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 March 31, 2005
[ ] 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 April 30, 2005
- --------------------------------------------------------------------------------
Common Stock, $.01 par value 1,538,430
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 March 31, 2005
and December 31, 2004 1
Consolidated Condensed Statements of
Income for the three months ended
March 31, 2005 and 2004 2
Consolidated Condensed Statements of
Cash Flows for the three months ended
March 31, 2005 and 2004 3
Notes to Consolidated Condensed Financial
Statements 4 to 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7 to 13
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)
March 31, December 31,
2005 2004
------------- -------------
ASSETS
Cash and due from banks:
Interest-bearing $ 4,773,488 $ 4,947,731
Noninterest-bearing 3,221,653 2,970,448
Securities available-for-sale 22,764,263 23,106,271
Loans receivable, net 415,544,444 407,316,318
Loans held for sale 641,590 904,127
Accrued interest receivable 1,986,002 1,953,605
Foreclosed real estate 966,574 1,079,257
Premises and equipment, net 10,707,621 9,889,737
Rental real estate 2,776,221 2,809,888
Title plant 925,256 925,256
Goodwill 4,970,800 4,970,800
Deferred taxes 995,124 1,102,612
Prepaid expenses and other assets 940,711 758,729
------------- -------------
Total assets $ 471,213,747 $ 462,734,779
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 320,738,105 $ 316,333,731
Borrowed funds 104,168,130 100,974,695
Advances from borrowers for taxes and insurance 1,201,945 1,856,249
Dividends payable 446,086 382,632
Accrued expenses and other liabilities 1,992,719 1,653,266
------------- -------------
Total liabilities 428,546,985 421,200,573
------------- -------------
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 2005, 1,538,430; 2004, 1,530,530 shares) 15,384 15,305
Additional paid-in capital 18,928,322 18,681,041
Retained earnings, substantially restricted 24,069,847 23,438,369
Accumulated other comprehensive (loss) (282,383) (519,309)
Unearned shares, employee stock ownership plan (64,408) (81,200)
------------- -------------
Total stockholders' equity 42,666,762 41,534,206
------------- -------------
Total liabilities and stockholders' equity $ 471,213,747 $ 462,734,779
============= =============
See Notes to Consolidated Condensed Financial Statements
1
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2005 2004
----------- -----------
Interest income:
Loans receivable $ 6,074,537 $ 5,816,384
Securities and cash deposits 260,797 284,106
----------- -----------
6,335,334 6,100,490
----------- -----------
Interest expense:
Deposits 1,801,034 1,727,150
Borrowed funds 1,095,449 1,089,877
----------- -----------
2,896,483 2,817,027
----------- -----------
Net interest income 3,438,851 3,283,463
Provision for loan losses 50,000 60,000
----------- -----------
Net interest income after provision for loan losses 3,388,851 3,223,463
----------- -----------
Noninterest income:
Fees and service charges 830,543 704,233
Abstract fees 276,261 353,839
Provision for impairment on available-for-sale securities (255,000) --
Mortgage banking income 40,688 53,981
Other income 286,102 319,805
----------- -----------
Total noninterest income 1,178,594 1,431,858
----------- -----------
Noninterest expense:
Compensation and employee benefits 1,578,679 1,582,325
Premises and equipment 349,979 358,989
Data processing 141,773 139,514
Other expenses 868,099 782,099
----------- -----------
Total noninterest expense 2,938,530 2,862,927
----------- -----------
Income before income taxes 1,628,915 1,792,394
Provision for income taxes 553,380 575,883
----------- -----------
Net income $ 1,075,535 $ 1,216,511
=========== ===========
Basic earnings per common share $ 0.70 $ 0.77
=========== ===========
Earnings per common share - assuming dilution $ 0.68 $ 0.73
=========== ===========
Dividends declared per common share $ 0.29 $ 0.25
=========== ===========
Comprehensive income $ 1,312,461 $ 1,313,006
=========== ===========
See Notes to Consolidated Condensed Financial Statements.
2
NORTH CENTRAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,075,535 $ 1,216,511
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 50,000 60,000
Depreciation 201,235 205,751
Amortization and accretion 115,855 162,036
Deferred taxes (33,482) (55,169)
Effect of contribution to employee stock ownership plan 68,383 132,595
(Gain) on sale of foreclosed real estate and loans, net (69,986) (57,081)
Provision for impairment on available-for-sale securities 255,000 --
Loss on disposal of equipment and premises, net 25,340 594
Proceeds from sales of loans held for sale 3,120,463 3,826,833
Originations of loans held for sale (2,817,238) (4,088,602)
Change in assets and liabilities:
Accrued interest receivable (32,397) (7,862)
Prepaid expenses and other assets (181,982) (68,492)
Accrued expenses and other liabilities 339,453 313,762
------------ ------------
Net cash provided by operating activities 2,116,179 1,640,876
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans 1,759,970 6,533,157
Purchase of loans (10,269,382) (25,283,810)
Proceeds from sales of securities available-for-sale 389,800 294,200
Purchase of securities available-for-sale (509,500) (622,800)
Proceeds from maturities of securities available-for-sale 571,806 517,630
Purchase of premises and equipment and rental real estate (1,010,792) (395,743)
Other 270,210 135,165
------------ ------------
Net cash (used in) investing activities (8,797,888) (18,822,201)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 4,404,374 10,155,294
Net (decrease) in advances from borrowers for taxes and insurance (654,304) (597,895)
Net change in short-term borrowings 4,200,000 8,000,000
Proceeds from other borrowed funds 2,000,000 --
Payments on other borrowings (3,006,565) (6,320)
Purchase of treasury stock -- (2,265,060)
Dividends paid (380,603) (331,063)
Issuance of common stock 195,769 818,845
------------ ------------
Net cash provided by financing activities 6,758,671 15,773,801
------------ ------------
Net increase (decrease) in cash 76,962 (1,407,524)
CASH AND DUE FROM BANKS
Beginning 7,918,179 10,018,573
------------ ------------
Ending $ 7,995,141 $ 8,611,049
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 1,806,666 $ 1,674,277
Interest paid on borrowings 1,095,424 1,089,834
Income taxes 52,269 38,576
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 month periods
ended March 31, 2005 and 2004 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 2004 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 March
31, 2005, the weighted average number of shares outstanding for basic and
diluted earnings per share computation were 1,526,643 and 1,577,802,
respectively. For the three-month period ended March 31, 2004, the weighted
average number of shares outstanding for basic and diluted earnings per share
computation were 1,582,434 and 1,658,884, respectively.
3. DIVIDENDS
On February 28, 2005, the Company declared a cash dividend on its common stock,
payable on April 7, 2005 to stockholders of record as of March 16, 2005, equal
to $0.29 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, 2004 and has
determined that there has been no impairment of goodwill.
As of March 31, 2005 and December 31, 2004, 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
months ended March 31, 2005 or March 31, 2004.
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
March 31, 2005 March 31, 2004
-------------- --------------
Net income, as reported $ 1,075,535 $ 1,216,511
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (32,608) (32,810)
----------- -----------
Pro forma net income $ 1,042,927 $ 1,183,701
=========== ===========
Earnings per common share - basic:
As reported $ 0.70 $ 0.77
Pro forma 0.68 0.75
Earnings per common share - assuming dilution:
As reported $ 0.68 $ 0.73
Pro forma 0.66 0.71
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 2005 and 2004, respectively: dividend rates of 2.4%
and 2.3%, price volatility of 14.5% and 20%, risk-free interest rates of 4.01%
and 4.10%, and expected lives of 8 years for all periods.
6. RECENT ACCOUNTING PRONOUNCEMENTS.
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer (SOP 03-3). SOP 03-3 requires loans acquired through a
transfer, such as a business combination, where there are differences in
expected cash flows and contractual cash flows due in part to credit quality, to
be recognized at their fair value. Under the provisions of SOP 03-3, any future
excess of cash flows over the original expected cash flows is to be recognized
as an adjustment of future yield. Future decreases in actual cash flow compared
to the original expected cash flow is recognized as a valuation allowance and
expensed immediately. Under SOP 03-3, valuation allowances cannot be created or
"carried over" in the initial accounting for impaired loans acquired. SOP 03-3
is effective for impaired loans acquired in fiscal years beginning after
December 15, 2004. The Company does not expect adoption to have a material
impact on the consolidated financial statements, results of operations or
liquidity of the Company.
In March 2004, the Financial Accounting Standards Board (FASB) reached consensus
on the guidance provided by Emerging Issues Task Force Issue 03-1, The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments
(EITF 03-1). The guidance is applicable to debt and equity securities that are
within the scope of FASB Statement of Financial Accounting Standard (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities and
certain other investments. EITF 03-1 specifies that an impairment would be
considered other-than-temporary unless (a) the investor has the ability and
intent to hold an investment for a reasonable period of time sufficient for the
recovery of the fair value up to (or beyond) the cost of the investment and (b)
evidence indicating the cost of the investment is recoverable within a
reasonable period of time outweighs evidence to the contrary. EITF 03-1 cost
method investment and disclosure provisions are effective for reporting periods
ending after June 15, 2004. The measurement and recognition provisions relating
to debt and equity securities have been delayed until the FASB issues
5
additional guidance. The Company adopted cost method investment and disclosure
provisions of EITF 03-1 on June 30, 2004.
In December 2004, the FASB issued SFAS No. 123(Revised), Share-Based Payment
(SFAS No. 123(R)), establishing accounting standards for transactions in which
an entity exchanges its equity instruments for goods or services. SFAS No.
123(R) also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entity's
equity instruments, or that may be settled by the issuance of those equity
instruments. SFAS No. 123(R) covers a wide range of share-based compensation
arrangements including stock options, restricted stock plans, performance-based
stock awards, stock appreciation rights and employee stock purchase plans. SFAS
No. 123(R) replaces existing requirements under SFAS No. 123, Accounting for
Stock-Based Compensation, and eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25. The provisions of SFAS No.
123(R) are effective for the Company on January 1, 2006. The Company is
currently assessing the financial statement impact of adopting SFAS No. 123(R).
6
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 consolidated financial condition,
results of operations and business of the Company and its subsidiaries including
First Federal Savings Bank of Iowa (the "Bank") 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
The Company'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 During the quarter the Company recorded an other-than-temporary, non-cash,
charge of $255,000 ($229,000 after-tax, or $0.15 per fully diluted share)
related to a $1.0 million face value perpetual preferred stock that
declined in value due to decreased interest rates. This perpetual preferred
stock was issued by Federal Home Loan Mortgage Corporation ("Freddie Mac").
Its dividend rate reprices every five years, most recently at year end
2004. This perpetual preferred stock issue is an investment grade security
that is held in the Company's available-for-sale securities portfolio.
o The Bank continues to open new offices in market areas where population
growth trends are positive. During the quarter the Company purchased a
building site in West Des Moines near Jordan Creek Town Center Mall. The
Company intends to begin construction of a new branch office at this
location and open this office in 2006, at which point the Company will have
three offices in the greater Des Moines, Iowa area. Des Moines is Iowa's
largest metropolitan area. The Bank will continue to analyze de novo branch
opportunities in the Des Moines metropolitan area. 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 strong positive trend. The growth
in core deposits continues to be due in part to the direct mail marketing
program emphasizing checking accounts and the growth of the Company's
offices in Clive and Ankeny, Iowa. This direct mail program is ongoing and
is expected to result in a continued growth in core deposits and fee
income.
7
o Management believes that the allowance for loan losses is adequate. The
allowance for loan losses to nonaccrual loans was 573.80% at March 31,
2005. Net annualized chargeoffs for 2005 were 0.02% of total loans and have
averaged 0.04% of total loans for the past five years. During the three
months ended March 31, 2005, the Company's net loan portfolio increased
$8.2 million or 2.0%. A significant portion of this increase consisted of
increases in the one-to-four family and multifamily real estate loans. The
Company's provision for loan losses for the three months ended March 31,
2005 was $50,000.
o Purchases and originations of out of state real estate loans remained an
integral part of the Company's 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 $8.5 million, or 1.8%, to $471.2 million at March 31,
2005 from $462.7 million at December 31, 2004. The increase in assets was due
primarily to the increase in net loans receivable.
Total loans receivable, net, increased by $8.2 million, or 2.0%, to $415.5
million at March 31, 2005 from $407.3 million at December 31, 2004, primarily
due to the origination of $13.2 million of first mortgage loans secured by
one-to-four family residences, multifamily, and commercial real estate;
purchases of first mortgage loans primarily secured by multifamily residences
and commercial real estate of $10.6 million; and originations of $5.1 million of
second mortgage loans during the three months ended March 31, 2005. These
originations and purchases were offset in part by payments and prepayments of
$19.6 million and sales of loans of $3.1 million during the three months ended
March 31, 2005. 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. Securities available-for-sale decreased $0.3 million,
or 1.5%, to $22.8 million at March 31, 2005 from $23.1 million at December 31,
2004, as the Company invested its cash in loans.
Deposits increased $4.4 million, or 1.4%, to $320.7 million at March 31, 2005
from $316.3 million at December 31, 2004, primarily reflecting increases in
money market accounts and savings accounts. The increase in deposits is due
primarily to pricing strategies and continued marketing efforts. Borrowings,
primarily FHLB advances, increased $3.2 million, to $104.2 million at March 31,
2005 from $101.0 million at December 31, 2004. The Company utilized the increase
in deposits and FHLB advances to fund loans.
Total shareholders' equity increased $1.1 million to $42.7 million at March 31,
2005 from $41.5 million at December 31, 2004, primarily due to earnings,
increased capital attributable to stock options exercised and a decrease in
accumulated other comprehensive loss, offset in part by declared dividends.
8
The Office of Thrift Supervision (the "OTS") requires that the Bank meet minimum
tangible, leverage (core) and risk-based capital requirements. As of March 31,
2005, the Bank exceeded all of its regulatory capital requirements. The Bank's
required, actual and excess capital levels as of March 31, 2005 were as follows:
Amount Percentage of Assets
-------- --------------------
(Dollars in thousands)
Tangible capital:
Capital level $ 33,053 7.26%
Less Requirement 6,991 1.50%
-------- ----
Excess $ 26,062 5.76%
======== ====
Core capital:
Capital level $ 33,053 7.26%
Less Requirement 18,641 4.00%
-------- ----
Excess $ 14,412 3.26%
======== ====
Risk-based capital:
Capital level $ 37,019 11.67%
Less Requirement 25,369 8.00%
-------- ----
Excess $ 11,650 3.67%
======== ====
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 three months of 2005 and 2004,
principal payments, prepayments, and proceeds from sale of loans totaled $22.7
million and $26.5 million, respectively. The net increase in deposits during the
first three months of 2005 and 2004 totaled $4.4 million and $10.2 million,
respectively. The proceeds from borrowed funds during the three months ended
March 31, 2005 and 2004 totaled $2.0 million and $0.0 million, respectively. The
net increase in short term borrowings during the three months ended March 31,
2005 and 2004 totaled $4.2 million and $8.0 million, respectively. During the
first three months of 2005 and 2004, the proceeds from the maturities, calls and
sales of securities totaled $1.0 million and $0.8 million, respectively. Cash
provided from operating activities during the first three months of 2005 and
2004 totaled $2.1 million and $1.6 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
three months of 2005 and 2004, the Company's gross purchases and origination of
loans totaled $31.7 million and $44.3 million, respectively. The purchase of
securities available-for-sale for the three months ended March 31, 2005 and 2004
totaled $0.5 million and $0.6 million, respectively. The repayment of borrowed
funds during the first three months of 2005 and 2004 totaled $3.0 million and
$6,000, 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 March 31, 2005, 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 did not repurchase any shares of common stock during the three
months ended March 31, 2005.
On January 6, 2005, the Company paid a quarterly cash dividend of $0.25 per
share on common stock outstanding as of the close of business on December 15,
2004, aggregating $383,000. On February 28, 2005, the Company declared a
quarterly cash dividend of $0.29 per share payable on April 7, 2005 to
shareholders of record as of the close of business on March 16, 2005,
aggregating $446,000.
9
RESULTS OF OPERATIONS
Net Income. Net income decreased by $141,000 to $1,076,000 for the quarter ended
March 31, 2005 compared to $1,217,000 for the same period in 2004. Net income is
an aggregate of net interest income, noninterest income, noninterest expense and
income tax expense. The decrease in net income was primarily due to a decrease
in noninterest income and an increase in noninterest expense, offset in part by
an increase in net interest income and a decrease in income tax expense.
Net Interest Income. Net interest income before provision for loan losses
increased by $155,000 to $3.44 million for the quarter ended March 31, 2005 from
$3.28 million for the quarter ended March 31, 2004. The increase is primarily
due to an increase in the average balance of interest-earning assets and a
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 2.85% for
the quarter ended March 31, 2005 from 2.97% for the quarter ended March 31,
2004. 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 repricing
of interest-earning assets and interest-bearing liabilities at generally lower
current market interest rates.
Interest Income. Interest income increased by $235,000 to $6.34 million for the
quarter ended March 31, 2005 compared to $6.10 million for the quarter ended
March 31, 2004. The increase in interest income was primarily due to an increase
in the average balance of interest-earning assets, offset in part by a decrease
in the average yield on interest-earning assets. The average balance of
interest-earning assets increased $34.4 million to $440.8 million for the
quarter ended March 31, 2005, from $406.4 million for 2004. The average yield on
interest-earning assets decreased to 5.76% for the quarter ended March 31, 2005
from 6.01% for the quarter ended March 31, 2004, primarily due to a general
decrease in market interest rates compared to their original rates. The increase
in the average balance of interest-earning assets primarily reflects increases
in the average balances of first mortgage loans and consumer 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 and commercial real estate,
purchases of first mortgage loans secured by 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 March
31, 2005. This reflects the Company's continued emphasis on real estate 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 March 31, 2005. See "Financial Condition."
Interest Expense. Interest expense increased by $79,000 to $2.90 million for the
quarter ended March 31, 2005 compared to $2.82 million for the quarter ended
March 31, 2004. The increase in interest expense was primarily due to an
increase in the average balances of interest-bearing liabilities, offset in part
by a decrease in the average cost of funds. The average balance of
interest-bearing liabilities increased by $30.5 million to $403.8 million for
the quarter ended March 31, 2005, from $373.3 million for the same period in
2004. The increase in the average balance of interest-bearing liabilities
primarily reflects an increase in the average balances of NOW, money market,
savings accounts and certificates of deposits. The increase in average interest-
bearing deposits was primarily due to the Company's continued marketing efforts
and the deposit activity associated with the Company's newest branches in Ankeny
and Clive, Iowa. The average cost of funds decreased to 2.91% for the quarter
ended March 31, 2005 from 3.04% for the quarter ended March 31, 2004, primarily
due to an increase in the average balances of deposit products which have a
lower average cost of funds compared to the overall cost of funds of the total
interest-bearing liabilities.
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 months ended March 31, 2005 and 2004, respectively.
For the Three Months Ended March 31,
-----------------------------------------------------------------------------------
2005 2004
-----------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans $ 410,459 $ 6,075 5.93% $ 369,982 $ 5,816 6.29%
Securities available-for-sale 23,609 228 3.87 27,023 258 3.82
Interest-bearing cash 6,738 32 1.95 9,413 26 1.12
--------- ------- ------ --------- -------- ------
Total interest-earning assets 440,806 6,335 5.76% 406,418 6,100 6.01%
------- ------ -------- ------
Noninterest-earning assets 23,219 23,189
--------- ---------
Total assets $ 464,025 $ 429,607
========= =========
Liabilities and Equity:
Interest-bearing liabilities:
NOW and money market savings $ 96,718 $ 239 1.00% $ 70,267 $ 85 0.49%
Passbook savings 29,016 22 0.31 28,655 22 0.31
Certificates of deposit 181,832 1,539 3.43 177,973 1,620 3.66
Borrowed funds 96,212 1,096 4.62 96,356 1,090 4.55
--------- ------- ------ --------- -------- ------
Total interest-bearing liabilities 403,778 $ 2,896 2.91% 373,251 $ 2,817 3.04%
------- ------ -------- -------
Noninterest-bearing liabilities 18,145 14,504
--------- ---------
Total liabilities 421,923 387,755
Equity 42,102 41,852
--------- ---------
Total liabilities and equity $ 464,025 $ 429,607
========= =========
Net interest income $ 3,439 $ 3,283
======= ========
Net interest rate spread 2.85% 2.97%
====== ======
Net interest margin 3.12% 3.23%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 109.17% 108.89%
====== ======
Provision for Loan Losses. The Company's provision for loan losses was $50,000
and $60,000 for the quarters ended March 31, 2005 and 2004, 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, and other factors related to the collectibility of the
Company's loan portfolio. The Company's total loan portfolio increased $42.6
million, or 11.1%, from March 31, 2004 to March 31, 2005. 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 $6.3
million, or 4.1%, from March 31, 2004 to March 31, 2005. 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 $25,000 for the
quarter ended March 31, 2005 as compared to $32,000 for the quarter ended March
31, 2004. The resulting allowance for loan loss was $3.3 million and $3.2
million at March 31, 2005 and March 31, 2004, respectively.
The allowance for loan losses as a percentage of total loans receivable
decreased to 0.76% at March 31, 2005 from 0.83% at March 31, 2004. The level of
nonperforming loans was $568,000 at March 31, 2005 and $250,000 at March 31,
2004.
11
RESULTS OF OPERATIONS (Continued)
Management believes that the allowance for loan losses is adequate as of March
31, 2005. 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 $253,000, or 17.7%, to
$1.18 million for the quarter ended March 31, 2005 from $1.43 million for the
quarter ended March 31, 2004. The decrease is due primarily to the other-than-
temporary impairment of securities available-for-sale and decreases in abstract
fees, loan prepayment fees, other income, and mortgage banking income (gain on
the sale of loans), offset in part by increases in fees and service charges.
During the quarter ended March 31, 2005, the Company recorded an
other-than-temporary impairment of $255,000 related to a $1.0 million face
value, perpetual preferred stock that declined in value due to decreased
interest rates. This perpetual preferred stock was issued by Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Its dividend rate reprices every five
years, most recently at year end 2004. This perpetual preferred stock issue is
an investment grade security that is held in the Company's available-for-sale
securities portfolio. Abstract fees decreased $78,000 due to decreased sales
volume as a result of a general decrease in real estate and refinancing
activity. Other income, which primarily includes annuity and mutual fund sales,
rent income, insurance sales, and income associated with foreclosed real estate,
decreased $34,000 due to a decrease in income from annuity sales, offset in part
by increases in income from securities commissions and foreclosed real estate.
Mortgage banking income decreased $13,000 due primarily to a decrease in
originations of loans held for sale. Fees and service charges increased $177,000
due primarily to an increase in fees associated with checking accounts,
including overdraft fees.
Noninterest Expense. Total noninterest expense increased by $76,000, or 2.6%, to
$2.94 million for the quarter ended March 31, 2005 from $2.86 million for the
quarter ended March 31, 2004. The increase is due to an increase in other
expenses, offset in part by a decrease in premises and equipment expenses.
Premises and equipment decreased $9,000 primarily due to a decrease in the rent
expense associated with the temporary branch facilities in Clive in 2004. The
Company's efficiency ratio for the quarter ended March 31, 2005 and 2004 was
63.64% and 60.72%, respectively. The Company's ratio of noninterest expense to
average assets for the quarters ended March 31, 2005 and 2004 were 2.53% and
2.67%, respectively.
Income Taxes. Income taxes decreased by $23,000 to $553,000 for the quarter
ended March 31, 2005 as compared to $576,000 for the quarter ended March 31,
2004. The decrease was due to the decrease in pre-tax earnings, offset in part
by the limited deductibility of the other-than-temporary impairment of
securities available-for-sale.
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 are material to investors.
CRITICAL ACCOUNTING POLICIES
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and disclosures included within this report, are based on the
Company's audited consolidated financial statements. These statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The financial information contained in these
statements is, for the most part, based on approximate measures of the financial
effects of transactions and events that have already occurred.
12
RESULTS OF OPERATIONS (Continued)
However, the preparation of these statements requires management to make certain
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses.
The Company's significant accounting policies are described in the Company's
2004 Annual Report on Form 10-K in the "Notes to Consolidated Financial
Statements". Based on its consideration of accounting policies that involve the
most complex and subjective estimates and judgments, management has identified
its most critical accounting policy to be that related to the allowance for loan
losses, and asset impairment judgments, including the recoverability of
goodwill.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
Company has policies and procedures for evaluating the overall credit quality of
its loan portfolio including timely identification of potential problem credits.
On a quarterly basis, management reviews the appropriate level for the allowance
for loan losses incorporating a variety of risk considerations, both
quantitative and qualitative. Quantitative factors include the Company's
historical loss experience, delinquency and charge-off trends, collateral
values, known information about individual loans and other factors. Qualitative
factors include the general economic environment in the Company's market area
and the expected trend of those economic conditions. To the extent actual
results differ from forecasts and management's judgment, the allowance for loan
losses may be greater or less than future charge-offs.
Goodwill represents the excess of the acquisition cost over the fair value of
the net assets acquired in a purchase acquisition. Goodwill is tested for
impairment at least annually.
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, 2004.
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.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no 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 March 31, 2005.
As of March 31, 2005, the Company had 18,650 shares that may yet be
purchased under the Repurchase Plan approved April 2004, which provided for the
repurchase of up to 100,000 shares of the Company's common stock. In January
2005, the Company approved a new Repurchase Plan which provides for the
repurchase of up to 100,000 shares of the Company's Common Stock. At March 31,
2005, there are 118,650 shares which may be purchased under both the April 2004
and January 2005 repurchase plans.
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
Exhibits
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1 Section 1350 Certifications
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: May 13, 2005 BY: /s/ David M. Bradley
--------------------
David M. Bradley, Chairman, President and
Chief Executive Officer
DATE: May 13, 2005 BY: /s/ David W. Edge
-----------------
David W. Edge, Chief Financial Officer and
Treasurer
15