NASB FINANCIAL, INC.
2002 ANNUAL REPORT
- -------------------------------------------------------------------
CONTENTS
2 Letter to Shareholders
3 Selected Consolidated Financial and Other Data
4-11 Management's Discussion and Analysis of Financial Condition and
Results of Operations
12-38 Consolidated Financial Statements
39 Report of Independent Auditors
40 Summary of Unaudited Quarterly Operating Results
40-41 Listing of Directors and Officers, Branch Offices
42 Investor Information, Common Stock Prices and Dividends
FINANCIAL HIGHLIGHTS
2002 2001 2000
----------------------------------------
(Dollars in thousands, except per share data)
For the year ended September 30:
Net interest income $ 39,661 35,516 35,838
Net income 19,878 16,351 14,721
Net income per share 2.36 1.91 1.66
Return on average assets 2.04% 1.67% 1.63%
Return on average equity 19.40% 18.25% 18.12%
Dividend payout ratio 24.41% 24.87% 22.89%
At year end:
Assets $ 978,222 971,462 984,525
Loans 912,875 896,470 914,012
Customer deposit accounts 549,437 586,037 621,665
Stockholders' equity 109,446 95,497 83,661
Stockholders' equity to assets 11.19% 9.83% 8.50%
Book value per share $ 13.00 11.23 9.84
Selected year end information:
Stock price per share: Bid $ 20.19 14.51 14.50
Ask 20.99 15.30 15.50
1
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(LOGO)
December 20, 2002
Dear Shareholder:
I am pleased to present our 2002 Annual Report. We are again able
to describe a successful year for NASB Financial. As in previous years,
there was much change and continues to be much optimism for the coming
year.
In my previous letter to you, I described the significant decrease
in interest rates as the most significant issue of the previous twelve
months. If we liked that change, we should have loved the past year.
The prime rate has decreased an additional 75 basis points. The yield
of the one, five, and ten-year U.S. Treasury obligations, and the 30-
year residential mortgage, have each declined approximately one
percentage point, and are at levels not seen in recent history.
This friendly environment enabled us to earn, prior to the income
tax adjustment described in Note 11, $18,378 for the fiscal year ending
September 30. This net income represents a 1.89% ROA, and 17.93% ROE;
both which compare favorably with other banks and thrifts in our area,
and throughout the country. Our residential lending and construction
loan departments had record volume years, and further developed our
reputation as the most active lender to all areas of real estate in the
market.
On December 19, 2002, we completed the purchase of CBES Bancorp,
Inc. This company had a reputation developed over seventy years as an
excellent place to deposit savings, and to borrow for the purchase of
real estate. We intend to continue this tradition, and expect Excelsior
Springs to be a great addition to our company. We welcome their
depositors, borrowers, and employees.
Again this year, we experienced very little growth in total assets.
While we have profited greatly from the low interest rate environment,
we continually position ourselves for the eventual return to a more
normal interest rate structure, and are ever aware that the dramatic
increase in real estate prices will not continue endlessly.
As in previous years, we are optimistic about the future, and
appreciate your continued support.
Sincerely,
/s/ David H. Hancock
David H. Hancock
Board Chairman
2
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables include selected information concerning the
financial position of NASB Financial, Inc., (including consolidated data
from the operations of subsidiaries) for the years ended September 30.
Dollar amounts are expressed in thousands, except per share data.
<Table>
<Caption>
SUMMARY STATEMENT OF OPERATIONS 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------
Interest income $ 72,667 85,309 78,962 63,557 62,391
Interest expense 33,006 49,793 43,124 33,102 34,542
------------------------------------------------
Net interest income 39,661 35,516 35,838 30,455 27,849
Provision for loan losses 557 460 600 300 64
------------------------------------------------
Net interest income after provision
for loan losses 39,104 35,056 35,238 30,155 27,785
Other income 11,962 11,994 9,409 11,382 11,424
General and administrative expenses 21,615 20,419 20,120 20,129 17,067
------------------------------------------------
Income before income tax expense 29,451 26,631 24,527 21,408 22,142
Income tax expense 9,573 10,280 9,806 8,508 8,556
------------------------------------------------
Net income $ 19,878 16,351 14,721 12,900 13,586
================================================
Earnings per share:
Basic $ 2.36 1.91 1.66 1.43 1.52
Diluted 2.35 1.90 1.63 1.40 1.48
Average shares outstanding (in thousands) 8,440 8,553 8,863 8,998 8,938
</Table>
<Table>
<Caption>
SUMMARY BALANCE SHEET 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------
Assets:
Bank deposits $ -- 12,166 1,577 7,317 --
Stock in Federal Home Loan Bank 15,173 13,676 13,222 8,405 5,961
Securities available for sale 17,319 7,420 10,006 19,510 24,951
Loans receivable held for sale 73,591 92,864 88,320 92,232 138,845
Mortgage-backed securities 1,483 6,864 10,445 13,019 21,612
Loans receivable held for investment 839,284 803,606 825,692 658,808 528,847
Non-interest earning assets 31,372 35,460 35,263 26,446 22,838
------------------------------------------------
Total assets $ 978,222 972,056 984,525 825,737 736,054
================================================
Liabilities:
Checks outstanding in excess of
bank balances $ 7,764 -- -- -- --
Customer & brokered deposit accounts 549,437 586,037 621,665 565,463 545,504
Advances from Federal Home Loan Bank 295,192 273,471 264,436 168,088 109,210
Other borrowings -- -- 100 150 200
Non-interest costing liabilities 16,383 17,051 14,663 13,173 11,307
------------------------------------------------
Total liabilities 868,776 876,559 900,864 746,874 666,221
Stockholders' equity 109,446 95,497 83,661 78,863 69,833
------------------------------------------------
Total liabilities and
stockholders' equity $ 978,222 972,056 984,525 825,737 736,054
================================================
Book value per share $ 13.00 11.23 9.84 8.81 7.84
================================================
OTHER DATA 2002 2001 2000 1999 1998
------------------------------------------------
Loans serviced for others $ 371,596 591,263 706,668 667,644 546,198
Number of full service branches 8 8 8 8 7
Number of employees 314 309 307 322 296
Shares outstanding (in thousands) 8,420 8,504 8,500 8,949 8,904
</Table>
3
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GENERAL
NASB Financial, Inc. ("the Company") was formed in April 1998 to
become a unitary thrift holding company of North American Savings Bank,
F.S.B. ("the Bank" or "North American"). The Company's principal
business is to provide banking services through the Bank. Specifically,
the Bank obtains savings and checking deposits from the public, then
uses those funds to originate and purchase real estate loans and other
loans. The Bank also purchases mortgage-backed securities ("MBS") and
other investment securities from time to time as conditions warrant. In
addition to customer deposits, the Bank obtains funds from the sale of
loans held-for-sale, the sale of securities available-for-sale,
repayments of existing mortgage assets, and advances from the Federal
Home Loan Bank ("FHLB"). The Bank's primary sources of income are
interest on loans, MBS, and investment securities plus customer service
fees and income from lending activities. Expenses consist primarily of
interest payments on customer deposits and other borrowings and general
and administrative costs.
The Bank operates eight deposit branch locations, six residential
loan origination branch offices, and one residential construction loan
origination office, primarily in the greater Kansas City area. Consumer
loans are also offered through the Bank's branch network. Customer
deposit accounts are insured up to allowable limits by the Savings
Association Insurance Fund ("SAIF"), a division of the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is regulated by the Office
of Thrift Supervision ("OTS") and the FDIC.
FORWARD-LOOKING STATEMENTS
We may from time to time make written or oral "forward-looking
statements", including statements contained in our filings with the
Securities and Exchange Commission ("SEC"). These forward-looking
statements may be included in this annual report to shareholders and in
other communications by the Company, which are made in good faith by us
pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements include statements about our
beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties, and are subject to change based on various factors, some
of which are beyond our control. The words "may", "could", "should",
"would", "believe", "anticipate", "estimate", "expect", "intend", "plan"
and similar expressions are intended to identify forward-looking
statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
goals, expectations, anticipations, estimates and intentions expressed
in the forward-looking statements:
- - the strength of the U.S. economy in general and the strength of the
local economies in which we conduct operations;
- - the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
- - the effects of, and changes in, foreign and military policy of the
United States Government; inflation, interest rate, market and monetary
fluctuations;
- - the timely development and acceptance of our new products and services
and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors'
products and services;
- - the willingness of users to substitute competitors' products and
services for our products and services;
- - our success in gaining regulatory approval of our products, services
and branching locations, when required;
- - the impact of changes in financial services' laws and regulations,
including laws concerning taxes, banking,securities and insurance;
- - technological changes;
- - acquisitions and dispositions;
- - changes in consumer spending and saving habits; and
- - our success at managing the risks involved in our business.
This list of important factors is not exclusive. We do not
undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on
behalf of the Company or the Bank.
FINANCIAL CONDITION
Total assets as of September 30, 2002, were $978.2 million, an
increase of $6.2 million from the prior year-end. Average interest-
earning assets decreased $47.0 million from the prior year to $924.0
million.
4
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As the Bank originates loans each month, management evaluates the
existing market conditions to determine which loans will be held in the
Bank's portfolio and which loans will be sold in the secondary market.
Loans sold in the secondary market are sold with servicing released or
converted into mortgage-backed securities ("MBS") and sold with the
servicing retained by the Bank. At the time of each loan commitment, a
decision is made to either hold the loan for investment, hold it for
sale with servicing retained, or hold it for sale with servicing
released. Management monitors market conditions to decide whether loans
should be held in the portfolio or sold and if sold, which method of
sale is appropriate. During the year ended September 30, 2002, the Bank
originated $522.7 million in mortgage loans held for sale, $468.9
million in mortgage loans held for investment, and $24.4 million in
other loans. This total of $1,016.0 million in loan originations was an
increase of $49.1 million over the prior fiscal year.
Included in the $73.6 million in loans held for sale as of
September 30, 2002, are $15.2 million in residential mortgage loans held
for sale with servicing released. All loans held for sale are carried
at the lower of cost or fair value.
The balance of total loans held for investment at September 30,
2002, was $839.3 million, an increase of $35.7 million from September
30, 2001. During fiscal 2002, total originations and purchases of
mortgage loans and other loans held for investment were $514.2 million.
The gross balance of loans on business properties was $391.4 million at
September 30, 2002, compared to $314.0 million as of the previous year
end. The gross balance of construction and development loans was $207.7
million at September 30, 2002, a decrease of $9.6 million.
The balance of mortgage servicing rights decreased $5.1 million
during fiscal 2002, a result of increased amortization due to an
increase in current loan prepayment and estimated future prepayment on
the underlying mortgage loans. In relationship to this decrease, the
total balance of mortgage loans serviced for others was $371.6 million,
a decrease of $219.7 million from the prior fiscal year-end.
Total liabilities were $868.8 million at September 30, 2002, a
decrease of $7.8 million from the previous year. Average interest-
costing liabilities during fiscal year 2002 were $842.4 million, a
decrease of $64.7 million from fiscal 2001.
Accrued expenses and other liabilities were $6.7 million at
September 30, 2002, an increase of $3.8 million from September 30, 2001.
This was due primarily to the recording of $2.0 million derivative
instrument for commitments in sell loans in accordance with Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Additionally, the liability for
amounts due on loans serviced for others increased $2.0 million due to
the increased repayment volume at year end.
Total customer deposit accounts as September 30, 2002, were $549.4
million, a decrease of $26.6 million from the prior year-end. The total
change in customer deposits was comprised of a decrease of $49.9 million
in certificates of deposit, offset by increases of $5.0 million in
demand deposit accounts, $15.8 million in savings accounts and $2.5
million in money market demand accounts. The average interest rate on
customer deposits at September 30, 2002, was 2.78%, a decrease of 177
basis points from the prior year-end. The average balance of customer
deposits during fiscal 2002 was $567.7 million, a decrease of $48.7
million from fiscal 2001.
Advances from the FHLB were $295.2 million at September 30, 2002,
an increase of $21.7 million from the prior fiscal year-end. During
fiscal year 2002, the Bank borrowed $224.0 million of new advances and
made $202.3 million of repayments. Management continues to use FHLB
advances as a primary funding source to provide operating liquidity and
to fund the origination of mortgage loans.
During the year ended September 30, 2002, the Company repurchased a
total of 112,248 shares of its common stock at a cost of $1.9 million.
Also during fiscal 2002, the Company paid a total of $4.9 million in
cash dividends to its stockholders.
NET INTEREST MARGIN
The Bank's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS, and investments and
the interest cost of customer deposits, FHLB advances, and other
borrowings. Management monitors net interest spreads and, although
constrained by certain market, economic, and competition factors, it
establishes loan rates and customer deposit rates that maximize net
interest margin.
During fiscal year 2002, average interest-earning assets exceeded
average interest-costing liabilities by $81.6 million, which was 8.6% of
average total assets. In fiscal year 2001, average interest-earning
assets exceeded average interest-costing liabilities by $63.9 million,
which was 6.3% of average total assets.
5
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The table below presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities, with the average interest rates
for the year and at the end of each year. Average yields reflect yield
reductions due to non-accrual loans. Average balances and weighted
average yields at year-end include all accrual and non-accrual loans.
Dollar amounts are expressed in thousands.
As of
Fiscal 2002 9/30/02
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
--------------------------------------
Interest-earning assets:
Loans receivable $ 870,532 70,743 8.13% 7.34%
Mortgage-backed securities 6,552 486 7.42% 6.87%
Investments 24,455 1,095 4.48% 4.86%
Bank deposits 22,521 343 1.52% 1.31%
--------------------------------------
Total earning assets 924,060 72,667 7.86% 7.18%
-----------------------------
Non-earning assets 29,193
--------
Total $ 953,253
========
Interest-costing liabilities:
Customer deposit accounts $ 567,717 19,705 3.47% 2.78%
FHLB advances 274,717 13,301 4.84% 3.73%
Other borrowings -- -- --% --%
--------------------------------------
Total costing liabilities 842,434 33,006 3.92% 3.11%
-----------------------------
Non-costing liabilities 10,157
Stockholders' equity 100,662
--------
Total $ 953,253
========
Net earning balance $ 81,626
========
Earning yield less costing rate 3.94% 4.07%
===================
Average interest-earning
assets $ 924,060
========
Net interest 39,661
========
Net yield spread on avg.
Interest-earning assets 4.29%
========
As of
Fiscal 2001 9/30/01
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
--------------------------------------
Interest-earning assets:
Loans receivable $ 914,576 82,166 8.98% 8.06%
Mortgage-backed securities 14,856 980 6.60% 7.26%
Investments 23,261 1,437 6.18% 5.61%
Bank deposits 18,350 726 3.96% 2.67%
--------------------------------------
Total earning assets 971,043 85,309 8.79% 7.94%
-----------------------------
Non-earning assets 38,849
--------
Total $1,009,892
========
Interest-costing liabilities:
Customer deposit accounts $ 616,393 31,669 5.14% 4.55%
FHLB advances 290,658 18,121 6.23% 5.47%
Other borrowings 46 3 6.50% --%
--------------------------------------
Total costing liabilities 907,097 49,793 5.49% 4.88%
-----------------------------
Non-costing liabilities 15,187
Stockholders' equity 87,608
--------
Total $1,009,892
========
Net earning balance $ 63,946
========
Earning yield less costing rate 3.30% 3.06%
===================
Average interest-earning
assets $ 971,043
========
Net interest 35,516
========
Net yield spread on avg.
Interest-earning assets 3.66%
========
As of
Fiscal 2000 9/30/00
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
--------------------------------------
Interest-earning assets:
Loans receivable $ 832,898 76,078 9.13% 8.75%
Mortgage-backed securities 20,042 1,330 6.64% 7.84%
Investments 16,563 1,217 7.35% 7.94%
Bank deposits 5,840 337 5.77% 6.28%
--------------------------------------
Total earning assets 875,343 78,962 9.02% 8.71%
-----------------------------
Non-earning assets 33,990
--------
Total $ 909,333
========
Interest-costing liabilities:
Customer deposit accounts $ 592,780 29,641 5.00% 5.46%
FHLB advances 219,909 13,476 6.13% 6.67%
Other borrowings 115 7 6.07% 7.50%
--------------------------------------
Total costing liabilities 812,804 43,124 5.31% 5.82%
-----------------------------
Non-costing liabilities 13,290
Stockholders' equity 83,239
--------
Total $ 909,333
========
Net earning balance $ 62,539
========
Earning yield less costing rate 3.71% 2.89%
===================
Average interest-earning
assets $ 875,343
========
Net interest 35,838
========
Net yield spread on avg.
Interest-earning assets 4.09%
========
The following tables set forth information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided
on changes attributable to (1) changes in rates (change in rate
multiplied by the old volume), (2) changes in volume (change in volume
multiplied by the old rate), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
Year ended September 30, 2002
compared to
year ended September 30, 2001
----------------------------------------
Rate/
Rate Volume Volume Total
----------------------------------------
Components of interest income:
Loans receivable $ (7,774) (3,955) 306 (11,423)
Mortgage-backed securities 122 (548) (68) (494)
Investments (395) 74 (21) (342)
Bank deposits (448) 165 (100) (383)
----------------------------------------
Net change in interest income (8,495) (4,264) 117 (12,642)
----------------------------------------
Components of interest expense:
Customer deposit accounts (10,294) (2,502) 832 (11,964)
FHLB advances (4,040) (993) 213 (4,820)
Other borrowings (3) (3) 3 (3)
----------------------------------------
Net change in
interest expense (14,337) (3,498) 1,048 (16,787)
----------------------------------------
Increase (decrease) in
net interest income $ 5,842 (766) (931) 4,145
========================================
6
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Year ended September 30, 2001
compared to
year ended September 30, 2000
----------------------------------------
Rate/
Rate Volume Volume Total
----------------------------------------
Components of interest income:
Loans receivable $ (1,249) 7,457 (120) 6,088
Mortgage-backed securities (8) (344) 2 (350)
Investments (194) 492 (78) 220
Bank deposits (106) 722 (227) 389
----------------------------------------
Net change in interest income (1,557) 8,327 (423) 6,347
----------------------------------------
Components of interest expense:
Customer deposit accounts 830 1,181 17 2,028
FHLB advances 220 4,337 88 4,645
Other borrowings -- (4) -- (4)
----------------------------------------
Net change in
interest expense 1,050 5,514 105 6,669
----------------------------------------
Increase (decrease) in
net interest income $ (2,607) 2,813 (528) (322)
========================================
COMPARISON OF YEARS ENDED SEPTEMBER 30, 2002 AND 2001
For the fiscal year ended September 30, 2002, the Company had net
income of $19.9 million, or $2.36 per share, compared to net income
$16.4 million, or $1.91 per share in the prior year.
Total interest income for the year ended September 30, 2002, was
$72.7 million, a decrease of $12.6 million (15%) over fiscal year 2001.
$4.3 million of this decrease was the result of a decrease in average
interest-earning assets of $47.0 million during the period from $971.0
million during fiscal 2001 to $924.0 million during fiscal 2002. The
average yield on assets decreased during fiscal 2002 to 7.86% from 8.79%
during fiscal 2001, which also resulted in a decrease in total interest
income of $8.5 million.
Interest income on loans decreased $11.5 million to $70.7 million
in fiscal 2002, compared to $82.2 million during fiscal 2001.
Approximately $4.0 million of this decrease was the result of a decrease
in the average balance of loans outstanding of $44.0 million over the
prior period. An additional decrease of $7.8 million resulted from an
85 basis point decrease in the average yield on loans. The weighted
average rate on loans receivable at the year ended September 30, 2002,
was 7.34%, a 72 basis point decrease from September 30, 2001.
Interest on MBS declined during fiscal year 2002, primarily due to
a decrease in the average balance of MBS of $8.3 million. In recent
years, North American has focused its growth on the commercial real
estate, residential construction, and residential "whole loan"
portfolios, so there have been no purchases of MBS. Management plans to
continue using MBS repayments as a source of funding for loan
originations.
Total interest expense during the year ended September 30, 2002,
decreased $16.8 million (34%) from the prior year. Specifically,
interest on customer and brokered deposit accounts decreased $12.0
million due to a decrease in the average balance of $48.7 million and a
167 basis point decrease in the average rate paid on interest-costing
liabilities. The average rate paid on FHLB advances decreased 139 basis
points and the average balance decreased $15.9 million. Management
continues to use FHLB advances as a primary source of short-term
financing.
The Bank's net interest income is impacted by changes in market
interest rates, which have varied greatly over time. Changing interest
rates also affect the level of loan prepayments and the demand for new
loans. Management monitors the Bank's net interest spreads (the
difference between yields received on assets and paid on liabilities)
and, although constrained by market conditions, economic conditions, and
prudent underwriting standards, it offers deposit rates and loan rates
that maximize net interest income. Management does not predict interest
rates, but instead attempts to fund the Bank's assets with liabilities
of a similar duration to minimize the impact of changing interest rates
on the Bank's net interest margin. Since the relative spread between
financial assets and liabilities is constantly changing, North
American's current net interest spread may not be an indication of
future net interest income.
The provision for losses on loans was $557,000 during the year
ended September 30, 2002, compared to $460,000 during fiscal 2001. The
allowance for loan losses was $5.9 million or 0.64% of the total loan
portfolio and approximately 92% of total nonaccrual loans. This
compares with an allowance for loan losses of $5.8 million or 0.65% of
the total loan portfolio and approximately 85% of the total nonaccrual
loans as of September 30, 2001.
7
<Page>
Total other income for fiscal year 2002 was $12.0 million, a
decrease of $32,000 from the amount earned in fiscal year 2001.
Specifically, the impairment provision on mortgage servicing rights
decreased $2.0 million. Customer service fees increased $779,000 from
fiscal 2001. The provision for losses on real estate owned decreased
$376,000 due primarily to a recovery realized on the sale of a seven
story parking garage in downtown Kansas City, Missouri. Other income
increased $554,000 primarily due to a $629,000 increase in loan
prepayment penalties and the $633,000 effect of recording the net fair
value of certain loan-related commitments in accordance with certain
aspects of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which were offset by a $795,000
increase in expense on real estate owned related to a hotel in Kansas
City, Missouri that the bank foreclosed on late in fiscal 2001. These
increases were offset by a $531,000 impairment loss on mortgage back
securities in fiscal 2002. Additionally, in fiscal 2001, the Bank
recorded a gain of $4.1 million on the sale of their Leawood, Kansas
branch office.
Since January 1, 2001, the Federal Reserve Board ("FRB") has
decreased the discount rate (the rate member banks pay to borrow from
the Federal Reserve) from 6.0% to 0.75% in December 2002. Market
interest rates and indices, including residential mortgage rates, have
generally decreased in response. The decreases in residential mortgage
rates have greatly increased the level of mortgage refinancing activity
and resulted in a greatly increased level of mortgage prepayments.
Since mortgage prepayment estimates and actual prepayments are
significant components used to calculate the market value of mortgage
servicing rights and their amortization, they have had a significant
negative impact on the Company's earnings during fiscal 2002 and 2001.
This was partially offset by an increase in mortgage loan origination
volume, and ultimately the gains on sale of that increased production.
The balance of mortgage servicing rights was $3.0 million and $8.0
million at September 30, 2002 and 2001, respectively.
Total general and administrative expenses for fiscal 2002 were
$21.6 million, up $1.2 million from the prior year. This is due
primarily to an increase in commission based compensation related to
mortgage banking of $322,000 as a result of the higher level of loan
origination volume. Commission paid on loans originated for the Bank's
portfolio are deferred and amortized into interest income on a level
yield over the life of the loan. Additionally, advertising expenses
increased $207,000, and other expenses increased $501,000 primarily due
to an increase in printing costs and other variable costs related to the
higher loan origination volume.
Income tax expense was $9.6 million, a decrease of $707,000 from
the prior year. This decrease was due to a $1.5 million reduction in
the tax liability resulting from a conclusion of certain items and
related current assessment of outstanding tax matters.
COMPARISON OF YEARS ENDED SEPTEMBER 30, 2001 AND 2000
For the fiscal year ended September 30, 2001, the Company had net
income of $16.4 million, or $1.91 per share, compared to net income
$14.7 million, or $1.66 per share in the prior year.
Total interest income for the year ended September 30, 2001, was
$85.3 million, an increase of $6.3 million (8%) over fiscal year 2000.
$8.3 million of this increase was the result of an increase in average
interest-earning assets of $95.7 million during the period from $875.3
million during fiscal 2000 to $971.0 million during fiscal 2001. The
average yield on assets decreased during fiscal 2001 to 8.79% from 9.02%
during fiscal 2000, which resulted in an offsetting decrease in total
interest income of $1.6 million.
Interest income on loans increased $6.1 million to $82.2 million in
fiscal 2001, compared to $76.1 million during fiscal 2000.
Approximately $7.5 million of this increase was the result of an
increase in the average balance of loans outstanding of $81.7 million
over the prior period, offset by a decrease of $1.2 million as a result
of a 15 basis point decrease in the average yield on loans. The
weighted average rate on loans receivable at the year ended September
30, 2001, was 8.06%, a 69 basis point decrease from September 30, 2000.
Interest on MBS declined during fiscal year 2001, primarily due to
a decrease in the average balance of MBS of $5.2 million
Total interest expense during the year ended September 30, 2001,
increased $6.7 million (15%) from the same period in the prior year.
Specifically, interest on customer and brokered deposit accounts
increased $2.0 million due to an increase in the average balance of
$23.6 million and a 14 basis point increase in the average rate paid on
interest-costing liabilities. The average rate paid on FHLB advances
increased 10 basis points and the average balance increased $70.7
million.
8
<Page>
The provision for losses on loans was $460,000 during the year
ended September 30, 2001, compared to $600,000 during fiscal 2000.
Total other income for fiscal year 2001 was $12.0 million, an
increase of $2.6 million from the amount earned in fiscal year 2000.
Specifically, gains on loans held for sale increased $4.8 million due to
an increase in the volume of loans sold. Customer fees and charges
increased $0.8 million. During fiscal 2001, the Bank recorded a gain of
$4.1 million on the sale of the Bank's Leawood, Kansas branch office.
These increases were offset by a decrease in loan servicing fees of $5.8
million as a result of an increase in amortization of capitalized
mortgage servicing rights, plus an increase in impairment provision on
mortgage servicing rights of $0.8 million. The increased amortization
and impairment of mortgage servicing rights were both a result of
increases in actual and estimated future prepayments of the underlying
mortgage loans.
Total general and administrative expenses for fiscal 2001 were
$20.4 million, up $0.3 million from the prior year. Specifically, the
increase in commission based compensation related to mortgage banking of
$1.7 million as a result of the higher level of loan origination volume.
This was offset by decreases in other compensation expense of $253,000,
advertising expenses of $198,000, and other expenses of $746,000.
ASSET/LIABILITY MANAGEMENT
Management recognizes that there are certain market risk factors
present in the structure of the Bank's financial assets and liabilities.
Since the Bank does not have material amounts of derivative securities,
equity securities, or foreign currency positions, interest rate risk
("IRR") is the primary market risk that is inherent in the Bank's
portfolio.
The objective of the Bank's IRR management process is to maximize
net interest income over a range of possible interest rate paths. The
monitoring of interest rate sensitivity on both the interest-earning
assets and the interest-costing liabilities are key to effectively
managing IRR. Management maintains an IRR policy, which outlines a
methodology for monitoring interest rate risk. The Board of Directors
reviews this policy and approves changes on a quarterly basis. The IRR
policy also identifies the duties of the Bank's Asset/Liability
Committee ("ALCO"). Among other things, the ALCO is responsible for
developing the Bank's annual business plan and investment strategy,
monitoring anticipated weekly cashflows, establishing prices for the
Bank's various products, and implementing strategic IRR decisions.
On a quarterly basis, the Bank monitors the estimate of changes
that would potentially occur to its net portfolio value ("NPV") of
assets, liabilities, and off-balance sheet items assuming a sudden
change in market interest rates. Management presents a NPV analysis to
the Board of Directors each quarter and NPV policy limits are reviewed
and approved.
The following table is an interest rate sensitivity analysis, which
summarizes information provided by the OTS, which estimates the changes
in NPV of the Bank's portfolio of assets, liabilities, and off-balance
sheet items given a range of assumed changes in market interest rates.
These computations estimate the effect on the Bank's NPV of an
instantaneous and sustained change in market interest rates of plus and
minus 300 basis points, as well as the Bank's current IRR policy limits
on such estimated changes. The computations of the estimated effects of
interest rate changes are based on numerous assumptions, including a
constant relationship between the levels of various market interest
rates and estimates of prepayments of financial assets. The OTS
compiled this information using data from the Bank's Thrift Financial
Report as of September 30, 2002. The model output data associated with
the -200 and -300 basis point scenarios was suppressed because of the
relatively low current interest rate environment. Dollar amounts are
expressed in thousands.
<Table>
<Caption>
Changes in Net Portfolio Value NPV as % of PV of Assets
Market ------------------------------------ Board approved
Interest rates $ Amount $ Change % Change Actual minimum
- ---------------------------------------------------- ------------------------
+ 3% 147,870 (13,670) -8% 15.2% 6%
+ 2% 154,362 (7,178) -4% 15.5% 6%
+ 1% 158,182 (3,358) -2% 15.6% 7%
no change 161,540 -- -- 15.7% 8%
- 1% 168,982 7,442 +5% 16.1% 8%
- 2% -- -- -- -- 8%
- 3% -- -- -- -- 8%
</Table>
9
<Page>
Management cannot predict future interest rates and the
effect of changing interest rates on future net interest
margin, net income, or NPV can only be estimated. However,
management believes that its overall system of monitoring and
managing IRR is effective.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented
have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement
of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of
money over time due to inflation. Unlike most industrial companies,
most of the Bank's assets and liabilities are monetary in nature.
Except for inflation's impact on general and administrative expenses,
interest rates have a more significant impact on the Bank's performance
than do the effects of inflation. However, the level of interest rates
may be significantly affected by the potential changes in the monetary
policies of the Board of Governors of the Federal Reserve System in an
attempt to impact inflation. Interest rates do not necessarily move in
the same direction or in the same magnitude as the prices of goods and
services.
Changing interest rates impact the demand for new loans, which
affect the value and profitability of North American's loan origination
department. Rate fluctuations inversely affect the value of the Bank's
mortgage servicing portfolio because of their impact on mortgage
prepayments. Falling rates usually stimulate a demand for new loans,
which makes the mortgage banking operation more valuable, but also
encourages mortgage prepayments, which depletes the value of mortgage
servicing rights. Rising rates generally have the opposite effect on
these operations.
LIQUIDITY AND CAPITAL RESOURCES
Effective July 18, 2001, the OTS adopted a rule that removed the
regulation to maintain a specific average daily balance of liquid
assets, but retained a provision that requires institutions to maintain
sufficient liquidity to ensure their safe and sound operation. North
American maintains a level of liquid assets adequate to meet the
requirements of normal banking activities, including the repayment of
maturing debt and potential deposit withdrawals. The Bank's primary
sources of liquidity are the sale and repayment of loans, retention or
newly acquired retail deposits, and FHLB advances. Management continues
to use FHLB advances as a primary source of short-term funding. At
September 30, 2002, the Bank had available advances at FHLB of $47.3
million. As a secondary source of liquidity, the Bank may purchase
brokered deposit accounts.
The OTS also requires thrift institutions to maintain specified
levels of regulatory capital. As of September 30, 2002, the Bank's
regulatory capital exceeded all minimum capital requirements, which
consist of three components: tangible, core, and risk-based. A
schedule, which more fully describes the Bank's regulatory capital
requirements, is provided in the notes to the consolidated financial
statements.
Fluctuations in the level of interest rates typically impact
prepayments on mortgage loans and mortgage related securities. During
periods of falling rates, these prepayments increase and a greater
demand exists for new loans. The availability of customer deposits is
partially impacted by area competition. Management is not currently
aware of any other market or economic conditions that could materially
impact the Bank's future ability to meet obligations as they come due.
The following table discloses payments due on the Company's
contractual obligations at September 30, 2002:
<Table>
<Caption>
Due in Due from Due from Due in
Total < 1 year 1-3 years 3-5 years > 5 years
----------------------------------------------------------
Advances from FHLB $ 295,192 291,293 630 697 2,572
Operating Leases 1,231 414 589 228 --
----------------------------------------------------------
Total contractual obligations $ 296,423 291,707 1,219 925 2,572
==========================================================
</Table>
CRITICAL ACOOUNTING POLICIES
The Company has identified the accounting policies below as
critical to the Company's operations and to understanding the Company's
consolidated financial statements. Following is an explanation of the
methods and assumptions underlying their application.
10
<Page>
ALLOWANCE FOR LOAN AND LEASE LOSSES
Management records an Allowance for Loan and Lease Losses
("ALLL") 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 ALLL recognizes the
inherent risks associated with lending activities but, unlike a specific
allowance, has not been allocated to particular problem assets but to a
homogenous pool of loans. Management analyzes the adequacy of the
allowance on a monthly basis and believes that the Bank's specific loss
allowances and ALLL are adequate. While management uses information
currently available to determine these allowances, they can fluctuate
based on changes in economic conditions and changes in the information
available to management. Also, regulatory agencies review the Bank's
allowances for loan loss as part of their examination, and they may
require the Bank to recognize additional loss provisions based on the
information available at the time of their examinations.
Management estimates the required level of ALLL using a formula
based on various subjective and objective factors. ALLL is established
and maintained in the form of a provision on loss charged to earnings.
Based on its analysis, management may determine that ALLL is above
appropriate levels. If so, a negative loss provision would be recorded
to reduce the ALLL. This could occur due to significant asset
recoveries or significant reductions in the level of classified assets.
Each quarter management assesses the risk of the assets in the loan
portfolio using historical loss data and current economic conditions in
order to determine impairment of the various loan portfolios and adjusts
the level of ALLL. At any given time, the ALLL should be sufficient to
absorb at least all estimated credit losses on outstanding balances over
the next twelve months.
When considering the adequacy of ALLL, management's evaluation of
the asset portfolio has two primary components: foreclosure probability
and loss severity. Foreclosure probability is the likelihood of loans
not repaying in accordance with their original terms, which would result
in the foreclosure and subsequent liquidation of the property. Loss
severity is any potential loss resulting from the loan's foreclosure and
subsequent liquidation. Management calculates estimated foreclosure
frequency and loss severity ratios for each homogenous loan pool based
upon historical data plus an estimate of certain subjective factors
including future market trends and economic conditions. These ratios
are applied to the balances of the homogeneous loan pools to determine
the adequacy of the ALLL each month.
In addition to analyzing homogenous pools of loans for impairment,
management reviews individual loans for impairment each month. A loan
becomes impaired when management believes it will be unable to collect
all principal and interest due according to the contractual terms of the
loan. If a loan is impaired, the Bank records a specific allowance
equal to the excess of the loan's carrying value over the present value
of the estimated future cash flows discounted at the loan's effective
rate based on the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. Loans on
residential properties with greater than four units and loans on
construction/development and commercial properties are evaluated for
impairment on a loan by loan basis.
VALUCATION OF MORTGAGE SERVICING RIGHTS
The Bank creates mortgage servicing rights ("MSRs") through the
securitization and sale of residential mortgage loans. MSRs are
recorded at cost based upon the relative fair values of the servicing
rights on the underlying loans. The fair value is determined by
discounting estimated future cash flows at the market rate of interest.
These rights are amortized in proportion to and over the period of
expected net servicing income or loss.
The Bank evaluates the carrying value of MSRs on a monthly basis
based on their estimated fair value. For purposes of evaluating and
measuring impairment of MSRs, the Bank stratifies the rights based on
their predominant risk characteristics. Management considers the
significant risks to be loan type, period of origination and stated
interest rate. If the estimated fair value, using a discounted cash
flow methodology, is less than the carrying amount of the portfolio, the
portfolio is written down to the amount of the discounted expected cash
flows utilizing a valuation allowance. The Bank utilizes consensus
market prepayment assumptions and discount rates to evaluate its
capitalized servicing rights, which considers the risk characteristics
of the underlying servicing rights. Prepayment assumptions have the
greatest impact on the market value of MSRs. Generally, if current
rates are lower than the rates on the underlying loans, prepayments will
accelerate, reducing the value of the MSRs. The Bank utilizes
prepayment assumptions compiled by the mortgage research departments of
several large broker/dealers. The measurement of the fair value of MSRs
is limited by the conditions existing and the assumptions utilized as of
a particular point in time, and those assumptions may not be appropriate
if applied at a different point in time.
11
<Page>
NASB Financial, Inc. and Subsidiary
Consolidated Balance Sheets
<Table>
<Caption>
September 30,
-----------------------
2002 2001
-----------------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 4,168 16,043
Securities available for sale, at market value (Note 2) (amortized cost of
$13,925 and $5,228 at September 30, 2002 and 2001, respectively) 14,635 5,014
Stock in Federal Home Loan Bank, at cost 15,173 13,676
Mortgage-backed securities (Notes 3 and 4):
Available for sale, at market value (amortized cost of $2,643 and
$2,338 at September 30, 2002 and 2001, respectively) 2,684 2,406
Held to maturity, at cost (market value of $1,544 and $7,462 at
September 30, 2002 and 2001, respectively) 1,483 6,864
Loans receivable (Note 5):
Held for sale, at lower of cost or market value (estimated market value
of $76,855 and $96,681 at September 30, 2002 and 2001, respectively) 73,591 92,864
Held for investment, net 839,284 803,606
Accrued interest receivable 4,795 5,587
Real estate owned, net (Note 6) 4,938 8,043
Premises and equipment, net (Note 7) 6,523 6,872
Investment in LLC (Note 20) 200 --
Mortgage servicing rights, net (Note 8) 2,957 8,008
Deferred income tax asset (Note 11) 2,537 594
Other assets 5,254 2,479
-----------------------
$ 978,222 972,056
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Check outstanding in excess of bank balances $ 7,764 --
Customer deposit accounts (Note 9) 549,437 576,040
Brokered deposit accounts -- 9,997
Advances from Federal Home Loan Bank (Note 10) 295,192 273,471
Escrows 7,404 7,116
Income taxes payable (Note 11) 2,230 7,021
Accrued expenses and other liabilities 6,749 2,914
-----------------------
Total liabilities 868,776 876,559
-----------------------
Commitments and contingencies (Note 18)
Stockholders' equity (Notes 12 and 13):
Common stock of $0.15 par value: 20,000,000 authorized; 9,802,112
shares and 9,773,612 shares issued at September 30, 2002 and
2001, respectively 1,470 1,466
Serial preferred stock of $1.00 par value: 7,500,000 shares
authorized; none outstanding -- --
Additional paid-in capital 15,862 15,635
Retained earnings 108,367 93,340
Treasury stock, at cost; 1,381,770 shares and 1,269,522 shares at
September 30, 2002 and 2001, respectively (16,716) (14,854)
Accumulated other comprehensive loss 463 (90)
-----------------------
Total stockholders' equity 109,446 95,497
-----------------------
$ 978,222 972,056
=======================
</Table>
See accompanying notes to consolidated financial statements.
12
<Page>
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Income
<Table>
<Caption>
Years Ended September 30,
------------------------------------
2002 2001 2000
------------------------------------
(Dollars in thousands, except per share data)
Interest on loans receivable $ 70,743 82,166 76,078
Interest on mortgage-backed securities 486 980 1,330
Interest and dividends on securities 1,095 1,437 1,217
Other interest income 343 726 337
------------------------------------
Total interest income 72,667 85,309 78,962
------------------------------------
Interest on customer deposit accounts 19,705 31,669 29,641
Interest on advances from Federal Home Loan
Bank and other borrowings 13,301 18,124 13,483
------------------------------------
Total interest expense 33,006 49,793 43,124
------------------------------------
Net interest income 39,661 35,516 35,838
Provision for loan losses 557 460 600
------------------------------------
Net interest income after provision
for loan losses 39,104 35,056 35,238
------------------------------------
Other income (expense):
Loan servicing fees (4,143) (4,583) 1,211
Impairment recovery (loss) of mortgage
servicing rights 1,005 (972) (164)
Impairment loss of mortgage-backed securities (531) -- --
Customer service fees and charges 4,441 3,662 2,854
Provision for recovery (loss) on real estate owned 236 (140) --
Gain on sale of securities available for sale -- 41 --
Gain on sale of loans receivable held for sale 9,334 8,841 4,040
Gain on sale of customer deposit branch -- 4,129 --
Other 1,570 1,016 1,468
------------------------------------
Total other income 11,962 11,994 9,409
------------------------------------
General and administrative expenses:
Compensation and fringe benefits 9,761 9,523 9,776
Commission-based mortgage banking compensation 4,583 4,261 2,545
Premises and equipment 2,234 2,293 2,459
Advertising and business promotion 649 442 640
Federal deposit insurance premiums 108 121 175
Other 4,280 3,779 4,525
------------------------------------
Total general and administrative expenses 21,615 20,419 20,120
------------------------------------
Income before income tax expense 29,451 26,631 24,527
------------------------------------
Income tax expense (benefit):
Current 11,862 14,596 8,557
Deferred (2,289) (4,316) 1,249
------------------------------------
Total income tax expense 9,573 10,280 9,806
------------------------------------
Net income $ 19,878 16,351 14,721
====================================
Basic earnings per share $ 2.36 1.91 1.66
====================================
Diluted earnings per share $ 2.35 1.90 1.63
====================================
Weighted average shares outstanding 8,439,845 8,552,936 8,863,432
====================================
</Table>
See accompanying notes to consolidated financial statements.
13
<Page>
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<Table>
<Caption>
Years ended September 30,
-----------------------------
2002 2001 2000
-----------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 19,878 16,351 14,721
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 787 849 954
Amortization and accretion, net 3,479 3,526 (303)
Deferred income tax expense (2,289) (4,316) 12499
Gain on sale of securities available for sale -- (41) --
Impairment loss (recovery) on mortgage servicing rights (1,055) 972 164
Impairment loss on mortgage-backed securities 531 -- --
Net fair value of loan-related commitments (633) -- --
Gain on sale of loans receivable held for sale (9,334) (8,841) (4,040)
Provision for loan losses 557 460 600
Provision for loss (recovery) on real estate owned (236) 140 --
Origination and purchase of loans receivable
held for sale (522,674) (540,621) (288,100)
Sale of loans receivable held for sale 579,668 578,409 285,854
Changes in:
Accrued interest receivable 792 705 (1,459)
Accrued expenses and other liabilities and
income taxes payable (3,445) 5,612 903
----------------------------
Net cash provided by operating activities 66,026 53,205 10,543
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 3,569 3,605 2,604
Available for sale 907 2,909 3,946
Principal repayments of mortgage loans receivable held
for investment and held for sale 410,497 411,076 255,174
Principal repayments of other loans receivable 37,096 30,834 25,954
Principal repayments of securities available for sale 20,479 367 --
Loan origination - mortgage loans receivable
held for investment (468,908) (394,685) (374,443)
Loan origination - other loans receivable (24,378) (31,610) (31,511)
Purchase of mortgage loans receivable held for investment (15,745) (34,636) (36,489)
Purchases of other loans receivable (5,173) -- --
Purchases of Federal Home Loan Bank stock (1,497) (454) (4,817)
Purchases of securities available for sale (29,197) (19,772) --
Proceeds from sale of securities available for sale -- 19,819 --
Proceeds from sale of real estate owned 8,180 5,109 2,410
Premises and equipment purchases, net (430) (1,898) (2,058)
Other 8 (73) (1,719)
----------------------------
Net cash used in investing activities (64,592) (9,409) (160,949)
</Table>
14
<Page>
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
<Table>
<Caption>
Years ended September 30,
-----------------------------
2002 2001 2000
-----------------------------
(Dollars in thousands)
Cash flows from financing activities:
Net increase (decrease) in customer deposit accounts (36,600) (35,628) 56,202
Proceeds from advances from Federal Home Loan Bank 224,000 226,000 303,200
Repayment of advances from Federal Home Loan Bank (202,279) (216,965) (206,852)
Repayment of other borrowings -- (100) (50)
Cash dividends paid (4,851) (4,066) (3,370)
Stock options exercised 231 916 904
Repurchase of common stock (1,862) (1,776) (7,438)
Change in checks outstanding in excess of bank balances 7,764 -- --
Change in escrows 288 219 587
-----------------------------
Net cash provided by (used in) financing activities (13,309) (31,400) 143,183
-----------------------------
Net increase (decrease) in cash and cash equivalents (11,875) 12,396 (7,223)
Cash and cash equivalents at beginning of period 16,043 3,647 10,870
-----------------------------
Cash and cash equivalents at end of period $ 4,168 16,043 3,647
=============================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 16,654 9,976 6,905
Cash paid for interest 33,258 49,734 43,035
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 4,551 9,821 3,468
Conversion of real estate owned to loans receivable 68 78 94
Capitalization of mortgage servicing rights 86 1,783 3,170
Transfer of loans from held to maturity to held for sale -- 67,117 --
Transfer of securities from held to maturity to
held for sale 1,212 -- --
</Table>
See accompanying notes to consolidated financial statements.
15
<Page>
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
<Table>
<Caption>
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive stockholders'
stock capital earnings stock income (loss) equity
---------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 1999 $ 1,425 13,856 69,704 (5,640) (482) 78,863
Comprehensive income:
Net income -- -- 14,721 -- -- 14,721
Other comprehensive income,
net of tax:
Unrealized loss on securities -- -- -- -- (19) (19)
----------
Total comprehensive income -- -- -- -- -- 14,702
Cash dividends paid -- -- (3,370) -- -- (3,370)
Stock options exercised 23 881 -- -- -- 904
Purchase of common stock
for treasury -- -- -- (7,438) -- (7,438)
---------------------------------------------------------------------
Balance at September 30, 2000 1,448 14,737 81,055 (13,078) (501) 83,661
Comprehensive income:
Net income -- -- 16,351 -- -- 16,351
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- 411 411
----------
Total comprehensive income -- -- -- -- -- 16,762
Cash dividends paid -- -- (4,066) -- -- (4,066)
Stock options exercised 18 898 -- -- -- 916
Purchase of common stock
for treasury -- -- -- (1,776) -- (1,776)
---------------------------------------------------------------------
Balance at September 30, 2001 1,466 15,635 93,340 (14,854) (90) 95,497
Comprehensive income:
Net income -- -- 19,878 -- -- 19,878
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- 553 553
----------
Total comprehensive income -- -- -- -- -- 20,431
Cash dividends paid -- -- (4,851) -- -- (4,851)
Stock options exercised 4 227 -- -- -- 231
Purchase of common stock
for treasury -- -- -- (1,862) -- (1,862)
---------------------------------------------------------------------
Balance at September 30, 2002 $ 1,470 15,862 108,367 (16,716) 463 109,446
======================================================================
</Table>
See accompanying notes to consolidated financial statements.
16
<Page>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NASB
Financial, Inc. (the "Company"), its wholly-owned subsidiary, North
American Savings Bank, F.S.B. (the "Bank"), and the Bank's wholly-
owned subsidiary, Nor-Am Service Corporation. All significant inter-
company transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand plus interest-
bearing deposits in the Federal Home Loan Bank of Des Moines. The Bank
had checks outstanding in excess of the balance in their accounts at
Federal Home Loan Bank of $7.8 million at September 30, 2002.
Deposits in the Federal Home Loan Bank of Des Moines totaled $12.2
million as of September 30, 2001.
SECURITIES AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Debt securities are classified as held to maturity when the
Company has the positive intent and ability to hold the securities to
maturity. Debt securities not classified as held to maturity or
trading are classified as available for sale. As of September 30, 2002
and 2001, the Company had no assets designated as trading. Securities
and mortgage-backed securities classified as available for sale are
recorded at their fair values, with unrealized gains and losses, net of
income taxes, reported as accumulated other comprehensive income or
loss.
Premiums and discounts are recognized as adjustments to interest
income over the life of the securities using a method that approximates
the level yield method. Gains or losses on the disposition of
securities are based on the specific identification method. Market
prices are obtained from broker-dealers and reflect estimated offer
prices.
To the extent management determines a decline in value in a
security or mortgage-backed security available for sale to be other
than temporary, the Bank will include such expense in the consolidated
statements of income.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity are stated at cost,
adjusted for amortization of premiums and discounts, which are
recognized as adjustments to interest income over the life of the
securities using the level-yield method.
To the extent management determines a decline in value in a
mortgage-backed security held to maturity to be other than temporary,
the Company will adjust the carrying value and include such expense in
the consolidated statements of income.
LOANS RECEIVABLE HELD FOR SALE
At the time of origination, management designates as held for sale
those loans that it does not intend to hold to maturity. Accordingly,
such loans are carried at the lower of amortized cost (outstanding
principal balance adjusted for unamortized deferred loan fees and
costs) or market value. Market values for such loans are determined
based on sale commitments or dealer quotations. Gains or losses on
such sales are recognized using the specific identification method.
Interest, including amortization and accretion of deferred loan fees
and costs, is included in interest income.
LOANS RECEIVABLE HELD FOR INVESTMENT, NET
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount
of unpaid principal less an allowance for loan losses, undisbursed loan
funds and unearned discounts and loan fees, net of certain direct loan
origination costs. Interest on loans is credited to income as earned
and accrued only when it is deemed collectible. Loans are placed on
nonaccrual status when, in the opinion of management, the full timely
collection of principal or interest is in doubt. As a general rule,
the accrual of interest is discontinued when principal or interest
payments become doubtful. When a loan is placed on nonaccrual status,
previously accrued but unpaid interest is reversed against current
income. Subsequent collections of cash may be applied as reductions to
the principal balance, interest in arrears or recorded as income,
depending on Bank management's assessment of the ultimate
collectibility of the loan. Nonaccrual loans may be restored to
accrual status when principal and interest become current and the full
payment of principal and interest is expected.
Net loan fees and direct loan origination costs are deferred and
amortized as yield adjustments to interest income using the level-yield
method over the contractual lives of the related loans.
17
<Page>
PROVISIONS FOR LOAN LOSSES
The Bank considers a loan to be impaired when management believes
it will be unable to collect all principal and interest due according
to the contractual terms of the loan. If a loan is impaired, the Bank
records a loss valuation equal to the excess of the loan's carrying
value over the present value of the estimated future cash flows
discounted at the loan's effective rate based on the loan's observable
market price or the fair value of the collateral if the loan is
collateral dependent. One-to-four family residential loans and
consumer loans are collectively evaluated for impairment. Loans on
residential properties with greater than four units, on construction
and development and commercial properties are evaluated for impairment
on a loan by loan basis. The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is
based on the Bank's past loan loss experience, known and inherent
losses in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. Assessing the adequacy
of the allowance for loan losses is inherently subjective as it
requires making material estimates, including the amount and timing of
future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In management's opinion, the
allowance, when taken as a whole, is adequate to absorb reasonable
estimated loan losses inherent in the Bank's loan portfolio.
REAL ESTATE OWNED
Real estate owned represents foreclosed assets held for sale and
is initially recorded at fair value as of the date of foreclosure less
any estimated disposal costs (the "new basis") and is subsequently
carried at the lower of the new basis or fair value less selling costs
on the current measurement date. Adjustments for estimated losses are
charged to operations when the fair value declines to an amount less
than the carrying value. Costs and expenses related to major additions
and improvements are capitalized, while maintenance and repairs that do
not improve or extend the lives of the respective assets are expensed.
Applicable gains and losses on the sale of real estate owned are
recognized when the asset is disposed depending on the adequacy of the
down payment and other requirements.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost, less accumulated
depreciation. Depreciation of premises and equipment is provided over
the estimated useful lives of the respective assets (three to forty
years) using the straight-line method. Maintenance and repairs are
charged to expense. Major renewals and improvements are capitalized.
Gains and losses on dispositions are credited or charged to earnings as
incurred.
INCOME TAXES
The Company files a consolidated Federal income tax return with
its subsidiaries using the accrual method of accounting.
The Company provides for income taxes using the asset/liability
method. Deferred income taxes are recognized for the tax consequences
of temporary differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities.
The Bank's bad debt deduction for the years ended September 30,
2002 and 2001, was based on the specific charge off method. The
percentage method for additions to the tax bad debt reserve was used
prior to the fiscal year ended September 30, 1997. Under the current
tax rules, Banks are required to recapture their accumulated tax bad
debt reserve, except for the portion that was established prior to
1988, the "base-year." The recapture of the excess reserve will be
completed over a six-year phase-in-period that began with the fiscal
year ended September 30, 1999. A deferred income tax liability is
required to the extent the tax bad debt reserve exceeds the 1988 base
year amount. Retained earnings include approximately $2 million
representing such bad debt reserve for which no deferred taxes have
been provided. Distributing the Bank's capital in the form of stock
redemptions has caused the Bank to recapture a significant amount of
its bad debt reserve prior to the phase-in period.
MORTGAGE SERVICING RIGHTS
Servicing assets and other retained interests in transferred
assets are measured by allocating the previous carrying amount between
the assets sold, if any, and retained interest, if any, based on their
relative fair values at the date of the transfer, and servicing assets
and liabilities are subsequently measured by (1) amortization in
proportion to and over the period of estimated net servicing income or
loss, and (2) assessment for asset impairment or increased obligation
based on their fair values.
Originated mortgage servicing rights are recorded at cost based
upon the relative fair values of the loans and the servicing rights.
Servicing release fees paid on comparable loans and discounted cash
flows are used to determine estimates of fair values. Purchased
mortgage servicing rights are acquired from independent third-party
originators and are recorded at the lower of cost or fair value. These
rights are amortized in proportion to and over the period of expected
net servicing income or loss.
18
<Page>
Impairment Evaluation - The Bank evaluates the carrying value of
capitalized mortgage servicing rights on a periodic basis based on
their estimated fair value. For purposes of evaluating and measuring
impairment of capitalized servicing rights, the Bank stratifies the
rights based on their predominant risk characteristics. The
significant risk characteristics considered by the Bank are loan type,
period of origination and stated interest rate. If the fair value
estimated, using a discounted cash flow methodology, is less than the
carrying amount of the portfolio, the portfolio is written down to the
amount of the discounted expected cash flows utilizing a valuation
allowance. The Bank utilizes consensus market prepayment assumptions
and discount rates to evaluate its capitalized servicing rights, which
considers the risk characteristics of the underlying servicing rights.
During the year ended September 30, 2002, the value of mortgage
servicing rights increased, which resulted in a recovery of valuation
allowance of $1.1 million. During the years ended September 30, 2001,
the Bank recorded an impairment loss on servicing rights of $972,000.
DERIVATIVE INSTRUMENTSS
The Bank regularly enters into commitments to originate and sell
loans held for sale. Such commitments are considered derivative
instruments under Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138. These statements require the
Bank to recognize all derivative instruments as either assets or
liabilities in the balance sheet and to measure those instruments at
fair value. As of September 30, 2002, the net fair value of loan
related commitments was $633,000.
REVENUE RECOGNITION
Interest income, loan servicing fees, customer service fees and
charges and ancillary income related to the Bank's deposits and lending
activities are accrued as earned.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires
the purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling of interest method. The
provisions of this statement apply to all business combinations
initiated after June 30, 2001. The Company's adoption of SFAS No. 141
did not have a significant impact on its consolidated financial
statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment approach. The provisions
of this statement are required to be applied starting in fiscal year
2003. The Company does not believe that the adoption of SFAS No. 142
will have a significant impact on its consolidated financial
statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
This statement is effective for all financial statements issued for
fiscal years beginning after June 15, 2002. The Company does not
believe that the adoption of SFAS No. 143 will have a significant
impact on its consolidated financial statements.
In August 2001, the FASB issued SFAS No.144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. The provisions of this statement are effective for
the Company's financial statements issued in fiscal year 2003. The
Company does not believe that the adoption of SFAS No. 144 will have a
significant impact on its consolidated financial statements.
In June 2002, the FASB issued, SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." The provisions
of SFAS No. 146 are effective for exit and disposal activities
initiated after December 31, 2002. The Company does not believe that
the adoption of SFAS No. 146 will have a significant impact on its
consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions." This statement provides guidance on
the accounting for the acquisition of a financial institution and
applies to all acquisitions except those between two or more mutual
enterprises. Those transition provisions are effective on October 1,
2002. The scope of SFAS No. 144 is amended to include long-term
customer-relationship intangible assets such as depositor-and-borrower-
relationship intangible assets and credit card-holder intangible
assets. The Company does not believe that the adoption of SFAS No. 147
will have a significant impact on its consolidated financial
statements.
19
<Page>
USE OF ESTIMATES
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions
that affect the amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues
and expenses during the reported periods. Estimates were used to
establish loss reserves, the valuation of mortgage servicing rights,
and fair values of financial instruments. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain amounts for 2001 and 2000 have been reclassified to
conform to the current year presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined using available
market information and a selection from a variety of valuation
methodologies. However, considerable judgment is required to interpret
market data in developing the estimates of fair value. Accordingly,
the estimates presented are not necessarily indicative of the amount
that could be realized in a current market exchange. The use of
different market assumptions and estimation methodologies may have a
material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument presented as of
September 30, 2002 and 2001:
CASH AND CASH EQUIVALENTS
The carrying amount reported in the consolidated balance sheets is a
reasonable estimate of fair value.
SECURITIES AVAILABLE FOR SALE
Fair values are based on quoted market prices, where available.
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values are based on quoted market prices, where available. When
quoted market prices are unavailable, fair values are computed using
consensus estimates of prepayment speeds and market spreads to treasury
securities.
STOCK IN FEDERAL HOME LOAN BANK ("FHLB")
The carrying value of stock in Federal Home Loan Bank approximates its
fair value.
LOANS RECEIVABLE HELD FOR SALE
Fair values of mortgage loans held for sale are based on quoted market
prices for loans with no current commitment to sell. Fair values of
mortgage loans sold forward are based on the committed prices.
LOANS RECEIVABLE HELD FOR INVESTMENT
Fair values are computed for each loan category using market spreads to
treasury securities for similar existing loans in the portfolio and
management's estimates of prepayments.
MORTGAGE SERVICING RIGHTS
The estimated fair values of mortgage servicing rights are determined
by discounting estimated future cash flows using a market rate of
interest and consensus estimates of prepayment speeds.
CUSTOMER DEPOSIT ACCOUNTS
The estimated fair values of demand deposits and savings accounts are
equal to the amount payable on demand at the reporting date. Fair
values of certificates of deposit are computed at fixed spreads to
treasury securities with similar maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK
The estimated fair values of advances from FHLB are determined by
discounting the future cash flows of existing advances using rates
currently available for new advances with similar terms and remaining
maturities.
COMMITMENTS TO ORIGINATE, PURCHASE AND SELL LOANS
The estimated fair value of commitments to originate, purchase, or sell
loans is based on the fees currently charged to enter into similar
agreements and the difference between current levels of interest rates
and the committed rates.
20
<Page>
(2) SECURITIES AVAILABLE FOR SALE
Summaries of securities available for sale are provided in the
following tables. Dollar amounts are expressed in thousands.
September 30, 2002
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------
U.S. Government obligations $ 2,011 -- (5) 2,006
Equity securities 2,738 37 -- 2,775
Debt securities 9,176 678 -- 9,854
--------------------------------------------
Total $13,925 715 (5) 14,635
============================================
September 30, 2001
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------------------------------------------
U.S. Government Obligations $ 2,490 -- (6) 2,484
Equity securities 2,738 -- (208) 2,530
--------------------------------------------
Total $ 5,228 -- (214) 5,014
=============================================
There were no sales of securities available for sale during the
year ended September 30, 2002. During the year ended September 30,
2001, gross gains of $41,000 and no losses were recognized on the sale
of securities available for sale. There were no sales of securities
available for sale during the year ended September 30, 2000.
The scheduled maturities of securities available for sale at
September 30, 2002, are presented in the following table. Dollar
amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------------------------------------------
No stated maturity $ 2,738 37 -- 2,775
Due from one to five years 7,551 387 (5) 7,933
Due from five to ten years 3,636 291 -- 3,927
--------------------------------------------
Total $ 13,925 715 (5) 14,635
============================================
(3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following tables present a summary of mortgage-backed
securities available for sale. Dollar amounts are expressed in
thousands.
<Table>
<Caption>
September 30, 2002
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------------
Pass-through certificates guaranteed
by GNMA - fixed rate $ 1,373 32 -- 1,405
Other asset-backed securities 1,212 -- -- 1,212
Mortgage-backed derivatives (including
CMO residuals and interest-only
securities) 58 9 -- 67
-----------------------------------------------------
Total $ 2,643 41 -- 2,684
=====================================================
</Table
21
<Page>
<Table>
<Caption>
September 30, 2001
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------------
Pass-through certificates guaranteed
by GNMA - fixed rate $ 2,253 59 -- 2,312
Mortgage-backed derivatives (including
CMO residuals and interest-only
securities) 85 9 -- 94
-----------------------------------------------------
Total $ 2,338 68 -- 2,406
=====================================================
</Table>
There were no sales of mortgage-backed securities available for
sale during the years ended September 30, 2002, 2001 or 2000.
During the quarter ended September 30, 2002, the Bank transferred a
mortgage backed security with an amortized cost of $1.2 million from the
held to maturity category to the available for sale category. Prior to
the transfer, the security was deemed impaired and a loss of $311,000
was recorded to write it down to fair market value. Thus, there were no
unrealized gains or losses at the date of transfer. The decision was
made to transfer the security after it was determined that there was a
significant deterioration in the underlying credit.
The scheduled maturities of mortgage-backed securities available
for sale at September 30, 2002, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------------------------------------------
Due from five to ten years $ 1,212 -- -- 1,212
Due after ten years 1,431 41 -- 1,472
--------------------------------------------
Total $ 2,643 41 -- 2,684
============================================
Actual maturities of mortgage-backed securities available for sale
may differ from scheduled maturities depending on the repayment
characteristics and experience of the underlying financial instruments,
on which borrowers have the right to call or prepay certain obligations.
(4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following tables present a summary of mortgage-backed
securities held to maturity. Dollar amounts are expressed in thousands.
<Table>
<Caption>
September 30, 2002
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------------
FHLMC participation certificates:
Fixed rate $ 837 44 -- 881
FNMA pass-through certificates:
Fixed rate 113 -- -- 113
Balloon maturity and
adjustable rate 251 3 -- 254
Pass-through certificates guaranteed
by GNMA - fixed rate 241 14 -- 255
Collateralized mortgage
obligation bonds 41 -- -- 41
-----------------------------------------------------
Total $ 1,483 61 -- 1,544
=====================================================
</Table>
22
<Page>
<Table>
<Caption>
September 30, 2001
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------------
FHLMC participation certificates:
Fixed rate $ 1,363 56 -- 1,419
Balloon maturity and
adjustable rate 2,327 63 -- 2,390
FNMA pass-through certificates:
Fixed rate 154 -- -- 154
Balloon maturity and
adjustable rate 311 5 -- 316
Pass-through certificates guaranteed
by GNMA - fixed rate 330 14 -- 344
Collateralized mortgage
obligation bonds 537 246 (1) 782
Other asset-backed securities 1,842 215 -- 2,057
-----------------------------------------------------
Total $ 6,864 599 (1) 7,462
=====================================================
</Table>
The scheduled maturities of mortgage-backed securities held to
maturity at September 30, 2002, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---------------------------------------------
Due from one to five years $ 59 3 -- 62
Due from five to ten years 628 40 -- 668
Due after ten years 796 18 -- 814
---------------------------------------------
Total $ 1,483 61 -- 1,544
=============================================
Actual maturities of mortgage-backed securities held to maturity
may differ from scheduled maturities depending on the repayment
characteristics and experience of the underlying financial instruments,
on which borrowers have the right to call or prepay certain
obligations.
The principal balances of mortgage-backed securities held to
maturity that are pledged to secure certain obligations of the Bank as
of September 30 are as follows. Dollar amounts are expressed in
thousands.
September 30, 2002
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------
Customer deposit accounts $ 2,056 78 -- 2,134
September 30, 2001
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-----------------------------------------------
Customer deposit accounts $ 2,509 84 -- 2,593
All dispositions of mortgage-backed securities held to maturity
during fiscal 2002, 2001, and 2000 were the result of maturities or
calls.
23
<Page>
(5) LOANS RECEIVABLE
The following table provides a detail of loans receivable as of
September 30. Dollar amounts are expressed in thousands.
HELD FOR INVESTMENT 2002 2001
---------------------------
Mortgage loans:
Permanent loans on:
Residential properties $ 246,591 279,679
Business properties 391,381 314,052
Partially guaranteed by VA or
insured by FHA 8,042 30,898
Construction and development 207,729 217,354
---------------------------
Total mortgage loans 853,743 841,956
Commercial loans 15,822 10,857
Installment loans and lease financing
to individuals 37,904 49,075
---------------------------
Total loans receivable held
for investment 907,469 901,888
Less:
Undisbursed loan funds (55,939) (85,384)
Unearned discounts and fees on
loans, net of deferred costs (6,381) (7,063)
Allowance for losses on loans (5,865) (5,835)
---------------------------
Net loans receivable held
for investment $ 839,284 803,606
===========================
HELD FOR SALE 2002 2001
---------------------------
Mortgage loans:
Permanent loans on
residential properties $ 108,723 108,149
Less:
Undisbursed loan funds (35,120) (15,331)
Unearned discounts and fees on loans,
net of deferred costs (12) 46
--------------------------
Net loans receivable held for sale $ 73,591 92,864
==========================
Included in the loans receivable balances are participating
interests in mortgage loans and wholly owned mortgage loans serviced by
other institutions of approximately $659,000 and $3.3 million at
September 30, 2002 and 2001, respectively.
Whole loans and participations serviced for others were
approximately $371.6 million and $591.3 million at September 30, 2002
and 2001, respectively. Loans serviced for others are not included in
the accompanying consolidated balance sheets.
First mortgage loans were pledged to secure FHLB advances in the
amount of approximately $596.4 million and $587.3 million at September
30, 2002 and 2001, respectively.
Aggregate loans to executive officers, directors and their
associates, including companies in which they have partial ownership
interest, did not exceed 5% of equity as of September 30, 2002 and
2001. Such loans were made under terms and conditions substantially
the same as loans made to parties not affiliated with the Bank.
As of September 30, 2002 and 2001, loans with an aggregate
principal balance of approximately $6.4 million and $6.9 million,
respectively, were on nonaccrual status. Gross interest income would
have increased by $432,000, $422,000 and $264,000 for the years ended
September 30, 2002, 2001 and 2000, respectively, if the nonaccrual
loans had been performing.
The following table presents the activity in the allowance for
losses on loans for 2002, 2001, and 2000. Allowance for losses on
mortgage loans includes specific valuation allowances and valuation
allowances associated with homogenous pools of loans. Dollar amounts
are expressed in thousands.
24
<Page>
2002 2001 2000
---------------------------------
Balance at beginning of year $ 5,835 7,157 6,671
Provisions 557 460 600
Charge-offs (586) (1,842) (116)
Recoveries 59 60 2
---------------------------------
Balance at end of year $ 5,865 5,835 7,157
=================================
The following table provides a summary of information on impaired
loans. Dollar amounts are expressed in thousands.
September 30,
----------------
2002 2001
----------------
Impaired loans with a valuation allowance $ 2,698 3,566
Impaired loans without a valuation allowance 69 --
----------------
$ 2,767 3,566
================
Valuation applicable to impaired loans $ 888 1,104
================
2002 2001 2000
------------------------
Average balance of impaired loans $ 3,297 6,898 3,104
Interest income recognized on
impaired loans 484 484 431
Interest income received on a cash basis
on impaired loans 492 516 538
During fiscal 2001, the Bank restructured one $3.5 million loan
participation secured by a nursing home in Eau Claire, Wisconsin, which
was the result of the borrower's bankruptcy reorganization. In the
restructuring, the interest rate was reduced and accrued interest was
capitalized to the loan balance. The Bank has a valuation allowance of
$821,000 against this loan, which results in a net carrying value of
$2.7 million.
During fiscal 2000, the Bank restructured a $1.1 million loan on a
57-unit motel and a separate restaurant building in Platte City,
Missouri. The borrower sold the motel during fiscal 2002 to a third
party who was financed by the Bank. Subsequently, the Bank sold its
remaining interest in the secured portion of the loan, leaving an
unsecured loan receivable of $69,000. Management believes this will be
recovered from excess funds escrowed by a third party with regard to an
outstanding tax lien on the property.
Although the Bank has a diversified loan portfolio, a substantial
portion is secured by real estate. The following table presents
information as of September 30 about the location of real estate that
secures loans in the Bank's mortgage loan portfolio. The line item
"Other" includes total investments in other states of less than $10
million each. Dollar amounts are expressed in thousands.
<Table>
<Caption>
2002
-------------------------------------------------------------
Residential
---------------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
- ------------------------------------------------------------------------------
Missouri $ 130,940 65,276 87,131 108,861 392,208
Kansas 64,983 13,052 57,860 96,995 232,890
Colorado 620 22,356 44,274 -- 67,250
Texas 2,094 23,083 2,736 -- 27,913
Oklahoma 4,128 -- 22,029 -- 26,157
Iowa 17,025 -- 8,452 -- 25,477
Indiana 14,891 -- 1,690 -- 16,581
Minnesota 5,868 8,403 -- -- 14,271
Wisconsin 824 -- 9,832 -- 10,656
Other 23,638 4,425 12,287 -- 40,340
-------------------------------------------------------------
$ 265,001 136,595 246,291 205,856 853,743
=============================================================
</Table>
25
<Page>
<Table>
<Caption>
2001
--------------------------------------------------------------
Residential
---------------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
- -------------------------------------------------------------------------------
Missouri $ 161,202 62,691 81,703 91,077 396,673
Kansas 74,352 14,538 45,410 122,106 256,406
Iowa 23,117 -- 11,034 -- 34,151
Colorado 895 21,837 2,825 -- 25,557
Oklahoma 3,614 -- 18,260 -- 21,874
Minnesota 9,999 9,784 -- -- 19,783
Indiana 15,157 -- 1,770 -- 16,927
Texas 1,022 9,816 762 -- 11,600
Wisconsin 1,555 -- 9,069 -- 10,624
Illinois 5,746 1,041 3,426 -- 10,213
Other 22,310 1,195 9,939 4,704 38,148
--------------------------------------------------------------
$ 318,969 120,902 184,198 217,887 841,956
==============================================================
</Table>
Proceeds from the sale of loans receivable held for sale during
fiscal 2002, 2001 and 2000, were $579.7 million, $578.4 million, and
$285.9 million, respectively. In fiscal 2002, the Bank realized gross
gains of $11.0 million and gross losses of $1.7 million on those sales.
In fiscal 2001, gross gains of $10.0 million and gross losses of $1.2
million were realized. In fiscal 2000, the Bank realized gross gains of
$4.5 million and $0.5 million of gross losses.
(6) REAL ESTATE OWNED
The following table presents real estate owned and other
repossessed property as of September 30. Dollar amounts are expressed
in thousands.
2002 2001
-------------------
Real estate acquired through (or deed in
lieu of) foreclosure $ 5,584 9,243
Less: allowance for losses (646) (1,200)
--------------------
Total $ 4,938 8,043
====================
The allowance for losses on real estate owned includes the
following activity for the years ended September 30. Dollar amounts
are expressed in thousands.
2002 2001 2000
--------------------------
Balance at beginning of year $ 1,200 1,229 1,289
Provisions (236) 140 --
Charge-offs (1,091) (633) (349)
Recoveries 773 464 289
--------------------------
Balance at end of year $ 646 1,200 1,229
==========================
(7) PREMISES AND EQUIPMENT
The following table summarizes premises and equipment as of
September 30. Dollar amounts are expressed in thousands.
2002 2001
-------------------
Land $ 2,505 2,569
Buildings and improvements 6,635 6,519
Furniture, fixtures and equipment 7,118 6,763
-------------------
16,258 15,851
Accumulated depreciation (9,735) (8,979)
-------------------
Total $ 6,523 6,872
===================
26
<Page>
Certain facilities of the Bank are leased under various operating
leases. Amounts paid for rent expense for the fiscal years ended
September 30, 2002, 2001, and 2000 were approximately $646,000,
$653,000, and $694,000, respectively.
Future minimum rental commitments under noncancelable leases are
presented in the following table. Dollar amounts are expressed in
thousands.
Fiscal year ended
September 30, Amount
- ----------------------------------
2003 $ 414
2004 349
2005 240
2006 165
2007 63
(8) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the years ended September 30. Dollar amounts are
expressed in thousands.
2002 2001 2000
----------------------------
Balance at beginning of year $ 8,008 14,851 13,881
Additions:
Originated mortgage servicing rights 86 1,772 4,391
Reductions:
Amortization (6,192) (7,634) (1,997)
Sale of mortgage servicing rights -- -- (1,260)
Impairment recovery (loss) 1,055 (972) (164)
----------------------------
Balance at end of year $ 2,957 8,008 14,851
============================
(9) CUSTOMER DEPOSIT ACCOUNTS
Customer deposit accounts as of September 30 are illustrated in
the following table. Dollar amounts are expressed in thousands.
2002 2001
----------------- ----------------
Amount % Amount %
- -------------------------------------------------------------------
Demand deposit accounts $ 70,919 13 65,885 11
Savings accounts 100,737 18 84,918 15
Money market demand accounts 9,298 2 6,782 1
Certificate accounts 368,483 67 418,455 71
Brokered accounts -- -- 9,997 2
----------------- -----------------
$ 549,437 100 586,037 100
================= =================
Weighted average interest rate 2.78% 4.55%
=========== ============
The aggregate amount of certificate accounts in excess of $100,000
was approximately $67.7 million and $60.6 million as of September 30,
2002 and 2001, respectively.
The following table presents contractual maturities of certificate
and brokered accounts as of September 30, 2002. Dollar amounts are
expressed in thousands.
27
<Page>
Maturing during the fiscal year ended September 30,
---------------------------------------------------------
2008 and
2003 2004 2005 2006 2007 after Total
---------------------------------------------------------
Certificate
accounts $ 297,493 49,499 11,099 5,216 1,937 3,239 368,483
The following table presents interest expense on customer deposit
accounts for the years ended September 30. Dollar amounts are
expressed in thousands.
2002 2001 2000
--------------------------------
Savings accounts $ 1,974 3,135 3,400
Money market demand and
demand deposit accounts 465 860 952
Certificate accounts 17,266 27,674 25,289
--------------------------------
$ 19,705 31,669 29,641
================================
(10) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the FHLB are secured by all stock held in the FHLB,
mortgage-backed securities and first mortgage loans with aggregate
unpaid principal balances equal to at least 150% of outstanding
advances not secured by FHLB stock. The following table provides a
summary of advances by year of maturity as of September 30. Dollar
amounts are expressed in thousands.
2002 2001
----------------- -----------------
Weighted Weighted
Average Average
Year ended September 30, Amount Rate Amount Rate
- --------------------------------------------------------------------
2002 $ -- -- $179,279 4.93%
2003 291,293 3.71% 90,293 6.57%
2004 307 5.25% 307 5.25%
2005 323 5.25% 323 5.25%
2006 340 5.25% 340 5.25%
2007 through 2014 2,929 5.25% 2,929 5.25%
------------------ -----------------
$ 295,192 3.73% $273,471 5.47%
================== =================
(11) INCOME TAXES PAYABLE
The differences between the effective income tax rates and the
statutory federal corporate tax rate for the years ended September 30
are as follows:
2002 2001 2000
--------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.0 3.0 3.0
Other, net (5.5) 0.6 2.0
--------------------------
32.5% 38.6% 40.0%
==========================
The decrease in the effective income tax rate for the year ended
September 30, 2002, is due to a $1.5 million reduction in the tax
liability resulting from a conclusion of certain items and related
current assessment of outstanding tax matters.
Deferred income tax expense (benefit) results from temporary
differences in the recognition of income and expense for tax purposes
and financial statement purposes. The following table lists these
temporary differences and their related tax effect for the years ended
September 30. Dollar amounts are expressed in thousands.
28
<Page>
2002 2001 2000
----------------------------
Deferred loan fees and costs $ (7) 33 (926)
Accrued interest receivable (8) (5) --
Book depreciation in excess of
tax depreciation (34) (155) (21)
Basis difference on investments (81) (8) 10
Loan loss reserves (1,558) 576 (182)
Mark-to-market adjustment 198 (351) (79)
Mortgage servicing rights (997) (4,230) 2,635
Prepaid expenses 11 (12) (20)
Other 187 (164) (168)
----------------------------
$ (2,289) (4,316) 1,249
============================
The tax effect of significant temporary differences representing
deferred tax assets (liabilities) are presented in the following table.
Dollar amounts are expressed in thousands.
2002 2001
-----------------
Deferred income tax assets:
Loan loss reserves $ 2,908 1,350
Book depreciation in excess of tax depreciation 551 517
Unrealized loss on securities available for sale -- 56
Mark-to-market adjustment 263 461
Deferred loan fees and costs 50 43
Other 51 238
-----------------
3,823 2,665
-----------------
Deferred income tax liabilities:
Mortgage servicing rights (577) (1,574)
Accrued interest receivable (8) (16)
Basis difference on investments (352) (433)
Unrealized gain of securities available for sale (290) --
Prepaid expenses (59) (48)
----------------
(1,286) (2,071)
----------------
Net deferred tax asset $ 2,537 594
================
The deferred tax asset is netted against current income taxes
payable in the liability section of the Company's balance sheet.
(12) STOCKHOLDERS' EQUITY
During fiscal 2002, the Company paid quarterly cash dividends on
common stock of $0.15 per share on February 22, 2002, May 24, 2002, and
August 23, 2002, and $0.125 per share on November 30, 2001.
During fiscal 2001, the Company paid quarterly cash dividends on
common stock of $0.125 per share on February 23, 2001, May 25, 2001, and
August 31, 2001, and $0.10 per share on November 24, 2000.
During fiscal 2000, the Company paid quarterly cash dividends on
common stock of $0.10 per share on February 25, 2000, May 26, 2000, and
August 25, 2000, and $0.08 per share on November 26, 1999.
During fiscal 2002, the Company repurchased 112,248 shares of its
own stock with a total value of $1.9 million at the time of repurchase.
During fiscal 2001, 118,611 shares were repurchased with a total value
of $1.8 million at the time of repurchase. Of those, 63,405 shares were
repurchased in conjunction with an issuer tender offer at a price of
$15.00 per share, with a total value of $951,000.
29
<Page>
Basic earnings per share is computed using the weighted average
number of common shares outstanding. The dilutive effect of potential
common shares outstanding is included in diluted earnings per share.
The computations of basic and diluted earnings per share are presented
in the following table. Dollar amounts are expressed in thousands,
except per share data.
Year Ended September 30,
--------------------------------------
2002 2001 2000
--------------------------------------
Net income $ 19,878 16,351 14,721
Basic weighted average shares 8,439,845 8,552,936 8,863,432
Effect of stock options 24,047 56,537 159,577
--------------------------------------
Dilutive potential common shares 8,463,892 8,609,473 9,023,009
Earnings per share:
Basic $ 2.36 1.91 1.66
Dilutive 2.35 1.90 1.63
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 (Note 16).
(13) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements as
administered by Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by the regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under the capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum capital amounts and ratios
(set forth in the table below). The Bank's primary regulatory agency,
the Office of Thrift Supervision ("OTS"), requires that the Bank
maintain minimum ratios of tangible capital (as defined in the
regulations) of 1.5%, core capital (as defined) of 4%, and total risk-
based capital (as defined) of 8%. The Bank is also subject to prompt
corrective action capital requirement regulations set forth by the FDIC.
The FDIC requires the Bank to maintain a minimum of Tier 1, total and
core capital (as defined) to risk-weighted assets (as defined), and of
core capital (as defined) to adjusted tangible assets (as defined).
Management believes that, as of September 30, 2002, the Bank meets all
capital adequacy requirements, to which it is subject.
As of September 30, 2002 and 2001, the most recent guidelines from
the OTS categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the table.
Management does not believe that there are any conditions or events
occurring since notification that would change the Bank's category.
30
<Page>
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
September 30,
------------------
2002 2001
- -------------------------------------------------------------
GAAP capital (Bank only) $102,357 86,483
Adjustment for regulatory capital:
Intangible assets -- (135)
Disallowed servicing asset (284) (718)
Reverse the effect of SFAS No. 115 (440) (38)
------------------
Tangible capital 101,633 85,592
Qualifying intangible assets -- --
------------------
Tier 1 capital (core capital) 101,633 85,592
Qualifying general valuation allowance 4,834 4,147
------------------
Risk-based capital $106,467 89,739
==================
<Table>
<Caption>
As of September 30, 2002
--------------------------------------------------------------
Actual Minimum Required for Minimum Required to be
Capital Adequacy "Well Capitalized"
---------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ ---------------------
Total capital to risk-weighted assets $106,467 13.2% 64,386 >=8% 80,482 >=10%
Core capital to adjusted tangible assets 101,633 10.6% 38,421 >=4% 48,026 >=5%
Tangible capital to tangible assets 101,633 10.6% 14,408 >=1.5% -- --
Tier 1 capital to risk-weighted assets 101,633 12.6% -- -- 48,289 >=6%
</Table
<Table>
<Caption>
As of September 30, 2001
--------------------------------------------------------------
Actual Minimum Required for Minimum Required to be
Capital Adequacy "Well Capitalized"
---------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ ---------------------
Total capital to risk-weighted assets $ 89,739 12.3% 58,531 >=8% 73,164 >=10%
Core capital to adjusted tangible assets 85,592 8.8% 38,721 >=4% 48,401 >=5%
Tangible capital to tangible assets 85,592 8.8% 14,520 >=1.5% -- --
Tier 1 capital to risk-weighted assets 85,592 11.7% -- -- 43,898 >=6%
</Table>
(14) BRANCH SALE
On July 28, 2001, the Bank sold its branch office in Leawood,
Kansas to another financial institution. In addition to the branch
building, the sale included $52 million in customer deposits, on which
the sale price was primarily based. The sale resulted in a pre-tax
gain for the Bank of $4.1 million. This amount has been included as
other income in the accompanying consolidated statements of income.
Since the branch sale was primarily comprised of customer deposit
liabilities, the Bank paid cash to the buyer at settlement. To fund the
sale, the Bank sold two separately identified portfolios of residential
mortgage loans. Pursuant to such sale, during the quarter ended March
31, 2001, the Bank transferred the following residential loan portfolios
from the held for investment category to the held for sale category: 1)
$57 million of fixed rate loans with 15-year original maturities that
were approximately 5 to 6 years old, and 2) $11 million of fixed rate
loans with 30-year original maturities that were approximately 2 years
old. This transfer of loans to the held for sale category and their
subsequent sale was for the express purpose of funding the branch sale.
31
<Page>
(15) EMPLOYEES' RETIREMENT PLAN
Substantially all of the Bank's full-time employees participate in
a 401(k) retirement plan (the "Plan"). The Plan is administered by
American United Life Insurance Company ("AUL"), through which
employees can choose from a variety of retail mutual funds to invest
their fund contributions. Under the terms of the Plan, the Bank makes
monthly contributions for the benefit of each participant in an amount
that matches one-half of the participant's contribution, not to exceed
3% of the participants' monthly base salary, provided that the
participant makes a monthly contribution of at least 1% of his or her
monthly base salary and no greater than 15%. All contributions made by
participants are immediately vested and cannot be forfeited.
Contributions made by the Bank, and related earnings thereon, become
vested to the participants according to length of service requirements
as specified in the Plan. Any forfeited portions of the contributions
made by the Bank and the allocated earnings thereon are used to reduce
future contribution requirements of the Bank. The Plan may be modified,
amended or terminated at the discretion of the Bank.
The Bank's contributions to the Plan amounted to $262,000,
$276,000, and $227,000, for the years ended September 30, 2002, 2001,
and 2000, respectively. These amounts have been included as
compensation and fringe benefits expense in the accompanying
consolidated statements of income.
(16) STOCK OPTION PLAN
The Bank maintains a stock option plan ("Option Plan") through
which options to purchase up to 10% of the number of shares of common
stock originally issued, as adjusted for a 4-for-1 stock split in March
1999 and the stock dividends discussed below, were granted to officers
and employees of the Bank. Options were granted for a period of ten
years. The option price may not be less than 100% of the fair market
value of the shares on the date of the grant. As of September 30, 2002,
the time frame for issuing new option agreements under the Option Plan
had expired.
The following table summarizes Option Plan activity during fiscal
2002, 2001, and 2000. The number of shares and price per share have
been adjusted to reflect the four-for-one stock split in fiscal 1999.
Weighted avg.
Number exercise price Price
Of shares per share per share
-------------------------------------
Options outstanding
at October 1, 1999 359,800 $ 6.82 $ 2.25 - 8.97
Exercised (153,848) (5.88) (5.88)
-------------------------------------
Options outstanding
at September 30, 2000 205,952 7.52 2.25 - 8.97
Exercised (122,452) (7.48) (5.06 - 8.97)
-------------------------------------
Options outstanding
at September 30, 2001 83,500 7.58 2.25 - 8.97
Exercised (28,500) (8.12) (7.50 - 8.97)
-------------------------------------
Options outstanding
at September 30, 2002 55,000 $ 7.31 $ 2.25 - 8.97
=====================================
The weighted average remaining contractual life of options
outstanding at September 30, 2002, 2001 and 2000 were 3.3 years, 4.4
years and 2.9 years, respectively.
The following table provides information regarding the expiration
dates of the stock options outstanding at September 30, 2002.
Number Weighted average
of shares exercise price
-------------------------------------
Expiring on:
December 22, 2002 12,000 $ 2.25
January 23, 2006 8,000 7.63
January 21, 2007 35,000 8.97
-------------------------------------
55,000 $ 7.31
=====================================
32
<Page>
All of the options outstanding at September 30, 200s, are
immediately exercisable in accordance with the vesting schedules
outlined in each stock option agreement.
The following table illustrates the range of exercise prices and
the weighted average remaining contractual lives for options outstanding
under the Option Plan as of September 30, 2002.
<Table>
<Caption>
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Range of remaining exercise exercise
exercise prices Number contractual life price Number price
- -------------------------------------------------------------- ---------------------------
$ 2.25 12,000 0.2 years $ 2.25 12,000 $ 2.25
7.63 8,000 3.3 years 7.63 8,000 7.63
8.97 35,000 4.3 years 8.97 35,000 8.97
--------- ---------
55,000 55,000
========= =========
</Table>
The Company applies Accounting Principles Board Opinion ("APB")
No. 25 in accounting for its Option Plan, under which no compensation
cost has been recognized for stock option awards. For purposes of
computing the pro forma effects of stock option grants under the fair
value accounting method, the fair value of each stock option grant was
estimated on the date of the grant using the Black-Scholes option
pricing model. Had compensation cost for the Option Plan been
determined in accordance with the fair value accounting method
prescribed under SFAS 123, "Accounting for Stock-Based Compensation,"
the Company's net income and net income per share on a pro forma basis
would have been as presented in the following table. Dollar amounts are
expressed in thousands, except per share data.
2002 2001 2000
------------------------------
Net Income:
As reported $ 19,878 16,351 14,721
Pro forma 19,874 16,327 14,691
Basic earnings per share:
As reported $ 2.36 1.91 1.66
Pro forma 2.36 1.91 1.66
Diluted earnings per share:
As reported 2.35 1.90 1.63
Pro forma 2.35 1.90 1.63
(17) SEGMENT INFORMATION
In accordance with SFAS No. 131, 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 years ended September 30, 2002,
2001, and 2000. Dollar amounts are expressed in thousands.
33
<Page>
Year ended Mortgage Other and
September 30, 2002 Banking Banking Eliminations Consolidated
- ------------------------------------------------------------------------
Net interest income $ 39,385 -- 276 39,661
Provision for
loan losses 557 -- -- 557
Other income 6,369 14,425 (8,832) 11,962
General and admin.
Expenses 12,035 11,809 (2,229) 21,615
Income tax expense 11,267 1,007 (2,701) 9,573
-------------------------------------------------
Net income $ 21,895 1,609 (3,626) 19,878
=================================================
Total assets $972,571 347 5,304 978,222
=================================================
Year ended Mortgage Other and
September 30, 2001 Banking Banking Eliminations Consolidated
- -----------------------------------------------------------------------
Net interest income $ 35,249 -- 267 35,516
Provision for
loan losses 460 -- -- 460
Other income 7,720 13,904 (9,630) 11,994
General and admin.
Expenses 10,936 11,825 (2,342) 20,419
Income tax expense 12,629 832 (3,181) 10,280
------------------------------------------------
Net income $ 18,944 1,247 (3,840) 16,351
================================================
Total assets $970,176 311 1,569 972,056
=================================================
Year ended Mortgage Other and
September 30, 2000 Banking Banking Eliminations Consolidated
- -----------------------------------------------------------------------
Net interest income $ 35,570 -- 268 35,838
Provision for
loan losses 600 -- -- 600
Other income 6,694 9,366 (6,651) 9,409
General and admin.
Expenses 8,482 10,191 1,447 20,120
Income tax expense 13,273 (330) (3,137) 9,806
------------------------------------------------
Net income $ 19,909 (495) (4,693) 14,721
================================================
Total assets $983,127 366 1,032 984,525
=================================================
(18) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank has entered into
financial agreements with off-balance-sheet risk to meet the financing
needs of its customers. These financial instruments include commitments
to extend credit, standby letters of credit and financial guarantees.
Those instruments involve, to varying degrees, elements of credit risk,
interest rate risk, and liquidity risk, which may exceed the amount
recognized in the consolidated financial statements. The contract
amounts or notional amounts of those instruments express the extent of
involvement the Bank has in particular classes of financial instruments.
With regard to financial instruments for commitments to extend
credit, standby letters of credit, and financial guarantees, the Bank's
exposure to credit loss because of non-performance by another party is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
As of September 30, 2002, the Bank had outstanding commitments to
originate $38.0 million in commercial real estate loans, $90.6 million
of fixed rate residential first mortgage loans and $23.5 million of
adjustable rate residential first mortgage loans. Commercial real
estate loan commitments have approximate average committed rates of
6.0%. Residential mortgage loan commitments have an approximate average
committed rate of 5.9% and approximate average fees and discounts of
0.2%. The interest rate commitments on residential loans generally
expire 60 days after the commitment date. Interest rate commitments on
commercial real estate loans have varying terms to expiration.
34
<Page>
At September 30, 2002 and 2001, the Bank had commitments to sell
loans of approximately $142.8 million and $105.0 million, respectively.
These instruments contain an element of risk in the event that other
parties are unable to meet the terms of such agreements. In such event,
the Bank's loans receivable held for sale would be exposed to market
fluctuations. Management does not expect any other party to default on
its obligations and, therefore, does not expect to incur any costs due
to such possible default. Any unrealized loss on these commitment
obligations is considered in conjunction with the Bank's lower of cost
or market valuation on its loans receivable held for sale.
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying values and fair values of
the Company's financial instruments presented in accordance with SFAS
No. 107. Dollar amounts are expressed in thousands.
<Table>
<Caption>
September 30, 2002 September 30, 2001
-------------------------- -------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------------------------- -------------------------
Financial Assets:
Cash and cash equivalents $ 4,168 4,168 16,043 16,043
Securities available for sale 14,635 14,635 5,014 5,014
Stock in Federal Home Loan Bank 15,173 15,173 13,676 13,676
Mortgage-backed securities:
Available for sale 2,684 2,684 2,406 2,406
Held to maturity 1,483 1,544 6,864 7,462
Loans receivable:
Held for sale 73,591 76,855 92,864 96,681
Held for investment 839,284 890,206 803,606 853,995
Mortgage servicing rights 2,957 2,957 8,008 8,008
Lending commitments on mortgage loans
held for sale - fixed rate (1) 2,298 2,298 -- --
Lending commitments on mortgage loans
held for sale - floating rate (1) 294 294 -- --
Financial Liabilities:
Cash overdraft 7,764 7,764 -- --
Customer deposit accounts 549,437 542,411 576,040 561,293
Brokered deposit accounts -- -- 9,997 10,010
Advances from FHLB 295,192 298,512 273,471 280,351
Commitments to sell loans (1) 1,959 1,959 -- --
</Table>
<Table>
<Caption>
September 30, 2002 September 30, 2001
-------------------------- -------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------------------------- -------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 39,337 80 94,516 1,552
Lending commitments - floating
rate 4,297 137 11,362 221
Commitments to sell loans -- -- 104,988 1,893
</Table>
(1) In March 2002, the Financial Accounting Standards Board
cleared guidance on when commitments are considered derivatives in
accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Such
guidance stated that commitments to originate loans held for sale and
commitments to sell loans are considered derivatives and should be
recorded in the financial statements at fair value. The guidance was
effective for the Company's quarter ended September 30, 2002. As a
result of the implementation of this issue, the Company recorded an
asset of $2.6 million, a liability of $2.0 million, and a net gain of
$633,000 in the consolidated financial statements for the year ended
September 30, 2002.
The fair value estimates presented are based on pertinent
information available to management as of September 30, 2002 and 2001.
Although management is not aware of any factors that would significantly
affect the estimated fair values, such amounts have not been
comprehensively revalued for purposes of these consolidated financial
statements since that date. Therefore, current estimates of fair value
may differ significantly from the amounts presented above.
35
<Page>
(20) INVESTMENT IN LLC
During the year ended September 30, 2002, the Company became a
partner in NBH, LLC, which was formed for the purpose of purchasing and
developing eighty-six acres of vacant land in Platte County, Missouri.
The Company's initial investment in this partnership will be
approximately $2.3 million, of which $200,000 was invested as of
September 30, 2002.
(21) MERGER
On September 5, 2002, NASB Financial, Inc. and CBES Bancorp, Inc.
("CBES") signed a definitive agreement pursuant to which CBES will be
merged with and into a wholly-owned subsidiary of NASB Financial, Inc.
formed solely to facilitate the transaction. The agreement provides
that upon the effective date of the merger, each stockholder of CBES
will receive $17.50 in cash for each share of CBES common stock owned by
such shareholder. The transaction value is estimated at $15.4 million.
As of September 30, 2002, CBES had assets of $109.8 million and equity
of $14.2 million. For the twelve month period ended September 30, 2002,
CBES had a pretax net loss of $872,000. The agreement has been approved
by the boards of directors of both NASB Financial, Inc. and CBES
Bancorp, Inc., the stockholders of CBES and the regulatory authorities.
The merger is expected to close on December 20, 2002.
(22) PARENT COMPANY FINANCIAL INFORMATION
NASB Financial, Inc.
Balance Sheets
<Table>
<Caption
September 30,
-----------------------
2002 2001
-----------------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 404 6,431
Securities available for sale 2,775 2,530
Accrued dividends receivable 23 23
Investment in Subsidiary 102,357 86,483
Real estate owned 3,403 --
Investment in LLC 200 --
Income taxes receivable 232 30
Other assets 52 --
-----------------------
$ 109,446 95,497
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ -- --
Stockholders' equity
Common stock 1,470 1,466
Additional paid-in capital 15,862 15,635
Retained earnings 108,367 93,340
Treasury stock (16,716) (14,854)
Accumulated other comprehensive loss 463 (90)
-----------------------
Total stockholders' equity 109,446 95,497
-----------------------
$ 109,446 95,497
=======================
</Table>
36
<Page>
NASB Financial, Inc.
Statements of Income
<Table>
<Caption>
Years Ended September 30,
------------------------------------
2002 2001 2000
------------------------------------
(Dollars in thousands)
Income:
Income from Subsidiary $ 20,221 16,221 14,597
Dividend income 275 275 275
------------------------------------
Total income 20,496 16,496 14,872
------------------------------------
Expenses:
Professional fees 81 30 30
Real estate owned expense 717 -- --
Other expense 35 33 39
------------------------------------
Total general expense 833 63 69
------------------------------------
Income before income tax expense 19,663 16,433 14,803
------------------------------------
Income tax (benefit) expense (215) 82 82
------------------------------------
Net income $ 19,878 16,351 14,721
====================================
</Table>
NASB Financial, Inc.
Statements of Cash Flows
<Table>
<Caption>
Years ended September 30,
-----------------------------
2002 2001 2000
-----------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 19,878 16,351 14,721
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed earnings of subsidiary (20,221) (16,221) (14,597)
Change in income taxes receivable (296) (5) 27
Other (51) -- --
----------------------------
Net cash (used in) provided by operating activities (690) 125 151
Cash flows from investing activities:
Dividends received from subsidiary 2,000 10,860 7,900
Real estate owned capital improvements (655) -- --
Investment in LLC (200) -- --
----------------------------
Net cash provided by investing activities 1,145 10,860 7,900
</Table>
37
<Page>
NASB Financial, Inc.
Statements of Cash Flows (continued)
<Table>
<Caption>
Years ended September 30,
-----------------------------
2002 2001 2000
-----------------------------
(Dollars in thousands)
Cash flows from financing activities:
Cash dividends paid (4,851) (4,066) (3,370)
Stock options exercised 231 916 904
Repurchase of common stock (1,862) (1,776) (7,438)
-----------------------------
Net cash used in financing activities (6,482) (4,926) (9,904)
-----------------------------
Net increase (decrease) in cash and cash equivalents (6,027) 6,059 (1,853)
Cash and cash equivalents at beginning of period 6,431 372 2,225
-----------------------------
Cash and cash equivalents at end of period $ 404 6,431 372
=============================
</Table>
38
<Page>
INDEPENDENT AUDITORS' REPORT
- ----------------------------------------------------------------------
The Board of Directors and Stockholders
NASB Financial, Inc., and Subsidiary
We have audited the accompanying consolidated balance sheets of
NASB Financial, Inc. and Subsidiary (the "Company") as of September
30, 2002 and 2001, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended September 30, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the Company
as of September 30, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
November 26, 2002
Kansas City, Missouri
39
<Page>
SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS
- ----------------------------------------------------------------------
The following tables include certain information concerning the
quarterly consolidated results of operations of the Company at the
dates indicated. Dollar amounts are expressed in thousands except per
share data.
<Table>
<Caption>
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------
Interest income $ 19,373 17,968 17,492 17,864 72,667
Interest expense 10,204 8,343 7,507 6,952 33,006
--------------------------------------------------------
Net interest income 9,139 9,625 9,985 10,912 39,661
Provision for loan losses 341 150 18 48 557
--------------------------------------------------------
Net interest income after
provision for loan losses 8,798 9,475 9,967 10,864 39,104
Other income 5,060 2,262 1,159 3,481 11,962
General and administrative
expenses 5,482 5,084 5,181 5,868 21,615
--------------------------------------------------------
Income before income taxes 8,376 6,653 5,945 8,477 29,451
Income tax expense 3,216 2,627 2,203 1,527 9,573
--------------------------------------------------------
Net income $ 5,160 4,026 3,742 6,950 19,878
========================================================
Earnings per share $ 0.61 0.48 0.44 0.83 2.36
========================================================
Average shares outstanding 8,510 8,413 8,419 8,420 8,440
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------
Interest income $ 21,895 21,777 21,344 20,293 85,309
Interest expense 13,045 13,056 12,734 10,958 49,793
--------------------------------------------------------
Net interest income 8,850 8,721 8,610 9,335 35,516
Provision for loan losses 150 150 150 10 460
--------------------------------------------------------
Net interest income after
provision for loan losses 8,700 8,571 8,460 9,325 35,056
Other income 1,021 1,063 4,839 5,071 11,994
General and administrative
expenses 4,781 5,097 5,255 5,286 20,419
--------------------------------------------------------
Income before income taxes 4,940 4,537 8,044 9,110 26,631
Income tax expense 1,929 1,746 3,097 3,508 10,280
--------------------------------------------------------
Net income $ 3,011 2,791 4,947 5,602 16,351
========================================================
Earnings per share $ 0.35 0.33 0.58 0.65 1.91
========================================================
Average shares outstanding 8,540 8,557 8,557 8,558 8,553
</Table>
BOARD OF DIRECTORS OF NASB FINANCIAL INC., AND NORTH AMERICAN SAVINGS
BANK, F.S.B.
- ----------------------------------------------------------------------
DAVID H. HANCOCK
Chairman, Chief Executive Officer
NASB Financial, Inc. and North American Savings Bank
KEITH B. COX
President
NASB Financial, Inc. and North American Savings Bank
JAMES A. WATSON
Executive Vice President, North American Savings Bank
FREDERICK V. ARBANAS
Retired President, Fred Arbanas, Inc. National Yellow Pages Service
Jackson County Legislature
Kansas City, Missouri
W. RUSSELL WELSH
President & CEO, Polsinelli, Shalton & Welte
Kansas City, Missouri
BARRETT BRADY
President, J.C. Nichols Company
Kansas City, Missouri
LINDA S. HANCOCK
Linda Smith Hancock Interiors
Kansas City, Missouri
40
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OFFICERS OF NASB FINANCIAL, INC.
- --------------------------------------------------------------------
DAVID H. HANCOCK
Chairman, President and Chief Executive Officer
KEITH B. COX
President
RHONDA NYHUS
Vice President and Treasurer
NORMA RIECK
Corporate Secretary
JAMES A. WATSON
Vice President
WADE HALL
Vice President
BRAD LEE
Vice President
JOHN M. NESSELRODE
Vice President
JOE O'FLAHERTY
Vice President
DENA SANDERS
Vice President
BRUCE THIELEN
Vice President
OFFICERS OF NORTH AMERICAN SAVINGS BANK, F.S.B.
- --------------------------------------------------------------------
DAVID H. HANCOCK
Chairman
Chief Executive Officer
KEITH B. COX
President
JAMES A. WATSON
Executive Vice President
Operations and Branch Admin.
RHONDA NYHUS
Senior Vice President
Chief Financial Officer
NORMA RIECK
Corporate Secretary
WADE HALL
Senior Vice President, Commercial Lending
BRAD LEE
Senior Vice President, Construction Lending
JOHN M. NESSELRODE
Senior Vice President, Chief Investment Officer
JOE O'FLAHERTY
Senior Vice President, Residential Lending
DENA SANDERS
Senior Vice President, Retail Banking
BRUCE THIELEN
Senior Vice President, Residential Lending
MIKE ANDERSON
Vice President, Construction Lending
SHERRIE EIMER
Vice President, Branch Operations
CATHLEEN GWIN
Vice President, Residential Lending
JENNIE HARRIS
Vice President, Residential Lending
JEFF JACKSON
Vice President, Information Technology
LISA LILLARD
Vice President, Commercial Lending
JOE MORRIS
Vice President, Residential Lending
RON REAGAN
Vice President, Residential Lending
LISA M. REYNOLDS
Vice President, Construction Lending
RON STAFFORD
Vice President, Residential Lending
CHERYL THOMPSON
Vice President, Construction Lending
NEIL VOLKMANN
Vice President, Residential Lending
BRANCH OFFICES
- ----------------------------------------------------------------------
Headquarters
12498 South 71 Highway
Grandview, Missouri
646 N. 291 Highway
Lee's Summit, Missouri
920 North Belt
St. Joseph, Missouri
3011-B North Belt
St. Joseph, Missouri
11221 East 23rd Street
Independence, Missouri
2002 East Mechanic
Harrisonville, Missouri
8501 North Oak Trafficway
Kansas City, Missouri
7012 NW Barry Road
Kansas City, Missouri
RESIDENTIAL LENDING
949 NE Columbus
Lee's Summit, Missouri
3322 S. Campbell - Suite W
Springfield, Missouri
12900 Metcalf - Suite 140
Overland Park, Kansas
12800 Corporate Hill Dr.
St. Louis, Missouri
1014 Country Club Road
St. Charles, Missouri
One Hallbrook Place
11150 Overbrook Road, Suite 225
Leawood, Kansas
CONSTRUCTION LENDING
12125-D Blue Ridge Ext.
Grandview, Missouri
LOAN ADMINISTRATION
12125-D Blue Ridge Ext.
Grandview, Missouri
41
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INVESTOR INFORMATION
- -------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS:
The Annual Meeting of Stockholders will be held on Tuesday,
January 28, 2003, at 8:30 a.m. in the lobby of North American Savings
Bank, 12498 South 71 Highway, Grandview.
ANNUAL REPORT ON 10-K:
Copies of NASB Financial, Inc. Form 10-K Report to the Securities
and Exchange Commission are available without charge upon written
request to Keith B. Cox, President, NASB Financial, Inc., 12498 South
71 Highway, Grandview, Missouri 64030.
TRANSFER AGENT:
UMB Bank, n.a., P.O. Box 64, Kansas City, Missouri 64141
STOCK TRADING INFORMATION:
The common stock of NASB Financial, Inc. and subsidiaries is
traded in the over-the-counter market. The Company's symbol is NASB.
INDEPENDENT AUDITORS:
Deloitte & Touche LLP, 1010 Grand Avenue, Suite 400, Kansas City,
Missouri 64106
SHAREHOLDER AND FINANCIAL INFORMATION:
Contact Keith B. Cox, NASB Financial, Inc., 12498 South 71
Highway, Grandview, Missouri 64030, (816) 765-2200.
COMMON STOCK PRICES AND DIVIDENDS
- -------------------------------------------------------------------
At September 30, 2002, stockholders held 8,420,342 outstanding
shares of NASB Financial, Inc. common stock. The Company paid cash
dividends of $0.10 per share were paid in February, May, and August and
November of 2000. Cash dividends of $0.125 per share were paid in
February, May, August and November of 2001. Cash dividends of $0.15
per share were paid in February, May and August of 2002.
The table below reflects the Bank's high and low bid prices. The
quotations represent intra-dealer quotations without retail markups,
markdowns or commissions, and do not necessarily represent actual
transactions.
Fiscal 2002 Fiscal 2001
---------------- ----------------
Quarter ended High Low High Low
- -----------------------------------------------------------
December 31 $ 17.00 14.50 14.50 12.00
March 31 20.51 15.40 12.81 11.63
June 30 24.64 20.50 14.75 11.88
September 30 24.19 19.25 15.75 12.76
42
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