SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________to________________
Commission File Number 0-27672
NORTH CENTRAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Iowa 42-1449849
--------------------------------------------------------------------
(State or Other Jurisdiction of (I. R. S. Employer
Incorporation or Organization) Identification Number)
825 Central Avenue Fort Dodge, Iowa 50501
-----------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:(515) 576-7531
None
----
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
Indicate by check mark whether the Registrant is an accelerated Filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2003
- --------------------------------------------------------------------------------
Common Stock, $.01 par value 1,608,080
NORTH CENTRAL BANCSHARES, INC.
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Condensed
Financial Statements (Unaudited) 1 to 3
Consolidated Condensed Statements of
Financial Condition at September 30, 2003
and December 31, 2002 1
Consolidated Condensed Statements of
Income for the three and nine months ended
September 30, 2003 and 2002 2
Consolidated Condensed Statements of
Cash Flows for the nine months ended
September 30, 2003 and 2002 3
Notes to Consolidated Condensed Financial
Statements 4 & 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 6 to 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Item 4. Controls and Procedures 13
Part II. Other Information
Items 1 through 6 14
Signatures 15
Exhibits
PART I. FINANCIAL INFORMATION
ITEM 1.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
ASSETS 2003 2002
------------ -----------
Cash and due from banks:
Interest-bearing $ 5,173,277 $ 13,025,657
Noninterest-bearing 2,253,495 2,142,944
Securities available-for-sale 28,380,893 22,833,742
Loans receivable, net 365,511,516 341,146,364
Loans held for sale 968,297 2,372,134
Accrued interest receivable 1,944,528 1,928,278
Foreclosed real estate 1,456,669 768,726
Premises and equipment, net 9,277,654 8,195,963
Rental real estate 2,944,331 2,197,382
Title plant 925,256 925,256
Goodwill 4,970,800 4,970,800
Deferred taxes 933,459 608,657
Prepaid expenses and other assets 1,102,811 2,755,778
------------- -------------
Total assets $ 425,842,986 $ 403,871,681
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 282,693,675 $ 277,000,082
Borrowed funds 100,037,673 85,026,438
Advances from borrowers for taxes and insurance 870,975 1,512,114
Dividends payable 337,697 295,250
Income taxes payable 30,933 63,553
Accrued expenses and other liabilities 1,317,087 1,226,040
------------- -------------
Total liabilities 385,288,040 365,123,477
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value, authorized
3,000,000 shares; issued and outstanding none) -- --
Common stock ($.01 par value, authorized 15,500,000
shares; issued 2003, 1,608,080;
2002, 1,640,280 shares) 16,081 16,403
Additional paid-in capital 17,621,895 17,011,095
Retained earnings, substantially restricted 23,232,246 21,862,248
Accumulated other comprehensive income (loss) (110,735) 176,555
Unearned shares, employee stock ownership plan (204,541) (318,097)
------------- -------------
Total stockholders' equity 40,554,946 38,748,204
------------- -------------
Total liabilities and stockholders' equity $ 425,842,986 $ 403,871,681
============= =============
See Notes to Consolidated Condensed Financial Statements
1
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Loans receivable $ 6,038,079 $ 6,619,709 $ 18,270,621 $ 19,119,533
Securities and cash deposits 304,425 317,198 1,039,161 1,108,613
------------ ------------ ------------ ------------
6,342,504 6,936,907 19,309,782 20,228,146
------------ ------------ ------------ ------------
Interest expense:
Deposits 1,913,974 2,394,364 6,002,801 7,197,948
Borrowed funds 1,141,660 1,138,206 3,369,189 3,326,469
------------ ------------ ------------ ------------
3,055,634 3,532,570 9,371,990 10,524,417
------------ ------------ ------------ ------------
Net Interest Income 3,286,870 3,404,337 9,937,792 9,703,729
Provision for loan losses 75,000 56,000 195,000 326,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 3,211,870 3,348,337 9,742,792 9,377,729
------------ ------------ ------------ ------------
Noninterest income:
Fees and service charges 681,339 661,825 1,871,520 1,846,679
Abstract fees 520,595 435,998 1,449,742 1,234,829
Mortgage banking fees 310,983 167,323 760,712 382,495
Gain (loss) on sale of securities available for
sale, net -- 842 -- (523)
Other income 250,698 242,932 773,657 745,792
------------ ------------ ------------ ------------
Total noninterest income 1,763,615 1,508,920 4,855,631 4,209,272
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 1,505,514 1,260,754 4,349,473 3,851,098
Premises and equipment 320,516 261,179 936,698 871,631
Data processing 143,351 130,896 433,849 392,008
SAIF deposit insurance premiums 11,188 11,623 33,980 35,575
Other expenses 779,773 616,851 2,218,169 1,901,421
------------ ------------ ------------ ------------
Total noninterest expense 2,760,342 2,281,303 7,972,169 7,051,733
------------ ------------ ------------ ------------
Income before income taxes 2,215,143 2,575,954 6,626,254 6,535,268
Provision for income taxes 720,710 867,956 2,101,736 2,172,686
------------ ------------ ------------ ------------
Net Income $ 1,494,433 $ 1,707,998 $ 4,524,518 $ 4,362,582
============ ============ ============ ============
Basic earnings per common share $ 0.95 $ 1.04 $ 2.86 $ 2.65
============ ============ ============ ============
Earnings per common share- assuming dilution $ 0.90 $ 0.98 $ 2.69 $ 2.50
============ ============ ============ ============
Dividends declared per common share $ 0.21 $ 0.18 $ 0.63 $ 0.54
============ ============ ============ ============
Comprehensive income $ 1,328,923 $ 1,859,212 $ 4,237,228 $ 4,521,596
============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements.
2
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,524,518 $ 4,362,582
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 195,000 326,000
Depreciation 592,824 531,622
Amortization and accretion 476,942 169,452
Deferred taxes (153,911) (127,021)
Effect of contribution to employee stock ownership plan 406,188 318,224
(Gain) on sale of foreclosed real estate and loans, net (804,865) (379,688)
Loss on sale of securities available for sale -- 523
(Gain) loss on disposal of equipment and premises, net (724) 5,923
Proceeds from sales of loans held for sale 47,097,003 29,647,050
Originations of loans held for sale (44,932,454) (30,814,807)
Change in assets and liabilities:
Accrued interest receivable (16,250) (78,439)
Prepaid expenses and other assets 1,652,967 (89,232)
Income taxes payable (32,620) 201,585
Accrued expenses and other liabilities 91,047 (120,745)
------------ ------------
Net cash provided by operating activities 9,095,665 3,953,029
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans 19,067,901 34,306,299
Purchase of loans (44,832,836) (63,607,175)
Proceeds from sales of securities available-for-sale -- 750,227
Purchase of securities available-for-sale (10,998,258) (322,763)
Proceeds from maturities of securities available-for-sale 4,922,174 7,341,398
Purchase of premises and equipment and rental real estate (2,545,586) (1,627,708)
Proceeds from sale of land and equipment 124,846 1,015
Other 154,804 1,131
------------ ------------
Net cash (used in) investing activities (34,106,955) (23,157,576)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,693,593 11,005,573
(Decrease) in advances from borrowers for taxes and
insurance (641,139) (813,737)
Net change in short-term borrowings 4,000,000 (250,000)
Proceeds from other borrowed funds 17,500,000 34,000,000
Payments on other borrowings (6,488,765) (20,602,608)
Purchase of treasury stock (3,069,494) (2,902,048)
Dividends paid (946,580) (836,500)
Issuance of common stock 1,221,846 1,231,681
------------ ------------
Net cash provided by financing activities 17,269,461 20,832,361
------------ ------------
Net increase (decrease) in cash (7,741,829) 1,627,814
CASH
Beginning 15,168,601 19,908,902
------------ ------------
Ending $ 7,426,772 $ 21,536,716
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 6,014,869 $ 7,462,117
Interest paid on borrowings 3,369,295 3,326,937
Income taxes 1,836,409 1,744,053
See Notes to Consolidated Condensed Financial Statements
3
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated condensed financial statements for the three and nine month
periods ended September 30, 2003 and 2002 are unaudited. In the opinion of the
management of North Central Bancshares, Inc. (the "Company" or the "Registrant")
these financial statements reflect all adjustments, consisting only of normal
recurring accruals, necessary to present fairly these consolidated financial
statements. The results of operations for the interim periods are not
necessarily indicative of results, which may be expected for an entire year.
Certain information and footnote disclosures normally included in complete
financial statements prepared in accordance with generally accepted accounting
principles have been omitted in accordance with the requirements for interim
financial statements. The financial statements and notes thereto should be read
in conjunction with the Company's 2002 Annual Report on Form 10-K.
The consolidated condensed financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
2. EARNINGS PER SHARE
The earnings per share amounts were computed using the weighted average number
of shares outstanding during the periods presented. In accordance with Statement
of Position No. 93-6, Employers' Accounting for Employee Stock Ownership Plans,
issued by the American Institute of Certified Public Accountants, shares owned
by First Federal Savings Bank of Iowa's Employee Stock Ownership Plan that have
not been committed to be released are not considered to be outstanding for the
purpose of computing earnings per share. For the three-month period ended
September 30, 2003, the weighted average number of shares outstanding for basic
and diluted earnings per share computation were 1,580,936 and 1,669,799,
respectively. For the nine-month period ended September 30, 2003, the weighted
average number of shares outstanding for basic and diluted earnings per share
computation were 1,582,228 and 1,679,038, respectively. For the three-month
period ended September 30, 2002, the weighted average number of shares
outstanding for basic and diluted earnings per share computation were 1,648,583
and 1,747,428, respectively. For the nine-month period ended September 30, 2002,
the weighted average number of shares outstanding for basic and diluted earnings
per share computation were 1,644,583 and 1,745,906, respectively.
3. DIVIDENDS
On August 29, 2003, the Company declared a cash dividend on its common stock,
payable on October 7, 2003 to stockholders of record as of September 16, 2003,
equal to $0.21 per share.
4. GOODWILL
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" that eliminated the
amortization and required a goodwill impairment test. The Company completed the
goodwill impairment test during the year ended December 31, 2002 and has
determined that there has been no impairment of goodwill.
As of September 30, 2003 and December 31, 2002, the Company had intangible
assets of $4,970,800, all of which has been determined to be goodwill. There was
no goodwill impairment loss or amortization related to goodwill during the three
and nine months ended September 30, 2003 or September 30, 2002.
5. STOCK OPTION PLAN
FASB Statement No. 123, Accounting for Stock-Based Compensation, establishes a
fair value based method for financial accounting and reporting for stock-based
employee compensation plans and for transactions in which an entity issues its
equity instruments to acquire goods and services from nonemployees. However, the
standard allows compensation to continue to be measured by using the intrinsic
value based method of
4
accounting prescribed by APB No. 25, Accounting for Stock Issued to Employees,
but requires expanded disclosures. The Company has elected to apply the
intrinsic value based method of accounting for stock options issued to
employees. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock.
Had compensation cost for the Plan been determined based on the grant date fair
values of awards (the method described in FASB Statement No. 123), the
approximate reported net income and earnings per common share would have been
decreased to the pro forma amounts shown below:
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net income, as reported $ 1,494,433 $ 1,707,998
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (8,731) (27,315)
----------- -----------
Pro forma net income $ 1,485,702 $ 1,680,683
=========== ===========
Earnings per common share - basic:
As reported $ 0.95 $ 1.04
Pro forma 0.94 1.02
Earnings per common share - assuming dilution:
As reported $ 0.90 $ 0.98
Pro forma 0.89 0.96
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net income, as reported $ 4,524,518 $ 4,362,582
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (61,725) (83,202)
----------- -----------
Pro forma net income $ 4,462,793 $ 4,279,380
=========== ===========
Earnings per common share - basic:
As reported $ 2.86 $ 2.65
Pro forma 2.82 2.60
Earnings per common share - assuming dilution:
As reported $ 2.69 $ 2.50
Pro forma 2.66 2.45
The fair values of the grants are estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 2003 and 2002, respectively: dividend rate of 2.3% and
3.5%, price volatility of 20% and 20%, risk-free interest rate of 3.70% and
4.92%, and expected lives of 8 years for all periods.
5
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q contains forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Company that are subject to various factors which
could cause actual results to differ materially from these estimates. These
factors include changes in general, economic, market, legislative and regulatory
conditions, and the development of an interest rate environment that adversely
affects the interest rate spread or other income anticipated from the Company's
operations and investments. The Company's actual results may differ from the
results discussed in the forward-looking statements. The Company disclaims any
obligation to publicly announce future events or developments that may affect
the forward-looking financial statements contained herein.
FINANCIAL CONDITION
Total assets increased $22.0 million, or 5.4%, to $425.8 million at September
30, 2003 compared to $403.9 million at December 31, 2002. Interest-bearing cash
decreased $7.9 million, or 60.3%, to $5.2 million at September 30, 2003 from
$13.0 million at December 31, 2002. Securities available for sale increased $5.5
million, or 24.3%, to $28.4 million at September 30, 2003 from $22.8 million at
December 31, 2002, primarily invested in mortgage backed securities. Total loans
receivable, net, increased by $24.4 million to $365.5 million at September 30,
2003 from $341.1 million at December 31, 2002, due primarily to originations of
$57.3 million of first mortgage loans secured primarily by one-to four-family
residences, purchases of $44.8 million of first mortgage loans secured primarily
by one to four family, multifamily and commercial real estate and originations
of $20.6 million of second mortgage loans secured primarily by
one-to-four-family residences. These originations and purchases were offset in
part by payments and prepayments of loans of approximately $102.7 million.
Foreclosed real estate increased $688,000, or 89.5% to $1.5 million at September
30, 2003 from $769,000 at December 31, 2002. At September 30, 2003, foreclosed
real estate consisted of sixteen one-to-four family properties and one
commercial real estate property in the state of Washington.
Total deposits increased $5.7 million, or 2.1%, to $282.7 million at September
30, 2003 from $277.0 million at December 31, 2002, reflecting increases
primarily in checking, savings accounts, money market accounts and public fund
certificates of deposits, offset by a decrease in retail certificates of deposit
accounts. The increase in the Bank's deposits was primarily due to an increase
in the deposits at the Bank's Ankeny office, which moved to a permanent location
in the first quarter of 2003. Other borrowings, primarily Federal Home Loan Bank
("FHLB") advances, increased by $15.0 million to $100.0 million at September 30,
2003 from $85.0 million at December 31, 2002, as management elected to increase
borrowings to fund asset growth. Total stockholders' equity increased $1.8
million, to $40.6 million at September 30, 2003 from $38.7 million at December
31, 2002. See "Capital."
CAPITAL
The Company's total stockholders' equity increased by $1.8 million to $40.6
million at September 30, 2003 from $38.7 million at December 31, 2002, primarily
due to earnings and stock issued in connection with stock options exercised,
which were offset in part by stock repurchases and dividends declared. The
changes in stockholders' equity were also due to a decrease in the unearned
shares from First Federal Savings Bank of Iowa's Employee Stock Ownership Plan
(the "ESOP") to $205,000 at September 30, 2003 from $318,000 at December 31,
2002. The decrease in unearned shares resulted from the release of shares within
the ESOP to employees of First Federal Savings Bank of Iowa (the "Bank").
6
The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum
tangible, leverage (core) and risk-based capital requirements. As of September
30, 2003, the Bank exceeded all of its regulatory capital requirements. The
Bank's required, actual and excess capital levels as of September 30, 2003 were
as follows:
(dollars in thousands)
Tangible capital:
Capital level $ 31,836 7.56%
Less Requirement 6,314 1.50%
-------- -----
Excess $ 25,522 6.06%
======== =====
Core capital:
Capital level $ 31,836 7.56%
Less Requirement 16,837 4.00%
-------- -----
Excess $ 14,999 3.56%
======== =====
Risk-based capital:
Capital level $ 34,978 12.31%
Less Requirement 22,735 8.00%
-------- -----
Excess $ 12,243 4.31%
======== =====
LIQUIDITY
The Company's primary sources of funds are cash provided by operating activities
(including net income), certain financing activities (including increases in
deposits and proceeds from borrowings) and certain investing activities
(including principal payments on loans and maturities, calls and proceeds from
the sale of securities). During the first nine months of 2003 and 2002,
principal payments, repayments and proceeds from sale of loans totaled $149.2
million and $116.3 million, respectively. The net increase in deposits during
the first nine months of 2003 and 2002 totaled $5.7 million and $11.0 million,
respectively. The proceeds from borrowed funds during the nine months ended
September 30, 2003 and 2002 totaled $17.5 million and $34.0 million,
respectively. The net increase in short term borrowings for the nine months
ended September 30, 2003 totaled $4.0 million. During the first nine months of
2003 and 2002, the proceeds from the maturities, calls and sales of securities
totaled $4.9 million and $8.1 million, respectively. Cash provided from
operating activities during the first nine months of 2003 and 2002 totaled $9.1
million and $4.0 million, respectively. The Company's primary use of funds is
cash used to originate and purchase loans, purchase of securities available for
sale, repayment of borrowed funds and other financing activities. During the
first nine months of 2003 and 2002, the Company's gross purchases and
origination of loans totaled $175.0 million and $145.7 million, respectively.
The purchase of securities available for sale for the nine months ended
September 30, 2003 and 2002 totaled $11.0 million and $323,000, respectively.
The repayment of borrowed funds during the first nine months of 2003 and 2002
totaled $6.5 million and $20.6 million, respectively. The net decrease in short
term borrowings during the nine months ended September 30, 2002 totaled
$250,000. For additional information about cash flows from the Company's
operating, financing and investing activities, see "Statements of Cash Flows in
the Condensed Consolidated Financial Statements."
The OTS regulations require the Company to maintain sufficient liquidity to
ensure its safe and sound operation.
The Company has a line of credit agreement in the amount of $3.0 million with an
unaffiliated bank. As of September 30, 2003, there were no borrowings
outstanding on this line of credit. The Company may use this line of credit to
fund stock repurchases in the future and for general corporate purposes.
Stockholders' equity totaled $40.6 million at September 30, 2003 compared to
$38.7 million at December 31, 2002, reflecting the Company's earnings, stock
issued, stock repurchases, the amortization of the unallocated portion of shares
held by the ESOP, dividends declared on common stock and the change in the
accumulated other comprehensive income (loss). The Company repurchased 90,400
shares of common stock during the nine months ended September 30, 2003 at an
average price of $33.95.
On July 7, 2003, the Company paid a quarterly cash dividend of $0.21 per share
on common stock outstanding as of the close of business on June 16, 2003,
aggregating $335,000. On August 29, 2003, the Company declared a quarterly cash
dividend of $0.21 per share payable on October 7, 2003 to shareholders of record
as of the close of business on September 16, 2003, aggregating $338,000.
7
RESULTS OF OPERATIONS
Interest Income. Interest income decreased by $594,000 to $6.3 million for the
three months ended September 30, 2003 compared to $6.9 million for the three
months ended September 30, 2002. The decrease in interest income was primarily
due to a decrease in the average yield on interest earning assets, offset in
part by an increase in the average interest bearing assets. The yield on
interest earning assets decreased to 6.25% for the three months ended September
30, 2003 from 7.14% for the three months ended September 30, 2002. The decrease
in average yields was due primarily to a decrease in the average yield on loans,
securities available for sale and interest-bearing cash. The average yield on
loans decreased to 6.64% for the three months ended September 30, 2003 from
7.56% for the three months ended September 30, 2002. The average yield on
securities available for sale decreased to 3.64% for the three months ended
September 30, 2003 from 4.51% for the three months ended September 30, 2002. The
average yield on interest bearing cash decreased to 1.13% for the three months
ended September 30, 2003 from 1.32% for the three months ended September 30,
2002. The decrease in the average yields on assets was primarily due to
decreases in market interest rates. The average balance of interest earning
assets increased $17.4 million to $405.1 million for the three months ended
September 30, 2003 from $387.6 million for the three months ended September 30,
2002. This increase was primarily due to higher levels of loans and securities
available for sale, offset in part by a decrease in interest bearing cash. The
increase in the average balance of loans generally reflects originations over
the past twelve months of first mortgage loans, second mortgage loans and
purchases of first mortgage loans secured primarily by one-to four-family
residential, multifamily and commercial real estate loans, offset in part by
payments, sales and prepayments of loans. The increase in the average balance of
securities available for sale generally reflects purchases over the past twelve
months, offset in part by proceeds from the maturity of securities available for
sale. See "Financial Condition."
Interest income decreased by $918,000 to $19.3 million for the nine months ended
September 30, 2003 compared to $20.2 million for the nine months ended September
30, 2002. The decrease in interest income was primarily due to a decrease in the
average yield on interest earning assets, offset in part by an increase in the
average interest bearing assets. The yield on interest earning assets decreased
to 6.42% for the nine months ended September 30, 2003 from 7.14% for the nine
months ended September 30, 2002. The decrease in average yields was due
primarily to a decrease in the average yield on loans, securities available for
sale and interest-bearing cash. The average yield on loans decreased to 6.87%
for the nine months ended September 30, 2003 from 7.62% for the nine months
ended September 30, 2002. The average yield on securities available for sale
decreased to 4.08% for the nine months ended September 30, 2003 from 4.76% for
the nine months ended September 30, 2002. The average yield on interest bearing
cash decreased to 0.93% for the nine months ended September 30, 2003 from 1.37%
for the nine months ended September 30, 2002. The decrease in the average yields
on assets was primarily due to decreases in market interest rates. The average
balance of interest earning assets increased $23.2 million to $401.2 million for
the nine months ended September 30, 2003 from $378.0 million for the nine months
ended September 30, 2002. This increase was primarily due to higher levels of
loans and securities available for sale. The increase in the average balance of
loans generally reflects originations over the past twelve months of first
mortgage loans, second mortgage loans and purchases of first mortgage loans
secured primarily by one-to four-family residential, multifamily and commercial
real estate loans, offset in part by payments, sales and prepayments of loans.
The increase in the average balance of securities available for sale generally
reflects purchases over the past twelve months, offset in part by proceeds from
the maturity and sale of securities available for sale. See "Financial
Condition."
Interest Expense. Interest expense decreased by $477,000 to $3.1 million for the
three months ended September 30, 2003 compared to $3.5 million for the three
months ended September 30, 2002. The decrease in interest expense was primarily
due to a decrease in the average cost of interest bearing liabilities, offset in
part by an increase in the average balances of interest bearing liabilities. The
average cost of interest bearing liabilities decreased to 3.24% for the three
months ended September 30, 2003 from 3.90% for the three months ended September
30, 2002. The decrease in the average cost of interest bearing liabilities was
due primarily to decreases in all categories of interest bearing liabilities.
The average cost of NOW and money market accounts decreased to 0.48% for the
three months ended September 30, 2003 from 0.87% for the three months ended
September 30, 2002. The average cost of savings accounts decreased to 0.44% for
the three months ended September 30, 2003 from 1.08% for the three months ended
September 30, 2002. The average cost of certificates of deposit decreased to
3.95% for the three months ended September 30, 2003 from 4.65% for the three
months ended September 30, 2002. The average cost of borrowed funds decreased to
4.64% for the three months ended September 30, 2003 from
8
RESULTS OF OPERATIONS (Continued)
5.26% for the three months ended September 30, 2002. The decrease in the average
cost of funds was primarily due to decreases in market interest rates. The
average balance of interest bearing liabilities increased $14.9 million to
$374.2 million for the three months ended September 30, 2003 from $359.2 million
for the three months ended September 30, 2002. This increase was due primarily
to an increase in NOW accounts, money market accounts, savings accounts and
borrowed funds, offset in part by a decrease in certificates of deposits.
Interest expense decreased by $1.2 million to $9.4 million for the nine months
ended September 30, 2003 compared to $10.5 million for the nine months ended
September 30, 2002. The decrease in interest expense was primarily due to a
decrease in the average cost of interest bearing liabilities, offset in part by
an increase in the average balances of interest bearing liabilities. The average
cost of interest bearing liabilities decreased to 3.37% for the nine months
ended September 30, 2003 from 4.02% for the nine months ended September 30,
2002. The decrease in the average cost of interest bearing liabilities was due
primarily to decreases in all categories of interest bearing liabilities. The
average cost of NOW and money market accounts decreased to 0.61% for the nine
months ended September 30, 2003 from 0.95% for the nine months ended September
30, 2002. The average cost of savings accounts decreased to 0.58% for the nine
months ended September 30, 2003 from 1.20% for the nine months ended September
30, 2002. The average cost of certificates of deposit decreased to 4.11% for the
nine months ended September 30, 2003 from 4.81% for the nine months ended
September 30, 2002. The average cost of borrowed funds decreased to 4.67% for
the nine months ended September 30, 2003 from 5.41% for the nine months ended
September 30, 2002. The decrease in the average cost of funds was primarily due
to decreases in market interest rates. The average balance of interest bearing
liabilities increased $20.8 million to $371.2 million for the nine months ended
September 30, 2003 from $350.4 million for the nine months ended September 30,
2002. This increase was due primarily to an increase in NOW accounts, money
market accounts, savings accounts and borrowed funds.
Net Interest Income. Net interest income before the provision for loan losses
decreased by $117,000 to $3.3 million for the three months ended September 30,
2003 from $3.4 million for the three months ended September 30, 2002. The
decrease is due primarily to a narrowing interest rate spread, offset in part by
an increase in the average balance of interest earning assets. The interest rate
spread (i.e., the difference in the average yield on assets and average cost of
liabilities) decreased to 3.01% for the three months ended September 30, 2003
from 3.24% for the three months ended September 30, 2002.
Net interest income before the provision for loan losses increased by $234,000
to $9.9 million for the nine months ended September 30, 2003 from $9.7 million
for the nine months ended September 30, 2002. The increase is due primarily to
an increase in the average balance of interest earning assets, offset in part by
a decrease in the interest rate spread. The interest rate spread (i.e., the
difference in the average yield on assets and average cost of liabilities)
decreased to 3.05% for the nine months ended September 30, 2003 from 3.12% for
the nine months ended September 30, 2002.
9
RESULTS OF OPERATIONS (Continued)
The following table sets forth certain information relating to the Company's
average balance sheets and reflects the average yield on assets and average cost
of liabilities for the three and nine month periods ended September 30, 2003 and
2002, respectively.
For the Three Months Ended September 30,
-------------------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans $ 363,015 $ 6,038 6.64% $ 349,615 $ 6,620 7.56%
Securities available for sale 29,572 269 3.64 23,973 270 4.51
Interest bearing cash 12,493 36 1.13 14,055 47 1.32
--------- --------- ------ --------- ------- ------
Total interest-earning assets 405,080 6,343 6.25% 387,643 $ 6,937 7.14%
Noninterest-earning assets 23,636 --------- ------ 20,531 ------- ------
--------- ---------
Total assets $ 428,716 $ 408,174
========= =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings $ 67,561 $ 83 0.48% $ 61,375 $ 135 0.87%
Passbook savings 28,303 31 0.44 25,286 69 1.08
Certificates of deposit 180,668 1,800 3.95 186,772 2,191 4.65
Borrowed funds 97,620 1,142 4.64 85,783 1,138 5.26
--------- --------- ------ --------- ------- ------
Total interest-bearing liabilities 374,152 $ 3,056 3.24% 359,216 $ 3,533 3.90%
--------- ------ ------- ------
Noninterest-bearing liabilities 14,261 10,473
--------- ---------
Total liabilities 388,413 369,689
Equity 40,303 38,485
--------- ---------
Total liabilities and equity $ 428,716 $ 408,174
========= =========
Net interest income $ 3,287 $ 3,404
======== =======
Net interest rate spread 3.01% 3.24%
====== ======
Net interest margin 3.25% 3.51%
Ratio of average interest-earning assets to ====== ======
average interest-bearing liabilities 108.26% 107.91%
====== ======
For the Nine Months Ended September 30,
--------------------------------------------------------------------------------
2003 2002
--------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans $ 354,680 $ 18,271 6.87% $ 334,658 $ 19,119 7.62%
Securities available for sale 30,255 926 4.08 26,054 931 4.76
Interest bearing cash 16,256 113 0.93 17,318 178 1.37
--------- --------- ------ --------- --------- ------
Total interest-earning assets 401,191 $ 19,310 6.42% 378,030 $ 20,228 7.14%
Noninterest-earning assets 22,515 --------- ------ 19,836 --------- ------
--------- ---------
Total assets $ 423,706 $ 397,866
========= =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings $ 65,834 $ 303 0.61% $ 61,892 $ 441 0.95%
Passbook savings 27,523 120 0.58 24,593 220 1.20
Certificates of deposit 181,404 5,580 4.11 181,705 6,537 4.81
Borrowed funds 96,487 3,369 4.67 82,223 3,326 5.41
--------- --------- ------ --------- --------- ------
Total interest-bearing liabilities 371,248 $ 9,372 3.37% 350,413 $ 10,524 4.02%
--------- ------ --------- ------
Noninterest-bearing liabilities 13,008 10,196
--------- ---------
Total liabilities 384,256 360,609
Equity 39,450 37,257
--------- ---------
Total liabilities and equity $ 423,706 $ 397,866
========= =========
Net interest income $ 9,938 $ 9,704
========= =========
Net interest rate spread 3.05% 3.12%
====== ======
Net interest margin 3.30% 3.42%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.06% 107.88%
====== ======
10
RESULTS OF OPERATIONS (Continued)
Provision for Loan Losses. The Company's provision for loan losses was $75,000
and $56,000 for the three months ended September 30, 2003 and 2002,
respectively. The Company's provision for loan losses was $195,000 and $326,000
for the nine months ended September 30, 2003 and 2002, respectively. The Company
establishes provisions for loan losses, which are charged to operations, in
order to maintain the allowance for loan losses at a level, which is deemed to
be appropriate, based upon an assessment of a number of factors. These factors
include prior loss experience, industry standards, past due loans, economic
conditions, the volume and type of loans in the Bank's portfolio, which includes
a significant amount of multi-family and commercial real estate loans,
substantially all of which are purchased and are collateralized by properties
located outside of the Bank's market area, and other factors related to the
collectibility of the Bank's loan portfolio. The net charge offs were $143,000
for the nine months ended September 30, 2003 as compared to net charge offs of
$89,000 for the nine months ended September 30, 2002. The resulting allowance
for loan losses was $3.2 million, $3.1 million and $3.1 million at September 30,
2003, December 31, 2002 and September 30, 2002, respectively.
The allowance for loan losses as a percentage of total loans receivable was
0.86%, 0.90% and 0.91% at September 30, 2003, December 31, 2002 and September
30, 2002, respectively. The level of nonperforming loans was $456,000 at
September 30, 2003, $643,000 at December 31, 2002 and $599,000 at September 30,
2002.
The allowance for loan losses is management's best estimates of probable losses
inherent in the loan portfolio as of the balance sheet date. While management
estimates loan losses using the best available information, such as independent
appraisals for significant collateral properties, no assurance can be made that
future adjustments to the allowance will not be necessary based on changes in
economic and real estate market conditions, further information obtained
regarding known problem loans, identification of additional problem loans, and
other factors, both within and outside of management's control.
Noninterest Income. Total noninterest income increased by $255,000 to $1.8
million for the three months ended September 30, 2003 from $1.5 million for the
three months ended September 30, 2002. The increase is due to increases in fees
and service charges, abstract fees and mortgage banking income. Fees and service
charges increased $20,000, primarily due to fees associated with checking
accounts, including overdraft fees, offset in part by a decrease in loan
prepayment fees. Abstract fees increased $85,000, primarily due to increased
sales volume. Sales volume increased in part due to a general increase in real
estate activity. Mortgage banking income increased $144,000 due in part to an
increase in loan originations resulting from lower interest rates and increased
pricing.
Total noninterest income increased by $646,000 to $4.9 million for the nine
months ended September 30, 2003 from $4.2 million for the nine months ended
September 30, 2002. The increase is due to increases in fees and service
charges, abstract fees and mortgage banking income. Fees and service charges
increased $25,000, primarily due to fees associated with checking accounts,
including overdraft fees, offset in part by a decrease in loan prepayment fees.
Abstract fees increased $215,000, primarily due to increased sales volume. Sales
volume increased in part due to a general increase in real estate activity.
Mortgage banking income increased $378,000 due in part to an increase in loan
originations resulting from lower interest rates and increased pricing.
Noninterest Expense. Total noninterest expense increased by $479,000 to $2.8
million for the three months ended September 30, 2003 from $2.3 million for the
three months ended September 30, 2002. The increase is due primarily to
increases in salaries and employee benefits, premises and equipment, data
processing and other expenses. The increase in salaries and employee benefits
was due in part to increases in defined benefit plan costs, employee stock
ownership plan costs, an increase in personnel in the Ankeny and Clive, Iowa
offices and ordinary salary increases. The increase in premises and equipment
was due in part to increased costs associated with the Ankeny and Clive, Iowa
offices. The increase in data processing costs was due in part to increases in
internet banking costs, consulting costs and ordinary cost increases. The
increase in other expenses were due in part to increases in marketing costs in
conjunction with a direct mail checking account promotion, increased property
taxes associated with Northridge Apartments Limited Partnership due to the
completion of a property tax abatement program and increased costs associated
with the opening of a second multifamily apartment building in March, 2003.
Other increases in noninterest expense were partially due to the Bank relocating
its temporary Ankeny office to a newly constructed 5,000 square foot branch
office in February, 2003 and the opening of a temporary office in Clive, Iowa
11
RESULTS OF OPERATIONS (Continued)
in August, 2003. The Company's efficiency ratio for the three months ended
September 30, 2003 and 2002 was 54.65% and 46.43%, respectively. The Company's
ratio of noninterest expense to average assets for the three months ended
September 30, 2003 and 2002 was 2.58% and 2.24%, respectively.
Total noninterest expense increased by $920,000 to $8.0 million for the nine
months ended September 30, 2003 from $7.1 million for the nine months ended
September 30, 2002. The increase is due primarily to increases in salaries and
employee benefits, premises and equipment, data processing and other expenses.
The increase in salaries and employee benefits was due in part to increases in
defined benefit plan costs, employee stock ownership plan costs, an increase in
personnel in the Ankeny, Iowa and Clive, Iowa offices and ordinary salary
increases. The increase in premises and equipment was due in part to increased
costs associated with the Ankeny and Clive, Iowa offices. The increase in data
processing was due in part to increases in internet banking costs, consulting
costs and ordinary cost increases. The increase in other expenses was due in
part to increases in marketing costs in conjunction with a direct mail checking
account promotion, increased property taxes associated with Northridge
Apartments Limited Partnership due to the completion of a property tax abatement
program and increased costs associated with the opening of a second multifamily
apartment building in March, 2003. Other increases in noninterest expense were
partially due to the Bank relocating its temporary Ankeny office to a newly
constructed 5,000 square foot branch office in February, 2003 and the opening of
a temporary office in Clive, Iowa in August, 2003. The Company's efficiency
ratio for the nine months ended September 30, 2003 and 2002 was 53.89% and
50.68%, respectively. The Company's ratio of noninterest expense to average
assets for the nine months ended September 30, 2003 and 2002 was 2.51% and
2.36%, respectively.
Income Taxes. Income taxes decreased by $147,000 to $721,000 for the three
months ended September 30, 2003 as compared to $868,000 for the three months
ended September 30, 2002, primarily due to a decrease in net income before
income taxes, and federal income tax credits from Northridge Apartments Limited
Partnership II.
Income taxes decreased by $71,000 to $2.1 million for the nine months ended
September 30, 2003 as compared to $2.2 million for the nine months ended
September 30, 2002, primarily due to federal income tax credits from Northridge
Apartments Limited Partnership II and a one time state tax credit which
decreased income tax expense by approximately $100,000, partially offset by an
increase in net income before income taxes and a decrease in nontaxable income.
Net Income. Net income decreased by $214,000 to $1.5 million for the three
months ended September 30, 2003, as compared to $1.7 million for the same period
in 2002.
Net income increased by $162,000 to $4.5 million for the nine months ended
September 30, 2003, as compared to $4.4 million for the same period in 2002.
12
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In management's opinion, there has not been a material change in market risk
from December 31, 2002 as reported in Item 7A of the Annual Report on Form 10-K.
ITEM 4.
CONTROLS AND PROCEDURES
Management, including the Company's Chief Executive Officer and Treasurer, has
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(e)) as of the end of the
period covered by this report. Based upon that evaluation, the Chief Executive
Officer and Treasurer concluded that the disclosure controls and procedures were
effective, in all material respects, to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during the
Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes
Oxley Act of 2003
Exhibit 32.1 Certification pursuant to Section 906 of the Sarbanes
Oxley Act of 2003
Exhibit 99.1 Press Release, dated July 25, 2003 (regarding 2nd quarter
earnings)
Exhibit 99.2 Press Release, dated August 29, 2003 (regarding
declaration of dividend)
(b) Reports on Form 8-K
The Company filed a Form 8-K on July 25, 2003 furnishing to the
Commission a press release announcing the Company's earnings for the
period ended June 30, 2003.
14
SIGNATURES
Pursuant to the requirements 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 CENTRAL BANCSHARES, INC.
DATE: November 13, 2003 BY: /s/ David M. Bradley
--------------------
David M. Bradley, Chairman, President and
Chief Executive Officer
DATE: November 13, 2003 BY: /s/ John L. Pierschbacher
-------------------------
John L. Pierschbacher
Principal Financial Officer
15