Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: June 30, 1998
or
[ ] 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: 0-24033
NASB Financial, Inc.
(Exact name of registrant as specified in its charter)
Missouri 43-1805201
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12498 South 71 Highway, Grandview, Missouri 64030
(Address of principal executive offices) (Zip Code)
(816) 765-2200
(Registrant's telephone number, including area code)
N/A
(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___
The number of shares of Common Stock of the Registrant outstanding
as of August 13, 1998, was 2,230,922.
<PAGE>
NASB Financial, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, September 30,
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,578 $ 3,267
Securities Available for sale 11,432 22,152
Mortgage-backed securities:
Available for sale 18,427 21,263
Held to maturity (estimated fair
value of $26,716 and $30,920 at
June 30, 1998, and September 30,
1997, respectively) 25,865 30,016
Loans receivable:
Held for sale (estimated fair
value of $139,581 and $141,502
at June 30, 1998, and September
30, 1997, respectively 133,898 138,869
Held for investment, net 516,016 497,873
Accrued interest receivable 4,546 4,723
Real estate owned, net 2,193 4,184
Premises and equipment 4,900 5,308
Other assets 6,852 5,809
---------- ----------
Total assets $ 726,707 $ 733,464
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 542,012 $ 520,544
Advances from Federal Home Loan Bank 109,214 143,226
Other notes payable 200 1,680
Escrows 4,022 6,054
Accrued expenses and other liabilities 4,258 2,764
---------- ----------
Total liabilities 659,706 674,268
---------- ----------
Stockholders' equity:
Common stock of $1.00 par value:
3,000,000 authorized; 2,333,828
outstanding at June 30, 1998, and
2,325,569 outstanding at September
30, 1997 2,334 2,326
Additional paid-in capital 12,262 12,198
Retained earnings 56,009 48,064
Treasury stock, at cost; 102,629
shares at June 30, 1998, and 89,327
shares at September 30, 1997 (3,754) (2,963)
Unrealized net gain (loss) on
securities available for sale 150 (429)
---------- ----------
Total stockholders' equity 67,001 59,196
---------- ----------
$ 726,707 $ 733,464
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NASB Financial, Inc.
Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Interest on loans $ 14,397 $ 13,457
Interest on mortgage-backed securities 738 979
Interest and dividends on investments 366 290
Other interest income 105 49
-------- --------
Total interest income 15,606 14,775
-------- --------
Interest on customer deposit accounts 6,776 6,462
Interest on advances and notes payable 1,733 2,184
-------- --------
Total interest expense 8,509 8,646
-------- --------
Net interest income 7,097 6,129
Provision for loan losses 62 173
-------- --------
Net interest margin after provision
for loan losses 7,035 5,956
-------- --------
Other income (expense):
Loan servicing fees 9 279
Customer service fees and charges 491 375
Real estate owned revenue, net (6) 55
Income from mortgage banking operations 528 511
Gain (loss) on sale of assets available
for sale (14) --
Gain on sale of loans held for sale 1,180 892
Other 289 246
-------- --------
Total other operating income 2,477 2,358
-------- --------
General and administrative expenses:
Compensation and fringe benefits 2,560 2,221
Premises and equipment expense 587 558
Advertising and business promotion 111 121
Federal deposit insurance premiums 82 80
Other 959 788
-------- --------
Total general and administrative 4,299 3,768
-------- --------
Income before income taxes 5,213 4,546
Income tax expense 2,037 1,750
-------- --------
Net Income $ 3,176 $ 2,796
======== ========
Basic earnings per share $ 1.42 $ 1.24
======== ========
Diluted earnings per share $ 1.39 $ 1.20
======== ========
Weighted average shares outstanding 2,232,513 2,251,688
<CAPTION>
Nine months ended
June 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Interest on loans $ 43,049 $ 40,468
Interest on mortgage-backed securities 2,410 2,671
Interest and dividends on investments 1,071 711
Other interest income 382 232
-------- --------
Total interest income 46,912 44,082
-------- --------
Interest on customer deposit accounts 20,161 19,207
Interest on advances and notes payable 5,902 6,862
-------- --------
Total interest expense 26,063 26,069
-------- --------
Net interest income 20,849 18,013
Provision for loan losses 377 408
-------- --------
Net interest margin after provision
for loan losses 20,472 17,605
-------- --------
Other income (expense):
Loan servicing fees 342 645
Customer service fees and charges 1,398 1,126
Real estate owned revenue, net 47 263
Income from mortgage banking operations 1,942 1,696
Gain (loss) on sale of assets available
for sale (24) 193
Gain on sale of loans held for sale 2,576 1,697
Other 1,140 493
-------- --------
Total other operating income 7,421 6,113
-------- --------
General and administrative expenses:
Compensation and fringe benefits 7,490 6,432
Premises and equipment expense 1,707 1,626
Advertising and business promotion 250 234
Federal deposit insurance premiums 247 401
Other 2,688 2,263
-------- --------
Total general and administrative 12,382 10,956
-------- --------
Income before income taxes 15,511 12,762
Income tax expense 6,001 4,912
-------- --------
Net Income $ 9,510 $ 7,850
======== ========
Basic earnings per share $ 4.25 $ 3.48
======== ========
Diluted earnings per share $ 4.15 $ 3.35
======== ========
Weighted average shares outstanding 2,236,509 2,255,806
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NASB Financial, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Additional Unrealized Total
Common paid-in Retained Treasury gains Stockholders'
Stock Capital Earnings Stock (losses) equity
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $ 2,236 12,198 48,064 (2,963) (429) 59,196
Change in unrealized gains
(losses) net of income
taxes of $362 -- -- -- -- 579 579
Cash dividends declared -- -- (1,565) -- -- (1,565)
Stock options exercised 8 64 -- -- -- 72
Purchase of common stock
for treasury -- -- -- (791) -- (791)
Net income for:
First fiscal quarter -- -- 3,132 -- -- 3,132
Second fiscal quarter -- -- 3,202 -- -- 3,202
Third fiscal quarter -- -- 3,176 -- -- 3,176
-------------------------------------------------------------------------
Balance at June 30, 1998 $ 2,334 12,262 56,009 (3,754) 150 67,001
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NASB Financial, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
June 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 3,176 $ 2,796
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase (decrease) in accrued interest receivable 7 (271)
Depreciation 267 273
Amortization and accretion (84) (258)
(Gain) loss on sale of assets available for sale 14 --
Gain on sale of loans held for sale (1,156) (892)
Income from mortgage banking operation (528) (511)
Provision for loan losses 63 173
Provision for REO losses 12 (23)
Increase (decrease) in accrued expenses and other
liabilities 576 (1,490)
Loans originated for sale - servicing released (27,054) (19,416)
Sale of loans - servicing released 26,522 20,049
Loans originated for sale - servicing retained (70,583) (32,194)
Sale of loans - held for sale 67,738 --
--------- ---------
Net cash used in operations (1,030) (31,764)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 1,597 1,156
Available for sale 2,019 1,073
Principal repayments of mortgage loans 56,238 38,662
Principal repayments of other loans 5,054 2,508
Principal repayments of securities:
Held to maturity -- 8,000
Available for sale -- --
Loan origination - mortgage loans (50,540) (70,235)
Loan origination - other loans (5,424) (6,772)
Purchase of mortgage loans (9,077) (6,078)
Purchase of mortgage-backed securities:
Held to maturity -- (9,826)
Available for sale -- (28,000)
Purchase of investment securities:
Held to maturity -- --
Available for sale (3,902) --
Proceeds from sale of mortgage-backed securities
Available for sale -- 62,713
Proceeds from sale of investment securities
Available for sale 10,719 --
Equipment purchases, net of sales (101) (367)
Other cash flows from investing activities 898 491
--------- ---------
Net cash provided by (used in) investing activities 7,481 (6,675)
Cash flows from financing activities:
Net increase in customer deposits 13,049 13,085
Additional advances from FHLB 110,000 219,000
Repayment of advances from FHLB (134,004) (186,000)
Cash dividends paid (585) (451)
Repurchase of common stock (724) (894)
Issuance of notes payable -- 250
Repayment of notes payable -- --
Net increase (decrease) in escrows 701 810
--------- ---------
Net cash provided by (used in) financing activities (11,536) 45,800
--------- ---------
Net increase (decrease) in cash and cash equivalents (5,085) 7,361
Cash and cash equivalents at beginning of the period 7,663 4,056
--------- ---------
Cash and cash equivalents at end of period $ 2,578 11,417
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of tax refunds) $ 2,322 3,462
Cash paid for interest 8,527 9,846
Supplemental disclosure of non-cash investing
and financing activities:
Conversion of loans to real estate owned 1,889 217
Conversion of real estate owned to loans -- --
Conversion of mortgage loans held for sale to
mortgage-backed securities available for sale 69,777 32,194
Capitalization of originated mortgage servicing rights 1,843 1,260
<CAPTION>
Nine months ended
June 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 9,510 $ 7,850
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase (decrease) in accrued interest receivable 176 (221)
Depreciation 773 773
Amortization and accretion (1,072) (704)
(Gain) loss on sale of assets available for sale 24 --
Gain on sale of loans held for sale (2,552) (1,890)
Income from mortgage banking operation (1,942) (1,696)
Provision for loan losses 377 408
Provision for REO losses 69 (194)
Increase (decrease) in accrued expenses and other
liabilities 1,426 (4,091)
Loans originated for sale - servicing released (92,963) (66,621)
Sale of loans - servicing released 96,149 67,650
Loans originated for sale - servicing retained (183,565) (87,788)
Sale of loans - held for sale 152,636 50,595
--------- ---------
Net cash used in operations (20,954) (35,929)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 4,143 3,466
Available for sale 10,926 2,826
Principal repayments of mortgage loans 160,955 105,575
Principal repayments of other loans 12,375 7,945
Principal repayments of securities:
Held to maturity -- 16,000
Available for sale 32 30
Loan origination - mortgage loans (132,643) (154,023)
Loan origination - other loans (13,592) (13,778)
Purchase of mortgage loans (18,643) (16,872)
Purchase of mortgage-backed securities:
Held to maturity -- (9,826)
Available for sale -- (28,000)
Purchase of investment securities:
Held to maturity -- (16,782)
Available for sale (5,147) --
Proceeds from sale of mortgage-backed securities
Available for sale -- 115,595
Proceeds from sale of investment securities
Available for sale 15,811 --
Equipment purchases, net of sales (364) (675)
Other cash flows from investing activities 4,825 1,508
--------- ---------
Net cash provided by (used in) investing activities 38,678 12,989
Cash flows from financing activities:
Net increase in customer deposits 21,468 9,655
Additional advances from FHLB 124,000 452,000
Repayment of advances from FHLB (158,012) (436,012)
Cash dividends paid (1,566) (1,256)
Repurchase of common stock (791) (1,378)
Issuance of notes payable -- 250
Repayment of notes payable (1,480) (135)
Net increase (decrease) in escrows (2,032) (1,656)
--------- ---------
Net cash provided by (used in) financing activities (18,413) 21,468
--------- ---------
Net increase (decrease) in cash and cash equivalents (689) (1,472)
Cash and cash equivalents at beginning of the period 3,267 12,889
--------- ---------
Cash and cash equivalents at end of period $ 2,578 11,417
========= =========
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of tax refunds) $ 5,687 5,237
Cash paid for interest 26,185 26,222
Supplemental disclosure of non-cash investing
and financing activities:
Conversion of loans to real estate owned 2,955 979
Conversion of real estate owned to loans -- --
Conversion of mortgage loans held for sale to
mortgage-backed securities available for sale 159,285 87,788
Capitalization of originated mortgage servicing rights 3,970 1,685
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information. Accordingly, they do not
include all of the information and footnotes required by GAAP for
complete financial statements. All adjustments are of a normal and
recurring nature and, in the opinion of management, the statements
include all adjustments considered necessary for fair presentation.
Operating results for the three months and nine months ended June 30,
1998, are not necessarily indicative of the results that may be expected
for the fiscal year ended September 30, 1998.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of the allowances for losses on loans and real estate
owned. While management believes that these allowances are adequate,
future additions to the allowances may be necessary based on changes in
economic conditions.
(2) REORGANIZATION AND MERGER
On April 1, 1998, NASB Financial, Inc. (the "Company") completed a
transaction whereby North American Savings Bank, F.S.B. (the "Bank")
became a wholly-owned subsidiary of the Company, through a merger of the
Bank with and into NASB Interim Savings Bank, F.S.B., a federally
chartered stock savings bank formed solely to facilitate this
transaction.
To complete the transaction, the Company issued an aggregate of
2,375,112 shares of Company common stock by exchanging one share of the
Company common stock for each share of common stock of the Bank. It
also exchanged an option to purchase one share of Company common stock
for each outstanding option to purchase one share of the Bank's common
stock.
The resulting Bank from the merger continues to operate under the
name "North American Savings Bank, F.S.B." The transaction was intended
to qualify as a tax-deferred reorganization under the Internal Revenue
Code of 1986, as amended, providing certain tax-deferred benefits for
income tax purposes for Bank stockholders. The merger was accounted for
as a pooling of interests, and accordingly, the accompanying financial
information has been restated to include the accounts of the Bank and
the Company for all periods presented.
(3) SECURITIES AVAILABLE FOR SALE
Summaries of securities and mortgage-backed securities available
for sale are provided in the following tables.
<TABLE>
<CAPTION>
June 30, 1998
(Dollars in thousands)
------------------------------------------------------------
Gross Gross Estimated Weighted
Amortized unrealized unrealized fair average
cost gains losses value yield
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Securities:
Taxable municipal obligations $ 1,605 -- 7 1,598 8.18%
FHLB stock 5,961 -- -- 5,961 7.00%
Preferred stock in Real Estate
Investment Trust 2,738 -- -- 2,738 10.00%
FHA debentures 1,138 1 4 1,135 6.66%
Mortgage-backed securities:
FHLMC participation certificates:
Balloon and adjustable rate 7 -- -- 7 5.25%
FNMA pass-through certificates
- fixed rate 8,673 4 44 8,633 5.95%
Pass through certificates
guaranteed by GNMA
- balloon and adjustable 6,212 23 -- 6,235 5.34%
Mortgage-backed derivatives
(including CMO residuals and
interest-only securities) 3,284 297 29 3,552 --
-----------------------------------------------
Total $ 29,618 325 84 29,859
===============================================
</TABLE>
(4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities:
<TABLE>
<CAPTION>
June 30, 1998
(Dollars in thousands)
---------------------------------------------------------------
Current Gross Gross Estimated Weighted
face Carrying unrealized unrealized fair average
value value gains losses value yield
------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
FHLMC participation certificates:
Fixed rate $ 4,125 4,151 165 11 4,305 8.06%
Balloon maturity and adjustable rate 8,738 8,673 95 -- 8,768 6.64%
FNMA pass-through certificates:
Fixed rate 619 623 -- 7 616 5.74%
Balloon maturity and adjustable rate 944 944 -- 5 939 6.79%
Pass-through certificates guaranteed
by GNMA - fixed rate 557 568 35 -- 603 8.69%
Collateralized mortgage obligation bonds 4,209 3,960 169 3 4,126 8.51%
Other asset-backed securities 7,069 6,946 413 -- 7,359 9.45%
---------------------------------------------------------------
Total $26,261 25,865 877 26 26,716 7.94%
===============================================================
</TABLE>
(5) LOANS RECEIVABLE
Loans receivable are as follows:
<TABLE>
<CAPTION>
(In thousands)
---------------------------
June 30, September 30,
1998 1997
---------- ----------
<S> <C> <C>
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 311,767 $ 300,934
Business properties 78,206 92,477
Partially guaranteed by VA or
insured by FHA 25,058 23,240
Construction and development 139,746 102,131
--------- ---------
Total mortgage loans 554,777 518,782
Commercial loans 7,503 10,973
Installment loans 24,946 22,071
--------- ---------
Total loans held for investment 587,226 551,826
Less:
Undisbursed loan funds (57,585) (40,540)
Unearned discounts and fees, net (6,968) (7,141)
Allowance for losses on loans (6,657) (6,272)
--------- ---------
Net loans held for investment $ 516,016 $ 497,873
========= =========
LOANS HELD FOR SALE:
Mortgage Loans:
Permanent loans on:
Residential properties $ 143,489 $ 149,306
Partially guaranteed by VA or
insured by FHA 2,486 2,550
--------- ---------
Total loans held for sale 145,975 151,856
Less:
Undisbursed loan funds (12,041) (12,577)
Unearned discounts and fees, net (36) (410)
--------- ---------
Net loans held for sale $ 133,898 $ 138,869
========= =========
</TABLE>
Included in the loans receivable balances at June 30, 1998, and
September 30, 1997, are participating interests in mortgage loans and
wholly owned mortgage loans serviced by other institutions in the
approximate amounts of $6.3 million and $9.0 million, respectively.
Loans and participations serviced for others amounted to
approximately $423.2 million and $454.2 million at June 30, 1998, and
September 30, 1997, respectively.
(6) REAL ESTATE OWNED AND OTHER REPOSSESSED PROPERTY
Real estate owned and other repossessed property consisted of the
following:
<TABLE>
<CAPTION>
(In thousands)
---------------------------
June 30, September 30,
1998 1997
---------- ----------
<S> <C> <C>
Real estate acquired through (or deed
in lieu of) foreclosure $ 5,623 $ 5,864
Less: allowance for losses (3,430) (1,680)
--------- ---------
Total $ 2,193 $ 4,184
========= =========
</TABLE>
The Bank carries real estate owned at fair value, which is the
lower of a) current market value minus estimated costs to sell or b)
cost established at the time of foreclosure.
(7) MORTGAGE SERVICING RIGHTS
On January 1, 1997, the Bank adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." SFAS No. 125 is required to be applied to transfers of
assets occurring after January 1, 1997. Among other things, this
Statement establishes a clear distinction between transactions that are
considered sales of assets and those that are considered financing
arrangements. According to the Statement, asset sales must meet
prescribed tests, which show that financial control of the asset has
been transferred to the buyer. If the transaction does not meet these
prescribed tests, the transaction is recorded as a financing activity,
and the asset remains on the balance sheet of the seller. The
implementation of this part of the Statement had no material impact on
Bank.
The Bank is most affected by the provision of this Statement that
requires the recognition of all servicing assets at the time that
mortgage loans are sold with servicing retained. Prior to this
Statement, the Bank recognized a gain or loss only for any servicing
value in excess of stated contractual amounts at the time of loan sale
("excess servicing"). The excess servicing value was recorded as an
asset and amortized as an offset to servicing income over the lives of
the related mortgage loans.
SFAS No. 125 now requires the Bank to calculate and recognize all
retained servicing value (including "normal" servicing) at the time of a
loan sale in which servicing is retained. These amounts for normal
originated mortgage servicing rights ("OMSRs") are recorded as assets
and amortized as offsets to future servicing income. Impairment of
OMSRs is assessed based on the fair value of the rights on a pool by
pool basis. Fair values are estimated using discounted cash flows based
on a market rate of interest.
In accordance with the Statement, servicing fees recognized in
excess of normal servicing fees are carried as interest-only strip
securities and classified as available for sale in accordance with SFAS
No. 115. Also, all previous amounts carried as excess servicing assets
were combined and reclassified as interest-only strip securities. At
June 30, 1998, the Bank had such interest-only strip securities in the
amount of $3.3 million, classified as available for sale.
(8) RECENTLY ISSUED ACCOUNTING STANDARDS
Effective during the current fiscal year ended September 30, 1998,
the Company has adopted SFAS No. 128, "Earnings per share." This
Statement simplifies the standards for computing and presenting earnings
per share and replaces previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Accordingly, net earnings per share for all periods presented have been
restated to conform to the new standard. Note 9 to the consolidated
financial statements provides a reconciliation of basic earnings per
share and diluted earnings per share.
SFAS No. 130, "Reporting of Comprehensive Income," will be
effective for the Company's fiscal year ended September 30, 1999. This
Statement establishes standards for the reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. The
Statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. Although it does not require
a specific format for presentation, it does require that the Company
display an amount representing total comprehensive income for the period
in that financial statement. Management does not believe that
implementation of this Statement will have a material impact on the
Company's consolidated financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," will be effective for the Company's fiscal year
1999 financial statements. This Statement establishes standards for the
way that the Company will report information about its operating
segments in interim and annual financial statements. It also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. Management does not
believe that implementation of this Statement will have a material
impact on the Company's financial statements, however, certain
additional financial statement disclosures will be required.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", was issued. This Statement will be effective
for the Company's fiscal year ended September 30, 2001. SFAS 133
requires companies to record derivative instruments as assets or
liabilities, measured at fair value. The recognition of gains or losses
resulting from changes in the values of those derivative instruments is
based on the use of each derivative instrument and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving
offsetting changes in fair value or cash flows. Management does not
believe that the implementation of this Statement will have a material
impact on the Company's consolidated financial statements.
(9) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER
SHARE
The following table presents a reconciliation of basic earnings per
share to diluted earnings per share for the periods indicated. Amounts
are presented in thousands, except share and per share data.
<TABLE>
<CAPTION>
Three months ended 6/30/98 Nine months ended 6/30/98
------------------------------- -------------------------------
Per-share Per-share
Income Shares Amount Income Shares Amount
-------- --------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 3,176 2,232,513 $ 1.42 $ 9,510 2,236,509 $ 4.25
========= =========
Effect of dilutive securities:
Stock options 50,272 55,374
------------------- -------------------
Diluted earnings per share $ 3,176 2,282,785 $ 1.39 $ 9,510 2,291,883 $ 4.15
============================== ===============================
<CAPTION>
Three months ended 6/30/97 Nine months ended 6/30/97
------------------------------- -------------------------------
Per-share Per-share
Income Shares Amount Income Shares Amount
-------- --------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 2,796 2,251,688 $ 1.24 $ 7,850 2,255,806 $ 3.48
======== =========
Effect of dilutive securities:
Stock options 73,175 85,123
------------------- -------------------
Diluted earnings per share $ 2,796 2,324,863 $ 1.20 $ 7,850 2,340,929 $ 3.35
============================== ===============================
</TABLE>
The dilutive securities included for each period presented above
consist entirely of stock options granted to employees as incentive
stock options under Section 442A
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The principal business of the Company is to provide banking
services through the Bank. Specifically, the Bank obtains savings and
checking deposits from the public, then uses those funds to originate
and purchase real estate loans and other loans. The Bank also purchases
mortgage-backed securities ("MBS") and other investment securities from
time to time as conditions warrant. In addition to customer deposits,
the Bank obtains funds from the sale of loans held-for-sale, the sale of
securities available-for-sale, repayments of existing mortgage assets,
and advances from the Federal Home Loan Bank ("FHLB"). The Bank's
primary sources of income are interest on loans, MBS, and investment
securities plus customer service fees and income from mortgage banking
activities. Expenses consist primarily of interest payments on customer
deposits and other borrowings and general and administrative costs.
The Bank is regulated by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"), and is subject
to periodic examination by both entities. The Bank is also subject to
the regulations of the Board of Governors of the Federal Reserve System
("FRB"), which establishes rules regarding reserves that must be
maintained against customer deposits.
FINANCIAL CONDITION
Assets
The Company's total assets as of June 30, 1998, were $726.7
million, a decrease of $6.8 million from September 30, 1997, the prior
fiscal year end.
As of June 30, 1998, included in securities available for sale are
$0.2 million in residual interest in collateralized mortgage obligation
bonds and $3.3 million in interest-only strip securities. The interest-
only strips consist of excess mortgage servicing rights established at
the time of various loan sales in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 125. Derivative financial instruments
are carried at estimated fair value in accordance with SFAS No. 115.
Neither the Company nor the Bank actively trade in derivative financial
instruments and management does not currently use derivative financial
instruments to manage interest rate risk or for other hedging
strategies.
MBS available for sale decreased $2.8 million during the nine
months ended June 30, 1998, as the sales volume of MBS exceeded the
volume of additions. Additions to MBS available for sale are
accomplished primarily through "swap" transactions, whereby the Bank
receives GNMA, FHLMC, and FNMA securities in exchange for whole mortgage
loans. Management plans to sell these securities in the subsequent
months. During the nine months ended June 30, 1998, the Bank swapped a
total of $159.3 million in mortgage loans for MBS.
As the Bank originates mortgage loans each month, management
evaluates the existing market conditions to determine which loans will
be held in the Bank's portfolio and which loans will be sold in the
secondary market. Loans sold in the secondary market can be sold with
servicing released or converted into MBS and sold with the loan
servicing retained by the Bank. At the time of each loan commitment, a
decision is made to either hold the loan for investment, hold it for
sale with servicing retained, or hold it for sale with servicing
released. Management monitors market conditions to decide whether
loans should be held in portfolio or sold and if sold, which method of
sale is appropriate. In total, the Bank originated $409.2 million in
mortgage loans during the nine months ended June 30, 1998, an increase
of 33% from $308.4 million during the nine months ended June 30, 1997.
Included in the $133.9 million in loans held for sale as of June
30, 1998, are $13.9 million in mortgage loans held for sale with
servicing released. During the nine-month period, the Bank originated
$93.0 million of these loans and sold $96.1 million. Also included in
loans held for sale as of June 30, 1998, are $2.5 million in commercial
residential loans insured by the Federal Housing Administration ("FHA").
The Bank holds options to sell these insured loans back to the FHA
during specified periods in the future at specified prices. All loans
held for sale are carried at the lower of cost or fair value.
Real estate owned decreased $2.0 million during the nine months
ended June 30, 1998, due to the sale of 14.4 acres of undeveloped land
in Dallas, Texas. The property, which was previously carried at $1.4
million, was sold for $4.4 million, net of expenses. In the
transaction, the Bank received $2.7 million in cash and a note for $1.7
million. Since the note was made at substantially below market terms,
management has continued to carry the asset as REO, and has established
a specific loss reserve for the entire amount of the loan. It is the
buyer's intention to resell the entire remaining property to third
parties and the Bank will receive payments on the note as these re-sales
are closed. One such resale occurred during the quarter ended June 30,
1998, and the Bank received a payment on the loan of approximately $1
million. Since the loan was fully reserved, the payment was treated as
a recovery, which increased the general valuation allowance ("GVA") on
REO by approximately $1 million.
The Company classifies problem assets as "substandard," "doubtful"
or "loss." Substandard assets have one or more defined weaknesses, and
it is possible that the Bank will sustain some loss unless the
deficiencies are corrected. Doubtful assets have the same defects as
substandard assets plus other weaknesses that make collection or full
liquidation improbable. Assets classified as loss are considered
uncollectible and of such little value that a specific loss allowance is
warranted.
The following table summarizes the Bank's classified assets as
reported to the OTS. Dollar amounts are expressed in thousands.
<TABLE>
<CAPTION>
6/30/98 9/30/97 6/30/97
--------- --------- ---------
<S> <C> <C> <C>
Asset Classification:
Substandard $ 9,135 10,263 9,801
Doubtful 10 12 13
Loss 2,152 2,944 2,992
-------------------------------
11,297 13,219 12,806
Allowance for losses (10,127) (7,952) (8,117)
-------------------------------
$ 1,170 5,267 4,689
===============================
</TABLE>
Total allowance for losses increased $2.2 million during the nine-
month period ended June 30, 1998. This increase occurred in the
allowance for REO loss account, due primarily to recoveries received on
the real estate in Dallas, Texas, which was discussed above.
When an insured institution classifies problem assets as either
substandard or doubtful, regulations require specific loss allowances to
reduce their book value to fair value. In addition, management
establishes GVA for other possible loan losses. GVA are allowances that
recognize the inherent risks associated with lending activities but,
unlike specific allowances, have not been allocated to particular
problem assets. When an association classifies a problem asset as loss,
it is required to establish a specific allowance for 100% of the asset
balance. The Bank's classification of its assets and the amount of its
valuation allowances are subject to review by the OTS who may require
additional GVA or specific loss allowances.
Management believes that the specific loss allowances and GVA are
adequate. While management uses available information to determine
these allowances, future allowances may be necessary because of changes
in economic conditions. Also, regulatory agencies (OTS and FDIC) review
the Bank's allowance for loss as part of their examinations, and they
may require the Bank to recognize additional loss provisions based on
the information available at the time of their examinations.
Liabilities and Equity
Customer deposit accounts increased $21.5 million during the nine
months ended June 30, 1998. The weighted average rate paid on customer
deposits as of June 30, 1998, was 5.18%, a decrease from 5.21% as of
June 30, 1997.
Advances from the Federal Home Loan Bank were $109.2 million as of
June 30, 1998, a decrease of $34.0 million from September 30, 1997.
During the nine-month period the Bank borrowed $124.0 million of new
advances and made $158.0 million in repayments. Management uses FHLB
advances at various times as an alternate funding source to provide
operating liquidity and to fund the origination and purchase of mortgage
loans.
Other notes payable decreased $1.5 million during the nine-month
period ended June 30, 1998. This was due to the maturity of industrial
development revenue refunding bonds, which were issued by the City of
Belton, Missouri.
Escrows were $4.0 million as of June 30, 1998, a decrease of $2.0
million from September 30, 1997. This decrease is due primarily to
amounts paid for borrowers taxes during the fourth calendar quarter of
1997.
Total stockholders' equity as of June 30, 1998, was $67.0 million
(9.22% of total assets). This compares to a book value of $59.2 million
(8.07% of total assets) at September 30, 1997. On a per share basis,
stockholders' equity was $30.03 on June 30, 1998, compared to $26.47 on
September 30, 1997.
The Company paid cash dividends on its common stock of $0.20 on
December 1, 1997, $0.25 on February 27, 1998, and $0.25 on May 29, 1998.
Subsequent to the quarter ended June 30, 1998, the Company announced a
cash dividend of $0.25 per share on August 31, 1998, payable to
stockholders of record as of August 7, 1998.
Total stockholders' equity as of June 30, 1998, includes an
unrealized gain of $150,000, net of income tax, on available for sale
securities in accordance with SFAS No. 115.
Ratios
The following table illustrates the Company's return on assets
(annualized net earnings divided by average total assets); return on
equity (annualized net earnings divided by average equity); and equity-
to-assets ratio (average equity divided by average total assets).
<TABLE>
<CAPTION>
Nine months ended
----------------------
6/30/98 6/30/97
---------- ----------
<S> <C> <C>
Return on average assets 1.74% 1.45%
Return on average equity 20.10% 19.44%
Equity-to-assets ratio 8.64% 7.44%
Dividend payout ratio 16.47% 15.99%
</TABLE>
RESULTS OF OPERATIONS - Comparison of three months ended June 30, 1998,
and 1997, and comparison of nine months ended June 30, 1998, and 1997.
For the three months ended June 30, 1998, the Company had net
income of $3,176,000 or $1.42 per share. This compares to net income of
$2,796,000 or $1.24 per share for the quarter ended June 30, 1997.
Net income for the nine months ended June 30, 1998, was $9,510,000
or $4.25 per share compared to net income of $7,850,000 or $3.48 per
share during the same period in the prior year.
Net Interest Margin
The Company's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS and investments and the
interest cost of customer deposits and other borrowings. Management
monitors net interest spreads and, although constrained by certain
market, economic, and competition factors, it establishes loan rates and
customer deposit rates that maximize net interest margin.
The following table presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities for the nine months ended June
30, 1998, and 1997. Average yields reflect reductions due to non-
accrual loans. Once a loan becomes 90 days delinquent, any interest
that has accrued up to that time is reserved and no further interest
income is recognized unless the loan is paid current. Average balances
and weighted average yields for the periods include all accrual and non-
accrual loans. The table also presents the interest-earning assets and
yields for each respective period. Dollar amounts are expressed in
thousands.
<TABLE>
<CAPTION>
Nine months ended 6/30/98 As of
----------------------------- 6/30/98
Average Yield/ Yield/
Balance Interest Rate Rate
---------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets
Loans $ 633,452 43,049 9.06% 8.08%
Mortgage-backed securities 44,667 2,410 7.19% 6.63%
Investments 19,401 1,071 7.36% 7.86%
Bank deposits 8,487 382 6.00% 5.23%
---------------------------------------
Total earning assets 706,007 46,912 8.86% 7.99%
---------------------------
Non-earning assets 25,472
----------
Total $ 731,479
==========
Interest-costing liabilities:
Customer deposits accounts $ 529,004 20,161 5.08% 5.18%
FHLB Advances 128,920 5,857 6.06% 5.78%
Other borrowings 1,078 45 5.57% 7.50%
---------------------------------------
Total costing liabilities 659,002 26,063 5.27% 5.28%
---------------------------
Non-costing liabilities 8,986
Stockholders' equity 63,491
----------
Total $ 731,479
==========
Net earning balance $ 47,005
==========
Earning yield less costing rate 3.59% 2.70%
================
Average interest-earning
assets, net interest, and
net yield spread on average
interest-earning assets $ 706,007 20,849 3.94%
==============================
<CAPTION>
Nine months ended 6/30/97 As of
----------------------------- 6/30/97
Average Yield/ Yield/
Balance Interest Rate Rate
---------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets
Loans $ 621,831 40,468 8.68% 8.33%
Mortgage-backed securities 47,948 2,671 7.43% 7.16%
Investments 13,574 711 6.98% 6.83%
Bank deposits 9,656 232 3.20% 5.30%
---------------------------------------
Total earning assets 693,009 44,082 8.48% 8.17%
Non-earning assets 20,485 ---------------------------
----------
Total $ 713,494
==========
Interest-costing liabilities
Customer deposits accounts $ 497,525 19,207 5.15% 5.21%
FHLB Advances 148,739 6,794 6.09% 6.14%
Other borrowings 1,498 68 6.05% 6.20%
---------------------------------------
Total costing liabilities 647,762 26,069 5.37% 5.44%
Non-costing liabilities 10,209 ---------------------------
Stockholders' equity 55,523
----------
Total $ 713,494
==========
Net earning balance $ 45,247
==========
Earning yield less costing rate 3.12% 2.73%
================
Average interest-earning
assets, net interest, and
net yield spread on average
interest-earning assets $ 693,009 18,013 3.47%
==============================
</TABLE>
The following table provides information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided on
changes attributable to (1) changes in volume (change in volume
multiplied by the old rate), (2) changes in rates (change in rate
multiplied by the old volume), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
<TABLE>
<CAPTION>
Nine months ended June 30, 1998 compared to
nine months ended June 30, 1997
-------------------------------------------------
Yield/
Yield Volume Volume Total
-------------------------------------------------
<S> <C> <C> <C> <C>
Components of interest income:
Loans $ 1,772 757 52 2,581
Mortgage-backed securities (86) (183) 8 (261)
Investments 38 305 17 360
Other assets 203 (28) (25) 150
-------------------------------------------------
Net change in interest income 1,927 851 52 2,830
-------------------------------------------------
Components of interest expense:
Customer deposit accounts (261) 1,216 (1) 954
FHLB Advances (33) (905) 1 (937)
Other borrowings (6) (19) 2 (23)
-------------------------------------------------
Net change in interest expense (300) 292 2 (6)
-------------------------------------------------
Increase (decrease) in
net interest margin $ 2,227 559 50 2,836
=================================================
</TABLE>
Net interest margin before loan loss provision in the three months
ended June 30, 1998, increased $968,000 from the quarter ended June 30,
1997. Specifically, interest income increased $831,000, and interest
expense decreased $137,000. Approximately $200,000 of the increase in
interest income is due to an increase in amortization of deferred
discounts and fees on loans, which was caused by an increase in loan
prepayments. When a loan prepays, the Bank records all remaining
unamortized discount or loan fees as an adjustment to loan yield. The
remainder of the increase in net interest margin is attributed to
retained earnings, which increased the net earning balance.
Net interest margin before loan loss provision in the nine months
ended June 30, 1998, increased $2.8 million from the nine months ended
June 30, 1997. Specifically, the increase in net interest margin was
due to an increase in interest income of $2.8 million. Approximately
$974,000 of this increase is due to an increase in amortization of
discounts and deferred fees on loans. This increase in the recognition
of discounts and deferred fees resulted in an increase in the average
yield on the earning asset portfolio from 8.68% during the nine months
ended June 30, 1997 to 9.06% during the nine months ended June 30, 1998.
The remainder of the increase in interest income is attributable to an
increase of $13.0 million in the average balance of earning assets to
$706.0 million from $693.0 million in the prior year.
The Company's net interest margin is impacted by changes in market
interest rates, which have varied greatly over time. Changing interest
rates affect the level of prepayments on mortgages, the demand for new
mortgage loans, and the supply and interest cost of customer deposits
and borrowings used to fund interest-earning assets. Management
monitors the Company's net interest spreads (the difference between
yields received on assets and paid on liabilities) and, although
constrained by market conditions, economic conditions, and prudent
underwriting standards, it offers deposit rates and loan rates that
maximize net interest income. Management does not predict interest
rates, but instead attempts to fund the Company's assets with
liabilities of a similar duration to minimize the impact of changing
interest rates on the Company's net interest margin. Since the relative
spread between financial assets and liabilities is constantly changing,
the Company's current net interest spread may not be an indication of
future net interest income.
Management has adopted a strategy to originate and purchase
mortgage loans with adjustable interest rates and fund these assets with
customer deposits or borrowings from the FHLB that have comparable
maturities or repricing characteristics. Most of these adjustable rate
mortgage ("ARM") products offer a below market interest rate initially,
with a provision to adjust each year based on certain market indices.
Although the initially low interest rates result in a more narrow
spread, the ARM products provide long-term stability to the net interest
margin and help to insulate the Company from the detrimental effects of
future changes in interest rates.
Provision for Loan Losses
The Company's provision for loan losses of $62,000 during the
quarter ended June 30, 1998, was a decrease of $111,000 over the three
months ended June 30, 1997. The provision for loan losses of $377,000
during the nine month period ended June 30, 1998, decreased $31,000 over
the nine month period ended June 30, 1997.
As stated above, management believes that the provisions for loss
are adequate. These provisions can fluctuate based on changes in
economic conditions or changes in the information available to
management. Also, regulatory agencies review the Company's allowances
for loss as a part of their examination process and they may require
changes in loss provision amounts based on information available at the
time of their examination. Management establishes allowances for loss
based on current economic values and any disruptions in the real estate
market could cause management to increase the provision for loss.
Other Operating Income
Other operating income for the three months ended June 30, 1998,
increased $119,000 from the same period in the prior year.
Specifically, loan servicing fees decreased $270,000 due to an increase
in the amortization of capitalized servicing rights, which was a result
of an increase in prepayments of the underlying mortgage loans.
Customer service fees increased $116,000 due to a higher volume of
checking accounts and other transaction accounts and an increase in late
charges on mortgage loans. Real estate owned revenue (expense)
decreased $61,000 due to the cost of deferred maintenance that was
performed on one commercial property during the quarter ended June 30,
1998. Gain on sale of loans increased $288,000 due to an increase in
the volume of loans sold. Other operating income increased $43,000 due
to a negative loss provision on other accounts receivable, which was the
result of a recovery during the quarter.
Other operating income for the nine months ended June 30, 1998,
increased $1.3 million from the same period in the prior year. Loan
servicing fees decreased $303,000 due to an increase in the amortization
of capitalized servicing rights, which was a result of an increase in
prepayments of the underlying mortgage loans. Customer service fees
increased $272,000 due to a higher volume of checking accounts and other
transaction accounts and an increase in late charges on mortgage loans.
Real estate owned revenue (expense) decreased $216,000 as a result of
the cost of deferred maintenance that was performed on one commercial
property and a decrease in rental income on commercial REO that was sold
during the period. Gross income from mortgage banking operations
increased $246,000 due to an increase in volume. Gain on sale of loans
increased $879,000 due to an increase in volume of loans sold plus the
impact of applying SFAS No. 125. Other operating income increased
$647,000 due to an increase in loan prepayment penalties and a negative
loss provision on other accounts receivable, which was the result of a
recovery.
General and Administrative Expenses
Total general and administrative expenses for the quarter ended
June 30, 1998, increased $531,000 from the same quarter in the prior
year. The increase in compensation and fringe benefits was related to
and increase in staffing in the construction lending and mortgage loan
origination departments, due to an increase in construction lending and
mortgage banking volume.
Total general and administrative expenses for the nine months ended
June 30, 1998, increased $1.4 million from the nine months ended June
30, 1997. The increases in compensation and other expenses are due
primarily to increases in staffing in the construction lending mortgage
lending departments. These are partially offset by a decrease in SAIF
insurance premiums, which is fully discussed in the section titled
"Insurance of Accounts."
Income Taxes
The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." The most recent audit of the Bank's
tax returns by the Internal Revenue Service was completed during the
quarter ended June 30, 1996.
YEAR 2000 ISSUE
The Board of Directors and the management of the Company have
established a formal process for the implementation of a plan to
evaluate and correct the problems that the year 2000 could cause to the
Company's critical automated systems. The year 2000 problem exists
because many automated systems use only two digit fields to represent
the year, such as "98" representing 1998. However, with the two digit
format, the year 2000 is indistinguishable from 1900, 2001 from 1901,
and so on. Should these critical systems fail in the year 2000, the
Company would have difficulty in processing transactions for loan and
deposit customers, which could cause significant damage to the Company's
important customer relationships.
The Company's year 2000 implementation process was established
using a standard framework set forth by the Federal Reserve Bank. The
process includes separate phases for awareness, assessment, renovation,
validation, and implementation. The Company's year 2000 plan also
includes the development and implementation of a contingency plan for
each of the Company's critical automated systems if they should fail to
become year 2000 compliant by certain target dates. Such contingency
plans should be completed by the end of the third calendar quarter in
1998. Since the Company does not develop any of the software programs
that are utilized, the process is focused on follow-up and testing of
software provided by third party vendors and data centers to ensure
their renovation. Also, the process attends to pre-packaged computer
software, personal computer and server hardware, and other electronic
equipment.
The data processing of Bank's core operations is provided by a
third party service bureau. Management has received assurances from the
Bank's service bureau that it is progressing toward its goal of making
their software and data center hardware year 2000 compliant. The Bank
is participating in testing procedures and it continues to prudently
monitor the progress reports received from the vendor. In the year 2000
process, the Company has also evaluated the hardware and software on its
wide-area network ("WAN"). To date, the Company has completed the
awareness and assessment phases of the year 2000 process. The plan's
renovation phase will occur in the third and fourth calendar quarters of
1988, with the validation and implementation phases to occur by March
31, 1999. Management estimates that the year 2000 implementation
process will cost between $300,000 and $400,000, which includes the cost
of capitalized computer hardware for the WAN and other costs to perform
testing and validation of services provided by the Company's service
bureau and other third parties.
The Company recently underwent an on-site examination of its year
2000 process, which was performed by the Office of Thrift Supervision
(OTS), its primary regulator. Management is continuing to work closely
with vendors, service providers, and regulators to accomplish its goal
of a smooth transition to the year 2000.
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Savings Association Insurance Fund ("SAIF") of the
FDIC. The Bank is subject to regulation by the OTS as its chartering
authority. Since passage of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA" or the "Act"), the FDIC
also has regulatory control over the Bank. The transactions of SAIF-
insured institutions are limited by statute and regulations that may
require prior supervisory approval in certain instances. Institutions
also must file reports with regulatory agencies regarding their
activities and their financial condition. The OTS and FDIC make
periodic examinations of the Bank to test compliance with the various
regulatory requirements. The OTS can require an institution to re-value
its assets based on appraisals and to establish specific valuation
allowances. This supervision and regulation is intended primarily for
the protection of depositors. Also, savings institutions are subject to
certain reserve requirements under Federal Reserve Board regulations.
Insurance of Accounts
The SAIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured member. Deposit insurance premiums are
determined using a Risk-Related Premium Schedule ("RRPS"), a matrix
which places each insured institution into one of three capital groups
and one of three supervisory groups. Currently, deposit insurance
premiums range from 0 to 27 basis points of the institution's total
deposit accounts, depending on the institution's risk classification.
The Bank is currently considered "well capitalized", which is the most
favorable capital group and supervisory subgroup. SAIF-insured
institutions are also assessed a premium of 0.648% of insured deposits
to service the interest on Financing Corporation ("FICO") debt.
Regulatory Capital Requirements
At June 30, 1998, the Bank exceeds all capital requirements
prescribed by the OTS. To calculate these requirements, a thrift must
deduct any investments in and loans to subsidiaries that are engaged in
activities not permissible for a national bank. As of June 30, 1998,
the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
The following table illustrates the Bank's capital ratios compared
to the regulatory requirements as of June 30, 1998. Dollar amounts are
expressed in thousands.
<TABLE>
<CAPTION>
As % of
As % of risk-
total Risk- weighted
Core assets based assets
------------------------- --------------------------
<S> <C> <C> <C> <C>
GAAP Capital (Bank only) $ 62,253 8.6% 62,253 12.9%
Adjustments for regulatory capital:
Intangible assets (138) -- (138) --
General valuation allowances -- -- 5,277 1.0%
Reverse effect of SFAS No. 115 (150) -- (150) --
------------------------- --------------------------
Regulatory capital 61,965 8.6% 67,242 13.9%
Requirement 28,975 4.0% 38,623 8.0%
------------------------- --------------------------
Excess $ 32,990 4.6% 28,619 5.9%
========================= ==========================
</TABLE>
Interest Rate Risk Component
The OTS has adopted a rule which requires savings institutions with
a "greater than normal" level of interest rate exposure to deduct
amounts from their total capital for the purpose of calculating the
risk-based capital requirement. The deduction is an amount equal to
one-half of the difference between the institution's measured exposure
and the "normal" exposure level (i.e., 2% of the estimated economic
value of the institution's assets). The rule measures interest rate
risk as the decline in Net Portfolio Value that would result from a 200
basis point increase or decrease in market interest rates. The rule
sets forth a description of valuation methodologies for assets,
liabilities, and off-balance sheet items. Subsidiaries that are deemed
to be controlled by an institution under generally accepted accounting
principles will be consolidated for purposes of calculating interest
rate risk. Although the interest rate component was originally
scheduled to become effective by December 31, 1994, the OTS has notified
institutions to delay implementation until further notice.
Loans to One Borrower
Institutions are prohibited from lending to any one borrower in
excess of 15% of the Bank's unimpaired capital plus unimpaired surplus,
or 25% of unimpaired capital plus unimpaired surplus if the loan is
secured by certain readily marketable collateral. Renewals that exceed
the loans-to-one-borrower limit are permitted if the original borrower
remains liable and no additional funds are disbursed. As of June 30,
1998, the Bank had no loans that exceeded the loans to one borrower
limit.
Investment in Subsidiaries
Investments in and extensions of credit to subsidiaries not engaged
in activities permissible for national banks must generally be deducted
from capital. As of June 30, 1998, the Bank did not have any
investments in or advances to subsidiaries engaged in activities not
permissible for national banks.
LIQUIDITY AND CAPITAL RESOURCES
The Bank generates liquidity primarily from savings deposits and
repayments on loans, investments, and mortgage-backed securities.
Liquidity measures the ability to meet deposit withdrawals and lending
commitments. For secondary sources of liquidity, the Bank has the
ability to sell assets held for sale, can borrow from primary securities
dealers on a collateralized basis, and can use the FHLB of Des Moines'
credit facility. The Bank, as a member of the FHLB System, is subject
to regulations that require the maintenance of liquidity ratios (daily
average liquid assets as a percentage of net withdrawable customer
deposits and current borrowings). The regulatory liquidity requirement
may vary depending on economic conditions and activity of customer
deposits. For the month of June 1998, the required liquidity ratio was
4%, and the Bank's average regulatory liquidity ratio was 5.2%.
Fluctuations in the level of interest rates typically impact
prepayments on mortgage loans and MBS. During periods of falling
interest rates, these prepayments increase and a greater demand exists
for new loans. The Bank's customer deposits are partially impacted by
area competition. Management is not currently aware of any other market
or economic conditions that could materially impact the Bank's future
ability to meet obligations as they come due.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material proceedings pending other than
ordinary and routine litigation incidental to the business of the
Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Report on Form 8-K dated April 15, 1998, which reported
under Item 5, the consummation of a Merger agreement, whereby North
American Savings Bank, F.S.B. became a wholly-owned subsidiary of NASB
Financial, Inc. The Agreement and Plan of Merger, Articles of
Incorporation for NASB Financial, Inc., and Bylaws of NASB Financial,
Inc. were included as exhibits to the filing.
S I G N A T U R E S
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.
<TABLE>
<S> <C>
(Registrant) NASB Financial, Inc.
By (signature) /s/ David H. Hancock
(Name) David H. Hancock
(Title) Chairman and
Chief Executive Officer
(Date) August 13, 1998
By (signature) /s/ Keith B. Cox
(Name) Keith B. Cox
(Title) Executive Vice President and
Chief Financial Officer
(Date) August 13, 1998
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1998
<PERIOD-START> APR-1-1998 OCT-1-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 2,511 2,511
<INT-BEARING-DEPOSITS> 67 67
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 29,859 29,859
<INVESTMENTS-CARRYING> 25,865 25,865
<INVESTMENTS-MARKET> 26,716 26,716
<LOANS> 649,914 649,914
<ALLOWANCE> 10,127 10,127
<TOTAL-ASSETS> 726,707 726,707
<DEPOSITS> 542,012 542,012
<SHORT-TERM> 109,016 109,016
<LIABILITIES-OTHER> 8,280 8,280
<LONG-TERM> 398 398
0 0
0 0
<COMMON> 2,334 2,334
<OTHER-SE> 64,664 64,664
<TOTAL-LIABILITIES-AND-EQUITY> 726,707 726,707
<INTEREST-LOAN> 14,397 43,049
<INTEREST-INVEST> 1,104 3,481
<INTEREST-OTHER> 105 382
<INTEREST-TOTAL> 15,606 46,912
<INTEREST-DEPOSIT> 6,776 20,161
<INTEREST-EXPENSE> 8,509 26,063
<INTEREST-INCOME-NET> 7,097 20,849
<LOAN-LOSSES> 62 377
<SECURITIES-GAINS> (14) (24)
<EXPENSE-OTHER> 4,299 12,382
<INCOME-PRETAX> 5,213 15,511
<INCOME-PRE-EXTRAORDINARY> 3,176 9,510
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,176 9,510
<EPS-PRIMARY> 1.42 4.25
<EPS-DILUTED> 1.39 4.15
<YIELD-ACTUAL> 3.94 3.94
<LOANS-NON> 2,927 2,927
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 10,947 10,947
<LOANS-PROBLEM> 579 579
<ALLOWANCE-OPEN> 6,587 6,272
<CHARGE-OFFS> 0 7
<RECOVERIES> 8 15
<ALLOWANCE-CLOSE> 6,657 6,657
<ALLOWANCE-DOMESTIC> 6,657 6,657
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 5,277 5,277
</TABLE>
