NASB FINANCIAL, INC.
2007 ANNUAL REPORT
- -------------------------------------------------------------------
CONTENTS
2 Letter to Shareholders
4 Selected Consolidated Financial and Other Data
5-15 Management's Discussion and Analysis of Financial Condition and
Results of Operations
16-44 Consolidated Financial Statements
45 Report of Independent Registered Public Accounting Firm
46 Summary of Unaudited Quarterly Operating Results and Listing
of Directors
47 Listing of Officers and Other Disclosures
48 Listing of Branch Offices and Investor Information
49 Common Stock Prices and Dividends
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
2007 2006 2005 2004 2000 1990
---------------------------------------------------------------
Dollars in thousands, except per share data
For the year ended September 30:
Net interest income $ 41,679 46,661 51,299 53,044 35,838 7,983
Net interest spread 2.53% 2.87% 3.47% 4.14% 3.71% 1.99%
Other income $ 21,198 24,524 28,512 21,813 9,409 2,774
General and administrative expenses 36,329 37,248 38,851 34,602 20,120 8,169
Net income (loss) 15,319 20,768 25,826 25,156 14,721 (369)
Basic earnings per share 1.89 2.47 3.06 2.98 1.66 (0.18)
Cash dividends paid 7,337 9,468 14,158 12,262 3,370 --
Dividend payout ratio 47.90% 45.59% 54.82% 48.74% 22.89% --
At year end:
Assets $ 1,506,483 1,524,796 1,556,344 1,361,888 984,525 388,477
Loans 1,316,592 1,338,171 1,320,644 1,114,569 914,012 180,348
Investment securities 80,881 97,634 129,970 171,791 20,451 179,599
Customer and brokered deposit accounts 855,536 851,042 802,694 683,740 621,665 333,634
Stockholder's equity 149,392 156,572 148,887 138,991 83,661 16,772
Book value per share 18.99 18.82 17.65 16.44 9.84 1.83
Basic shares outstanding (in thousands) 7,868 8,319 8,437 8,455 8,500 9,148
Other financial data:
Return on average assets 1.01% 1.35% 1.77% 2.04% 1.63% (0.20)%
Return on average equity 10.01% 13.60% 17.94% 18.88% 18.12% (2.50)%
Stockholder's equity to assets 9.92% 10.27% 9.57% 10.21% 8.50% 4.30%
Average shares outstanding (in thousands) 8,101 8,397 8,451 8,456 8,863 8,116
Selected year end information:
Stock price per share: Bid $ 35.76 39.79 39.57 38.16 14.50 1.03
Ask 35.80 39.90 40.00 39.02 15.50 1.13
</Table>
Per share amounts have been adjusted to give retroactive effect to the
four-for-one stock split, which occurred during the fiscal year ended
September 30, 1999.
1
<Page>
(LOGO)
December 1, 2007
Dear Shareholder:
I am in the unfortunate position of reporting a second consecutive
year of reduced results for your company. Similar to last year, I'll
note our results compared to recent years:
Previous Five Years'
--------------------
Fiscal 2007 Average
----------- -------
Net income (in thousands) $ 15,319 $ 23,119
Net interest income (in thousands) 41,679 47,924
Return on average equity 10.01% 16.97%
Return on average assets 1.01% 1.77%
The past year has been particularly difficult for NASB. While I
am aware that most financial institutions have experienced lower
returns, we don't expect to be graded on a curve, and are disappointed
in these results.
While we have continued to focus on the higher quality borrowers,
we are predominantly a real estate lender, and no one in this space has
proved to be immune from the difficulties presented by the recent
environment. The following comments are intended to provide our
shareholders with information as to how we have positioned ourselves,
and to what degree the highly publicized residential real estate
problems have impacted this company.
First, you will note that we show ownership of mortgage-backed
securities totaling approximately $81 million at year-end. Unrelated
to the securities that have received so much publicity, and caused
tremendous losses (both $ and jobs) at some institutions, our mortgage-
backed assets are guaranteed by the government-sponsored enterprises
(Fannie Mae and Freddie Mac).
The other real estate sectors upon which we have focused are
described on page six and in footnote five. We have committed
approximately twenty-four percent of our total assets to residential
development/construction lending. These loans are primarily to local
builders with whom we have long-standing relationships, and are, for
the most part, considered to be the preeminent companies in the Kansas
City residential construction market. The few loans we have outside of
our area are mostly participations in developments that are sponsored
by national builders that are well capitalized, and expose us to areas
that have more growth than the Kansas City market.
While we are experiencing generally favorable results from these
loans, sales have slowed considerably, and many builders are being
challenged more than in previous years. According to the KC Area
Realtors Association, resales of existing homes have recently declined
by ~5%, and new home sales by ~30%. There is approximately a nine-
month supply of new and used homes available, greater than the five to
six months typically on the market. As new construction slows, this
"excess" supply will diminish, but there is substantial debate whether
the return to normal conditions will take several months, or a
substantially longer period.
As additionally described on page six and in footnote five, we
have devoted approximately twenty-seven percent of our assets to
permanent residential lending. Similar to lenders' experience
throughout the United States, our delinquencies and foreclosures have
increased during the past year; however, we expect our experience to
remain acceptable in this area. For the past fifteen years we have
originated residential loans to individuals that do not meet agency
standards, but have substantial equity in their home, have sufficient
documentable income with which to meet their mortgage obligations, or
have other characteristics that make us think satisfactory repayment is
likely. Over 95% of our portfolio is secured by first liens on the
property. We have generally had higher standards for the second
mortgages we have originated. For the most part, this strategy has
been successful, and we have continued to not experience unacceptable
losses in this area.
2
<Page>
The other area of our emphasis is commercial real estate lending.
This sector comprises approximately thirty-one percent of our assets,
and consists of loans secured by a variety of property types, generally
with long-term leases to substantial tenants. In almost every
instance, we have the additional security of full recourse to one or
more substantial individuals. Our experience to date has been very
favorable.
As stated above, no active real estate lender can be immune to the
recent conditions in our various markets. Accordingly, as noted in the
accompanying financial statements, we increased our loan loss reserves
through a provision of $1.6 million during the past year. We will
continue to adjust our reserves in the coming year as dictated by our
experiences, and by market conditions.
In addition to the challenging real estate markets, in the past
year we have continued to face an unfavorable interest rate structure.
At September 30, 2006, the spread between the three-month Treasury
bill, and the ten-year note was a negative twenty-eight basis points.
This spread was slightly positive at June 30, 2007, and the recent
reductions in targets by the Federal Reserve Board caused this spread
to be a positive 65 basis points at our year-end. While not a
historically large difference, this change does provide some relief to
lenders who typically create liabilities for periods shorter than loan
terms. A large part of the better results in previous years, noted at
the beginning of this letter, were achieved in a period when the
referenced spread was in excess of 200 basis points.
To meet these many challenges, we have an effective infrastructure
and an experienced management team. We are committed to controlling
our expenses, continuing to focus on maintaining high asset quality,
and to making decisions that will ultimately enhance our shareholders'
value. We are encouraged by the opportunities that await us in 2008,
and, again this year, appreciate your continued support.
Sincerely,
/s/ David H. Hancock
David H. Hancock
Board Chairman
3
<Page>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables include selected information concerning the
financial position of NASB Financial, Inc., (including consolidated
data from the operations of subsidiaries) for the years ended September
30. Dollar amounts are expressed in thousands, except per share data.
<Table>
<Caption>
SUMMARY STATEMENT OF OPERATIONS 2007 2006 2005 2004 2003
- -----------------------------------------------------------------------------------------
Interest income $ 103,818 99,132 83,773 73,128 72,624
Interest expense 62,139 52,521 32,474 20,084 23,620
------------------------------------------------
Net interest income 41,679 46,611 51,299 53,044 49,004
Provision for loan losses 1,634 745 522 465 538
------------------------------------------------
Net interest income after provision
for loan losses 40,045 45,866 50,777 52,579 48,466
Other income 21,198 24,524 28,512 21,813 16,235
General and administrative expenses 36,329 37,248 38,851 34,602 25,733
------------------------------------------------
Income before income tax expense 34,914 33,142 40,438 39,790 38,968
Income tax expense 9,595 12,374 14,612 14,634 14,999
------------------------------------------------
Net income $ 15,319 20,768 25,826 25,156 23,969
================================================
Earnings per share:
Basic $ 1.89 2.47 3.06 2.98 2.84
Diluted 1.88 2.46 3.05 2.97 2.84
Average shares outstanding (in thousands) 8,101 8,397 8,451 8,456 8,434
</Table>
<Table>
<Caption>
SUMMARY BALANCE SHEET 2007 2006 2005 2004 2003
- -----------------------------------------------------------------------------------------
Assets:
Bank deposits $ 18,847 6,511 27,523 10,081 20,640
Stock in Federal Home Loan Bank 22,307 24,043 22,390 17,808 15,606
Securities 80,881 97,584 129,970 171,791 11,160
Loans receivable held for sale, net 47,233 50,462 94,130 246,468 168,292
Loans receivable held for
Investment, net 1,269,359 1,287,709 1,226,514 868,101 853,414
Non-interest earning assets 67,856 58,487 55,817 47,639 38,247
-------------------------------------------------
Total assets $1,506,483 1,524,796 1,556,344 1,361,888 1,107,359
=================================================
Liabilities:
Customer & brokered deposit accounts $ 855,536 851,042 802,694 683,740 654,688
Advances from Federal Home Loan Bank 458,933 499,357 465,907 367,341 308,088
Subordinated debentures 25,774 -- -- -- --
Securities sold under agreements to
repurchase -- -- 122,000 159,100 --
Non-interest costing liabilities 16,848 17,825 16,856 12,716 17,149
-------------------------------------------------
Total liabilities 1,357,091 1,368,224 1,407,457 1,222,897 979,925
Stockholders' equity 149,392 156,572 148,887 138,991 127,434
-------------------------------------------------
Total liabilities and
stockholders' equity $1,506,483 1,524,796 1,556,344 1,361,888 1,107,359
=================================================
Book value per share $ 18.99 18.82 17.65 16.44 15.09
=================================================
OTHER DATA 2007 2006 2005 2004 2003
-------------------------------------------------
Loans serviced for others $ 84,735 101,076 107,131 118,663 178,197
Number of full service branches 9 8 8 8 8
Number of employees 312 362 441 429 378
Shares outstanding (in thousands) 7,868 8,319 8,437 8,455 8,443
</Table>
4
<Page>
GENERAL
NASB Financial, Inc. ("the Company") was formed in April 1998 to
become a unitary thrift holding company of North American Savings Bank,
F.S.B. ("the Bank" or "North American"). The Company's principal
business is to provide banking services through the Bank.
Specifically, the Bank obtains savings and checking deposits from the
public, then uses those funds to originate and purchase real estate
loans and other loans. The Bank also purchases mortgage-backed
securities ("MBS") and other investment securities from time to time as
conditions warrant. In addition to customer deposits, the Bank obtains
funds from the sale of loans held-for-sale, the sale of securities
available-for-sale, repayments of existing mortgage assets, and
advances from the Federal Home Loan Bank ("FHLB"). The Bank's primary
sources of income are interest on loans, MBS, and investment securities
plus customer service fees and income from lending activities.
Expenses consist primarily of interest payments on customer deposits
and other borrowings and general and administrative costs.
The Bank operates nine deposit branch locations, three residential
loan origination branch offices, and one residential construction loan
origination office, primarily in the greater Kansas City area. The
Bank also operates one commercial real estate loan origination office
at it's headquarters in Grandview, Missouri. Consumer loans are also
offered through the Bank's branch network. Customer deposit accounts
are insured up to allowable limits by the Deposit Insurance Fund
("DIF"), 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 all-inclusive. 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.
5
<Page>
FINANCIAL CONDITION
Total assets as of September 30, 2007, were $1,506.5 million, a
decrease of $18.3 million from the prior year-end. Average interest-
earning assets decreased $18.1 million from the prior year to $1,462.0
million.
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, 2007, the
Bank originated $1,001.7 million in mortgage loans held for sale,
$401.5 million in mortgage loans held for investment, and $9.1 million
in other loans. This total of $1,412.3 million in loan originations
was a decrease of $60.1 million over the prior fiscal year.
Loans held for sale as of September 30, 2007, were $47.2 million,
and consisted entirely of 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,
2007, was $1,277.5 million, a decrease of $18.2 million from September
30, 2006. This decrease related primarily to the Bank's construction
and development portfolio and resulted from a general slowdown in the
residential construction market. During fiscal 2007, total
originations and purchases of mortgage loans and other loans held for
investment were $410.7 million. The gross balance of loans on business
properties was $490.0 million at September 30, 2007, compared to $482.0
million as of the previous year-end. The gross balance of construction
and development loans was $476.1 million at September 30, 2007, a
decrease of $29.9 million.
The balance of mortgage servicing rights at September 30, 2007,
was $911,000, a decrease of $178,000 from September 30, 2006.
Originated mortgage servicing rights of $6,000 were capitalized during
the year ended September 30, 2007. The total outstanding balance of
mortgage loans serviced for others was $84.7 million, a decrease of
$16.3 million from the prior fiscal year-end.
The following graphs summarize the Company's total assets as of
September 30, 2007 and 2006.
Total Assets - Fiscal 2007
Percent of
Asset Category Total Assets
- -------------- -------------
Permanent loans on business properties 31%
Permanent loans on residential properties 27%
Construction and development loans 24%
Cash and investments 9%
Other loans 5%
Other non-earning assets 4%
------
100%
======
6
<Page>
Total Assets - Fiscal 2006
Percent of
Asset Category Total Assets
- -------------- -------------
Permanent loans on business properties 31%
Permanent loans on residential properties 27%
Construction and development loans 24%
Cash and investments 9%
Other loans 5%
Other non-earning assets 4%
------
100%
======
Total liabilities were $1,357.1 million at September 30, 2007, a
decrease of $11.1 million from the previous year. Average interest-
costing liabilities during fiscal year 2006 were $1,359.7 million, a
decrease of $13.3 million from fiscal 2006.
Total customer deposit accounts at September 30, 2007, were $722.1
million, a decrease of $697,000 from the prior year-end. The total
change in customer deposits was comprised of a decrease of $7.4 million
in savings accounts and a decrease of $1.4 million in money market
demand accounts, offset by increases of $6.9 million in demand deposit
accounts and $1.2 million in certificates of deposit. Additionally,
the Company held a total of $133.4 million in brokered deposits at
September 30, 2007, an increase of $5.2 million from September 30,
2006. The average interest rate on customer and brokered deposits at
September 30, 2007, was 4.30%, an increase of 32 basis points from the
prior year-end. The average balance of customer and brokered deposits
during fiscal 2007 was $819.5 million, a decrease of $47.8 million from
fiscal 2006.
Advances from the FHLB were $458.9 million at September 30, 2007,
a decrease of $40.4 million from the prior fiscal year-end. During
fiscal year 2007, the Bank borrowed $353.7 million of new advances and
made $393.8 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.
Subordinated debentures were $25.8 million as of September 30,
2007. Such debentures resulted from the issuance of pooled Trust
Preferred Securities through the Company's wholly owned statutory
trust, NASB Preferred Trust I. The Trust used the proceeds from the
offering to purchase a like amount of the Company's subordinated
debentures. The debentures, which have a variable rate of 1.65% over
the 3-month LIBOR and a 30-year term, are the sole assets of the Trust.
The debentures are callable, in whole or in part, after five years of
the issuance date.
During the year ended September 30, 2007, the Company repurchased
a total of 451,028 shares of its common stock at a cost of $16.4
million. Also during fiscal 2007, the Company paid a total of $7.3
million in cash dividends to its stockholders.
7
<Page>
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 2007, average interest-earning assets exceeded
average interest-costing liabilities by $102.3 million, which was 6.7%
of average total assets. In fiscal year 2006, average interest-earning
assets exceeded average interest-costing liabilities by $107.1 million,
which was 7.0% of average total assets.
The net interest spread (earning yield less costing rate) for the
fiscal year ended September 30, 2007, was 2.53%, a decrease of 34 basis
points from the prior year. The net interest spread for the fiscal
year ended September 30, 2006, was 2.87%, a decrease of 60 basis points
from the prior year. The downward trend in net interest margin is a
result of various factors, including, but not limited to, generally
rising interest rates and a flattening treasury yield curve.
Management believes that the effect of these economic factors could
cause this trend to continue, but is partially mitigated by the large
percentage of assets held in adjustable rate instruments.
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 2007 9/30/07
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
----------------------------------------
Interest-earning assets:
Loans receivable $ 1,339,370 99,067 7.40% 7.15%
Mortgage-backed securities 89,972 3,157 3.51% 4.19%
Investments 25,145 1,254 4.99% 4.25%
Bank deposits 7,506 340 4.53% 4.27%
----------------------------------------
Total earning assets 1,461,993 103,818 7.10% 6.90%
-----------------------------
Non-earning assets 63,799
----------
Total $ 1,525,792
==========
Interest-costing liabilities:
Customer checking and savings
deposit accounts $ 169,264 2,036 1.20% 1.20%
Customer and brokered
certificates of deposit 650,273 31,476 4.84% 5.09%
FHLB advances 512,341 26,811 5.23% 5.08%
Subordinated debentures 20,269 1,421 7.01% 7.01%
Repurchase agreements 7,546 395 5.23% --%
----------------------------------------
Total costing liabilities 1,359,693 62,139 4.57% 4.62%
-----------------------------
Non-costing liabilities 12,668
Stockholders' equity 153,431
----------
Total $ 1,525,792
==========
Net earning balance $ 102,300
==========
Earning yield less costing rate 2.53% 2.28%
===================
Average interest-earning
assets $ 1,461,993
==========
Net interest 41,679
========
Net yield spread on avg.
Interest-earning assets 2.85%
========
As of
Fiscal 2006 9/30/06
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
--------------------------------------
Interest-earning assets:
Loans receivable $ 1,336,590 93,830 7.02% 7.16%
Mortgage-backed securities 112,201 4,163 3.71% 4.26%
Investments 23,417 900 3.84% 4.26%
Bank deposits 7,929 239 3.01% 4.81%
--------------------------------------
Total earning assets 1,480,137 99,132 6.70% 6.91%
-----------------------------
Non-earning assets 57,259
--------
Total $ 1,537,396
========
Interest-costing liabilities:
Customer checking and savings
deposit accounts $ 184,180 1,968 1.07% 1.05%
Customer and brokered
certificates of deposit 683,167 27,978 4.10% 4.74%
FHLB advances 481,422 21,791 4.53% 5.21%
Repurchase agreements 24,231 784 3.24% --%
--------------------------------------
Total costing liabilities 1,373,000 52,521 3.83% 4.43%
-----------------------------
Non-costing liabilities 12,468
Stockholders' equity 151,928
--------
Total $ 1,537,396
========
Net earning balance $ 107,137
========
Earning yield less costing rate 2.87% 2.48%
===================
Average interest-earning
assets $ 1,480,137
========
Net interest 46,611
========
Net yield spread on avg.
Interest-earning assets 3.15%
========
As of
Fiscal 2005 9/30/05
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
--------------------------------------
Interest-earning assets:
Loans receivable $ 1,218,854 77,267 6.34% 6.50%
Mortgage-backed securities 151,686 5,653 3.73% 4.26%
Investments 21,406 562 2.63% 1.40%
Bank deposits 10,357 291 2.81% 3.10%
--------------------------------------
Total earning assets 1,402,303 83,773 5.97% 6.17%
-----------------------------
Non-earning assets 50,065
--------
Total $ 1,452,368
========
Interest-costing liabilities:
Customer checking and savings
deposit accounts $ 199,411 1,557 0.78% 0.99%
Customer and brokered
certificates of deposit 534,218 15,525 2.91% 3.58%
FHLB advances 430,581 11,735 2.73% 3.81%
Repurchase agreements 135,569 3,657 2.70% 3.14%
--------------------------------------
Total costing liabilities 1,299,779 32,474 2.50% 3.26%
-----------------------------
Non-costing liabilities 10,426
Stockholders' equity 142,163
--------
Total $ 1,452,368
========
Net earning balance $ 102,524
========
Earning yield less costing rate 3.47% 2.91%
===================
Average interest-earning
assets $ 1,402,303
========
Net interest 51,299
========
Net yield spread on avg.
Interest-earning assets 3.66%
========
8
<Page>
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, 2007
compared to
year ended September 30, 2006
----------------------------------------
Rate/
Rate Volume Volume Total
----------------------------------------
Components of interest income:
Loans receivable $ 5,079 195 (37) 5,237
Mortgage-backed securities (224) (825) 43 (1,006)
Investments 269 66 19 354
Bank deposits 121 (13) (7) 101
----------------------------------------
Net change in interest income 5,245 (577) 18 4,686
----------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts 5,551 (1,649) (336) 3,566
FHLB advances 3,370 1,401 249 5,020
Subordinated debentures -- -- 1,421 1,421
Repurchase agreements 482 (541) (330) (389)
----------------------------------------
Net change in
interest expense 9,403 (789) 1,004 9,618
----------------------------------------
(Decrease) increase in net
interest income $ (4,158) 212 (986) (4,932)
========================================
Year ended September 30, 2006
compared to
year ended September 30, 2005
----------------------------------------
Rate/
Rate Volume Volume Total
----------------------------------------
Components of interest income:
Loans receivable $ 8,288 7,464 811 16,563
Mortgage-backed securities (30) (1,473) 13 (1,490)
Investments 259 53 26 338
Bank deposits 21 (68) (5) (52)
----------------------------------------
Net change in interest income 8,538 5,976 845 15,359
----------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts 8,217 3,115 1,532 12,864
FHLB advances 7,750 1,389 917 10,056
Repurchase agreements 732 (3,006) (599) (2,873)
----------------------------------------
Net change in
interest expense 16,699 1,498 1,850 20,047
----------------------------------------
(Decrease) increase in net
interest income $ (8,161) 4,478 (1,005) (4,688)
========================================
COMPARISON OF YEARS ENDED SEPTEMBER 30, 2007 AND 2006
For the fiscal year ended September 30, 2007, the Company had net
income of $15.3 million, or $1.89 per share, compared to net income
$20.8 million, or $2.47 per share in the prior year.
Total interest income for the year ended September 30, 2007, was
$103.8 million, an increase of $4.7 million from fiscal year 2006. The
average yield on interest-earning assets increased during fiscal 2007
to 7.10% from 6.70% during fiscal 2006, which resulted in an increase
in interest income of $5.2 million. The average balance of interest-
earning assets decreased from $1,480.1 million during fiscal 2006 to
$1,462.0 million during fiscal 2007, resulting in a decrease in
interest income of $577,000.
9
<Page>
Interest income on loans increased $5.2 million to $99.1 million
in fiscal 2007, compared to $93.8 million during fiscal 2006. $5.1
million of that increase resulted from a 38 basis point increase in the
average yield on loans outstanding during the fiscal year. The
weighted average rate on loans receivable at September 30, 2007, was
7.15%, a one basis point decrease from September 30, 2006. $195,000 of
the increase in interest on loans receivable resulted from a $2.8
million increase in the average balance of loans outstanding over the
prior year. Interest income on mortgage-backed securities decreased
$1.0 million to $3.2 million in fiscal 2007, compared to $4.2 million
during fiscal 2006. Of that decrease, $825,000 resulted from a $22.2
million decrease in the average balance of mortgage-backed securities
from the prior year and $224,000 resulted from a 20 basis point
decrease in the average yield on mortgage-backed securities during the
fiscal year.
Total interest expense during the year ended September 30, 2007,
increased $9.6 million from the prior year. Specifically, interest on
customer and brokered deposit accounts increased $3.6 million during
fiscal 2007. Of that increase, approximately $5.6 million resulted
from a 64 basis point increase in the average rate paid on such
interest-costing liabilities. This increase was partially offset by an
approximate $1.6 million decrease which resulted from a $47.8 million
decrease in the average balance of customer and brokered deposits
accounts from the prior year. The average rate paid on FHLB advances
increased 70 basis points, which resulted in an increase in interest on
FHLB advances of approximately $3.4 million from fiscal year 2006. An
additional increase of approximately $1.4 million resulted from a $30.9
million increase in the average balance of FHLB advances over the prior
period. Management continues to use FHLB advances as a primary source
of short-term financing. Interest expense on subordinated debentures
increased $1.4 million due to a $20.2 million increase in the average
balance of such interest-costing liabilities, which were issued in
December 2006.
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 $1.6 million during the year
ended September 30, 2007, compared to $745,000 during fiscal 2006. The
allowance for loan losses was $8.1 million or 0.61% of the total loan
portfolio and approximately 245% of total nonaccrual loans as of
September 30, 2007. This compares with an allowance for loan losses of
$8.0 million or 0.59% of the total loan portfolio and approximately
125% of the total nonaccrual loans as of September 30, 2006. The
relatively small increase in the allowance for loan loss of $106,000
was the result of the aforementioned provision for loan loss resulting
from management's analysis of the Bank's loan portfolios, largely
offset by net charge-offs for the year of $1.5 million. Although the
balance of the Bank's loan portfolios decreased during fiscal 2007,
management determined that the slight increase in the allowance for
loan loss was appropriate due to deteriorating conditions in the
residential housing market. The provision for loss on loans related
primarily to the charge-off of loans secured by residential
construction properties and business properties. With regard to loan
portfolio concentrations at September 30, 2007, loans secured by
business properties made up thirty-three percent of the Bank's total
loans receivable, and fifty-three percent of the allowance for loan
losses was allocated to such loans. This compares to thirty-two
percent of total loans receivable and fifty-seven percent of the
allowance at September 30, 2006. At September 30, 2007, loans secured
by residential properties made up twenty-nine percent of the Bank's
total loans receivable, and twelve percent of the allowance for loan
losses was allocated to such loans. This compares to twenty-nine
percent of total loans receivable and ten percent of the allowance at
September 30, 2006. At September 30, 2007, construction and
development loans made up thirty-three percent of the Bank's total
loans receivable, and twenty-one percent of the allowance for loan
losses was allocated to such loans. This compares to thirty-four
percent of total loans receivable and twenty-two percent of the
allowance at September 30, 2006. Management believes that the quality
of collateral, as well as general loan terms, of the Bank's loan
portfolios have remained essentially unchanged from the prior year.
Management also believes that the provision for loan losses is
sufficient to provide for a level of loan loss allowance at year end
that would adequately absorb all estimated credit losses on outstanding
balances over the subsequent twelve-month period.
Total other income for fiscal year 2007 was $21.2 million, a
decrease of $3.3 million from the amount earned in fiscal year 2006.
Specifically, provision for loss on real estate owned increased $1.6
million due to increased charge-offs on residential construction and
business properties. Customer service fees and charges decreased
$372,000 due primarily to a decrease in overdraft fees and return item
charges. Loan service fees decreased $271,000 due primarily to an
increase in amortization of capitalized servicing. Gain on sale of
securities available for sale decreased $258,000 due to the fact that
no securities were sold during fiscal 2007. Additionally, other income
decreased $935,000 due to decreases in loan prepayment penalties,
income from foreclosed assets held for sale, and income from the
Company's investment in LLCs.
10
<Page>
Total general and administrative expenses for fiscal 2007 were
$36.3 million, a decrease of $919,000 from the prior year.
Specifically, compensation and fringe benefits decreased $1.1 million
due primarily to a decrease in employee benefit related costs and the
closing of a residential loan origination office located in St. Louis,
Missouri during the third quarter of fiscal 2006. Other expense
decreased $714,000 due primarily to a decrease in audit and consulting
fees, as well as credit, appraisal, underwriting, legal and other costs
related to mortgage banking operations and the construction and
commercial real estate lending operations of the Bank. These decreases
were offset by a $288,000 increase in commission-based mortgage banking
compensations due primarily to an increase in mortgage-banking volume
during fiscal 2007. Additionally, advertising and business promotion
expense increased $565,000 due to increased costs related to the
national mortgage banking operation and strategic direct marketing
costs related to the retail banking operation.
COMPARISON OF YEARS ENDED SEPTEMBER 30, 2006 AND 2005
For the fiscal year ended September 30, 2006, the Company had net
income of $20.8 million, or $2.47 per share, compared to net income
$25.8 million, or $3.06 per share in the prior year.
Total interest income for the year ended September 30, 2006, was
$99.1 million, an increase of $15.4 million from fiscal year 2005. The
average yield on interest-earning assets increased during fiscal 2006
to 6.70% from 5.97% during fiscal 2005, which resulted in an increase
in interest income of $8.5 million. The average balance interest-
earning assets increased from $1,402.3 million during fiscal 2005 to
$1,480.1 million during fiscal 2006, resulting in an additional
increase in interest income of $6.0 million.
Interest income on loans increased $16.5 million to $93.8 million
in fiscal 2006, compared to $77.3 million during fiscal 2005. An
increase of approximately $7.5 million resulted from a $117.7 million
increase in the average balance of loans outstanding over the prior
year. Additionally, an increase of $8.3 million resulted from a 68
basis point increase in the average yield on loans outstanding during
the fiscal year. The weighted average rate on loans receivable at the
year ended September 30, 2006, was 7.16%, a 66 basis point increase
from September 30, 2005. Interest income on mortgage-backed securities
decreased $1.5 million to $4.2 million in fiscal 2006, compared to $5.7
during fiscal 2005. This decrease was primarily the result of a $39.5
million decrease in the average balance of mortgage-backed securities
from the prior year.
Total interest expense during the year ended September 30, 2006,
increased $20.0 million (62%) from the prior year. Specifically,
interest on customer and brokered deposit accounts increased $8.2
million due to a 112 basis point increase in the average rate paid on
such interest-costing liabilities. An additional increase of
approximately $3.1 million resulted from an increase in the average
balance of customer and brokered deposit accounts of $133.7 million
over the prior period. The average rate paid on FHLB advances
increased 180 basis points, which resulted in an increase in interest
on FHLB advances of approximately $7.8 million from fiscal year 2005.
An additional increase of approximately $1.4 million resulted from a
$50.8 million increase in the average balance of FHLB advances over the
prior period. Management continues to use FHLB advances as a primary
source of short-term financing. Interest expense on securities sold
under agreements to repurchase decreased $2.9 million due primarily to
a $111.3 million decrease in the average balance of such interest-
costing liabilities from the prior year.
The provision for losses on loans was $745,000 during the year
ended September 30, 2006, compared to $522,000 during fiscal 2005. The
allowance for loan losses was $8.0 million or 0.59% of the total loan
portfolio and approximately 125% of total nonaccrual loans as of
September 30, 2006. This compares with an allowance for loan losses of
$7.5 million or 0.57% of the total loan portfolio and approximately
134% of the total nonaccrual loans as of September 30, 2005. The
increase in the allowance for loan loss of $455,000 resulted from the
aforementioned provision for loan loss, which was partially offset by
net loan charge-offs for the year of $290,000. The provision for loss
on loans related primarily to increases in the balance of loans
outstanding, which were secured by business properties, residential
construction, and land development. With regard to loan portfolio
concentrations at September 30, 2006, loans secured by business
properties made up thirty-two percent of the Bank's total loans
receivable, and fifty-seven percent of the allowance for loan losses
was allocated to such loans. This compares to twenty-eight percent of
total loans receivable and fifty-eight percent of the allowance at
September 30, 2005. At September 30, 2006, loans secured by
residential properties made up twenty-nine percent of the Bank's total
loans receivable, and ten percent of the allowance for loan losses was
allocated to such loans. This compares to thirty-five percent of total
loans receivable and ten percent of the allowance at September 30,
2005. At September 30, 2006, construction and development loans made
up thirty-four percent of the Bank's total loans receivable, and
twenty-two percent of the allowance for loan losses was allocated to
such loans. This compares to thirty-two percent of total loans
receivable and nineteen percent of the allowance at September 30, 2005.
11
<Page>
Total other income for fiscal year 2006 was $24.5 million, a
decrease of $4.0 million from the amount earned in fiscal year 2005.
Specifically, gain on sale of loans held for sale decreased $3.5
million due to a decrease in mortgage banking volume. Customer service
fees and charges decreased $1.0 million due to a decrease in mortgage
banking volume and a decrease in overdraft fees and return item
charges. These decreases were offset by a $258,000 gain realized on
the sale of securities available for sale. Additionally, loan service
fees increased $252,000 due primarily to a decrease in amortization of
capitalized servicing, and, recoveries on real estate owned increased
$127,000 due recoveries realized on the sale of foreclosed assets held
for sale in the current year.
Total general and administrative expenses for fiscal 2006 were
$37.2 million, a decrease of $1.6 million from the prior year.
Specifically, compensation, fringe benefits, and commission-based
mortgage banking compensation decreased $1.8 million due primarily to a
decrease in mortgage banking volume. Advertising and business
promotion decreased $347,000 due primarily to decreased volume in the
national mortgage banking operation. These decreases were offset by a
$362,000 increase in premises and equipment expense, which related
primarily to the Company's new loan administration and construction
lending facility that was completed in March 2005. Additionally, other
expense increased $177,000 due to an increase in audit fees related to
the implementation of Section 404 of the Sarbanes-Oxley Act of 2002.
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 that 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, 2007. The model output data associated with
the -300 basis point scenario was suppressed because of the relatively
low current interest rate environment. Dollar amounts are expressed in
thousands.
<Table>
<Caption>
NPV as % of PV of Assets
Changes in Net Portfolio Value ------------------------
Market ------------------------------------ Board approved
Interest rates $ Amount $ Change % Change Actual minimum
- ---------------------------------------------------- ------------------------
+ 3% 135,315 (35,303) -21% 9.4% 6%
+ 2% 149,298 (21,320) -12% 10.2% 6%
+ 1% 161,578 (9,040) -5% 10.9% 7%
no change 170,618 -- -- 11.3% 8%
- 1% 178,973 8,355 +5% 10.7% 8%
- 2% 188,059 17,441 +10% 12.1% 8%
- 3% -- -- -- -- 8%
</Table>
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.
12
<Page>
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 of
existing or newly acquired retail deposits, and FHLB advances.
Management continues to use FHLB advances as a primary source of short-
term funding. FHLB advances are secured by a blanket pledge agreement
of the loan and securities portfolio, as collateral, supported by
quarterly reporting of eligible collateral to FHLB. Available FHLB
borrowings are limited based upon a percentage of the Bank's assets and
eligible collateral, as adjusted by appropriate eligibility and
maintenance levels. Management continually monitors the balance of
eligible collateral relative to the amount of advances outstanding.
At September 30, 2007, the Bank had available advances at FHLB of
$573.8 million, and outstanding advances of $458.9 million. The Bank
has established relationships with various brokers, and, as a secondary
source of liquidity, the Bank may purchase brokered deposit accounts.
At September 30, 2007, the Bank has $133.4 million in brokered
deposits, and it could purchase up to an additional $299.0 million in
brokered deposits and remain "well capitalized" as defined by the OTS.
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 Bank's ability to attract and retain
customer deposits is partially impacted by area competition and by
other alternative investment sources that may be available to the
Bank's customers in various interest rate environments. Management is
not currently aware of any other trends, market conditions, or other
economic factors that could materially impact the Bank's primary
sources of funding or affect its future ability to meet obligations as
they come due. Although future changes to the level of market interest
rates is uncertain, management believes its sources of funding will
continue to remain stable during upward and downward interest rate
environments. In the unlikely event of a significant change in the
availability of the Bank's funding sources, the Bank could obtain
funding through the various capital market alternatives available such
as an issuance of corporate debt, commercial paper or fed funds.
The OTS also requires thrift institutions to maintain specified
levels of regulatory capital. As of September 30, 2007, 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.
Under OTS regulations, there is no limit to the amount of capital
that the Bank may distribute to the Company in the form of dividends.
However, each dividend distribution is subject to a thirty-day review
by the OTS, who can take exception to any proposed dividend. Declared
dividends remain unpaid until management receives written notification
of "no exception" from the OTS.
13
<Page>
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Various commitments and contingent liabilities arise in the normal
course of business, which are not required to be recorded on the
balance sheet. The most significant of these are loan commitments and
standby letters of credit. The bank had outstanding commitments to
originate mortgage loans for its portfolio and standby letters of
credit totaling $20.4 million and $10.5 million, respectively, at
September 30, 2007. In addition, the Bank had outstanding commitments
to originate mortgage loans totaling $71.3 million at September 30,
2007, which it had committed to sell to outside investors. Since
commitments may expire unused or be only partially used, these totals
do not necessarily reflect future cash requirements. Management does
not anticipate any material losses arising from commitments and
contingent liabilities and believes that there are no material
commitments to extend credit that represent risk of an unusual nature.
Management anticipates that the Company will continue to have
sufficient funds through repayments and maturities of loans and
securities, deposits and borrowings, to meet its commitments.
The following table discloses payments due on the Company's
contractual obligations at September 30, 2007:
<Table>
<Caption>
Due in Due from Due from Due in
Total < 1 year 1-3 years 3-5 years > 5 years
----------------------------------------------------------
Advances from FHLB $ 458,933 178,841 180,092 100,000 --
Subordinated debentures 25,774 -- -- -- 25,774
Operating leases 3,018 479 1,119 684 736
----------------------------------------------------------
Total contractual obligations $ 487,725 179,320 181,211 100,684 26,510
==========================================================
</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.
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 objective factors such as
historical data and loan characteristics, 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.
14
<Page>
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.
15
<Page>
NASB Financial, Inc. and Subsidiary
Consolidated Balance Sheets
<Table>
<Caption>
September 30,
-----------------------
2007 2006
-----------------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 26,050 11,442
Securities available for sale, at fair value 42 50
Stock in Federal Home Loan Bank, at cost 22,307 24,043
Mortgage-backed securities:
Available for sale, at fair value 80,622 97,259
Held to maturity, at cost 217 325
Loans receivable:
Held for sale, at lower of amortized cost or market value, net 47,233 50,462
Held for investment, net 1,277,456 1,295,700
Allowance for loan losses (8,097) (7,991)
Accrued interest receivable 8,398 8,205
Foreclosed assets held for sale, net 6,511 5,231
Premises and equipment, net 15,765 12,994
Investment in LLCs 19,058 16,737
Mortgage servicing rights, net 911 1,089
Deferred income tax asset, net 1,998 2,856
Other assets 8,012 6,394
-----------------------
$ 1,506,483 1,524,796
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 722,102 722,799
Brokered deposit accounts 133,434 128,243
Advances from Federal Home Loan Bank 458,933 499,357
Subordinated debentures 25,774 --
Escrows 9,468 8,910
Income taxes payable 1,261 2,602
Accrued expenses and other liabilities 6,119 6,313
-----------------------
Total liabilities 1,357,091 1,368,224
-----------------------
Stockholders' equity:
Common stock of $0.15 par value: 20,000,000 authorized; 9,857,112
Shares issued at September 30, 2007 and 2006, respectively 1,479 1,479
Serial preferred stock of $1.00 par value: 7,500,000 shares
authorized; none outstanding -- --
Additional paid-in capital 16,400 16,311
Retained earnings 170,613 162,631
Treasury stock, at cost; 1,989,498 shares and 1,538,470 shares at
September 30, 2007 and 2006, respectively (38,418) (22,061)
Accumulated other comprehensive loss (682) (1,788)
-----------------------
Total stockholders' equity 149,392 156,572
-----------------------
$ 1,506,483 1,524,796
=======================
</Table>
See accompanying notes to consolidated financial statements.
16
<Page>
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Income
<Table>
<Caption>
Years Ended September 30,
------------------------------------
2007 2006 2005
------------------------------------
(Dollars in thousands, except per share data)
Interest on loans receivable $ 99,067 93,830 77,267
Interest on mortgage-backed securities 3,157 4,163 5,653
Interest and dividends on securities 1,254 900 562
Other interest income 340 239 291
------------------------------------
Total interest income 103,818 99,132 83,773
------------------------------------
Interest on customer and brokered deposit accounts 33,512 29,946 17,082
Interest on advances from Federal Home Loan Bank 26,811 21,791 11,735
Interest on subordinated debentures 1,421 -- --
Interest on securities sold under agreements
to repurchase 395 784 3,657
------------------------------------
Total interest expense 62,139 52,521 32,474
------------------------------------
Net interest income 41,679 46,611 51,299
Provision for loan losses 1,634 745 522
------------------------------------
Net interest income after provision
for loan losses 40,045 45,866 50,777
------------------------------------
Other income (expense):
Loan servicing fees, net 103 374 122
Impairment (loss) recovery on mortgage servicing
rights 34 (10) 2
Customer service fees and charges 5,817 6,189 7,196
Provision for (loss) recovery on real
estate owned (595) 1,026 899
Gain on sale of securities available for sale -- 258 --
Gain on sale of loans receivable held for sale 14,418 14,331 17,865
Other 1,421 2,356 2,428
------------------------------------
Total other income 21,198 24,524 28,512
------------------------------------
General and administrative expenses:
Compensation and fringe benefits 15,567 16,657 16,831
Commission-based mortgage banking compensation 7,310 7,022 8,651
Premises and equipment 3,637 3,600 3,238
Advertising and business promotion 4,178 3,613 3,960
Federal deposit insurance premiums 103 108 100
Other 5,534 6,248 6,071
------------------------------------
Total general and administrative expenses 36,329 37,248 38,851
------------------------------------
Income before income tax expense 24,914 33,142 40,438
------------------------------------
Income tax expense (benefit):
Current 9,429 12,836 12,692
Deferred 166 (462) 1,920
------------------------------------
Total income tax expense 9,595 12,374 14,612
------------------------------------
Net income $ 15,319 20,768 25,826
====================================
Basic earnings per share $ 1.89 2.47 3.06
====================================
Diluted earnings per share $ 1.88 2.46 3.05
====================================
Basic weighted average shares outstanding 8,100,904 8,396,552 8,450,769
====================================
</Table>
See accompanying notes to consolidated financial statements.
17
<Page>
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<Table>
<Caption>
Years ended September 30,
---------------------------------
2007 2006 2005
(Restated)
---------------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 15,319 20,768 25,826
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,220 1,249 1,090
Amortization and accretion, net (1,668) (1,272) (2,839)
Deferred income tax expense (benefit) 166 (462) 1,920
Gain on sale of securities available for sale -- (258) --
Loss (income) from investment in LLCs 197 (147) --
Impairment (recovery) loss on mortgage servicing rights (34) 10 (2)
Gain on sale of loans receivable held for sale (14,418) (14,331) (17,865)
Provision for loan losses 1,634 745 522
Provision for loss (recovery) on real estate owned 595 (1,026) (899)
Principal repayments of mortgage loans receivable held
for sale -- 20 35,468
Origination of loans receivable held for sale (1,001,663) (951,335) (1,289,597)
Sale of loans receivable held for sale 1,019,310 1,009,316 1,223,505
Stock based compensation - stock options 89 55 --
Changes in:
Net fair value of loan-related commitments (42) 58 (271)
Accrued interest receivable (192) (1,208) (1,110)
Accrued expenses, other liabilities and
income taxes payable (529) 1,007 3,318
---------------------------------
Net cash provided by (used in) operating activities 19,984 63,189 (20,934)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 108 106 213
Available for sale 17,887 32,302 39,386
Principal repayments of mortgage loans receivable held
for investment 412,833 449,779 419,147
Principal repayments of other loans receivable 8,741 9,206 13,160
Principal repayments of securities available for sale 8 7 7
Loan origination - mortgage loans receivable
held for investment (401,520) (516,072) (585,619)
Loan origination - other loans receivable (9,141) (5,012) (12,502)
Purchase of mortgage loans receivable held for investment -- -- (1,310)
Proceeds from sale (purchases) of Federal Home Loan
Bank stock 1,736 (1,653) (4,582)
Proceeds from sale of securities available for sale -- 438 --
Proceeds from sale of real estate owned 6,785 5,623 9,249
Purchase of premises and equipment, net (4,097) (3,685) (3,167)
Investment in LLC (2,517) (4,385) (4,224)
Other (2,261) 657 1,117
---------------------------------
Net cash provided by (used in) investing activities 28,562 (32,689) (129,125)
</Table>
18
<Page>
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
<Table>
<Caption>
Years ended September 30,
---------------------------------
2007 2006 2005
(Restated)
---------------------------------
(Dollars in thousands)
Cash flows from financing activities:
Net increase in customer and brokered
deposit accounts 3,622 48,022 119,304
Proceeds from advances from Federal Home Loan Bank 353,650 371,000 454,000
Repayment of advances from Federal Home Loan Bank (393,848) (337,324) (355,207)
Proceeds from subordinated debentures 25,774 -- --
Proceeds from sale of securities under agreements to
repurchase 30,900 -- 311,900
Repayment of securities sold under agreements to
repurchase (30,900) (122,000) (349,000)
Cash dividends paid (7,337) (9,468) (14,158)
Repurchase of common stock for treasury (16,357) (4,109) (695)
Change in escrows 558 (513) 986
---------------------------------
Net cash (used in) provided by financing activities (33,938) (54,392) 167,130
---------------------------------
Net increase (decrease) in cash and cash equivalents 14,608 (23,892) 17,071
Cash and cash equivalents at beginning of period 11,442 35,334 18,263
---------------------------------
Cash and cash equivalents at end of period $ 26,050 11,442 35,334
=================================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 10,771 11,027 12,971
Cash paid for interest 61,965 52,524 30,096
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 13,690 3,450 11,268
Conversion of real estate owned to loans receivable 5,617 2,170 --
Capitalization of originated mortgage servicing rights 6 174 326
Transfer of loans from held for sale to held for
investment -- -- 200,515
</Table>
See accompanying notes to consolidated financial statements.
19
<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 (loss) income equity
---------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 2004 $ 1,479 16,256 139,663 (17,257) (1,150) 138,991
Comprehensive income:
Net income -- -- 25,826 -- -- 25,826
Other comprehensive income,
net of tax:
Unrealized loss on securities -- -- -- -- (1,077) (1,077)
----------
Total comprehensive income 24,749
Cash dividends paid -- -- (14,158) -- -- (14,158)
Purchase of common stock
for treasury -- -- -- (695) -- (695)
---------------------------------------------------------------------
Balance at September 30, 2005 $ 1,479 16,256 151,331 (17,952) (2,227) 148,887
Comprehensive income:
Net income -- -- 20,768 -- -- 20,768
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- 439 439
----------
Total comprehensive income 21,207
Cash dividends paid -- -- (9,468) -- -- (9,468)
Stock based compensation expense -- 55 -- -- -- 55
Purchase of common stock
for treasury -- -- -- (4,109) -- (4,109)
---------------------------------------------------------------------
Balance at September 30, 2006 $ 1,479 16,311 162,631 (22,061) (1,788) 156,572
Comprehensive income:
Net income -- -- 15,319 -- -- 15,319
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- 1,106 1,106
----------
Total comprehensive income 16,425
Cash dividends paid -- -- (7,337) -- -- (7,337)
Stock based compensation expense -- 89 -- -- -- 89
Purchase of common stock
for treasury -- -- -- (16,357) -- (16,357)
---------------------------------------------------------------------
Balance at September 30, 2007 $ 1,479 16,400 170,613 (38,418) (682) 149,392
======================================================================
</Table>
See accompanying notes to consolidated financial statements.
20
<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. The consolidated
financial statements do not include the accounts of our wholly owned
statutory trust, NASB Preferred Trust I (the "Trust"). The Trust
qualifies as a special purpose entity that is not required to be
consolidated in the financial statements of NASB Financial, Inc. The
Trust Preferred Securities issued by the Trust are included in Tier I
capital for regulatory capital purposes.
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 totaling
$18.8 million and $6.5 million as of September 30, 2007 and 2006,
respectively. The Federal Reserve Board ("FRB") requires federally
chartered savings banks to maintain non-interest-earnings cash reserves
at specified levels against their transaction accounts. Required
reserves may be maintained in the form of vault cash, a non-interest-
bearing account at a Federal Reserve Bank, or a pass-through account,
as defined by FRB. At September 30, 2007, the Bank's reserve
requirement was $5.0 million.
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, 2007
and 2006, 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
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.
Loans held for sale 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.
21
<Page>
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.
ALLOWANCE 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.
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are initially recorded at fair
value as of the date of foreclosure less any estimated selling costs
(the "new basis") and are 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 realized 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 (from three to forty years for buildings and
improvements, and from three to ten years for furniture, fixtures, and
equipment) of the respective assets 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.
INVESTMENT IN LLCs
The Company is a partner in two limited liability companies, which
were formed for the purpose of purchasing and developing vacant land in
Platte County, Missouri. These investments are accounted for using the
equity method of accounting.
22
<Page>
STOCK OPTIONS
The Company has a stock-based employee compensation plan which is
described more fully in Note 17. On October 1, 2005, the Company
adopted SFAS 123(R), "Share Based Payment (Revised 2004)" ("SFAS
123(R)"), which requires that compensation costs relating to share-
based payment transactions be recognized in the financial statements.
The Company has adopted SFAS 123(R) using the modified prospective
method in which compensation cost is recognized over the service period
for all awards granted subsequent to the adoption of SFAS 123(R) as
well as for the unvested portion of awards outstanding as of the
Company's adoption of SFAS 123(R). In accordance with the modified
prospective, results for prior periods have not been restated. Stock
based compensation expense for stock options totaled $89 thousand ($55
thousand, net of tax) and $55 thousand ($34 thousand, net of tax)
during the years ended September 30, 2007 and 2006, respectively.
Prior to the adoption of SFAS 123(R), the Company applied the
recognition and measurement principals of Accounting Principles Board
Opinion ("APB") No. 25 in accounting for its Option Plan, under which
no compensation cost were 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, 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.
2005
---------
Net Income:
As reported $ 25,826
Pro forma 25,813
Basic earnings per share:
As reported $ 3.06
Pro forma 3.06
Diluted earnings per share:
As reported $ 3.05
Pro forma 3.05
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,
2007 and 2006, 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 was
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 $3.7 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 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.
23
<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, 2007, the value of mortgage
servicing rights increased, which resulted in a recovery of valuation
allowance of $34,000. During the year ended September 30, 2006, the
Bank recorded an impairment loss on servicing rights of $10,000.
DERIVATIVE INSTRUMENTS
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 and SFAS No. 149. These
statements require the Bank to recognize all derivative instruments in
the balance sheet and to measure those instruments at fair value. As
of September 30, 2007 and 2006, the fair value of loan related
commitments resulted in a net asset of $39,000 and a liability of
$3,000, respectively.
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.
EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted-
average common shares outstanding during the year. Diluted earnings
per share is computed using the weighted average common shares and all
potential dilutive common shares outstanding during the year. Dilutive
securities consist entirely of stock options granted to employees as
incentive stock options under Section 442A of the Internal Revenue Code
as amended.
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,
--------------------------------------
2007 2006 2005
--------------------------------------
Net income $ 15,319 20,768 25,826
Average common shares outstanding 8,100,904 8,396,552 8,450,769
Average common share stock
Options outstanding 66,970 47,467 16,739
--------------------------------------
Average diluted common shares 8,167,874 8,444,019 8,467,508
Earnings per share:
Basic earnings per share $ 1.89 2.47 3.06
Diluted earnings per share 1.88 2.46 3.05
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty
in Income Taxes, an interpretation of SFAS No. 109, Accounting for
Income Taxes." FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in a company's financial statements, in
accordance with SFAS No. 109. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken, or expected to be
taken, in a tax return. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company plans to adopt this statement on
October 1, 2007, and does not believe that the adoption of FIN 48 will
have a material impact on the consolidated financial statements.
In September 2006, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 157 (SFAS No. 157),
"Fair Value Measurements." SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after
November 2, 2007, and interim periods within those fiscal years. The
Company is currently evaluating the impact of SFAS No. 157 on the
Company's financial statements.
24
<Page>
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108 (SAB No. 108), which provides
guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose
of materiality assessment. Prior year misstatements must be considered
in quantifying misstatements in current year financial statements and
if the effect of those misstatements is material to the current year,
the prior year financial statements must be corrected even though such
revision was, and continues to be, immaterial to the prior year
financial statements. SAB No. 108 was effective for fiscal years
ending after November 15, 2006. The adoption of SAB No. 108 did not
have a material impact on the consolidated financial statements.
In February 2007, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 159 (SFAS No. 159),
"The Fair Value Option for Financial Assets and Financial Liabilities."
SFAS No. 159 provides companies with an option to measure eligible
financial assets and liabilities at fair value. The fair value option
may be applied instrument by instrument and is irrevocable once made.
If a company elects the fair value option for an eligible instrument,
changes in fair value must be reported as unrealized gains and loses in
earnings at each subsequent reporting date. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of SFAS No. 159 on the Company's
financial statements, if implemented.
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 2006 and 2005 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, 2007 and 2006:
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.
25
<Page>
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 AND BROKERED 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.
SUBORDINATED DEBENTURES
The estimated fair values of subordinated debentures is determined by
discounting the future cash flows of existing debentures using rates
currently available for new debentures with similar terms and remaining
maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The estimated fair values of securities sold under agreements to
repurchase are determined by discounting the future cash flows of
existing repurchase agreements using rates currently available for new
repurchase agreements 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.
(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, 2007
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------
Municipal securities $ 42 -- -- 42
--------------------------------------------
Total $ 42 -- -- 42
============================================
September 30, 2006
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------
Municipal securities $ 50 -- -- 50
--------------------------------------------
Total $ 50 -- -- 50
============================================
During the year ended September 30, 2006, gross gains of $258,000
and no losses were recognized on the sale of securities available for
sale. There were no sales of securities available for sale during the
years ended September 30, 2007 and 2005.
26
<Page>
The scheduled maturities of securities available for sale at
September 30, 2007, are presented in the following table. Dollar
amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due from one to five years $ 25 -- -- 25
Due from five to ten years 17 -- -- 17
--------------------------------------------
Total $ 42 -- -- 42
============================================
(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, 2007
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
Pass-through certificates guaranteed
by GNMA - fixed rate $ 181 3 -- 184
Pass-through certificates guaranteed
by FNMA - adjustable rate 11,267 -- (135) 11,132
FHLMC participation certificates:
Fixed rate 967 -- (63) 904
Adjustable rate 69,316 -- (914) 68,402
-----------------------------------------------------
Total $ 81,731 3 (1,112) 80,622
=====================================================
</Table>
<Table>
<Caption>
September 30, 2006
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
Pass-through certificates guaranteed
by GNMA - fixed rate $ 261 -- -- 261
Pass-through certificates guaranteed
by FNMA - adjustable rate 13,604 -- (401) 13,203
FHLMC participation certificates:
Fixed rate 1,205 -- (79) 1,126
Adjustable rate 85,097 -- (2,428) 82,669
-----------------------------------------------------
Total $ 100,167 -- (2,908) 97,259
=====================================================
</Table>
There were no sales of mortgage-backed securities available for
sale during the years ended September 30, 2007, 2006, or 2005.
27
<Page>
The following tables present a summary of the fair value and gross
unrealized losses of those mortgage-backed securities available for
sale which had unrealized losses at September 30, 2007 and 2006.
Dollar amounts are expressed in thousands.
September 30, 2007
---------------------------------------------
Less Than 12 Months 12 Months or Longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Pass-through certificates
guaranteed by FNMA:
Adjustable rate $ -- -- 11,132 135
FHLMC participation
certificates:
Fixed rate -- -- 904 63
Adjustable rate -- -- 68,402 914
---------------------------------------------
Total $ -- -- $ 80,438 1,112
=============================================
September 30, 2006
---------------------------------------------
Less Than 12 Months 12 Months or Longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Pass-through certificates
guaranteed by FNMA:
Adjustable rate $ -- -- 13,203 401
FHLMC participation
certificates:
Fixed rate -- -- 1,126 79
Adjustable rate -- -- 82,669 2,428
---------------------------------------------
Total $ -- -- $ 96,998 2,908
=============================================
Based upon evaluation of available evidence, including changes in
market interest rates during fiscal years 2007 and 2006, management
believes the declines in fair value of these securities, which consist
almost exclusively of moderately-seasoned 5/1 adjustable rate mortgage-
backed securities, are temporary. The decline in fair value is due to
significant increases in interest rates, which have occurred since
these securities were purchased. However, management believes that as
these securities approach their reset dates, they will no longer be
impaired. Should the impairment of these securities become other than
temporary, the cost basis of the investment will be reduced and the
resulting loss recognized in net income in the period the other-than-
temporary impairment is identified. Management has the ability to hold
these securities to maturity.
The scheduled maturities of mortgage-backed securities available
for sale at September 30, 2007, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due from five to ten years $ 967 -- (63) 904
Due after ten years 80,764 3 (1,049) 79,718
-------------------------------------------
Total $ 81,731 3 (1,112) 80,622
===========================================
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.
28
<Page>
The principal balances of mortgage-backed securities held to
available for sale 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, 2007
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 1,779 2 (32) 1,749
FHLB advances 77,280 -- (1,004) 76,276
---------------------------------------------
$ 79,059 2 (1,036) 78,025
==============================================
September 30, 2006
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 2,188 -- (68) 2,120
FHLB advances 79,459 -- (2,256) 77,203
---------------------------------------------
$ 81,647 -- (2,324) 79,323
==============================================
(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, 2007
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
FHLMC participation certificates:
Fixed rate $ 88 3 -- 91
FNMA pass-through certificates:
Fixed rate 46 -- -- 46
Balloon maturity and
adjustable rate 70 -- -- 70
Pass-through certificates guaranteed
by GNMA - fixed rate 13 -- -- 13
----------------------------------------------------
Total $ 217 3 -- 220
=====================================================
</Table>
<Table>
<Caption>
September 30, 2006
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
FHLMC participation certificates:
Fixed rate $ 130 6 -- 136
FNMA pass-through certificates:
Fixed rate 89 -- -- 89
Balloon maturity and
adjustable rate 75 -- -- 75
Pass-through certificates guaranteed
by GNMA - fixed rate 31 2 -- 33
----------------------------------------------------
Total $ 325 8 -- 333
=====================================================
</Table>
29
<Page>
The scheduled maturities of mortgage-backed securities held to
maturity at September 30, 2007, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due from one to five years $ 19 1 -- 20
Due from five to ten years 18 -- -- 18
Due after ten years 180 2 -- 182
---------------------------------------------
Total $ 217 3 -- 220
=============================================
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, 2006
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 164 2 -- 166
==============================================
September 30, 2006
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 245 5 -- 250
==============================================
All dispositions of mortgage-backed securities held to maturity
during fiscal 2007, 2006, and 2005 were the result of maturities or
calls.
(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 2007 2006
---------------------------
Mortgage loans:
Permanent loans on:
Residential properties $ 357,896 367,918
Business properties 489,978 482,029
Partially guaranteed by VA or
insured by FHA 1,541 1,890
Construction and development 476,081 506,034
---------------------------
Total mortgage loans 1,325,496 1,357,871
Commercial loans 63,801 60,692
Installment loans and lease financing
to individuals 17,729 17,279
---------------------------
Total loans receivable held
for investment 1,407,026 1,435,842
Less:
Undisbursed loan funds (124,184) (135,463)
Unearned discounts and fees on
loans, net of deferred costs (5,386) (4,679)
---------------------------
Net loans receivable held
for investment $ 1,277,456 1,295,700
===========================
30
<Page>
HELD FOR SALE 2007 2006
---------------------------
Mortgage loans:
Permanent loans on
residential properties $ 70,624 73,205
Less:
Undisbursed loan funds (23,391) (22,742)
Unearned discounts and fees on loans,
net of deferred costs -- (1)
--------------------------
Net loans receivable held for sale $ 47,233 50,462
==========================
During the quarter ended September 30, 2005, the Bank transferred
$200.5 million of permanent mortgage loans on residential properties
from the held for sale category to the held for investment category.
The decision to make this transfer was based upon the fact that there
were no foreseeable future events that would cause the Bank to sell
these loans. The Bank has both the intent and ability to hold these
loans for the foreseeable future or until maturity. The basis at
which the loans were transferred was amortized cost, which was lower
than market value at the time of transfer.
Included in the loans receivable balances are participating
interests in mortgage loans and wholly owned mortgage loans serviced
by other institutions of approximately $80,000 and $119,000 at
September 30, 2007 and 2006, respectively.
Whole loans and participations serviced for others were
approximately $84.7 million and $101.1 million at September 30, 2007
and 2006, 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 $785.6 million and $844.7 million at September
30, 2007 and 2006, 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, 2007 and
2006. 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, 2007 and 2006, loans with an aggregate principal
balance of approximately $3.3 million and $6.4 million, respectively,
were on nonaccrual status. Gross interest income would have increased
by $167,000, $255,000 million and $253,000 for the years ended
September 30, 2007, 2006 and 2005, respectively, if the nonaccrual
loans had been performing.
The following table presents the activity in the allowance for
losses on loans for 2007, 2006, and 2005. 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.
2007 2006 2005
---------------------------------
Balance at beginning of year $ 7,991 7,536 8,221
Provisions 1,634 745 522
Charge-offs (1,528) (313) (1,265)
Recoveries -- 23 58
---------------------------------
Balance at end of year $ 8,097 7,991 7,536
=================================
The following tables provide a summary of information on impaired
loans. Dollar amounts are expressed in thousands.
September 30,
----------------
2007 2006
----------------
Impaired loans with a valuation allowance $ 122 3,405
Impaired loans without a valuation allowance -- --
----------------
$ 122 3,405
================
Valuation applicable to impaired loans $ 122 380
================
31
<Page>
2007 2006 2005
------------------------
Average balance of impaired loans $ 262 3,568 3,445
Interest income recognized on
impaired loans 120 85 119
Interest income received on a cash basis
on impaired loans 120 97 132
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>
2007
-------------------------------------------------------------
Residential
---------------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
- ------------------------------------------------------------------------------
Missouri $ 193,441 37,366 90,014 233,583 554,404
Kansas 51,719 11,489 24,019 223,334 310,561
Colorado 3,529 6,020 63,676 -- 73,225
Texas 11,315 13,389 40,564 4,648 69,916
Florida 16,695 953 19,577 -- 37,225
Arizona 11,105 677 16,062 8,110 35,954
North Carolina 4,230 3,720 14,050 4,160 26,160
Oklahoma 1,226 3,082 20,519 -- 24,827
Iowa 5,958 3,650 4,395 1,276 15,279
Washington 3,332 -- 10,852 -- 14,184
Illinois 5,831 615 6,516 -- 12,962
Ohio 2,214 -- 9,900 -- 12,114
Georgia 4,525 -- 6,974 -- 11,499
Pennsylvania 3,222 -- 8,147 -- 11,369
Indiana 2,198 -- 8,093 970 11,261
Tennessee 924 -- 9,468 -- 10,392
Other 47,249 1,260 45,655 -- 94,164
-------------------------------------------------------------
$ 368,713 82,221 398,481 476,081 1,325,496
=============================================================
</Table>
<Table>
<Caption>
2006
-------------------------------------------------------------
Residential
---------------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
- ------------------------------------------------------------------------------
Missouri $ 223,385 51,393 83,551 266,696 625,025
Kansas 67,097 7,832 21,280 237,080 333,289
Colorado 2,111 9,875 70,109 -- 82,095
Texas 6,222 11,255 40,476 -- 57,953
Florida 15,139 970 17,799 -- 33,908
North Carolina 2,316 3,790 20,146 -- 26,252
Oklahoma 1,453 3,575 20,371 -- 25,399
Iowa 6,725 3,656 4,602 1,288 16,271
Arizona 8,553 717 6,664 -- 15,934
Washington 1,649 -- 11,093 -- 12,742
Indiana 2,746 -- 8,701 970 12,417
Wisconsin 157 -- 11,704 -- 11,861
Ohio 806 -- 10,171 -- 10,977
Pennsylvania 1,046 -- 9,829 -- 10,875
Other 39,459 3,396 40,018 -- 82,873
-------------------------------------------------------------
$ 378,864 96,459 376,514 506,034 1,357,871
=============================================================
</Table>
32
<Page>
Proceeds from the sale of loans receivable held for sale during
fiscal 2007, 2006 and 2005, were $1,019.3 million, $1,009.3 million,
and $1,223.5 million, respectively. In fiscal 2007, the Bank realized
gross gains of $14.6 million and gross losses of $231,000 on those
sales. In fiscal 2006, gross gains of $14.5 million and gross losses
of $151,000 were realized. In fiscal 2005, the Bank realized gross
gains of $18.3 million and $406,000 of gross losses.
(6) FORECLOSED ASSETS HELD FOR SALE
The following table presents real estate owned and other
repossessed property as of September 30. Dollar amounts are expressed
in thousands.
2007 2006
-------------------
Real estate acquired through (or deed in
lieu of) foreclosure $ 6,715 5,506
Less: allowance for losses (204) (275)
--------------------
Total $ 6,511 5,231
====================
The allowance for losses on real estate owned includes the
following activity for the years ended September 30. Dollar amounts
are expressed in thousands.
2007 2006 2005
--------------------------
Balance at beginning of year $ 275 195 1,093
Provision for loss (recovery) 595 (1,026) (899)
Charge-offs (1,222) (356) (1,168)
Recoveries 556 1,462 1,169
--------------------------
Balance at end of year $ 204 275 195
==========================
(7) PREMISES AND EQUIPMENT
The following table summarizes premises and equipment as of
September 30. Dollar amounts are expressed in thousands.
2007 2006
-------------------
Land $ 4,308 3,832
Buildings and improvements 12,743 11,480
Furniture, fixtures and equipment 10,688 10,203
-------------------
27,739 25,515
Accumulated depreciation (11,974) (12,521)
-------------------
Total $ 15,765 12,994
===================
Certain facilities of the Bank are leased under various operating
leases. Amounts paid for rent expense for the fiscal years ended
September 30, 2007, 2006, and 2005, were approximately $884,000, $1.0
million, and $905,000, 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
-----------------------------------
2008 $ 479
2009 595
2010 524
2011 243
Thereafter 1,177
33
<Page>
(8) INVESTMENT IN LLC
During the year ended September 30, 2004, the Company became a
partner in Central Platte Holdings, LLC, which was formed for the
purpose of purchasing and developing eight hundred acres of vacant land
in Platte County, Missouri for residential development. This
investment is accounted for using the equity method of accounting. The
company is owner of a fifty-percent (50%) membership interest in
Central Platte Holdings, LLC. The Company's investment in this
partnership was $16.5 million and $14.1 million at September 30, 2007
and 2006, respectively.
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
for residential and commercial development. This investment is
accounted for using the equity method of accounting. The company is
owner of a fifty-percent (50%) membership interest in NBH, LLC. The
Company's investment in this partnership was $2.6 million at September
30, 2007 and 2006.
(9) 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.
2007 2006 2005
----------------------------
Balance at beginning of year $ 1,089 911 839
Originated mortgage servicing rights 6 174 326
Amortization (218) 14 (256)
Impairment (loss) recovery 34 (10) 2
----------------------------
Balance at end of year $ 911 1,089 911
============================
(10) CUSTOMER AND BROKERED DEPOSIT ACCOUNTS
Customer and brokered deposit accounts as of September 30 are
illustrated in the following table. Dollar amounts are expressed in
thousands.
2007 2006
----------------- ----------------
Amount % Amount %
- -------------------------------------------------------------------
Demand deposit accounts $ 93,451 11 86,517 10
Savings accounts 70,077 8 77,469 9
Money market demand accounts 10,323 1 11,717 2
Certificate accounts 548,251 64 547,096 64
Brokered accounts 133,434 16 128,243 15
----------------- -----------------
$ 855,536 100 851,042 100
================= =================
Weighted average interest rate 4.30% 3.98%
=========== ============
The aggregate amount of deposit accounts in excess of $100,000 was
approximately $118.4 million and $122.9 million as of September 30,
2007 and 2006, respectively.
The following table presents contractual maturities of certificate
and brokered accounts as of September 30, 2007. Dollar amounts are
expressed in thousands.
Maturing during the fiscal year ended September 30,
---------------------------------------------------------
2013 and
2008 2009 2010 2011 2012 after Total
---------------------------------------------------------
Certificate
accounts $ 411,310 56,215 15,886 22,922 38,705 3,213 548,251
Brokered
accounts 133,434 -- -- -- -- -- 133,434
---------------------------------------------------------
$ 544,744 56,215 15,886 22,922 38,705 3,213 681,685
=========================================================
34
<Page>
The following table presents interest expense on customer deposit
accounts for the years ended September 30. Dollar amounts are
expressed in thousands.
2007 2006 2005
--------------------------------
Savings accounts $ 1,231 1,265 1,036
Money market demand and
demand deposit accounts 705 602 421
Certificate and brokered
accounts 31,576 28,079 15,625
--------------------------------
$ 33,512 29,946 17,082
================================
(11) 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 approximately 140% 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.
2007 2006
----------------- -----------------
Weighted Weighted
Average Average
Year ended September 30, Amount Rate Amount Rate
- --------------------------------------------------------------------
2007 $ -- -- $ 358,567 5.22%
2008 178,841 5.21% 33,586 5.57%
2009 175,066 4.97% 435 5.25%
2010 5,026 5.95% 5,399 5.90%
2011 100,000 5.01% 100,420 5.01%
2012 through 2014 -- --% 950 5.25%
------------------ -----------------
$ 458,933 5.08% $ 499,357 5.21%
================== =================
(12) SUBORDINATED DEBENTURES
On December 13, 2006, NASB Financial, Inc., through its wholly
owned statutory trust, NASB Preferred Trust I (the "Trust"), issued $25
million of pooled Trust Preferred Securities. The Trust used the
proceeds from the offering to purchase a like amount of NASB Financial
Inc.'s subordinated debentures. The debentures, which have a variable
rate of 1.65% over the 3-month LIBOR and a 30-year term, are the sole
assets of the Trust. In exchange for the capital contributions made to
the Trust by NASB Financial, Inc. upon formation, NASB Financial. Inc.
owns all the common securities of the Trust.
In accordance with Financial Accounting Standards Board
Interpretation No. 46R, Consolidation of Variable Interest Entities
(FIN 46R), the Trust qualifies as a special purpose entity that is not
required to be consolidated in the financial statements of the Company.
The $25.0 million Trust Preferred Securities issued by the Trust will
remain on the records of the Trust. The Trust Preferred Securities are
included in Tier I capital for regulatory capital purposes.
The Trust Preferred Securities have a variable interest rate of
1.65% over the 3-month LIBOR, and are mandatorily redeemable upon the
30-year term of the dentures, or upon earlier redemption as provided in
the Indenture. The debentures are callable, in whole or in part, after
five years of the issuance date. The Company did not incur a placement
or annual trustee fee related to the issuance. The securities are
subordinate to all other debt of the Company and interest may be
deferred up to five years.
35
<Page>
(13) 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:
2007 2006 2005
--------------------------
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 0.5 (0.7) (1.9)
--------------------------
38.5% 37.3% 36.1%
==========================
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.
2007 2006 2005
----------------------------
Deferred loan fees and costs $ 34 30 263
Accrued interest receivable -- (1) (1)
Tax depreciation vs. book
depreciation 209 (165) (126)
Basis difference on investments (15) (20) (30)
Loan loss reserves 961 (143) 915
Mark-to-market adjustment (656) (375) 716
Mortgage servicing rights (49) 61 44
Prepaid expenses -- -- (83)
Other (318) 151 222
----------------------------
$ 166 (462) 1,920
============================
The tax effect of significant temporary differences representing
deferred tax assets (liabilities) are presented in the following table.
Dollar amounts are expressed in thousands.
2007 2006
-----------------
Deferred income tax assets:
Loan loss reserves $ 2,428 3,389
Book depreciation in excess of tax depreciation 281 490
Unrealized loss on securities available for sale 428 1,122
-----------------
3,137 5,001
-----------------
Deferred income tax liabilities:
Mark-to-market adjustment (443) (1,099)
Mortgage servicing rights (235) (284)
Accrued interest receivable (2) (2)
Basis difference on investments (28) (43)
Deferred loan fees and costs (298) (265)
Other (133) (452)
----------------
(1,139) (2,145)
----------------
Net deferred tax asset $ 1,998 2,856
================
(14) STOCKHOLDERS' EQUITY
During fiscal 2007, the Company paid quarterly cash dividends on
common stock of $0.225 per share on November 24, 2006, February 23,
2007, May 25, 2007, and August 24, 2007.
During fiscal 2006, the Company paid quarterly cash dividends on
common stock of $0.225 per share on February 24, 2006, May 26, 2006,
and August 25, 2006, and $0.45 per share on November 25, 2005.
36
<Page>
During fiscal 2005, the Company paid quarterly cash dividends on
common stock of $0.225 per share on February 25, 2005, May 27, 2005,
and August 26, 2005, and $1.00 per share on November 26, 2004.
During fiscal 2007, the Company repurchased 451,028 shares of
its own stock with a total value of $16.4 million at the time of
repurchase. During fiscal 2006, the Company repurchased 118,800 shares
of its own stock with a total value of $4.1 million at the time of
repurchase. During fiscal 2005, the Company repurchased 18,000 shares
of its own stock with a total value of $695,000 at the time of
repurchase
(15) 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, 2007, the
Bank meets all capital adequacy requirements, to which it is subject.
As of September 30, 2007 and 2006, 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.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
September 30,
------------------
2007 2006
- -------------------------------------------------------------
GAAP capital (Bank only) $152,330 137,797
Adjustment for regulatory capital:
Intangible assets (2,871) (2,971)
Disallowed servicing and deferred
tax assets (1,998) (2,397)
Reverse the effect of SFAS No. 115 682 1,788
------------------
Tangible capital 148,143 134,217
Qualifying intangible assets -- --
------------------
Tier 1 capital (core capital) 148,143 134,217
Qualifying general valuation allowance 7,790 7,557
------------------
Risk-based capital $155,933 141,774
==================
37
<Page>
<Table>
<Caption>
As of September 30, 2007
--------------------------------------------------------------
Actual Minimum Required for Minimum Required to be
Capital Adequacy "Well Capitalized"
---------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ ---------------------
Total capital to risk-weighted assets $155,933 12.7% 97,946 >=8% 122,432 >=10%
Core capital to adjusted tangible assets 148,143 10.0% 59,269 >=4% 74,086 >=5%
Tangible capital to tangible assets 148,143 10.0% 22,226 >=1.5% -- --
Tier 1 capital to risk-weighted assets 148,143 12.1% -- -- 73,459 >=6%
</Table>
<Table>
<Caption>
As of September 30, 2006
--------------------------------------------------------------
Actual Minimum Required for Minimum Required to be
Capital Adequacy "Well Capitalized"
---------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ ---------------------
Total capital to risk-weighted assets $141,774 11.5% 98,619 >=8% 123,274 >=10%
Core capital to adjusted tangible assets 134,217 8.9% 60,158 >=4% 75,197 >=5%
Tangible capital to tangible assets 134,217 8.9% 22,559 >=1.5% -- --
Tier 1 capital to risk-weighted assets 134,217 10.9% -- -- 73,964 >=6%
</Table>
(16) 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
Standard Insurance Company, 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 50%, subject to certain limitations. 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 $324,000,
$342,000, and $415,000 for the years ended September 30, 2007, 2006,
and 2005, respectively. These amounts have been included as
compensation and fringe benefits expense in the accompanying
consolidated statements of income.
(17) STOCK OPTION PLAN
During fiscal year 1986, the Company's stockholders approved a
stock option plan ("1986 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 stock
dividends, were granted to officers and employees of the Bank. The
time frame for issuing new options under the 1986 Option Plan has
expired and, as of September 30, 2007, there are no options granted
under this plan that remain outstanding. Options were granted for a
period of ten years. The option price could not be less than 100% of
the fair market value of the shares on the date of the grant.
On January 27, 2004, the Company's stockholders approved a new
equity stock option plan ("2004 Option Plan") through which options to
purchase up to 250,000 shares of common stock may be granted to
officers and employees of the Company. Options may be granted over 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.
38
<Page>
The following table summarizes both 1986 and 2004 Option Plan
activity during fiscal years 2007, 2006, and 2005. The number of
shares and price per share have been adjusted to reflect the 4-for-1
stock split in fiscal 1999. All options outstanding at September 30,
2007, were granted under the 2004 Option Plan.
Weighted avg. Range of
Number exercise price exercise price
Of shares per share per share
-------------------------------------
Options outstanding
at October 1, 2004 13,000 $ 35.50 $ 35.50
Granted 26,500 42.13 39.79-42.53
-------------------------------------
Options outstanding
at September 30, 2005 39,500 $ 39.95 $ 35.50-42.53
Granted 18,500 32.91 32.91
-------------------------------------
Options outstanding
at September 30, 2006 58,000 $ 37.70 $ 32.91-42.53
Granted 21,657 32.82 $ 30.33-39.33
Forfeited (1,000) 42.17 42.17
-------------------------------------
Options outstanding
at September 30, 2007 78,657 $ 36.30 $ 30.33-42.53
=====================================
The weighted average remaining contractual life of options
outstanding at September 30, 2007, 2006 and 2005 were 7.0 years, 7.0
years and 6.6 years, respectively.
The following table provides information regarding the expiration
dates of the stock options outstanding at September 30, 2007.
Number Weighted average
of shares exercise price
-------------------------------------
Expiring on:
July 27, 2009 10,000 $ 35.50
August 1, 2010 12,500 42.17
July 27, 2014 3,000 35.50
November 30, 2014 500 39.79
August 1, 2015 12,000 42.17
August 4, 2015 500 42.53
July 21, 2016 18,500 32.91
November 29, 2016 6,000 39.33
July 24, 2017 15,657 30.33
-------------------------------------
78,657 $ 36.30
=====================================
Of the options outstanding at September 30, 2007, 21,700 are
immediately exercisable and 56,957 are exercisable at future dates 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, 2007.
<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
- -------------------------------------------------------------- ---------------------------
$ 35.50 10,000 1.8 years $ 35.50 6,000 $ 35.50
42.17 12,500 2.8 years 42.17 5,000 42.17
35.50 3,000 6.8 years 35.50 1,800 35.50
39.79 500 7.2 years 39.79 200 39.79
42.17-42.53 12,500 7.8 years 42.18 5,000 42.18
32.91 18,500 8.8 years 32.91 3,700 32.91
39.33 6,000 9.2 years 39.33 -- --
30.33 15,657 9.8 years 30.33 -- --
--------- ---------
78,657 21,700
========= =========
</Table>
39
<Page>
(18) SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified three
principal operating segments for purposes of financial reporting:
Banking, Local Mortgage Banking, and National 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 National Mortgage Banking segment originates mortgage loans
via the internet primarily for sale to investors. The Local 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, 2007,
2006, and 2005. Dollar amounts are expressed in thousands.
<Table>
<Caption>
Local National
Year ended Mortgage Mortgage Other and
September 30, 2007 Banking Banking Banking Eliminations Consolidated
- ----------------------------------------------------------------------------------
Net interest income $ 43,027 -- -- (1,348) 41,679
Provision for
loan losses 1,634 -- -- -- 1,634
Other income 4,035 6,608 13,022 (2,467) 21,198
General and admin.
Expenses 16,249 7,242 13,150 (312) 36,329
Income tax expense 11,234 (244) (49) (1,346) 9,595
------------------------------------------------------------
Net income (loss)$ 17,945 (390) (79) (2,157) 15,319
============================================================
Total assets $ 1,485,602 2,790 348 17,743 1,506,483
============================================================
</Table>
<Table>
<Caption>
Local National
Year ended Mortgage Mortgage Other and
September 30, 2006 Banking Banking Banking Eliminations Consolidated
- ----------------------------------------------------------------------------------
Net interest income $ 46,538 -- -- 73 46,611
Provision for
loan losses 745 -- -- -- 745
Other income 7,281 9,606 9,513 (1,876) 24,524
General and admin.
Expenses 15,992 10,046 11,596 (386) 37,248
Income tax expense 13,813 (164) (776) (499) 12,374
------------------------------------------------------------
Net income (loss)$ 23,269 (276) (1,307) (918) 20,768
============================================================
Total assets $ 1,506,910 502 242 17,142 1,524,796
============================================================
</Table>
<Table>
<Caption>
Local National
Year ended Mortgage Mortgage Other and
September 30, 2005 Banking Banking Banking Eliminations Consolidated
- ----------------------------------------------------------------------------------
Net interest income $ 51,202 -- -- 97 51,299
Provision for
loan losses 522 -- -- -- 522
Other income 6,827 13,373 11,011 (2,699) 28,512
General and admin.
Expenses 15,584 12,464 11,586 (783) 38,851
Income tax expense 15,092 327 (207) (600) 14,612
------------------------------------------------------------
Net income (loss)$ 26,831 582 (368) (1,219) 25,826
============================================================
Total assets $ 1,542,083 695 407 13,159 1,556,344
============================================================
</Table>
40
<Page>
(19) 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, 2007, the Bank had outstanding commitments to
originate $14.0 million in commercial real estate loans, $60.9 million
of fixed rate residential first mortgage loans and $16.7 million of
adjustable rate residential first mortgage loans. Commercial real
estate loan commitments have approximate average committed rates of
8.0%. Residential mortgage loan commitments have an approximate
average committed rate of 6.7% and approximate average fees and
discounts of 0.73%. The interest rate commitments on residential loans
generally expire 60 days after the commitment date. Interest rate
commitments on commercial real estate loans have varying terms to
expiration.
At September 30, 2007 and 2006, the Bank had commitments to sell
loans of approximately $74.6 million and $91.2 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.
(20) 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, 2007 September 30, 2006
-------------------------- -------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------------------------- -------------------------
Financial Assets:
Cash and cash equivalents $ 26,050 26,050 11,442 11,442
Securities available for sale 42 42 50 50
Stock in Federal Home Loan Bank 22,307 22,307 24,043 24,043
Mortgage-backed securities:
Available for sale 80,622 80,622 97,259 97,259
Held to maturity 217 220 325 333
Loans receivable:
Held for sale 47,233 47,233 50,462 50,464
Held for investment 1,269,359 1,291,983 1,287,709 1,278,375
Mortgage servicing rights 911 911 1,089 1,089
Lending commitments on mortgage loans
held for sale - fixed rate 40 40 20 20
Commitments to sell loans 8 8 -- --
Financial Liabilities:
Customer deposit accounts 722,102 724,228 722,799 719,846
Brokered deposit accounts 133,434 133,813 128,243 128,373
Advances from FHLB 458,933 464,138 499,357 498,475
Subordinated debentures 25,774 25,774 -- --
Commitments to sell loans 9 9 22 22
</Table>
41
<Page>
<Table>
<Caption>
September 30, 2007 September 30, 2006
-------------------------- -------------------------
Contract or Estimated Contract or Estimated
Notional Unrealized Notional Unrealized
Amount Gain Amount Gain
-------------------------- -------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 17,161 (38) 28,690 62
Lending commitments - floating
rate 3,237 73 1,952 49
Commitments to sell loans -- -- -- --
</Table>
The fair value estimates presented are based on pertinent
information available to management as of September 30, 2007 and 2006.
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.
(21) RESTATEMENT
In connection with the preparation of the Company's Consolidated
Statements of Cash Flows, management reconsidered the classification of
repayments on its loans held for sale in accordance with guidance under
Statement of Financial Accounting Standard No. 95, "Statement of Cash
Flows" ("SFAS 95").
The Company has historically classified principal repayments on
its loans held for sale in the investing section of the statement of
cash flows. The SEC has taken exception with this treatment, and
informed the Company that principal repayments on loans held for sale
should be classified in the operating section of the statement of cash
flows in accordance with guidance under SFAS 95. Additionally, as a
result of researching this classification issue, management discovered
an error in its calculation of originations and principal repayments of
loans held for sale reported in the statement of cash flows.
The following table illustrates the restatement made to the
Consolidated Statement of Cash Flows for the year ended September 30,
2005. Dollar amounts are expressed in thousands:
Net cash from operating activities,
as previously reported $ (37,404)
Reclassification of principal repayments
of loans receivable held for sale 35,468
Correction of origination and principal
repayments of loans receivable held for sale (18,998)
--------
Reported net cash from operating activities $ (20,934)
========
Net cash from investing activities,
as previously reported $ (112,655)
Reclassification of principal repayments
of loans receivable held for sale (35,468)
Correction of origination and principal
repayments of loans receivable held for sale 18,998
--------
Reported net cash from investing activities $ (129,125)
========
42
<Page>
(22) PARENT COMPANY FINANCIAL INFORMATION
NASB Financial, Inc.
Balance Sheets
<Table>
<Caption>
September 30,
-----------------------
2007 2006
-----------------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 2,191 935
Loans receivable 1,165 1,191
Accrued interest receivable 4 4
Investment in subsidiary 152,329 137,796
Investment in LLC 19,058 16,737
Investment in NASB Trust Preferred I 774 --
-----------------------
$ 175,521 156,663
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Subordinated debentures $ 25,774 --
Escrows 40 40
Accrued interest payable 306 --
Income taxes payable 9 51
-----------------------
Total liabilities 26,129 91
-----------------------
Stockholders' equity
Common stock 1,479 1,479
Additional paid-in capital 16,400 16,311
Retained earnings 170,613 162,631
Treasury stock (38,418) (22,061)
Accumulated other comprehensive income (682) (1,788)
-----------------------
Total stockholders' equity 149,392 156,572
-----------------------
$ 175,521 156,663
=======================
</Table>
NASB Financial, Inc.
Statements of Income
<Table>
<Caption>
Years Ended September 30,
------------------------------------
2007 2006 2005
------------------------------------
(Dollars in thousands)
Income:
Income from Subsidiary $ 16,338 20,640 25,415
Interest and dividend income 72 73 96
Income (loss) from investment in LLC (197) 147 --
Gain on sale of real estate owned -- 93 680
------------------------------------
Total income 16,213 20,953 26,191
------------------------------------
Expenses:
Interest on subordinated debentures 1,421 -- --
Professional fees 75 57 39
Real estate owned expense -- -- 16
Loss on sale of securities available for sale -- -- --
Other expense 36 54 80
------------------------------------
Total general expense 1,532 111 135
------------------------------------
Income before income tax expense 14,681 20,842 26,056
Income tax expense (benefit) (638) 74 230
------------------------------------
Net income $ 15,319 20,768 25,826
====================================
</Table>
43
<Page>
NASB Financial, Inc.
Statements of Cash Flows
<Table>
<Caption>
Years ended September 30,
-----------------------------
2007 2006 2005
-----------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 15,319 20,768 25,826
Adjustments to reconcile net income to net cash
used in operating activities:
Loss (income) from investment in LLC 197 (147) --
Gain on sale of real estate owned -- (93) (680)
Equity in undistributed earnings of subsidiary (16,338) (20,640) (25,415)
Change in income taxes payable (43) (137) 178
Change in accrued interest payable 307 -- --
----------------------------
Net cash used in operating activities (558) (249) (91)
Cash flows from investing activities:
Dividends received from subsidiary 28,000 18,100 15,500
Principal repayments of loans receivable 26 24 22
Proceeds from sale of real estate owned -- 93 3,545
Investment in subsidiary (25,000) -- --
Investment in NASB Trust Preferred I (774) -- --
Investment in LLC (2,518) (4,385) (4,224)
----------------------------
Net cash provided by (used in) investing activities (266) 13,832 14,843
Cash flows from financing activities:
Proceeds from subordinated debentures 25,774 -- --
Cash dividends paid (7,337) (9,468) (14,158)
Repurchase of common stock (16,357) (4,109) (695)
Change in escrows -- (4) (7)
-----------------------------
Net cash provided by (used in) financing activities 2,080 (13,581) (14,860)
-----------------------------
Net increase (decrease) in cash and cash equivalents 1,256 2 (108)
Cash and cash equivalents at beginning of period 935 933 1,041
-----------------------------
Cash and cash equivalents at end of period $ 2,191 935 933
=============================
</Table>
44
<Page>
Report of Independent Registered Public Accounting Firm
- ----------------------------------------------------------------------
Audit Committee, Board of Directors and Stockholders
NASB Financial, Inc.
Grandview, Missouri
We have audited the accompanying consolidated balance sheets of
NASB Financial, Inc. (the "Company") as of September 30, 2007 and 2006,
and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
September 30, 2007. 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of NASB Financial, Inc. as of September 30, 2007 and 2006, and the
results of its operations and its cash flows for each of the three
years in the period ended September 30, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), NASB
Financial, Inc.'s internal control over financial reporting as of
September 30, 2007 based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated
December 7, 2007 expressed an unqualified opinion on the effectiveness
of the Company's internal control over financial reporting.
/s/ BKD LLP
December 7, 2007
Kansas City, Missouri
45
<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
2007 Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------
Interest income $ 26,044 25,817 26,054 25,903 103,818
Interest expense 15,345 15,516 15,618 15,660 62,139
--------------------------------------------------------
Net interest income 10,699 10,301 10,436 10,243 41,679
Provision for loan losses 126 633 175 700 1,634
--------------------------------------------------------
Net interest income after
provision for loan losses 10,573 9,668 10,261 9,543 40,045
Other income 5,495 5,411 5,858 4,434 21,198
General and administrative
expenses 8,629 8,949 9,961 8,790 36,329
--------------------------------------------------------
Income before income taxes 7,439 6,130 6,158 5,187 24,914
Income tax expense 2,865 2,361 2,372 1,997 9,595
--------------------------------------------------------
Net income $ 4,574 3,769 3,786 3,190 15,319
========================================================
Earnings per share $ 0.55 0.46 0.47 0.40 1.89
========================================================
Average shares outstanding 8,319 8,202 7,987 7,897 8,101
First Second Third Fourth
2006 Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------
Interest income $ 23,992 24,327 25,121 25,692 99,132
Interest expense 11,732 12,706 13,500 14,583 52,521
--------------------------------------------------------
Net interest income 12,260 11,621 11,621 11,109 46,611
Provision for loan losses 65 93 250 337 745
--------------------------------------------------------
Net interest income after
provision for loan losses 12,195 11,528 11,371 10,772 45,866
Other income 5,841 5,321 6,622 6,740 24,524
General and administrative
expenses 9,897 9,482 9,571 8,298 37,248
--------------------------------------------------------
Income before income taxes 8,139 7,367 8,422 9,214 33,142
Income tax expense 2,930 2,652 3,244 3,548 12,374
--------------------------------------------------------
Net income $ 5,209 4,715 5,178 5,666 20,768
========================================================
Earnings per share $ 0.62 0.56 0.61 0.68 2.47
========================================================
Average shares outstanding 8,435 8,417 8,396 8,338 8,397
</Table>
BOARD OF DIRECTORS OF NASB FINANCIAL INC., AND NORTH AMERICAN SAVINGS
BANK, F.S.B.
- ----------------------------------------------------------------------
DAVID H. HANCOCK
Chairman and Chief Executive Officer
NASB Financial, Inc. and North American Savings Bank
KEITH B. COX
President
NASB Financial, Inc. and North American Savings Bank
PAUL L. THOMAS
Vice President
NASB Financial, Inc.
Executive Vice President and Chief Credit Officer
North American Savings Bank
FREDERICK V. ARBANAS
Jackson County Legislature
Retired President, Fred Arbanas, Inc. National Yellow Pages Service
Kansas City, Missouri
BARRETT BRADY
Senior Vice President, Highwood Properties, Inc.
Kansas City, Missouri
A. RAY CECRLE
First Vice President, Stifel, Nicolaus & Company, Inc.
Overland Park, Kansas
LINDA S. HANCOCK
Linda Smith Hancock Interiors
Kansas City, Missouri
FLETCHER M. LAMKIN
Retired President, Westminster College
Fulton, Missouri
W. RUSSELL WELSH
President & CEO, Polsinelli Shalton Flanigan Suelthaus
Kansas City, Missouri
46
<Page>
OFFICERS OF NASB FINANCIAL, INC.
- --------------------------------------------------------------------
DAVID H. HANCOCK
Chairman
Chief Executive Officer
KEITH B. COX
President
RHONDA NYHUS
Vice President and Treasurer
SHAUNA OLSON
Corporate Secretary
WADE HALL
Vice President
BRAD LEE
Vice President
JOHN M. NESSELRODE
Vice President
DENA SANDERS
Vice President
BRUCE THIELEN
Vice President
PAUL L. THOMAS
Vice President
JAMES A. WATSON
Vice President
OFFICERS OF NORTH AMERICAN SAVINGS BANK, F.S.B.
- --------------------------------------------------------------------
DAVID H. HANCOCK
Chairman
Chief Executive Officer
KEITH B. COX
President
PAUL L. THOMAS
Executive Vice President
Chief Credit Officer
JAMES A. WATSON
Executive Vice President
Banking Compliance
RHONDA NYHUS
Senior Vice President
Chief Financial Officer
SHAUNA OLSON
Corporate Secretary
MIKE ANDERSON
Senior Vice President, Construction Lending
WADE HALL
Senior Vice President, Commercial Lending
BRAD LEE
Senior Vice President, Construction Lending
JOHN M. NESSELRODE
Senior Vice President, Chief Investment Officer
DENA SANDERS
Senior Vice President, Retail Banking
BRUCE THIELEN
Senior Vice President, Residential Lending
PHIL CRAVEN
Vice President, Commercial Lending
SHERRIE EIMER
Vice President, Branch Administration
CATHLEEN GWIN
Vice President, Residential Lending
SCOTT HAASE
Vice President, Residential Lending
JENNIE HARRIS
Vice President, Residential Lending
JEFF JACKSON
Vice President, Information Technology
KAREN JACOBSON
Vice President, Branch Operations
LISA LILLARD
Vice President, Loan Servicing
LISA M. REYNOLDS
Vice President, Construction Lending
DAN REYNOLDSON
Vice President, Residential Lending
CHRISTINE SCHABEN
Vice President, Human Resources
RICK SPECIALE
Vice President, Internal Audit
RON STAFFORD
Vice President, Residential Lending
CHRISTINE TODD
Vice President, Risk Management
DRAKE VIDRINE
Vice President, Construction Lending
DONNA WILLIAMS
Vice President, Construction Lending
OTHER DISCLOSURES REGARDING DIRECTORS, OFFICERS, AND EMPLOYEES OF NASB
FINANCIAL, INC.
- ----------------------------------------------------------------------
AUDIT COMMITTEE
During fiscal year ended September 30, 2007, Directors Brady,
Arbanas, and Cecrle served on the Company's audit committee. Director
Brady serves as the audit committee chairman and financial expert.
Director Brady meets the audit committee independence requirements as
prescribed by provisions of the Sarbanes-Oxley Act.
CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS
All Senior Financial Officers are required to abide by a Code of
Ethics, which meets the requirements of Section 406 of the Sarbanes-
Oxley Act. A copy of the Company's Code of Ethics for Senior Financial
Officers will be provided upon written request to: Keith B. Cox, NASB
Financial, Inc., 12498 South 71 Highway, Grandview, Missouri 64030.
47
<Page>
PROCEDURE FOR ANNONYMOUS COMPLAINTS
The Company has procedures in place to receive, retain, and treat
complaints received regarding accounting, internal controls, or
auditing matters. These procedures allow for confidential and
anonymous submission by employees of concerns regarding questionable
accounting or auditing matters.
BRANCH OFFICES
- ----------------------------------------------------------------------
Headquarters
12498 South 71 Highway
Grandview, Missouri
646 N. 291 Highway
Lee's Summit, Missouri
1001 North Jesse James Road
Excelsior Springs, Missouri
920 North Belt
St. Joseph, Missouri
11400 East 23rd Street
Independence, Missouri
2002 East Mechanic
Harrisonville, Missouri
8501 North Oak Trafficway
Kansas City, Missouri
7012 NW Barry Road
Kansas City, Missouri
2707 NW Prairie View Road
Platte City, Missouri
RESIDENTIAL LENDING
10950 El Monte, Suite 210
Overland Park, Kansas
949 NE Columbus
Lee's Summit, Missouri
4350 S National Avenue, Suite A100
Springfield, Missouri
CONSTRUCTION LENDING
12520 South 71 Highway
Grandview, Missouri
LOAN ADMINISTRATION
12520 South 71 Highway
Grandview, Missouri
INVESTOR INFORMATION
- -------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS:
The Annual Meeting of Stockholders will be held on Tuesday,
January 22, 2008, at 8:30 a.m. in the lobby of North American Savings
Bank, 12498 South 71 Highway, Grandview, Missouri.
ANNUAL REPORT ON 10-K:
Copies of NASB Financial, Inc. Form 10-K Report to the Securities
and Exchange Commission are available without charge upon written
request to Keith B. Cox, President, NASB Financial, Inc., 12498 South
71 Highway, Grandview, Missouri 64030.
TRANSFER AGENT:
Registrar & Transfer Co., 10 Commerce Drive, Cranford, New Jersey
07016
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:
BKD LLP, 120 West 12th Street, Suite 1200, Kansas City, Missouri
64105
SHAREHOLDER AND FINANCIAL INFORMATION:
Contact Keith B. Cox, NASB Financial, Inc., 12498 South 71
Highway, Grandview, Missouri 64030, (816) 765-2200.
48
<Page>
COMMON STOCK PRICES AND DIVIDENDS
- -------------------------------------------------------------------
At September 30, 2007, stockholders held 7,867,614 outstanding
shares of NASB Financial, Inc. common stock. The Company paid cash
dividends of $0.225 per share in February, May, and August 2005. A
cash dividend of $0.45 was paid in November 2005. Cash dividends of
$0.225 per share were paid in February, May, August, and November 2006.
The Company paid cash dividends of $0.225 per share in February, May,
and August 2007.
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 2007 Fiscal 2006
---------------- ----------------
Quarter ended High Low High Low
- -----------------------------------------------------------
December 31 $ 43.95 38.00 39.65 35.75
March 31 42.55 34.00 40.32 34.00
June 30 36.15 32.70 35.69 33.14
September 30 36.93 28.00 41.07 31.80
49
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