SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 $9.3 million in gross income for the year ended December
31, 1999.
As of March 1, 2000, there were issued and outstanding 1,231,270 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, 2000 was approximately $7,820,688. (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, 1999
PART III of Form 10-KSB--Portions of Proxy Statement for the Annual Meeting of
Stockholders for the fiscal year ended December 31, 1999.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C>
Item 1. Description of Business 2
Item 2. Description of Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6. Management's Discussion and Analysis or Plan of Operation 27
Item 7. Financial Statements 27
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 27
PART III
Item 9. Directors, Executive Officers, Promoters and Control Person;
Compliance with Section 16 (a) of the Exchange Act 27
Item 10. Executive Compensation 27
Item 11. Security Ownership of Certain Beneficial Owners and Management 27
Item 12. Certain Relationships and Related Transactions 28
Item 13. Exhibits and Reports on Form 8-K 28
SIGNATURES 30
</TABLE>
1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
North Bancshares, Inc. (the "Company" or "North Bancshares") is a
Delaware corporation which was organized in 1993 by North Federal Savings Bank
("North Federal" or the "Bank") for the purpose of becoming the Bank's holding
company. The Company owns all of the capital stock of the Bank which was issued
on December 21, 1993 in connection with the Bank's 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 1,231,207 shares of common stock outstanding at December
31, 1999. 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, 1999,
the Company had total consolidated assets of $130.7 million, deposits of $76.5
million, and stockholders' equity of $11.3 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 acquires participations 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
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with the approval of an authorized executive officer, the words or phrases "will
likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market area and competition, that could
cause actual results to differ materially from historical 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
The Year 2000 issue arose from the inability of some computer systems
to recognize the year 2000. Many 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.
The Company experienced no problems with hardware or software systems
at the beginning of the year 2000 and continues to experience no problems or
issues related to the millenium issue. The Company is not aware of any borrowers
incurring significant Year 2000 issues or any vendors used by the Company which
have incurred significant Year 2000 issues. The Company spent approximately
$40,000 on Year 2000 related hardware, software and contingency planning over
the past two years.
A contingency plan, which involves processing transactions at the
third-party data processors back-up recovery site, disaster recovery programs in
the event of electrical failures, manual bookkeeping systems and additional cash
requirements was approved by the board of directors and will be maintained by
management during the year 2000 in the event that unanticipated Year 2000 issues
arise.
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, 1999, the Bank's total loans
outstanding totaled $89.4 million, of which $76.3 million, or 85.4%, were one-
to four-family residential mortgage loans. Of the one- to four-family mortgage
loans outstanding at that date, 82.1% were fixed-rate loans (69.2% of total
gross loans receivable), including balloon loans, and 17.9% were adjustable-rate
loans (16.2% of total gross loans receivable). At that same date, multi-family
residential mortgage loans totaled $10.5 million, of which $10.2 million were
fixed-rate balloon loans.
At December 31, 1999, the balance of the Bank's loans included of $2.6
million in consumer and commercial real estate loans, which represented 2.9% of
the Bank's gross loan portfolio.
The Bank also invests in mortgage-backed securities. At December 31,
1999, mortgage-backed securities, available for sale totaled $15.3 million or
11.7% of total assets. At such date, all
3
<PAGE>
of the mortgage-backed securities portfolio was insured or guaranteed by Ginnie
Mae, Freddie Mac or Fannie Mae.
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,
1999, the maximum amount which the Bank could have lent under this limit to any
one borrower and the borrower's related entities was approximately $1.8 million.
At December 31, 1999, 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, 1999 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 $945,000, respectively. Each of these is a loan or group of loans
secured by either a first mortgage on real estate or a first lien on real
property and each of these loans was current as of December 31, 1999.
4
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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,
------------------------------------------------------------
1999 1998 1997
------------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family............... $76,287(1) 85.35% $73,568 89.19% $71,770 90.49%
Multi-family...................... 10,548(2) 11.80 7,098 8.60 6,459 8.14
------- ----- ------- ----- ------- -----
Total real estate loans........ 86,835 97.15 80,666 97.79 78,229 98.63
------- ----- ------- ----- ------- -----
CONSUMER LOANS:
Deposit account................... 104 0.12 102 0.12 127 0.16
Automobile........................ 16 .02 -- -- 1 --
Home equity and home
improvement...................... 1,485 1.65 714 0.87 154 0.19
------- ----- ------- ----- ------- -----
Total consumer loans.............. 1,605 1.79 816 0.99 282 0.35
------- ----- ------- ----- ------- -----
COMMERCIAL LOANS.................. 945 1.06 1,007 1.22 806 1.02
------- ----- ------- ----- ------- -----
Total loans receivable............ 89,385 100.00% 82,489 100.00% 79,317 100.00%
------- ====== ------- ====== ------- ======
LESS:
Deferred fees and discounts....... 165 152 78
Allowance for loan losses......... 231 214 208
------- ------- -------
Total loans receivable, net..... $88,989 $82,123 $79,031
======= ======= =======
MORTGAGE-BACKED
SECURITIES:
FNMA.............................. 2,373 15.57% 1,638 10.69% 934 16.06%
GNMA.............................. 23 .15 121 .79 182 3.13
FHLMC............................. 12,842 84.28 13,564 88.52 4,699 80.81
------- ----- ------- ----- ------- -----
Total mortgage-backed
securities.................... 15,238 100.00% 15,323 100.00% 5,815 100.00%
====== ====== ======
Net premiums ...................... 97 112 26
------- ------- -------
Net mortgage-backed $15,335 $15,435 $ 5,841
securities........................ ======= ======= =======
</TABLE>
- -----------------------
(1) This amount includes a total of $4.9 million of 5, 7 and 10 year balloon
loans.
(2) This amount includes a total of $10.2 million of 5, 7 and 10 year balloon
loans.
5
<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,
-------------------------------------------------------------------------
1999 1998 1997
------------------------ -------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- -------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
One- to four-family................... $61,823(1) 69.16% $58,312 70.69% $50,707 63.93%
Multi-family.......................... 10,118(2) 11.32 7,098 8.61 6,459 8.14
------- ----- ------- ----- ------- -----
Total fixed-rate real estate loans... 71,941 80.48 65,410 79.30 57,166 72.07
Consumer.............................. 511 0.57 341 0.41 222 0.28
Commercial............................ 945 1.06 1,007 1.22 806 1.02
------- ----- ------- ----- ------- -----
Total fixed-rate loans............... 73,397 82.11 66,758 80.93 58,194 73.37
------- ----- ------- ----- ------- -----
ADJUSTABLE-RATE LOANS:
Real estate:
One- to four-family................... 14,464 16.18 15,256 18.49 21,063 26.56
Multi-family.......................... 430 .48 -- -- -- --
Consumer.............................. 1,094 1.23 475 .58 60 .07
------- ----- ------- ----- ------- -----
Total adjustable rate loans.......... 15,988 17.89 15,731 19.07 21,123 26.63
------- ----- ------- ----- ------- -----
Total loans receivable.............. 89,385 100.00% 82,489 100.00% 79,317 100.00%
====== ====== ======
LESS:
Deferred fees and discounts............ 165 152 78
Allowance for loan losses.............. 231 214 208
------- ------- -------
Total loans receivable, net........... $88,989 $82,123 $79,031
======= ======= =======
</TABLE>
- -----------------------
(1) This amount includes a total of $4.9 million of 5, 7 and 10 year balloon
loans.
(2) This amount includes a total of $10.2 million of 5, 7 and 10 year balloon
loans.
6
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1999. 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, 2000 which
have a pre-determined interest rate is $71.4 million, while the amount of loans
due after such date with floating rates is $16.0 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,
- ------------------------------
2000(1)....................... $ 620 7.81% $ 1,062 8.40% $ 3 4.83% $945 10.00% $ 2,630 8.83%
2001.......................... 1,976 7.32 410 8.44 15 4.79 -- 0.00 2,401 7.50
2002.......................... 408 8.09 629 8.09 46 8.14 -- 0.00 1,083 8.09
2003 and 2004................. 1,952 7.50 4,120 7.72 1,150 8.35 -- 0.00 7,222 7.76
2005 to 2009.................. 5,586 7.51 4,327 7.64 33 8.13 -- 0.00 9,946 7.57
2010 to 2014.................. 7,341 7.05 -- 0.00 358 7.88 -- 0.00 7,699 7.09
2015 and following............ 58,404 7.26 -- 0.00 -- 0.00 -- 0.00 58,404 7.26
------- ---- ------- ---- ------ ---- ---- ----- ------- ----
$76,287 7.27% $10,548 7.81% $1,605 8.19% $945 10.00% $89,385 7.39%
======= ==== ======= ==== ====== ==== ==== ===== ======= ====
</TABLE>
- -----------------------
(1) Includes demand loans, loans having no stated maturity, and past due loans.
7
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ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
The cornerstone of the Bank's lending program has been the origination
of permanent loans, to be held in its portfolio, secured by mortgages on
owner-occupied 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, 1999, $76.3 million, or
85.3%, 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
1999, the Bank continued to emphasize 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 25 of
these loans totaling $6.8 million during 1999 and plans to continue to emphasize
this type of lending during 2000.
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, 1999, the total balance of one- to four-family
ARMs, which includes equity lines of credit, was $14.5 million, or 16.2% 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, 1999, the
Bank had multi-family real estate loans totaling $10.6 million, or 11.8% of the
Bank's gross loan portfolio. The largest multi-family loan at December 31, 1999
was $1.0 million and represented a 50% participation with a local financial
institution. At December 31, 1999, 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
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on competitive factors. Multi-family real estate loans are generally written in
amounts of up to 75% of the appraised value of the property, and borrowers are
personally liable for all of the indebtedness.
Appraisals on properties securing multi-family loans are performed by
independent appraisers designated by the Bank at the time the loan is made. All
appraisals on multi-family loans are reviewed by the Bank's loan committee. In
addition, the Bank's current underwriting procedures require verification of the
borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property.
Multi-family loans generally present a higher level of risk than loans
secured by one- to four- family residences. This greater risk is due to several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed, or a bankruptcy court modifies a lease
term), the borrower's ability to repay the loan may be impaired.
CONSUMER LENDING
The Bank originates a variety of different types of consumer loans,
including 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 1999 and plans to
continue to emphasize this type of lending during 2000, particularly home equity
and rehabilitation loans, because of their attractive yields, shorter terms to
maturity, and community need. At December 31, 1999, $1.6 million or 1.8% of the
Bank's gross loan portfolio, consisted of consumer loans compared with $816,000
or .99% at December 31, 1998.
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,
1999, the Bank had $391,000 of home equity loans outstanding, or .44% 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, 1999, the Bank had $1.1 million
of outstanding line of credit loans and $1.7 million in unused credit line
commitments compared with $475,000 of outstanding line of credit loans and
$695,000 in unused credit line commitments at December 31, 1998.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
the ability to meet existing obligations and payments on the proposed loan.
Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount. While consumer loans other than
home equity loans generally involve a higher level of credit risk than one- to
four-family residential loans, consumer loans are typically made at higher
interest rates or for shorter terms. The shorter term of consumer loans
increases the interest rate sensitivity of the lending institution's portfolio.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency
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<PAGE>
laws, may limit the amount which can be recovered on such loans. Although the
Bank had no delinquent consumer loans at December 31, 1999 there can be no
assurance that delinquencies will not occur in the future.
COMMERCIAL LENDING
In order to further enhance the yield on its assets, the Bank issued a
commercial line of credit to a manufactured housing developer to finance the
period of time between the delivery of a unit to closing. This period is usually
between 60 to 90 days. The line of credit is collateralized by a secured
interest in the individual units and any related sales contracts. In addition,
the line of credit is personally guaranteed by the developer. The loan-to-value
ratio will range between 50% to 60% at any given time. At December 31, 1999, the
outstanding line of credit amounted to $1.5 million and the balance was
$945,000. The line of credit carries a fixed rate of interest on a one-year
renewable basis and was current as of December 31, 1999. 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, 1999, mortgage-backed securities
available for sale totaled $15.3 million, or 11.7% of the Bank's total assets.
For information regarding the amortized cost and market values of North
Federal's mortgage-backed securities portfolio, see Note 4 of the Notes to
Consolidated Financial Statements contained in the Annual Report to Stockholders
filed as Exhibit 13 hereto.
Under the OTS' risk-based capital requirements, GNMA mortgage-backed
securities have a zero percent risk-weighting and FNMA, FHLMC and AA- or higher
rated mortgage-backed securities have a 20% risk-weighting, in contrast to the
50% risk-weighting carried by one- to four-family performing residential
mortgage loans. None of the mortgage-backed securities held by the Bank at
December 31, 1999 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.
10
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The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at December 31, 1999. 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,
-------------------------------------------------------------------------------------------- 1999
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>
FHLMC $ -- $ 99 $ 46 $ 3 $ 892 $11,896 $ -- $12,936
FNMA 458 -- -- -- -- 1,918 -- 2,376
GNMA -- -- 23 -- -- -- -- 23
----- ---- ---- -- ----- ------- ----- -------
Total $ 458 $ 99 $ 69 $ 3 $ 892 $13,814 $ -- $15,335
===== ==== ==== === ===== ======= ===== =======
</TABLE>
11
<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,
-----------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans receivable (gross) at beginning of period... $ 82,489 $ 79,317 $ 73,628
-------- -------- --------
Originations and purchases by type:
- -----------------------------------
Fixed Rate:
Real estate - one- to four-family............... 13,470 23,889 8,746
- multi-family.................. 3,464 3,106 2,519
- consumer and commercial....... 1,997 1,143 274
Non-real estate - consumer and commercial....... 54 78 81
-------- -------- --------
Total fixed rate loans originated............. 18,985 28,216 11,620
Adjustable Rate:
Real estate - one- to four-family............... 4,554 2,828 6,473
- multi-family.................. 430 -- --
-------- -------- --------
Total adjustable rate loans originated........ 4,984 2,828 6,473
Sales......................................... -- 230 --
Principal repayments.............................. 17,073 27,642 12,404
-------- --------
Total loans at end of period................. $ 89,385 $ 82,489 $ 79,317
======== ======== ========
Mortgage-backed securities (net) at beginning of
period........................................... $ 15,435 $ 5,841 $ 7,465
Purchases...................................... 3,627 11,097 --
Repayments..................................... 1,761 1,354 1,628
Sales.......................................... 2,005 -- --
Change in unrealized gain (loss) on mortgage-
backed securities available-for-sale.......... (774) 73 --
Amortization of premiums and discounts......... 6 76 4
-------- -------- --------
Mortgage-backed securities (net) at end of
period...................................... $ 14,528 $ 15,435 $ 5,841
======== ======= =======
</TABLE>
12
<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 upon the property is sold at public auction and may be purchased by
the Bank. Delinquent consumer loans are handled in a 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 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, 1999, the Bank had no loans 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.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
One- to four-family.................. $ -- $ 24 $ -- $ -- $ 24
Consumer............................. -- -- -- 1 --
----- ----- ----- ----- -----
Total non-performing assets....... $ -- $ 24 $ -- $ 1 $ 24
===== ===== ===== ===== =====
Total as a percentage of total assets.. 0.00% 0.02% 0.00% 0.00% 0.02%
===== ===== ===== ===== =====
</TABLE>
OTHER LOANS OF CONCERN. As of December 31, 1999, 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, 1999.
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
13
<PAGE>
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, which may order additional general or
specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the problem assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. There were no
classified assets at December 31, 1999.
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 1999, a provision for loss in the amount of $17,000 increased the
allowance for loan losses due to increased perceived risk in 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 Notes 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, 1999,
the Bank had an allowance for loan losses of $231,000, which was equal to .26%
of loans receivable.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
Year Ended December 31,
----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of year .. $214 $208 $208 $200 $160
Charge-offs:
One- to four-family ......... -- -- -- -- --
Consumer .................... -- -- -- -- --
Recoveries .................... -- -- -- -- --
---- ---- ---- ---- ----
Net charge-offs ............... -- -- -- -- --
Additions charged to operations 17 6 -- 8 40
---- ---- ---- ---- ----
Balance at end of year ........ $231 $214 $208 $208 $200
==== ==== ==== ==== ====
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.
14
<PAGE>
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Unallocated......................... $231 $214 $208 $208 $200
---- ---- ---- ---- ----
Total.......................... $231 $214 $208 $208 $200
==== ==== ==== ==== ====
</TABLE>
INVESTMENT ACTIVITIES
North Federal must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has maintained liquid
assets at levels significantly above the minimum requirements imposed by the OTS
regulations and above levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
maintained. See "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
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, 1999, the Company's interest-bearing deposits with
banks and dollar denominated money market accounts totaled $1.7 million, or 1.3%
of total assets. Investment securities, consisting of U.S. government
securities, federal agency obligations and FHLB stock, totaled $19.3 million, or
14.8% of total assets, and investment in federal funds sold totaled $2.4 million
or 1.8% 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, 1999, the weighted average term to maturity or
repricing of the investment portfolio, excluding FHLB stock, equity securities
and mortgage-backed securities, was two months.
15
<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,
------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
CARRYING % OF CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government agency securities .......... $ 16,436 85.36% $ 13,922 83.95% $ 22,630 90.69%
FHLB stock ................................. 2,205 11.45 1,705 10.28 1,705 6.83
Other ...................................... 63 0.33 100 0.60 200 0.80
Equity securities .......................... 551 2.86 858 5.17 420 1.68
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities and FHLB stock $ 19,255 100.00% $ 16,585 100.00% $ 24,955 100.00%
========== ========== ========== ========== ========== ==========
Other Interest-Earning Assets:
Interest-bearing deposits with banks ....... $ 1,260 $ 2,413 $ 2,937
Dollar denominated mutual funds ............ 466 801 1,477
Federal funds sold ......................... 2,439 5,722 5,976
---------- ---------- ----------
Total ................................... $ 4,165 $ 8,936 $ 10,390
========== ========== ==========
Average remaining life or term to repricing of
investment securities and other interest-earning
assets, excluding FHLB stock and equity securities.. 2 mos. 3 mos. 3 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, 1999
-----------------------------------------------------------
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 $ -- $ 503 $17,443 $17,946 $16,436
Other ........................... -- 63 -- 63 63
------- ------- ------- ------- -------
Total investment securities . $ -- 566 $17,443 $18,009 16,499
======= ======= ======= ======= =======
Weighted average yield(1) ....... --% 7.22% 6.64% 6.66%
======= ======= =======
</TABLE>
- -----------------------
(1) The weighted average yield is based upon the interest rate in effect at
December 31, 1999.
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.
16
<PAGE>
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 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, 1999. 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,
----------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
TRANSACTION AND SAVINGS DEPOSITS:
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts 2.75%........................ $13,088 17.1% $13,642 17.9% $15,282 20.4%
NOW Accounts 2.02%............................. 8,592 11.2 8,740 11.5 8,429 11.2
Non-Interest Bearing Demand Accounts........... 2,278 3.0 1,789 2.3 1,208 1.6
Money Market Deposit Accounts 0.00% -5.25%..... 15,704 20.5 10,143 13.3 5,544 7.4
------- ----- ------- ----- ------- -----
Total Non-Certificates......................... 39,662 51.8 34,314 45.0 30,463 40.6
------- ----- ------- ----- ------- -----
TOTAL CERTIFICATES:
- -------------------
0.00 - 4.99%................................. 13,074 17.1 6,076 8.0 885 1.2
5.00 - 5.99%................................. 14,728 19.3 24,714 32.4 30,775 41.0
6.00 - 6.99%................................. 5,460 7.1 6,889 9.0 9,043 12.1
7.00 - 7.99%................................. 3,297 4.3 3,919 5.2 3,764 5.0
8.00 - 8.99%................................. 285 0.4 310 0.4 111 0.1
------- ----- ------- ----- ------- -----
Total Certificates............................. 36,844 48.2 41,908 55.0 45,578 59.4
------- ----- ------- ----- ------- -----
Total Deposits................................. $76,506 100.0% $76,222 100.0% $75,041 100.0%
======= ===== ======= ====== ======= ======
</TABLE>
17
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Opening balance ................... $ 76,222 $ 75,041 $ 73,611
Deposits .......................... 134,200 117,369 108,398
Withdrawals ....................... 137,136 119,251 110,169
Interest credited ................. 3,220 3,063 3,201
-------- -------- --------
Ending balance .................... $ 76,506 $ 76,222 $ 75,041
======== ======== ========
Net increase (decrease) ........... $ 284 $ 1,181 $ 1,430
======== ======== ========
Percent increase (decrease) ....... 0.37% 1.57% 1.94%
======== ======== ========
</TABLE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1999.
<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)
Certificate accounts maturing
in quarter ending :
- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 2000 .......... $ 5,512 $ 1,110 $ -- $ 1,464 $ -- $ 8,086 21.95%
June 30, 2000 ........... 4,896 479 353 1,614 -- 7,342 19.93
September 30, 2000 ...... 945 5,439 930 -- -- 7,314 19.85
December 31, 2000 ....... 292 2,266 443 24 -- 3,025 8.21
March 31, 2001 .......... 718 696 -- -- -- 1,414 3.84
June 30, 2001 ........... 296 412 12 14 -- 734 1.99
September 31, 2001 ...... 189 67 188 -- -- 444 1.20
December 31, 2001 ....... 75 283 400 6 -- 764 2.07
March 31, 2002 .......... 99 557 408 120 27 1,211 3.29
June 30, 2002 ........... 29 379 294 -- -- 702 1.91
September 30, 2002 ...... -- 71 1,189 20 59 1,339 3.63
December 31, 2002 ....... -- 69 301 35 43 448 1.22
Thereafter .............. 23 2,900 942 -- 156 4,021 10.91
------- ------- ------- ------- ------- ------- ------
Total ................ $13,074 $14,728 $ 5,460 $ 3,297 $ 285 $36,844 100.00%
======= ======= ======= ======= ======= ======= ======
Percent of total ..... 35.49% 39.97% 14.82% 8.95% 0.77% 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
18
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1999.
<TABLE>
<CAPTION>
MATURITY
-------------------------------------------
OVER OVER
3 MONTHS 3 TO 6 6 TO 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CERTIFICATES OF DEPOSIT OF LESS THAN
$100,000 .......................... $ 7,116 $ 5,945 $ 8,694 $ 9,155 $30,910
CERTIFICATES OF DEPOSIT OF $100,000
OR GREATER ........................ 970 1,397 1,645 1,922 5,934
------- ------- ------- ------- -------
TOTAL CERTIFICATES OF DEPOSIT ...... $ 8,086 $ 7,342 $10,339 $11,077 $36,844
======= ======= ======= ======= =======
</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, 1999, the Bank's FHLB of
Chicago advances totaled $41.1 million.
The following table sets forth certain information regarding borrowings
at and for the dates indicated:
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------------------------------------------------
(DOLLARS IN THOUSANDS)
FHLB OF CHICAGO ADVANCES
<S> <C> <C> <C>
Average balance outstanding......................... $ 38,292 $ 32,792 $ 28,192
Maximum amount outstanding at any month
end during the year........................ 41,100 37,100 34,100
Balance outstanding at end of year.................. 41,100 34,100 29,100
Weighted average interest rate during the
year....................................... 5.39% 5.61% 6.29%
Weighted average interest rate at end of
year....................................... 5.48% 5.34% 5.82%
</TABLE>
SUBSIDIARY AND OTHER ACTIVITIES
As a federally chartered savings bank, North Federal is permitted by
OTS regulations to invest up to 2% of its assets in the stock of, or unsecured
loans to, service corporation subsidiaries. North Federal may invest an
additional 1% of its assets in service corporations where such additional funds
are used for inner-city or community development purposes.
At December 31, 1999 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
19
<PAGE>
its subsidiary was $12 at December 31, 1999. For the year ended December 31,
1999, North Financial Corporation had net income of $1.
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, 1999, the Bank's lending limit under this restriction was $3.1
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
20
<PAGE>
premium. Risk classification of all insured institutions will be made by the
FDIC for each semi-annual assessment period. At December 31, 1999, the Bank was
classified as a well-capitalized institution.
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 ("FICO") for resolving the thrift crisis in the
1980's, in the amount equal to 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to 1.52 basis
points for each $100 in domestic deposits. It is expected that the assessment
will soon be changed to approximately 2 basis points for all insured
institutions regardless of fund. 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, 1999, the Bank
had tangible capital of $11.9 million, or 9.0% of adjusted total assets, which
is approximately $9.9 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 institution's supervisory rating.
Core capital generally consists of tangible capital plus certain intangible
assets. At December 31, 1999, North Federal had core capital equal to $11.9
million, or 9.0% of adjusted total assets, which is $8.0 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, 1999.
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, 1999, North Federal had total capital of $12.1 million
(including $11.9 million in core capital and $231,000 in qualifying
supplementary capital) and risk-weighted assets of $56.9 million or total
capital of 21.4% of risk-weighted assets. This amount was $7.6 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.
21
<PAGE>
The imposition by the OTS or the FDIC of any of these measures on North
Federal may have a substantial adverse effect on the Bank's operations and
profitability. The Company's shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
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, 1999, 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 this record into
account in its evaluation of certain applications, such as a merger or the
establishment of a branch, by the Bank.
22
<PAGE>
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. 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, 1999, the Bank had $2.2 million in FHLB
stock, which was in compliance with this requirement.
For the year ended December 31, 1999, dividends paid by the FHLB of
Chicago to North Federal totaled $129,000. The $40,000 dividend received for the
quarter ended December 31, 1999 reflects an annualized rate of 7.50%.
23
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following is a discussion of material tax matters and does
not purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Company and Bank have not been audited by the IRS
during the last 12 years. For federal income tax purposes, the Company and the
Bank file consolidated income tax returns and report their income on a calendar
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with some exceptions,
such as the Bank's tax reserve for bad debts, discussed below.
RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES
Prior to the enactment, on August 20, 1996, of the Small Business Job
Protection Act of 1996 (the "Small Business Act"), for federal income tax
purposes, thrift institutions such as the Bank, which met certain definitional
tests primarily relating to their assets and nature of their business, were
permitted to establish tax reserves for bad debts and to make annual additions
thereto, which additions could, within specified limitations, be deducted in
arriving at their taxable income. The Bank's deduction with respect to
"qualifying loans," which are generally loans secured by certain interests in
real property, could be computed using the "Experience Method" which would be
the greater of an amount based on a six-year moving average of the Bank's actual
loss experience or an amount which would increase the Bank's reserve for losses
on qualifying real property loans to the base year percentage, or a percentage
equal to 8.0% of the Bank's taxable income (the "PTI Method"), computed without
regard to this deduction and with additional modifications and reduced by the
amount of any permitted addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the Bank
has been 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
24
<PAGE>
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Bank's AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). In addition, for taxable years beginning after December 31,
1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of
AMTI (with certain modifications) over $2 million is imposed on corporations,
including the Bank, whether or not an AMT is paid. Under pending legislative
proposals, the environmental tax would be extended to taxable years beginning
before January 1, 2007. The Bank does not expect to be subject to the AMT, but
may be subject to the environmental tax liability.
Elimination of Dividends. Dividends Received Deduction. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. A 70% dividends received deduction
generally applies with respect to dividends received from domestic corporations
that are not members of such affiliated group, except that an 80% dividends
received deduction applies if the Company and the Bank own more than 20% of the
stock of a corporation paying a dividend. Under pending legislative proposals,
the 70% dividends received deduction would be reduced to 50% with respect to
dividends paid after enactment of such legislation.
STATE AND LOCAL TAXATION
STATE OF ILLINOIS. The Company and the Bank file a combined unitary
Illinois income tax return. For Illinois income tax purposes the Company and the
Bank are taxed at an effective rate equal to 7.3% of Illinois Taxable Income.
For these purposes, "Illinois Taxable Income" generally means federal taxable
income, subject to certain adjustments (including the addition of interest
income on state and municipal obligations and the exclusion of interest income
on 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, credit unions located in the same communities, as well as
mutual funds and other investment alternatives. 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 branch and access to automated teller machines.
EMPLOYEES
At December 31, 1999, the Company had a total of 37 employees,
including two part-time employees. Management considers its employee relations
to be excellent.
25
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following is a description of the Company and the Bank's current
executive officers who are not also directors.
VICTOR E. CAPUTO - Mr. Caputo, age 55, 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.
JOSEPH M. PERRI - Mr. Perri, age 51, joined the Bank as Senior Vice
President and Loan Department Manager in March 2000. He has been involved in
loan origination, operations and management for over 25 years. Prior to joining
the Bank he was Senior Vice President of LaSalle National Bank of Chicago where
he was responsible for nationwide commercial mortgage production. He has also
held executive level lending positions at Savings of America and Exchange
National Bank of Chicago. He is a graduate of the University of Illinois and has
attended the University of Wisconsin and Ohio State University.
MARTIN W. TROFIMUK - Mr. Trofimuk, age 39, 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.
KARLA A. LAUER - Ms. Lauer, age 32, rejoined the Bank as Vice President
in 1997. Ms. Lauer previously worked for the Bank as an Assistant Branch Manager
and a New Accounts Officer in 1994 and 1995. Ms. Lauer has served as a Branch
Manager for the Harris Bank and for Cragin Federal Savings and Loan Association.
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, 1999, the net book value of the Bank's investment
in premises, equipment and leaseholds was approximately $1,020,706. On February
25, 2000, the Bank entered into an agreement to sell the parking lot at 1635 N.
Clark St. for $1.5 million. The transaction is expected to close in the second
quarter of 2000.
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,
1999.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 47 of the Company's 1999 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 1999 Annual Report to Stockholders
are incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 16 through 46 of the Company's 1999 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 2000, a copy of which has been filed with the
Securities and Exchange Commission.
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, 1999, 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 2000, a copy of which has been filed with the
Securities and Exchange Commission.
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 2000, a copy of which will
has been filed with the Securities and Exchange Commission.
27
<PAGE>
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 2000, a copy of which has been filed with
the Securities and Exchange Commission.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
REFERENCE TO
PRIOR FILING
OR EXHIBIT
REGULATION NUMBER
S-B EXHIBIT ATTACHED
NUMBER DOCUMENT HERETO
- --------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3(I) Certificate of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of holders, *
including indentures
9 Voting trust agreement None
10.1 1993 Stock Option and Incentive Plan ***
10.2 Recognition and Retention Plan ***
10.3 Supplemental Employee Stock Retirement Plan *
10.4 Form of employment agreement with Joseph A. *
Graber, Victor E. Caputo and Martin W.
Trofimuk
11 Statement regarding computation of per share None
earnings
13 Annual report to security holders 13
16 Letter on change in certifying accountant None
18 Letter on change in accounting principles None
21 Subsidiaries of Registrant **
22 Published report regarding matters submitted to None
vote
23 Consent of independent accountants 23
24 Power of attorney Not required
27 Financial data schedule 27
28 Information from reports furnished to state None
insurance regulatory authorities
99 Additional exhibits Not required
</TABLE>
- -----------------------
* Filed as exhibits to the Registrant's Form S-1 registration statement
(File No. 33-69444) and incorporated herein by reference.
** Filed as an exhibit to the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1996 and incorporated herein by
reference.
*** 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, 1999 regarding
the release of earnings for September 30, 1999 and a quarterly dividend.
28
<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
- -----------------------------------
Mary Ann Hass, Chairman
Date: March 30, 2000
--------------------------
/s/ James L. Ferstel
- -----------------------------------
James L. Ferstel, Director
Date: March 30, 2000
--------------------------
/s/ Robert H. Rusher
- -----------------------------------
Robert H. Rusher, Director
Date: March 30, 2000
--------------------------
/s/ Elmer L. Hass
- -----------------------------------
Elmer L. Hass, Director
Date: March 30, 2000
--------------------------
/s/ Gregory W. Rose
- -----------------------------------
Gregory W. Rose, Director
Date: March 30, 2000
--------------------------
/s/ Joseph A. Graber
- -----------------------------------
Joseph A. Graber, President and Chief
Executive Officer and Director
Date: March 30, 2000
--------------------------
/s/ Frank J. Donati
- -----------------------------------
Frank J. Donati, Director
Date: March 30, 2000
--------------------------
/s/ Martin W. Trofimuk
- -----------------------------------
Martin W. Trofimuk, Vice President and
Treasurer(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Date: March 30, 2000
--------------------------
[LOGO] NORTH
BANCSHARES, INC.
THE SECRET
OF SUCCESS
IS CONSTANCY
TO PURPOSE
NORTH
BANCSHARES, INC.
1999 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............................ 48
<PAGE>
[LOGO]
NORTH
BANCSHARES, INC.
100 WEST NORTH AVENUE AT CLARK * CHICAGO, ILLINOIS 60610-1399 * (312) 664-4320
March 15, 2000
To Our Shareholders:
We are pleased to present the 1999 Annual Report of North Bancshares,
Inc. The information in this Annual Report is designed to provide a detailed
financial review of 1999 and our outlook for the future. A detailed summary of
our targets and goals are outlined in the "Management's Discussion and Analysis"
section of the report.
During 1999, we continued the process of diversifying our portfolio of
loans to include more apartment building, commercial real estate and consumer
loans. Also, the number and amount of mortgage loans refinanced during 1999
slowed from the torrid pace of 1998 and 1997, allowing us to grow the portfolio.
The niche loan products we have developed as well as our free checking account
product and our money market deposit account, have been well received by the
community. We will continue to market these products in our existing communities
and expand our marketing efforts for these products into the newly revitalized
near north and near northwest sides of the city and around our branch in
Wilmette.
One of the primary objectives of our business plan was accomplished the
first quarter of 2000 with the announced sale of our parking facility. Our
objective was to improve future earnings by turning this property into an
interest earning asset by reducing non-interest expenses associated with real
estate taxes and maintenance on the property and by utilizing certain tax loss
carryforwards. We believe by unlocking this formerly non-earning asset our
shareholders will ultimately benefit in the long term.
We believe the secret to success is constancy to purpose; therefore,
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 our communities and by
offering the products and services that meet those financial needs.
Sincerely,
/s/ Mary Ann Hass
Mary Ann Hass
Chairman of the Board
/s/ Joseph A. Graber
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.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
(IN THOUSANDS)
=================================================================================================================================
SELECTED FINANCIAL CONDITION DATA:
- ----------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $130,689 $125,832 $123,078 $117,473 $111,668
Loans receivable, net 88,989 82,123 79,031 73,378 56,161
Mortgage backed securities held to maturity --- 4,478 5,841 7,465 9,419
Mortgage backed securities available for sale 14,528 10,884 --- --- 6,927
Investment securities held to maturity --- --- --- --- 498
Investment securities available for sale 17,050 14,880 23,250 24,426 27,882
Deposit accounts 76,506 76,222 75,041 73,611 75,169
Borrowed funds 41,100 34,100 29,100 24,100 11,750
Stockholders' equity 11,253 13,322 16,448 17,823 21,028
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
SELECTED OPERATING DATA: 1999 1998 1997 1996 1995
- ------------------------ -----------------------------------------------------------------------------
Total interest income $8,837 $8,644 $8,751 $8,468 $7,525
Total interest expense 5,276 5,104 4,973 4,640 4,144
-----------------------------------------------------------------------------
Net interest income before
provision for loan losses 3,561 3,540 3,778 3,828 3,381
Provision for loan losses 17 6 --- 8 40
-----------------------------------------------------------------------------
Net interest income after provision
for loan losses 3,544 3,534 3,778 3,820 3,341
-----------------------------------------------------------------------------
Non-interest income (loss):
Fees & service charges 282 263 211 190 120
Gain on sale of investment and mortgage-
backed securities and mutual funds 75 75 60 88 245
Gain on sale of loans --- 3 --- --- ---
Other than temporary decline in value of
securities available for sale (66) --- --- --- ---
Other 17 18 20 23 19
-----------------------------------------------------------------------------
Total non-interest income 308 359 291 301 384
Non-interest expense 2,954 3,146 3,070 3,464 2,776
-----------------------------------------------------------------------------
Income before tax expense 898 747 999 657 949
Income tax expense 362 235 363 165 253
-----------------------------------------------------------------------------
NET INCOME $536 $512 $636 $492 $696
=============================================================================
Basic earnings per share $.45 .42 .45 .31 .45
Diluted earnings per share $.44 .40 .42 .30 .42
-----------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS AND
OTHER DATA:
PERFORMANCE RATIOS:
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Return on assets (ratio of net income to
average assets) 0.42% 0.41% 0.53% 0.42% 0.64%
Interest rate spread information:
Average during year 2.30 2.33 2.41 2.53 2.15
End of year 2.35 2.36 2.51 2.57 2.24
Net interest margin 2.83 2.94 3.19 3.36 3.19
Ratio of operating expenses to average assets 2.30 2.54 2.54 2.98 2.57
Efficiency ratio .76 .81 .75 .84 .74
Ratio of average interest-earning assets to
average interest-bearing liabilities 112.76 114.43 118.65 120.61 126.61
ASSET QUALITY RATIOS:
====================================================================================================================================
Non-performing assets to total assets at end
of year 0.00 0.02 0.00 0.00 0.02
Allowance for loan losses to non-performing
loans N/A(1) 891.67 N/A(1) N/A(1) 833.33
Allowance for loan losses to loans receivable 0.26 0.26 0.26 0.28 0.36
CAPITAL RATIOS:
====================================================================================================================================
Stockholders' equity to total assets 8.61 10.59 13.36 15.17 18.83
Average stockholders' equity to average
assets 9.56 11.18 14.03 16.32 19.71
Return on stockholders' equity (ratio of net
income to average equity) 4.36 3.70 3.75 2.59 3.27
Shares outstanding-actual 1,231,207 1,262,893 1,429,812 1,586,925 1,848,717
Book value per share 9.14 10.55 11.59 11.23 11.33
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, 1999, 1997 and 1996.
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, 1999, there
were 1,231,207 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 or borrows funds and uses such funds to
originate or acquire one- to four-family residential mortgages, loans secured by
multi-family apartment buildings, mixed use properties, commercial real estate
loans and equity loans and lines of credit secured by real estate. The Company
also purchases participating interests in multi-family apartment building loans
and commercial real estate loans and maintains a commercial line of credit with
a manufactured housing developer. The Company's shorter term investments are
primarily 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
The Year 2000 issue arose from the inability of some computer systems
to recognize the year 2000. Many 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.
The Company experienced no problems with hardware or software systems
at the beginning of the year 2000 and continues to experience no problems or
issues related to the millenium issue. The Company is not aware of any borrowers
incurring significant Year 2000 issues or any vendors used by the Company which
have incurred significant Year 2000 issues. The Company spent approximately
$40,000 during 1998 and 1999 on Year 2000 related hardware, software and
contingency planning.
A contingency plan, which involves processing transactions at the
third-party data processors back-up recovery site, disaster recovery programs in
the event of electrical failures, manual bookkeeping systems and additional cash
requirements was approved by the board of directors and will be maintained by
management during the year 2000 in the event that unanticipated Year 2000 issues
arise.
MANAGEMENT STRATEGY
THE COMPANY'S THREE YEAR GOALS ARE TO:
o Achieve a 7.5% to 8.0% return on equity (ROE) by the end of fiscal year
2002;
o Achieve a .65% to .75% return on assets (ROA) by the end of fiscal year
2002;
o Increase interest-earning assets by approximately 5% to 7% per year;
o Maintain the Company's record of high asset quality;
o Improve the loan to assets ratio to between 65% to 75%, of which 10% to 15%
would be consumer, multi-family and commercial loans;
o Increase total number and dollar amount of non-interest bearing checking
and other transaction accounts;
o Increase non-interest income by approximately 8% to 10% annually;
o Maintain a high dividend payout ratio;
o Continue to evaluate stock repurchase programs in light of the effect on
earnings per share, book value, stock options exercised and availability of
funds;
o Improve efficiency ratio to 65% by the end of fiscal year 2002.
IN ORDER TO ACHIEVE THESE GOALS THE BANK:
o Will continue to expand consumer and commercial real estate lending;
o Will continue to change the mix of the loan portfolio to include more
adjustable rate and balloon loans;
o Will increase the origination and sale of fixed rate loans into secondary
markets;
o Will continue to focus on shifting liabilities from higher cost
certificates of deposit to lower cost, fee-generating transaction accounts
and money market deposit accounts;
o Will continue to develop relationships with other financial institutions in
order to participate in multi-family apartment and commercial real estate
lending;
o Will continue to expand our third-party loan originator network;
o 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;
o Will continue to review employee benefit plans and other non-interest
expenses in order to achieve additional cost savings;
o Will continue to review development alternatives for the Bank's remaining
real estate owned.
5
<PAGE>
PROGRESS TOWARDS GOALS:
o Increased return on equity 17.8% to 4.36% for the year ended December 31,
1999 from 3.70% for the year ended December 31, 1998;
o Diversified loan portfolio during 1999 with 62% of the loan production in
two-to four-family, multi- family, commercial real estate and equity line
of credit loans;
o Management continued to develop business relationships with other financial
institutions and purchased $3.8 million in multi-family and commercial real
estate participation loans in 1999;
o Loans to assets ratio at the end of 1999 was 68.1%, of which 14.7% were
consumer, commercial real estate and multi-family loans compared with 65.3%
and the end of 1998, of which 10.8% were consumer, commercial real estate
and multi-family loans;
o The Company has maintained its high level of asset quality during 1999; No
loans were delinquent 90 days or more at December 31, 1999;
o Ratio of non-interest expense to average assets reduced from 2.54% at
December 31, 1998 to 2.30% at December 31, 1999;
o Reduced certificates of deposit from 55.0% of total deposits at the end of
1998 to 48.1% at the end of 1999 while increasing money market deposit
accounts by $5.6 million or 54.8% during 1999;
o Increased the number of non-interest bearing checking accounts by 32.6%
during 1999;
o Dividend payout ratio amounted to 100% of diluted earnings per share in
1999;
o Completed eleventh stock repurchase program during 1999;
o The equity to assets ratio has been reduced from 13.4% at December 31, 1997
to 8.6% at December 31, 1999;
o Signed two new correspondent lending agreements with mortgage brokers
during 1999;
o Announced planned sale of parking lot in February 2000.
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 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 to 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,
1999, 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 one year exceeded
total interest-earning assets maturing or repricing in the same period by $13.2
million, representing a cumulative one year gap as a percentage of
interest-earning assets of a negative 10.4%.
The following table sets forth the repricing dates of the Company's
interest-earning assets and interest- bearing liabilities at December 31, 1999
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, consumer
loans and mortgage-backed securities are assumed to prepay at an annual rate of
23.2%. Passbook accounts are assumed to be withdrawn at annual rates of 18.5%,
11.5%, 7.4%, 6.5% and 4.5%, respectively, during the periods shown. Money market
deposit accounts are assumed to be withdrawn at annual rates of 8.5%, 5.2%,
8.5%, 10.2% and 25.0%, respectively, during the periods shown. Transaction
accounts are assumed to be withdrawn at annual rates of 8.9%, 12.7%, 9.4%, 5.7%
and 5.2%, respectively, during the
6
<PAGE>
periods shown. 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, 1999
-------------------------------------------------------------------------------------
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 $9,208 7,948 $24,258 $14,363 $16,594 $72,371
Consumer and commercial loans 1,134 165 543 603 105 2,550
Mortgage-backed securities 2,175 1,617 4,773 2,781 3,989 15,335
Adjustable rate one-to-four family
and multi-family real estate loans 2,157 1,445 5,795 5,067 --- 14,464
Investment securities and other(1) 20,608 503 1,062 --- --- 22,173
--------------------------------------------------------------------------------------
Total interest-earning assets 35,282 11,678 36,431 22,814 20,688 126,893
--------------------------------------------------------------------------------------
Passbook accounts $1,211 $1,099 $1,945 $946 $7,887 $13,088
NOW accounts 382 365 1,640 658 5,547 8,592
Money market deposit accounts 667 639 1,909 4,078 8,411 15,704
Certificate accounts 15,428 10,339 7,056 3,876 145 36,844
Borrowed funds 18,000 12,000 11,100 --- --- 41,100
--------------------------------------------------------------------------------------
Total interest-bearing liabilities 35,688 24,442 23,650 9,558 21,990 115,328
--------------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities ($406) ($12,764) $12,781 $13,256 ($1,302) $11,565
-----------------------------------------------------------------------===============
Cumulative interest rate
sensitivity gap ($406) ($13,170) ($389) $12,867 $11,565
========================================================================
Cumulative interest rate gap as a
percentage of total assets (0.31)% (10.08)% (0.30)% 9.85% 8.85%
========================================================================
Cumulative interest rate gap as a
percentage of interest-earning
assets (0.32)% (10.38)% (0.31)% 10.14% 9.11%
========================================================================
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes investment securities available for sale, FHLB stock and other
interest-earning assets.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans (ARMs), have features which restrict changes in interest rates on a short
term basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
7
<PAGE>
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>
-----------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned\ Yield\ Outstanding Earned\ Yield\ Outstanding Earned\ Yield\
Balance Paid Rate Balance Paid Rate Balance Paid Rate
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable (1) $85,918 $6,365 7.41% $77,962 $5,924 7.60% $76,376 $5,968 7.81%
Investment securities 17,726 1,164 6.57 23,291 1,643 7.05 27,558 1,933 7.02
Mortgage-backed securities 15,618 945 6.05 8,014 481 6.00 6,737 470 6.98
Federal funds sold 2,680 140 5.22 6,837 399 5.84 3,627 207 5.71
Other 4,003 223 5.57 4,274 197 4.61 3,989 173 4.34
------------------------------------------------------------------------------------------------
Total interest-earning assets 125,945 8,837 7.02 120,378 8,644 7.18 118,287 8,751 7.40
------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
MMDA & NOW accounts 21,789 812 3.73 15,492 468 3.02 13,928 372 2.67
Passbook accounts 13,435 369 2.75 14,439 397 2.75 15,495 426 2.75
Certificate accounts 38,026 2,030 5.34 42,472 2,401 5.65 42,082 2,403 5.71
Borrowed funds 38,446 2,065 5.37 32,792 1,838 5.61 28,192 1,772 6.29
------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 111,696 5,276 4.72 105,195 5,104 4.85 99,697 4,973 4.99
------------------------------------------------------------------------------------------------
Net interest income $3,561 $3,540 $3,778
------ ------ ------
Net interest rate spread 2.30% 2.33% 2.41%
---- ---- ----
Net earning assets $14,249 $15,183 $18,590
------- ------- -------
Net interest margin 2.83% 2.94% 3.19%
---- ---- ----
Average interest-earning assets
to average interest-bearing
liabilities 112.76% 114.43% 118.65%
------ ------ ------
</TABLE>
- --------------------------------------------------------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
8
<PAGE>
WEIGHTED AVERAGE YIELD ANALYSIS
The following table presents the yields received on loans,
mortgage-backed securities, investment securities, federal funds and other
interest-earning assets and the rates paid on deposits and borrowed funds and
the resultant interest rate spreads at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
WEIGHTED AVERAGE YIELD ON:
Loans receivable 7.39% 7.44% 7.78%
Investment securities 6.66 6.73 6.90
Mortgage-backed securities (1) 6.18 6.48 7.18
Federal funds 3.88 4.52 5.92
Other 4.24 4.83 5.80
--------------------------------------------------------
Combined weighted average yield on
interest-earning assets 7.06 7.05 7.42
--------------------------------------------------------
WEIGHTED AVERAGE RATE PAID ON:
Passbook accounts 2.75 2.75 2.75
MMDA & NOW accounts 3.93 2.97 2.55
Certificate accounts 5.45 5.58 5.80
Borrowed funds 5.48 5.34 5.82
--------------------------------------------------------
Combined weighted average rate paid on
interest-bearing liabilities 4.71 4.69 4.91
--------------------------------------------------------
SPREAD 2.35% 2.36% 2.51%
========================================================
</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,
----------------------------------------------------------------------------------
1998 vs 1999 1997 vs 1998
----------------------------------------------------------------------------------
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) $589 $(148) $441 $121 $(165) $(44)
Investment securities (2) (366) (113) (479) (301) 9 (292)
Mortgage-backed securities (3) 460 4 464 77 (66) 11
Federal funds sold (217) (42) (259) 187 5 192
Other (15) 41 26 13 12 25
----------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 451 (258) 193 97 (205) (108)
----------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
MMDA & NOW accounts 234 110 344 47 49 96
Passbook accounts (28) --- (28) (29) --- (29)
Certificate accounts (237) (134) (371) 22 (24) (2)
Borrowed funds 304 (77) 227 258 (193) 65
----------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $273 $(101) 172 $298 $(168) 130
----------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $21 ($238)
============= ==============
</TABLE>
- --------------------------------------------------------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses.
(2) Includes investments classified as available for sale and held to maturity.
(3) Includes mortgage-backed securities classified as available for sale and
held to maturity.
10
<PAGE>
CHANGES IN FINANCIAL CONDITION
Total assets amounted to $130.7 million at December 31, 1999, an
increase of $4.9 million from $125.8 million at December 31, 1998. The increase
was primarily attributable to a $6.9 million increase in net loans receivable
and a $2.2 million increase in investment securities available for sale
partially offset by a $3.8 million decrease in cash and cash equivalents.
Net loans receivable amounted to $89.0 million at December 31, 1999, an
increase of $6.9 million from $82.1 million at December 31, 1998. The increase
was due partially to $3.9 million in multi-family and commercial real estate
mortgages originated or purchased during the period and $700,000 in new consumer
loans. The Company originated $24.0 million in mortgage, consumer and commercial
real estate loans during the year ended December 31, 1999 and received $17.1
million in loan repayments during the period compared with $31.0 million in
originations and $27.9 million in repayments during the year ended December 31,
1998.
Investment securities available for sale amounted to $17.1 million at
December 31, 1999, an increase of $2.2 million from $14.9 million at December
31, 1998. The increase was primarily attributable to the reallocation of cash
and cash equivalents into intermediate and longer term investment securities.
Total deposits amounted to $76.5 million at December 31, 1999 compared
with $76.2 million at December 31, 1998. Although total deposits remained stable
there was a $6.0 million increase in checking and money market accounts
partially offset by a $5.1 million decrease in certificates of deposit.
Borrowed funds increased $7.0 million to $41.1 million at December 31,
1999 from $34.1 million at December 31, 1998. The additional borrowings were
used to fund new loan originations during the period.
Stockholders' equity was $11.3 million at December 31, 1999, compared
with $13.3 million at December 31, 1998. The decrease was primarily attributable
to a $1.8 million increase in other comprehensive loss related to an increase in
medium and long term interest rates and their negative effect on the market
value of the available for sale securities portfolios. In addition, the Company
purchased $630,000 in treasury stock during the year which was partially offset
by $269,000 in stock options exercised.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
GENERAL. Net income amounted to $536,000 for the year ended December
31, 1999, an increase of $24,000 from $512,000 for the year ended December 31,
1998. Diluted earnings per share amounted to $.44 for the year ended December
31, 1999, an increase of $.04 or 10%, from $.40 per share for the year ended
December 31, 1998. The increase was primarily attributable to a $192,000
decrease in non-interest expense partially offset by a $127,000 increase in
income tax expense. In addition, there was a slight decrease in the average
number of outstanding shares.
INTEREST INCOME. Interest income was $8.8 million for the year ended
December 31, 1999, a $193,000 increase from $8.6 million for the year ended
December 31, 1998. The increase was primarily attributable to a $5.5 million
increase in average interest earning assets from $120.4 million for the year
ended December 31, 1998 to $125.9 million for the year ended December 31, 1999.
The effect of the increase in average interest earning assets was partially
offset by a decrease in the yield on average interest-earning assets to 7.02%
for the year ended December 31, 1999 from 7.18% for the year ended December 31,
1998. The decrease in the yield was due primarily to proceeds from mortgage loan
prepayments and higher yielding investment securities called prior to maturity,
at the beginning of 1999, which were temporarily reinvested in shorter term
lower yielding investments.
INTEREST EXPENSE. Interest expense increased by $172,000 to $5.3
million for the year ended December 31, 1999 from $5.1 million for the year
ended December 31, 1998. The increase was primarily attributable to a
11
<PAGE>
$227,000 increase in interest on borrowed funds partially offset by a $55,000
decrease in interest on deposit accounts. The average balance of
interest-bearing deposit accounts increased $847,000 to $73.3 million for the
year ended December 31, 1999 from $72.4 million for the year ended December 31,
1998. The average balance of borrowed funds increased $5.6 million to $38.4
million for the year ended December 31, 1999 from $32.8 million for the year
ended December 31, 1998. The increase was due to additional borrowings obtained
to fund loan growth. The annualized average cost of interest-bearing liabilities
improved to 4.72% for the year ended December 31, 1999 from 4.85% for the year
ended December 31, 1998, due primarily to a reduction in the average cost of
certificate accounts from 5.65% for the year ended December 31, 1998 to 5.34%
for the year ended December 31, 1999 and the shift from certificate accounts to
lower costing money market deposit and checking accounts. In addition, there was
a decrease in the average cost of borrowed funds to 5.37% for the year ended
December 31, 1999 from 5.61% for the year ended December 31, 1998.
PROVISION FOR LOAN LOSSES. The Company added $17,000 to its allowance
for loan losses for the year ended December 31, 1999 compared with $6,000 for
the year ended December 31, 1998. The increase is primarily attributable to an
increase in the amount of consumer loans in the loan portfolio. The allowance
for loan losses was $231,000 at December 31, 1999 and amounted to .26% of loans
receivable at December 31, 1999. The allowance for loan losses was $214,000 at
December 31, 1998 and amounted to .26% of loans receivable at December 31, 1998.
Future additions to the Company's allowance are dependent upon various factors
such as 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 $308,000 for the
year ended December 31, 1999, a decrease of $51,000 from $359,000 for the year
ended December 31, 1998. The decrease was primarily attributable to a $66,000
increase in other than temporary decline in value of securities available for
sale partially offset by a $19,000 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 and debit card
transaction fees.
NON-INTEREST EXPENSE. Non-interest expense decreased by $192,000 and
amounted to $3.0 million for the year ended December 31, 1999 compared with $3.1
million for the year ended December 31, 1998. There was a $93,000 decrease in
compensation and benefits expense primarily related to a reduction in staff as
part of the Company's efforts to improve efficiency and lower ESOP and pension
expense. In addition, there was a $92,000 decrease in professional fees
primarily related to a decrease in the number of shareholder proposals and
related issues that required review by counsel and a reduction in tax accounting
expense.
INCOME TAX EXPENSE. The allocation for income taxes increased $127,000
to $362,000 for the year ended December 31, 1999 from $235,000 for the year
ended December 31, 1998. The effective tax rate was 40.3% for the year ended
December 31, 1999 compared with 31.4% for the year ended December 31, 1998. The
increase in income tax expense was primarily related to increased income before
taxes and the increase in the effective rate was primarily attributable to an
Illinois state income tax refund of approximately $53,000 recorded in the fourth
quarter of 1998 that reduced the provision for 1998 income tax. In addition,
there was no tax benefit associated with the $66,000 in other than temporary
decline in value of securities available for sale recorded during 1999.
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-interest income and a decrease in
the weighted average number of shares outstanding.
12
<PAGE>
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 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
13
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary source of funds are deposits, borrowings from the
FHLB of Chicago, amortization and prepayment of loans and mortgage-backed
securities and sales and maturities of other investment securities. The Bank can
also borrow from its correspondent banks. During 1999, the Bank borrowed an
additional $7.0 million from the FHLB of Chicago. Advances from the FHLB of
Chicago at December 31, 1999 totaled $41.1 million. The Bank uses its liquid
resources to fund loan commitments, to 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, 1999, the
Bank's liquidity ratio was 5.6% compared with 8.8% for the year ended December
31, 1998. The decrease in the liquidity ratio 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.
At December 31, 1999, the Company had $1.9 million in loan applications
pending approval and closing and $1.7 million in unused lines of credit.
Certificates of deposit scheduled to mature in one year or less at
December 31, 1999, totaled approximately $25.8 million. Management believes,
based on its ability to adjust rates on those accounts to market levels, that a
significant portion of such deposits will remain with the Company. The Company
will continue to focus on shifting its liability mix from higher cost
certificates of deposit to lower cost transaction accounts that do not earn
interest and produce fee income but will continue to use certificates of deposit
as an alternate funding source.
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, 1999, 1998 and 1997.
CAPITAL REQUIREMENTS
Current regulatory standards impose the following capital requirements
on the Bank and other thrifts: a risk- based capital standard expressed as a
percentage of risk-adjusted assets, a leverage ratio of core capital to total
adjusted assets, and a tangible capital ratio expressed as a percentage of total
adjusted assets. As of December 31, 1999, the Bank exceeded its regulatory
capital standards. At such date, the Bank's tangible capital, core capital and
risk-based capital of $11.9 million, $11.9 million and $12.1 million,
respectively, exceeded the applicable minimum requirements by $9.9 million or
7.5%, $8.0 million or 6.0%, and $7.5 million or 13.4%, respectively.
14
<PAGE>
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 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." On July 7, 1999, the FASB delayed
implementation of SFAS No. 133 until the fiscal year beginning after June 15,
2000 by issuing FASB Statement 137. The statement establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
to hedging activities and also allowed a one-time reclassification of certain
investment securities. This statement was adopted by the Company in 1999, and
did not have a material effect on the Company's financial statements.
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 SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities." The adoption of this statement did not have an effect on the
Company's financial statements.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
North Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial
condition of North Bancshares, Inc. and subsidiary ("the Company") as of
December 31, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Chicago, Illinois
February 11, 2000
16
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1999 1998
-------- --------
<S> <C> <C>
Cash and due from banks $ 1,712 810
Interest-bearing deposits 1,260 2,413
Federal funds sold 2,439 5,722
Investment in dollar denominated mutual funds 466 801
-------- --------
Total cash and cash equivalents 5,877 9,746
Investment securities available for sale, at fair value (note 2) 17,050 14,880
Mortgage-backed securities held to maturity,
at amortized cost (note 3) -- 4,478
Mortgage-backed securities available for sale, at fair value (note 4) 14,528 10,884
Stock in Federal Home Loan Bank of Chicago, at cost 2,205 1,705
Loans receivable, net of allowance for loan losses of $231
and $214 in 1999 and 1998, respectively (note 5) 88,989 82,123
Accrued interest receivable (note 6) 941 849
Premises and equipment, net (note 7) 1,033 1,021
Other assets 66 146
-------- --------
Total assets $130,689 125,832
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
--------- ---------
<S> <C> <C>
Liabilities:
Deposit accounts (note 8) $ 76,506 76,222
Borrowed funds (note 9) 41,100 34,100
Advance payments by borrowers for taxes and
insurance 1,092 1,036
Accrued interest payable and other liabilities 738 1,152
--------- ---------
Total liabilities 119,436 112,510
--------- ---------
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 13,393 13,437
Retained earnings, substantially restricted 11,115 11,127
Treasury stock, at cost (682,868 and 651,182 shares
in 1999 and 1998, respectively) (11,025) (10,664)
Accumulated other comprehensive loss, net of tax (1,916) (153)
Common stock acquired by Employee Stock Ownership
Plan (note 14) (333) (444)
--------- ---------
Total stockholders' equity 11,253 13,322
Commitments and contingencies
--------- ---------
Total liabilities and stockholders' equity $ 130,689 125,832
========= =========
</TABLE>
18
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1999, 1998, and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 6,365 5,924 5,968
Interest-bearing deposits and federal funds sold 204 472 280
Investment securities available for sale 1,164 1,592 1,832
Mortgage-backed securities available for sale 945 141 --
Mortgage-backed securities held to maturity -- 340 470
Investment in mutual funds 25 51 101
Dividends on FHLB stock 134 124 100
------- ------- -------
Total interest income 8,837 8,644 8,751
------- ------- -------
Interest expense:
Deposit accounts 3,211 3,266 3,201
Borrowed funds 2,065 1,838 1,772
------- ------- -------
Total interest expense 5,276 5,104 4,973
------- ------- -------
Net interest income before provision for loan losses 3,561 3,540 3,778
Provision for loan losses (note 5) 17 6 --
------- ------- -------
Net interest income after provision for loan losses 3,544 3,534 3,778
------- ------- -------
Noninterest income:
Gain on sale of mortgage loans held for sale -- 3 --
Gain on sale of investment and mortgage-backed securities available for sale 75 75 60
Other than temporary decline in value of securities available for sale (66) -- --
Fees and service charges 282 263 211
Other 17 18 20
------- ------- -------
Total noninterest income 308 359 291
------- ------- -------
Noninterest expense:
Compensation and benefits 1,602 1,695 1,602
Occupancy expense 447 479 474
Professional fees 172 264 149
Data processing 194 194 169
Advertising and promotion 132 138 133
Federal deposit insurance premium 45 46 47
Recognition and retention plan (note 15) -- -- 74
Other 362 330 422
------- ------- -------
Total noninterest expense 2,954 3,146 3,070
------- ------- -------
Income before income tax expense 898 747 999
Income tax expense (note 10) 362 235 363
------- ------- -------
Net income $ 536 512 636
======= ======= =======
Earnings per share:
Basic $ .45 .42 .45
Diluted .44 .40 .42
======= ======= =======
</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, 1999, 1998, and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS), NET
----- ------- -------- ----- ------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 14 13,688 10,988 (5,340) (786)
Net income -- -- 636 -- --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale -- -- -- -- 582
Reclassification adjustments for gain included in net income -- -- -- -- 40
Change in minimum pension liability -- -- -- -- (52)
------- ------- ------- ------- -------
Comprehensive income -- -- 636 -- 570
Payment on ESOP loan -- -- -- -- --
Market adjustment for common ESOP shares -- 158 -- -- --
Amortization of award for RRP stock -- -- -- -- --
Purchase of treasury stock, 134,350 shares -- -- -- (2,803) --
Cash dividend ($.32 per share) -- -- (485) -- --
Options exercised and reissuance of treasury stock -- (74) -- 437 --
3-for-2 stock split effected in the form of a stock dividend 5 (5) -- -- --
------- ------- ------- ------- -------
Balance at December 31, 1997 19 13,767 11,139 (7,706) (216)
Net income -- -- 512 -- --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale -- -- -- -- (146)
Reclassification adjustments for gain included in net income -- -- -- -- 49
Change in minimum pension liability -- -- -- -- 160
------- ------- ------- ------- -------
Comprehensive income -- -- 512 -- 63
Payment on ESOP loan -- -- -- -- --
Market adjustment for common ESOP shares -- 141 -- -- --
Purchase of treasury stock, 223,291 shares -- -- -- (3,868) --
Cash dividend ($.40 per share) -- -- (524) -- --
Options exercised and reissuance of treasury stock -- (471) -- 910 --
------- ------- ------- ------- -------
Balance at December 31, 1998 19 13,437 11,127 (10,664) (153)
Net income -- -- 536 -- --
Other comprehensive loss, net of tax:
Change in unrealized gain (loss) on securities available for sale -- -- -- -- (1,501)
Reclassification adjustments for gain included in net income -- -- -- -- 6
Change in minimum pension liability -- -- -- -- (268)
------- ------- ------- ------- -------
Comprehensive loss -- -- 536 -- (1,763)
Payment on ESOP loan -- -- -- -- --
Market adjustment for common ESOP shares -- 93 -- -- --
Purchase of treasury stock, 48,186 shares -- -- -- (630) --
Cash dividend ($.44 per share) -- -- (548) -- --
Options exercised and reissuance of treasury stock -- (137) -- 269 --
------- ------- ------- ------- -------
Balance at December 31, 1999 $ 19 13,393 11,115 (11,025) (1,916)
======= ======= ======= ======= =======
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
COMMON
STOCK
ACQUIRED BY DEFERRED
ESOP COMPENSATION TOTAL
------- ------- -------
<S> <C> <C> <C>
Balance at December 31, 1996 (667) (74) 17,823
Net income -- -- 636
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale -- -- 582
Reclassification adjustments for gain included in net income -- -- 40
Change in minimum pension liability -- -- (52)
------- ------- -------
Comprehensive income -- -- 1,206
Payment on ESOP loan 112 -- 112
Market adjustment for common ESOP shares -- -- 158
Amortization of award for RRP stock -- 74 74
Purchase of treasury stock, 134,350 shares -- -- (2,803)
Cash dividend ($.32 per share) -- -- (485)
Options exercised and reissuance of treasury stock -- -- 363
3-for-2 stock split effected in the form of a stock dividend -- --
------- ------- -------
Balance at December 31, 1997 (555) -- 16,448
Net income -- -- 512
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on securities available for sale -- -- (146)
Reclassification adjustments for gain included in net income -- -- 49
Change in minimum pension liability -- -- 160
------- ------- -------
Comprehensive income -- -- 575
Payment on ESOP loan 111 -- 111
Market adjustment for common ESOP shares -- -- 141
Purchase of treasury stock, 223,291 shares -- -- (3,868)
Cash dividend ($.40 per share) -- -- (524)
Options exercised and reissuance of treasury stock -- -- 439
------- ------- -------
Balance at December 31, 1998 (444) -- 13,322
Net income -- -- 536
Other comprehensive loss, net of tax:
Change in unrealized gain (loss) on securities available for sale -- -- (1,501)
Reclassification adjustments for gain included in net income -- -- 6
Change in minimum pension liability -- -- (268)
------- ------- -------
Comprehensive loss -- -- (1,227)
Payment on ESOP loan 111 -- 111
Market adjustment for common ESOP shares -- -- 93
Purchase of treasury stock, 48,186 shares -- -- (630)
Cash dividend ($.44 per share) -- -- (548)
Options exercised and reissuance of treasury stock -- -- 132
------- ------- -------
Balance at December 31, 1999 (333) -- 11,253
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 536 512 636
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 70 95 96
Deferred income tax expense (benefit) (22) 44 43
Provision for loan losses 17 6 --
Deferred loan fees, net of amortization 14 74 36
Amortization of premiums and discounts (18) (6) (43)
ESOP and RRP compensation expense 204 252 344
Gain on sale of investment and mortgage-backed securities
available for sale (75) (75) (60)
Other than temporary decline in value of securities
available for sale 66 -- --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (92) 211 (35)
(Increase) decrease in other assets 80 (115) 273
Increase in other liabilities, net 133 87 47
-------- -------- --------
Net cash provided by operating activities 913 1,085 1,337
-------- -------- --------
Cash flows from investing activities:
Maturities of investment securities available for sale 2,000 29,335 5,250
Purchase of investment securities available for sale (5,986) (27,562) (11,694)
Proceeds from sales of investment securities available for sale 250 6,596 8,780
Proceeds from sales of mortgage-backed securities
available for sale 2,005 -- --
Repayments of mortgage-backed securities
held to maturity -- 1,354 1,628
Repayments of mortgage-backed securities available for sale 1,761 138 --
Purchase of mortgage-backed securities available for sale (3,627) (11,097) --
Loan originations (23,970) (31,044) (18,093)
Loan repayments 17,073 27,872 12,404
Purchase of Federal Home Loan Bank of Chicago stock (500) -- (500)
Purchase of premises and equipment (82) (73) (78)
-------- -------- --------
Net cash used in investing activities (11,076) (4,481) (2,303)
-------- -------- --------
</TABLE>
21
(Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1999, 1998, and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in deposit accounts $ 284 1,181 1,430
Proceeds from borrowed funds 37,000 13,000 19,700
Repayments of borrowed funds (30,000) (8,000) (14,700)
Increase (decrease) in advance payments by
borrowers for taxes and insurance 56 (203) 36
Payment of cash dividend (548) (524) (485)
Proceeds from stock options exercised 132 439 296
Purchase of treasury stock (630) (3,868) (2,803)
-------- -------- --------
Net cash provided by financing activities 6,294 2,025 3,474
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (3,869) (1,371) 2,508
Cash and cash equivalents at beginning of year 9,746 11,117 8,609
-------- -------- --------
Cash and cash equivalents at end of year $ 5,877 9,746 11,117
======== ======== ========
Supplemental disclosures of cash flow information -
cash payments during the year for:
Interest $ 5,253 5,094 4,949
Income taxes 142 370 --
Supplemental disclosures of noncash activities -
Transfer of mortgage-backed securities from held
to maturity to available for sale 4,478 -- --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
(Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
North Bancshares, Inc. (the Company) was incorporated in August 1993 as
a holding company to purchase 100% of the common stock of North Federal
Savings Bank (Savings Bank) and subsidiary. The Savings Bank converted
from the mutual form to a stock form institution, and the Company
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>
(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>
(I) EARNINGS PER SHARE
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,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Numerator -
Net income $ 536 512 636
Denominator:
Basic earnings per share - weighted- average
outstanding shares 1,200,601 1,230,678 1,424,476
Effect of dilutive stock options outstanding
25,897 42,842 77,084
Diluted earnings per share - adjusted
weighted-average shares outstanding 1,226,498 1,273,520 1,501,560
Basic earnings per share $ .45 .42 .45
Diluted earnings per share $ .44 .40 .42
========== ========== ==========
</TABLE>
(J) STOCK SPLIT
The Company declared a 3-for-2 common stock split on November
11, 1997, effected in the form of a stock dividend, payable
December 29, 1997 to stockholders of record on December 8, 1997.
All references in the 1997 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>
(M) FINANCIAL REPORTING OF SEGMENTS
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. 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, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ------- ------- -------
<S> <C> <C> <C>
December 31, 1999:
U.S. Government agency securities $17,946 -- (1,510) 16,436
Equity securities 730 -- (179) 551
Other 63 -- -- 63
------- ------- ------- -------
$18,739 -- (1,689) 17,050
======= ======= ======= =======
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
======= ======= ======= =======
</TABLE>
26
(Continued)
<PAGE>
The amortized cost and estimated fair value of investment securities
available for sale by contractual maturity at December 31, 1999 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.
AMORTIZED ESTIMATED
COST FAIR VALUE
------- -------
Due after five years through ten years $ 4,502 4,159
Due after ten years 13,444 12,277
No stated maturity 793 614
------- -------
$18,739 17,050
======= =======
Proceeds from sales of investment securities available for sale during
1999 were $250, with gross losses of $13. 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.
(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:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
27
(Continued)
<PAGE>
The mortgage-backed securities held to maturity portfolio was
transferred to the available for sale portfolio upon the adoption of the
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The amortized cost of
these mortgage-backed securities was $4,478 at the time of transfer with
a $55 unrealized gain.
There were no sales of mortgage-backed securities held to maturity
during 1999, 1998, or 1997.
(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, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1999:
Federal Home Loan Mortgage
Corporation $ 12,936 2 (668) 12,270
Federal National Mortgage
Association 2,376 -- (141) 2,235
Governmental National Mortgage
Association 23 -- -- 23
---------- ---------- ---------- ----------
$ 15,335 2 (809) 14,528
========== ========== ========== ==========
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>
Proceeds from sales of mortgage-backed securities available for sale
during 1999 were $2,005, with gross gains of $90 and gross losses of $2.
There were no sales of mortgage-backed securities available for sale
during 1998 or 1997.
28
(Continued)
<PAGE>
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Mortgage loans:
One-to-four-family $ 76,287 73,568
Multifamily 10,548 7,098
---------- ----------
Total mortgage loans 86,835 80,666
Commercial loans 945 1,007
Consumer loans 1,605 816
---------- ----------
Total loans receivable 89,385 82,489
Less:
Deferred loan fees, net 165 152
Allowance for loan losses 231 214
---------- ----------
$ 88,989 82,123
========== ==========
Weighted-average interest rate 7.39% 7.44
========== ==========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 214 208 208
Provision for loan losses 17 6 --
---------- ---------- ----------
Balance at end of year $ 231 214 208
========== ========== ==========
</TABLE>
Loans receivable delinquent three months or more at December 31 are as
follows:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF TOTAL
OF LOANS AMOUNT LOANS
----------- ------------ ---------------
<S> <C> <C> <C>
1999 -- $ -- --
1998 1 24 .03%
1997 -- -- --
=========== ============ ===============
</TABLE>
The Company did not have any loans considered to be impaired during
1999, 1998 or 1997.
29
(Continued)
<PAGE>
Mortgage loans serviced for others amounted to approximately $384, $82,
and $129 as of December 31, 1999, 1998, and 1997, respectively.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Loans receivable $ 530 487
Mortgage-backed securities 86 107
Investment securities 285 225
Stock in Federal Home Loan Bank of Chicago 40 30
---------- ----------
$ 941 849
========== ==========
</TABLE>
(7) PREMISES AND EQUIPMENT
The cost of premises and equipment, less accumulated depreciation and
amortization, is summarized as follows as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 280 280
Office building 1,138 1,138
Furniture, fixtures, and equipment 1,192 1,120
Leasehold improvements 87 87
---------- ----------
2,697 2,625
Less accumulated depreciation and amortization (1,664) (1,604)
---------- ----------
$ 1,033 1,021
========== ==========
</TABLE>
Included in occupancy expense is depreciation and amortization of
premises and equipment of $70, $95, and $96 for the years ended December
31, 1999, 1998, and 1997, respectively.
30
(Continued)
<PAGE>
NORTH BANCSHARES INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(8) DEPOSIT ACCOUNTS
Deposit accounts are summarized as follows as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------------- -----------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OR STATED OR STATED
RATE AMOUNT PERCENT RATE AMOUNT PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Passbook 2.75% $13,088 17.1% 2.75% $13,642 17.9
Non-interest bearing demand
accounts -- 2,278 3.0 -- 1,789 2.3
NOW accounts 2.02 8,592 11.3 2.02 8,740 11.5
Money market deposit accounts 4.97 15,704 20.5 3.78 10,143 13.3
------- ------- ------- ------- ------- -------
39,662 51.9 34,314 45.0
------- ------- ------- -------
Certificate accounts:
Fixed rate 5.75-8.11 443 .5 5.75-8.11 459 .6
Money market certificates:
91 day 4.25 850 1.1 4.34 814 1.1
Six month 4.61 5,185 6.8 4.82 6,993 9.2
One year 5.05 10,762 14.1 5.15 9,296 12.2
One and one-half year 4.94 3,073 4.0 5.43 2,388 3.1
Two year 5.23 1,902 2.5 5.60 2,772 3.6
Two and one-half year 5.34 753 1.0 5.70 824 1.1
Three, four, and five year 6.01 13,876 18.1 6.10 18,362 24.1
------- ------- ------- ------- ------- -------
36,844 48.1 41,908 55.0
------- ------- ------- -------
Total deposit accounts $76,506 100.0% $76,222 100.0
======= ======= ======= =======
Weighted average interest rate 4.30% 4.34%
======= ========
Contractual maturity of certificate accounts:
Under 12 months $25,767 69.9% $28,574 68.2
12 to 36 months 7,056 19.2 9,152 21.8
Over 36 months 4,021 10.9 4,182 10.0
------- ------- ------- -------
$36,844 100.0% $41,908 100.0
======= ======= ======= =======
</TABLE>
Certificates of deposit of $100 or more totaled $5,935, $6,261, and
$6,137 as of December 31, 1999, 1998, and 1997, respectively.
31
(Continued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Interest expense for deposit accounts is summarized as follows for the
years ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Passbook $ 369 397 426
NOW accounts 157 159 158
Money market deposit accounts 654 309 214
Certificate accounts 2,031 2,401 2,403
---------- ---------- ----------
$ 3,211 3,266 3,201
========== ========== ==========
</TABLE>
(9) BORROWED FUNDS
Borrowed funds are summarized as follows as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
WEIGHTED WEIGHTED
INTEREST INTEREST
RATE AMOUNT RATE AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Secured advances from the FHLB of Chicago maturing:
1999 --% $ -- 6.11% $ 3,000
2000 5.64 8,000 -- --
2001 5.89 7,350 5.89 7,350
2002 5.89 750 5.43 10,750
2004 5.62 15,000 -- --
2008 4.74 8,000 4.77 13,000
2009 5.00 2,000 -- --
---------- ---------- ---------- ----------
5.48% $ 41,100 5.34% $ 34,100
========== ========== ========== ==========
</TABLE>
Fixed rate advances amounted to $36,100 and variable rate amounted to
$5,000 at December 31, 1999. Certain advances are callable by the FHLB
on a quarterly basis. Advances in the amount of $15,000 with a scheduled
maturity of 2004 are callable beginning in 2000. Advances with a
scheduled maturity of 2008 in the amount of $5,000 are callable
beginning in 2000 and the remaining $3,000 callable beginning in 2001.
Advances with a scheduled maturity of 2009 in the amount of $2,000 are
callable beginning in 2000.
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>
(10) INCOME TAXES
Income tax expense (benefit) is comprised as follows for the years ended
December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Federal:
Current $ 384 198 336
Deferred (15) 93 46
----- ----- -----
369 291 382
----- ----- -----
State:
Current -- (7) (16)
Deferred (7) (49) (3)
----- ----- -----
(7) (56) (19)
----- ----- -----
$ 362 235 363
===== ===== =====
</TABLE>
Income tax expense resulted in an effective tax rate of 40.3%, 31.5% and
36.4% for the years ended December 31, 1999, 1998, and 1997,
respectively. The reasons for the difference between the effective tax
rate and the statutory Federal income tax rate are shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
---------- ---------- ----------
(PERCENTAGE OF EARNINGS BEFORE
INCOME TAXES)
<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 (0.8) (7.5) (1.0)
Nonrecognition (utilization) of capital loss
carryforward .5 (2.0) (2.3)
Nondeductible compensation expense 2.5 5.0 3.1
Other, net 4.1 2.0 2.6
---------- ---------- ----------
Effective income tax rate 40.3% 31.5 36.4
========== ========== ==========
</TABLE>
33
(Continued)
<PAGE>
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>
1999 1998
------- -------
<S> <C> <C>
Deferred tax liabilities:
Dividends received in stock, not recognized for tax purposes $ 33 33
Tax depreciation in excess of book depreciation 161 123
Excess of tax bad debt reserve over base year 85 107
Deferred loan fees 75 87
------- -------
Gross deferred tax liabilities 354 350
------- -------
Deferred tax assets:
State net operating loss carryforwards 177 160
Capital loss carryforward 103 98
Unrealized loss on securities available for sale 967 103
Pension expense 55 41
Allowance for losses on loans 89 83
------- -------
Gross deferred tax assets 1,391 485
Less valuation allowance (103) (98)
------- -------
Deferred tax assets, less valuation allowance 1,288 387
------- -------
Net deferred tax asset $ (934) (37)
======= =======
</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 as of December 31, 1999 and 1998.
Retained earnings as of December 31, 1999 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 $266 which will expire
beginning in the year 2000 and net operating loss carryforwards for
state income tax purposes of approximately $3,726 which will expire in
the year 2005.
34
(Continued)
<PAGE>
(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, 1999
and 1998 is shown below:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,321 3,085
Service cost 60 43
Interest cost 224 235
Actuarial (gain) loss (39) 88
Benefits paid (237) (130)
------- -------
Benefit obligation at end of year $ 3,329 3,321
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year $ 3,094 2,702
Actual return on plan assets (93) 411
Company contributions 138 111
Benefits paid (237) (130)
------- -------
Fair value of plan assets at end of year $ 2,902 3,094
======= =======
</TABLE>
35
(Continued)
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Reconciliation of funded status:
Funded status $(427) (227)
Unrecognized net actuarial loss 723 400
Unrecognized transition asset (11) (15)
Unrecognized prior service cost (9) (10)
----- -----
Prepaid benefit cost $ 276 148
===== =====
</TABLE>
Net pension cost for the years ended December 31, 1999, 1998, and 1997
includes the following components:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Service cost benefits earned during the year $ 60 43 43
Interest cost on projected benefit obligation 224 235 219
Expected return on plan assets (274) (236) (187)
Net amortization and deferral -- 8 (31)
---------- ---------- ----------
$ 10 50 44
========== ========== ==========
</TABLE>
The projected benefit obligation was determined using an assumed
weighted-average discount rate of 7.0% in 1999 and 1998, and 7.75% in
1997, and an assumed compensation increase of 4% in 1999, 1998, and
1997. The assumed weighted-average long-term rate of return on plan
assets was assumed to be 9% in 1999, 1998, and 1997.
(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 as of December 21, 1993. At December 31, 1999, there were 5,000
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 1999, 1998, and 1997 was $.82, $.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, 1999, 1998, and
1997, respectively: expected dividend yield of 3.78%, 3.25%, and 2.50%;
expected volatility factors of .05%, .05%, and .04%; risk-free interest
rates of 4.6%, 4.8%, and 5.4%; and expected lives of 10 years.
36
(Continiued)
<PAGE>
Under SFAS No. 123, the Company is required to disclose pro forma net
income and earnings per share for 1999, 1998, and 1997 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>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported $ 536 512 636
Pro forma 535 507 614
Earnings per share:
Basic:
As reported .45 .42 .45
Pro forma .45 .41 .43
Diluted:
As reported .44 .40 .42
Pro forma .44 .40 .41
========== ========== ==========
</TABLE>
A summary of the status of the Plan for the years ended December 31,
1999, 1998, and 1997 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
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 98,651 $ 8.44 142,553 $ 7.39 174,549 $ 6.75
Granted 1,747 11.69 12,500 13.95 12,416 13.66
Exercised (16,500) 6.67 (56,402) 7.01 (44,412) 6.67
-------- -------- -------- -------- -------- --------
Outstanding and
exercisable at
end of year 83,898 8.86 98,651 8.44 142,553 7.39
======== ======== ======== ======== ======== ========
</TABLE>
As of December 31, 1999, the range of exercise prices and
weighted-average remaining contractual life of outstanding options was
$6.67 to $14.83 and six years, respectively.
37
(Continued)
<PAGE>
(14) EMPLOYEE STOCK OWNERSHIP PLAN
In conjunction with the Savings Bank's conversion, the Company formed an
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 the Company 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 the
Company 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 the Company 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 $333 and $444 at December 31, 1999 and 1998,
respectively. In 1999 and 1998, contributions to the ESOP which were
used to fund principal and interest payments on the ESOP debt totaled
$144 and $152, 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 vested at a rate of 20% per
year, beginning December 31, 1993. The cost of common shares awarded was
amortized to compensation expense as the participants vested in the
shares and the unamortized cost is reflected as a reduction of
stockholders' equity as deferred compensation. The awards were fully
vested as of December 31, 1997.
(16) COMPREHENSIVE INCOME
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.
38
(Continued)
<PAGE>
<TABLE>
<CAPTION>
BEFORE TAX NET
TAX (EXPENSE) OF TAX
AMOUNT BENEFIT AMOUNT
---------- ---------- ----------
<S> <C> <C> <C>
Year ended December 31, 1999:
Disclosure of reclassification amount:
Unrealized holding loss on securities
arising during the period $ (2,234) 733 (1,501)
Less: reclassification adjustment for gain
included in net income 9 (3) 6
Additional liability for employee pension plan (406) 138 (268)
---------- ---------- ----------
Change in other comprehensive income $ (2,631) 868 (1,763)
========== ========== ==========
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
========== ========== ==========
</TABLE>
39
(Continued)
<PAGE>
(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, 1999, that the Savings Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999 and 1998, 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, 1999 and 1998 are presented in the table below:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31,1999:
Total capital (to risk
weighted assets) $12,192 21.43% $ 4,551 8.0% $ 5,689 10.0%
Tier 1 capital (to risk
weighted assets) 11,961 21.03 N/A N/A 3,413 6.0
Tier 1 capital (to
average assets) 11,961 9.01 3,984 3.0 6,640 5.0
Tangible capital (to
average assets) 11,961 9.01 1,992 1.5 N/A N/A
======= ======= ======= ======= ======= =======
</TABLE>
40
(Continued)
<PAGE>
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk
weighted assets) $12,316 24.58% $ 4,009 8.0% $ 5,011 10.0%
Tier 1 capital (to risk
weighted assets) 12,102 24.15 N/A N/A 3,007 6.0
Tier 1 capital (to
average assets) 12,102 9.68 3,749 3.0 6,248 5.0
Tangible capital (to
average assets) 12,102 9.68 1,874 1.5 N/A N/A
======= ======= ======= ======= ======= =======
</TABLE>
(18) COMMITMENTS AND CONTINGENCIES AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of its business. These instruments include
commitments to originate loans 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, 1999 of $2,511 represents
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, 1999 represent commitments for fixed rate loans with an average
interest rate of 8.75% 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" (SFAS No. 107), requires the
disclosure of estimated fair values of all asset, liability, and
off-balance sheet financial instruments. The estimated fair value
amounts under SFAS No. 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
41
(Continued)
<PAGE>
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>
1999 1998
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 1,712 1,712 810 810
Interest-bearing deposits 1,260 1,260 2,413 2,413
Federal funds sold 2,439 2,439 5,722 5,722
Investment in dollar denominated mutual 466 466 801 801
funds
Investment securities available for sale 17,050 17,050 14,880 14,880
Mortgage-backed securities held to maturity -- -- 4,478 4,533
Mortgage-backed securities available for 14,528 14,528 10,884 10,884
sale
Stock in Federal Home Loan Bank of Chicago 2,205 2,205 1,705 1,705
Loans receivable 88,989 86,155 82,123 82,879
Accrued interest receivable 941 941 849 849
-------- -------- -------- --------
$129,590 126,756 124,665 125,476
======== ======== ======== ========
1999 1998
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Financial liabilities:
Deposit accounts $ 76,506 76,632 76,222 76,683
Borrowed funds 41,100 40,739 34,100 34,162
Accrued interest payable 269 269 246 246
-------- -------- -------- --------
$117,875 117,640 110,568 111,091
======== ======== ======== ========
</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.
42
(Continued)
<PAGE>
(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) STOCK IN FEDERAL HOME LOAN BANK OF CHICAGO
The fair value of Federal Home Loan Bank of Chicago's stock is
based on its redemption value.
(E) 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.
(F) 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.
(G) 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.
(H) 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.
43
(Continued)
<PAGE>
(20) PARENT COMPANY ONLY FINANCIAL INFORMATION
The condensed statements of financial condition as of December 31, 1999
and 1998 and the condensed statements of operations and cash flows for
each of the years in the three-year period ended December 31, 1999 for
the Parent Company only is presented below and should be read in
conjunction with other notes to the consolidated financial statements.
CONDENSED STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY)
----------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Cash held at Savings Bank $ 63 58
Interest-bearing deposits 11 145
Investment in dollar denominated mutual funds -- 4
Investment securities available for sale 613 958
Accrued interest receivable 3 5
Other assets 12 20
Investment in Savings Bank 10,432 12,034
------------ ------------
Total assets $ 11,134 13,224
============ ============
Liabilities - other liabilities $ (119) (98)
------------ ------------
Stockholders' equity:
Common stock 19 19
Additional paid-in capital 13,393 13,437
Retained earnings 11,115 11,127
Treasury stock, at cost (11,025) (10,664)
Accumulated other comprehensive loss, net of tax (1,916) (153)
Common stock acquired by Employee Stock Ownership Plan (333) (444)
------------ ------------
Total stockholders' equity 11,253 13,322
------------ ------------
Total liabilities and stockholders' equity $ 11,134 13,224
============ ============
</TABLE>
44
(Conintued)
<PAGE>
CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY)
--------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Equity in earnings of the Savings Bank $ 645 512 576
Interest income 50 93 181
Gain (loss) on sale of investment securities available for
sale, net (13) 43 67
Other than temporary decline in value of securities available
for sale (66) -- --
Noninterest expense (95) (156) (195)
-------- -------- --------
Income before income taxes 521 492 629
Income tax benefit 15 20 7
-------- -------- --------
Net income $ 536 512 636
======== ======== ========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
--------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 536 512 636
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and discounts -- -- (2)
ESOP and RRP compensation expense 204 252 344
Decrease (increase) in accrued interest 2 3 (1)
Decrease in other liabilities (133) (207) (50)
(Increase) decrease in other assets 8 2,758 248
Loss (gain) on sale of investment securities available
for sale, net 13 (43) (67)
Other than temporary decline in value of securities
available for sale 66 -- --
Equity in earnings of the Savings Bank (645) (512) (576)
-------- -------- --------
Net cash provided by operating activities 51 2,763 532
-------- -------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale -- (1,156) (2,994)
Maturities of investment securities available for sale -- 100 1,000
Proceeds from sale of investment securities available for sale
251 601 1,785
-------- -------- --------
Net cash provided by (used in) investing activities 251 (455) (209)
-------- -------- --------
</TABLE>
45
(Continued)
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Cash dividend from Savings Bank $ 611 278 3,444
Payment of cash dividend (548) (524) (485)
Proceeds from stock options exercised 132 439 296
Purchase of treasury stock (630) (3,868) (2,803)
-------- -------- --------
Net cash (used in) provided by financing activities (435) (3,675) 452
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (133) (1,367) 775
-------- -------- --------
Cash and cash equivalents at beginning of year 207 1,574 799
-------- -------- --------
Cash and cash equivalents at end of year $ 74 207 1,574
======== ======== ========
</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, 1999
-------------------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income $ 2,132 2,187 2,228 2,290
Interest expense 1,267 1,311 1,323 1,375
---------- ---------- ---------- ----------
Net interest income before provision
for loan losses 865 876 905 915
Provision for loan losses -- (8) (9) --
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 865 868 896 915
Fees and service charges 77 65 73 67
Gain (loss) on sale of investment and
mortgage-backed securities available for sale 33 57 (15) --
Other than temporary decline in value of
securities available for sale -- 8 (24) (34)
Other noninterest income 4 5 4 4
Noninterest expense (708) (743) (764) (739)
---------- ---------- ---------- ----------
Income before income taxes 271 244 170 213
Income tax expense 95 94 78 95
---------- ---------- ---------- ----------
Net income $ 176 150 92 118
========== ========== ========== ==========
Basic earnings per share $ .15 .12 .08 .10
========== ========== ========== ==========
Diluted earnings per share $ .15 .12 .07 .10
========== ========== ========== ==========
Cash dividends per share $ .11 .11 .11 .11
========== ========== ========== ==========
</TABLE>
46
(Conintued)
<PAGE>
NORTH BANCSHARES, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
<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>
47
<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 and Vice President and
Chief Executive Officer Secretary and Chief Treasurer
Operating Officer
JOSEPH M. PERRI KARLA A. LAUER EMILIE V. REITER
Senior Vice President-Loans Vice President-Services Assistant Secretary
North Federal Savings Bank North Federal 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
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 1999 and 1998. The Common Stock began
trading on December 21, 1993. On March 1, 2000, North Bancshares, Inc. had
approximately 200 shareholders of record and 400 beneficial shareholders. As of
such date, there were 1,231,270 shares of common stock issued and outstanding.
1999 1998
- --------------------------------------------------------------------------------
HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
First Quarter 12.500 10.750 18.500 17.500
Second Quarter 14.375 11.750 18.000 15.375
Third Quarter 14.000 12.000 15.375 11.250
Fourth Quarter 13.500 10.375 12.500 11.000
48
<PAGE>
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 or can be viewed on line by accessing the SEC's
Edgar reporting system or by accessing Nasdaq.com and reviewing the current
Edgar filings for NBSI:
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
1:30 P.M., April 26, 2000, 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 312-904-2584 or by writing:
LASALLE BANK, N.A. MARKET MAKERS
Trust and Asset Management
135 South LaSalle Street Friedman, Billings, Ramsey, Inc.
Chicago, IL 60603 Howe Barnes Investments, Inc.
Knight Securities, L. P.
Stifel, Nicolaus & Company, Inc.
CORPORATE COUNSEL/WASHINGTON,D.C. Spear, Leeds, Kellogg, Inc.
Silver, Freedman & Taff, L.L.P. Trident Securities, Inc.
1100 New York Avenue, N.W. Tucker Anthony, Inc.
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
<PAGE>
[LOGO] NORTH
BANCHSARES, INC.
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 11,
2000, relating to the consolidated statements of financial condition of North
Bancshares, Inc. and subsidiary as of December 31, 1999 and 1998, 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,
1999, which report appears in the December 31, 1999 annual report on Form 10-KSB
of North Bancshares, Inc.
/s/ KPMG LLP
Chicago, Illinois
March 17, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF CONDITION AT DECEMBER 31, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,712
<INT-BEARING-DEPOSITS> 1,260
<FED-FUNDS-SOLD> 2,439
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,578
<INVESTMENTS-CARRYING> 33,714
<INVESTMENTS-MARKET> 31,578
<LOANS> 88,989
<ALLOWANCE> 231
<TOTAL-ASSETS> 130,689
<DEPOSITS> 76,506
<SHORT-TERM> 8,000
<LIABILITIES-OTHER> 1,830
<LONG-TERM> 33,100
0
0
<COMMON> 19
<OTHER-SE> 11,234
<TOTAL-LIABILITIES-AND-EQUITY> 130,689
<INTEREST-LOAN> 6,365
<INTEREST-INVEST> 2,338
<INTEREST-OTHER> 134
<INTEREST-TOTAL> 8,837
<INTEREST-DEPOSIT> 3,211
<INTEREST-EXPENSE> 2,065
<INTEREST-INCOME-NET> 3,561
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 75
<EXPENSE-OTHER> 2,954
<INCOME-PRETAX> 898
<INCOME-PRE-EXTRAORDINARY> 898
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 536
<EPS-BASIC> .45
<EPS-DILUTED> .44
<YIELD-ACTUAL> 4.36
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 231
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 231
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 231
</TABLE>
