UNITED STATES
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 June 30, 2004
[ ] 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 July 30, 2004
- --------------------------------------------------------------------------------
Common Stock, $.01 par value 1,562,780
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 June 30, 2004
and December 31, 2003 1
Consolidated Condensed Statements of
Income for the three and six months ended
June 30, 2004 and 2003 2
Consolidated Condensed Statements of
Cash Flows for the six months ended
June 30, 2004 and 2003 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 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
Item 4. Controls and Procedures 14
Part II. Other Information
Items 1 through 6 15 to 16
Signatures 17
Exhibits
PART I. FINANCIAL INFORMATION
ITEM 1.
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, December 31,
2004 2003
------------- -------------
ASSETS
Cash and due from banks:
Interest-bearing $ 6,339,460 $ 7,124,828
Noninterest-bearing 2,163,118 2,893,745
Securities available-for-sale 24,692,614 26,952,157
Loans receivable, net 392,535,845 362,959,238
Loans held for sale 811,561 326,900
Accrued interest receivable 1,884,799 1,866,521
Foreclosed real estate 1,170,226 1,453,353
Premises and equipment, net 10,013,907 9,842,477
Rental real estate 2,885,265 2,968,918
Title plant 925,256 925,256
Goodwill 4,970,800 4,970,800
Deferred taxes 966,696 757,543
Prepaid expenses and other assets 869,525 967,565
------------- -------------
Total assets $ 450,229,072 $ 424,009,301
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 302,531,610 $ 283,963,569
Borrowed funds 102,487,641 95,004,605
Advances from borrowers for taxes and insurance 1,713,174 1,736,755
Dividends payable 390,695 337,907
Accrued expenses and other liabilities 1,886,250 1,374,824
------------- -------------
Total liabilities 409,009,370 382,417,660
------------- -------------
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 2004, 1,571,780; 2003, 1,604,780 15,718 16,048
shares)
Additional paid-in capital 18,060,860 17,711,322
Retained earnings, substantially restricted 23,951,330 24,103,330
Accumulated other comprehensive (loss) (350,378) (71,266)
Less cost of treasury stock, 2004, 9,000 shares;
2003, none (342,250) --
Unearned shares, employee stock ownership plan (115,578) (167,793)
------------- -------------
Total stockholders' equity 41,219,702 41,591,641
------------- -------------
Total liabilities and stockholders' equity $ 450,229,072 $ 424,009,301
============= =============
See Notes to Consolidated Condensed Financial Statements
1
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Loans receivable $ 5,910,413 $ 6,063,880 $11,726,797 $12,232,542
Securities and cash deposits 252,833 377,015 536,939 734,736
----------- ----------- ----------- -----------
6,163,246 6,440,895 12,263,736 12,967,278
----------- ----------- ----------- -----------
Interest expense:
Deposits 1,717,126 2,007,147 3,444,276 4,088,827
Borrowed funds 1,086,128 1,129,521 2,176,005 2,227,529
----------- ----------- ----------- -----------
2,803,254 3,136,668 5,620,281 6,316,356
----------- ----------- ----------- -----------
Net Interest Income 3,359,992 3,304,227 6,643,455 6,650,922
Provision for loan losses 50,000 60,000 110,000 120,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 3,309,992 3,244,227 6,533,455 6,530,922
----------- ----------- ----------- -----------
Noninterest income:
Fees and service charges 825,971 626,589 1,530,204 1,190,181
Abstract fees 411,328 495,127 765,167 929,147
Mortgage banking income 73,653 275,361 127,634 449,729
Other income 320,769 301,979 640,574 522,959
----------- ----------- ----------- -----------
Total noninterest income 1,631,721 1,699,056 3,063,579 3,092,016
----------- ----------- ----------- -----------
Noninterest expense:
Compensation and employee benefits 1,491,378 1,411,599 3,073,703 2,843,959
Premises and equipment 351,439 307,010 710,428 616,182
Data processing 140,103 156,179 279,617 290,498
Other expenses 769,759 779,289 1,551,858 1,461,188
----------- ----------- ----------- -----------
Total noninterest expense 2,752,679 2,654,077 5,615,606 5,211,827
----------- ----------- ----------- -----------
Income before income taxes 2,189,034 2,289,206 3,981,428 4,411,111
Provision for income taxes 707,593 761,506 1,283,476 1,381,026
----------- ----------- ----------- -----------
Net Income $ 1,481,441 $ 1,527,700 $ 2,697,952 $ 3,030,085
=========== =========== =========== ===========
Basic earnings per common share $ 0.95 $ 0.97 $ 1.72 $ 1.91
=========== =========== =========== ===========
Earnings per common share- assuming dilution $ 0.91 $ 0.92 $ 1.64 $ 1.80
=========== =========== =========== ===========
Dividends declared per common share $ 0.25 $ 0.21 $ 0.50 $ 0.42
=========== =========== =========== ===========
Comprehensive income $ 1,105,834 $ 1,379,534 $ 2,418,840 $ 2,908,305
=========== =========== =========== ===========
See Notes to Consolidated Condensed Financial Statements.
2
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,697,952 $ 3,030,085
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 110,000 120,000
Depreciation 428,939 380,866
Amortization and accretion 211,965 309,863
Deferred taxes (43,131) (148,617)
Effect of contribution to employee stock ownership plan 198,594 269,386
(Gain) on sale of foreclosed real estate and loans, net (162,969) (482,786)
Loss on disposal of equipment and premises, net 2,718 1,253
Proceeds from sales of loans held for sale 9,156,254 28,946,235
Originations of loans held for sale (9,513,281) (29,442,264)
Change in assets and liabilities:
Accrued interest receivable (18,278) 47,855
Prepaid expenses and other assets 98.040 1,776,066
Accrued expenses and other liabilities 511,426 464,004
------------ ------------
Net cash provided by operating activities 3,678,229 5,271,946
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans 11,812,536 17,592,624
Purchase of loans (41,670,703) (26,199,567)
Proceeds from sales of securities available-for-sale 744,500 --
Purchase of securities available-for-sale (1,056,500) (10,865,958)
Proceeds from maturities of securities available-for-sale 2,093,295 1,978,412
Purchase of premises and equipment and rental real estate (519,434) (1,814,249)
Other 311,171 141,527
------------ ------------
Net cash (used in) investing activities (28,285,135) (19,167,211)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 18,568,041 13,336,409
(Decrease) in advances from borrowers for taxes and insurance (23,581) (30,594)
Net change in short-term borrowings 4,500,000 --
Proceeds from other borrowed funds 5,000,000 17,500,000
Payments on other borrowings (2,016,964) (5,072,916)
Purchase of treasury stock (3,182,560) (3,069,494)
Dividends paid (723,903) (618,352)
Issuance of common stock 969,878 1,062,859
------------ ------------
Net cash provided by financing activities 23,090,911 23,107,912
------------ ------------
Net increase (decrease) in cash (1,515,995) 9,212,647
CASH AND DUE FROM BANKS
Beginning 10,018,573 15,168,601
------------ ------------
Ending $ 8,502,578 $ 24,381,248
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 3,347,774 $ 4,124,268
Interest paid on borrowings 2,176,111 2,227,635
Income taxes 506,576 1,091,808
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 six month
periods ended June 30, 2004 and 2003 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 disclosure 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 2003 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 June
30, 2004, the weighted average number of shares outstanding for basic and
diluted earnings per share computation were 1,557,367 and 1,623,165,
respectively. For the six-month period ended June 30, 2004, the weighted average
number of shares outstanding for basic and diluted earnings per share
computation were 1,569,902 and 1,641,026, respectively. For the three-month
period ended June 30, 2003, the weighted average number of shares outstanding
for basic and diluted earnings per share computation were 1,572,148 and
1,666,398, respectively. For the six-month period ended June 30, 2003, the
weighted average number of shares outstanding for basic and diluted earnings per
share computation were 1,583,748 and 1,684,531, respectively.
3. DIVIDENDS
On May 28, 2004, the Company declared a cash dividend on its common stock,
payable on July 6, 2004 to stockholders of record as of June 15, 2004, equal to
$0.25 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, 2003 and has
determined that there has been no impairment of goodwill.
As of June 30, 2004 and December 31, 2003, 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 six months ended June 30, 2004 or June 30, 2003.
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
4
standard allows compensation to continue to be measured by using the intrinsic
value based method of 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
June 30, 2004 June 30, 2003
------------ -------------
Net income, as reported $ 1,481,441 $ 1,527,700
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (5,048) (13,317)
----------- -----------
Pro forma net income $ 1,476,393 $ 1,514,383
=========== ===========
Earnings per common share - basic:
As reported $ 0.95 $ 0.97
Pro forma 0.95 0.96
Earnings per common share - assuming dilution:
As reported $ 0.91 $ 0.92
Pro forma 0.91 0.91
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
------------- -------------
Net income, as reported $ 2,697,952 $ 3,030,085
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (42,906) (52,994)
----------- -----------
Pro forma net income $ 2,655,046 $ 2,977,091
=========== ===========
Earnings per common share - basic:
As reported $ 1.72 $ 1.91
Pro forma 1.69 1.88
Earnings per common share - assuming dilution:
As reported $ 1.64 $ 1.80
Pro forma 1.62 1.77
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 2004 and 2003, respectively: dividend rate of 2.3% and
2.3%, price volatility of 20% and 20%, risk-free interest rate of 4.10% and
3.70%, 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 here within.
Executive Overview
North Central Bancshares, Inc.'s business strategy is to operate the Bank as a
well-capitalized, profitable and independent community oriented savings bank.
Specifically, the Company's business strategy incorporates the following
elements: (1) operating as a community oriented financial institution; (2)
increasing loan and deposit balances in existing branch offices as well as by
establishing de novo branch offices in markets where population growth trends
are positive such as the Des Moines, Iowa metropolitan area; (3) maintaining
high asset quality by emphasizing investment in residential mortgage,
multifamily and commercial real estate loans and consumer loans; (4) emphasizing
growth in core deposits, which includes demand deposit, NOW, money market and
savings accounts; (5) maintaining capital in excess of regulatory requirements;
(6) controlling noninterest expense; (7) managing interest rate risk exposure;
and (8) increasing noninterest income through increases in fees, service charges
and sales of noninsured products.
The purpose of this summary is to provide an overview of the items management
focuses on when evaluating the condition of the Company and our success in
implementing our stockholder value strategy. Our stockholder value strategy has
three major themes: (1) enhancing our shareholders' value; (2) making our retail
banking franchise more valuable; and (3) efficiently utilizing our capital.
Management believes the following points were the most important to that
analysis this quarter:
o A key factor in the Company's management of capital is the Company's
stock repurchase programs. An active stock repurchase program has
consistently been used by the Company to manage capital and increase
earnings per share. Since the Company's inception it has repurchased
2,677,272 shares at a cost of $50.0 million as of June 30, 2004.
o The Bank continues to open new offices in market areas where
population growth trends are positive. A temporary office was opened
in Clive, Iowa in October, 2003. The Clive office's permanent location
opened in March, 2004. The Bank opened a permanent office in Ankeny,
Iowa in February, 2003. Both of these locations are in suburbs of Des
Moines which is Iowa's largest metropolitan area. The Company will
continue to analyze de novo branch opportunities in the Des Moines
metropolitan area. Noninterest expenses have increased during the
three and six months ended June 30, 2004 and 2003 in part due to the
Company's strategy of opening de novo branch offices. We believe that
this strategy will result in loan and deposit growth for the Company
but will negatively impact net earnings until each de novo branch
achieves profitability.
o Consistent with the Bank's emphasis on attracting and retaining core
deposits, deposit fee growth continued a strongly positive trend. The
growth in core deposits is due in part to a new direct mail marketing
program implemented in early 2003 emphasizing checking accounts. This
direct mail program is ongoing and is expected to result in a
continued growth in core deposits and fee income.
6
o Management believes that the allowance for loan losses is adequate.
The allowance for loan losses to nonaccrual loans was 576.28% at June
30, 2004. Net annualized chargeoffs for 2004 were 0.02% of total loans
and have averaged 0.04% of total loans for the past five years. During
the six months ended June 30, 2004, the Company's loan portfolio
increased $29.6 million or 8.1%. A significant portion of this
increase consisted of increases in the commercial and multifamily real
estate loans, which carry a higher level of credit risk than other
loans in the portfolio. The Company's provision for loan losses for
the three and six months ended June 30, 2004 was $50,000 and $110,000,
respectively.
o Purchases and originations of out of state real estate loans remained
an integral part of the Company's o business plan. The Company has
purchased and originated out of state real estate loans to supplement
local mortgage loan originations and to diversify its mortgage loan
portfolio geographically.
FINANCIAL CONDITION
Total assets increased $26.2 million, or 6.2%, to $450.2 million at June 30,
2004 from $424.0 million at December 31, 2003. The increase in assets was due
primarily to increases in net loans receivable, offset in part by a decrease in
securities available for sale, interest bearing cash and due from banks.
Total loans receivable, net, increased by $29.6 million, or 8.1%, to $392.5
million at June 30, 2004 from $363.0 million at December 31, 2003, primarily due
to the origination of $37.2 million of first mortgage loans secured by
one-to-four family residences and multifamily loans, purchases of first mortgage
loans primarily secured by multifamily residences and commercial real estate
loans of $41.7 million, and originations of $10.8 million of second mortgage
loans during the six months ended June 30, 2004. These originations and
purchases were offset in part by payments and prepayments of $56.6 million and
sales of loans of $9.0 million during the six months ended June 30, 2004. The
Company sells substantially all fixed-rate loans with maturities in excess of 15
years in the secondary mortgage market in order to reduce interest rate risk.
The Company has also sold a portion of the fixed-rate loans with 15 year
maturities in the secondary market in order to reduce interest rate risk.
Securities available for sale decreased $2.3 million or 8.4%, to $24.7 million
at June 30, 2004 from $27.0 million at December 31, 2003 as the Company invested
the cash in loans. Interest bearing cash and due from banks decreased $1.5
million, or 15.1%, to $8.5 million at June 30, 2004 from $10.0 million at
December 31, 2003 as the Company invested cash in loans.
Deposits increased $18.6 million, or 6.5%, to $302.5 million at June 30, 2004
from $284.0 million at December 31, 2003, primarily reflecting increases in NOW
accounts, savings accounts, money market accounts and retail certificate of
deposit accounts. The increase in deposits is due primarily to the offices in
Clive and Ankeny, Iowa and management's marketing efforts. Borrowings, primarily
FHLB advances, increased $7.5 million, to $102.5 million at June 30, 2004 from
$95.0 million at December 31, 2003. The increase in borrowed funds is due
primarily to an increase in short and long term borrowings. The Company utilized
the increase in deposits and FHLB advances to fund loans.
Total shareholders' equity decreased $372,000 to $41.2 million at June 30, 2004
from $41.6 million at December 31, 2003, primarily due to funds used for the
repurchase of stock, dividends paid to shareholders and an increase in
accumulated other comprehensive loss, offset in part by net income and stock
options exercised.
7
The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum
tangible, leverage (core) and risk-based capital requirements. As of June 30,
2004, the Bank exceeded all of its regulatory capital requirements. The Bank's
required, actual and excess capital levels as of June 30, 2004 were as follows:
Amount Percentage of Assets
------ --------------------
(dollars in thousands)
Tangible capital:
Capital level $32,497 7.31%
Less Requirement 6,670 1.50%
------- ----
Excess $25,827 5.81%
======= ====
Core capital:
Capital level $32,497 7.31%
Less Requirement 17,786 4.00%
------- ----
Excess $14,711 3.31%
======= ====
Risk-based capital:
Capital level $35,645 11.93%
Less Requirement 23,903 8.00%
------- ----
Excess $11,742 3.93%
======= ====
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 six months of 2004 and 2003, principal
payments, repayments and proceeds from sale of loans totaled $65.8 million and
$98.1 million, respectively. The net increase in deposits during the first six
months of 2004 and 2003 totaled $18.6 million and $13.3 million, respectively.
The proceeds from borrowed funds during the six months ended June 30, 2004 and
2003 totaled $5.0 million and $17.5 million, respectively. The net change in
short term borrowings during the six months ended June 30, 2004 and 2003 totaled
$4.5 million and none, respectively. During the first six months of 2004 and
2003, the proceeds from the maturities, calls and sales of securities totaled
$2.8 million and $2.0 million, respectively. Cash provided from operating
activities during the first six months of 2004 and 2003 totaled $3.7 million and
$5.3 million, respectively. The Company's primary use of funds is to originate
and purchase loans, purchase securities available for sale, repay borrowed funds
and other financing activities. During the first six months of 2004 and 2003,
the Company's gross purchases and origination of loans totaled $96.3 million and
$106.9 million, respectively. The purchase of securities available for sale for
the six months ended June 30, 2004 and 2003 totaled $1.1 million and $10.9
million, respectively. The repayment of borrowed funds during the first six
months of 2004 and 2003 totaled $2.0 million and $5.1 million, respectively. 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 June 30, 2004, 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.
The Company repurchased 85,705 shares of common stock during the six months
ended June 30, 2004 at an average price of $37.13.
On April 7, 2004, the Company paid a quarterly cash dividend of $0.25 per share
on common stock outstanding as of the close of business on March 16, 2004,
aggregating $397,000. On May 28, 2004, the Company declared a quarterly cash
dividend of $0.25 per share payable on July 6, 2004 to shareholders of record as
of the close of business on June 15, 2004, aggregating $391,000.
8
RESULTS OF OPERATIONS
Net Income. Net income decreased by $46,000 to $1,481,000 for the quarter ended
June 30, 2004 compared to $1,528,000 for the same period in 2003. Net income is
primarily dependent on net interest income, noninterest income, noninterest
expense and income tax expense. The decrease in net income was primarily due to
increases in noninterest expenses and decreases in noninterest income, offset in
part by increases in net interest income and decreases in income tax expense.
Net income decreased by $332,000 to $2,698,000 for the six months ended June 30,
2004 compared to $3,030,000 for the same period in 2003. Net income is primarily
dependent on net interest income, noninterest income, noninterest expense and
income tax expense. The decrease in net income was primarily due to increases in
noninterest expenses and decreases in noninterest income, offset in part by
decreases in income tax expense.
Net Interest Income. Net interest income before provision for loan losses
increased by $56,000 to $3,360,000 for the quarter ended June 30, 2004 from
$3,304,000 for the quarter ended June 30, 2003. The increase is primarily due to
an increase in the average balance of interest earning assets and the decrease
in the average cost of funds, offset in part by a decrease in the yield on
interest earning assets and an increase in the average balance of interest
bearing liabilities. The interest rate spread (i.e., the difference in the
average yield on assets and average cost of liabilities) decreased to 2.96% for
the quarter ended June 30, 2004 from 3.00% for the quarter ended June 30, 2003.
The decrease in interest rate spread reflects the general decrease in the yield
on interest earning assets offset in part by the decrease in the overall cost of
interest bearing liabilities. The decrease in the yield on interest earning
assets and the cost of interest bearing liabilities reflects a continuing low
interest rate environment.
Net interest income before provision for loan losses decreased by $7,000 to
$6,643,000 for the six months ended June 30, 2004 from $6,651,000 for the six
months ended June 30, 2003. The decrease is primarily due to a decrease in the
yield on interest earning assets and an increase in the average balance of
interest bearing liabilities, offset in part by an increase in the average
balance of interest earning assets and the decrease in the average cost of
funds. The interest rate spread (i.e., the difference in the average yield on
assets and average cost of liabilities) decreased to 2.97% for the six months
ended June 30, 2004 from 3.06% for the six months ended June 30, 2003. The
decrease in interest rate spread reflects the general decrease in the yield on
interest earning assets offset in part by the decrease in the overall cost of
interest bearing liabilities. The decrease in the yield on interest earning
assets and the cost of interest bearing liabilities reflects a continuing low
interest rate environment.
Interest Income. Interest income decreased by $278,000 to $6,163,000 for the
quarter ended June 30, 2004 compared to $6,441,000 for the quarter ended June
30, 2003. 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 balance of interest earning assets. The average yield on interest
earning assets decreased to 5.88% for the quarter ended June 30, 2004 from 6.35%
for the quarter ended June 30, 2003, primarily due to the continuing low
interest rate environment. The average balance of interest earning assets
increased $14.9 million to $420.0 million for the quarter ended June 30, 2004,
from $405.1 million for 2003. The increase in the average balance of interest
earning assets primarily reflects increases in the average balances of first
mortgage loans, offset in part by decreases in interest bearing cash and due
from banks and securities available for sale. The increase in the average
balances of first mortgage loans were primarily derived from originations of
first mortgage loans secured by one-to four-family and multifamily residences,
purchases of first mortgage loans secured by one-to- four family residences,
multifamily residences and commercial real estate, which originations and
purchases were offset in part by payments and prepayments and sales of loans
during the twelve months ended June 30, 2004. This reflects the Company's
continued emphasis on residential lending. The decrease in the average balance
of securities available for sale were derived from payments and calls of
securities, offset in part by purchases during the twelve months ended June 30,
2004. See "Financial Condition."
Interest income decreased by $704,000 to $12,264,000 for the six months ended
June 30, 2004 compared to $12,967,000 million for the six months ended June 30,
2003. 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 balance of interest earning assets. The average yield on interest
earning assets decreased to 5.94% for the six
9
RESULTS OF OPERATIONS (Continued)
months ended June 30, 2004 from 6.51% for the six months ended June 30, 2003,
primarily due to the continuing low interest rate environment. The average
balance of interest earning assets increased $13.9 million to $413.2 million for
the six months ended June 30, 2004, from $399.2 million for 2003. The increase
in the average balance of interest earning assets primarily reflects increases
in the average balances of first mortgage loans, offset in part by decreases in
interest bearing cash and due from banks and securities available for sale. The
increase in the average balances of first mortgage loans were primarily derived
from originations of first mortgage loans secured by one-to four-family and
multifamily residences, purchases of first mortgage loans secured by one-to-four
family residences, multifamily residences and commercial real estate, which
originations and purchases were offset in part by payments and prepayments and
sales of loans during the twelve months ended June 30, 2004. This reflects the
Company's continued emphasis on residential lending. The decrease in the average
balance of securities available for sale were derived from payments and calls of
securities, offset in part by purchases during the twelve months ended June 30,
2004. See "Financial Condition."
Interest Expense. Interest expense decreased by $333,000 to $2,803,000 for the
quarter ended June 30, 2004 compared to $3,137,000 for the quarter ended June
30, 2003. The decrease in interest expense was primarily due to a decrease in
the average cost of funds, offset in part by an increase in the average balances
of interest bearing liabilities. The average cost of funds decreased to 2.92%
for the quarter ended June 30, 2004 from 3.35% for the quarter ended June 30,
2003, primarily due to the continuing low interest rate environment. The
decrease in interest expense was partially offset by a $10.8 million increase in
the average balance of interest-bearing liabilities to $386.6 million for the
quarter ended June 30, 2004, from $375.8 million for the same period in 2003.
The increase in the average balance of interest-bearing liabilities primarily
reflects an increase in the average balances of NOW, money market and savings
accounts, offset by a slight decrease in certificates of deposits and borrowed
funds. The increase in average interest bearing deposits was primarily due to
the branches in Clive and Ankeny, Iowa, which were opened in 2004 and 2003,
respectively, and the Company's marketing efforts. The increase in interest
bearing liabilities was primarily used to fund loans.
Interest expense decreased by $696,000 to $5,620,000 for the six months ended
June 30, 2004 compared to $6,316,000 for the six months ended June 30, 2003. The
decrease in interest expense was primarily due to a decrease in the average cost
of funds, offset in part by an increase in the average balances of interest
bearing liabilities. The average cost of funds decreased to 2.97% for the six
months ended June 30, 2004 from 3.45% for the six months ended June 30, 2003,
primarily due to the continuing low interest rate environment. The decrease in
interest expense was partially offset by a $10.3 million increase in the average
balance of interest-bearing liabilities to $380.1 million for the six months
ended June 30, 2004, from $369.8 million for the same period in 2003. The
increase in the average balance of interest-bearing liabilities primarily
reflects an increase in the average balance of NOW, money market and savings
accounts and borrowed funds, offset by a decrease in the certificate of deposit.
The increase in average interest bearing deposits was primarily due to the
branches in Clive and Ankeny, Iowa, which were opened in 2004 and 2003,
respectively, and the Company's marketing efforts. The increase in interest
bearing liabilities was primarily used to fund loans.
10
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 six month periods ended June 30, 2004 and 2003,
respectively.
For the Three Months Ended June 30,
-------------------------------------------------------------------------------------
2004 2003
-------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans $ 386,949 $ 5,910 6.12% $ 353,505 $ 6,064 6.87%
Securities available-for-sale 25,939 232 3.58 32,002 336 4.19
Interest bearing cash 7,072 21 1.17 19,565 41 0.85
--------- --------- ---- --------- --------- ----
Total interest-earning assets 419,960 6,163 5.88% 405,072 6,441 6.35%
Noninterest-earning assets 23,430 --------- ---- 22,777 --------- ----
--------- ---------
Total assets $ 443,390 $ 427,849
========= =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings $ 76,339 $ 117 0.62% $ 66,888 $ 106 0.64%
Passbook savings 29,876 23 0.31 27,642 38 0.54
Certificates of deposit 182,811 1,577 3.47 183,340 1,863 4.08
Borrowed funds 97,618 1,086 4.48 97,978 1,130 4.62
--------- --------- ---- ---------- --------- ----
Total interest-bearing liabilities 386,644 $ 2,803 2.92% 375,848 $ 3,137 3.35%
Noninterest-bearing liabilities 15,303 --------- ---- 12,884 ---------- ----
--------- ----------
Total liabilities 401,947 388,732
Equity 41,443 39,117
--------- ----------
Total liabilities and equity $ 443,390 $ 427,849
========= =========
Net interest income $ 3,360 $3,304
========= ======
Net interest rate spread 2.96% 3.00%
==== ====
Net interest margin 3.20% 3.26%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 108.62% 107.78%
====== ======
For the Six Months Ended June 30,
--------------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
AssetsAssets:
Interest-earning assets:
Loans $ 378,465 $ 11,726 6.20% $ 350,512 $ 12,232 6.99%
Securities available for sale 26,481 490 3.70 30,597 658 4.30
Interest bearing cash 8,243 47 1.14 18,137 77 0.85
--------- --------- ---- --------- --------- ----
Total interest-earning assets 413,189 $ 12,263 5.94% 399,246 $ 12,967 6.51%
Noninterest-earning assets 23,310 --------- ---- 21,955 --------- ----
--------- ---------
Total assets $ 436,499 $ 421,201
========= =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings $ 73,303 $ 203 0.56% $ 64,970 $ 220 0.68%
Passbook savings 29,266 45 0.31 27,133 89 0.66
Certificates of deposit 180,392 3,196 3.56 181,772 3,779 4.19
Borrowed funds 97,153 2,176 4.50 95,920 2,228 4.68
---------- --------- ---- --------- --------- ----
Total interest-bearing liabilities 380,114 $ 5,620 2.97% 369,795 $ 6,316 3.45%
--------- ---- --------- ----
Noninterest-bearing liabilities 14,738 12,385
--------- ---------
Total liabilities 394,852 382,180
Equity 41,647 39,021
--------- ---------
Total liabilities and equity $ 436,499 $ 421,201
========= =========
Net interest income $ 6,643 $ 6,651
========= =========
Net interest rate spread 2.97% 3.06%
==== ====
Net interest margin 3.22% 3.33%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 108.70% 107.96%
====== ======
11
RESULTS OF OPERATIONS (Continued)
Provision for Loan Losses. The Company's provision for loan losses was $50,000
and $60,000 for the quarters ended June 30, 2004 and 2003, respectively. The
Company's provision for loan losses was $110,000 and $120,000 for the six months
ended June 30, 2004 and 2003, 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 prior loss experience, industry standards, past due loans,
economic conditions, the volume and type of loans in the Company's portfolio,
which includes a significant amount of multifamily and commercial real estate
loans, substantially all of which are purchased and are secured by properties
located out of state, and other factors related to the collectibility of the
Company's loan portfolio. The Company's total loan portfolio increased $45.3
million or 12.8%, from June 30, 2004 as compared to June 30, 2003. This increase
primarily consisted of increases in the one-to-four family, commercial and
multifamily real estate loans. The Company's out of state loans increased $21.3
million, or 15.3%, from June 30, 2004, as compared to June 30, 2003. The
properties securing the loans purchased are primarily out of state and
constitute a higher rate of risk than originated loans due to the size,
locations and type of collateral securing such loans. The economic conditions in
the Bank's primary market areas are currently stable to improving. The net
charge-offs were $44,000 for the six months ended June 30, 2004 as compared to
$74,000 for the six months ended June 30, 2003. The resulting allowance for loan
loss was $3.2 million and $3.2 million at June 30, 2004 and June 30, 2003,
respectively.
The allowance for loan losses as a percentage of total loans receivable
decreased to 0.81% at June 30, 2004 from 0.90% at June 30, 2003. The level of
loans 30 to 89 days past due as of June 30, 2004 and 2003 was $4,441,000 and
$4,435,000, respectively. The level of nonperforming loans was $561,000 at June
30, 2004 and $651,000 at June 30, 2003.
Management believes that the allowance for loan losses is adequate as of June
30, 2004. 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 problem loans, identification
of additional problem loans, and other factors, both within and outside of
management's control.
Noninterest Income. Total noninterest income decreased by $67,000, or 4.0%, to
$1,632,000 for the quarter ended June 30, 2004 from $1,699,000 for the quarter
ended June 30, 2003. The decrease is due to decreases in mortgage banking income
(gain on the sale of loans) and abstract fees, offset in part by increases in
fees and service charges and other income. Mortgage banking income decreased
$202,000 due primarily to a decrease in originations of loans held for sale.
Abstract fees decreased $84,000 due to decreased sales volume as a result of a
general decrease in real estate activity, such as loan originations and
refinances. Fees and service charges increased $199,000 due to an increase in
fees associated with checking accounts, including overdraft fees and increases
in loan prepayment fees. Other income, which primarily includes annuity and
mutual fund sales, rent income, insurance sales and income associated with
foreclosed real estate, increased $19,000 due to an increase in income
associated with foreclosed real estate, offset in part by decreases in annuity
and mutual fund sales and insurance sales.
Total noninterest income decreased by $28,000, or 0.9%, to $3,064,000 for the
six months ended June 30, 2004 from $3,092,000 for the six months ended June 30,
2003. The decrease is due to decreases in mortgage banking income (gain on sale
of loans) and abstract fees, offset in part by increases in fees and service
charges and other income. Mortgage banking income decreased $322,000 due
primarily to a decrease in originations of loans held for sale. Abstract fees
decreased $164,000 due to decreased sales volume as a result of a general
decrease in real estate activity, such as loan originations and refinances. Fees
and service charges increased $340,000 due to an increase in fees associated
with checking accounts, including overdraft fees and increases in loan
prepayment fees. Other income, which primarily includes annuity and mutual fund
sales, rent income, insurance sales and income associated with foreclosed real
estate, increased $118,000 due to an increase in income associated with
foreclosed real estate, increased rental income associated with the opening of a
second multifamily apartment building in March, 2003, increases in annuity and
mutual fund sales and increases in insurance sales.
12
RESULTS OF OPERATIONS (Continued)
Noninterest Expense. Total noninterest expense increased by $99,000 to
$2,753,000 for the quarter ended June 30, 2004 from $2,654,000 for the quarter
ended June 30, 2003. The increase is primarily due to an increase in
compensation and employee benefits and premises and equipment, offset in part by
a decrease in data processing expenses. Compensation and benefits increased
$80,000 due to an increase in personnel at the Clive office, increases in the
Company's contribution to the retirement plan and normal salary increases,
offset in part by a decrease in the costs associated with the Company's employee
stock ownership plan. Premises and equipment increased $44,000 primarily due to
an increase in the costs associated with the Clive and Ankeny offices and normal
cost increases. Data processing decreased $16,000 primarily due to contractually
lower data processing costs and reduced consulting costs. The Company's
efficiency ratio for the quarter ended June 30, 2004 and 2003 was 55.14% and
53.05%, respectively. The Company's ratio of noninterest expense to average
assets for the quarters ended June 30, 2004 and 2003 were 2.48% and 2.48%,
respectively.
Total noninterest expense increased by $404,000 to $5,616,000 for the six months
ended June 30, 2004 from $5,212,000 for the six months ended June 30, 2003. The
increase is primarily due to an increase in compensation and employee benefits,
premises and equipment and other expenses, offset by a decrease is data
processing expenses. Compensation and benefits increased $230,000 due to an
increase in personnel at the Clive office, increases in the Company's
contribution to the retirement plan and normal salary increases, offset in part
by a decrease in the costs associated with the Company's employee stock
ownership plan. Premises and equipment increased $94,000 primarily due to an
increase in the costs associated with the Clive and Ankeny offices and normal
cost increases. Other expenses increased $91,000 primarily due to increases in
costs associated with checking accounts, including write-offs of overdrafts,
increases in apartment operating costs associated primarily from the opening of
a second multifamily apartment building in March, 2003, increases in
professional fees and an increase in costs associated with the Clive office,
including marketing costs, offset in part by decreases in costs associated with
the abstract company ("First Iowa Title Services, Inc."). Data processing
decreased $11,000 primarily due to contractually lower data processing costs and
reduced consulting costs. The Company's efficiency ratio for the six months
ended June 30, 2004 and 2003 was 57.85% and 53.49%, respectively. The Company's
ratio of noninterest expense to average assets for the six months ended June 30,
2004 and 2003 were 2.57% and 2.47%, respectively.
Income Taxes. Income taxes decreased by $54,000 to $708,000 for the quarter
ended June 30, 2004 as compared to $762,000 for the quarter ended June 30, 2003.
The decrease was principally due to a decrease in pre-tax earnings during the
2004 period as compared to the 2003 period and an increase in recurring federal
income tax credits from Northridge Apartment Limited Partnership II.
Income taxes decreased by $98,000 to $1,283,000 for the six months ended June
30, 2004 as compared to $1,381,000 for the six months ended June 30, 2003. The
decrease was principally due to a decrease in pre-tax earnings during the 2004
period as compared to the 2003 period, an increase in recurring federal income
tax credits from Northridge Apartment Limited Partnership II, offset in part by
a one time state tax credit from Northridge Apartment Limited Partnership II,
which decreased income tax expense by approximately $110,000 in 2003.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In management's opinion, there has not been a material change in market risk
since December 31, 2003.
13
ITEM 4.
CONTROLS AND PROCEDURES
Management, including the Company's President and Chief Executive Officer and
Chief Financial Officer and Treasurer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this report.
Based upon that evaluation, the President and Chief Executive Officer and Chief
Financial 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.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information with respect to purchases made
by or on behalf of the Company or any "affiliated purchases" (as defined in rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common
stock during the three months ended June 30, 2004.
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Total Number of Average Price Paid Part of Publicly Be Purchased Under
Period Shares Purchased Per Share Announced Plans The Plan
- ---------------------------------------------------------------------------------------------------------
April 1, 2004 to
April 30, 2004 15,000 $38.35 15,000 85,000
May 1, 2004 to
May 31, 2004 4,000 $37.50 4,000 81,000
June 1, 2004 to
June 30, 2004 5,000 $38.45 5,000 76,000
------ ------
Total 24,000 24,000
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2004 Annual Meeting of Stockholders on April 23,
2004. All proposals submitted to stockholders at the meeting were approved. At
the meeting, the stockholders of the Company considered and voted upon the
following matters:
1. The election of the following individuals as directors for a
three-year term:
C. Thomas Chalstrom
Randall L. Minear
Melvin R. Schroeder
The results of the election of directors are as follows:
FOR WITHHOLD
C. Thomas Chalstrom 1,457,005 29,119
Randall L. Minear 1,449,095 37,029
Melvin R. Schroeder 1,456,995 29,129
There were no broker non-votes or abstentions on this proposal.
The following directors' terms of office continued after the meeting:
Mark M. Thompson
David M. Bradley
Robert H. Singer, Jr.
15
2. The ratification of the engagement of McGladrey & Pullen LLP, as the
Company's independent auditors for the 2004 fiscal year, was approved
by a vote of 1,472,948 in favor, 9,450 votes against.
There were no broker non-votes on this proposal.
Item 5. Other Information
(a) Not applicable
(b) Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1 Section 1350 Certifications
(b) Reports on Form 8-K
On April 23, 2004 the Company furnished to the Commission a press
release announcing the Company's earnings for the quarter ended March
31, 2004.
On April 23, 204, the Company filed with the Commission a Current
Report on form 8-k reporting under Item 5 the retirement of Craig A.
Barnes from the Company's Board of Directors, the election of C. Thomas
Chalstrom and Randall L. Minear to the Board of directors and various
committees of the Company, and the election of Mr. Chalstrom as
President of the Bank.
16
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: August 13, 2004 BY: /s/ David M. Bradley
--------------------
David M. Bradley, Chairman, President and
Chief Executive Officer
DATE: August 13, 2004 BY: /s/ John L. Pierschbacher
-------------------------
John L. Pierschbacher
Principal Financial Officer
17