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, 2002
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 10, 2003, was 8,439,942.
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands)
December 31, September 30,
2002 2002
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 7,836 4,168
Securities available for sale 13,386 14,635
Stock in Federal Home Loan Bank, at cost 19,230 15,173
Mortgage-backed securities:
Available for sale 7,721 2,684
Held to maturity (market value of $1,398
and $1,544 at December 31, 2002, and
September 30, 2002, respectively) 1,332 1,483
Loans receivable:
Held for sale 130,899 73,591
Held for investment, net 889,090 839,284
Accrued interest receivable 5,489 4,795
Real estate owned, net 5,821 4,938
Premises and equipment, net 7,267 6,523
Investment in LLC 2,262 200
Mortgage servicing rights, net 2,214 2,957
Deferred tax asset 3,051 2,537
Other assets 11,152 5,254
---------- ----------
$ 1,106,750 978,222
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Checks outstanding in excess of
bank balances $ 9,259 7,764
Customer deposit accounts 617,930 549,437
Advances from Federal Home Loan Bank 349,479 295,192
Escrows 4,001 7,404
Income taxes payable 5,105 2,230
Accrued expenses and other liabilities 7,727 6,749
---------- ----------
Total liabilities 993,501 868,776
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 authorized; 9,818,112 issued
at December 31, 2002, and 9,802,112 issued
at September 30, 2002 1,473 1,470
Serial preferred stock of $1.00 par
value: 7,500,000 shares authorized;
none issued or outstanding -- --
Additional paid-in capital 15,922 15,862
Retained earnings 112,158 108,367
Treasury stock, at cost; 1,382,170 shares
at December 31, 2002 and 1,381,770 shares
at September 30, 2002 (16,726) (16.716)
Accumulated other comprehensive income 422 463
---------- ----------
Total stockholders' equity 113,249 109,446
---------- ----------
$ 1,106,750 978,222
========== ==========
See accompanying notes to consolidated financial statements.
1
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Income (Unaudited)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2002 2001
--------- ---------
Interest on loans $ 17,730 18,723
Interest on mortgage-backed securities 89 177
Interest and dividends on securities 270 270
Other interest income 27 173
--------- ---------
Total interest income 18,116 19,343
--------- ---------
Interest on customer deposit accounts 3,564 6,195
Interest on advances from FHLB and
other borrowings 2,801 4,009
--------- ---------
Total interest expense 6,365 10,204
--------- ---------
Net interest income 11,751 9,139
Provision for loan losses 18 341
--------- ---------
Net interest income after provision
for loan losses 11,733 8,798
--------- ---------
Other income (expense):
Loan servicing fees (758) 313
Impairment recovery (loss) on mortgage
servicing rights 247 (276)
Impairment loss on mortgage-backed securities -- (170)
Customer service fees and charges 1,346 1,099
Provision for losses on real estate owned (1,200) (67)
Loss on sale of investments (13) --
Gain on sale of loans held for sale 2,737 3,740
Other (34) 421
--------- ---------
Total other income 2,325 5,060
--------- ---------
General and administrative expenses:
Compensation and fringe benefits 2,513 2,451
Commission-based mortgage banking
compensation 1,364 1,233
Premises and equipment 558 528
Advertising and business promotion 260 124
Federal deposit insurance premiums 26 30
Other 1,121 1,116
--------- ---------
Total general and administrative expenses 5,842 5,482
--------- ---------
Income before income tax expense 8,216 8,376
Income tax expense 3,161 3,216
--------- ---------
Net income $ 5,055 5,160
========= =========
Basic earnings per share $ 0.60 0.61
========= =========
Diluted earnings per share $ 0.60 0.60
========= =========
Weighted average shares outstanding 8,425,299 8,509,525
See accompanying notes to consolidated financial statements.
2
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Unaudited)
(In thousands, except share data)
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive stockholders'
stock capital earnings stock income equity
-----------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 2002 $ 1,470 15,862 108,367 (16,716) 463 109,446
Comprehensive income:
Net income -- -- 5,055 -- -- 5,055
Other comprehensive loss,
net of tax
Unrealized loss on securities -- -- -- -- (41) (41)
available for sale ---------
Total comprehensive income -- -- -- -- -- 5,014
Cash dividends paid -- -- (1,264) -- -- (1,264)
Stock options exercised 3 60 -- -- -- 63
Purchase of common stock for
treasury -- -- -- (10) -- (10)
----------------------------------------------------------------------
Balance at December 31, 2002 $ 1,473 15,922 112,158 (16,726) 422 113,249
======================================================================
See accompanying notes to consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2002 2001
----------------------
Cash flows from operating activities:
Net income $ 5,055 5,160
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 179 215
Amortization and accretion, net 392 (449)
Impairment (recovery) loss on mortgage servicing rights (247) 276
Impairment loss on mortgage-backed securities -- 170
Net fair value of loan related commitments 248 --
Gain on sale of loans receivable held for sale (2,737) (3,740)
Provision for loan losses 18 341
Provision for losses on real estate owned 1,200 67
Origination and purchase of loans held for sale (203,881) (150,185)
Sale of loans receivable held for sale 208,028 192,075
Changes in:
Accrued interest receivable (347) 534
Accrued expenses and other liabilities and
income taxes payable 3,695 1,464
----------------------
Net cash provided by operating activities 11,603 45,928
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 163 976
Available for sale 227 289
Principal repayments of mortgage loans held
for investment and held for sale 170,336 143,796
Principal repayments of other loans receivable 10,221 10,374
Maturity of investment securities available for sale -- 20,000
Loan origination - mortgage loans held for investment (222,814) (171,299)
Loan origination - other loans receivable (6,578) (5,368)
Purchase of mortgage loans held for investment (1,260) (8,294)
Purchase of investment securities available for sale -- (20,000)
Purchase of FHLB stock (1,735) (1,497)
Purchase from sale of securities available for sale 2,738 --
Proceeds for sale of real estate owned 1,102 1,552
Purchases of premises and equipment, net of sales 32 (223)
Investment in LLC (2,063) --
Net cash acquired in merger 16,664 --
Other (1,028) (926)
----------------------
Net cash used in investing activities (33,995) (30,620)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2002 2001
----------------------
Cash flows from financing activities:
Net increase (decrease) in customer deposit accounts (14,258) 5,177
Proceeds from advances from FHLB 145,000 45,000
Repayment on advances from FHLB (101,072) (30,068)
Cash dividends paid (1,264) (1,063)
Stock options exercised 63 94
Repurchase of common stock -- (329)
Change in checks outstanding in excess of
bank balances 1,494 --
Net decrease in escrows (3,903) (4,260)
----------------------
Net cash provided by financing activities 26,060 14,551
----------------------
Net increase in cash and cash equivalents 3,668 29,859
Cash and cash equivalents at beginning of the period 4,168 16,043
----------------------
Cash and cash equivalents at end of period $ 7,836 45,902
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ (12) 4,112
Cash paid for interest 6,343 10,446
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 1,034 1,057
Conversion of real estate owned to loans receivable -- 57
Capitalization of mortgage servicing rights 41 36
In connection with the merger, the Company acquired assets of $109.9 million,
assumed liabilities of $94.3 million, and received net cash of $16.7 million.
See accompanying notes to consolidated financial statements.
5
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are
prepared in accordance with instructions to Form 10-Q and do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States of America ("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.
These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K to the Securities and Exchange Commission.
Operating results for the three months ended December 31, 2002, are not
necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 2003. The consolidated balance sheet of
the Company as of September 30, 2002, has been derived from the audited
balance sheet of the Company as of that date.
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, real estate owned,
and valuation of mortgage servicing rights. Management believes that
these allowances are adequate, future additions to the allowances may be
necessary based on changes in economic conditions.
The Company's critical accounting policies involving the more
significant judgements and assumptions used in the preparation of the
consolidated financial statements as of December 31, 2002, have remained
unchanged from September 30, 2002. These policies are provision for
loan losses and mortgage servicing rights. Disclosure of these critical
accounting policies is incorporated by reference under Item 8
"Financial Statements and Supplementary Data" in the Company's Annual
Report on Form 10-K for the Company's year ended September 30, 2002.
The FASB recently issued SFAS No. 142, "Goodwill and Other
Intangible Assets," No. 143, "Accounting for Asset Retirement
Obligations," No.144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statements No. 13, and Technical
Corrections," No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," and No. 147, "Acquisitions of Certain Financial
Institutions." These Statements are effective on various dates
throughout the Company's 2003 fiscal year. Implementation of these
Statements is not expected to have a material effect on the Company's
consolidated financial statements.
Certain quarterly amounts for previous periods have been
reclassified to conform to the current quarter's presentation.
(2) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for
sale. Dollar amounts are expressed in thousands.
December 31, 2002
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------------------------------------
U.S. government obligations $ 2,011 -- -- 2,011
Agency securities 1,515 -- (1) 1,514
Debt securities 9,165 621 -- 9,786
Municipal securities 75 -- -- 75
-------------------------------------------
Total $ 12,766 621 (1) 13,386
===========================================
6
(3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed securities
available for sale. Dollar amounts are expressed in thousands.
December 31, 2002
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 1,229 31 -- 1,260
FHLMC participation
certificates
- fixed rate 5,238 27 -- 5,265
Other asset backed
securities 1,137 -- -- 1,137
Mortgage-backed derivatives
(including CMO residuals
and interest-only
securities) 50 9 -- 59
-------------------------------------------
Total $ 7,654 67 -- 7,721
===========================================
(4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity. Dollar amounts are expressed in thousands.
December 31, 2002
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------------------------------------
FHLMC participation
certificates:
Balloon maturity and
adjustable rate $ 786 48 -- 834
FNMA pass-through
certificates:
Fixed rate 107 -- -- 107
Balloon maturity and
adjustable rate 167 2 -- 169
Pass-through certificates
guaranteed by GNMA
- fixed rate 233 16 -- 249
Collateralized mortgage
obligation bonds 39 -- -- 39
-------------------------------------------
Total $ 1,332 66 -- 1,398
===========================================
(5) LOANS RECEIVABLE
Loans receivable are as follows:
December 31,
2002
---------------------
(Dollars in thousands)
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 247,256
Business properties 428,651
Partially guaranteed by VA or
insured by FHA 21,649
Construction and development 231,382
----------
Total mortgage loans 928,938
Commercial loans 18,874
Installment loans to individuals 37,431
----------
Total loans held for investment 985,243
Less:
Undisbursed loan funds (83,669)
Unearned discounts and fees and costs
on loans, net (5,327)
Allowance for losses on loans (7,157)
----------
Net loans held for investment $ 889,090
==========
7
December 31,
2002
---------------------
(Dollars in thousands)
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 139,815
Less:
Undisbursed loan funds (9,465)
Unearned discounts and fees and costs
on loans, net 549
----------
Net loans held for sale $ 130,899
==========
Included in the loans receivable balances at December 31, 2002, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the approximate amount of
$803,000. Loans and participations serviced for others amounted to
approximately $411.6 million at December 31, 2002.
(6) REAL ESTATE OWNED
Real estate owned and other repossessed property consisted of the
following:
December 31,
2002
---------------------
(Dollars in thousands)
Real estate acquired through (or deed
in lieu of) foreclosure $ 7,697
Less: allowance for losses (1,876)
----------
Total $ 5,821
==========
Real estate owned is carried 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.
(7) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the period ended December 31, 2002. Dollar amounts
are expressed in thousands.
Balance at October 1, 2002 $ 2,957
Additions:
Originated mortgage servicing rights 41
Acquired in merger 122
Impairment recovery 247
Reductions:
Amortization 1,153
Sale of mortgage servicing rights --
Impairment loss --
--------
Balance at December 31, 2002 $ 2,214
========
8
(8) 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.
Three months ended
----------------------
12/31/02 12/30/01
----------------------
Net income (in thousands) $ 5,055 5,160
Basic weighted average shares outstanding 8,425,299 8,509,525
Effect of stock options 15,340 38,486
----------------------
Dilutive potential common shares 8,440,639 8,548,011
Net income per share:
Basic $ 0.60 0.61
Diluted 0.60 0.60
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.
(9) SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified two
principal operating segments for purposes of financial reporting:
Banking and Mortgage Banking. These segments were determined based on
the Company's internal financial accounting and reporting processes and
are consistent with the information that is used to make operating
decisions and to assess the Company's performance by the Company's key
decision makers.
The Mortgage Banking segment originates mortgage loans for sale to
investors and for the portfolio of the Banking segment. The Banking
segment provides a full range of banking services through the Bank's
branch network, exclusive of mortgage loan originations. A portion of
the income presented in the Mortgage Banking segment is derived from
sales of loans to the Banking segment based on a transfer pricing
methodology that is designed to approximate economic reality. The Other
and Eliminations segment includes financial information from the parent
company plus inter-segment eliminations.
The following table presents financial information from the
Company's operating segments for the periods indicated. Dollar amounts
are expressed in thousands.
Three months ended Mortgage Other and
December 31, 2002 Banking Banking Eliminations Consolidated
------------------------------------------------------------------------
Net interest income $ 11,772 -- (21) 11,751
Provision for loan losses 18 -- -- 18
Other income 2,079 5,327 (5,081) 2,325
General and administrative
expenses 3,070 3,719 (947) 5,842
Income tax expense 4,144 619 (1,602) 3,161
-------------------------------------------
Net income $ 6,619 989 (2,553) 5,055
===========================================
Three months ended Mortgage Other and
December 31, 2001 Banking Banking Eliminations Consolidated
------------------------------------------------------------------------
Net interest income $ 9,070 -- 69 9,139
Provision for loan losses 341 -- -- 341
Other income 3,557 4,542 (3,039) 5,060
General and administrative
expenses 3,006 3,330 (854) 5,482
Income tax expense 3,712 485 (981) 3,216
-------------------------------------------
Net income $ 5,568 727 (1,135) 5,160
===========================================
9
(10) MERGER
On December 19, 2002, the merger transaction with Community
Bancorp, Inc ("CBES") was completed. Pursuant to a definitive
agreement dated September 5, 2002, CBES was merged with and into a
wholly owned subsidiary of NASB Financial, Inc. formed solely to
facilitate the transaction. The agreement provided that upon the
effective date of the merger, each shareholder of CBES would receive
$17.50 in cash for each share of CBES common stock owned by such
shareholder. The aggregate purchase price was $15.6 million. The
following table summarizes the fair values of the assets acquired and
the liabilities assumed at the date of acquisition. Dollar amounts are
expressed in thousands.
Cash and cash equivalents $ 32,251
Investments and mortgage backed securities 9,171
Loans receivable 58,624
Premises and equipment 955
Core deposits 1,499
Goodwill 1,846
Other assets 5,577
-----------
Total assets acquired 109,923
-----------
Customer deposit accounts 82,750
Advances from Federal Home Loan Bank 10,358
Other liabilities 1,228
-----------
Total liabilities assumed 94,336
-----------
Net assets acquired $ 15,587
===========
The only significant identifiable intangible asset acquired was the
core deposit base, which has a useful life of approximately 15 years and
will be amortized using the straight-line method. The $1.8 million of
goodwill was assigned entirely to the banking segment of the business.
10
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, 2002, were $1,106.8
million, an increase of $128.5 million from September 30, 2002, the
prior fiscal year end. $109.9 million of this increase was due to the
merger with Community Bancorp, Inc.
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, 2002, the Bank
originated and purchased $203.9 million in mortgage loans held for sale,
$224.1 million in mortgage loans held for investment, and $6.6 million
in other loans. This total of $434.6 million in loans originated
compares to $335.1 million in loans originated during the three months
ended December 31, 2001.
Included in the $130.9 million in loans held for sale as of
December 31, 2002, are $25.6 million in mortgage loans held for sale
with servicing released. All loans held for sale are carried at the
lower of cost or fair value.
The Bank 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, plus any classified assets of the holding company.
Dollar amounts are expressed in thousands.
12/31/02 9/30/02 12/31/01
-------------------------------------
Asset Classification:
Substandard $ 16,537 14,822 19,592
Doubtful -- -- --
Loss 2,979 1,395 2,112
-------------------------------------
19,516 16,217 21,704
Allowance for losses (9,377) (6,854) (7,141)
-------------------------------------
$ 10,139 9,363 14,563
=====================================
11
Management records a provision for loan losses in amounts
sufficient to cover current net charge-offs and an estimate of probable
losses based on an analysis of risks that management believes to be
inherent in the loan portfolio. The Allowance for Loan and Lease Losses
("ALLL") recognizes the inherent risks associated with lending
activities but, unlike specific allowances, have not been allocated to
particular problem assets but to a homogenous pool of loans. Management
believes that the specific loss allowances and ALLL 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 losses 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 $68.5 million during the three
months ended December 31, 2002. The weighted average rate on customer
deposits as of December 31, 2002, was 2.52%, a decrease from 4.08% as of
December 31, 2001.
Advances from the FHLB were $349.5 million as of December 31, 2002,
an increase of $54.3 million from September 30, 2002. During the three-
month period, the Bank borrowed $145.0 million of new advances, acquired
$10.4 million in the merger, and repaid $101.1 million. 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 $4.0 million as of December 31, 2002, a decrease of
$3.4 million from September 30, 2002. This decrease is due to amounts
paid for borrowers' taxes during the fourth calendar quarter of 2002.
Total stockholders' equity as of December 31, 2002, was $113.2
million (10.3% of total assets). This compares to $109.4 million (11.2%
of total assets) at September 30, 2002. On a per share basis,
stockholders' equity was $13.42 on December 31, 2002, compared to $13.00
on September 30, 2002.
The Company paid cash dividends on its common stock of $0.15 on
November 22, 2002. Subsequent to the quarter ended December 31, 2002,
the Company announced a cash dividend of $0.17 per share to be paid on
February 28, 2003, to stockholders of record as of February 7, 2003.
Total stockholders' equity as of December 31, 2002, includes an
unrealized gain of $422,000, net of deferred income taxes, on available
for sale securities. This amount is reflected in the line item
"Accumulated other comprehensive income."
RATIOS
The following table illustrates the Company's return on assets
(annualized net income divided by average total assets); return on
equity (annualized net income divided by average total equity); equity-
to-assets ratio (ending total equity divided by ending total assets);
and dividend payout ratio (dividends paid divided by net income).
Three months ended
------------------------
12/31/02 12/31/01
------------------------
Return on assets 1.94% 2.10%
Return on equity 18.16% 21.18%
Equity-to-assets ratio 10.23% 10.01%
Dividend payout ratio 25.00% 20.60%
RESULTS OF OPERATIONS - Comparison of three months ended December 31,
2002 and 2001.
For the three months ended December 31, 2002, the Company had net
income of $5,055,000 or $0.60 per share. This compares to net income of
$5,160,000 or $0.61 per share for the quarter ended December 31, 2001.
12
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, 2002 and 2001. 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.
Three months ended 12/31/02 As of
--------------------------- 12/31/02
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $ 926,802 17,730 7.65% 7.02%
Mortgage-backed securities 5,382 89 6.61% 6.33%
Securities 28,678 270 3.77% 4.19%
Bank deposits 10,576 27 1.02% 0.81%
-------------------------------------
Total earning assets 971,438 18,116 7.46% 6.93%
---------------------------
Non-earning assets 26,846
---------
Total $ 998,284
=========
Interest-costing liabilities
Customer deposits accounts $ 546,834 3,564 2.61% 2.52%
FHLB Advances 312,813 2,801 3.58% 3.30%
Other borrowings -- -- --% --
-------------------------------------
Total costing liabilities 859,647 6,365 2.96% 2.80%
---------------------------
Non-costing liabilities 31,358
Stockholders' equity 107,279
---------
Total $ 998,284
=========
Net earning balance $ 111,791
=========
Earning yield less costing rate 4.50% 4.13%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $ 971,438 11,751 4.84%
==========================
Three months ended 12/31/01 As of
--------------------------- 12/31/01
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $ 894,663 18,723 8.37% 7.75%
Mortgage-backed securities 8,564 177 8.27% 7.15%
Securities 24,764 270 4.36% 5.14%
Bank deposits 28,919 173 2.39% 1.43%
-------------------------------------
Total earning assets 956,910 19,343 8.09% 7.43%
---------------------------
Non-earning assets 33,774
---------
Total $ 990,684
=========
Interest-costing liabilities
Customer deposits accounts $ 590,124 6,195 4.20% 4.08%
FHLB Advances 289,687 4,009 5.54% 5.01%
Other borrowings -- -- --% --
-------------------------------------
Total costing liabilities 879,811 10,204 4.64% 4.39%
---------------------------
Non-costing liabilities 13,345
Stockholders' equity 97,528
---------
Total $ 990,684
=========
Net earning balance $ 77,099
=========
Earning yield less costing rate 3.45% 3.04%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $ 956,910 9,139 3.82%
==========================
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.
13
Three months ended December 31, 2002, compared to
three months ended December 31, 2001
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (1,610) 673 (56) (993)
Mortgage-backed securities (36) (66) 14 (88)
Securities (37) 43 (6) --
Other assets (99) (110) 63 (146)
-----------------------------------------------
Net change in interest income (1,782) 540 15 (1,227)
-----------------------------------------------
Components of interest expense:
Customer deposit accounts (2,346) (455) 170 (2,631)
FHLB Advances (1,419) 320 (109) (1,208)
-----------------------------------------------
Net change in interest expense (3,765) (135) 61 (3,839)
-----------------------------------------------
Increase (decrease) in net
interest margin $ 1,983 675 (46) 2,612
===============================================
Net interest margin before loan loss provision for the three months
ended December 31, 2002, increased $2.6 million from the same period in
the prior year. Specifically, total interest expense decreased $3.8
million due to a $20.2 million decrease in the average balances of
interest-costing liabilities and a decrease in the interest rate cost of
those liabilities of 1.7%. This was partially offset by a decrease in
total interest income of $1.2 million from the same period in the prior
year. $1.8 million of this decrease resulted from a 63 basis point
decrease in the average rate earned on interest-earning assets, which
was offset by $14.5 million increase in the average balance of interest-
earning assets.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $18,000 during the
quarter ended December 31, 2002, compared to $341,000 for the same
period in the prior year. Management performs an ongoing analysis of
individual loans and of homogenous pools of loans to assess for any
impairment. On a consolidated basis, loan loss reserve was 48.0% of
total classified assets at December 31, 2002, 42.3% at September 30,
2002, and 32.9% at December 31, 2001.
As stated above, management believes that the provisions for loan
losses is adequate. The provision 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 losses 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.
OTHER INCOME
Other income for the three months ended December 31, 2002,
decreased $2.7 million from the same period in the prior year.
Specifically, gain on sale of loans held for sale decreased $1.0 million
due to decreased mortgage banking volume. Provision for losses on real
estate owned increased $1.1 million due primarily to a $1.2 million
reserve recorded on a hotel property in the Southeast area of Kansas
City, Missouri. The provision for loss associated with this property,
which was foreclosed in September 2001, reduces it's carrying value to
$2.5 million. Several events occurred during the quarter ended December
31, 2002, which led management to establish the provision. First, a
well-known large retail chain, which had previously announced plans to
occupy space in a shopping mall adjacent to the hotel property,
announced that they had been unsuccessful in reaching agreement on a
lease. Management believed this retail neighbor would have helped to
sustain the pre-provision carrying value of the hotel. Secondly, the
hotel property experienced declining occupancy ratios during the quarter
and management's efforts to sell the property at its previous carrying
value were unsuccessful. Management believes this property is properly
recorded at it's new carrying value, however, any further deterioration
may require further write-downs in the future.
Net loan servicing fees decreased $1.1 million, which was a result
of increases in actual and estimated future prepayment of the underlying
mortgage loans during the quarter. These decreases in other income were
partially offset by an increase in impairment recovery on mortgage
servicing rights of $523,000. Income from loan servicing fees are net
of amortization of mortgage servicing rights. Such amortization is
greatly affected by the level of actual prepayments and estimated future
prepayments on the underlying mortgage loans. Management performs an
ongoing analysis of mortgage servicing rights to determine to what
extent, if any, they may be impaired. Changes in the trend of mortgage
interest rates can occur quickly and may have a significant impact on
future mortgage prepayments and amortization of mortgage servicing
rights.
14
GENREAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the quarter ended
December 31, 2002, increased $360,000 from the same period in the
previous year. This was due primarily to an increase in compensation
and other expenses attributable to the increased loan origination
volume.
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Savings Association Insurance Fund ("SAIF") of the
FDIC. The Bank is subject to regulation by the OTS as its chartering
authority. Since passage of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA" or the "Act"), the
FDIC also has regulatory control over the Bank. The transactions of
SAIF-insured institutions are limited by statute and regulations that
may require prior supervisory approval in certain instances.
Institutions also must file reports with regulatory agencies regarding
their activities and their financial condition. The OTS and FDIC make
periodic examinations of the Bank to test compliance with the various
regulatory requirements. The OTS can require an institution to re-value
its assets based on appraisals and to establish specific valuation
allowances. This supervision and regulation is intended primarily for
the protection of depositors. Also, savings institutions are subject to
certain reserve requirements under Federal Reserve Board regulations.
INSURANCE OF ACCOUNTS
The SAIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured member. Deposit insurance premiums are
determined using a Risk-Related Premium Schedule ("RRPS"), a matrix
which places each insured institution into one of three capital groups
and one of three supervisory groups. Currently, deposit insurance
premiums range from 0 to 27 basis points of the institution's total
deposit accounts, depending on the institution's risk classification.
The Bank is currently considered "well capitalized", which is the most
favorable capital group and supervisory subgroup. SAIF-insured
institutions are also assessed a premium to service the interest on
Financing Corporation ("FICO") debt.
REGULATORY CAPITAL REQUIREMENTS
At December 31, 2002, 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,
2002, 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, 2002 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 103,256
Adjustment for regulatory capital:
Intangible assets (3,345)
Disallowed portion of servicing assets (46)
Reverse the effect of SFAS No. 115 (422)
---------
Tangible capital 99,443
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 99,443
Qualifying general valuation allowance 5,730
---------
Risk-based capital $ 105,173
=========
15
As of December 31, 2002
-------------------------------------------------------------------
Minimum required for Minimum required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 105,173 11.8% 71,327 >=8% 89,159 >=10%
Core capital to adjusted tangible assets 99,443 9.1% 43,822 >=4% 54,778 >=5%
Tangible capital to tangible assets 99,443 9.1% 16,433 >=1.5% -- --
Tier 1 capital to risk-weighted assets 99,443 11.2% -- -- 53,495 >=6%
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, 2002, the Bank had no loans that exceeded the loans to one borrower
limit.
LIQUIDITY AND CAPITAL RESOURCES
The Bank generates liquidity primarily from savings deposits and
repayments on loans, investments, and MBS. 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.
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.
16
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
A report on Form 8-K was filed on December 23, 2002 under Item 2,
which announced the consummation of the merger transaction with
Community Bancorp, Inc ("CBES") on December 19, 2002. Pursuant
to a definitive agreement dated September 5, 2002, CBES was merged
with and into a wholly owned subsidiary of NASB Financial , Inc.
formed solely to facilitate the transaction. The agreement
provided that upon the effective date of the merger, each
shareholder of CBES would receive $17.50 in cash for each share of
CBES common stock owned by such shareholder.
A report on Form 8-K was filed on December 23, 2002 under Item 4,
which reported management's intent to appoint the firm of BKD, LLP
to replace Deloitte & Touche, LLP as independent auditors of the
Bank.
17
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 14, 2003 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
February 14, 2003 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
18
I, David Hancock, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NASB Financial,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statement were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidate subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 14, 2003
19
I, Rhonda Nyhus, Vice President and Treasurer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NASB Financial,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statement were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidate subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 14, 2003
20
19