SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: December 31, 1998
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-24033
NASB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1805201
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12498 South 71 Highway, Grandview, Missouri 64030
(Address of principal executive offices) (Zip Code)
(816) 765-2200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock of the Registrant outstanding
as of February 9, 1999, was 2,260,841.
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands)
December 31, September 30,
1998 1998
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 6,884 $ 3,331
Securities available for sale
(amortized cost of $5,888 and
$7,485 at December 31, 1998, and
September 30, 1998, respectively) 5,586 7,209
Stock in Federal Home Loan Bank, at cost 5,961 5,961
Mortgage-backed securities:
Available for sale (amortized cost of
$17,053 and $17,824 at December 31,
1998, and September 30, 1998,
respectively) 16,582 17,742
Held to maturity 21,076 23,947
Loans receivable:
Held for sale 129,911 131,845
Held for investment, net 540,039 526,512
Accrued interest receivable 4,146 4,455
Real estate owned, net 2,515 3,232
Premises and equipment, net 4,926 4,818
Mortgage servicing rights, net 5,206 4,517
Other assets 2,636 2,485
---------- ----------
$ 745,468 $ 736,054
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 546,408 $ 545,504
Advances from Federal Home Loan Bank 114,170 109,210
Other borrowings 200 200
Escrows 1,236 5,915
Income taxes payable 3,361 1,606
Accrued expenses and other liabilities 7,464 3,786
---------- ----------
Total liabilities 672,839 666,221
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock of $1.00 par value:
3,000,000 authorized; 2,367,828 issued
at December 31, 1998, and 2,333,828,
issued at September 30, 1998 2,368 2,334
Serial preferred stock of $1.00 par
value: 7,500,000 shares authorized;
none outstanding -- --
Additional paid-in capital 12,815 12,262
Retained earnings 61,984 59,527
Treasury stock, at cost; 107,987 shares
at December 31, 1998, and at September
30, 1998. (4,070) (4,070)
Unrealized net loss on securities
available for sale (468) (220)
---------- ----------
Total stockholders' equity 72,629 69,833
---------- ----------
745,468 736,054
========== ==========
See accompanying notes to consolidated financial statements.
1
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Income (Unaudited)
(In thousands, except share data)
Three Months Ended
December 31,
-----------------------
1998 1997
--------- ---------
Interest on loans $ 14,533 $ 14,245
Interest on mortgage-backed securities 482 894
Interest and dividends on investments 234 376
Other interest income 223 159
--------- ---------
Total interest income 15,472 15,674
--------- ---------
Interest on customer deposit accounts 6,680 6,810
Interest on advances and notes payable 1,679 2,132
--------- ---------
Total interest expense 8,359 8,942
--------- ---------
Net interest income 7,113 6,732
Provision for loan losses 75 7
--------- ---------
Net interest margin after provision
for loan losses 7,038 6,725
--------- ---------
Other income (expense):
Loan servicing fees (274) 173
Customer service fees and charges 532 444
Impairment of mortgage servicing rights (104) --
Gain on sale of securities held for sale 94 --
Gain on sale of loans held for sale 2,239 1,237
Other 334 479
-------- --------
Total other operating income 2,821 2,333
-------- --------
General and administrative expenses:
Compensation and fringe benefits 2,921 2,467
Premises and equipment expense 582 571
Advertising and business promotion 182 53
Federal deposit insurance premiums 79 81
Other 1,158 792
-------- --------
Total general and administrative expenses 4,922 3,964
-------- --------
Income before income taxes 4,937 5,094
Income tax expense 1,922 1,961
-------- --------
Net income 3,015 3,133
======== ========
Basic earnings per share 1.35 1.40
======== ========
Diluted earnings per share 1.34 1.39
======== ========
Weighted average shares outstanding 2,233,811 2,236,929
2
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Additional Unrealized Total
Common paid-in Retained Treasury Gains and stockholders'
stock capital earnings stock (losses) equity
-----------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $ 2,334 12,262 59,527 (4,070) (220) 69,833
Change in unrealized gains and
(losses), net of income taxes
of $165 -- -- -- -- (248) (248)
Cash dividends declared -- -- (558) -- -- (558)
Stock options exercised 34 553 -- -- -- 587
Net income for first fiscal quarter -- -- 3,015 -- -- 3,015
-----------------------------------------------------------------------
Balance at December 31, 1998 $ 2,368 12,815 61,984 (4,070) (468) 72,629
=======================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Three months ended December 31,
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,015 3,133
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 243 247
Amortization and accretion 47 (491)
Gain on sale of securities available for sale (94) --
Impairment of originated mortgage servicing rights 104 --
Gain on sale of loans held for sale (2,239) (1,237)
Provision for loan losses 75 7
Provision for losses on real estate owned -- 85
Origination and purchase of loans held for sale (128,471) (89,114)
Sale of loans held for sale 119,575 76,485
Changes in:
Accrued interest receivable 309 124
Accrued expenses and other liabilities and current taxes payable 5,433 1,515
----------------------------------
Net cash used in operating activities (2,003) (9,246)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 2,423 1,314
Available for sale 1,280 1,967
Principal repayments of mortgage loans held for investment
and held for sale 52,439 51,956
Principal repayments of other loans 5,399 6,090
Principal repayments of securities:
Available for sale 30 30
Loan origination - mortgage loans held for investment (46,943) (38,544)
Loan origination - other loans (6,824) (4,167)
Purchase of mortgage loans held for investment (5,379) (4,440)
Proceeds from sale of securities available for sale 1,657 --
Proceeds for sale of real estate owned 688 433
Equipment purchases (352) (158)
Other cash flows from investing activities 511 14
----------------------------------
Net cash provided by investing activities 4,929 14,495
</TABLE>
4
<PAGE>
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
Three months ended December 31,
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in customer deposit accounts 904 3,180
Proceeds from advances from FHLB 5,000 9,000
Repayment on advances from FHLB (40) (14,004)
Cash dividends paid (558) (447)
Repurchase of common stock -- (42)
Proceeds from issuance of notes payable -- 2,154
Net decrease in escrows (4,679) (4,644)
----------------------------------
Net cash provided by (used in) financing activities 627 (4,803)
----------------------------------
Net increase in cash and cash equivalents 3,553 446
Cash and cash equivalents at beginning of the period 3,331 3,267
----------------------------------
Cash and cash equivalents at end of period $ 6,884 3,713
==================================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds received) $ -- (36)
Cash paid for interest 8,456 9,038
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans to real estate owned $ 230 377
Conversion of real estate owned to loans 78 --
Capitalization of originated mortgage servicing rights 1,300 576
Capitalization of originated mortgage servicing interest only strips 805 343
Excess servicing reclassified to mortgage-backed securities available
for sale (interest only strip securities) -- 1,527
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information. Accordingly, they do not
include all of the information and footnotes required by GAAP for
complete financial statements. All adjustments are of a normal and
recurring nature and, in the opinion of management, the statements
include all adjustments considered necessary for fair presentation.
Operating results for the three months ended December 31, 1998, are not
necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 1999.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of the allowances for losses on loans and real estate
owned. While management believes that these allowances are adequate,
future additions to the allowances may be necessary based on changes in
economic conditions.
(2) REORGANIZATION AND MERGER
On April 1, 1998, NASB Financial, Inc. (the "Company") completed
a transaction whereby North American Savings Bank, F.S.B. (the "Bank")
became a wholly-owned subsidiary of the Company, through a merger of the
Bank with and into NASB Interim Savings Bank, F.S.B., a federally
chartered stock savings bank formed solely to facilitate this
transaction.
To complete the transaction, the Company issued an aggregate of
2,375,112 shares of Company common stock by exchanging one share of the
Company common stock for each share of common stock of the Bank. It
also exchanged an option to purchase one share of Company common stock
for each outstanding option to purchase one share of the Bank's common
stock.
The resulting Bank from the merger continues to operate under the
name "North American Savings Bank, F.S.B." The transaction was
intended to qualify as a tax-deferred reorganization under the Internal
Revenue Code of 1986, as amended, providing certain tax-deferred
benefits for income tax purposes for Bank stockholders. The merger was
accounted for as a pooling of interests, and accordingly, the
accompanying financial information has been restated to include the
accounts of the Bank and the Company for all periods presented.
(3) COMPREHENSIVE INCOME
For the period ended December 31, 1998, the Company reported net
income of $3,015,000. Total comprehensive income, reported pursuant to
SFAS No. 130, "Reporting Comprehensive Income," was $2,767,000, which
includes the change in the accumulated unrealized gains and losses on
available for sale securities, net of income taxes of $165,000.
(4) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for
sale.
December 31, 1998
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
------------------------------------------------
U.S. Government
Obligations $ 3,150 -- (8) 3,142
Equity securities 2,738 -- (294) 2,444
------------------------------------------------
Total $ 5,888 -- (302) 5,586
================================================
6
<PAGE>
(5) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed securities
available for sale.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
------------------------------------------------
<S> <C> <C> <C> <C>
Pass-through certificates guaranteed by
GNMA - fixed rate $ 6,218 17 -- 6,235
FNMA pass-through certificates - fixed rate 6,606 26 -- 6,632
Mortgage-backed derivatives (including CMO
residuals and interest-only securities) 4,229 14 (528) 3,715
------------------------------------------------
Total $ 17,053 57 (528) 16,582
================================================
</TABLE>
(6) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC participation certificates:
Fixed rate $ 3,474 103 1 3,576
Balloon maturity and adjustable rate 6,810 76 -- 6,886
FNMA pass-through certificates:
Fixed rate 508 -- -- 508
Balloon maturity and adjustable rate 786 -- 2 784
Pass-through certificates guaranteed
by GNMA - fixed rate 499 35 -- 534
Collateralized mortgage obligation bonds 3,417 319 2 3,734
Other asset-backed securities 5,582 830 134 6,278
------------------------------------------------
Total $ 21,076 1,363 139 22,300
================================================
</TABLE>
(7) LOANS RECEIVABLE
Loans receivable are as follows:
December 31,1998
(Dollars in thousands)
--------------------
LOANS HELD FOR INVESTMENT:
Mortgage Loans:
Permanent loans on:
Residential properties $ 307,269
Business properties 82,190
Partially guaranteed by VA or insured by FHA 32,024
Construction and development 153,325
----------
Total mortgage loans 574,808
Commercial loans 6,869
Installment loans to individuals 30,069
----------
Total loans held for investment 611,746
Less:
Undisbursed loan funds (59,292)
Unearned discounts and fees on loans, net (6,499)
Allowance for losses on loans (5,916)
----------
Net loans held for investment $ 540,039
==========
7
<PAGE>
December 31,1998
(Dollars in thousands)
--------------------
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 140,317
Partially insured by FHA 458
----------
Total loans held for sale 140,775
Less:
Undisbursed loan funds (10,973)
Unearned discounts and fees on loans, net 109
----------
Net loans held for sale $ 129,911
==========
Included in the loans receivable balances at December 31, 1998, and
September 30, 1998, are participating interests in mortgage loans and
wholly owned mortgage loans serviced by other institutions in the
approximate amounts of $5.7 million and $6.0 million, respectively.
Loans and participations serviced for others amounted to approximately
$558.5 million and $546.2 million at December 31, 1998, and September
30, 1998, respectively.
(8) REAL ESTATE OWNED AND OTHER REPOSSESSED PROPERTY
Real estate owned and other repossessed property consisted of the
following:
December 31, September 30,
1998 1998
-----------------------------
(Dollars in thousands)
Real estate acquired through (or deed
in lieu of) foreclosure $ 3,921 4,568
Less: allowance for losses (1,406) (1,336)
-----------------------------
Total $ 2,515 3,232
=============================
The Bank carries real estate owned at fair value as of the date of
foreclosure minus 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.
(9) MORTGAGE SERVICING RIGHTS
On January 1, 1997, the Bank adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." SFAS No. 125 is required to be applied to transfers of
assets occurring after January 1, 1997. Among other things, this
Statement establishes a clear distinction between transactions that are
considered sales of assets and those that are considered financing
arrangements. According to the Statement, asset sales must meet
prescribed tests, which show that financial control of the asset has
been transferred to the buyer. If the transaction does not meet these
prescribed tests, the transaction is recorded as a financing activity,
and the asset remains on the balance sheet of the seller. The
implementation of this part of the Statement had no material impact on
the Bank.
The Bank is most affected by the provision of this Statement that
requires the recognition of all servicing assets at the time that
mortgage loans are sold with servicing retained. Prior to this
Statement, the Bank recognized a gain or loss only for any servicing
value in excess of stated contractual amounts at the time of loan sale
("excess servicing"). The excess servicing value was recorded as an
asset and amortized as an offset to servicing income over the lives of
the related mortgage loans.
8
<PAGE>
SFAS No. 125 now requires the Bank to calculate and recognize all
retained servicing value (including "normal servicing") at the time of
a loan sale in which servicing is retained. These amounts for normal
originated mortgage servicing rights ("OMSRs") are recorded as assets
and amortized as offsets to future servicing income. Impairment of
OMSRs is assessed based on the fair value of the rights on a pool by
pool basis. Fair values are estimated using discounted cash flows based
on a market rate of interest.
In accordance with the Statement, servicing fees recognized in
excess of normal servicing fees are carried as interest-only strip
securities and classified as available for sale in accordance with SFAS
No. 115. Also, all previous amounts carried as excess servicing assets
were combined and reclassified as interest-only strip securities. At
December 31, 1998, the Bank had such interest-only strip securities in
the amount of $3.5 million, classified as available for sale.
(10) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER
SHARE
The following table presents a reconciliation of basic earnings per
share to diluted earnings per share for the periods indicated. Dollar
amounts are presented in thousands, except share data.
Three months ended
----------------------
12/31/98 12/31/97
----------------------
Net income $ 3,015 3,133
Basic weighted average shares 2,233,811 2,236,929
Effect of stock options 14,435 15,431
----------------------
Dilutive potential common shares 2,248,246 2,252,360
Net income per share:
Basic $ 1.35 1.40
Dilutive 1.34 1.39
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.
(11) SUBSEQUENT EVENTS
On January 26, 1999, the stockholders of the Company voted to amend
the Company's Articles of Incorporation to increase the number of
authorized Common Stock from 3,000,000 to 20,000,000 shares. At the
same time, stockholders also approved a reduction in the par value of
Common Stock from $1.00 to $0.15.
On January 27, 1999, the Company announced that the Board of
Directors declared a four-for-one stock split, whereby each stockholder
will receive three additional shares of the Company's stock for each
share they own. The Board declared March 5, 1999, as the pay date of
the stock split to stockholders of record on February 19, 1999.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The principal business of the Company is to provide banking
services through the Bank. Specifically, the Bank obtains savings and
checking deposits from the public, then uses those funds to originate
and purchase real estate loans and other loans. The Bank also purchases
mortgage-backed securities ("MBS") and other investment securities
from time to time as conditions warrant. In addition to customer
deposits, the Bank obtains funds from the sale of loans held-for-sale,
the sale of securities available-for-sale, repayments of existing
mortgage assets, and advances from the Federal Home Loan Bank
("FHLB"). The Bank's primary sources of income are interest on loans,
MBS, and investment securities plus customer service fees and income
from mortgage banking activities. Expenses consist primarily of
interest payments on customer deposits and other borrowings and general
and administrative costs.
The Bank is regulated by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"), and is subject
to periodic examination by both entities. The Bank is also subject to
the regulations of the Board of Governors of the Federal Reserve System
("FRB"), which establishes rules regarding reserves that must be
maintained against customer deposits.
FINANCIAL CONDITION
ASSETS
The Company's total assets as of December 31, 1998, were $745.5
million, an increase of $9.4 million from September 30, 1998, the prior
fiscal year end.
During the three months ended December 31, 1998, securities
available for sale decreased $1.6 million, which was the result of the
sale of a taxable municipal obligation.
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. Derivative financial
instruments are carried at estimated fair value in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." 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 mortgage loans each month, management
evaluates the existing market conditions to determine which loans will
be held in the Bank's portfolio and which loans will be sold in the
secondary market. Loans sold in the secondary market can be sold with
servicing released or converted into MBS and sold with the loan
servicing retained by the Bank. At the time of each loan commitment, a
decision is made to either hold the loan for investment, hold it for
sale with servicing retained, or hold it for sale with servicing
released. Management monitors market conditions to decide whether
loans should be held in portfolio or sold and if sold, which method of
sale is appropriate. During the three months ended December 31, 1998,
the Bank originated $128.5 million in mortgage loans held for sale,
$46.9 million in mortgage loans held for investment, and $6.8 million in
other loans. This total of $182.2 million in loans originated was an
increase of $50.4 million over the three months ended December 31, 1997.
10
<PAGE>
Included in the $129.9 million in loans held for sale as of
December 31, 1998, are $16.8 million in mortgage loans held for sale
with servicing released. Also included in loans held for sale as of
December 31, 1998, are $0.5 million in commercial residential loans
insured by the Federal Housing Administration ("FHA"). The Bank holds
options to sell these insured loans back to the FHA during specified
periods in the future at specified prices. All loans held for sale are
carried at the lower of cost or fair value.
The Company classifies problem assets as "substandard,"
"doubtful" or "loss." Substandard assets have one or more defined
weaknesses, and it is possible that the Bank will sustain some loss
unless the deficiencies are corrected. Doubtful assets have the same
defects as substandard assets plus other weaknesses that make collection
or full liquidation improbable. Assets classified as loss are
considered uncollectible and of such little value that a specific loss
allowance is warranted.
The following table summarizes the Bank's classified assets as
reported to the OTS. Dollar amounts are expressed in thousands.
12/31/98 9/30/98 12/31/97
---------------------------------
Asset Classification:
Substandard $ 12,999 10,772 11,207
Doubtful 7 8 11
Loss 2,103 1,956 2,899
---------------------------------
15,109 12,736 14,117
Allowance for losses (7,809) (7,701) (7,901)
---------------------------------
$ 7,300 5,035 6,216
=================================
Total classified assets increased $2.4 million during the quarter
ended December 31, 1998, primarily due to the classification of one
commercial mortgage-backed security. The issuers of this security,
which is secured by a retirement complex, did not pay the most recent
semi-annual payment. $2.3 million of this security was classified as
substandard and $0.2 million was classified as loss. Management has
negotiated an amended payment schedule, whereby the interest rate will
be reduced for a period of six months, and the interest accrued-to-date
will be capitalized and earn the note rate. Management believes that
the entire principal balance will be repaid in accordance with the
modified terms.
When an insured institution classifies problem assets as either
substandard or doubtful, regulations require specific loss allowances to
reduce their book value to fair value. In addition, management
establishes GVA ("general valuation allowances") for other possible
loan losses. GVA are allowances that recognize the inherent risks
associated with lending activities but, unlike specific allowances, have
not been allocated to particular problem assets. When an association
classifies a problem asset as loss, it is required to establish a
specific allowance for 100% of the asset balance. The Bank's
classification of its assets and the amount of its valuation allowances
are subject to review by the OTS who may require additional GVA or
specific loss allowances.
Management believes that the specific loss allowances and GVA are
adequate. While management uses available information to determine
these allowances, future allowances may be necessary because of changes
in economic conditions. Also, regulatory agencies (OTS and FDIC) review
the Bank's allowance for loss as part of their examinations, and they
may require the Bank to recognize additional loss provisions based on
the information available at the time of their examinations.
LIABILITIES AND EQUITY
Customer deposit accounts increased $0.9 million during the three
months ended December 31, 1998. The weighted average rate paid on
customer deposits as of December 31, 1998, was 4.88%, a decrease from
5.29% as of December 31, 1997.
11
<PAGE>
Advances from the Federal Home Loan Bank were $114.2 million as of
December 31, 1998, an increase of $5.0 million from September 30, 1998.
During the three-month period the Bank borrowed $5.0 million of new
advances. Management uses FHLB advances at various times as an
alternate funding source to provide operating liquidity and to fund the
origination and purchase of mortgage loans.
Escrows were $1.2 million as of December 31, 1998, a decrease of
$4.7 million from September 30, 1998. This decrease is due primarily to
amounts paid for borrowers taxes during the fourth calendar quarter of
1998.
Total stockholders' equity as of December 31, 1998, was $72.6
million (9.74% of total assets). This compares to a book value of $69.8
million (9.49% of total assets) at September 30, 1998. On a per share
basis, stockholders' equity was $32.14 on December 31, 1998, compared to
$31.37 on September 30, 1998.
The Company paid cash dividends on its common stock of $0.25 on
November 30, 1998. Subsequent to the quarter ended December 31, 1998,
the Company announced a cash dividend of $0.32 per share on February 26,
1999, payable to stockholders of record as of February 5, 1999.
Total stockholders' equity as of December 31, 1998, includes an
unrealized loss of $468,000, net of income tax, on available for sale
securities in accordance with SFAS No. 115.
RATIOS
The following table illustrates the Company's return on assets
(annualized net earnings divided by average total assets); return on
equity (annualized net income divided by average equity); equity-to-
assets ratio (average equity divided by average total assets); and
dividend payout ratio (dividends paid divided by net income).
Three months ended
--------------------
12/31/98 12/31/97
--------------------
Return on average assets 1.63% 1.71%
Return on average equity 16.93% 20.62%
Equity-to-assets ratio 9.62% 8.28%
Dividend payout ratio 18.51% 14.27%
RESULTS OF OPERATIONS - Comparison of three months ended December 31,
1998, and 1997.
For the three months ended December 31, 1998, the Company had net
income of $3,015,000 or $1.35 per share. This compares to net income of
$3,133,000 or $1.40 per share for the quarter ended December 31, 1997.
NET INTEREST MARGIN
The Company's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS and investments and
the interest cost of customer deposits and other borrowings. Management
monitors net interest spreads and, although constrained by certain
market, economic, and competition factors, it establishes loan rates and
customer deposit rates that maximize net interest margin.
The following table presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities for the three months ended
December 31, 1998, and 1997. Average yields reflect reductions due to
non-accrual loans. Once a loan becomes 90 days delinquent, any interest
that has accrued up to that time is reserved and no further interest
income is recognized unless the loan is paid current. Average balances
and weighted average yields for the periods include all accrual and non-
accrual loans. The table also presents the interest-earning assets and
yields for each respective period. Dollar amounts are expressed in
thousands.
12
<PAGE>
Three months ended 12/31/98 As of
--------------------------- 12/31/98
Average Yield/ Yield/
Balance Interest Rate Rate
----------------------------------------
Interest-earning assets
Loans $ 660,487 14,533 8.80% 7.94%
Mortgage-backed securities 31,415 482 6.14% 6.01%
Investments 17,809 234 5.26% 7.90%
Bank deposits 11,926 223 7.48% 4.58%
----------------------------------------
Total earning assets 721,636 15,472 8.58% 7.81%
Non-earning assets 23,948
-----------
Total $ 745,585
===========
Interest-costing liabilities
Customer deposits accounts $ 549,070 6,680 4.87% 4.88%
FHLB Advances 113,678 1,675 5.89% 5.74%
Other borrowings 200 4 7.50% 7.50%
----------------------------------------
Total costing liabilities 662,948 8,359 5.04% 5.03%
Non-costing liabilities 10,810
Stockholders' equity 71,827
-----------
Total $ 745,585
===========
Net earning balance 58,688
===========
Earning yield less costing rate 3.53% 2.79%
=================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $ 721,636 7,113 3.94%
============================
Three months ended 12/31/97 As of
--------------------------- 12/31/97
Average Yield/ Yield/
Balance Interest Rate Rate
----------------------------------------
Interest-earning assets
Loans $ 624,827 14,245 9.12% 8.15%
Mortgage-backed securities 52,466 894 6.82% 6.94%
Investments 22,135 376 6.79% 6.79%
Bank deposits 9,542 159 6.67% 5.40%
----------------------------------------
Total earning assets 708,970 15,674 8.84% 8.01%
Non-earning assets 24,536
-----------
Total $ 733,506
===========
Interest-costing liabilities
Customer deposits accounts $ 524,182 6,810 5.20% 5.29%
FHLB Advances 136,974 2,106 6.15% 6.05%
Other borrowings 1,680 26 6.19% 6.22%
----------------------------------------
Total costing liabilities 662,836 8,942 5.40% 5.45%
Non-costing liabilities 9,595
Stockholders' equity 61,075
-----------
Total $ 733,506
===========
Net earning balance 46,134
===========
Earning yield less costing rate 3.45% 2.56%
==================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $ 708,970 6,732 3.80%
============================
The following table provides information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided on
changes attributable to (1) changes in volume (change in volume
multiplied by the old rate), (2) changes in rates (change in rate
multiplied by the old volume), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
Three months ended December 31, 1998 compared
to three months ended December 31, 1997
----------------------------------------------
Yield/
Yield Volume Volume Total
----------------------------------------------
Components of interest income:
Loans $ (499) 813 (26) 288
Mortgage-backed securities (89) (359) 36 (412)
Investments (85) (74) 17 (142)
Other assets 19 40 5 64
----------------------------------------
Net change in interest income (654) 420 32 (202)
----------------------------------------
Components of interest expense:
Customer deposit accounts (432) 324 (22) (130)
FHLB Advances (89) (358) 16 (431)
Other borrowings 6 (23) (5) (22)
----------------------------------------
Net change in interest expense (515) (57) (11) (583)
----------------------------------------
Increase (decrease) in net
interest margin $ (139) 477 43 381
========================================
13
<PAGE>
Net interest margin before loan loss provision in the three months
ended December 31, 1998, increased $381,000 from the quarter ended
December 31, 1997. Specifically, the decrease in interest income of
$202,000 was more than offset by a decrease in interest expense of
$583,000. This decrease in interest expense was due primarily to a
$23.3 million decrease in the average balance of FHLB Advances, which
had an average cost of 5.89% during the three months ended December 31,
1998, while the average balance of customer deposits, which had an
average cost of 4.87%, increased $24.9 million. The remainder of the
increase in net interest margin is attributed to the increase in
retained earnings, which increased the net earning balance.
The Company's net interest margin is impacted by changes in market
interest rates, which have varied greatly over time. Changing interest
rates affect the level of prepayments on mortgages, the demand for new
mortgage loans, and the supply and interest cost of customer deposits
and borrowings used to fund interest-earning assets. Management
monitors the Company's net interest spreads (the difference between
yields received on assets and paid on liabilities) and, although
constrained by market conditions, economic conditions, and prudent
underwriting standards, it offers deposit rates and loan rates that
maximize net interest income. Management does not predict interest
rates, but instead attempts to fund the Company's assets with
liabilities of a similar duration to minimize the impact of changing
interest rates on the Company's net interest margin. Since the relative
spread between financial assets and liabilities is constantly changing,
the Company's current net interest spread may not be an indication of
future net interest income.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses of $75,000 during the
quarter ended December 31, 1998, was an increase of $68,000 over the
three months ended December 31, 1997. The quarterly provision for loan
losses was reduced to $7,000 during the three months ended December 31,
1997, because of several recoveries recognized on residential
properties.
As stated above, management believes that the provisions for loss
are adequate. These provisions can fluctuate based on changes in
economic conditions or changes in the information available to
management. Also, regulatory agencies review the Company's allowances
for loss as a part of their examination process and they may require
changes in loss provision amounts based on information available at the
time of their examination. Management establishes allowances for loss
based on current economic values and any disruptions in the real estate
market could cause management to increase the provision for loss.
OTHER OPERATING INCOME
Other operating income for the three months ended December 31,
1998, increased $488,000 from the same period in the prior year.
Specifically, loan servicing fees decreased $447,000, 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 $88,000 due to a higher volume of
checking accounts and other transaction accounts and an increase in late
charges on mortgage loans. During the quarter ended December 31, 1998,
the Bank recorded a write down of $104,000 for impairment of mortgage
servicing rights. Gain on sale of loans increased $1.1 million due to
an increase in the volume of loans sold. Other operating income
decreased $145,000 due to a reduction in loan prepayment penalties.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the quarter ended
December 31, 1998, increased $958,000 from the same quarter in the prior
year. The increase in compensation and fringe benefits was related to
an increase in staffing and other expenses in the construction lending
and mortgage loan origination departments, due to an increase in
origination volume.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." The most recent audit of the
Bank's tax returns by the Internal Revenue Service was completed during
the quarter ended June 30, 1996.
14
<PAGE>
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 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 during February 1999.
Data processing of 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 plans to make updates to the contingency plans on an ongoing
basis throughout the 1999 calendar year. The third party service bureau
has also formulated a contingency plan, which management has
incorporated into the Company's overall contingency plan.
The Board of directors are updated on the status of the year 2000
process 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.
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Savings Association Insurance Fund ("SAIF") of the
FDIC. The Bank is subject to regulation by the OTS as its chartering
authority. Since passage of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA" or the "Act"), the
FDIC also has regulatory control over the Bank. The transactions of
SAIF-insured institutions are limited by statute and regulations that
may require prior supervisory approval in certain instances.
Institutions also must file reports with regulatory agencies
15
<PAGE>
regarding their activities and their financial condition. The OTS and
FDIC make periodic examinations of the Bank to test compliance with the
various regulatory requirements. The OTS can require an institution to
re-value its assets based on appraisals and to establish specific
valuation allowances. This supervision and regulation is intended
primarily for the protection of depositors. Also, savings institutions
are subject to certain reserve requirements under Federal Reserve Board
regulations.
INSURANCE OF ACCOUNTS
The SAIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured member. Deposit insurance premiums are
determined using a Risk-Related Premium Schedule ("RRPS"), a matrix
which places each insured institution into one of three capital groups
and one of three supervisory groups. Currently, deposit insurance
premiums range from 0 to 27 basis points of the institution's total
deposit accounts, depending on the institution's risk classification.
The Bank is currently considered "well capitalized", which is the most
favorable capital group and supervisory subgroup. SAIF-insured
institutions are also assessed a premium of 0.61% of insured deposits to
service the interest on Financing Corporation ("FICO") debt.
REGULATORY CAPITAL REQUIREMENTS
At December 31, 1998, the Bank exceeds all capital requirements
prescribed by the OTS. To calculate these requirements, a thrift must
deduct any investments in and loans to subsidiaries that are engaged in
activities not permissible for a national bank. As of December 31,
1998, the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
At December 31, 1998 Amount
- -----------------------------------------------------------
GAAP capital (Bank only) $ 66,825
Adjustment for regulatory capital:
Intangible assets (1,663)
Disallowed portion of servicing assets (408)
Reverse the effect of SFAS No. 115 287
--------
Tangible capital 65,041
Qualifying intangible assets 1,531
--------
Tier 1 capital (core capital) 66,572
Qualifying general valuation allowance 4,821
--------
Risk-based capital $ 71,393
========
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------------------------------------------
Minimum Required For Minimum Require to be
Actual Capital Adequacy "Well Capitalized"
----------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
----------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk-weighted assets $ 71,393 13.7% 41,645 >=8% 52,056 >=10%
Core capital to adjusted tangible assets 66,572 9.0% 29,730 >=4% 37,162 >=5%
Tangible capital to tangible assets 65,041 8.8% 11,149 >=1.5% -- --
Tier 1 capital to risk-weighted assets 66,572 12.8% -- -- 31,234 >=6%
</TABLE>
16
<PAGE>
INTEREST RATE RISK COMPONENT
The OTS has adopted a rule which requires savings institutions with
a "greater than normal" level of interest rate exposure to deduct
amounts from their total capital for the purpose of calculating the
risk-based capital requirement. The deduction is an amount equal to
one-half of the difference between the institution's measured exposure
and the "normal" exposure level (i.e., 2% of the estimated economic
value of the institution's assets). The rule measures interest rate
risk as the decline in Net Portfolio Value that would result from a 200
basis point increase or decrease in market interest rates. The rule
sets forth a description of valuation methodologies for assets,
liabilities, and off-balance sheet items. Subsidiaries that are deemed
to be controlled by an institution under generally accepted accounting
principles will be consolidated for purposes of calculating interest
rate risk. Although the interest rate component was originally
scheduled to become effective by December 31, 1994, the OTS has notified
institutions to delay implementation until further notice.
LOANS TO ONE BORROWER
Institutions are prohibited from lending to any one borrower in
excess of 15% of the Bank's unimpaired capital plus unimpaired surplus,
or 25% of unimpaired capital plus unimpaired surplus if the loan is
secured by certain readily marketable collateral. Renewals that exceed
the loans-to-one-borrower limit are permitted if the original borrower
remains liable and no additional funds are disbursed. As of December
31, 1998, the Bank had no loans that exceeded the loans to one borrower
limit.
INVESTMENT IN SUBSIDIARIES
Investments in and extensions of credit to subsidiaries not engaged
in activities permissible for national banks must generally be deducted
from capital. As of December 31, 1998, the Bank did not have any
investments in or advances to subsidiaries engaged in activities not
permissible for national banks.
LIQUIDITY AND CAPITAL RESOURCES
The Bank generates liquidity primarily from savings deposits and
repayments on loans, investments, and mortgage-backed securities.
Liquidity measures the ability to meet deposit withdrawals and lending
commitments. For secondary sources of liquidity, the Bank has the
ability to sell assets held for sale, can borrow from primary securities
dealers on a collateralized basis, and can use the FHLB of Des Moines'
credit facility. The Bank, as a member of the FHLB System, is subject
to regulations that require the maintenance of liquidity ratios (daily
average liquid assets as a percentage of net withdrawable customer
deposits and current borrowings). The regulatory liquidity requirement
may vary depending on economic conditions and activity of customer
deposits. For the month of December 1998, the required liquidity ratio
was 4%, and the Bank's average regulatory liquidity ratio was 15.4%.
Fluctuations in the level of interest rates typically impact
prepayments on mortgage loans and MBS. During periods of falling
interest rates, these prepayments increase and a greater demand exists
for new loans. The Bank's customer deposits are partially impacted by
area competition. Management is not currently aware of any other market
or economic conditions that could materially impact the Bank's future
ability to meet obligations as they come due.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material proceedings pending other than ordinary
and routine litigation incidental to the business of the
Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
18
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NASB FINANCIAL, INC.
(Registrant)
February 9, 1999 By: /s/ David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
February 9, 1999 By: /s/ Keith B. Cox
Keith B. Cox
Vice President and Treasurer
19
<PAGE>
19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 2309
<INT-BEARING-DEPOSITS> 4575
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28129
<INVESTMENTS-CARRYING> 21076
<INVESTMENTS-MARKET> 22300
<LOANS> 669950
<ALLOWANCE> 7300
<TOTAL-ASSETS> 745468
<DEPOSITS> 546408
<SHORT-TERM> 114170
<LIABILITIES-OTHER> 12061
<LONG-TERM> 200
0
0
<COMMON> 2368
<OTHER-SE> 70261
<TOTAL-LIABILITIES-AND-EQUITY> 745468
<INTEREST-LOAN> 14533
<INTEREST-INVEST> 716
<INTEREST-OTHER> 223
<INTEREST-TOTAL> 15472
<INTEREST-DEPOSIT> 6680
<INTEREST-EXPENSE> 8359
<INTEREST-INCOME-NET> 7113
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 94
<EXPENSE-OTHER> 4922
<INCOME-PRETAX> 4937
<INCOME-PRE-EXTRAORDINARY> 4937
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3015
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 3.94
<LOANS-NON> 3724
<LOANS-PAST> 0
<LOANS-TROUBLED> 7257
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6365
<CHARGE-OFFS> 524
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 5916
<ALLOWANCE-DOMESTIC> 5916
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4821
</TABLE>
