SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the period ended SEPTEMBER 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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
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.
[X]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-
affiliates of the Registrant, based on the asking price of its Common
Stock on December 24, 1998, was approximately $128.8 million.
As of December 24, 1998, there were issued and outstanding
2,259,841 shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II - Annual report to Stockholders for the Fiscal Year Ended
September 30, 1998.
2. Part III - Proxy Statement for the 1999 Annual Meeting of
Stockholders.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
NASB Financial, Inc. (the "Company") was formed in 1998 as a
unitary thrift holding company of North American Savings Bank, F.S.B.
("North American" or the "Bank"). The Bank is a federally chartered
stock savings bank, with its headquarters in the Kansas City area. The
Bank began operating in 1927, and became a member of the Federal Home
Loan Bank ("FHLB") of Des Moines in 1940. Its customer deposit
accounts are insured by the Savings Association Insurance Fund
("SAIF"), a division of the Federal Deposit Insurance Corporation
("FDIC"). The Bank converted to a stock form of ownership in
September, 1985.
The Bank's market area includes the counties of Jackson, Cass,
Clay, Buchanan, Andrew, and Lafayette in Missouri, and Johnson and
Wyandotte counties in Kansas. The Bank currently has eight customer
deposit offices including one in Leawood, Kansas, and one each in
Grandview, Lee's Summit, Independence, Harrisonville, Gladstone, and St.
Joseph in Missouri. North American also operates loan production
offices in Lee's Summit, St. Louis, St. Charles and Springfield in
Missouri, and in Overland Park, Kansas. The economy of the Kansas City
area is diversified with major employers in agribusiness, greeting
cards, automobile production, transportation, telecommunications, and
government.
The Bank's principal business is to attract deposits from the
general public and to originate real estate loans, other loans and
short-term investments. The Bank obtains funds mainly from deposits
received from the general public, sales of loans and loan
participations, advances from the FHLB and other borrowings, and
principal repayments on loans and mortgage-backed securities ("MBS").
The Bank's primary sources of income include interest on loans, interest
on MBS, customer service fees, and mortgage banking fees. Its primary
expenses are interest payments on customer deposit accounts and
borrowings and normal operating costs.
YEAR-END WEIGHTED AVERAGE YIELDS AND RATES
The following table presents the year-end balances of interest-
earning assets and interest-costing liabilities with weighted average
yields and rates. Balances and weighted average yields include all
accrual and non-accrual loans. Dollar amounts are expressed in
thousands.
<TABLE>
<CAPTION>
As of 9/30/98 As of 9/30/97 As of 9/30/96
--------------- --------------- ---------------
Yield/ Yield/ Yield/
Balance Rate Balance Rate Balance Rate
--------------- --------------- ---------------
<S> <S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $658,357 8.09% $636,742 8.16% $619,262 8.27%
Mortgage-backed securities 41,689 6.57% 51,279 7.16% 48,525 7.43%
Investments 13,170 7.81% 22,152 6.80% 10,654 7.24%
Bank deposits -- -- 513 5.31% 10,087 4.98%
--------------- --------------- ---------------
Total earning assets 713,216 7.99% 710,686 8.05% 688,528 8.15%
Non-earning assets 22,838 22,778 22,560
--------------- --------------- ---------------
Total $736,054 $733,464 $711,088
========= ========= =========
Interest-costing liabilities:
Customer deposit accounts $545,504 5.04% $520,544 5.29% $499,631 5.29%
FHLB advances 109,210 5.77% 143,226 6.03% 145,242 6.00%
Other borrowings 200 7.50% 1,680 6.22% 1,565 5.98%
--------------- --------------- ---------------
Total costing liabilities 654,914 5.16% 665,450 5.45% 646,438 5.45%
Non-costing liabilities 11,307 8,818 13,501
Stockholders' equity 69,833 59,196 51,149
--------------- --------------- ---------------
Total $736,054 $733,464 $711,088
========= ========= =========
Net earning balance 58,302 45,236 42,090
========= ========= =========
Earning yield less costing rate 2.83% 2.60% 2.70%
===== ===== =====
</TABLE>
1
<PAGE>
RATIOS
The following table sets forth, for the periods indicated, North
American's return on assets (net income divided by average total
assets), return on equity (net income divided by average equity), and
equity-to-assets ratio (average equity divided by average total assets).
The Bank paid cash dividends on its common stock of $0.125 per share in
February, May, August, and November 1995. Cash dividends of $0.15625
per share were paid in February, May, August, and November, 1996. Cash
dividends of $0.20 per share were paid in February, May, August, and
December 1997. Cash dividends of $0.25 were paid in February, May, and
August 1998.
Year ended September 30,
----------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------
Return on average assets 1.85% 1.53% 1.14% 1.41% 1.37%
Return on average equity 21.06% 20.07% 15.89% 20.05% 20.70%
Equity to asset ratio 8.78% 8.07% 7.19% 7.04% 6.87%
Dividend payout ratio 15.63% 15.38% 17.51% 10.15% N/A
ASSET ACTIVITIES
LENDING ACTIVITIES
The Bank, like most other savings institutions, has traditionally
concentrated its lending activities on mortgage loans secured by
residential property and, to a lesser extent, commercial property. The
residential mortgage loan originations have predominantly long-term
fixed and adjustable rates. The Bank also has a portfolio of mortgage
loans that are secured by multifamily, construction, development, and
commercial real estate properties. The remaining part of North
American's loan portfolio consists of non-mortgage commercial loans and
installment loans. The following table presents the Bank's total loans
receivable, held for investment plus held for sale, for the periods
indicated. The related discounts, premiums, deferred fees and loans-in-
process accounts are excluded. Dollar amounts are expressed in
thousands.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
Amount Pct. Amount Pct. Amount Pct. Amount Pct. Amount Pct.
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Permanent Loans on:
Residential properties $ 455,503 61 450,240 64 427,458 64 343,659 67 219,683 60
Business properties 77,085 11 92,477 13 102,286 15 87,187 17 82,977 22
Partially guaranteed by
VA or insured by FHA 25,533 3 25,790 4 49,308 7 12,269 2 9,077 2
Construction and development 150,729 20 102,131 14 62,881 10 38,459 8 31,718 9
--------------------------------------------------------------------------
Total mortgage loans 708,850 95 670,638 95 641,933 96 481,574 94 343,455 93
Commercial loans 7,225 1 10,973 2 14,668 2 21,444 4 17,860 5
Installment loans to individuals 28,524 4 22,071 3 12,305 2 9,177 2 7,895 2
--------------------------------------------------------------------------
$ 744,599 100 703,682 100 668,906 100 512,195 100 369,210 100
=========================================================================
</TABLE>
The following table sets forth information at September 30, 1998,
regarding the dollar amount of loans maturing in the Bank's portfolio
based on their contractual terms to maturity. Demand loans, which have
no stated schedule of repayment and no stated maturity, are reported as
due in one year or less. Scheduled repayments are reported in the
maturity category in which the payment is due. As of September 30,
1998, net real estate loans totaled 85% of the Bank's assets. Dollar
amounts are expressed in thousands.
2
<PAGE>
2000
Through After
1999 2003 2004 Total
-----------------------------------------
Mortgage Loans:
Permanent:
- at fixed rates $ 1,528 5,220 198,159 204,907
- at adjustable rates 22 2,051 351,141 353,214
Construction and
development:
- at fixed rates 1,926 2,496 1,840 6,262
- at adjustable rates 121,413 20,497 2,557 144,467
-----------------------------------------
Total mortgage loans 124,889 30,264 553,697 708,850
Commercial loans 341 676 6,208 7,225
Installment loans
to individuals 3,075 9,025 16,424 28,524
-----------------------------------------
Total loans receivable $128,305 39,965 576,329 744,599
=========================================
RESIDENTIAL REAL ESTATE LOANS
The Bank offers a range of residential loan programs. At September
30, 1998, approximately 61% of total loans receivable were permanent
conventional loans on residential properties. Also, the Bank is
authorized to originate loans guaranteed by the Veteran's Administration
("VA") and loans insured by the Federal Housing Administration
("FHA"). As of September 30, 1998, approximately $25.5 million or 3%
of the Bank's total loans were insured by the FHA or VA.
The Bank's residential loans come from several sources. The loans
that the Bank originates are generally a result of direct solicitations
of real estate brokers, builders, or developers. North American
periodically purchases real estate loans from other savings institutions
or mortgage bankers. Loan originations and purchases must be approved
by various levels of management and, depending on the loan amount, are
subject to ratification by the Board of Directors.
At the time a potential borrower applies for a single family
residential mortgage loan, it is designated as either a portfolio loan,
which is held for investment and carried at amortized cost, or a loan
held-for-sale in the secondary market and carried at the lower of cost
or fair value. All the loans on single family property that the Bank
holds for sale conform to secondary market underwriting criteria
established by the Federal Home Loan Mortgage Corporation ("FHLMC")
and the Federal National Mortgage Association ("FNMA"). All loans
originated, whether held for sale or held for investment, conform to
internal underwriting guidelines, which consider a property's loan-to-
value ratio and the borrower's ability to repay the loan.
CONSTRUCTION AND DEVELOPMENT LOANS
Construction and land development loans are offered to
owner/occupants, to persons building a residence for seasonal use or for
investment purposes, and to builders/developers who build properties to
be sold. As of September 30, 1998, approximately 20% of the Bank's
total loans receivable were construction and development loans.
Construction loans are originated at interest rates that adjust daily
based on a pre-determined percentage above the prime lending rate. Most
construction loans are due and payable within one year or else converted
to a permanent loan. In some cases extensions are permitted if payments
are current and the construction has continued satisfactorily. Land
acquisition and development loans for the purpose of developing raw land
into residential or commercial property typically have three-year terms
at floating interest rates.
The Bank's requirements for a construction loan are similar to
those of a mortgage on an existing residence. In addition, the borrower
must submit accurate plans, specifications, and cost projections of the
property to be constructed. North American's staff performs periodic
inspections of each property during construction to ensure adequate
progress is achieved before scheduled loan disbursements are made.
During fiscal year 1997, the Bank purchased the operations of
Construction Financial Services ("CFS") in Leawood, Kansas.
Management believes the acquisition will help North American increase
its share of construction and development business in Johnson County,
Kansas.
3
<PAGE>
COMMERCIAL REAL ESTATE LOANS
The Bank purchases and originates several different types of
commercial real estate loans. As of September 30, 1998, commercial real
estate loans on business properties were $77 million or 11% of the
Bank's total loan portfolio. Permanent multifamily mortgage loans on
properties of 5 to 36 dwelling units have a 50% risk-weight for risk-
based capital requirements if they have an initial loan-to-value ratio
of not more than 80% and if their annual average occupancy rate exceeds
80%. All other performing commercial real estate loans have 100% risk-
weights.
CONSUMER LOANS
As of September 30, 1998, consumer installment loans and lease
financing to individuals represented approximately 4% of loans
receivable. These loans consist primarily of loans on savings accounts
and consumer lines of credit that are secured by a customer's equity in
their primary residence. During fiscal 1997, the Bank began offering
more traditional consumer loan products in an effort to provide a wider
range of banking products to its customers.
SALES OF MORTGAGE LOANS
The Bank is an active seller of loans in the national secondary
mortgage market. A portion of loans originated are sold to various
investors along with the rights to service the loans (servicing
released). Another portion are originated for sale with loan servicing
rights kept by the Bank (servicing retained). At the time of each loan
commitment, management decides if the loan will be held in portfolio or
sold and, if sold, which investor is appropriate. During fiscal 1998,
the Bank sold $127.7 million in loans with servicing released.
The Bank records loans held for sale at the lower of cost or
estimated fair value, and any adjustments made to record them at
estimated fair value are made through the income statement. As of
September 30, 1998, the Bank had loans held for sale with a carrying
value of $131.8 million, which included $0.5 million in commercial
residential loans that are insured by the FHA. The Bank holds options
to put these loans back to the FHA during specified periods in the
future. Management plans to exercise the options if future market
conditions are favorable, which precludes management's intention to hold
them to maturity.
CLASSIFIED ASSETS, DELINQUENCIES, AND ALLOWANCE FOR LOSS
CLASSIFIED ASSETS. In accordance with the asset classification
system outlined by the Office of Thrift Supervision ("OTS"), North
American's problem assets are classified as either "substandard,"
"doubtful," or "loss."
An asset is considered substandard if it is inadequately protected
by the borrower's current net worth, the borrower's ability to repay, or
the value of collateral. Substandard assets include those characterized
by the distinct possibility that the insured institution will sustain
some loss if the deficiencies are not corrected. Assets classified as
doubtful have the same weaknesses of those classified as substandard
with the added characteristic that the weaknesses present make
collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Assets classified as loss are considered uncollectible and of such
little value that their existence without establishing a specific loss
reserve is not warranted.
When the Bank classifies a problem asset, it establishes a specific
loss allowance needed to reduce its book value to the present value of
the expected future cash flows discounted at the loan's initial
effective interest rate, or as a practical expedient, to the loan's
observable market price or the fair value of the collateral, if the loan
is dependent on collateral. In addition, general valuation allowances
("GVA") are established by management. GVA represents allowances that
recognize inherent risks associated with lending activities but have not
yet been allocated to particular assets. When the Bank classifies all
or part of problem assets as loss, it establishes a specific loss
allowance equal to 100% of the loss classification. The OTS reviews
North American's asset classification during each examination and can
require changes to asset classifications, specific loss allowances, GVA,
and loan loss provision.
Each month, management reviews the problem loans in its portfolio
to determine whether changes to the asset classifications or allowances
are needed. The following table summarizes the Bank's classified
assets. Dollar amounts are expressed in thousands.
4
<PAGE>
As of September 30,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
Asset Classification
Substandard $10,772 10,263 9,482 8,844 11,148
Doubtful 8 12 15 17 --
Loss 1,956 2,944 2,967 2,716 2,457
-------------------------------------------------
Total Classified 12,736 13,219 12,464 11,577 13,605
Allowance for
loan/REO losses (7,701) (7,952) (7,551) (7,060) (7,859)
-------------------------------------------------
Net classified assets $ 5,035 5,267 4,913 4,517 5,746
=================================================
Net classified to total
classified assets 40% 40% 39% 39% 42%
=================================================
When a loan becomes 90 days past due, the Bank stops accruing
interest and establishes a reserve for the interest accrued-to-date.
The following table summarizes non-performing assets, troubled debt
restructurings, and real estate acquired through foreclosure or in-
substance foreclosure. Dollar amounts are expressed in thousands.
As of September 30,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
Total Assets $736,054 733,464 711,088 641,838 568,577
=================================================
Non-accrual loans $ 3,854 3,679 3,303 985 1,331
Troubled debt
Restructurings 9,827 14,678 11,686 14,312 15,562
Net real estate and
other assets acquired
through foreclosure 3,232 4,184 4,377 4,462 4,572
-------------------------------------------------
Total $ 16,913 22,541 19,366 19,759 21,465
=================================================
Percent of total
Assets 2.30% 3.07% 2.72% 3.08% 3.78%
=================================================
DELINQUENCIES. The following table summarizes delinquent loan
information.
As of September 30, 1998
-------------------------------------
Number of Percent of
Loans delinquent for Loans Amount Total Loans
- ----------------------------------------------------------------
30 to 89 days 86 $ 4,848 0.7%
90 or more days 48 3,854 0.6%
-------------------------------------
Total 134 $ 8,702 1.3%
=====================================
As of September 30, 1997
-------------------------------------
Number of Percent of
Loans delinquent for Loans Amount Total Loans
- ----------------------------------------------------------------
30 to 89 days 77 $ 4,904 0.7%
90 or more days 46 3,679 0.6%
-------------------------------------
Total 123 $ 8,583 1.3%
=====================================
The effect of non-performing loans on interest income for fiscal
year 1998 is presented below. Dollar amounts are expressed in
thousands.
Principal amount of non-performing loans
as of September 30, 1998 $ 3,854
=======
Gross amount of interest income that would have
been recorded during fiscal 1998 if these loans
had been performing $ 345
Actual amount included in interest income for fiscal 1998 109
-------
Interest income not recognized on non-performing loans $ 236
=======
5
<PAGE>
ALLOWANCE FOR LOSS. Management records a provision for estimated
loan losses in an amount sufficient to cover current net charge-offs and
potential future losses based on an analysis of risks inherent in the
loan portfolio. Management continually monitors the performance of the
loan portfolio and establishes specific loss allowances when warranted.
Specifically, when it appears that a property and borrower are no longer
capable of full repayment, management establishes a specific loss
allowance to reduce the loan's book value to fair value based on the
anticipated results of collections. In addition, management establishes
a GVA through charges to the provision for loan loss based on an
assessment of the portfolio's credit risk, other than specifically
identified problem loans. Management attempts to maintain a GVA
proportionate to the level of risk in the Bank's performing loan
portfolio.
The following table sets forth the activity in the allowance for
loan losses. Dollar amounts are expressed in thousands.
September 30,
-----------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------
Balance at beginning of year $ 6,272 5,836 5,484 6,285 5,962
Total provisions 64 477 633 (749) 328
Recoveries (charge-offs) 29 (41) (281) (52) (5)
-----------------------------------------
Balance at end of year $ 6,365 6,272 5,836 5,484 6,285
=========================================
The following table is a summary of quarterly loss provisions for
the years ended September 30. Dollar amounts are expressed in
thousands.
1998 1997
---------------------------
1st quarter provision $ 6 15
2nd quarter provision 308 220
3rd quarter provision 75 173
4th quarter provision (325) 69
---------------------------
Total $ 64 477
===========================
During the fourth quarter of fiscal 1998, management booked a
negative provision for losses on loans after a periodic analysis of the
Bank's GVA on loans showed the Bank to be over reserved. The excess GVA
was accumulated as a result of several recoveries on residential loans
during that quarter.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
The Bank's staff attempts to contact borrowers who fail to make
scheduled payments, generally after a payment is more than 15 days past
due. In most cases, delinquencies are cured promptly. If a delinquency
exceeds 90 days, North American will implement measures to remedy the
default, such as accepting a voluntary deed for the property in lieu of
foreclosure or commencing a foreclosure action. If a foreclosure
occurs, the property is classified as real estate owned ("REO") until
the property is sold. North American sometimes finances the sale of
foreclosed real estate ("loan to facilitate"). Loans to facilitate
may involve a reduced down payment, a reduced rate, or a longer term
than the Bank's typical underwriting standards.
If a loan has a specific loss reserve at the time it is foreclosed,
the specific reserve is netted against the loan balance in recording the
foreclosed loan as REO. Management records a provision for losses on
REO when, subsequent to foreclosure, the estimated net realizable value
of a repossessed asset declines below its book value. The following
table sets forth activity in the allowance for loss on REO. Dollar
amounts are expressed in thousands.
September 30,
-----------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------
Beginning allowance for loss $ 1,680 1,715 1,576 1,574 2,216
Provisions (1,987) (172) 3 203 (930)
Net recoveries (charge-offs) 1,643 137 136 (201) 288
-----------------------------------------
Allowance for loss
at year-end $ 1,336 1,680 1,715 1,576 1,574
=========================================
6
<PAGE>
SECURITIES AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
On October 1, 1994, the Bank adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In accordance with
SFAS No. 115, management classifies debt securities as available for
sale if the Bank does not have the intention and ability to hold it
until maturity. Assets available for sale are carried at estimated fair
value, with all fair value adjustments recorded in a separate component
of stockholders' equity. The Bank does not actively trade in derivative
financial instruments and management does not currently use derivative
financial instruments for interest rate risk management or to accomplish
any hedging strategies.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The Bank's MBS portfolio consists primarily of securities issued by
the FHLMC, FNMA, and Government National Mortgage Association
("GNMA"). As of September 30, 1998, the Bank had $4.9 million in
fixed rate and $8.7 million in balloon and adjustable rate mortgage-
backed securities ("MBS") issued by these agencies. The Bank also had
$3.6 million in CMO bonds and $6.7 million in other asset-backed
securities held to maturity.
INVESTMENT SECURITIES
As of September 30, 1998, the Bank held no investment security from
a single issuer for which the market value exceeded 10% of the Bank's
stockholders' equity.
SOURCE OF FUNDS
In addition to customer deposits, the Bank obtains funds from loan
and MBS repayments, sales of loans held-for-sale and securities
available-for-sale, investment maturities, FHLB advances, and other
borrowings. Loan repayments, as well as the availability of customer
deposits, are influenced significantly by the level of market interest
rates. Borrowings may be used to compensate for insufficient customer
deposits or to support expanded loan and investment activities.
CUSTOMER DEPOSITS
The following table sets forth the composition of various types of
customer deposit accounts. Dollar amounts are expressed in thousands.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
Amount Pct. Amount Pct. Amount Pct. Amount Pct. Amount Pct.
-------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Account and Rate:
Demand deposit accounts $ 60,803 11 51,934 10 43,073 8 48,919 9 59,594 12
Savings accounts 78,991 14 70,457 13 63,495 11 54,438 10 30,652 6
Money market demand accounts 8,276 2 9,723 2 19,560 4 19,183 4 32,257 7
Certificates of deposit 397,434 73 388,430 75 373,503 77 407,088 77 361,164 75
-----------------------------------------------------------------------
$ 545,504 100 520,544 100 499,631 100 529,628 100 483,667 100
======================================================================
Weighted average interest rate 5.04% 5.29% 5.29% 5.49% 4.68%
======================================================================
</TABLE>
The following table presents the deposit activities at the Bank.
Dollar amounts are expressed in thousands.
For the years ended September 30,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
Deposit receipts $582,168 540,220 473,035 586,266 672,076
Deposits purchased -- -- -- -- 33,896
Withdrawals 576,831 537,489 485,992 557,424 673,046
Deposit receipts and
purchases in excess
of (less than)
withdrawals 5,337 2,731 (12,957) 28,842 32,926
Deposits sold -- -- (36,225) -- --
Interest credited 19,623 18,182 19,185 17,119 12,837
-------------------------------------------------
Net increase
(decrease) $ 24,960 20,913 (29,997) 45,961 45,763
=================================================
Balance at end
of year $545,504 520,544 499,631 529,628 483,667
=================================================
7
<PAGE>
Customers who wish to withdraw certificates of deposit prior to
maturity are subject to a penalty for early withdrawal.
FHLB ADVANCES AND OTHER BORROWINGS
FHLB advances are an important source of borrowing for North
American. The FHLB functions as a central reserve bank providing credit
for thrifts and other member institutions. As a member of the FHLB,
North American is required to own stock in the FHLB of Des Moines and
can apply for advances, collateralized by the stock and certain types of
residential mortgages, provided that certain standards related to
credit-worthiness are met.
The Bank has historically relied on customer deposits and loan
repayments as its primary sources of funds. Advances are sometimes used
as a funding supplement, particularly when management determines that it
can profitably invest the advances over their term. During fiscal 1998,
the Bank borrowed an additional $291 million in advances and as of
September 30, 1998, had a balance of $109.2 million (16% of total
liabilities) of advances from the FHLB.
The following table presents, for the periods indicated, certain
information as to the Bank's advances from the FHLB and other
borrowings. Dollar amounts are expressed in thousands.
As of September 30,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
FHLB advances $109,210 143,226 145,242 50,258 28,275
Other notes payable 200 1,680 1,565 1,690 6,096
-------------------------------------------------
Total $109,410 144,906 146,807 51,948 34,371
=================================================
Weighted avg. rate 5.77% 6.03% 6.00% 6.63% 7.42%
=================================================
As of September 30, 1998, the Bank had no category of short-term
borrowings for which the average balance outstanding during the year was
more than stockholders' equity.
OTHER ACTIVITIES
SERVICE CORPORATION ACTIVITIES
The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") substantially limits the types of service corporation
activities permissible by the Bank. North American's service
corporation, Nor-Am, was incorporated in 1972. Nor-Am sells tax-
deferred annuities and mutual funds through the Bank's branch offices
and credit life and disability insurance to loan customers.
OTHER INFORMATION
EMPLOYEES
As of September 30, 1998, the Bank and its subsidiaries had 296
employees. Management considers its relations with the employees to be
excellent.
The Bank currently maintains a comprehensive employee benefit
program including a qualified pension plan, hospitalization and major
medical insurance, paid vacations, paid sick leave, long-term disability
insurance, life insurance, and reduced loan fees for employees who
qualify. The Bank's employees are not represented by any collective
bargaining group.
COMPETITION
The Bank, like other savings institutions, is operating in a
changing environment. Non-depository financial service companies such
as securities dealers, insurance agencies, and mutual funds have become
competitors for retail savings and investments. In addition to offering
competitive interest rates, a savings institution can attract customer
deposits by offering a variety of services and convenient office
locations and business hours. Mortgage banking/brokerage firms compete
for the residential mortgage business. The primary factors in competing
for loans are interest rates and rate adjustment provisions, loan
maturity, loan fees, and the quality of service to borrowers and
brokers.
8
<PAGE>
REGULATION
GENERAL
Federal savings institutions are members of the FHLB System and
their deposits are insured by the SAIF, a division of the Federal
Deposit Insurance Corporation ("FDIC"). They are subject to extensive
regulation by the OTS as the chartering authority and now, since the
passage of the FIRREA, the FDIC. SAIF insured institutions are limited
in the transactions in which they may engage by statute and regulation,
which in certain instances may require an institution to conform with
regulatory standards or to receive prior approval from regulators.
Institutions must also file periodic reports with these government
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. If it is deemed appropriate,
the FDIC can require a re-valuation of the Bank's assets based on
examinations and they can require the Bank to establish specific
allowances for loss that reflect any such re-valuation. This
supervision and regulation is intended primarily for the protection of
depositors. Savings institutions are also subject to certain reserve
requirements under Federal Reserve Board regulations.
The enforcement provisions of the Federal Deposit Insurance Act
("FDI Act") are applicable to savings institutions and savings and
loan holding companies. While the OTS is primarily responsible for
enforcing those provisions, the FDIC also has authority to impose
enforcement action on savings institutions in certain situations. The
jurisdiction of the FDI Act's enforcement powers cover all "insured-
related parties" including stockholders, attorneys, appraisers and
accountants who knowingly or recklessly participate in wrongful action
likely to have an adverse effect on an insured institution. Regulators
have broad flexibility to impose enforcement action on an institution
that fails to comply with its regulatory requirements, particularly with
respect to the capital requirements. Possible enforcement action ranges
from requiring a capital plan, restricting operations, or terminating
deposit insurance. The FDIC can recommend to the director of the OTS
(the "Director") enforcement action, and if action is not taken by the
Director, the FDIC has the authority to compel such action under certain
circumstances.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
("FDICIA")
Key provisions of FDICIA allow the Bank Insurance Fund ("BIF") of
the FDIC to increase its borrowing from the Treasury Department. The
BIF can also borrow up to 90% of the fair market value of its assets to
provide working capital. These borrowed funds will be repaid from
assessments on the banking industry.
The FDICIA required the FDIC to formulate safety and soundness
standards, effective December 31,1993. The standards address matters
such as underwriting and documentation standards, internal controls and
audit systems, interest rate risk, and compensation and other employee
benefits.
FEDERAL HOME LOAN BANKING SYSTEM
The Bank is a member of the FHLB System, which consists of 12
regional Federal Home Loan Banks each subject to OTS supervision and
regulation. The FHLBs provide a central credit facility for member
institutions. The Bank, as a member of the FHLB of Des Moines, is
required to hold shares of capital stock of the FHLB in an amount equal
to at least 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 1/20 of its advances from
the FHLB of Des Moines, whichever is greater. The Bank complies with
this requirement and holds stock in the FHLB of Des Moines at September
30, 1998, of $5.9 million. FHLB advances must be secured by specified
types of collateral. Also, standards of community investment and
community service must be met by members that apply for FHLB advances.
LIQUIDITY
As a member of the FHLB System, the Bank is required to maintain an
average balance of liquid assets equal to a monthly average of not less
than a specified percentage of its net withdrawable deposit accounts
plus short-term borrowings. This liquidity requirement, which is
currently 5%, may be changed from time to time by the OTS to an amount
within the range of 4% to 10%, depending on economic conditions and the
savings flows of member banks. Federal regulations also require each
member institution to maintain an average daily balance of short-term
liquid assets at a specified percentage (currently 1%) of the total of
its net withdrawable savings accounts and borrowings payable in one year
or less.
9
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Monetary penalties may be imposed for failure to meet liquidity
requirements. The Bank's average liquidity for the month of September
1998 was 11.31%.
INSURANCE ON CUSTOMER DEPOSIT ACCOUNTS
The SAIF insures the Bank's deposit accounts to a maximum of
$100,000 for each insured member. Deposit 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 subgroups. The capital groups are an objective measure of
risk based on regulatory capital calculations and include well
capitalized, adequately capitalized, and undercapitalized. The
supervisory subgroups (A, B, and C) are more subjective and are
determined by the FDIC based on recent regulatory examinations. Member
institutions are eligible for reclassification every six months.
On September 30, 1996, the Deposit Insurance Funds Act of 1996
("Funds Act") was signed into law. The Funds Act outlined a one-time
assessment of 65.7 basis points of insured deposits, which was used to
increase the SAIF to 1.25% of total insured deposits. Beginning January
1, 1997, annual deposit insurance premiums range from 0 to 27 basis
points of insured deposits based on where an institution fits on the
RRPS. North American is considered to be "well capitalized" and has
been placed in the most favorable capital subgroup. In addition to
deposit insurance premiums, SAIF-insured institutions are currently
assessed a premium of 0.61% of insured deposits, which is used to
service the interest on the Financing Corporation ("FICO") debt.
The FDIC has authority to conduct examinations of, require
reporting of, and initiate enforcement actions against a thrift.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS.
REGULATORY CAPITAL REQUIREMENTS
Regulations require that thrifts maintain minimum levels of
regulatory capital, which are at least as stringent as those imposed on
national banks by the Office of the Comptroller of the Currency
("OCC").
LEVERAGE LIMIT. The leverage limit requires that a thrift maintain
"core capital" of at least 4% of its adjusted tangible assets.
"Core capital" includes (i) common stockholders' equity, including
retained earnings; non-cumulative preferred stock and related earnings;
and minority interest in the equity accounts of consolidated
subsidiaries, minus (ii) those intangibles (including goodwill) and
investments in and loans to subsidiaries not permitted in computing
capital for national banks, plus (iii) certain purchased mortgage
servicing rights and certain qualifying supervisory goodwill. At
September 30, 1998, the Bank had no supervisory goodwill and $289,000 of
the Bank's servicing rights were deducted from its regulatory capital.
At September 30, 1998, the Bank's core capital ratio was 8.7%
TANGIBLE CAPITAL REQUIREMENT. The tangible capital requirement
mandates that a thrift maintain tangible capital of at least 1.5% of
tangible assets. For the purposes of this requirement, adjusted total
assets are generally calculated on the same basis as for the leverage
ratio requirement. Tangible capital is defined in the same manner as
core capital, except that all goodwill and certain other intangible
assets must be deducted. As of September 30, 1998, North American's
regulatory tangible capital was 8.5% of tangible assets.
RISK-BASED CAPITAL REQUIREMENT. The OTS's standards require that
institutions maintain risk-based capital equal to at least 8% of risk-
weighted assets. Total risk-based capital includes core capital plus
supplementary capital. In determining risk-weighted assets, all assets
including certain off-balance-sheet items are multiplied by a risk
weight factor from 0% to 100%, based on risk categories assigned by the
OTS. The RRPS categorizes bank risk-based capital ratio over 10% as
well capitalized, 8% to 10% as adequately capitalized, and under 8% as
undercapitalized. As of September 30, 1998, the Bank's current risk-
based regulatory capital was 13.6% of risk-weighted assets.
INTEREST RATE RISK RULE. The OTS has adopted a rule, which
requires that thrifts 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.
10
<PAGE>
The deduction is an amount equal to one-half of the difference between
an 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.
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.
OTS ASSESSMENTS
The OTS has a sliding scale assessment formula to provide funding
for its operations. Troubled savings associations are charged a
"premium assessment" at a rate of 50% higher than non-troubled savings
associations at the same level of assets. Non-troubled institutions are
charged "general assessments." The changes in assessment fees reflect
the increased supervisory attention that troubled institutions require
from the OTS, which in turn increases the cost of regulation and
examinations.
EQUITY RISK INVESTMENTS
OTS regulations limit the aggregate amount that an insured
institution may invest in real estate, service corporations, equity
securities, and nonresidential construction loans and loans with loan-
to-value ratios greater than 80%. Under the regulations, savings
associations which meet their minimum regulatory capital requirements
and have tangible capital of less than 6% of total liabilities may make
aggregate equity risk investments equal to the greater of 3% of assets
or two and one-half times their tangible capital. Savings associations
that meet their minimum regulatory capital requirements and have
tangible capital equal to or greater than 6% of total liabilities may
make aggregate equity risk investments of up to three times their
tangible capital.
LOANS TO ONE BORROWER
FIRREA prohibits an institution from investing in any one real
estate project in an amount in excess of the applicable loans-to-one-
borrower limit, which is an amount equal to 15% of unimpaired capital on
an unsecured basis and an additional amount equal to 10% of unimpaired
capital and surplus if the loan is secured by certain readily marketable
collateral. Renewals that exceed the loans-to-one-borrower limit are
permissible if the original borrower remains liable for the debt and no
additional funds are disbursed. As of September 30, 1998, North
American had no loans that exceeded its 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 September 30, 1998, the Bank did not have any
investments in or advances to subsidiaries engaged in activities not
permissible for national banks.
FEDERAL RESERVE SYSTEM
Regulations require that institutions maintain reserves of 3%
against transaction accounts up to a specified level and an initial
reserve of 10% against that portion of total transaction accounts in
excess of such amount. In addition, an initial reserve of 3% must be
maintained on non-personal time deposits, which include borrowings with
maturities of less than four years. Such reserves are non-interest
bearing. These percentages are subject to change by the Federal Reserve
Board. The balance maintained to meet these reserve requirements may
also be used to satisfy the liquidity requirements imposed by the OTS.
As of September 30, 1998, North American met its reserve requirements.
Savings institutions have authority to borrow from the Federal
Reserve Bank's "discount window," but only after exhausting all FHLB
sources of borrowing.
TAXATION
The Company is subject to the general applicable corporate tax
provisions of the Internal Revenue Code ("Code") and the Bank is
subject to certain additional provisions of the Code which apply to
savings institutions and other types of financial institutions. The
Company most recently underwent an examination by the IRS during fiscal
year 1996.
11
<PAGE>
BAD DEBT RESERVES
Prior to October 1, 1996, the Bank was allowed a special bad debt
deduction for additions to tax bad debt reserves established for the
purpose of absorbing losses. This deduction was either based on an
institution's actual loss experience (the "experience method") or,
subject to certain tests relating to the composition of assets, based on
a percentage of taxable income ("percentage method"). Under the
percentage method, qualifying institutions generally deducted 8% of
their taxable income. For fiscal year 1996, the bank used the
percentage of taxable income method.
As a result of changes in the Federal tax code, the Bank's bad debt
deduction for the year ended September 30, 1998 and 1997, was based on
actual experience as the percentage method for additions to the tax bad
debt reserve has been eliminated. Under the new tax rules, thrift
institutions are required to recapture their accumulated tax bad debt
reserve, except for the portion that was established prior to 1988, the
"base-year". The recapture will be completed over a six-year phase-in
period. The phase-in period will be delayed for two years for
institutions who meet certain residential lending requirements. As of
September 30, 1998, North American had approximately $2 million
established as a tax bad debt reserve in the base-year, and zero tax bad
debt reserve after the base year. Distributing the Bank's capital in the
form of purchasing treasury stock has forced North American to recapture
its after base-year bad debt reserve prior to the phase-in period.
Management believes that accelerating the recapture is more than offset
by opportunity to buy treasury stock at lower average market prices.
MINIMUM TAX
For taxable years beginning after December 31, 1986, the
alternative minimum tax rate is 20%. The alternative minimum tax
generally applies to a base of regular taxable income plus certain tax
preferences and is payable to the extent such preferences exceed an
exemption amount.
STATE TAXATION
The Bank is subject to a special financial institution tax based on
7% of net income. This tax is in lieu of all other taxes on thrift
institutions except taxes on real estate, tangible personal property
owned by the Bank, contributions paid to the State unemployment
insurance fund, and sales/use taxes.
ITEM 2. PROPERTIES
North America's main office is located at 12498 South 71 Highway,
Grandview, Missouri. In addition to its main office, the Bank has 6
branch offices, 7 loan origination offices, and one customer service
office. Net book value of premises owned and leasehold improvement (net
of accumulated depreciation) at September 30, 1998, was approximately
$3.3 million.
Date Owned/ Lease
Location Occupied Leased Expiration
- -----------------------------------------------------------------------
12498 South 71 Highway
Grandview, Missouri 1972 Owned
646 N, 291 Highway
Lees Summit, Missouri 1992 Leased November 2002
8501 North Oak Trafficway
Kansas City, Missouri 1994 Owned
920 North Belt
St. Joseph, Missouri 1979 Owned
8840 State Line Road
Leawood, Kansas 1994 Owned
2002 E Mechanic
Harrisonville, Missouri 1975 Owned
12
<PAGE>
Date Owned/ Lease
Location Occupied Leased Expiration
- -----------------------------------------------------------------------
11221 E 23rd St.
Independence, Missouri 1990 Owned
12125-D Blue Ridge Extension
Grandview, Missouri 1990 Leased January 2000
949 NE Columbus
Lee's Summit, Missouri 1993 Leased November 2002
12900 Metcalf - Suite 140
Overland Park, Kansas 1996 Leased March 1999
1611 Des Peres Rd. - Suite 110
St. Louis, Missouri 1994 Leased February 2001
1014 Country Club Road
St. Charles, Missouri 1997 Leased February 2000
11237 Nall Avenue
Leawood, Kansas 1997 Leased May 2002
5620 SW 29th Street
Topeka, Kansas 1998 Leased August 2001
3322 South Campbell - Suite W
Springfield, Missouri 1993 Leased August 2001
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal actions that arose in the
normal course of business. There are no legal proceedings to which the
Company or its subsidiaries is a party that would have a material impact
on its consolidated financial statements.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information appearing on page 39 of the 1998 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing on page 3 of the 1998 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information appearing on pages 4 through 11 in the 1998 Annual
Report to Stockholders is incorporated herein by reference.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information appearing on pages 12 through 35 of the 1998 Annual
Report to Stockholders is incorporated herein by reference. See Item 14
below for a list of the financial statements and notes so incorporated.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCE DISCLOSURE
A report on Form 8-K was filed on January 16, 1998, with the OTS by
North American Savings Bank, F.S.B. This event occurred prior to the
Bank's merger with NASB Financial, Inc. The report gave notification of
a change in registrant's certifying accountants from Ernst & Young LLP
to Deloitte & Touche LLP. This change was made as a matter of corporate
policy to periodically rotate accounting firms, and there were no
disagreements with Ernst & Young on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope and
procedures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing on pages 3 through 11 of the Company's
Proxy Statement for the 1999 Annual Meeting is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing on pages 3 through 11 of the Company's
Proxy Statement for the 1999 Annual Meeting is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing on page 2 of the Company's Proxy
Statement for the 1999 Annual Meeting is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing on pages 10 through 11 of the Company's
Proxy Statement for the 1999 Annual Meeting is incorporated herein by
reference.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The following consolidated financial statements of NASB Financial,
Inc. and the independent auditor's report thereon which appear in the
Company's 1998 Annual report to Stockholders ("Annual Report") have
been incorporated herein by reference to Item 8.
Consolidated Balance Sheets at September 30, 1998, and 1997 (Annual
Report - Page 12).
Consolidated Statements of Income for the years ended September 30,
1998, 1997, and 1996 (Annual Report - Page 13).
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1998, 1997, and 1996 (Annual Report - Page 16).
Consolidated Statements of Cash Flows for the years ended September
30, 1998, 1997, and 1996 (Annual Report - Pages 14 and 15).
Notes to Consolidated Financial Statements (Annual Report - Pages
17 through 35).
Report of Independent Auditors (Annual Report - Page 36).
14
<PAGE>
(2) Financial Statement Schedules.
Schedules are provided in the Consolidated Financial Statements.
(3) Exhibits.
Exhibit
Number
- --------
2 Agreement and Plan of Merger by and among North American Savings
Bank, F.S.B., NASB Interim Savings Bank, F.S.B., and NASB Financial Inc.
Exhibit 2 to Form 8-K, dated April 15, 1998, and incorporated herein by
reference.
3 Federal Stock Savings Bank Charter and Bylaws. Exhibit 3 to Form
10-K for fiscal year ended September 30, 1992, dated December 27, 1992,
and incorporated herein by reference.
3.1 Articles of Incorporation of NASB Financial, Inc. Exhibit 3.1 to
Form 8-K, dated April 15, 1998, and incorporated herein by reference.
3.2 Bylaws of NASB Financial, Inc. Exhibit 3.2 to Form 8-K, dated
April 15, 1998, and incorporated herein by reference.
10.1 Employees' Stock Option Plan and specimen copy of Option
Agreement entered into between the Company and the Plan participants.
(Exhibit 10.4 to Form 10-K for fiscal year ended September 30, 1986,
dated December 26, 1986, and incorporated herein by reference.)
10.2 Amended and Restated Retirement Income Plan for Employees of
North American Savings Bank dated September 30, 1988, dated December 20,
1988, and incorporated herein by reference).
* 13 1998 Annual Report to Stockholders.
22 Subsidiaries of the Registrant at September 30, 1998, listed on
page 1.
23 Proxy Statement of NASB Financial, Inc. for the 1999 Annual
Meeting of Stockholders filed with the SEC (certain portions of such
proxy Statement are incorporated herein by reference to page numbers in
the text of this report on Form 10-K).
* Filed Herewith
(b) Reports of Form 8-K.
A report on Form 8-K was filed on April 15, 1998, which described
the formation of NASB Financial, Inc. and its merger with North American
Savings Bank, F.S.B. The filing included the Agreement and Plan of
Merger (exhibit 2), the Articles of Incorporation of NASB Financial,
Inc. (exhibit 3.1), and the Bylaws of NASB Financial, Inc. (exhibit
3.2).
A report on Form 8-K was filed on January 16, 1998, with the OTS by
North American Savings Bank, F.S.B. This event occurred prior to the
Bank's merger with NASB Financial, Inc. The report gave notification of
a change in registrant's certifying accountants from Ernst & Young LLP
to Deloitte & Touche LLP. This change was made as a matter of corporate
policy to periodically rotate accounting firms, and there were no
disagreements with Ernst & Young on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope and
procedures.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NASB FINANCIAL, INC.
By: /s/ David H. Hancock
David H. Hancock
Chairman
Date: December 28, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on December 28, 1998, by the
following persons on behalf of the Registrant and in the capacities
indicated.
Signature Title
/s/ David H. Hancock Chairman (Chief Executive Officer)
David H. Hancock
/s/ Walter W. Pinnell President
Walter W. Pinnell
/s/ Keith B. Cox Chief Financial Officer
Keith B. Cox (Principal Accounting Officer)
/s/ Frederick V. Arbanas Director
Frederick V. Arbanas
/s/ Barrett Brady Director
Barrett Brady
/s/ Linda S. Hancock Director
Linda S. Hancock
/s/ W. Russell Welsh Director
W. Russell Welsh
/s/ James A. Watson Director
James A. Watson
16
NASB FINANCIAL, INC.
1998 ANNUAL REPORT
- ----------------------------------------------------------------
CONTENTS
2 Letter to Shareholders
3 Selected Consolidated Financial and Other Data
4-11 Management's Discussion and Analysis of Financial Condition and
Results of Operations
12-35 Consolidated Financial Statements
36 Independent Auditor's Report
37 Summary of Unaudited Quarterly Operating Results
38 Listing of Directors and Officers
39 Branch Offices, Investor Information, Common Stock Prices and
Dividends
FINANCIAL HIGHLIGHTS
1998 1997 1996
-------------------------------------
(Dollars in thousands, except per share data)
FOR THE YEAR ENDED SEPTEMBER 30
Net interest income $ 27,849 24,777 22,242
Net income 13,586 11,071 7,731
Net income per share 6.08 4.92 3.39
Return on average assets 1.85% 1.53% 1.14%
Return on average equity 21.06% 20.07% 15.89%
AT YEAR END:
Assets $736,054 733,464 711,088
Loans 658,357 636,742 619,262
Customer deposit accounts 545,504 520,544 499,631
Stockholders' equity 69,833 59,196 51,149
Stockholders' equity to assets 9.5% 8.1% 7.2%
Book value per share $ 31.37 26.47 22.60
SELECTED YEAR END INFORMATION:
Stock price per share: Bid $ 50.00 51.00 30.75
Ask 55.00 54.50 33.75
1
<PAGE>
[LOGO]
December 20, 1998
Dear Shareholder:
I am pleased to report that 1998 was another successful year for your
Company. In January 1998, our shareholders approved the formation of
NASB Financial, a unitary thrift holding company that now owns 100% of
North American Savings Bank. This is our new Company's first annual
report. Although the new structure provides a great deal of flexibility
regarding our operating activities, the following information almost
entirely reflects the results of the savings bank.
During the past year, we resolved a twelve-year-old real estate problem
loan (+$1,500,000), and revalued our residential real estate loan
servicing portfolio to reflect an increase in prepayments due to the
decline in interest rates (-$500,000). After the tax-adjusted effect of
these two items, NASB will report net income of $13,586,000. Exclusive
of these two items income would have been $12,510,000, which represents
a 13% increase over the previous year.
Non-interest expenses increased by $2,179,000. This 15% increase is
abnormal for us, and is primarily the result of hopefully making certain
that we properly deal with any potential problems associated with the
coming millennium, and with attempting to originate more profitable
consumer and construction loans.
The real estate markets in which we deal remain very robust. Although
we enter the new year with more capital, more customers, and higher
returns, it is difficult to be more than cautiously optimistic of the
future. The rates at which we can invest are at levels not seen since
the 1960s. We face increasingly intense competition from a wide array
of companies that are larger than we, have more capital, more
experience, and, in some cases, are willing to make loans that would not
meet our standards for quality and/or profitability.
We will work very hard as we attempt to continue our successes during
the coming year. As always, we are appreciative of your continued
support.
Sincerely,
/s/ David H. Hancock
David H. Hancock
Board Chairman
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables include selected information concerning the
financial position of NASB Financial, Inc., (including consolidated data
from the operations of subsidiaries) for the years ended September 30.
Dollar amounts are expressed in thousands, except per share data.
SUMMARY STATEMENT OF OPERATIONS 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------
Interest income $ 62,391 60,031 56,002 50,075 40,859
Interest expense 34,542 35,254 33,760 28,893 22,600
----------------------------------------
Net interest income 27,849 24,777 22,242 21,182 18,259
Provision for loan losses 64 477 633 (749) 328
----------------------------------------
Net interest income after
provision for loan losses 27,785 24,300 21,609 21,931 17,931
Other income 11,424 8,596 9,045 4,679 7,953
General and administrative
expenses 17,067 14,888 18,085 13,319 14,569
----------------------------------------
Income before income taxes,
and cumulative effect of change
in accounting principle 22,142 18,008 12,569 13,291 11,315
Income tax expense 8,556 6,937 4,838 5,115 4,025
----------------------------------------
Income before extraordinary item
and cumulative effect of change
in accounting principle 13,586 11,071 7,731 8,176 7,290
Cumulative effect of change
in accounting principle -- -- -- 369 --
----------------------------------------
Net income $ 13,586 11,071 7,731 8,545 7,290
========================================
Basic earnings per share:
Before cumulative effect of change
in accounting principle $ 6.08 4.92 3.39 3.54 3.17
Cumulative effect of change
in accounting principle -- -- -- .16 --
----------------------------------------
Total income per share $ 6.08 4.92 3.39 3.70 3.17
========================================
Average shares outstanding
(in thousands) 2,234 2,251 2,279 2,309 2,298
SUMMARY BALANCE SHEET 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------
Assets:
Bank deposits $ -- 513 10,087 11,327 2,721
Securities available
for sale 24,951 33,603 30,117 1,341 17,666
Stock in Federal Home
Loan Bank 5,961 9,812 3,990 3,990 3,990
Loans held for sale 131,845 138,869 33,963 23,122 46,523
Securities held to maturity -- -- -- 13,583 42,152
Mortgage-backed securities 23,947 30,016 25,072 80,709 97,116
Loans receivable 526,512 497,873 585,299 483,858 338,064
Non-interest earning assets 22,838 22,778 22,560 23,908 20,345
-----------------------------------------
Total assets $736,054 733,464 711,088 641,838 568,577
=========================================
Liabilities:
Customer deposit accounts $545,504 520,544 499,631 529,628 483,667
Advances from Federal
Home Loan Bank 109,210 143,226 145,242 50,258 28,275
Other borrowings 200 1,680 1,565 1,690 6,096
Non-interest costing
Liabilities 11,307 8,818 13,501 14,076 11,491
-------------------------------------------
Total liabilities 666,221 674,268 659,939 595,652 529,529
Stockholders' equity 69,833 59,196 51,149 46,186 39,048
-------------------------------------------
Total liabilities and
stockholders' equity $736,054 733,464 711,088 641,838 568,577
==========================================
Book value per share $ 31.37 26.47 22.60 19.95 16.93
==========================================
OTHER DATA 1998 1997 1996 1995 1994
------------------------------------------
Loans serviced for others $ 546,198 454,169 370,817 434,769 481,816
Number of full service branches 7 7 7 8 8
Number of employees 296 267 267 245 253
Shares outstanding (in thousands)2,226 2,236 2,264 2,315 2,307
3
<PAGE>
GENERAL
NASB Financial, Inc. ("the Company") was formed in April 1998 to
become a unitary thrift holding company of North American Savings Bank,
F.S.B. ("the Bank" or "North American"). The Company's principal
business 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 lending activities. Expenses consist primarily of
interest payments on customer deposits and other borrowings and general
and administrative costs.
The Bank operates seven deposit branch locations, six residential
loan origination branch offices, and two residential construction loan
origination offices, primarily in the greater Kansas City area.
Consumer loans are also offered through the Bank's branch network.
Customer deposit accounts are insured up to allowable limits by the
Savings Association Insurance Fund ("SAIF"), a division of the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the
Office of Thrift Supervision ("OTS") and the FDIC.
FINANCIAL CONDITION
Total assets as of September 30, 1998, were $736.0 million, an
increase of $2.6 million from the prior year-end. Average interest-
earning assets increased $4.0 million from the prior year to $707.6
million.
During the fiscal year ended September 30, 1998, securities
available for sale decreased $5.1 million, which was the result of the
sale of Federal Housing Administration ("FHA") debentures. These FHA
debentures were originally acquired in exchange for FHA insured
commercial real estate loans at the exercise of the Bank's option.
Included in mortgage-backed securities available for sale are $3.3
million in interest-only strips, which 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, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." These are more fully described in
the notes to consolidated financial statements. Interest-only strips
are carried at estimated fair value. The Bank does not 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.
As the Bank originates 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 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 the portfolio or
sold and if sold, which method of sale is appropriate. During the year
ended September 30, 1998, the Bank originated $378.8 million in mortgage
loans held for sale, $186.4 million in mortgage loans held for
investment, and $21.8 million in other loans. This total of $587.0
million in loan originations was an increase of $127.8 over the prior
fiscal year.
Included in the $131.8 million in loans held for sale as of
September 30, 1998, are $13.1 million in mortgage loans held for sale
with servicing released. During the year, the Bank originated $124.6
million of these loans and sold $127.7 million. The Bank intends to
retain the servicing on the remaining $254.2 million in mortgage loans
originated for sale. Also included in loans held for sale at September
30, 1998, are $0.5 million in commercial residential loans insured by
the 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.
4
<PAGE>
The balance of total loans held for investment at September 30,
1998, was $526.5 million, an increase of $28.6 million from the balance
at September 30, 1997. During fiscal 1998, total originations and
purchases of mortgage loans and other loans held for investment were
$208.2 million, offset by $179.6 million in repayments and
amortizations. A significant portion of the increase in loans held for
investment were residential construction loans. The gross balance of
residential construction loans was $150.7 million at September 30, 1998,
an increase of $48.6 million (48%). During fiscal 1998, management
increased the level of staffing and other resources committed to the
origination of residential construction loans.
Mortgage servicing rights increased $1.8 million during fiscal 1998
as a result of loans sold with servicing released. In relationship to
this increase, the total balance of mortgage loans serviced for others
was $546.2 million, an increase of $92.0 million from the prior fiscal
year-end.
Total liabilities were $666.2 million at September 30, 1998, a
decrease of $8.0 million (1%) from the previous year. Average interest-
costing liabilities during fiscal year 1998 were $658.7 million, a
decrease of $1.6 million from fiscal 1997.
Customer deposit accounts increased $25.0 million during fiscal
year 1998, which includes an increase of $8.9 million in demand deposit
accounts, an increase of $8.5 million in savings accounts, and an
increase of $9.0 million in certificates of deposit, offset by a
decrease of $1.4 million in money market demand accounts. The average
interest rate on customer deposits at September 30, 1998, was 5.04%, a
decrease of 25 basis points from the prior year-end. The average
balance of customer deposits during fiscal 1998 was $533.1 million, an
increase of $22.7 million from fiscal 1997.
Advances from the Federal Home Loan Bank were $109.2 million at
September 30, 1998, a decrease of $34.0 million from the prior fiscal
year-end. During fiscal year 1998, the Bank borrowed $291.0 million of
new advances and made $325.0 million of repayments. Management
continues to use FHLB advances as a primary funding source to provide
operating liquidity and to fund the origination of mortgage loans.
Accrued expenses and other liabilities were $3.8 million at
September 30, 1998, an increase of $1.5 million from the prior year-end.
This increase is related to normal fluctuations in amounts due to
investors on loans serviced for others.
During the year ended September 30, 1998, the Company repurchased
18,660 shares of its common stock at a cost of $1.1 million. Also, the
Company paid a total of $2.1 million in cash dividends to its
stockholders.
NET INTEREST MARGIN
The Bank'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, FHLB advances, 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.
During fiscal year 1998, average interest-earning assets exceeded
average interest-costing liabilities by $48.8 million, which was 6.7% of
average total assets. In fiscal year 1997, average interest-earning
assets exceeded average interest-costing liabilities by $43.3 million,
which was 6.0% of average total assets.
5
<PAGE>
The table below presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities, with the average interest rates
for the year and at the end of each year. Average yields reflect yield
reductions due to non-accrual loans. Average balances and weighted
average yields at year-end include all accrual and non-accrual loans.
Dollar amounts are expressed in thousands.
Fiscal 1998 As of
---------------------------- 9/30/98
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------------
Interest-earning assets:
Loans $639,956 57,714 9.02% 8.09%
MBS 42,443 3,056 7.20% 6.57%
Investments 18,890 1,186 6.28% 7.81%
Bank Deposits 6,291 435 6.92% --
-------------------------------------------
Total earning assets 707,580 62,391 8.82% 7.99%
Non-earning assets 25,274 -------------------------------
---------
Total $732,854
=========
Interest-costing liabilities:
Customer deposits $533,097 27,014 5.07% 5.04%
FHLB advances 124,774 7,478 5.99% 5.77%
Other borrowings 875 50 5.71% 7.50%
-------------------------------------------
Total costing liabilities 658,746 34,542 5.24% 5.16%
Non-costing liabilities 8,982 -------------------------------
Stockholders' equity 65,126
---------
Total $732,854
=========
Net earning balance $ 48,834
Earning yield less costing rate 3.58% 2.83%
====== ======
Average interest-earning
assets $707,580
=========
Net interest 27,849
========
Net yield spread on avg.
Interest-earning assets 3.94%
======
Fiscal 1997 As of
---------------------------- 9/30/97
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------------
Interest-earning assets:
Loans $620,914 55,052 8.87% 8.16%
MBS 56,965 3,609 6.34% 7.16%
Investments 17,375 1,083 6.23% 6.80%
Bank Deposits 8,356 287 3.43% 5.31%
-------------------------------------------
Total earning assets 703,610 60,031 8.53% 8.05%
Non-earning assets 22,996 -------------------------------
---------
Total $726,606
=========
Interest-costing liabilities:
Customer deposits $510,365 25,014 5.07% 5.29%
FHLB advances 148,400 9,280 6.25% 6.03%
Other borrowings 1,575 93 5.91% 6.22%
-------------------------------------------
Total costing liabilities 660,340 35,254 5.34% 5.45%
Non-costing liabilities 10,252 -------------------------------
Stockholders' equity 56,014
---------
Total $726,606
=========
Net earning balance $ 43,270
Earning yield less costing rate 3.19% 2.60%
====== ======
Average interest-earning
assets $707,580
=========
Net interest 24,777
========
Net yield spread on avg.
Interest-earning assets 3.52%
======
Fiscal 1996 As of
---------------------------- 9/30/96
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------------
Interest-earning assets:
Loans $568,797 49,434 8.69% 8.27%
MBS 68,426 4,901 7.16% 7.43%
Investments 15,130 1,114 7.37% 7.24%
Bank Deposits 11,250 553 4.92% 4.98%
-------------------------------------------
Total earning assets 663,603 56,002 8.44% 8.15%
Non-earning assets 21,849 -------------------------------
---------
Total $685,452
=========
Interest-costing liabilities:
Customer deposits $520,829 27,494 5.28% 5.29%
FHLB advances 99,201 6,170 6.22% 6.00%
Other borrowings 1,612 96 5.96% 5.98%
-------------------------------------------
Total costing liabilities 621,642 33,760 5.43% 5.45%
Non-costing liabilities 12,911 -------------------------------
Stockholders' equity 50,899
---------
Total $685,452
=========
Net earning balance $ 41,961
Earning yield less costing rate 3.01% 2.70%
====== ======
Average interest-earning
assets $663,603
=========
Net interest 22,242
========
Net yield spread on avg.
Interest-earning assets 3.35%
======
The following tables set forth 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 rates (change in rate multiplied
by the old volume), (2) changes in volume (change in volume multiplied
by the old rate), 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.
Year ended September 30, 1998
compared to
year ended September 30, 1997
------------------------------------------
Rate/
Rate Volume Volume Total
------------------------------------------
Components of interest income:
Loans $ 931 1,689 42 2,662
Mortgage-backed securities 490 (921) (122) (553)
Investments 9 94 -- 103
Other assets 292 (71) (73) 148
------------------------------------------
Net change in interest income 1,722 791 (153) 2,360
------------------------------------------
Components of interest expense:
Customer deposit accounts -- 1,152 (19) 1,133
FHLB advances (386) (1,477) 61 (1,802)
Other borrowings (3) (41) 1 (43)
------------------------------------------
Net change in interest expense (389) (366) 43 (712)
------------------------------------------
Increase (decrease) in net
interest income $ 2,111 1,157 (196) 3,072
==========================================
6
<PAGE>
Year ended September 30, 1997
compared to
year ended September 30, 1996
------------------------------------------
Rate/
Rate Volume Volume Total
------------------------------------------
Components of interest income:
Loans $ 1,024 4,529 65 5,618
Mortgage-backed securities (561) (821) 90 (1,292)
Investments (172) 165 (24) (31)
Other assets (168) (142) 44 (266)
------------------------------------------
Net change in interest income 123 3,731 175 4,029
------------------------------------------
Components of interest expense:
Customer deposit accounts (1,094) (552) 33 (1,613)
FHLB advances 30 3,060 20 3,110
Other borrowings (1) (2) -- (3)
------------------------------------------
Net change in interest expense(1,065) 2,506 53 1,494
------------------------------------------
Increase (decrease) in net
interest income $ 1,188 1,225 122 2,535
==========================================
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1998 AND 1997
For the fiscal year ended September 30, 1998, the Company had net
income of $13.6 million, or $6.08 per share compared to net income in
the prior year of $11.1 million or $4.92 per share.
Total interest income for the year ended September 30, 1998, was
$62.4 million, an increase of $2.4 million (4%) over fiscal year 1997.
Total interest-earning assets increased $4.0 million from $703.6 million
during fiscal 1997 to $707.6 million during fiscal 1998. In addition,
the average yield on interest-earning assets increased 29 basis points
from 8.53% during fiscal 1997 to 8.82% during fiscal year 1998.
The increase in the Bank's total interest income during fiscal 1998
was due primarily to an increase of $2.7 million in interest from the
Bank's loan portfolio, of which $931,000 was the result of an increase
in the average balance of loans outstanding and $1.7 million was due to
an increase in yield on loans. The average balance of loans outstanding
was $640.0 million during fiscal year 1998, an increase of $19.0 million
over the fiscal year 1997 average balance of $620.9 million. The
weighted average rate on loans receivable at the year ended September
30, 1998, was 8.09%, an 7 basis point decrease from September 30, 1997.
However, the weighted average yield on the Bank's loan portfolio
increased 15 basis points during fiscal 1998 to 9.02%, due to an
increase in the amortization of deferred fees and discounts on loans,
which occurred because of an increase in loan repayments.
Interest on MBS declined during fiscal year 1998 due to a decrease
in the average balance of MBS of $14.5 million, partially offset by an
increase in yield on MBS of 86 basis points. As North American has
remained focused on its residential "whole loan" portfolio, repayments
of MBS have been used for the origination of new residential loans.
Total interest expense during the year ended September 30, 1998,
decreased $0.7 million (2%) from the same period in the prior year,
primarily due to a $23.6 million decrease in the average balance and 26
basis point decrease in the average rate paid on FHLB advances.
Management continues to use FHLB advances as a primary source of short-
term financing. These decreases in FHLB advances were partially offset
by an $22.7 million increase in the average balances of customer
deposits. The average cost of customer deposits during fiscal 1998 was
5.07%, unchanged from fiscal 1997.
The Bank's net interest income is impacted by changes in market
interest rates, which have varied greatly over time. Changing interest
rates also affect the level of loan prepayments and the demand for new
loans. Management monitors the Bank'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 Bank's assets with liabilities
of a similar duration to minimize the impact of changing interest rates
on the Bank's net interest margin. Since the relative spread between
financial assets and liabilities is constantly changing, North
American's current net interest spread may not be an indication of
future net interest income.
7
<PAGE>
Management records a provision for estimated loan losses in amounts
sufficient to cover current net charge-offs and an estimate of potential
future losses based on an analysis of risks that management believes to
be inherent in the loan portfolio. The General Valuation Allowance
("GVA") recognizes the inherent risks associated with lending
activities but, unlike specific allowances, have not been allocated to
particular problem assets. The provision for losses on loans was
$64,000 during the year ended September 30, 1998, compared to $477,000
during fiscal 1997. The provision was reduced proportionate to the
decrease in the level of problem loans during fiscal 1998. Management
analyzes the adequacy of the allowance accounts on a monthly basis and
believes that the Bank's specific loss allowances and GVA are adequate.
While management uses information currently available to determine these
allowances, they can fluctuate based on changes in economic conditions
and changes in the information available to management. Also,
regulatory agencies review the Bank's allowances for loss as part of
their examination, and they may require the Bank to recognize additional
loss provisions based on the information available at the time of their
examinations.
Total other income for fiscal year 1998 was $11.4 million, an
increase of $2.8 million from fiscal 1997. Specifically, loan servicing
fees decreased $0.4 million due to an increase in amortization of
capitalized mortgage servicing rights, which was a result of an increase
in prepayments of the underlying mortgage loans. Customer service fees
increased $287,000 due to a higher volume of demand deposit and other
transaction accounts and an increase in late charges on mortgage loans.
During the quarter ended September 30, 1998, a write down and valuation
allowance of $651,000 was established for impairment of mortgage
servicing rights. Provision for losses on real estate for fiscal 1998
was a net recovery of $2.0 million, compared to a net recovery of
$172,000 during fiscal 1997. Management booked a negative loss
provision on REO after a periodic analysis of the Bank's GVA on REO
showed the Bank to be substantially over reserved. The excess GVA on
REO accumulated as a result of a recovery on a large commercial property
that was recently sold. Gains on loans held for sale increased $1.1
million due to an increase in the volume of loans sold. Other operating
income increased $743,000 due to an increase in loan prepayment fees
plus an increase in sales of tax-deferred annuities and mutual fund
products through the Bank's subsidiary, Nor-Am Service Corporation.
Total general and administrative expenses for fiscal year 1998
increased $2.2 million from the prior year. Specifically, compensation
expense increased $1.5 million, due primarily to an increase in staffing
in the residential, construction, and consumer lending departments.
This 17% increase from the prior year is in relationship to a 28%
increase in total loan origination volume.
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1997 and 1996
For the fiscal year ended September 30, 1997, the Company had net
income of $11.1 million, or $4.92 per share compared to net income in
the prior year of $7.7 million or $3.39 per share. The results for the
year ended September 30, 1996, included a one-time charge for customer
deposit insurance of $3,355,000 ($2,063,000 after tax effect) to
recapitalize the SAIF. Excluding the charge, net income for the fiscal
year ended September 30, 1996, was $9.8 million, or $4.30 per share.
Total interest income for the year ended September 30, 1997, was
$60.0 million, an increase of $4.0 million (7%) over fiscal year 1996.
This increase was due primarily to a $40.0 million growth in average
interest-earning assets from $663.6 million during fiscal year 1996 to
$703.6 million during fiscal year 1997. In addition, the average yield
on interest-earning assets increased 9 basis points from 8.44% during
fiscal year 1996 to 8.53% during fiscal year 1997.
Most of the growth in interest-earning assets was achieved in the
Bank's loan portfolio, which resulted in an increase in interest on
loans of $5.6 million. The average balance of loans outstanding was
$620.9 million in fiscal 1997, an increase of $52.1 million over fiscal
1996 average balance of $568.8 million. During fiscal 1997, the Bank
continued to originate a large volume of adjustable rate mortgage loans
that have initial interest rates that are below market rates. However,
the weighted average yield on the Bank's loan portfolio increased 18
basis points during fiscal 1997 to 8.87% as many of the adjustable rate
loans made in previous years adjusted to market rates. Although
adjustable interest rate loans have a detrimental impact on the Bank's
net interest margin during their initial periods, the rate adjustment
feature will help to stabilize net interest income in the future and
help to insulate the Bank from dramatic increases in market interest
rates.
8
<PAGE>
Interest on MBS declined during fiscal 1997 due to a decrease in
the average balance of MBS from $68.4 million during fiscal 1996 to
$57.0 million during fiscal 1997.
Total interest expense during the fiscal year ended September 30,
1997, increased $1.5 million (4%) from the same period in the prior
year, due primarily to an increase in the average balance of FHLB
advances of $49.2. This increase was partially offset by a decrease in
interest expense on customer deposits. The average balance of customer
deposits during fiscal 1997 was $510.4 million, a decrease of $10.5
million from fiscal 1996.
Total other income for fiscal 1997 was $8.6 million, a decrease of
$0.4 million from fiscal 1996. Specifically, gains on the sale of loans
held for sale increased $1.2 million from the prior fiscal year,
partially offset by a decrease in the sale of assets available for sale
of $613,000. The line item in this section labeled "other" consists
primarily of loan prepayment penalties and assumption fees, sales of
Bank premises, and income from sales of non-traditional products such as
annuities and mutual funds, which are sold through the Bank's service
corporation. Specifically, the decrease in "other" other income of
$1.5 million was due primarily to a reduction in loan prepayment penalty
income and the gain on sale of the Bank's Higginsville, Missouri branch
during the 1996 fiscal year.
Total general and administrative expenses for fiscal 1997 decreased
$3.2 million from the prior year, primarily due to the one-time SAIF
assessment, which was expensed during the 1996 fiscal year. Annual SAIF
deposit insurance premiums were reduced $746,000 following the one-time
charge. Compensation expense increased $604,000, due primarily to an
increase in the costs related to an increase in total loan origination
volume.
ASSET LIABILITY MANAGEMENT
Management recognizes that there are certain market risk factors
present in the structure of the Bank's financial assets and liabilities.
Since the Bank does not have material amounts of derivative securities,
equity securities, or foreign currency positions, interest rate risk
("IRR") is the primary market risk that is inherent in the Bank's
portfolio.
The objective of the Bank's IRR management process is to maximize
net interest income over a range of possible interest rate paths. The
monitoring of interest sensitivity on both the interest-earning assets
and the interest-costing liabilities are key to effectively managing
IRR. Management maintains an IRR policy, which outlines a methodology
for monitoring interest rate risk. The Board of Directors reviews this
policy and approves changes on a regular basis. The IRR policy also
identifies the duties of the Bank's Asset/Liability committee
("ALCO"). Among other things, the ALCO is responsible for developing
the Bank's annual business plan and investment strategy, monitoring
anticipated weekly cashflows, establishing prices for the Bank's various
products, and implementing strategic IRR decisions.
On a quarterly basis, the Bank monitors the estimate of changes
that would potentially occur to its net portfolio value ("NPV") of
assets, liabilities, and off balance sheet items assuming a sudden
change in market interest rates. Management presents a NPV analysis to
the Board of Directors each quarter and NPV policy limits are reviewed
and approved.
The following table is an interest rate sensitivity analysis, which
summarizes information provided by the OTS, which estimates the changes
in NPV of the Bank's portfolio of assets, liabilities, and off balance
sheet items given a range of assumed changes in market interest rates.
These computations estimate the effect on North American's NPV of a
instantaneous and sustained change in market interest rates of plus and
minus 400 basis points, as well as the Bank's current IRR policy limits
on such estimated changes. The computations of the estimated effects of
interest rate changes are based on numerous assumptions, including a
constant relationship between the levels of various market interest
rates and estimates of prepayments of financial assets. The OTS
compiled this information using data from the Bank's Thrift Financial
Report as of September 30, 1998. Dollar amounts are expressed in
thousands.
9
<PAGE>
Changes in Net Portfolio Value Board NPV as
Market ------------------------------- approved % of PV
Interest rates $ Amount $ Change % Change policy limit of assets
- -----------------------------------------------------------------------
+ 4% 71,750 (10,115) -12% -75% 10.1%
+ 3% 77,629 (4,235) -5% -50% 10.7%
+ 2% 81,587 (278) -0% -30% 11.1%
+ 1% 82,668 803 +1% -15% 11.1%
no change 81,865 -- -- -- 10.8%
- 1% 81,233 (632) -1% -15% 10.6%
- 2% 82,718 853 +1% -30% 10.7%
- 3% 86,237 4,372 +5% -50% 11.0%
- 4% 90,303 8,438 +10% -75% 11.3%
Management cannot predict future interest rates and the effect of
changing interest rates on future net interest margin, net income, or
NPV can only be estimated. However, management believes that its
overall system of monitoring and managing of IRR is effective.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented have been
prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, most of the Bank's assets and
liabilities are monetary in nature. Except for inflation's impact on
general and administrative expenses, interest rates have a more
significant impact on the Bank's performance than do the effects of
inflation. However, the level of interest rates may be significantly
affected by the potential changes in the monetary policies of the Board
of Governors of the Federal Reserve System in an attempt to impact
inflation. Interest rates do not necessarily move in the same direction
or in the same magnitude as the prices of goods and services.
Changing interest rates impact the demand for new loans, which
affect the value and profitability of North American's loan origination
department. Rate fluctuations inversely affect the value of the Bank's
mortgage servicing portfolio because of their impact on mortgage
prepayments. Falling rates usually stimulate a demand for new loans,
which makes the mortgage banking operation more valuable, but also
encourages mortgage prepayments, which depletes the value of mortgage
servicing. Rising rates generally have the opposite effect on these
operations.
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. 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.
In calendar year 1997, management implemented a year 2000 process
using the standard framework set forth by the Federal Financial
Institutions Examination Council, which includes separate phases for
awareness, assessment, renovation, validation, and implementation. In
the awareness phase, management committed resources and established a
year 2000 committee consisting of managers from all departments of the
Company. This committee proceeded through the assessment phase, which
included an analysis of the year 2000 impact on all hardware, software,
and electronic equipment; identifying the Company's critical business
processes; developing priorities by risk; gaining commitment from
vendors and service providers; and evaluating the impact on the Bank's
customers. The renovation phase included the replacement or elimination
of non-compliant software, hardware, and vendors. In
10
<PAGE>
the validation phase, the committee will test all renovated systems and
test all data exchanges with outside organizations. In the
implementation phase, all renovated systems will be put into service.
To date, the Company has completed the awareness and assessment phases
and is near the end of the renovation phase. The validation and
implementation phases are scheduled to be completed by March 31, 1999.
During fiscal 1998, the OTS performed an on-site examination of the
Bank's year 2000 process. The Bank has been notified that it will
undergo a second year 2000 examination by the OTS sometime before March
31, 1999.
Data processing of the Bank's core operations is provided by a
third party service bureau. In November 1998, the Bank's service bureau
installed its fully renovated year 2000 compliant software. The Bank
has actively participated in testing procedures and it continues to
prudently monitor the progress reports received from the vendor. The
Company's year 2000 process also includes the evaluation of phone
systems, alarm systems, funds transfer providers, and all hardware and
software on its wide-area network ("WAN"). Management estimates that
the year 2000 implementation process will cost approximately $400,000,
most of which is the cost of capitalized computer hardware for the WAN.
Approximately one-half of this cost has been incurred as of September
30, 1998. Management expects the remainder of these costs to be
incurred during fiscal 1999.
The Company is in the process of finalizing its year 2000
contingency plan for each of the Company's critical automated systems.
The contingency plan will be implemented if any of the critical systems
should fail to become year 2000 compliant by certain target dates.
Management expects the plan to be complete by January 31, 1999, but it
also plans to make updates to the contingency plans on an ongoing basis.
The third party service bureau has also formulated a contingency plan,
which management is incorporating into the Company's overall contingency
plan.
The Board of Directors are updated on the status of the year 2000
process on at regular intervals. Management believes that the Company's
year 2000 process is adequate to ensure that all mission critical
systems will be year 2000 compliant.
LIQUIDITY AND CAPITAL RESOURCES
The OTS specifies a required minimum liquidity ratio for thrift
institutions, defined as liquid assets as a percentage of net
withdrawable deposits and current borrowings. The Bank's liquidity
ratio may increase or decrease depending on the availability of funds
and the comparative yields on investment alternatives. For secondary
sources of liquidity, the Bank may sell assets available for sale,
borrow from primary securities dealers on a collateralized basis, or may
use the FHLB of Des Moines' credit facility.
North American maintains a balance of liquid assets above the
minimum regulatory requirement and at a level adequate to meet the
requirements of normal banking activities, including the repayment of
maturing debt and potential deposit withdrawals. The required liquidity
ratio, which may vary from time to time, was 4% during at September
1998, and 5% during September 1997. For the months of September 1998
and 1997, North American's liquidity ratios were 11.3% and 5.7%,
respectively.
The OTS also requires thrift institutions to maintain specified
levels of regulatory capital. As of September 30, 1998, the Bank's
regulatory capital exceeded all minimum capital requirements, which
consist of three components: tangible, core, and risk-based. A
schedule, which more fully describes the Bank's regulatory capital
requirement, is provided in the notes to consolidated financial
statements.
Fluctuations in the level of interest rates typically impact
prepayments on mortgage loans and mortgage related securities. During
periods of falling rates, these prepayments increase and a greater
demand exists for new loans. The availability of customer deposits is
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.
11
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30,
---------------------
1998 1997
---------------------
ASSETS (Dollars in thousands)
Cash and cash equivalents $ 3,331 3,267
Securities available for sale (Note 3)
(amortized cost of $7,485 and $12,371 at
September 30, 1998 and 1997, respectively) 7,209 12,340
Stock in Federal Home Loan Bank, at cost 5,961 9,812
Mortgage-backed securities (Notes 4 and 5):
Available for sale, at market value (amortized
cost of $17,824 and $21,929 at September 30,
1998 and 1997, respectively) 17,742 21,263
Held to maturity (estimated market value of
$25,029 and $30,920 at September 30, 1998
and 1997, respectively) 23,947 30,016
Loans receivable (Note 6):
Held for sale (estimated market value of
$133,732 and $141,502 at September 30, 1998
and 1997, respectively) 131,845 138,869
Held for investment, net 526,512 497,873
Accrued interest receivable 4,455 4,723
Real estate owned, net (Note 7) 3,232 4,184
Premises and equipment, net (Note 8) 4,818 5,308
Mortgage servicing rights, net (Note 17) 4,517 2,681
Other assets 2,485 3,128
----------------------
$736,054 733,464
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts (Note 9) $545,504 520,544
Advances from Federal Home Loan Bank (Note 10) 109,210 143,226
Other borrowings (Note 11) 200 1,680
Escrows 5,915 6,054
Income taxes payable (Note 12) 1,606 480
Accrued expenses and other liabilities 3,786 2,284
----------------------
Total liabilities 666,221 674,268
----------------------
Commitments and contingencies (Note 18)
Stockholders' equity (Notes 13, 14 and 16):
Common stock of $1.00 par value: 3,000,000
authorized; 2,333,828 issued at September 30,
1998, and 2,325,569 issued at
September 30, 1997 2,334 2,326
Serial preferred stock of $1.00 par value:
7,500,000 shares authorized; none outstanding -- --
Additional paid-in capital 12,262 12,198
Retained earnings 59,527 48,064
Treasury stock, at cost; 107,987 shares at
September 30, 1998, and 89,327 shares
at September 30, 1997. (4,070) (2,963)
Unrealized net loss on securities available
for sale (220) (429)
----------------------
Total stockholders' equity 69,833 59,196
----------------------
$736,054 733,464
======================
See accompanying notes to consolidated financial statements.
12
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30,
--------------------------------
1998 1997 1996
--------------------------------
(Dollars in thousands, except per share data)
Interest on loans receivable $ 57,714 55,052 49,434
Interest on mortgage-backed securities 3,056 3,609 4,901
Interest and dividends on securities 1,186 1,083 1,114
Other interest income 435 287 553
-----------------------------
Total interest income 62,391 60,031 56,002
-----------------------------
Interest on customer deposit accounts 27,014 25,881 27,494
Interest on advances and other borrowings 7,528 9,373 6,266
-----------------------------
Total interest expense 34,542 35,254 33,760
-----------------------------
Net interest income 27,849 24,777 22,242
Provision for loan losses 64 477 633
-----------------------------
Net interest income after
provision for loan losses 27,785 24,300 21,609
-----------------------------
Other income (expense):
Loan servicing fees 351 777 549
Customer service fees and charges 1,854 1,567 1,486
Impairment of originated mortgage
servicing rights (651) -- --
Provision for losses on real estate owned 1,987 172 (3)
Gain on sale of securities
available for sale -- -- 3
Gain on sale of loans held for sale 6,383 5,321 4,111
Other 1,500 759 2,289
-----------------------------
Total other income 11,424 8,596 9,045
-----------------------------
General and administrative expenses:
Compensation and fringe benefits 10,285 8,769 8,165
Premises and equipment 2,312 2,239 2,124
Advertising and business promotion 403 309 309
Federal deposit insurance premiums 327 480 1,226
SAIF special deposit insurance assessment -- -- 3,355
Other 3,740 3,091 2,906
-----------------------------
Total general and
administrative expenses 17,067 14,888 18,085
-----------------------------
Income before income taxes 22,142 18,008 12,569
-----------------------------
Income tax expense (benefit):
Current 7,582 5,659 7,623
Deferred 974 1,278 (2,785)
-----------------------------
Total income tax expense 8,556 6,937 4,838
-----------------------------
Net income $ 13,586 11,071 7,731
=============================
Basic earnings per share $ 6.08 4.92 3.39
===============================
Diluted earnings per share $ 5.93 4.76 3.29
===============================
Weighted average shares outstanding 2,234,435 2,250,875 2,278,820
See accompanying notes to consolidated financial statements.
13
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30,
----------------------------
1998 1997 1996
----------------------------
Cash flows from operating activities: (Dollars in thousands)
Net income $ 13,586 11,071 7,731
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 1,044 1,061 975
Amortization and accretion (1,066) (1,168) (1,596)
Deferred income tax expense (benefit) 974 1,278 (2,785)
Gain on sale of securities
available for sale -- -- (613)
Impairment of originated mortgage
servicing rights 651 -- --
Gain on sale of loans held for sale (6,383) (5,321) (4,111)
Stock dividend from FHLB 3,851 -- (80)
Provision for loan losses 64 477 633
Provision for losses on real estate owned (1,987) (172) 3
Origination and purchase of loans
held for sale (378,760) (398,091) (197,628)
Sale of loans held for sale 345,242 293,905 187,230
Changes in:
Accrued interest receivable 268 (511) 261
Accrued expenses and other
liabilities and current taxes payable 1,522 (6,035) 403
----------------------------
Net cash used in operating activities (20,994) (103,506) (9,577)
Cash flows from investing activities:
Principal repayments of
mortgage-backed securities:
Held to maturity 6,059 4,847 8,771
Available for sale 12,037 4,156 6,198
Principal repayments of mortgage
loans held for investment and
held for sale 221,560 151,980 126,558
Principal repayments of other loans 17,406 11,262 14,118
Principal repayments of securities:
Held to maturity -- 16,000 29,162
Available for sale 32 30 80
Loan origination - mortgage loans
held for investment (186,393) (42,172) (186,960)
Loan origination - other loans (21,821) (18,909) (9,945)
Purchase of mortgage loans held
for investment (26,703) (23,230) (40,634)
Purchases of mortgage-backed securities
held to maturity -- (9,826) --
Purchases of securities:
Held to maturity -- (16,782) (29,895)
Available for sale (5,147) -- --
Proceeds from sale of mortgage-backed
securities available for sale -- -- 18,090
Proceeds from sale of securities
available for sale 11,960 -- 8,476
Proceeds for sale of real estate owned 5,908 1,592 1,355
Equipment purchases (553) (817) (1,196)
Other cash flows from investing activities 618 (239) 3,130
---------------------------
Net cash provided by (used in)
investing activities 34,963 77,892 (52,692)
14
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended September 30,
----------------------------
1998 1997 1996
----------------------------
Cash flows from financing activities: (Dollars in thousands)
Net increase (decrease) in customer
deposit accounts 24,960 20,913 (29,998)
Proceeds from advances from FHLB 291,000 534,000 323,800
Repayment on advances from FHLB (325,016) (536,016) (228,816)
Cash dividends paid (2,123) (1,702) (1,353)
Repurchase of common stock (1,107) (1,381) (1,101)
Proceeds from issuance of notes payable -- 250 --
Repayment of notes payable (1,480) (135) (124)
Net increase (decrease) in escrows (139) 63 (762)
----------------------------
Net cash provided by (used in)
financing activities (13,905) 15,992 61,646
----------------------------
Net increase (decrease) in cash
and cash equivalents 64 (9,622) (623)
Cash and cash equivalents at
beginning of the period 3,267 12,889 13,512
----------------------------
Cash and cash equivalents at end of period $ 3,331 3,267 12,889
============================
Supplemental disclosure of cash flow information:
Cash paid for income taxes
(net of refunds received) $ 7,563 7,406 6,225
Cash paid for interest 34,619 35,376 33,909
Supplemental schedule of non-cash
investing and financing activities:
Conversion of loans to real estate owned $ 3,459 1,370 992
Conversion of real estate owned to loans 766 100 --
Conversion of loans to securities
available for sale (FHA debentures) 2,012 10,714 --
Capitalization of originated mortgage
servicing rights 3,500 1,853 --
Capitalization of originated mortgage
servicing interest only strips 2,237 912 --
Excess servicing reclassified to
mortgage-backed securities available
for sale (interest only strip securities) -- 1,527 --
Transfer of securities from held-for-
investment to available-for-sale
in accordance with the special provision
provided by the FASB during
fiscal year 1996:
Mortgage-backed securities -- -- 46,769
Securities -- -- 3,177
15
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Unrealized Total
Common paid-in Retained Treasury gains and stockholders'
stock capital earnings stock (losses) equity
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $ 2,315 12,139 32,317 (481) (104) 46,186
Change in unrealized gains and (losses),
net of income taxes of $215 -- -- -- -- (343) (343)
Cash dividends declared -- -- (1,353) -- -- (1,353)
Stock options exercised 3 26 -- -- -- 29
Purchase of common stock for treasury -- -- -- (1,101) -- (1,101)
Net income -- -- 7,731 -- -- 7,731
---------------------------------------------------------------
Balance at September 30, 1996 2,318 12,165 38,695 (1,582) (447) 51,149
Change in unrealized gains and (losses),
net of income taxes of $11 -- -- -- -- 18 18
Cash dividends declared -- -- (1,702) -- -- (1,702)
Stock options exercised 8 33 -- -- -- 41
Purchase of common stock for treasury -- -- -- (1,381) -- (1,381)
Net income -- -- 11,071 -- -- 11,071
---------------------------------------------------------------
Balance at September 30, 1997 2,326 12,198 48,064 (2,963) (429) 59,196
Change in unrealized gains and (losses),
net of income taxes of $137 -- -- -- -- 209 209
Cash dividends declared -- -- (2,123) -- -- (2,123)
Stock options exercised 8 64 -- -- -- 72
Purchase of common stock for treasury -- -- -- (1,107) -- (1,107)
Net income -- -- 13,586 -- -- 13,586
---------------------------------------------------------------
Balance at September 30, 1998 $ 2,334 12,262 59,527 (4,070) (220) 69,833
===============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NASB
Financial, Inc. (the "Company"), its wholly-owned subsidiary, North
American Savings Bank, F.S.B. (the "Bank"), and the Bank's wholly-
owned subsidiary, Nor-Am Service Corporation. All significant inter-
company transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and interest-
bearing deposits in the Federal Home Loan Bank of Des Moines totaling
$0.5 million as of September 30, 1997. The Bank held no cash
equivalents at September 30, 1998.
SECURITIES AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," management determines the appropriate
classification of debt securities at the time of purchase. Debt
securities are classified as held to maturity when the Bank has the
positive intent and ability to hold the securities to maturity. Debt
securities not classified as held to maturity or trading are classified
as available for sale. As of September 30, 1998, and 1997, the Bank had
no assets designated as trading.
Securities and mortgage-backed securities classified as available
for sale are recorded at their fair values, with unrealized gains and
losses, net of income taxes, reported in a separate component of
stockholders' equity. Gains or losses on the disposition of securities
are based on the specific identification method. The calculation of any
adjustment to carry assets available for sale at market value is
computed on certain pools of assets, which have been aggregated, based
on common characteristics. Market prices are obtained from broker-
dealers and reflect estimated offer prices.
During 1995, the Financial Accounting Standards Board ("FASB")
issued a report entitled "A Guide to Implementation of Statement No.
115, on Accounting for Certain Investments in Debt and Equity
Securities" (the "Guide"). The Guide allowed a one-time
reclassification of securities from held-to-maturity to available-for-
sale without adverse accounting consequences for the remainder of the
portfolio. During the quarter ended December 31, 1995, the Bank elected
to reclassify investment securities and mortgage-backed securities held-
to-maturity with a carrying value of approximately $49.9 million and a
market value of approximately $50.1 million to available-for-sale. As a
result, equity increased by approximately $0.2 to reflect the net
unrealized gain on the securities.
LOANS HELD FOR SALE
Loans held for sale consist of loans that management does not
intend to hold until maturity. Accordingly, such loans are carried at
the lower of amortized cost (outstanding principal balance adjusted for
deferred loan fees) or market value. Market values for such loans are
determined based on sale commitments or dealer quotations. Gains or
losses on such sales are recognized using the specific identification
method. Interest, including amortization and accretion of deferred loan
fees, is included in interest income.
LOANS RECEIVABLE HELD FOR INVESTMENT, NET
Loans are stated at the amount of unpaid principal less an
allowance for loan losses, undisbursed loan funds and unearned discounts
and loan fees, net of certain direct loan origination costs. Interest
on loans is credited to income as earned and accrued only when it is
deemed collectible. Loans are placed on nonaccrual status when, in the
opinion of management, the full timely collection of principal or
interest is in doubt. As a general rule, the accrual of interest is
discontinued when principal or interest payments become doubtful. When
a loan is placed on nonaccrual status, previously accrued but unpaid
interest is reversed against current income. Subsequent collections of
cash may be applied as reductions to the principal balance, interest in
arrears or recorded as income, depending on management's assessment of
the ultimate collectibility of the loan. Nonaccrual loans may be
restored to accrual status when principal and interest become current
and the full payment of principal and interest is expected.
DEFERRED LOAN ORIGINATION FEES AND COSTS
Net loan fees and direct loan origination costs are deferred and
amortized to interest income using a method which approximates the
level-yield method over the life of the loan.
17
<PAGE>
PROVISION FOR LOSSES
LOANS - The Company considers a loan to be impaired when management
believes it will be unable to collect all principal and interest due
according to the contractual terms of the loan. If a loan is impaired,
the Company records a loss valuation equal to the excess of the loan's
carrying value over the present value of the estimated future cash flows
discounted at the loan's effective rate based on the loan's observable
market price, or the fair value of the collateral if the loan is
collateral dependent. The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is
based on the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. Assessing the adequacy
of the allowance for loan losses is inherently subjective as it requires
making material estimates, including the amount and timing of future
cash flows expected to be received on impaired loans, that may be
susceptible to significant change. In management's opinion, the
allowance, when taken as a whole, is adequate to absorb reasonable
estimated loan losses inherent in the Company's loan portfolio.
SECURITIES - The provision for losses on securities is charged to
earnings in an amount which, based on management's estimate, is
necessary to establish a general valuation allowance sufficient to
absorb credit losses that may exist within the Bank's investment
portfolio. These provisions are made based on the results of
management's continuing reviews of the investment security portfolio,
which include analysis of issuer financial data and assessments of an
issuers ability to continue to meet obligations.
REAL ESTATE OWNED
Real estate owned represents foreclosed assets held for sale and is
recorded at fair value as of the date of foreclosure less any estimated
disposal costs (the "new basis") and is subsequently carried at the
lower of the new basis or fair value less selling costs on the current
measurement date. Adjustments for estimated losses are charged to
operations when any significant decline in fair value is less than the
carrying value. Costs and expenses related to major additions and
improvements are capitalized, while maintenance and repairs that do not
improve or extend the lives of the respective assets are expensed.
Applicable gains on the sale of real estate owned are recognized when
the asset is disposed depending on the adequacy of the down payment and
other requirements.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost, less accumulated
depreciation. Depreciation of premises and equipment is provided over
the estimated useful lives of the respective assets (three to forty
years) using the straight-line method. Maintenance and repairs are
charged to expense. Major renewals and improvements are capitalized.
Gains and losses on dispositions are credited or charged to earnings as
incurred.
INCOME TAXES
The Bank qualifies as a savings and loan for tax purposes in
accordance with Section 7701(a)(19) of the Internal Revenue Code.
The provision for deferred income taxes is based on the liability
method and represents the change in the Bank's deferred income tax
liability or asset during the year. Deferred income taxes arise from
temporary differences in the carrying values of various assets and
liabilities for financial reporting and income tax purposes. Deferred
tax liabilities or assets are recorded at the tax rate that will be in
effect at the time the temporary differences are expected to reverse.
MORTGAGE SERVICING RIGHTS
The Bank adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,"
effective for the year ended September 30, 1997. For each servicing
contract in existence before January 1, 1997, the previously recognized
originated and purchased servicing rights and "excess servicing"
receivables were combined, net of any previously recognized servicing
obligations under that contract, as a servicing asset or liability. The
Statement provides that servicing assets and other retained interests in
transferred assets be measured by allocating the previous carrying
amount between the assets sold, if any, and retained interest, if any,
based on their relative fair values at the date of the transfer, and
that servicing assets and liabilities be subsequently measured by (1)
amortization in proportion to and over the period of estimated net
servicing income or loss, and (2) assessment for asset impairment or
increased obligation based on their fair values.
18
<PAGE>
Originated mortgage servicing rights are recorded at cost based
upon the relative fair values of the loans and the servicing rights.
Servicing release fees paid on comparable loans and discounted cash
flows are used to determine estimates of fair values. Purchased
mortgage servicing rights are acquired from independent third-party
originators and are recorded at the lower of cost or fair value. These
rights are amortized in proportion to and over the period of expected
net servicing income.
IMPAIRMENT EVALUATION - The Bank evaluates the carrying value of
capitalized mortgage servicing rights on a periodic basis based on their
estimated fair value. For purposes of evaluating and measuring
impairment of capitalized servicing rights in accordance with SFAS
No. 125, the Bank stratifies the rights based on their predominant risk
characteristics. The significant risk characteristics considered by the
Bank are loan type, period of origination and stated interest rate. If
the fair value estimated, using a discounted cash flow methodology, is
less than the carrying amount of the portfolio, the portfolio is written
down to the amount of the discounted expected cash flows utilizing a
valuation allowance. The Bank utilizes consensus market prepayment
assumptions and discount rates to evaluate its capitalized servicing
rights, which considers the risk characteristics of the underlying
servicing rights. For the years ended 1996 and 1997, there were no
write downs or valuation allowances established for capitalized
servicing. A write down and valuation allowance of $651,000 was
established during the period ending September 30, 1998.
In accordance with the SFAS No. 125, 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
September 30, 1998, the Bank had such interest-only strip securities
with a carrying value of $3.2 million, classified as available for sale.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." The Statement establishes standards for the
reporting of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This 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. This Statement requires
that the Company (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a statement of
financial position. The Statement is effective for the Company's
financial statements for the fiscal year ending September 30, 1999. The
Company is prepared to comply with the additional reporting requirements
of this Statement and does not anticipate that the implementation of
this Statement will have a material impact on the consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement
establishes standards for the way the public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Statement is
effective for the Company's financial statements for the fiscal year
ending September 30, 1999. The Company is prepared to comply with the
additional reporting requirements of this Statement and does not
anticipate that the implementation of this Statement will have a
material impact on the consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits." The
Statement revises employers' disclosures about pensions and other post-
retirement benefit plans, but does not change the measurement or
recognition of those plans. The Statement is effective for the
Company's financial statements for the fiscal year ending September 30,
1999. The Company is prepared to comply with the additional reporting
requirements of this Statement and does not anticipate that the
implementation of this Statement will have a material impact on the
consolidated financial statements.
19
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards for derivative
instruments including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and hedging
activities. The Statement requires an entity to recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
Statement is effective for the Company's financial statements for the
fiscal year ending September 30, 2000. The adoption of this Statement
is not expected to have a material impact on the Company's consolidated
financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." The Statement
changes the way mortgage banking entities account for certain securities
and other interests they retain after securitizing mortgage loans that
were held for sale. The Statement is effective for the Company's
financial statements as of January 1, 1999. The adoption of this
Statement is not expected to have a material impact on the Company's
consolidated financial statements.
EARNINGS PER SHARE
The Company has adopted SFAS No. 128, "Earnings Per Share,"
during the year ended September 30, 1998. The Statement simplifies the
standards for computing and presenting earnings per share and replaces
the previously reported primarily 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. Diluted earnings per
share is similar to the previously reported primary earnings per share.
Accordingly, net earnings per share for all periods presented have been
restated to conform to the new standard.
USE OF ESTIMATES
The preparation of financial statements in accordance with
generally accepted accounting principles ("GAAP") requires management
to make estimates and assumptions that affect the amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses during the reported
periods. Estimates were used to establish loss reserves, valuation of
servicing rights, and fair values of financial instruments. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts for 1997 and 1996 have been reclassified to conform
to the current year presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments," requires the Bank to disclose fair value information
about financial instruments for which it is practicable to estimate,
whether or not such fair values are reflected in the consolidated
balance sheets. Estimated fair value amounts have been determined using
available market information and a selection from a variety of valuation
methodologies. However, considerable judgment is necessarily required
to interpret market data in developing the estimates of fair value.
Accordingly, the estimates presented are not necessarily indicative of
the amount that could be realized in a current market exchange. The use
of different market assumptions and estimation methodologies may have a
material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument presented as of
September 30, 1998 and 1997:
CASH AND CASH EQUIVALENTS
The carrying amount reported in the consolidated balance sheets is a
reasonable estimate of fair value.
SECURITIES AVAILABLE FOR SALE
Fair values are based on quoted market prices, where available.
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values are based on quoted market prices, where available. When
quoted Market prices are unavailable, fair values are computed using
consensus estimates of prepayment speeds and market spreads to treasury
securities.
STOCK IN FEDERAL HOME LOAN BANK
The carrying value of stock in Federal Home Loan Bank approximates
its fair value.
20
<PAGE>
LOANS RECEIVABLE - HELD FOR SALE
Fair values of mortgage loans held for sale are based on quoted
market prices for loans with no commitment to sell. Fair values for
mortgage loans sold forward are the committed prices.
LOANS RECEIVABLE - HELD FOR INVESTMENT
Fair values are computed for each loan category using market spreads
to treasury securities for similar existing loans in the portfolio and
management's estimates of prepayments.
ACCRUED INTEREST RECEIVABLE
The carrying amount reported in the consolidated balance sheets is a
reasonable estimate of fair value.
CUSTOMER DEPOSIT ACCOUNTS
The estimated fair value of demand deposits and savings accounts is
equal to the amount payable on demand at the reporting date. Fair
values of certificates of deposit are computed at fixed spreads to
treasury securities with similar maturities.
FHLB ADVANCES
The estimated fair values of advances from FHLB are determined by
discounting the future cash flows of existing advances using rates
currently available for new advances with similar terms and remaining
maturities.
OTHER BORROWINGS
Fair values are estimated using rates currently available to the Bank
for debt with similar terms and remaining maturities.
ACCRUED INTEREST PAYABLE
The carrying amount reported in the consolidated balance sheets is a
reasonable estimate of fair value.
OFF BALANCE SHEET ITEMS
The estimated fair value of commitments to originate, purchase, or
sell loans is based on the fees currently charged to enter into similar
agreements and the difference between current levels of interest rates
and the committed rates.
(2) REORGANIZATION AND MERGER
On April 1, 1998, the Company completed a transaction whereby 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.
21
<PAGE>
(3) SECURITIES AVAILABLE FOR SALE
Summaries of securities available for sale are provided in the
following tables. Dollar amounts are expressed in thousands.
September 30, 1998
---------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
Taxable municipal
obligations $ 1,597 -- -- 1,597
U.S. Government obligations 3,150 -- (10) 3,140
Equity securities 2,738 -- (266) 2,472
--------------------------------------------
Total $ 7,485 -- (276) 7,209
============================================
September 30, 1997
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
Taxable municipal
obligations $ 1,656 -- (31) 1,625
U.S. Government Obligations 10,715 -- -- 10,715
-----------------------------------------
Total $12,371 -- (31) 12,340
=========================================
There were no realized gains or losses on the sale of securities
available for sale during the years ended September 30, 1998 and 1997.
During the year ended September 30, 1996, gross gains of $653,000 and
gross losses of $40,000 were realized on the sale of securities
available for sale.
The scheduled maturities of securities available for sale at
September 30, 1998, are presented in the following table. Dollar
amounts are expressed in thousands.
September 30, 1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
Due from five to ten years $ 3,150 -- (10) 3,140
Due after ten years 1,597 -- -- 1,597
--------------------------------------------
Total $ 4,747 -- (10) 4,737
============================================
(4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following tables present a summary of mortgage-backed
securities available for sale. Dollar amounts are expressed in
thousands.
September 30, 1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 6,432 39 -- 6,471
FNMA pass-through certificates
- fixed rate 7,650 58 (1) 7,707
Mortgage-backed derivatives
(including CMO residuals
and interest-only
securities) 3,742 -- (178) 3,564
--------------------------------------------
Total $17,824 97 (179) 17,742
============================================
22
<PAGE>
September 30, 1997
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
FHLMC Participation certificates
- fixed rate $ 8,842 24 (49) 8,817
FNMA pass-through certificates
- fixed rate 10,733 -- (145) 10,588
Mortgage-backed derivatives
(including CMO residuals
and interest-only
securities) 2,354 2 (498) 1,858
--------------------------------------------
Total $21,929 26 (692) 21,263
============================================
There were no gross realized gains or losses on the sale of
mortgage-backed securities available for sale during the years ended
September 30, 1998, 1997, or 1996.
The scheduled maturities of mortgage-backed securities available
for sale at September 30, 1998, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
Due in one year or less $ 478 -- -- 478
Due from five to ten years 7,172 58 -- 7,230
Due after ten years 10,174 39 (179) 10,034
--------------------------------------------
Total $17,824 97 (179) 17,742
============================================
(5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following tables present a summary of mortgage-backed
securities held to maturity. Dollar amounts are expressed in thousands.
September 30, 1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
FHLMC participation certificates:
Fixed rate $ 3,753 195 -- 3,948
Balloon maturity and
adjustable rate 7,809 145 -- 7,954
FNMA pass-through certificates:
Fixed rate 572 7 -- 579
Balloon maturity and
adjustable rate 922 2 -- 924
Pass-through certificates
guaranteed by GNMA
- fixed rate 525 38 -- 563
Collateralized mortgage
obligation bonds 3,644 320 (2) 3,962
Other asset-backed securities 6,722 409 (32) 7,099
--------------------------------------------
Total $23,947 1,116 (34) 25,029
============================================
23
<PAGE>
September 30, 1997
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
FHLMC participation certificates:
Fixed rate $ 5,175 177 (24) 5,328
Balloon maturity and
adjustable rate 9,741 75 -- 9,816
FNMA pass-through certificates:
Fixed rate 827 -- (46) 781
Balloon maturity and
adjustable rate 1,012 -- -- 1,012
Pass-through certificates
guaranteed by GNMA
- fixed rate 741 35 -- 776
Collateralized mortgage
obligation bonds 4,663 355 (4) 5,014
Other asset-backed securities 7,857 339 (3) 8,193
--------------------------------------------
Total $30,016 981 (77) 30,920
============================================
The scheduled maturities of mortgage-backed securities held to
maturity at September 30, 1998, are presented in the following table.
Dollar amounts are expressed in thousands.
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
Due in one year or less $ 2,375 -- (32) 2,343
Due from one to five years 7,819 145 -- 7,964
Due from five to ten years 5,257 593 -- 5,850
Due after ten years 8,496 378 (2) 8,872
--------------------------------------------
Total $23,947 1,116 (34) 25,029
============================================
The principal balances of mortgage-backed securities that are
pledged to secure certain obligations of the Bank as of September 30 are
as follows. Dollar amounts are expressed in thousands.
September 30, 1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
Customer deposit accounts $ 6,533 126 -- 6,659
September 30, 1997
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains gains value
--------------------------------------------
Customer deposit accounts $ 1,450 11 (17) 1,444
Advances from FHLB 2,400 64 (4) 2,460
--------------------------------------------
Total $ 3,850 75 (21) 3,904
============================================
24
<PAGE>
(6) LOANS RECEIVABLE
The following table provides a detail of loans receivable as of
September 30. Dollar amounts are expressed in thousands.
LOANS HELD FOR INVESTMENT 1998 1997
- ---------------------------------------------------------------------
Mortgage loans:
Permanent loans on:
Residential properties $311,982 300,934
Business properties 77,085 92,477
Partially guaranteed by VA
or insured by FHA 25,071 23,240
Construction and development 150,729 102,131
-----------------------------
Total mortgage loans 564,867 518,782
Commercial loans 7,225 10,973
Installment loans and lease financing
to individuals 28,524 22,071
-----------------------------
Total loans receivable 600,616 551,826
Less:
Undisbursed loan funds (61,836) (40,540)
Unearned discounts and fees on loans,
net of deferred costs (5,903) (7,141)
Allowance for losses on loans (6,365) (6,272)
-----------------------------
Net loans held for investment $526,512 497,873
=============================
LOANS HELD FOR SALE 1998 1997
- ---------------------------------------------------------------------
Mortgage loans:
Permanent loans on:
Residential properties $143,521 149,306
Partially insured by FHA 462 2,550
-----------------------------
143,983 151,856
Less:
Undisbursed loan funds (12,168) (12,577)
Unearned discounts and fees on loans,
net of deferred costs 30 (410)
----------------------------
Net loans held for sale $131,845 138,869
=============================
Included in the loans receivable balances are participating
interests in mortgage loans and wholly owned mortgage loans serviced by
other institutions of approximately $6.0 million and $9.0 million, at
September 30, 1998 and 1997, respectively. Whole loans and
participations serviced for others were approximately $546.2 million and
$454.2 million at September 30, 1998 and 1997, respectively. Loans
serviced for others are not included in the accompanying consolidated
balance sheets.
First mortgage loans were pledged to secure FHLB advances in the
amount of approximately $163.8 million, and $214.8 million at September
30, 1998 and 1997, respectively.
Aggregate loans to executive officers, directors and their
associates, including companies in which they have partial ownership
interest did not exceed 5% of equity as of September 30, 1998 and 1997.
Such loans were made under terms and conditions substantially the same
as loans made to parties not affiliated with the Bank.
As of September 30, 1998 and 1997, loans with an aggregate
principal balance of approximately $3.8 million and $3.7 million,
respectively, were on nonaccrual status. Gross interest income would
have increased by $236,000 and $226,000 for the years ended September
30, 1998 and 1997, respectively if the nonaccrual accrual loans had been
performing.
25
<PAGE>
The following table presents the activity in allowance for losses
on loans for 1998, 1997, and 1996. Allowance for losses on mortgage
loans includes specific valuation allowances and general valuation
allowances. Dollar amounts are expressed in thousands.
Amount
--------
Balance at September 30, 1995 $ 5,484
Provisions 633
Charge-offs (505)
Recoveries 224
--------
Balance at September 30, 1996 5,836
Provisions 477
Charge-offs (41)
Recoveries --
--------
Balance at September 30, 1997 6,272
Provisions 64
Charge-offs (7)
Recoveries 36
--------
Balance at September 30, 1998 $ 6,365
========
Although the Bank has a diversified loan portfolio, a substantial
portion is secured by real estate. The following table presents
information as of September 30 about the location of real estate that
secures loans in the Bank's mortgage loan portfolio. The line item
"Other" includes total investments in other states of less than $10
million each. Dollar amounts are expressed in thousands.
1998
-----------------------------------------------------------
Residential
----------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
- ----------------------------------------------------------------------
Missouri $ 203,965 10,000 42,878 76,170 333,013
Kansas 73,908 8,392 16,287 70,059 168,646
Other 35,904 4,884 17,920 4,500 63,208
------------------------------------------------------------
$ 313,777 23,276 77,085 150,729 564,867
============================================================
1997
------------------------------------------------------------
Residential
----------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
- -----------------------------------------------------------------------
Missouri $ 184,977 7,622 39,445 59,011 291,055
Kansas 71,819 11,928 25,679 38,370 147,796
Other 39,639 8,189 27,353 4,750 79,931
-------------------------------------------------------------
$ 296,435 27,739 92,477 102,131 518,782
=============================================================
Proceeds from the sale of loans held for sale during fiscal years
1998, 1997 and 1996, were $345.2 million, $293.9 million, and $187.2
million, respectively. In fiscal 1998, the Bank realized gross gains of
$6.5 million and gross losses of $0.1 million on those sales. In fiscal
1997, gross gains of $5.6 million and gross losses of $0.3 million were
realized. In fiscal 1996 the Bank realized gross gains of $4.1 million
and no gross losses.
26
<PAGE>
(7) REAL ESTATE OWNED
The following table presents real estate owned and other
repossessed property as of September 30. Dollar amounts are expressed
in thousands.
1998 1997
------------------------
Real estate acquired through
(or deed in lieu of) foreclosure $ 4,568 5,864
Less: allowance for losses (1,336) (1,680)
------------------------
Total $ 3,232 4,184
========================
The allowance for losses on real estate owned includes the
following activity for the years ended September 30. Dollar amounts are
expressed in thousands.
1998 1997 1996
------------------------------
Balance at beginning of year $ 1,680 1,715 1,576
Provisions (1,987) (172) 3
Charge-offs (434) (242) (64)
Recoveries 2,077 379 200
------------------------------
Balance at end of year $ 1,336 1,680 1,715
==============================
(8) PREMISES AND EQUIPMENT
The following table summarizes premises and equipment as of
September 30. Dollar amounts are expressed in thousands.
1998 1997
-------------------
Land $ 1,774 1,774
Buildings and improvements 3,678 3,557
Furniture, fixtures and equipment 6,839 6,378
-------------------
12,291 11,709
Accumulated depreciation (7,473) (6,401)
-------------------
Total $ 4,818 5,308
===================
Certain facilities of the Bank are leased under various operating
leases. Amounts paid for rent expense for the fiscal years ended
September 30, 1998, 1997, and 1996 were approximately $510,000,
$470,000, and $448,000, respectively.
Future minimum rental commitments under noncancelable leases are
presented in the following table. Dollar amounts are expressed in
thousands.
Fiscal year ended
September 30, Amount
- ----------------------------------
1999 $ 532
2000 470
2001 396
2002 234
2003 19
-------
Total $ 1,651
=======
27
<PAGE>
(9) CUSTOMER DEPOSIT ACCOUNTS
Customer deposit accounts as of September 30 are illustrated in the
following table. Dollar amounts are expressed in thousands.
1998
------------------------------------
Amount Average % of
rate total
------------------------------------
Demand deposit accounts $ 60,803 1.36% 11
Savings accounts 78,991 4.14% 14
Money market demand accounts 8,276 2.95% 2
Certificate accounts 397,434 5.82% 73
------------------------------------
$545,504 5.04% 100
====================================
1997
------------------------------------
Amount Average % of
rate total
------------------------------------
Demand deposit accounts $ 51,934 1.91% 10
Savings accounts 70,457 4.29% 13
Money market demand accounts 9,723 2.95% 2
Certificate accounts 388,430 5.98% 75
------------------------------------
$520,544 5.29% 100
====================================
The aggregate amount of certificates of deposits in excess of
$100,000 was approximately $31.4 million and $14.4 million as of
September 30, 1998 and 1997, respectively.
The following table presents contractual maturities of certificate
accounts as of September 30, 1998. Dollar amounts are expressed in
thousands.
Up to One to Two to After three
one year two years three years years Total
-----------------------------------------------------
Certificate of
deposits $195,802 154,987 22,281 24,364 397,434
The following table presents interest expense on customer deposit
accounts for the years ended September 30. Dollar amounts are expressed
in thousands.
1998 1997 1996
---------------------------------
Savings accounts $ 3,048 2,777 2,584
Money market and demand
deposit accounts 1,121 1,325 1,447
Certificate accounts 22,845 21,779 23,463
---------------------------------
$ 27,014 25,881 27,494
=================================
(10) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Des Moines are secured
by all stock in the Federal Home Loan Bank of Des Moines, mortgage-
backed securities and first mortgage loans with aggregate unpaid
principal balances equal to at least 150% of outstanding advances not
secured by FHLB stock. The following table provides a summary of
advances by year of maturity as of September 30. Dollar amounts are
expressed in thousands.
1998 1997
------------------- ------------------
Weighted Weighted
Years ended Average Average
September 30, Amount Rate Amount Rate
- -------------------------------------------------------------------
1998 $ -- -- $135,016 6.06%
1999 85,016 5.76% 8,016 5.54%
2000 16 5.18% 16 5.18%
2001 16 5.18% 16 5.18%
2002 16 5.18% 16 5.18%
2003 through 2012 24,146 5.79% 146 5.18%
------------------- ------------------
$109,210 5.77% $143,226 6.03%
=================== ==================
28
<PAGE>
(11) OTHER BORROWINGS
Other borrowings with original terms of greater than one year are
listed in the schedule below. Dollar amounts are expressed in
thousands.
Description Rate Amount
- -------------------------------------------------------
Other notes payable 7.50% 200
The balance of other borrowings at September 30, 1998, are
scheduled to mature according to the following schedule. Dollar amounts
are expressed in thousands.
Years ending Amount
September 30, Maturing
- ------------------------------------
1999 $ 50
2000 50
2001 50
2002 50
-----
$ 200
=====
(12) INCOME TAXES
The differences between the effective income tax rates and the
statutory federal corporate tax rate for the years ended September 30
are as follows:
1998 1997 1996
---------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Other, net 3.5 3.5 3.5
---------------------------
38.5% 38.5% 38.5%
===========================
Prior to October 1, 1996, the Bank was allowed a special bad debt
deduction for additions to tax bad debt reserves established for the
purpose of absorbing losses. The allowable deduction in effect for
fiscal 1996 was either 8% of income subject to tax, or based on actual
experience. In calculating the bad debt deduction for income tax
purposes for the year ended September 1996, the Bank used the 8% method.
As a result of changes in the Federal tax code, the Bank's bad debt
deduction for the years ended September 30, 1998 and 1997, was based on
actual experience.
Deferred income tax expense (benefit) results from temporary
differences in the recognition of income and expense for tax purposes
and financial statement purposes. The following table lists these
temporary differences and their related tax effect for the years ended
September 30. Dollar amounts are expressed in thousands.
1998 1997 1996
---------------------------
Deferred loan fees and costs $ 282 457 (507)
Accrued interest receivable (10) (20) (61)
Provision for losses on loans
and real estate owned 196 (90) 488
Book depreciation in excess of
tax depreciation (108) (84) (27)
Basis difference on investments (1) 6 (851)
Special SAIF assessment -- 1,292 (1,292)
Mark-to-market adjustment (314) (118) 236
Tax bad debt reserve (39) (818) (937)
Originated mortgage servicing rights 964 660 --
Other 4 (7) 166
---------------------------
$ 974 1,278 (2,785)
===========================
At September 30, 1998, in accordance with SFAS No. 109 a deferred
tax liability of approximately $775,000 has not been recognized for the
Bank's base year tax bad debt reserve.
29
<PAGE>
The tax effect of significant temporary differences representing
deferred tax assets and liabilities are presented in the following
table. Dollar amounts are expressed in thousands.
1998 1997
--------------------
Deferred loan fees and costs $ (506) (224)
Accrued interest receivable (36) (46)
Provision for losses on loans
and real estate owned (223) (27)
Tax depreciation in excess of
book depreciation 219 111
Basis difference on investments (425) (426)
Tax bad debt reserve 1,794 1,755
Mark-to-market adjustment 196 (118)
Originated mortgage servicing rights (1,624) (660)
Prepaid expenses (73) (72)
Other (142) (139)
--------------------
$ (820) 154
====================
(13) STOCKHOLDERS' EQUITY
During fiscal 1998, the Company paid quarterly cash dividends on
common stock of $0.25 per share on February 27, 1998, May 29, 1998, and
August 31, 1998, and $0.20 per share on December 1, 1997.
During fiscal 1997, The Company paid quarterly cash dividends on
common stock of $0.20 per share on February 28, 1997, May 30, 1997, and
August 30, 1997, and $0.15625 per share on November 29, 1996.
During the year ended September 30, 1998, the Company repurchased
18,660 shares of its own stock with a total value of $1.1 million at the
time of repurchase. During the year ended September 30, 1997, 34,596
shares were repurchased with a total value of $1.4 million at the time
of repurchase.
(14) REGULATORY CAPITAL REQUIREMENTS
The Bank is required to maintain capital in excess of certain
minimum requirements as prescribed by the OTS. Any institution that
fails to meet these minimum regulatory capital requirements will be
subject to action by the regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under the
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures have been established by regulation to ensure
capital adequacy require the Bank to maintain minimum capital amounts
and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined). As
of September 30, 1998, the Bank meets all capital adequacy requirements.
As of September 30, 1998, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the tables
presented. Management does not believe that there are any conditions or
events occurring since notification that would change the Bank's
classification. Also, management is not aware of any existing or
potential conditions that would change the Bank's capital adequacy
classification.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
30
<PAGE>
At September 30, 1998 Amount
- ------------------------------------------------------------
GAAP CAPITAL (Bank only) $ 64,082
Adjustment for regulatory capital:
Intangible assets (1,703)
Disallowed portion of servicing assets (289)
Reverse the effect of SFAS No. 115 56
--------
Tangible capital 62,146
Qualifying intangible assets 1,568
--------
Tier 1 capital (core capital) 63,714
Qualifying general valuation allowance 5,181
--------
Risk-based capital $ 68,895
========
As of September 30, 1998
----------------------------------------------------------
Minimum Required for Minimum Required to
Actual Capital Adequacy "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------
Total capital to
risk-weighted
assets $ 68,895 13.6% 40,559 >=8% 50,698 >=10%
Core capital to
adjusted tangible
assets 63,714 8.7% 29,347 >=4% 36,683 >=5%
Tangible capital to
tangible assets 62,146 8.5% 11,005 >=1.5% -- --
Tier 1 capital to
risk-weighted
assets 63,714 12.6% -- -- 30,419 >=6%
As of September 30, 1997
----------------------------------------------------------
Minimum Required for Minimum Required to
Actual Capital Adequacy "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------
Total capital to
risk-weighted
assets $ 64,203 13.3% 38,470 >=8% 48,088 >=10%
Core capital to
adjusted tangible
assets 59,477 8.1% 29,363 >=4% 36,704 >=5%
Tangible capital to
tangible assets 57,762 7.9% 11,011 >=1.5% -- --
Tier 1 capital to
risk-weighted
assets 59,477 12.4% -- -- 28,853 >=6%
(15) EMPLOYEES' RETIREMENT PLAN
Substantially all of the Bank's full-time employees participate in
a 401(k) retirement plan (the "Plan"). The Plan is administered by
American United Life Insurance Company ("AUL"), through which
employees can choose from a variety of retail mutual funds to invest
their fund contributions. Under the terms of the Plan, the Bank makes
monthly contributions for the benefit of each participant in an amount
that matches one-half of the participant's contribution, not to exceed
3% of the participants' monthly base salary, provided that the
participant makes a monthly contribution of at least 1% of his monthly
base salary and no greater than 15%. All contributions made by
participants are immediately vested and cannot be forfeited.
Contributions made by the Bank, and related earnings thereon, become
vested to the participants according to length of service requirements
as specified in the Plan. Any forfeited portions of the contributions
made by the Bank and the allocated earnings thereon are used to reduce
future contribution requirements of the Bank. The Plan may be modified,
amended or terminated at the discretion of the Bank.
The Bank's contributions to the Plan amounted to $195,000,
$151,000, and $124,000 for the years ended September 30, 1998, 1997, and
1996, respectively. These amounts have been included as compensation
expense in the accompanying consolidated statements of income.
(16) STOCK OPTION PLAN
The Bank maintains a stock option plan ("Option Plan") through
which options to purchase up to 10% of the number of shares of common
stock originally issued, as adjusted for stock dividends, were granted
to officers and employees of the Bank. Options were granted for a
period of ten years from inception of the Plan and had expirations of
five and ten years. The option price may not be less than 100% of the
fair market value of the shares on the date of
31
<PAGE>
the grant. As of September 30, 1998, the time frame for issuing new
option agreements under the Option Plan had expired.
The following table summarizes Option Plan activity during 1998,
1997, and 1996.
Number Price
of shares per share
-----------------------------
Options outstanding at September 30, 1995 112,251 $ 4.09 - 30.13
Granted 34,488 30.00 - 30.63
Exercised (3,500) (4.09 - 9.00)
Forfeited (7,000) (5.62 - 20.25)
-----------------------------
Options outstanding at September 30, 1996 136,239 4.09 - 30.63
Granted 13,000 35.88
Exercised (7,315) (4.09 - 9.00)
Forfeited (2,215) (4.09 - 30.63)
-----------------------------
Options outstanding at September 30, 1997 139,709 4.09 - 35.88
Granted -- --
Exercised (9,259) (4.09 - 31.13)
Forfeited -- --
-----------------------------
Options outstanding at September 30, 1998 130,450 $ 4.09 - 35.88
=============================
The following table provides information regarding the expiration
dates of the stock options outstanding at September 30, 1998.
Number Weighted average
of shares exercise price
-------------------------------------
Expiring on:
June 25, 2000 38,462 23.50
June 13, 2001 27,488 30.00
December 22, 2002 15,000 9.00
October 26, 2003 28,500 20.25
August 23, 2004 1,000 20.25
September 26, 2005 2,000 30.13
January 23, 2006 2,000 30.50
June 12, 2006 3,000 30.00
January 21, 2007 13,000 35.88
-------------------------------------
130,450 24.06
=====================================
Of the options outstanding at September 30, 1998, 78,472 are
immediately exercisable and 51,978 are exercisable at future dates in
accordance with the vesting schedules outlined in each stock option
agreement.
The Bank applies APB 25 in accounting for its stock option plan,
under which no compensation cost has been recognized for stock option
awards. Had compensation cost for the stock option plan been determined
in accordance with the fair value accounting method prescribed under
SFAS 123, "Accounting for Stock-Based Compensation," the Company's net
earnings and net earnings per share on a pro form basis would have been
as presented in the following table. Dollar amounts are expressed in
thousands, except per share data.
1998 1997 1996
------------------------------
Net Income:
As reported $ 13,586 11,071 7,731
Pro forma 13,557 11,050 7,726
Basic net earnings per share:
As reported $ 6.08 4.92 3.39
Pro forma 6.07 4.91 3.39
Diluted net earnings per share:
As reported 5.93 4.76 3.29
Pro forma 5.92 4.75 3.29
32
<PAGE>
For purposes of computing the pro forma effects of stock option
grants under the fair value accounting method, the fair value of each
stock option grant was estimated on the date of the grant using the
Black-Scholes option pricing model. The following assumptions for
fiscal year 1998, 1997 and 1996 were used for the grants:
1998 1997 1996
-----------------------------------
Risk Free interest rate 4.22% 6.00% 6.00%
Expected Volatility .213 .12 .12
Expected life 6 Years 6 years 6 years
Dividend yield 3.5% - 4.2% 3.5% - 4.2% 3.5% - 4.2%
(17) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's servicing
rights for the years ended September 30. Dollar amounts are expressed
in thousands.
1998 1997 1996
--------------------------------
Balance at beginning of year $ 2,681 1,276 1,851
Additions:
Originated mortgage servicing rights 3,498 1,852 --
Reductions:
Amortization (1,011) (447) (575)
Impairment loss (651) -- --
--------------------------------
Balance at end of year $ 4,517 2,681 1,276
================================
(18) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank has entered into
financial agreements with off-balance-sheet risk to meet the financing
needs of its customers. These financial instruments include commitments
to extend credit, standby letters of credit and financial guarantees.
Those instruments involve, to varying degrees, elements of credit risk,
interest rate risk, and liquidity risk, which may exceed the amount
recognized in the consolidated financial statements. The contract
amounts or notional amounts of those instruments express the extent of
involvement the Bank has in particular classes of financial instruments.
With regard to financial instruments for commitments to extend
credit, standby letters of credit, and financial guarantees, the Bank's
exposure to credit loss because of non-performance by another party is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments
As of September 30, 1998, the Bank had outstanding commitments to
originate $8.5 million in commercial real estate loans, $54.4 million of
fixed rate residential first mortgage loans and $5.4 million of
adjustable rate residential first mortgage loans. Commercial real
estate loan commitments have approximate average committed rates of
8.5%. Residential mortgage loan commitments have an approximate average
mortgage rate of 7.3% and approximate average fees and discounts of
0.3%. The interest rate commitments on residential loans generally
expire 60 days after the commitment date. Interest rate commitments on
commercial real estate loans have varying terms to expiration.
At September 30, 1998 and 1997, the Bank had commitments to sell
loans of approximately $72.5 million and $35.4 million, respectively.
These instruments contain an element of risk in the event that other
parties are unable to meet the terms of such agreements. In such event,
the Bank's loans held for sale would be exposed to market fluctuations.
Management does not expect any other party to default on its obligations
and, therefore, does not expect to incur any costs due to such possible
default. Any unrealized loss on these commitment obligations are
considered in conjunction with the Bank's lower of cost or market value
on its loans held for sale.
33
<PAGE>
(19) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS
PER SHARE
Basic net earnings per share is computed using the weighted average
number of common shares outstanding. The dilutive effect of potential
common shares outstanding are included in diluted net earnings per
share. The computations of basic and diluted net earnings per share are
presented in the following table. Dollar amounts are presented in
thousands, except per share data.
Year Ended September 30,
-----------------------------------
1998 1997 1996
-----------------------------------
Net income $ 13,586 11,071 7,731
Basic weighted average shares 2,234,435 2,250,875 2,278,820
Effect of stock options 54,208 75,524 69,790
Dilutive potential common shares 2,288,643 2,326,399 2,348,610
Net income per share:
Basic $ 6.08 4.92 3.39
Dilutive 5.93 4.76 3.29
The dilutive securities included for each period presented above
consist entirely of stock options granted to employees as incentive
stock options under Section 442A of the Internal Revenue Code as
amended.
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying values and fair values of
the Bank's financial instruments presented in accordance with SFAS No.
107. Dollar amounts are expressed in thousands.
September 30, 1998 September 30, 1997
------------------- ------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
------------------- ------------------
Financial Assets:
Cash and cash equivalents $ 3,331 3,331 3,267 3,331
Securities available for sale 7,209 7,209 12,340 7,209
Stock in Federal Home Loan Bank 5,961 5,961 9,812 9,812
Mortgage-backed securities:
Available for sale 17,742 17,742 21,263 21,263
Held to maturity 23,947 25,029 30,016 30,920
Loans receivable:
Held for sale 131,845 133,732 138,869 141,502
Held for investment 526,512 543,729 497,873 519,038
Accrued interest receivable 4,455 4,455 4,723 4,723
Mortgage servicing rights 4,517 4,517 2,681 2,681
Financial Liabilities:
Customer deposit accounts 545,504 541,394 520,544 515,825
FHLB advances 109,210 110,955 143,226 143,478
Other notes payable 200 204 1,680 1,680
Accrued interest payable 343 343 420 420
34
<PAGE>
September 30, 1998 September 30, 1997
-------------------- --------------------
Contract or Estimated Contract or Estimated
notional unrealized notional unrealized
amount gain (loss) amount gain (loss)
------------------------ ----------------------
Unrecognized financial
instruments:
Lending commitments
- fixed rate, net $ 62,857 1,182 36,320 647
Lending commitments
- floating rate 5,480 118 22,429 528
Commitments to
sell loans 72,534 (790) 35,370 (14)
The fair value estimates presented are based on pertinent
information available to management as of September 30, 1998 and 1997.
Although management is not aware of any factors that would significantly
affect the estimated fair values, such amounts have not been
comprehensively revalued for purposes of these financial statements
since that date. Therefore, current estimates of fair value may differ
significantly from the amounts presented above.
35
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- ----------------------------------------------------------------------
The Board of Directors and Stockholders
NASB Financial, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of NASB
Financial, Inc. and Subsidiary (the "Company") as of September 30,
1998, and the related consolidated statements of income, cash flows and
stockholders' equity for the year ended September 30, 1998. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of the Company
for the years ended September 30, 1997 and 1996, were audited by other
auditors whose report dated November 14, 1997 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of the Company at September 30, 1998, and the results
of their operations and their cash flows for the year ended September
30, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
the Company changed its method of accounting for mortgage servicing
rights for the year ended September 30, 1997.
/s/ DELOITTE & TOUCHE LLP
December 23, 1998
Kansas City, Missouri
36
<PAGE>
SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS
- ----------------------------------------------------------------------
The following tables include certain information concerning the
quarterly results of operations of the Company (including consolidated
data from operations of subsidiaries) at the dates indicated. Dollar
amounts are expressed in thousands except per share data.
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------------
Interest income $ 15,674 15,632 15,606 15,479 62,391
Interest expense 8,942 8,611 8,509 8,480 34,542
---------------------------------------------
Net interest income 6,732 7,021 7,097 6,999 27,849
Provision for loan losses 7 308 62 (313) 64
---------------------------------------------
Net interest income after
provision for loan losses 6,725 6,713 7,035 7,312 27,785
Other income 2,333 2,612 2,477 4,002 11,424
General and
administrative expenses 3,964 4,119 4,299 4,685 17,067
---------------------------------------------
Income before income taxes 5,094 5,206 5,213 6,629 22,142
Income tax expense 1,961 2,004 2,037 2,554 8,556
---------------------------------------------
Net income $ 3,133 3,202 3,176 4,075 13,586
=============================================
Income per share $ 1.40 1.43 1.42 1.83 6.08
=============================================
Average shares outstanding 2,237 2,240 2,233 2,226 2,234
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------------
Interest income $ 14,797 14,510 14,775 15,949 60,031
Interest expense 8,861 8,562 8,646 9,185 35,254
---------------------------------------------
Net interest income 5,936 5,948 6,129 6,764 24,777
Provision for loan losses 15 220 173 69 477
---------------------------------------------
Net interest income after
provision for loan losses 5,921 5,728 5,956 6,695 24,300
Other income 1,315 2,440 2,358 2,483 8,596
General and
administrative expenses 3,791 3,397 3,768 3,932 14,888
---------------------------------------------
Income before income taxes 3,445 4,771 4,546 5,246 18,008
Income tax expense 1,326 1,836 1,750 2,025 6,937
---------------------------------------------
Net income $ 2,119 2,935 2,796 3,221 11,071
=============================================
Income per share $ 0.94 1.30 1.24 1.44 4.92
=============================================
Average shares outstanding 2,259 2,257 2,252 2,236 2,251
37
<PAGE>
BOARD OF DIRECTORS OF NASB FINANCIAL INC., AND NORTH AMERICAN SAVINGS
BANK, F.S.B.
- ------------------------------------------------------------------------
DAVID H. HANCOCK
Chairman
Chief Executive Officer
NASB Financial, Inc. and
North American Savings Bank
WALTER W. PINNELL
President
NASB Financial, Inc. and
North American Savings Bank
JAMES A. WATSON
Executive Vice President
North American Savings Bank
FREDERICK V. ARBANAS
President, Fred Arbanas, Inc.
National Yellow Pages Service
Jackson County Legislature
Kansas City, Missouri
BARRETT BRADY
President, J.C. Nichols Company
Kansas City, Missouri
W. RUSSELL WELSH
Managing Partner
Polsinelli, White, Vardeman & Shalton
Kansas City, Missouri
LINDA S. HANCOCK
Linda Smith Hancock Interiors
Kansas City, Missouri
OFFICERS OF NASB FINANCIAL, INC.
- ------------------------------------------------------------------------
DAVID H. HANCOCK
Chairman
Chief Executive Officer
WALTER W. PINNELL
President
KEITH B. COX
Vice President and Treasurer
JAMES A. WATSON
Vice President
PAUL L. THOMAS
Vice President and
Corporate Secretary
BRAD LEE
Vice President
JOHN M. NESSELRODE
Vice President
BRUCE THIELEN
Vice President
OFFICERS OF NORTH AMERICAN SAVINGS BANK, F.S.B.
- ------------------------------------------------------------------------
DAVID H. HANCOCK
Chairman
Chief Executive Officer
WALTER W. PINNELL
President
JAMES A. WATSON
Executive Vice President
Operations and Branch Admin.
KEITH B. COX
Executive Vice President
Chief Financial Officer
PAUL L. THOMAS
Vice President
Corporate Secretary
BRAD LEE
Senior Vice President
Construction Lending
JOHN M. NESSELRODE
Senior Vice President
Chief Investment Officer
BRUCE THIELEN
Senior Vice President
Residential Lending
MIKE ANDERSON
Vice President
Construction Lending
STEVE ANKLE
Vice President
Consumer Lending
ROGER CAMPBELL
Vice President
Construction Lending
PAT COX
Vice President
Residential Lending
JOE O'FLAHERTY
Vice President
Residential Lending
RON REAGAN
Vice President
Residential Lending
LISA M. REYNOLDS
Vice President
Construction Lending
PATRICIA K. PITTACK
Vice President
MARKETING DIRECTOR
NEIL VOLKMANN
Vice President
Residential Lending
38
<PAGE>
BRANCH OFFICES
- ------------------------------------------------------------------------
Headquarters
GRANDVIEW, MISSOURI
12498 South 71 Highway
LEE'S SUMMIT, MISSOURI
646 N. 291 Highway
ST. JOSEPH, MISSOURI
920 North Belt
KANSAS CITY, MISSOURI
8501 North Oak Trafficway
INDEPENDENCE, MISSOURI
11221 East 23rd Street
LEAWOOD, KANSAS
8840 State Line Road
HARRISONVILLE, MISSOURI
2002 East Mechanic
LOAN ADMINISTRATION
12125-D Blue Ridge Ext.
RESIDENTIAL LENDING
949 NE Columbus
Lee's Summit, Missouri
3322 S. Campbell - Suite W
Springfield, Missouri
12900 Metcalf - Suite 140
Overland Park, Kansas
5620 SW 29th St.
Topeka, Kansas
1611 Des Peres Road,
Suite 110
St. Louis, Missouri
1014 Country Club Road
St. Charles, Missouri
CONSTRUCTION LENDING
12125-D Blue Ridge Ext.
11237 Nall Avenue
Leawood, Kansas
INVESTOR INFORMATION
ANNUAL MEETING OF STOCKHOLDERS:
The Annual Meeting of Stockholders will be held on Tuesday, January
26, 1999, at 10:00 a.m. at North American Savings Bank, 12125-D Blue
Ridge Extension, Grandview, Missouri.
ANNUAL REPORT ON 10-K:
Copies of NASB Financial, Inc. Form 10-K Report to the Securities
and Exchange Commission are available without charge upon written
request to Keith B. Cox, Vice President and Treasurer, NASB Financial,
Inc., 12498 South 71 Highway, Grandview, Missouri 64030.
TRANSFER AGENT:
UMB Bank, n.a., P.O. Box 64, Kansas City, Missouri 64141
STOCK TRADING INFORMATION:
The common stock of NASB Financial, Inc. and subsidiaries is traded
in the over-the-counter market. The Company's symbol is NASB.
INDEPENDENT AUDITORS:
Deloitte & Touche LLP, 1010 Grand Avenue, Suite 400, Kansas City,
Missouri 64106
SHAREHOLDER AND FINANCIAL INFORMATION:
Contact Keith B. Cox, NASB Financial, Inc., 12498 South 71 Highway,
Grandview, Missouri 64030, (816) 765-2200.
COMMON STOCK PRICES AND DIVIDENDS
- ------------------------------------------------------------------------
At September 30, 1998, approximately 422 registered stockholders
held 2,225,841 outstanding shares of NASB Financial, Inc. common stock.
The Company paid cash dividends of $0.12 per share were paid in
February, May, and August, and November of 1995. Cash dividends of
$0.15625 per share were paid in February, May, August, and November of
1996. Cash dividends of $0.20 per share were paid in February, May, and
August of 1997.
The table below reflects the Bank's high and low bid prices. The
quotations represent intra-dealer quotations without retail markups,
markdowns or commissions, and do not necessarily represent actual
transactions.
Fiscal 1998 Fiscal 1997
------------- --------------
Quarter ended High Low High Low
------------- -------------
December 31 $ 54.38 48.00 33.00 30.75
March 31 78.88 50.00 38.00 33.00
June 30 62.00 58.13 46.50 38.00
September 30 58.50 50.00 51.50 48.50
39
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,331
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,951
<INVESTMENTS-CARRYING> 23,947
<INVESTMENTS-MARKET> 25,029
<LOANS> 658,357
<ALLOWANCE> 7,701
<TOTAL-ASSETS> 736,054
<DEPOSITS> 545,504
<SHORT-TERM> 85,016
<LIABILITIES-OTHER> 11,307
<LONG-TERM> 24,394
0
0
<COMMON> 2,334
<OTHER-SE> 67,499
<TOTAL-LIABILITIES-AND-EQUITY> 736,054
<INTEREST-LOAN> 60,770
<INTEREST-INVEST> 1,186
<INTEREST-OTHER> 435
<INTEREST-TOTAL> 62,391
<INTEREST-DEPOSIT> 27,014
<INTEREST-EXPENSE> 34,542
<INTEREST-INCOME-NET> 27,849
<LOAN-LOSSES> 64
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,067
<INCOME-PRETAX> 22,142
<INCOME-PRE-EXTRAORDINARY> 22,142
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,586
<EPS-PRIMARY> 6.08
<EPS-DILUTED> 5.93
<YIELD-ACTUAL> 3.94
<LOANS-NON> 3,854
<LOANS-PAST> 0
<LOANS-TROUBLED> 9,827
<LOANS-PROBLEM> 5,035
<ALLOWANCE-OPEN> 6,272
<CHARGE-OFFS> 7
<RECOVERIES> 36
<ALLOWANCE-CLOSE> 6,365
<ALLOWANCE-DOMESTIC> 6,365
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,225
</TABLE>
