491
------ ----- -----
$3,266 3,201 3,285
====== ===== =====
</TABLE>
(9) BORROWED FUNDS
Borrowed funds are summarized as follows as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ----------------------------
WEIGHTED WEIGHTED
INTEREST INTEREST
RATE AMOUNT RATE AMOUNT
--------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Secured advances from the FHLB of
Chicago maturing:
1998 --% $ -- 6.17% $ 8,000
1999 6.11 3,000 6.11 3,000
2001 5.89 7,350 5.89 7,350
2002 5.43 10,750 5.43 10,750
2008 4.77 13,000 -- --
--------------- -------------- --------------- -----------
5.34% $ 34,100 5.82% $ 29,100
=============== ============== =============== ===========
</TABLE>
All advances are fixed rate. Certain advances are callable by the FHLB
on a quarterly basis. Advances in the amount of $10,000 with a scheduled
maturity of 2002 are callable beginning in 1999. Advances with a
scheduled maturity of 2008 in the amount of $10,000 are callable
beginning in 1999, and the remaining $3,000 callable beginning in 2001.
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 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(10) INCOME TAXES
Income tax expense (benefit) is comprised as follows for the years ended
December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Federal:
Current $ 198 336 91
Deferred 93 46 110
------------ ------------ -----------
291 382 201
------------ ------------ -----------
State:
Current (7) (16) (51)
Deferred (49) (3) 15
------------ ------------ -----------
(56) (19) (36)
------------ ------------ -----------
$ 235 363 165
============ ============ ===========
</TABLE>
Income tax expense resulted in an effective tax rate of 31.5%, 36.4% and
25.1% for the years ended December 31, 1998, 1997, and 1996,
respectively. The reasons for the difference between the effective tax
rate and the statutory Federal income tax rate are shown below.
<TABLE>
<CAPTION>
PERCENTAGE OF EARNINGS BEFORE INCOME
TAXES
-----------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Federal income tax rate 34.0% 34.0 34.0
Items affecting Federal income tax rate:
State income tax, net of federal benefit (7.5) (1.0) (7.8)
Utilization of capital loss carryforward (2.0) (2.3) (4.2)
Nondeductible compensation expense 5.0 3.1 2.8
Other, net 2.0 2.6 .3
------------ ------------- ------------
Effective income tax rate 31.5% 36.4 25.1
============ ============= ============
</TABLE>
33 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax liabilities and deferred tax
assets at December 31 are:
<TABLE>
<CAPTION>
1998 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 123 34
Excess of tax bad debt reserve over base year 107 156
Deferred loan fees 87 71
--------------- ---------------
Gross deferred tax liabilities 350 294
--------------- ---------------
Deferred tax assets:
State net operating loss carryforwards 160 104
Capital loss carryforward 98 115
Unrealized loss on securities available for sale 103 39
Pension expense 41 66
Allowance for losses on loans 83 81
--------------- ---------------
Gross deferred tax assets 485 405
Less valuation allowance (98) (115)
--------------- ---------------
Net deferred tax assets 387 290
--------------- ---------------
Net deferred tax liability (asset) $ (37) 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, 1998 and 1997.
Retained earnings at December 31, 1998 include $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 $254 which will expire in
the year 2000, and net operating loss carryforwards for state income tax
purposes of approximately $3,370 which will expire in the year 2013.
34 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(11) 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.
(12) 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.
The Company's pension plan data for the years ended December 31, 1998
and 1997 is shown below.
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,085 2,856
Service cost 43 43
Interest cost 235 219
Actuarial loss 88 86
Benefits paid (130) (119)
--------------- -------------
Benefit obligation at end of year $ 3,321 3,085
=============== =============
Change in plan assets:
Fair value of plan assets at beginning of year $ 2,702 2,524
Actual return on plan assets 411 183
Company contributions 111 114
Benefits paid (130) (119)
--------------- -------------
Fair value of plan assets at end of year $ 3,094 2,702
=============== =============
</TABLE>
35 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Reconciliation of funded status:
Funded status $(227) (383)
Unrecognized net actuarial loss 400 502
Unrecognized transition asset (15) (20)
Unrecognized prior service cost (10) (11)
----- ----
Prepaid benefit cost $ 148 88
===== ====
</TABLE>
Net pension cost for the years ended December 31, 1998, 1997, and 1996
includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Service cost benefits earned during the year $ 43 43 74
Interest cost on projected benefit obligation 235 219 208
Actual return on plan assets (236) (187) (181)
Net amortization and deferral 8 (31) (13)
----- ---- ----
$ 50 44 88
===== ==== ====
</TABLE>
The projected benefit obligation was determined using an assumed
weighted average discount rate of 7.0%, 7.75%, and 8.0% in 1998, 1997,
and 1996, respectively, and an assumed compensation increase of 4% in
1998, 1997, and 1996. The assumed weighted average long-term rate of
return on plan assets was assumed to be 9% in 1998, 1997, and 1996.
(13) 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 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, 1998, there were 6,747
additional shares available for grant under the Plan.
The Company follows 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 1998 and 1997 was $.58 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, 1998 and 1997,
respectively: expected dividend yield of 3.25% and 2.5%; expected
volatility factors of .05% and .04%; risk-free interest rates of 4.8%
and 5.4%; and expected lives of 10 years. There were no stock options
granted in 1996.
36 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Under SFAS No. 123, the Company is required to disclose pro forma net
income and earnings per share for 1998, 1997, and 1996 as if
compensation expense relative to the fair value of options granted had
been included in earnings. Had the Company determined compensation
expense 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>
1998 1997 1996
------ ----- ----
<S> <C> <C> <C>
Net income:
As reported $ 512 636 492
Pro forma 507 614 492
Earnings per share:
Basic:
As reported .42 .45 .31
Pro forma .41 .43 .31
Diluted:
As reported .40 .42 .30
Pro forma .40 .41 .30
====== ===== ====
</TABLE>
A summary of the status of the Company's stock option transactions under
the Plan for the years ended December 31, 1998, 1997, and 1996 is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 142,553 $ 7.39 174,549 $ 6.75 176,631 $ 6.75
Granted 12,500 13.95 12,416 13.66 -- --
Exercised (56,402) 7.01 (44,412) 6.67 (2,082) 6.67
------- -------- ------- ------ ------- -------
Outstanding and
exercisable at
end of year 98,651 8.44 142,553 7.39 174,549 6.75
=================================================================================================
</TABLE>
At December 31, 1998, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $6.67 to $13.95
and 5 years, respectively.
37 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(14) 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 $444 and $555 at December 31, 1998
and 1997, respectively. In 1998 and 1997, contributions to the ESOP
which were used to fund principal and interest payments on the ESOP debt
totaled $152 and $161, respectively.
(15) 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 participants vest in the shares
and the unamortized cost is reflected as a reduction of stockholders'
equity as deferred compensation. At December 31, 1997, all 73,314 shares
have vested. The Company recorded compensation expense in 1997 and 1996
of $74 and $75, respectively. The awards were fully vested as of
December 31, 1997.
(16) COMPREHENSIVE INCOME
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December
15, 1997. This statement establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company adopted this
statement effective January 1, 1998.
38 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
The following table sets forth the required disclosures of the
reclassification amounts as presented on the statement of changes in
stockholders' equity and the related tax effects allocated to each
component of other comprehensive income for the periods indicated.
<TABLE>
<CAPTION>
BEFORE TAX NET
TAX (EXPENSE) OF TAX
AMOUNT BENEFIT AMOUNT
------------ --------------- ------------
<S> <C> <C> <C>
Year ended December 31, 1998:
Disclosure of reclassification amount:
Unrealized holding loss on securities arising
during the period $ (242) 96 (146)
Less: reclassification adjustment for gain
included in net income 75 (26) 49
Reduction of liability for employee pension plan 268 (108) 160
------------ --------------- ------------
Change in other comprehensive income $ 101 (38) 63
============ =============== ============
Year ended December 31, 1997:
Disclosure of reclassification amount:
Unrealized holding gain on securities
arising during the period $ 1,000 (418) 582
Less: reclassification adjustment for gain
included in net income 60 (20) 40
Additional liability adjustment for employee
pension plan (86) 34 (52)
------------ --------------- ------------
Change in other comprehensive income $ 974 (404) 570
============ =============== ============
Year ended December 31, 1996:
Disclosure of reclassification amount:
Unrealized holding loss on securities
arising during the period $(1,368) 547 (821)
Less: reclassification adjustment for gain
included in net income 88 (35) 53
Reduction of liability for employee pension plan 34 (14) 20
------------ --------------- ------------
Change in other comprehensive income (loss) $(1,246) 498 (748)
============ =============== ============
</TABLE>
39 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(17) REGULATION AND SUPERVISION
The Savings 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, 1998, that the Savings Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998 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, 1998 and 1997 are presented in the table below.
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES
------------------------------- ------------------------------
AMOUNT RATIO AMOUNT RATIO
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk weighted
assets) $ 12,316 24.58% $ 4,009 8.0%
Tier 1 capital (to risk weighted
assets) 12,102 24.15 N/A N/A
Tier 1 Capital (to average assets) 12,102 9.68 3,749 3.0
Tangible capital (to average
assets) 12,102 9.68 1,874 1.5
=============== ============== ============== ==============
As of December 31, 1997:
Total capital (to risk weighted
assets) $ 11,771 25.38% $ 3,710 8.0%
Tier 1 capital (to risk weighted
assets) 11,563 24.93 N/A N/A
Tier 1 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>
40 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(18) COMMITMENTS AND CONTINGENCIES AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of its business. These instruments include
commitments to originate loans 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, 1998 and 1997 of $1,814
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, 1998 represent
commitments for fixed rate loans with an average interest rate of 7.10%
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.
(19) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INVESTMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (Statement 107), requires the
disclosure of estimated fair values of all asset, liability, and
off-balance sheet financial instruments. The estimated fair value
amounts under Statement 107 have been determined as of a specific point
in time utilizing various available market information, assumptions, and
appropriate valuation methodologies. Accordingly, the estimated fair
values presented herein are not necessarily representative of the
underlying value of the Company. Rather the disclosures are limited to
reasonable estimates of the fair value of only the Company's financial
instruments. The use of assumptions and various valuation techniques, as
well as the absence of secondary assets for certain financial
instruments, will likely reduce the comparability of fair value
disclosures between financial institutions. The Company does not plan to
sell most of its assets or settle most of its liabilities at these fair
values. The estimated fair values of the Company's financial instruments
as of December 31 are set forth in the following table.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 810 810 727 727
Interest-bearing deposits 2,413 2,413 2,937 2,937
Federal funds sold 5,722 5,722 5,976 5,976
Investment in dollar denominated
mutual funds 801 801 1,477 1,477
Investment securities available for sale 14,880 14,880 23,250 23,250
Mortgage-backed securities held to maturity 4,478 4,533 5,841 5,936
Mortgage-backed securities
available for sale 10,884 10,884 -- --
Loans receivable 82,123 82,879 79,031 80,679
Accrued interest receivable 849 849 1,060 1,060
------------- ----------- ------------- -----------
$ 122,960 123,475 120,299 122,042
============= =========== ============= ===========
</TABLE>
41 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Financial liabilities:
Deposit accounts $ 76,222 76,683 75,041 75,215
Borrowed funds 34,100 34,162 29,100 28,703
Accrued interest payable 246 246 236 236
------------- ----------- -------------- -------------
$ 110,568 111,091 104,377 104,154
============= =========== ============== =============
</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.
(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.
42 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(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.
(20) PARENT COMPANY ONLY FINANCIAL INFORMATION
The condensed statements of financial condition as of December 31, 1998
and 1997 and the condensed statements of operations and cash flows for
each of the years in the three-year period ended December 31, 1998 for
the Parent Company only is presented below and should be read in
conjunction with other notes to the consolidated financial statements.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY)
----------------------------------------------------------------------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Assets:
Cash held at Savings Bank $ 58 852
Interest-bearing deposits 145 141
Investment in dollar denominated mutual funds 4 581
Investment securities available for sale 958 620
Accrued interest receivable 5 8
Other assets 20 2,778
Investment in Savings Bank 12,034 11,507
-------------- -------------
Total assets $ 13,224 16,487
Liabilities - other liabilities $ (98) 39
Stockholders' equity:
Common stock 19 19
Additional paid-in capital 13,437 13,767
Retained earnings 11,127 11,139
Treasury stock, at cost (10,664) (7,706)
Accumulated other comprehensive income (loss), net of tax (153) (216)
Common stock acquired by Employee Stock Ownership Plan (444) (555)
-------------- -------------
Total stockholders' equity 13,322 16,448
-------------- -------------
Total liabilities and stockholders' equity $ 13,224 16,487
==============================================================================================
</TABLE>
43 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY)
-------------------------------------------------------------------------------------------------------
1998 1997 1996
----------- -------------- --------------
<S> <C> <C> <C>
Equity in earnings of the Savings Bank $ 512 576 439
Interest income 93 181 157
Gain on sale of investment securities available for sale,
net 43 67 81
Other income -- -- 4
Noninterest expense (156) (195) (203)
----------- -------------- --------------
Income before income taxes 492 629 478
Income tax benefit 20 7 14
----------- -------------- --------------
Net income $ 512 636 492
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
------------------------------------------------------------------------------------------------------
1998 1997 1996
----------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 512 636 492
Adjustments to reconcile net income to net cash
from operating activities:
Amortization of premiums and discounts -- (2) 1
Amortization of cost of stock benefit plans 111 186 186
Decrease (increase) in accrued interest 3 (1) 63
(Decrease) increase in other liabilities (66) 108 20
(Increase) decrease in other assets 2,758 248 (3,025)
Gain on sale of investment securities
available for sale, net (43) (67) (81)
Equity in earnings of the Savings Bank (512) (576) (439)
----------- -------------- -------------
Net cash provided by (used in) operating
activities 2,763 532 (2,783)
----------- -------------- -------------
Cash flows from investing activities:
Purchase of investment securities available for
sale (1,156) (2,994) (625)
Maturities of investment securities available for
sale 100 1,000 1,000
Proceeds from sale of investment securities
available for sale 601 1,785 2,207
----------- -------------- -------------
Net cash provided by (used in) investing
activities (455) (209) 2,582
----------- -------------- -------------
======================================================================================================
</TABLE>
44 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ------------
Cash flows from financing activities:
<S> <C> <C> <C>
Cash dividend from Savings Bank $ 278 3,444 3,332
Payment of cash dividends (524) (485) (453)
Proceeds from stock options exercised 439 296 15
Purchase of treasury stock (3,868) (2,803) (2,759)
------------ ------------- ------------
Net cash (used in) provided by financing
activities (3,675) 452 135
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents (1,367) 775 (66)
Cash and cash equivalents at beginning of year 1,574 799 865
------------ ------------- ------------
$ 207 1,574 799
============ ============= ============
</TABLE>
(21) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain unaudited income and expense and
per share data on a quarterly basis for the three month periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
------------- ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income $ 2,149 2,119 2,173 2,203
Interest expense 1,240 1,256 1,298 1,310
------------- ------------ ------------- -------------
Net interest income before provision for
loan losses 909 863 875 893
Provision for loan losses -- -- -- 6
------------- ------------ ------------- -------------
Net interest income after provision for
loan losses 909 863 875 887
Fees and service charges 59 66 69 69
Gain (loss) on sale of investment
securities available for sale 39 20 24 (5)
Other noninterest income 4 5 6 3
Noninterest expense 798 823 797 728
------------- ------------ ------------- -------------
Income before income taxes 213 131 177 226
Income tax expense 58 65 64 48
------------- ------------ ------------- -------------
Net income $ 155 66 113 178
============= ============ ============= =============
Basic earnings per share $ .12 .05 .09 .16
============= ============ ============= =============
Diluted earnings per share $ .12 .05 .09 .14
============= ============ ============= =============
Cash dividends per share $ .10 .10 .10 .10
============= ============ ============= =============
</TABLE>
45 (Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
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 available for sale 48 6 (1) 7
Other noninterest income 4 5 4 7
Noninterest expense 746 796 798 730
------------- ------------ ------------- -------------
Income before income taxes 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 per share $ .08 .08 .08 .08
============= ============ ============= =============
</TABLE>
46
<PAGE>
BOARD OF DIRECTORS
MARY ANN HASS ELMER L. HASS GREGORY W. ROSE
Chairman of the Board Retired-Cragin Metals Managing Partner
Products, Inc. Monarch Tool & Die Co.
JAMES L. FERSTEL JOSEPH A. GRABER ROBERT H. RUSHER
Attorney at Law President and Retired-President and
Chief Executive Officer Chief Operating Officer
FRANK J. DONATI, CPA
President
Donati Financial Services, Inc.
CURRENT OFFICERS
JOSEPH A. GRABER VICTOR E. CAPUTO MARTIN W. TROFIMUK
President and Executive Vice President Vice President and
Chief Executive Officer and Secretary and Chief Treasurer
Operating Officer
KARLA A. LAUER JOHN K. TAYLOR EMILIE V. REITER
Vice President-Services Vice President-Loans Assistant Secretary
North Federal North Federal Savings Bank
Savings Bank
CATHERINE J. HARPER SUSAN L. RODRIGUEZ D. ROBERT HARLESS
Assistant Vice President Assistant Secretary Assistant Vice
North Federal Savings Bank North Federal Savings Bank President North
Federal Savings Bank
47
<PAGE>
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 1998 and 1997. The prices have been
adjusted to reflect a three-for-two stock split effected in the form of a 50%
stock dividend on December 29, 1997. The Common Stock began trading on December
21, 1993. On March 1, 1999, North Bancshares, Inc. had approximately 200
shareholders of record and 400 beneficial shareholders. As of such date, there
were 1,258,585 shares of common stock issued and outstanding.
1998 1997
- ------------------------------------------------------------------
HIGH LOW HIGH LOW
- ------------------------------------------------------------------
First Quarter 18.500 17.500 13.167 10.500
Second Quarter 18.000 15.375 13.417 12.750
Third Quarter 15.375 11.250 16.333 12.833
Fourth Quarter 12.500 11.000 18.875 15.667
INVESTOR 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] 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 28, 1999, 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
48
<PAGE>
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 LLP
303 East Wacker Drive
Chicago, IL 60601-5255
49
EXHIBIT 23 - CONSENT OF ACCOUNTANTS
The Board of Directors
North Bancshares, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-82356) on Form S-8 of North Bancshares, Inc. of our report dated February 12,
1999, relating to the consolidated statements of financial condition of North
Bancshares, Inc. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998, which report appears in the December 31, 1998 annual report on Form 10-KSB
of North Bancshares, Inc.
KPMG LLP
Chicago, Illinois
March __, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTIANS 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 810
<INT-BEARING-DEPOSITS> 2,413
<FED-FUNDS-SOLD> 5,722
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,880
<INVESTMENTS-CARRYING> 15,069
<INVESTMENTS-MARKET> 14,880
<LOANS> 82,123
<ALLOWANCE> 214
<TOTAL-ASSETS> 125,832
<DEPOSITS> 76,222
<SHORT-TERM> 10,350
<LIABILITIES-OTHER> 2,188
<LONG-TERM> 23,750
0
0
<COMMON> 19
<OTHER-SE> 13,303
<TOTAL-LIABILITIES-AND-EQUITY> 125,832
<INTEREST-LOAN> 5,924
<INTEREST-INVEST> 2,596
<INTEREST-OTHER> 124
<INTEREST-TOTAL> 8,644
<INTEREST-DEPOSIT> 3,266
<INTEREST-EXPENSE> 1,838
<INTEREST-INCOME-NET> 3,540
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 75
<EXPENSE-OTHER> 3,146
<INCOME-PRETAX> 747
<INCOME-PRE-EXTRAORDINARY> 747
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 512
<EPS-PRIMARY> .42
<EPS-DILUTED> .40
<YIELD-ACTUAL> 3.70
<LOANS-NON> 0
<LOANS-PAST> 24
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 214
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 214
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 214
</TABLE>
<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
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0
0
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</TABLE>
