Securities and Exchange Commission
Washington, DC 20549
FORM 10-K/A
(Amendment No. 1)
[X] Annual Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the period ended SEPTEMBER 30, 2005
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-24033
NASB FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1805201
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12498 South 71 Highway, Grandview, Missouri 64030
(Address of principal executive offices) (Zip Code)
(816) 765-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.15 par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X]Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
[X]Yes [ ]No
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
[ ]Yes [X]No
The aggregate market value of the voting stock held by non-
affiliates of the Registrant, based on the asking price of its Common
Stock on March 31, 2005, was approximately $165.6 million.
As of December 1, 2005, there were issued and outstanding 8,437,442
shares of the Registrant's common stock
..
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II - Annual report to Stockholders for the Fiscal Year Ended
September 30, 2005.
2. Part III - Proxy Statement for the 2006 Annual Meeting of
Stockholders.
EXPLANATORY NOTE REGARDING THIS FORM 10-K/A
This Amendment No. 1 to the Annual Report on Form 10-K/A amends our
Annual Report on Form 10-K for the year ended September 30, 2005,
initially filed with the Securities and Exchange Commission ("SEC") on
December 14, 2005 (the "Original Filing"). We are filing this Amendment
No. 1 to restate our consolidated financial statements for the three
years ended September 30, 2005, 2004 and 2003, to appropriately reflect
certain information in conformity with Statement of Financial Accounting
Standards 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 consolidated statements of cash flows.
As a result of these matters, management evaluated the impact of
this restatement on the Company's internal controls and concluded that
it has a material weakness in its internal control over financial
reporting related to the process for the preparation and review of the
consolidated statement of cash flows. Accordingly, management has
revised its report on internal control over financial reporting that was
included in the Original Filing.
This Amendment No. 1 amends Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" (the "MD&A"). The MD&A is amended to add a section entitled
"Off Balance Sheet Arrangements and Contractual Obligations."
Additionally, the "Liquidity and Capital Resources" section of the MD&A
was amended. These changes were made as the result of an SEC comment
letter.
This Amendment No. 1 also amends Part II, Item 8, "Financial
Statements and Supplementary Data." This Amendment No. 1 amends and
restates the Company's consolidated financial statements for the years
ended September 30, 2005, 2004 and 2003, including the notes thereto.
The Company's Consolidated Statement of Cash Flows have been restated in
order to reclassify items related to the origination, sale and principal
repayment of loans held for sale. Refer to Note 22, "Restatement," in
this Amendment No. 1 for further information on the restatement impact
for the years ended September 30, 2005, 2004 and 2003.
This Amendment No. 1 also amends Part II, Item 9a, "Controls and
Procedures," related to the restatement of the Company's consolidated
financial statements noted above, including an updated Report of
Independent Registered Public Accounting Firm.
Pursuant to the rules of the Securities and Exchange Commission,
Item 15, "Exhibits," of Part IV of the original Form 10-K has been
amended to contain updated certifications from our Chief Executive
Officer and Chief Financial Officer, as required by Sections 302 and 906
of the Sarbanes-Oxley Act of 2002.
This Amendment No. 1 only amends and restates the Items described
above to reflect the effects of the restatement and comments of the SEC,
and we have not modified or updated other disclosures presented in our
Original Filing. Other Items of the Original Filing are not included in
this Amendment No. 1. Accordingly, this Amendment No. 1 does not
reflect events occurring after the filing of the Original Filing and
does not modify or update those disclosures affected by subsequent
events, except as specifically referenced herein. Information not
affected by this Amendment No. 1 is unchanged and reflects the
disclosures made at the time of the Original Filing on December 14,
2005.
1
PART I
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
NASB Financial, Inc. ("the Company") was formed in April 1998 to
become a unitary thrift holding company of North American Savings Bank,
F.S.B. ("the Bank" or "North American"). The Company's principal
business is to provide banking services through the Bank. Specifically,
the Bank obtains savings and checking deposits from the public, then
uses those funds to originate and purchase real estate loans and other
loans. The Bank also purchases mortgage-backed securities ("MBS") and
other investment securities from time to time as conditions warrant. In
addition to customer deposits, the Bank obtains funds from the sale of
loans held-for-sale, the sale of securities available-for-sale,
repayments of existing mortgage assets, and advances from the Federal
Home Loan Bank ("FHLB"). The Bank's primary sources of income are
interest on loans, MBS, and investment securities plus customer service
fees and income from lending activities. Expenses consist primarily of
interest payments on customer deposits and other borrowings and general
and administrative costs.
The Bank operates eight deposit branch locations, six residential
loan origination branch offices, one residential internet loan
origination office, 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 Savings Association Insurance Fund
("SAIF"), a division of the Federal Deposit Insurance Corporation
("FDIC"). The Bank is regulated by the Office of Thrift Supervision
("OTS") and the FDIC.
FORWARD-LOOKING STATEMENTS
We may from time to time make written or oral "forward-looking
statements", including statements contained in our filings with the
Securities and Exchange Commission ("SEC"). These forward-looking
statements may be included in this annual report to shareholders and in
other communications by the Company, which are made in good faith by us
pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements include statements about our
beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties, and are subject to change based on various factors, some
of which are beyond our control. The words "may," "could," "should,"
"would," "believe," "anticipate," "estimate," "expect," "intend,"
"plan," and similar expressions are intended to identify forward-looking
statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
goals, expectations, anticipations, estimates and intentions expressed
in the forward-looking statements:
- the strength of the U.S. economy in general and the strength of the
local economies in which we conduct operations;
- the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve Board;
- the effects of, and changes in, foreign and military policy of the
United States Government; inflation, interest rate, market and monetary
fluctuations;
- the timely development and acceptance of our new products and services
and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors'
products and services;
- the willingness of users to substitute competitors' products and
services for our products and services;
- our success in gaining regulatory approval of our products, services
and branching locations, when required;
- the impact of changes in financial services' laws and regulations,
including laws concerning taxes, banking, securities and insurance;
- technological changes;
- acquisitions and dispositions;
- changes in consumer spending and saving habits; and
- our success at managing the risks involved in our business.
This list of important factors is not 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.
2
FINANCIAL CONDITION
Total assets as of September 30, 2005, were $1,556.3 million, an
increase of $194.5 million from the prior year-end. Average interest-
earning assets increased $158.7 million from the prior year to $1,402.3
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, 2005, the Bank
originated $1,254.1 million in mortgage loans held for sale, $585.6
million in mortgage loans held for investment, and $12.5 million in
other loans. This total of $1,852.2 million in loan originations was an
increase of $327.5 million over the prior fiscal year.
Included in the $94.1 million in loans held for sale as of
September 30, 2005, are $90.5 million in residential mortgage loans held
for sale with servicing released. All loans held for sale are carried
at the lower of cost or fair value.
The balance of total loans held for investment at September 30,
2005, was $1,234.1 million, an increase of $357.7 million from September
30, 2004. $200.5 million of this increase was due to a transfer of
permanent mortgage loans on residential properties from the held for
sale category to the held for investment category during the quarter
ended September 30, 2005. During fiscal 2005, total originations and
purchases of mortgage loans and other loans held for investment were
$599.4 million. The gross balance of loans on business properties was
$428.6 million at September 30, 2005, compared to $413.9 million as of
the previous year-end. The gross balance of construction and
development loans was $501.1 million at September 30, 2005, an increase
of $122.9 million.
The balance of mortgage servicing rights at September 30, 2005, was
$911,000, an increase of $72,000 from September 30, 2004. Originated
mortgage servicing rights of $326,000 were capitalized during the year
ended September 30, 2005, and amortization of $256,000 was recorded
based upon current and estimated future prepayments on the underlying
mortgage loans. The total outstanding balance of mortgage loans
serviced for others was $107.1 million, a decrease of $11.6 million from
the prior fiscal year-end.
Total liabilities were $1,407.5 million at September 30, 2005, an
increase of $184.6 million from the previous year. Average interest-
costing liabilities during fiscal year 2005 were $1,299.8 million, an
increase of $147.1 million from fiscal 2004.
Total customer deposit accounts at September 30, 2005, were $707.9
million, an increase of $54.2 million from the prior year-end. The
total change in customer deposits was comprised of an increase of $66.6
million in certificates of deposit. This increase was offset by
decreases of $1.4 million in demand deposit accounts, $6.8 million in
savings accounts and $4.2 million in money market demand accounts.
Additionally, the Company held a total of $94.8 million in brokered
deposits at September 30, 2005, an increase of $64.8 million from
September 30, 2004. The average interest rate on customer and brokered
deposits at September 30, 2005, was 2.96%, an increase of 92 basis
points from the prior year-end. The average balance of customer and
brokered deposits during fiscal 2005 was $733.6 million, an increase of
$60.5 million from fiscal 2004.
Advances from the FHLB were $465.9 million at September 30, 2005,
an increase of $98.6 million from the prior fiscal year-end. During
fiscal year 2005, the Bank borrowed $454.0 million of new advances and
made $355.2 million of repayments. Management continues to use FHLB
advances as a primary funding source to provide operating liquidity and
to fund the origination of mortgage loans.
During the year ended September 30, 2005, the Company repurchased a
total of 18,000 shares of its common stock at a cost of $695,000. Also
during fiscal 2005, the Company paid a total of $14.2 million in cash
dividends to its stockholders.
NET INTEREST MARGIN
The Bank's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS, and investments and
the interest cost of customer deposits, FHLB advances, and other
borrowings. Management monitors net interest spreads and, although
constrained by certain market, economic, and competition factors, it
establishes loan rates and customer deposit rates that maximize net
interest margin.
3
During fiscal year 2005, average interest-earning assets exceeded
average interest-costing liabilities by $102.5 million, which was 7.1%
of average total assets. In fiscal year 2004, average interest-earning
assets exceeded average interest-costing liabilities by $91.0 million,
which was 7.1% of average total assets.
The net interest spread (earning yield less costing rate) for the
fiscal year ended September 30, 2005, was 3.47%, a decrease of 67 basis
points from the prior year. The net interest spread for the fiscal
year ended September 30, 2004, was 4.14%, a decrease of 30 basis points
from the prior year. The downward trend in net interest margin is a
result of various factors, including, but not limited to, 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 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%
Other borrowings 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%
========
As of
Fiscal 2004 9/30/04
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
--------------------------------------
Interest-earning assets:
Loans receivable $ 1,058,919 66,725 6.30% 5.89%
Mortgage-backed securities 149,209 5,825 3.90% 3.91%
Investments 19,217 462 2.40% 2.24%
Bank deposits 16,282 116 0.71% 1.15%
--------------------------------------
Total earning assets 1,243,627 73,128 5.88% 5.55%
-----------------------------
Non-earning assets 46,966
--------
Total $ 1,290,593
========
Interest-costing liabilities:
Customer checking and savings
deposit accounts $ 208,935 1,471 0.70% 0.67%
Customer and brokered
certificates of deposit 464,152 11,326 2.44% 2.62%
FHLB advances 345,596 5,528 1.60% 2.11%
Other borrowings 133,954 1,759 1.31% 1.45%
--------------------------------------
Total costing liabilities 1,152,637 20,084 1.74% 1.98%
-----------------------------
Non-costing liabilities 6,723
Stockholders' equity 131,233
--------
Total $ 1,290,593
========
Net earning balance $ 90,990
========
Earning yield less costing rate 4.14% 3.57%
===================
Average interest-earning
assets $ 1,243,627
========
Net interest 53,044
========
Net yield spread on avg.
Interest-earning assets 4.27%
========
As of
Fiscal 2003 9/30/03
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
--------------------------------------
Interest-earning assets:
Loans receivable $ 992,780 71,042 7.16% 6.28%
Mortgage-backed securities 7,114 439 6.17% 6.58%
Investments 25,483 961 3.77% 3.53%
Bank deposits 20,752 182 0.88% 0.57%
--------------------------------------
Total earning assets 1,046,129 72,624 6.94% 6.10%
-----------------------------
Non-earning assets 31,759
--------
Total $ 1,077,888
========
Interest-costing liabilities:
Customer checking and savings
deposit accounts $ 200,865 2,003 1.00% 0.70%
Customer certificates of
Deposit 420,010 12,437 2.96% 2.80%
FHLB advances 323,278 9,180 2.84% 1.62%
Other borrowings -- -- --% --%
--------------------------------------
Total costing liabilities 944,153 23,620 2.50% 1.97%
-----------------------------
Non-costing liabilities 16,986
Stockholders' equity 116,749
--------
Total $ 1,077,888
========
Net earning balance $ 101,976
========
Earning yield less costing rate 4.44% 4.13%
===================
Average interest-earning
assets $ 1,046,129
========
Net interest 49,004
========
Net yield spread on avg.
Interest-earning assets 4.68%
========
4
Total interest expense during the year ended September 30, 2005,
increased $12.4 million (62%) from the prior year. Specifically,
interest on customer and brokered deposit accounts increased $2.9
million due to a 43 basis point increase in the average rate paid on
such interest-costing liabilities. An additional increase of
approximately $1.2 million resulted from an increase in the average
balance of customer and brokered deposit accounts of $60.5 million over
the prior period. The average rate paid on FHLB advances increased 113
basis points, which resulted in an increase in interest on FHLB advances
of approximately $3.9 million from fiscal year 2004. An additional
increase of approximately $1.4 million resulted from an $85.0 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 increased $1.9 million due to a 139 basis point increase
in the average rate paid on such borrowings.
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 $522,000 during the year
ended September 30, 2005, compared to $465,000 during fiscal 2004. The
allowance for loan losses was $7.5 million or 0.57% of the total loan
portfolio and approximately 134% of total nonaccrual loans as of
September 30, 2005. This compares with an allowance for loan losses of
$8.2 million or 0.73% of the total loan portfolio and approximately 52%
of the total nonaccrual loans as of September 30, 2004. The decrease in
the allowance for loan loss of $685,000 resulted from net loan charge-
offs for the year of $1.2 million, which was partially offset by the
aforementioned provision for loan losses. The provision for loss on
loans related primarily to loans secured by business properties
classified as "substandard." With regard to loan portfolio
concentrations at September 30, 2005, loans secured by business
properties made up twenty-eight percent of the Bank's total loans
receivable, and fifty-eight percent of the allowance for loan losses was
allocated to such loans. This compares to thirty-two percent of total
loans receivable and sixty-four percent of the allowance at September
30, 2004. At September 30, 2005, loans secured by residential
properties made up thirty-five 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-four percent of total
loans receivable and eleven percent of the allowance at September 30,
2004. At September 30, 2005, construction and development loans made up
thirty-two percent of the Bank's total loans receivable, and nineteen
percent of the allowance for loan losses was allocated to such loans.
This compares to twenty-nine percent of total loans receivable and
sixteen percent of the allowance at September 30, 2004. 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 2005 was $28.5 million, an
increase of $6.7 million from the amount earned in fiscal year 2004.
Specifically, gain on sale of loans held for sale increased $6.0 million
due to an increase in mortgage banking volume. Recoveries on real
estate owned increased $662,000 due to gains realized on the sale of
foreclosed assets held for sale. Customer service fees and charges
increased $587,000 due primarily to fee income earned by the Company's
national mortgage banking operation. These increases were offset by
$725,000 decrease in gain on sale of securities available for sale due
to the sale of corporate debt and asset-backed securities in fiscal year
2004. Other income increased $406,000 due primarily to a $680,000 gain
recognized on the sale of a nursing home in Eau Claire, Wisconsin, which
the bank foreclosed on in fiscal 2005. Additionally, income received on
foreclosed assets held for sale increased $296,000, and an increase of
$406,000 was due to the effect of recording the net fair value of
certain loan-related commitments in accordance with FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities."
These increases in other income were offset by an $802,000 decrease in
loan prepayment penalties
Total general and administrative expenses for fiscal 2005 were
$38.9 million, an increase of $4.2 million from the prior year.
Specifically, compensation, fringe benefits, and commission-based
mortgage banking compensation increased $3.0 million due primarily to
increased mortgage banking volume, and the continued growth of the
national mortgage banking operation. Additionally, advertising
increased $1.2 million due to the growth of the national mortgage
banking operation.
6
COMPARISON OF YEARS ENDED SEPTEMBER 30, 2004 AND 2003
For the fiscal year ended September 30, 2004, the Company had net
income of $25.2 million, or $2.98 per share, compared to net income
$24.0 million, or $2.84 per share in the prior year.
Total interest income for the year ended September 30, 2004, was
$73.1 million, an increase of $504,000 from fiscal year 2003. The
average yield on assets decreased during fiscal 2004 to 5.88% from 6.94%
during fiscal 2003, which resulted in a decrease in interest income of
$9.1 million. This decrease was offset by an increase in average
interest-earning assets of $197.5 million from $1,046.1 million during
fiscal 2003 to $1,243.6 million during fiscal 2004, resulting in an
offsetting increase in interest income of $13.2 million.
Interest income on loans decreased $4.3 million to $66.7 million in
fiscal 2004, compared to $71.0 million during fiscal 2003. A decrease
of approximately $8.5 million resulted from an 86 basis point decrease
in the average yield on loans. This decrease was partially offset by an
increase of approximately $4.7 million, which resulted from an increase
in the average balance of loans outstanding of $66.1 million over the
prior period. The weighted average rate on loans receivable at the year
ended September 30, 2004, was 5.89%, a 39 basis point decrease from
September 30, 2003.
Interest on MBS increased $5.4 million to $5.8 million during
fiscal year 2004, compared to $439,000 during fiscal 2003. This
increase was primarily due to a $142.1 million increase in the average
balance of MBS over the prior period.
Total interest expense during the year ended September 30, 2004,
decreased $3.5 million (15%) from the prior year. Specifically,
interest on customer and brokered deposit accounts decreased $2.7
million due to a 43 basis point decrease in the average rate paid on
such interest-costing liabilities. This decrease was offset by an
increase of approximately $1.2 million which resulted from an increase
in the average balance of customer and brokered deposit accounts of
$52.2 million over the prior period. The average rate paid on FHLB
advances decreased 124 basis points, which resulted in a decrease in
interest on FHLB advances of approximately $4.0 million from fiscal year
2003. This decrease was offset by an increase of approximately $634,000
which resulted from a $22.3 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 was $1.8 million
during the year ended September 30, 2004. There were no securities
sold under agreements to repurchase in fiscal year 2003.
The provision for losses on loans was $465,000 during the year
ended September 30, 2004, compared to $538,000 during fiscal 2003. The
allowance for loan losses was $8.2 million or 0.73% of the total loan
portfolio and approximately 52% of total nonaccrual loans. This
compares with an allowance for loan losses of 8.0 million or 0.78% of
the total loan portfolio and approximately 116% of the total nonaccrual
loans as of September 30, 2003. The increase in the allowance for loan
loss of $235,000 resulted from the aforementioned provision for loan
losses less net loan charge-offs for the year of $230,000. The
provision for loss on loans was recorded primarily as a result of an
increase from the prior year in loans secured by business properties
classified as "substandard." With regard to loan portfolio
concentrations at September 30, 2004, loans secured by business
properties made up thirty-two percent of the Bank's total loans
receivable, and sixty-four percent of the allowance for loan losses was
allocated to such loans. This compares to thirty-six percent of total
loans receivable and sixty percent of the allowance at September 30,
2003. At September 30, 2004, loans secured by residential properties
made up thirty-four percent of the Bank's total loans receivable, and
eleven percent of the allowance for loan losses was allocated to such
loans. This compares to thirty-three percent of total loans receivable
and sixteen percent of the allowance at September 30, 2003. At
September 30, 2004, construction and development loans made up twenty-
nine percent of the Bank's total loans receivable, and sixteen percent
of the allowance for loan losses was allocated to such loans. This
compares to twenty-five percent of total loans receivable and twelve
percent of the allowance at September 30, 2003. 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.
7
Total other income for fiscal year 2004 was $21.8 million, an
increase of $5.6 million from the amount earned in fiscal year 2003.
Specifically, provision for losses on real estate owned decreased $2.2
million due primarily to a reserve recorded in the fiscal 2003 on a
hotel property in the Southeast area of Kansas City, Missouri, which was
sold in April 2003. Customer service fees and charges increased $1.6
million due primarily to fee income earned by the Company's national
mortgage banking operation, which began operations in October 2003.
Loan servicing fees increased $1.5 million due primarily to a decrease
in the amortization of capitalized servicing. This resulted from
decreases in actual prepayments and estimated future prepayments of the
underlying mortgage loans during fiscal year 2004. Other income
increased $1.2 million due primarily to the effect of recording the fair
value of certain loan-related commitments in accordance with certain
aspects of FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and a decrease in expenses on
foreclosed assets held for sale. Gain on sale of securities available
for sale increased $476,000 due to the sale of corporate debt securities
and the sale of an asset-backed security, which the Company had
previously deemed impaired. These increases in other income were offset
by a $1.0 million decrease in gain on sale of loans held for sale, and a
$345,000 decrease in the impairment recovery on mortgage servicing
rights.
Total general and administrative expenses for fiscal 2004 were
$34.6 million, an increase of $8.9 million from the prior year.
Specifically, compensation, fringe benefits, and commission-based
mortgage banking compensation increased $5.4 million, and advertising
increased $1.7 million due primarily to the addition of the national
mortgage banking operation. Additionally, other expenses increased $1.2
million due primarily to an increase in data processing and other
charges related to the addition of the national mortgage banking
operation.
ASSET/LIABILITY MANAGEMENT
Management recognizes that there are certain market risk factors
present in the structure of the Bank's financial assets and liabilities.
Since the Bank does not have material amounts of derivative securities,
equity securities, or foreign currency positions, interest rate risk
("IRR") is the primary market risk that is inherent in the Bank's
portfolio.
The objective of the Bank's IRR management process is to maximize
net interest income over a range of possible interest rate paths. The
monitoring of interest rate sensitivity on both the interest-earning
assets and the interest-costing liabilities are key to effectively
managing IRR. Management maintains an IRR policy, which outlines a
methodology for monitoring interest rate risk. The Board of Directors
reviews this policy and approves changes on a quarterly basis. The IRR
policy also identifies the duties of the Bank's Asset/Liability
Committee ("ALCO"). Among other things, the ALCO is responsible for
developing the Bank's annual business plan and investment strategy,
monitoring anticipated weekly cashflows, establishing prices for the
Bank's various products, and implementing strategic IRR decisions.
On a quarterly basis, the Bank monitors the estimate of changes
that would potentially occur to its net portfolio value ("NPV") of
assets, liabilities, and off-balance sheet items assuming a sudden
change in market interest rates. Management presents a NPV analysis to
the Board of Directors each quarter and NPV policy limits are reviewed
and approved.
The following table is an interest rate sensitivity analysis, which
summarizes information provided by the OTS, which estimates the changes
in NPV of the Bank's portfolio of assets, liabilities, and off-balance
sheet items given a range of assumed changes in market interest rates.
These computations estimate the effect on the Bank's NPV of an
instantaneous and sustained change in market interest rates of plus and
minus 300 basis points, as well as the Bank's current IRR policy limits
on such estimated changes. The computations of the estimated effects of
interest rate changes are based on numerous assumptions, including a
constant relationship between the levels of various market interest
rates and estimates of prepayments of financial assets. The OTS
compiled this information using data from the Bank's Thrift Financial
Report as of September 30, 2005. 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.
Changes in Net Portfolio Value NPV as % of PV of Assets
Market ------------------------------------ Board approved
Interest rates $ Amount $ Change % Change Actual minimum
---------------------------------------------------- ------------------------
+ 3% 124,820 (42,475) -25% 8.4% 6%
+ 2% 139,809 (27,485) -18% 9.2% 6%
+ 1% 153,786 (13,508) -8% 10.0% 7%
no change 167,294 -- -- 10.6% 8%
- 1% 181,754 14,459 +9% 11.4% 8%
- 2% 196,036 28,742 +17% 12.1% 8%
- 3% -- -- -- -- 8%
8
Management cannot predict future interest rates and the
effect of changing interest rates on future net interest
margin, net income, or NPV can only be estimated. However,
management believes that its overall system of monitoring and
managing IRR is effective.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented
have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement
of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of
money over time due to inflation. Unlike most industrial companies,
most of the Bank's assets and liabilities are monetary in nature.
Except for inflation's impact on general and administrative expenses,
interest rates have a more significant impact on the Bank's performance
than do the effects of inflation. However, the level of interest rates
may be significantly affected by the potential changes in the monetary
policies of the Board of Governors of the Federal Reserve System in an
attempt to impact inflation. Interest rates do not necessarily move in
the same direction or in the same magnitude as the prices of goods and
services.
Changing interest rates impact the demand for new loans, which
affect the value and profitability of North American's loan origination
department. Rate fluctuations inversely affect the value of the Bank's
mortgage servicing portfolio because of their impact on mortgage
prepayments. Falling rates usually stimulate a demand for new loans,
which makes the mortgage banking operation more valuable, but also
encourages mortgage prepayments, which depletes the value of mortgage
servicing rights. Rising rates generally have the opposite effect on
these operations.
LIQUIDITY AND CAPITAL RESOURCES
Effective July 18, 2001, the OTS adopted a rule that removed the
regulation to maintain a specific average daily balance of liquid
assets, but retained a provision that requires institutions to maintain
sufficient liquidity to ensure their safe and sound operation. North
American maintains a level of liquid assets adequate to meet the
requirements of normal banking activities, including the repayment of
maturing debt and potential deposit withdrawals. The Bank's primary
sources of liquidity are the sale and repayment of loans, retention 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, 2005, the Bank had available advances at FHLB of $560.8
million, and outstanding advances of $465.9 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, 2005, the Bank has $94.8 million in brokered deposits,
and it could purchase up to an additional$132.3 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, 2005, 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.
9
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.
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 it's portfolio and standby letters of credit totaling
$23.6 million and $5.5 million, respectively, at September 30, 2005. In
addition, the Bank had outstanding commitments to originate mortgage
loans totaling $165.6 million at September 30, 2005, 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, 2005:
Due in Due from Due from Due in
Total < 1 year 1-3 years 3-5 years > 5 years
----------------------------------------------------------
Advances from FHLB $ 465,907 424,550 34,153 5,833 1,371
Operating Leases 2,693 1,009 1,436 248 --
Securities sold under
agreements to repurchase 122,000 122,000 -- -- --
----------------------------------------------------------
Total contractual obligations $ 590,600 547,559 35,589 6,081 1,371
==========================================================
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.
10
When considering the adequacy of ALLL, management's evaluation of
the asset portfolio has two primary components: foreclosure probability
and loss severity. Foreclosure probability is the likelihood of loans
not repaying in accordance with their original terms, which would result
in the foreclosure and subsequent liquidation of the property. Loss
severity is any potential loss resulting from the loan's foreclosure and
subsequent liquidation. Management calculates estimated foreclosure
frequency and loss severity ratios for each homogenous loan pool based
upon historical data plus an estimate of certain subjective factors
including future market trends and economic conditions. These ratios
are applied to the balances of the homogeneous loan pools to determine
the adequacy of the ALLL each month.
In addition to analyzing homogenous pools of loans for impairment,
management reviews individual loans for impairment each month. A loan
becomes impaired when management believes it will be unable to collect
all principal and interest due according to the contractual terms of the
loan. If a loan is impaired, the Bank records a specific allowance
equal to the excess of the loan's carrying value over the present value
of the estimated future cash flows discounted at the loan's effective
rate based on the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. Loans on
residential properties with greater than four units and loans on
construction/development and commercial properties are evaluated for
impairment on a loan by loan basis.
VALUCATION OF MORTGAGE SERVICING RIGHTS
The Bank creates mortgage servicing rights ("MSRs") through the
securitization and sale of residential mortgage loans. MSRs are
recorded at cost based upon the relative fair values of the servicing
rights on the underlying loans. The fair value is determined by
discounting estimated future cash flows at the market rate of interest.
These rights are amortized in proportion to and over the period of
expected net servicing income or loss.
The Bank evaluates the carrying value of MSRs on a monthly basis
based on their estimated fair value. For purposes of evaluating and
measuring impairment of MSRs, the Bank stratifies the rights based on
their predominant risk characteristics. Management considers the
significant risks to be loan type, period of origination and stated
interest rate. If the estimated fair value, using a discounted cash
flow methodology, is less than the carrying amount of the portfolio, the
portfolio is written down to the amount of the discounted expected cash
flows utilizing a valuation allowance. The Bank utilizes consensus
market prepayment assumptions and discount rates to evaluate its
capitalized servicing rights, which considers the risk characteristics
of the underlying servicing rights. Prepayment assumptions have the
greatest impact on the market value of MSRs. Generally, if current
rates are lower than the rates on the underlying loans, prepayments will
accelerate, reducing the value of the MSRs. The Bank utilizes
prepayment assumptions compiled by the mortgage research departments of
several large broker/dealers. The measurement of the fair value of MSRs
is limited by the conditions existing and the assumptions utilized as of
a particular point in time, and those assumptions may not be appropriate
if applied at a different point in time.
11
NASB Financial, Inc. and Subsidiary
Consolidated Balance Sheets
September 30,
-----------------------
2005 2004
-----------------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 35,334 18,263
Securities available for sale, at fair value (amortized cost of
$237 and $244 at September 30, 2005 and 2004, respectively) 237 244
Stock in Federal Home Loan Bank, at cost 22,390 17,808
Mortgage-backed securities:
Available for sale, at fair value (amortized cost of $132,923 and
$172,803 at September 30, 2005 and 2004, respectively) 129,302 170,933
Held to maturity, at cost (fair value of $447 and $645 at
September 30, 2005 and 2004, respectively) 431 614
Loans receivable:
Held for sale, at lower of amortized cost or market value (estimated
fair value of $94,203 and $249,064 at September 30, 2005 and 2004,
respectively) 94,130 246,468
Held for investment, net 1,234,050 876,322
Allowance for loan losses (7,536) (8,221)
Accrued interest receivable 6,997 5,887
Foreclosed assets held for sale, net 7,760 4,014
Premises and equipment, net 10,558 8,481
Investment in LLC's 12,206 7,982
Mortgage servicing rights, net 911 839
Deferred income tax asset 2,671 3,915
Other assets 6,903 8,339
-----------------------
$ 1,556,344 1,361,888
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 707,892 653,700
Brokered deposit accounts 94,802 30,040
Advances from Federal Home Loan Bank 465,907 367,341
Securities sold under agreements to repurchase 122,000 159,100
Escrows 9,423 8,437
Income taxes payable 796 1,072
Accrued expenses and other liabilities 6,637 3,207
-----------------------
Total liabilities 1,407,457 1,222,897
-----------------------
Stockholders' equity:
Common stock of $0.15 par value: 20,000,000 authorized; 9,857,112
Shares issued at September 30, 2005 and 2004, respectively 1,479 1,479
Serial preferred stock of $1.00 par value: 7,500,000 shares
authorized; none outstanding -- --
Additional paid-in capital 16,256 16,256
Retained earnings 151,331 139,663
Treasury stock, at cost; 1,419,670 shares and 1,401,670 shares at
September 30, 2005 and 2004, respectively (17,952) (17,257)
Accumulated other comprehensive loss (2,227) (1,150)
-----------------------
Total stockholders' equity 148,887 138,991
-----------------------
$ 1,556,344 1,361,888
=======================
See accompanying notes to consolidated financial statements.
12
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended September 30,
------------------------------------
2004 2004 2003
------------------------------------
(Dollars in thousands, except per share data)
Interest on loans receivable $ 77,267 66,725 71,042
Interest on mortgage-backed securities 5,653 5,825 439
Interest and dividends on securities 562 462 961
Other interest income 291 116 182
------------------------------------
Total interest income 83,773 73,128 72,624
------------------------------------
Interest on customer deposit accounts 17,082 12,797 14,440
Interest on advances from Federal Home Loan Bank 11,735 5,528 9,180
Interest on securities sold under agreements
to repurchase 3,657 1,759 --
------------------------------------
Total interest expense 32,474 20,084 23,620
------------------------------------
Net interest income 51,299 53,044 49,004
Provision for loan losses 522 465 538
------------------------------------
Net interest income after provision
for loan losses 50,777 52,579 48,466
------------------------------------
Other income (expense):
Loan servicing fees, net 122 278 (1,177)
Impairment recovery on mortgage servicing
rights 2 36 381
Customer service fees and charges 7,196 6,609 5,001
Provision for (loss) recovery on real estate owned 899 237 (1,984)
Gain on sale of securities available for sale -- 725 249
Gain on sale of loans receivable held for sale 17,865 11,906 12,923
Other 2,428 2,022 842
------------------------------------
Total other income 28,512 21,813 16,235
------------------------------------
General and administrative expenses:
Compensation and fringe benefits 16,831 15,985 11,417
Commission-based mortgage banking compensation 8,651 6,491 5,620
Premises and equipment 3,238 3,066 2,530
Advertising and business promotion 3,960 2,739 1,008
Federal deposit insurance premiums 100 101 105
Other 6,071 6,220 5,053
------------------------------------
Total general and administrative expenses 38,851 34,602 25,733
------------------------------------
Income before income tax expense 40,438 39,790 38,968
------------------------------------
Income tax expense (benefit):
Current 12,692 13,256 16,090
Deferred 1,920 1,378 (1,091)
------------------------------------
Total income tax expense 14,612 14,634 14,999
------------------------------------
Net income $ 25,826 25,156 23,969
====================================
Basic earnings per share $ 3.06 2.98 2.84
====================================
Diluted earnings per share $ 3.05 2.97 2.84
====================================
Basic weighted average shares outstanding 8,450,769 8,455,734 8,433,713
====================================
See accompanying notes to consolidated financial statements.
13
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years ended September 30,
--------------------------------
2005 2004 2003
(Restated) (Restated) (Restated)
--------------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 25,826 25,156 23,969
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 1,090 1,039 754
Amortization and accretion, net (2,839) (1,491) (354)
Deferred income tax expense (benefit) 1,920 1,378 (1,091)
Gain on sale of securities available for sale -- (725) (249)
Impairment recovery on mortgage servicing rights (2) (36) (381)
Net fair value of loan-related commitments (271) 135 714
Gain on sale of loans receivable held for sale (17,865) (11,906) (12,923)
Provision for loan losses 522 465 538
Provision for loss (recovery) on real estate owned (899) (237) 1,984
Principal repayments of mortgage loans receivable
held for sale 35,468 31,834 16,962
Origination of loans receivable held for sale (1,289,597) (1,076,198) (928,819)
Sale of loans receivable held for sale 1,223,505 979,295 858,372
Changes in:
Accrued interest receivable (1,110) (1,180) 435
Accrued expenses, other liabilities and
income taxes payable 3,318 (3,377) (178)
-------------------------------
Net cash (used in) provided by operating activities (20,934) (55,848) (40,267)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 213 318 571
Available for sale 39,386 23,796 3,111
Principal repayments of mortgage loans receivable
held for investment 419,147 454,238 665,683
Principal repayments of other loans receivable 13,160 14,980 28,517
Principal repayments of securities available for sale 7 3 3,519
Loan origination - mortgage loans receivable
held for investment (585,619) (473,061) (644,812)
Loan origination - other loans receivable (12,502) (7,294) (34,747)
Purchase of mortgage loans receivable held for investment (1,310) (8,050) (2,627)
Proceeds from sale (purchases) of Federal Home Loan
Bank stock (4,582) (2,202) 1,889
Purchase of mortgage-backed securities available
for sale -- (193,043) --
Proceeds from sale of securities available for sale -- 5,369 7,132
Proceeds from sale of real estate owned 9,249 6,386 6,269
Purchase of premises and equipment, net (3,167) (1,889) (907)
Investment in LLC (4,224) (5,710) (2,072)
Net cash acquired in acquisition of CBES Bancorp, Inc. -- -- 16,664
Other 1,117 (47) (420)
-------------------------------
Net cash used in investing activities (129,125) (186,206) 47,770
14
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
Years ended September 30,
--------------------------------
2005 2004 2003
(Restated) (Restated) (Restated)
--------------------------------
(Dollars in thousands)
Cash flows from financing activities:
Net increase (decrease) in customer and brokered
deposit accounts 119,304 29,580 22,970
Proceeds from advances from Federal Home Loan Bank 454,000 560,900 460,000
Repayment of advances from Federal Home Loan Bank (355,207) (501,421) (457,293)
Proceeds from sale of securities under agreements to
repurchase 311,900 223,980 --
Repayment of securities sold under agreements to
repurchase (349,000) (64,880) --
Cash dividends paid (14,158) (12,262) (5,567)
Stock options exercised -- 143 260
Repurchase of common stock for treasury (695) (180) (352)
Change in checks outstanding in excess of bank balances -- -- (7,764)
Change in escrows 986 136 396
--------------------------------
Net cash provided by financing activities 167,130 235,996 12,650
--------------------------------
Net increase (decrease) in cash and cash equivalents 17,071 (6,058) 20,153
Cash and cash equivalents at beginning of period 18,263 24,321 4,168
--------------------------------
Cash and cash equivalents at end of period $ 35,334 18,263 24,321
================================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 12,971 16,645 13,725
Cash paid for interest 30,096 14,066 23,613
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 11,268 3,860 8,008
Conversion of real estate owned to loans receivable -- 168 1,638
Capitalization of originated mortgage servicing rights 326 2 138
Transfer of loans from held for sale to held for
investment 200,515 -- --
In connection with the acquisition of CBES Bancorp, Inc. on December 19, 2002, the Company acquired assets of
$109.9 million, assumed liabilities of $94.3 million, received cash of $32.2 million, and paid cash of $15.6
million.
See accompanying notes to consolidated financial statements.
15
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
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, 2002 $ 1,470 15,862 108,367 (16,716) 463 109,446
Comprehensive income:
Net income -- -- 23,969 -- -- 23,969
Other comprehensive income,
net of tax:
Unrealized loss on securities -- -- -- -- (313) (313)
----------
Total comprehensive income 23,656
Cash dividends paid -- -- (5,567) -- -- (5,567)
Stock options exercised 6 254 -- -- -- 260
Purchase of common stock
for treasury -- -- -- (361) -- (361)
---------------------------------------------------------------------
Balance at September 30, 2003 $ 1,476 16,116 126,769 (17,077) 150 127,434
Comprehensive income:
Net income -- -- 25,156 -- -- 25,156
Other comprehensive income,
net of tax:
Unrealized loss on securities -- -- -- -- (1,300) (1,300)
----------
Total comprehensive income 23,856
Cash dividends paid -- -- (12,262) -- -- (12,262)
Stock options exercised 3 140 -- -- -- 143
Purchase of common stock
for treasury -- -- -- (180) -- (180)
---------------------------------------------------------------------
Balance at September 30, 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
======================================================================
See accompanying notes to consolidated financial statements.
16
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NASB
Financial, Inc. (the "Company"), its wholly-owned subsidiary, North
American Savings Bank, F.S.B. (the "Bank"), and the Bank's wholly-owned
subsidiary, Nor-Am Service Corporation. All significant inter-company
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand plus interest-
bearing deposits in the Federal Home Loan Bank of Des Moines totaling
$14.9 million and $10.1 million as of September 30, 2005 and 2004,
respectively. In addition, the Bank has interest-bearing deposits with
various brokers totaling $12.7 million as of September 30, 2005, which
are pledged as collateral to secure the liability resulting from
securities sold under agreements to repurchase.
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, 2005
and 2004, the Company had no assets designated as trading. Securities
and mortgage-backed securities classified as available for sale are
recorded at their fair values, with unrealized gains and losses, net of
income taxes, reported as accumulated other comprehensive income or
loss.
Premiums and discounts are recognized as adjustments to interest
income over the life of the securities using a method that approximates
the level yield method. Gains or losses on the disposition of
securities are based on the specific identification method. Market
prices are obtained from broker-dealers and reflect estimated offer
prices.
To the extent management determines a decline in value in a
security or mortgage-backed security available for sale to be other
than temporary, the Bank will include such expense in the consolidated
statements of income.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity are stated at cost,
adjusted for amortization of premiums and discounts, which are
recognized as adjustments to interest income over the life of the
securities using the level-yield method.
To the extent management determines a decline in value in a
mortgage-backed security held to maturity to be other than temporary,
the Company will adjust the carrying value and include such expense in
the consolidated statements of income.
LOANS RECEIVABLE HELD FOR SALE
At the time of origination, management designates as held for sale
those loans that it does not intend to hold to maturity. Accordingly,
such loans are carried at the lower of amortized cost (outstanding
principal balance adjusted for unamortized deferred loan fees and
costs) or market value. Market values for such loans are determined
based on sale commitments or dealer quotations. Gains or losses on
such sales are recognized using the specific identification method.
Interest, including amortization and accretion of deferred loan fees
and costs, is included in interest income.
LOANS RECEIVABLE HELD FOR INVESTMENT, NET
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount
of unpaid principal less an allowance for loan losses, undisbursed loan
funds and unearned discounts and loan fees, net of certain direct loan
origination costs. Interest on loans is credited to income as earned
and accrued only when it is deemed collectible. Loans are placed on
nonaccrual status when, in the opinion of management, the full timely
collection of principal or interest is in doubt. As a general rule,
the accrual of interest is discontinued when principal or interest
payments become doubtful. When a loan is placed on nonaccrual status,
previously accrued but unpaid interest is reversed against current
income. Subsequent collections of cash may be applied as reductions to
the principal balance, interest in arrears or recorded as income,
depending on Bank management's assessment of the ultimate
collectibility of the loan. Nonaccrual loans may be restored to
accrual status when principal and interest become current and the full
payment of principal and interest is expected.
Net loan fees and direct loan origination costs are deferred and
amortized as yield adjustments to interest income using the level-yield
method over the contractual lives of the related loans.
17
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 LLC's
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.
STOCK OPTIONS
The Company has a stock-based employee compensation plan which is
described more fully in Note 17. The Company applies Accounting
Principles Board Opinion ("APB") No. 25 in accounting for its Option
Plan, under which no compensation cost has been recognized for stock
option awards. For purposes of computing the pro forma effects of stock
option grants under the fair value accounting method, the fair value of
each stock option grant was estimated on the date of the grant using
the Black-Scholes option pricing model. Had compensation cost for the
Option Plan been determined in accordance with the fair value
accounting method prescribed under SFAS 123, "Accounting for Stock-
Based Compensation," the Company's net income and net income per share
on a pro forma basis would have been as presented in the following
table. Dollar amounts are expressed in thousands, except per share
data.
2005 2004 2003
------------------------------
Net Income:
As reported $ 25,826 25,156 23,969
Pro forma 25,813 25,144 23,969
Basic earnings per share:
As reported $ 3.06 2.98 2.84
Pro forma 3.06 2.97 2.84
Diluted earnings per share:
As reported $ 3.05 2.97 2.84
Pro forma 3.05 2.97 2.84
18
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,
2005 and 2004, 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.
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 years ended September 30, 2005 and 2004, the value of
mortgage servicing rights increased, which resulted in a recovery of
valuation allowance of $2,000 and $36,000, respectively.
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. 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, 2005
and 2004, the fair value of loan related commitments resulted in a net
asset of $55,000 and a liability of $216,000, 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
Earnings per share have been computed based upon the weighted-
average common shares outstanding during the year. Diluted earnings
per share is computing 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.
19
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,
--------------------------------------
2005 2004 2003
--------------------------------------
Net income $ 25,826 25,156 23,969
Average common shares outstanding 8,450,769 8,455,734 8,433,713
Average common share stock
Options outstanding 16,739 3,068 11,648
--------------------------------------
Average diluted common shares 8,467,508 8,458,802 8,445,361
Earnings per share:
Basic earnings per share $ 3.06 2.98 2.84
Diluted earnings per share 3.05 2.97 2.84
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), and
subsequently revised through Interpretation No. 46(R) in December 2003,
which establishes guidance for determining when an entity should
consolidate another entity that meets the definition of a variable
interest entity. FIN 46 addresses consolidation by business
enterprises of variable interest entities, which have one or both of
the following characteristics: i) the equity investment at risk is
not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, which is
provided through other interests that will absorb some or all of the
expected losses of the entity; and ii) the equity investors lack an
essential characteristic of a controlling financial interest. The
adoption of FIN 46 did not have a material impact on the Company's
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This
statement amends SFAS No. 133 to clarify the definition of a derivative
and incorporate many of the implementation issues cleared as a result
of the Derivatives Implementation Group process. This statement was
effective for contracts entered into or modified after June 30, 2003.
The adoption of SFAS No. 149 did not have a material impact on the
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." This statement affects the classification, measurement, and
disclosure requirements of certain freestanding financial instruments,
including mandatorily redeemable shares. This statement was effective
for certain financial instruments entered into or modified after May
31, 2003. The adoption of SFAS No. 150 did not have a material impact
on the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), "Share Based
Payment (Revised 2004)," which requires that compensation costs
relating to share-based payment transactions be recognized in the
financial statements and includes implementation guidance on measuring
the fair value of share-based payments. SFAS No. 123(R) replaces SFAS
No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No.
123, as originally issued in 1995, established as preferable a fair-
value-based method of accounting for share-based payment transactions
with employees, but permitted the option of continuing to apply the
guidance in Opinion No. 25 and disclosing in the footnotes the effect
on net income of applying the preferred fair-value-based method. The
provisions of SFAS No. 123(R) will be effective for the Company's
annual financial statements for periods beginning after June 15, 2005.
The Company does not believe that the adoption of SFAS No. 123(R) will
have a material impact on the consolidated financial statements.
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 2004 and 2003 have been reclassified to
conform to the current year presentation.
20
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, 2005 and 2004:
CASH AND CASH EQUIVALENTS
The carrying amount reported in the consolidated balance sheets is a
reasonable estimate of fair value.
SECURITIES AVAILABLE FOR SALE
Fair values are based on quoted market prices, where available.
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values are based on quoted market prices, where available. When
quoted market prices are unavailable, fair values are computed using
consensus estimates of prepayment speeds and market spreads to treasury
securities.
STOCK IN FEDERAL HOME LOAN BANK ("FHLB")
The carrying value of stock in Federal Home Loan Bank approximates its
fair value.
LOANS RECEIVABLE HELD FOR SALE
Fair values of mortgage loans held for sale are based on quoted market
prices for loans with no current commitment to sell. Fair values of
mortgage loans sold forward are based on the committed prices.
LOANS RECEIVABLE HELD FOR INVESTMENT
Fair values are computed for each loan category using market spreads to
treasury securities for similar existing loans in the portfolio and
management's estimates of prepayments.
MORTGAGE SERVICING RIGHTS
The estimated fair values of mortgage servicing rights are determined
by discounting estimated future cash flows using a market rate of
interest and consensus estimates of prepayment speeds.
CUSTOMER DEPOSIT ACCOUNTS
The estimated fair values of demand deposits and savings accounts are
equal to the amount payable on demand at the reporting date. Fair
values of certificates of deposit are computed at fixed spreads to
treasury securities with similar maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK
The estimated fair values of advances from FHLB are determined by
discounting the future cash flows of existing advances using rates
currently available for new advances with similar terms and remaining
maturities.
COMMITMENTS TO ORIGINATE, PURCHASE AND SELL LOANS
The estimated fair value of commitments to originate, purchase, or sell
loans is based on the fees currently charged to enter into similar
agreements and the difference between current levels of interest rates
and the committed rates.
21
(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, 2005
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------
Equity securities $ 180 -- -- 180
Municipal securities 57 -- -- 57
--------------------------------------------
Total $ 237 -- -- 237
============================================
September 30, 2004
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------
Equity securities $ 180 -- -- 180
Municipal securities 64 -- -- 64
--------------------------------------------
Total $ 244 -- -- 244
============================================
There were no sales of securities available for sale during the
year ended September 30, 2005. During the year ended September 30,
2004, gross gains of $367,000 and no losses were recognized on the sale
of securities available for sale. During the year ended September 30,
2003, gross gains of $262,000 and gross losses of $13,000 were
recognized on the sale of securities available for sale.
The scheduled maturities of securities available for sale at
September 30, 2005, are presented in the following table. Dollar
amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
No stated maturity $ 180 -- -- 180
Due from one to five years 22 -- -- 22
Due from five to ten years 31 -- -- 31
Due after ten years 4 -- -- 4
--------------------------------------------
Total $ 237 -- -- 237
============================================
(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.
September 30, 2005
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
Pass-through certificates guaranteed
by GNMA - fixed rate $ 361 -- (4) 357
Pass-through certificates guaranteed
by FNMA - adjustable rate 18,995 -- (525) 18,470
FHLMC participation certificates:
Fixed rate 1,607 -- (88) 1,519
Adjustable rate 111,960 -- (3,004) 108,956
-----------------------------------------------------
Total $ 132,923 -- (3,621) 129,302
=====================================================
22
September 30, 2004
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
Pass-through certificates guaranteed
by GNMA - fixed rate $ 530 4 -- 534
Pass-through certificates guaranteed
By FNMA - adjustable rate 26,577 -- (341) 26,236
FHLMC participation certificates:
Fixed rate 1,977 -- (88) 1,889
Adjustable rate 143,719 -- (1,445) 142,274
-----------------------------------------------------
Total $ 172,803 4 (1,874) 170,933
=====================================================
During the year ended September 30, 2004, gross gains of $358,000
and no losses were recognized on the sale of mortgage-backed securities
available for sale. There were no sales of mortgage-backed securities
available for sale during the years ended September 30, 2005, or 2003.
During the quarter ended September 30, 2002, the Bank transferred a
mortgage-backed security with an amortized cost of $1.2 million from the
held to maturity category to the available for sale category. Prior to
the transfer, the security was deemed impaired and a loss of $311,000
was recorded to write it down to fair market value. Thus, there were no
unrealized gains or losses at the date of transfer. The decision was
made to transfer the security after it was determined that there was a
significant deterioration in the underlying credit. During the year
ended September 30, 2004, this mortgage-backed security was sold, and a
gain of $358,000 was recognized.
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, 2005 and 2004. Dollar
amounts are expressed in thousands.
September 30, 2005
---------------------------------------------
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 GNMA:
Fixed rate $ 357 4 $ -- --
Pass-through certificates
guaranteed by FNMA:
Adjustable rate -- -- 18,470 525
FHLMC participation
certificates:
Fixed rate -- -- 1,519 88
Adjustable rate -- -- 108,956 3,004
---------------------------------------------
Total $ 357 4 $ 128,945 3,617
=============================================
September 30, 2004
---------------------------------------------
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 $ 26,236 341 $ -- --
FHLMC participation
certificates:
Fixed rate -- -- 1,889 88
Adjustable rate 142,274 1,445 -- --
---------------------------------------------
Total $ 168,510 1,786 $ 1,889 88
=============================================
23
Based upon evaluation of available evidence, including changes in
market interest rates during fiscal years 2005 and 2004, management
believes the declines in fair value of these securities are temporary.
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.
The scheduled maturities of mortgage-backed securities available
for sale at September 30, 2005, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due after ten years $ 132,923 -- (3,621) 129,302
============================================
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.
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, 2005
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 2,329 -- (71) 2,258
Securities sold under
agreements to repurchase 120,997 -- (3,252) 117,745
---------------------------------------------
$ 123,326 -- (3,323) 120,003
==============================================
September 30, 2004
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 1,311 2 (28) 1,285
Securities sold under
agreements to repurchase 169,720 -- (1,779) 167,941
---------------------------------------------
$ 171,031 2 (1,807) 169,226
==============================================
(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.
September 30, 2005
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
FHLMC participation certificates:
Fixed rate $ 194 12 -- 206
FNMA pass-through certificates:
Fixed rate 104 1 -- 105
Balloon maturity and
adjustable rate 82 -- -- 82
Pass-through certificates guaranteed
by GNMA - fixed rate 51 3 -- 54
----------------------------------------------------
Total $ 431 16 -- 447
=====================================================
24
September 30, 2004
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
FHLMC participation certificates:
Fixed rate $ 302 23 -- 325
FNMA pass-through certificates:
Fixed rate 85 -- -- 85
Balloon maturity and
adjustable rate 118 1 -- 119
Pass-through certificates guaranteed
by GNMA - fixed rate 87 7 -- 94
Collateralized mortgage
obligation bonds 22 -- -- 22
----------------------------------------------------
Total $ 614 31 -- 645
=====================================================
The scheduled maturities of mortgage-backed securities held to
maturity at September 30, 2005, 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 $ 104 6 -- 110
Due from five to ten years 64 3 -- 67
Due after ten years 263 7 -- 270
---------------------------------------------
Total $ 431 16 -- 447
=============================================
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, 2005
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 355 13 -- 368
==============================================
September 30, 2003
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 528 26 -- 554
==============================================
All dispositions of mortgage-backed securities held to maturity
during fiscal 2005, 2004, and 2003 were the result of maturities or
calls.
25
(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 2005 2004
---------------------------
Mortgage loans:
Permanent loans on:
Residential properties $ 388,142 178,282
Business properties 428,566 413,887
Partially guaranteed by VA or
insured by FHA 3,314 6,667
Construction and development 501,072 378,154
---------------------------
Total mortgage loans 1,321,094 976,990
Commercial loans 54,182 40,250
Installment loans and lease financing
to individuals 21,413 22,489
---------------------------
Total loans receivable held
for investment 1,396,689 1,039,729
Less:
Undisbursed loan funds (158,854) (157,881)
Unearned discounts and fees on
loans, net of deferred costs (3,785) (5,526)
---------------------------
Net loans receivable held
for investment $ 1,234,050 876,322
===========================
HELD FOR SALE 2005 2004
---------------------------
Mortgage loans:
Permanent loans on
residential properties $ 147,412 268,724
Less:
Undisbursed loan funds (53,288) (22,460)
Unearned discounts and fees on loans,
net of deferred costs 6 204
--------------------------
Net loans receivable held for sale $ 94,130 246,468
==========================
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 which would cause the Bank to sell
these loans.
Included in the loans receivable balances are participating
interests in mortgage loans and wholly owned mortgage loans serviced by
other institutions of approximately $151,000 and $331,000 at September
30, 2005 and 2004, respectively.
Whole loans and participations serviced for others were
approximately $107.1 million and $118.7 million at September 30, 2005
and 2004, 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 $845.8 million and $706.6 million at September
30, 2005 and 2004, 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, 2005 and
2004. 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, 2005 and 2004, loans with an aggregate
principal balance of approximately $5.6 million and $15.7 million,
respectively, were on nonaccrual status. Gross interest income would
have increased by $253,000, $1.2 million and $415,000 for the years
ended September 30, 2005, 2004 and 2003, respectively, if the
nonaccrual loans had been performing.
26
The following table presents the activity in the allowance for
losses on loans for 2005, 2004, and 2003. 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.
2005 2004 2003
---------------------------------
Balance at beginning of year $ 8,221 7,986 5,865
Provisions 522 465 538
Charge-offs (1,265) (319) (180)
Recoveries 58 89 454
Acquired in merger -- -- 1,309
---------------------------------
Balance at end of year $ 7,536 8,221 7,986
=================================
The following tables provide a summary of information on impaired
loans. Dollar amounts are expressed in thousands.
September 30,
----------------
2005 2004
----------------
Impaired loans with a valuation allowance $ 1,608 5,207
Impaired loans without a valuation allowance -- --
----------------
$ 1,608 5,207
================
Valuation applicable to impaired loans $ 447 1,407
================
2005 2004 2003
------------------------
Average balance of impaired loans $ 3,445 5,443 4,048
Interest income recognized on
impaired loans 119 106 607
Interest income received on a cash basis
on impaired loans 132 150 534
During fiscal 2001, the Bank restructured one $3.5 million loan
participation secured by a nursing home in Eau Claire, Wisconsin, which
was the result of the borrower's bankruptcy reorganization. In the
restructuring, the interest rate was reduced and accrued interest was
capitalized to the loan balance. At September 30, 2004, the Bank had a
valuation allowance of $821,000 against this loan, which results in a
net carrying value of $2.7 million. During the year ended September
30, 2005, the Bank foreclosed on this loan. The property was
subsequently sold, and the Company recognized a gain of $680,000.
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.
2005
-------------------------------------------------------------
Residential
---------------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
------------------------------------------------------------------------------
Missouri $ 257,022 54,332 72,570 286,621 670,545
Kansas 74,450 8,901 20,921 213,115 317,387
Colorado 1,128 12,786 74,535 -- 88,449
Texas 2,577 14,000 35,958 -- 52,535
Oklahoma 1,828 467 22,913 -- 25,208
Illinois 7,594 860 12,180 -- 20,634
Florida 10,859 979 6,425 -- 18,263
Iowa 9,851 3,655 2,632 1,336 17,474
Arizona 5,786 756 5,920 -- 12,462
Indiana 3,454 -- 7,273 -- 10,727
Other 25,628 6,817 54,965 -- 87,410
-------------------------------------------------------------
$ 400,177 103,553 316,292 501,072 1,321,094
=============================================================
27
2004
-------------------------------------------------------------
Residential
---------------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
------------------------------------------------------------------------------
Missouri $ 118,188 62,239 75,356 229,567 485,350
Kansas 41,292 11,729 28,838 148,587 230,446
Colorado 459 14,538 77,369 -- 92,366
Texas 1,490 17,321 11,975 -- 30,786
Oklahoma 2,501 476 23,394 -- 26,371
Iowa 8,557 3,725 8,882 -- 21,164
Illinois 2,825 890 15,093 -- 18,808
Wisconsin 204 -- 10,459 -- 10,663
Other 18,649 3,628 38,759 -- 61,036
-------------------------------------------------------------
$ 194,165 114,546 290,125 378,154 976,990
=============================================================
Proceeds from the sale of loans receivable held for sale during
fiscal 2005, 2004 and 2003, were $1,223.5 million, $979.3 million, and
$858.4 million, respectively. In fiscal 2005, the Bank realized gross
gains of $18.3 million and gross losses of $406,000 on those sales. In
fiscal 2004, gross gains of $14.2 million and gross losses of $2.3
million were realized. In fiscal 2003, the Bank realized gross gains of
$16.3 million and $3.4 million 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.
2005 2004
-------------------
Real estate acquired through (or deed in
lieu of) foreclosure $ 7,955 5,107
Less: allowance for losses (195) (1,093)
--------------------
Total $ 7,760 4,014
====================
The allowance for losses on real estate owned includes the
following activity for the years ended September 30. Dollar amounts
are expressed in thousands.
2005 2004 2003
--------------------------
Balance at beginning of year $ 1,093 1,019 646
Provisions (899) (237) 1,984
Charge-offs (1,168) (273) (2,365)
Recoveries 1,169 584 754
--------------------------
Balance at end of year $ 195 1,093 1,019
==========================
(7) PREMISES AND EQUIPMENT
The following table summarizes premises and equipment as of
September 30. Dollar amounts are expressed in thousands.
2005 2004
-------------------
Land $ 2,676 2,676
Buildings and improvements 11,023 8,428
Furniture, fixtures and equipment 8,843 8,273
-------------------
22,542 19,377
Accumulated depreciation (11,984) (10,896)
-------------------
Total $ 10,558 8,481
===================
Certain facilities of the Bank are leased under various operating
leases. Amounts paid for rent expense for the fiscal years ended
September 30, 2005, 2004, and 2003 were approximately $905,000,
$937,000, and $724,000, respectively.
28
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
-----------------------------------
2006 $ 1,009
2007 806
2008 630
2009 165
2010 83
(8) INVESTMENT IN LLC'S
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. The Company's investment in this
partnership was $9.6 million at September 30, 2005. This investment is
accounted for using the equity method of accounting.
During the year ended September 30, 2002, the Company became a
partner in NBH, LLC, which was formed for the purpose of purchasing and
developing eighty-six acres of vacant land in Platte County, Missouri.
The Company's investment in this partnership was $2.6 million at
September 30, 2005. This investment is accounted for using the equity
method of accounting.
(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.
2005 2004 2003
----------------------------
Balance at beginning of year $ 839 1,191 2,957
Additions:
Originated mortgage servicing rights 326 2 139
Acquired in merger -- -- 122
Reductions:
Amortization (256) (390) (2,408)
Impairment recovery 2 36 381
----------------------------
Balance at end of year $ 911 839 1,191
============================
(10) CUSTOMER DEPOSIT ACCOUNTS
Customer deposit accounts as of September 30 are illustrated in
the following table. Dollar amounts are expressed in thousands.
2005 2004
----------------- ----------------
Amount % Amount %
-------------------------------------------------------------------
Demand deposit accounts $ 82,596 10 84,016 12
Savings accounts 97,435 12 104,277 15
Money market demand accounts 12,271 2 16,453 2
Certificate accounts 515,590 64 448,954 66
Brokered accounts 94,802 12 30,040 5
----------------- -----------------
$ 802,694 100 683,740 100
================= =================
Weighted average interest rate 2.96% 2.04%
=========== ============
29
The aggregate amount of deposit accounts in excess of $100,000 was
approximately $121.1 million and $98.8 million as of September 30, 2005
and 2004, respectively.
The following table presents contractual maturities of certificate
and brokered accounts as of September 30, 2005. Dollar amounts are
expressed in thousands.
Maturing during the fiscal year ended September 30,
---------------------------------------------------------
2011 and
2006 2007 2008 2009 2010 after Total
---------------------------------------------------------
Certificate
accounts $ 374,563 60,422 52,804 9,626 10,902 7,273 515,590
Brokered
accounts 94,802 -- -- -- -- -- 94,802
---------------------------------------------------------
469,365 60,422 52,804 9,626 10,902 7,273 610,392
=========================================================
The following table presents interest expense on customer deposit
accounts for the years ended September 30. Dollar amounts are
expressed in thousands.
2005 2004 2003
--------------------------------
Savings accounts $ 1,036 975 1,392
Money market demand and
demand deposit accounts 421 396 535
Certificate and brokered
accounts 15,625 11,426 12,513
--------------------------------
$ 17,082 12,797 14,440
================================
(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 at least 150% of outstanding
advances not secured by FHLB stock. The following table provides a
summary of advances by year of maturity as of September 30. Dollar
amounts are expressed in thousands.
2005 2004
----------------- -----------------
Weighted Weighted
Average Average
Year ended September 30, Amount Rate Amount Rate
--------------------------------------------------------------------
2005 $ -- -- $ 335,433 2.00%
2006 424,549 3.76% 550 5.25%
2007 30,567 4.01% 567 5.25%
2008 3,586 5.02% 3,586 5.02%
2009 435 5.25% 435 5.25%
2010 through 2015 6,770 5.77% 6,770 5.77%
------------------ -----------------
$ 465,907 3.81% $ 367,341 2.11%
================== =================
30
(12) REPURCHASE AGREEMENTS
The Bank has sold various adjustable-rate mortgage-backed
securities under agreements to repurchase. The following table provides
a summary of repurchase agreements, including the repurchase liability
and the asset value by number of days to maturity as of September 30.
Asset value consists of securities sold under agreement to repurchase
and money market accounts pledged as collateral. Dollar amounts are
expressed in thousands.
2005
--------------------------------------
Repurchase Liability Asset Value
----------------- -----------------
Weighted Estimated
Average Fair
Number of days to maturity Amount Rate Amount Value
--------------------------------------------------------------------
Less than 30 days $ 61,000 2.77% $ 65,745 64,224
From 30 to 90 days 8,500 3.66% 9,418 9,158
Over 90 days 52,500 3.49% 58,491 57,020
------------------ -----------------
$ 122,000 3.14% $ 133,654 130,402
================== =================
2004
--------------------------------------
Repurchase Liability Asset Value
----------------- -----------------
Weighted Estimated
Average Fair
Number of days to maturity Amount Rate Amount Value
--------------------------------------------------------------------
Less than 30 days $ 89,100 1.39% $ 94,549 93,622
From 30 to 90 days 4,000 1.83% 4,711 4,662
Over 90 days 66,000 1.50% 70,460 69,657
------------------ -----------------
$ 159,100 1.45% $ 169,720 167,941
================== =================
(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:
2005 2004 2003
--------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.0 3.0 3.1
Other, net (1.9) (1.2) 0.4
--------------------------
36.1% 36.8% 38.5%
==========================
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.
2005 2004 2003
----------------------------
Deferred loan fees and costs $ 263 13 9
Accrued interest receivable (1) (2) (2)
Tax depreciation vs. book
depreciation (126) 234 100
Basis difference on investments (30) 78 (343)
Loan loss reserves 915 (362) (392)
Mark-to-market adjustment 716 1,325 (255)
Mortgage servicing rights 44 (78) (367)
Prepaid expenses (83) 12 9
Other 222 158 150
----------------------------
$ 1,920 1,378 (1,091)
============================
31
The tax effect of significant temporary differences representing
deferred tax assets (liabilities) are presented in the following table.
Dollar amounts are expressed in thousands.
2005 2004
-----------------
Deferred income tax assets:
Loan loss reserves $ 3,246 4,161
Book depreciation in excess of tax depreciation 325 199
Unrealized loss on securities available for sale 1,397 722
Deferred loan fees and costs -- 28
-----------------
4,968 5,110
-----------------
Deferred income tax liabilities:
Mark-to-market adjustment (1,474) (758)
Mortgage servicing rights (223) (179)
Accrued interest receivable (3) (4)
Basis difference on investments (63) (93)
Deferred loan fees and costs (235) --
Prepaid expenses -- (83)
Other (299) (78)
----------------
(2,297) (1,195)
----------------
Net deferred tax asset $ 2,671 3,915
================
(14) STOCKHOLDERS' EQUITY
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 2004, the Company paid quarterly cash dividends on
common stock of $0.20 per share on February 27, 2004, May 28, 2004, and
August 27, 2004, and $0.85 per share on November 28, 2003.
During fiscal 2003, the Company paid quarterly cash dividends on
common stock of $0.17 per share on February 28, 2003, May 23, 2003, and
August 29, 2003, and $0.15 per share on November 22, 2002.
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.
During fiscal 2004, the Company repurchased 5,000 shares of its own
stock with a total value of $180,000 at the time of repurchase. During
fiscal 2003, the Company repurchased 14,500 shares of its own stock with
a total value of $352,000 at the time of repurchase. In addition, four
hundred shares of the Company's stock were acquired in the merger with
CBES Bancorp, Inc., with a value of $10,000 at the time of acquisition.
(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.
32
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, 2005, the Bank meets all
capital adequacy requirements, to which it is subject.
As of September 30, 2005 and 2004, 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,
------------------
2005 2004
-------------------------------------------------------------
GAAP capital (Bank only) $134,761 128,787
Adjustment for regulatory capital:
Intangible assets (3,071) (3,171)
Disallowed servicing and deferred
tax assets (4,596) (5,351)
Reverse the effect of SFAS No. 115 2,227 1,150
------------------
Tangible capital 129,321 121,415
Qualifying intangible assets -- --
------------------
Tier 1 capital (core capital) 129,321 121,415
Qualifying general valuation allowance 6,941 6,360
------------------
Risk-based capital $136,262 127,775
==================
As of September 30, 2005
--------------------------------------------------------------
Actual Minimum Required for Minimum Required to be
Capital Adequacy "Well Capitalized"
---------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ ---------------------
Total capital to risk-weighted assets $136,262 11.2% 97,221 >=8% 121,527 >=10%
Core capital to adjusted tangible assets 129,321 8.4% 61,632 >=4% 77,039 >=5%
Tangible capital to tangible assets 129,321 8.4% 23,112 >=1.5% -- --
Tier 1 capital to risk-weighted assets 129,321 10.6% -- -- 72,916 >=6%
As of September 30, 2004
--------------------------------------------------------------
Actual Minimum Required for Minimum Required to be
Capital Adequacy "Well Capitalized"
---------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ ---------------------
Total capital to risk-weighted assets $127,775 12.7% 80,539 >=8% 100,674 >=10%
Core capital to adjusted tangible assets 121,415 9.0% 53,895 >=4% 67,369 >=5%
Tangible capital to tangible assets 121,415 9.0% 20,211 >=1.5% -- --
Tier 1 capital to risk-weighted assets 121,415 12.1% -- -- 60,405 >=6%
33
(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 $415,000,
$330,000, and $328,000 for the years ended September 30, 2005, 2004, and
2003, 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, 2005, 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 are granted for a period of ten
years. The option price may not be less than 100% of the fair market
value of the shares on the date of the grant.
The following table summarizes both 1986 and 2004 Option Plan
activity during fiscal years 2005, 2004, and 2003. 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, 2005,
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, 2002 55,000 $ 7.31 $ 2.25 - 8.97
Exercised (38,000) (6.85) (2.25 - 8.97)
-------------------------------------
Options outstanding
at September 30, 2003 17,000 $ 8.34 $ 7.63 - 8.97
Granted 13,000 35.50 35.50
Exercised (17,000) (8.34) (7.63 - 8.97)
-------------------------------------
Options outstanding
at September 30, 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
=====================================
The weighted average remaining contractual life of options
outstanding at September 30, 2005, 2004 and 2003 were 6.6 years, 6.0
years and 2.8 years, respectively.
34
The following table provides information regarding the expiration
dates of the stock options outstanding at September 30, 2005.
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 13,000 42.17
August 4, 2015 500 35.50
-------------------------------------
39,500 $ 39.95
=====================================
Of the options outstanding at September 30, 2005, 2,600 are
immediately exercisable and 36,900 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, 2005.
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 3.8 years $ 35.50 2,000 $ 35.50
42.17 12,500 4.8 years 42.17 -- --
35.50 3,000 8.8 years 35.50 600 35.50
39.79 500 9.2 years 39.79 -- --
42.17-42.53 13,500 9.8 years 42.18 -- --
--------- ---------
39,500 2,600
========= =========
(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.
35
The following table presents financial information from the
Company's operating segments for the years ended September 30, 2004,
2003, and 2002. Dollar amounts are expressed in thousands.
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 $ 26,831 582 (368) (1,219) 25,826
============================================================
Total assets $ 1,542,083 695 407 13,159 1,556,344
============================================================
Local National
Year ended Mortgage Mortgage Other and
September 30, 2004 Banking Banking Banking Eliminations Consolidated
----------------------------------------------------------------------------------
Net interest income $ 53,005 -- -- 39 53,044
Provision for
loan losses 465 -- -- -- 465
Other income 8,574 12,598 6,727 (6,086) 21,813
General and admin.
Expenses 15,160 13,286 7,889 (1,733) 34,602
Income tax expense 16,773 (251) (424) (1,464) 14,634
------------------------------------------------------------
Net income $ 29,181 (437) (738) (2,850) 25,156
============================================================
Total assets $ 1,353,190 521 564 7,613 1,361,888
============================================================
Year ended Mortgage Other and
September 30, 2003 Banking Banking Eliminations Consolidated
-----------------------------------------------------------------------
Net interest income $ 49,035 -- (31) 49,004
Provision for
loan losses 538 -- -- 538
Other income 12,947 20,551 (17,263) 16,235
General and admin.
Expenses 14,038 15,752 (4,057) 25,733
Income tax expense 18,251 1,847 (5,099) 14,999
-------------------------------------------------
Net income $ 29,155 2,952 (8,138) 23,969
=================================================
Total assets $1,104,673 408 2,278 1,107,359
=================================================
(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.
36
As of September 30, 2005, the Bank had outstanding commitments to
originate $21.7 million in commercial real estate loans, $131.8 million
of fixed rate residential first mortgage loans and $45.3 million of
adjustable rate residential first mortgage loans. Commercial real
estate loan commitments have approximate average committed rates of
6.3%. Residential mortgage loan commitments have an approximate average
committed rate of 5.8% and approximate average fees and discounts of
0.2%. The interest rate commitments on residential loans generally
expire 60 days after the commitment date. Interest rate commitments on
commercial real estate loans have varying terms to expiration.
At September 30, 2005 and 2004, the Bank had commitments to sell
loans of approximately $173.2 million and $129.9 million, respectively.
These instruments contain an element of risk in the event that other
parties are unable to meet the terms of such agreements. In such event,
the Bank's loans receivable held for sale would be exposed to market
fluctuations. Management does not expect any other party to default on
its obligations and, therefore, does not expect to incur any costs due
to such possible default. Any unrealized loss on these commitment
obligations is considered in conjunction with the Bank's lower of cost
or market valuation on its loans receivable held for sale.
(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.
September 30, 2005 September 30, 2004
-------------------------- -------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------------------------- -------------------------
Financial Assets:
Cash and cash equivalents $ 35,334 35,334 18,263 18,263
Securities available for sale 237 237 244 244
Stock in Federal Home Loan Bank 22,390 22,390 17,808 17,808
Mortgage-backed securities:
Available for sale 129,302 129,302 170,933 170,933
Held to maturity 431 447 614 645
Loans receivable:
Held for sale 94,130 94,203 246,468 249,064
Held for investment 1,226,514 1,256,411 868,101 898,835
Mortgage servicing rights 911 911 839 839
Lending commitments on mortgage loans
held for sale - fixed rate (26) (26) -- --
Lending commitments on mortgage loan
held for sale - floating rate 52 52 (16) 212
Financial Liabilities:
Customer deposit accounts 707,892 704,432 653,700 637,041
Brokered deposit accounts 94,802 94,544 30,040 30,013
Advances from FHLB 465,907 465,961 367,341 368,056
Securities sold under agreements
to repurchase 122,000 121,891 159,100 158,689
Commitments to sell loans 29 29 200 200
September 30, 2005 September 30, 2004
-------------------------- -------------------------
Contract or Estimated Contract or Estimated
Notional Unrealized Notional Unrealized
Amount Gain Amount Gain
-------------------------- -------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 22,008 4 39,414 13
Lending commitments - floating
rate 1,624 41 14,281 230
Commitments to sell loans -- -- -- --
37
The fair value estimates presented are based on pertinent
information available to management as of September 30, 2005 and 2004.
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) ACQUISITION
On December 19, 2002, the Company acquired CBES Bancorp, Inc
("CBES"). Pursuant to a definitive agreement dated September 5, 2002,
CBES was acquired by a wholly owned subsidiary of NASB Financial, Inc.
formed solely to facilitate the transaction. The agreement provided
that upon the effective date of the acquisition, each shareholder of
CBES would receive $17.50 in cash for each share of CBES common stock
owned by such shareholder. The aggregate purchase price was $15.6
million. The following table summarizes the fair values of the assets
acquired and the liabilities assumed at the date of acquisition. Dollar
amounts are expressed in thousands.
Cash and cash equivalents $ 32,251
Investment and mortgage-backed securities 9,171
Loans receivable 58,624
Premises and equipment 955
Core deposits 1,499
Goodwill 1,846
Other assets 5,577
---------
Total assets acquired 109,923
---------
Customer deposit accounts 82,750
Advances from Federal Home Loan Bank 10,358
Other liabilities 1,228
---------
Total liabilities assumed 94,336
---------
Net assets acquired $ 15,587
=========
The only significant identifiable intangible asset acquired was the
core deposit base, which has a useful life of approximately 15 years and
will be amortized using the straight-line method. The $1.8 million of
goodwill was assigned entirely to the banking segment of the business.
(22) 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 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.
38
The following table illustrates the restatement made to the
Consolidated Statement of Cash Flows. Dollar amounts are expressed in
thousands:
Year ended September 30,
---------------------------
2005 2004 2003
---------------------------
Net cash from operating activities,
as previously reported $ (37,404) (37,088) 194,758
Reclassification of principal repayments
of loans receivable held for sale 35,468 31,834 16,962
Correction of origination and principal
repayments of loans receivable
held for sale (18,998) (50,594) (251,987)
---------------------------
Reported net cash from operating
activities $ (20,934) (55,848) (40,267)
===========================
Net cash from investing activities,
as previously reported $ (112,655) (204,966) (187,255)
Reclassification of principal repayments
of loans receivable held for sale (35,468) (31,834) (16,962)
Correction of origination and principal
repayments of loans receivable
held for sale 18,998 50,594 251,987
---------------------------
Reported net cash from investing
activities $ (129,125) (186,206) 47,770
===========================
39
(22) PARENT COMPANY FINANCIAL INFORMATION
NASB Financial, Inc.
Balance Sheets
September 30,
-----------------------
2005 2004
-----------------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 933 1,041
Loans receivable 1,215 1,238
Accrued interest receivable 4 4
Investment in subsidiary 134,762 128,788
Investment in LLC 12,206 7,982
-----------------------
$ 149,120 139,053
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Escrows $ 44 51
Income taxes payable 189 11
-----------------------
Total liabilities 233 62
-----------------------
Stockholders' equity
Common stock 1,479 1,479
Additional paid-in capital 16,256 16,256
Retained earnings 151,331 139,663
Treasury stock (17,952) (17,257)
Accumulated other comprehensive income (2,227) (1,150)
-----------------------
Total stockholders' equity 148,887 138,991
-----------------------
$ 149,120 139,053
=======================
NASB Financial, Inc.
Statements of Income
Years Ended September 30,
------------------------------------
2005 2004 2003
------------------------------------
(Dollars in thousands)
Income:
Income from Subsidiary $ 25,415 25,192 25,667
Interest and dividend income 96 38 --
Gain on sale of real estate owned 680 -- --
------------------------------------
Total income 26,191 25,230 25,667
------------------------------------
Expenses:
Professional fees 39 29 78
Provision for loss on real estate owned -- -- 1,984
Real estate owned expense 16 24 648
Loss on sale of securities available for sale -- -- 13
Other expense 80 42 38
------------------------------------
Total general expense 135 95 2,761
------------------------------------
Income before income tax expense 26,056 25,135 22,906
------------------------------------
Income tax expense (benefit) 230 (21) (1,063)
------------------------------------
Net income $ 25,826 25,156 23,969
====================================
40
NASB Financial, Inc.
Statements of Cash Flows
Years ended September 30,
-----------------------------
2005 2004 2003
-----------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 25,826 25,156 23,969
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Amortization -- -- 11
Loss on sale of securities available for sale -- -- 13
Gain on sale of real estate owned (680) -- --
Provision for loss on real estate owned -- -- 1,984
Equity in undistributed earnings of subsidiary (25,415) (25,192) (25,667)
Change in income taxes receivable 178 38 229
Other -- 35 (101)
----------------------------
Net cash (used in) provided by operating activities (91) 37 438
Cash flows from investing activities:
Dividends received from subsidiary 15,500 16,500 19,500
Principal repayments of loans receivable 22 10 196
Proceeds from sale of securities available for sale -- -- 3,225
Proceeds from sale of real estate owned 3,545 -- 1,585
Real estate owned capital improvements -- -- (173)
Investment in LLC (4,224) (5,710) (2,072)
Cash paid for acquisition, net -- -- (14,992)
----------------------------
Net cash provided by investing activities 14,843 10,800 7,269
Cash flows from financing activities:
Cash dividends paid (14,158) (12,262) (5,567)
Stock options exercised -- 143 260
Repurchase of common stock (695) (180) (352)
Change in escrows (7) 51 --
-----------------------------
Net cash used in financing activities (14,860) (12,248) (5,659)
-----------------------------
Net (decrease) increase in cash and cash equivalents (108) (1,411) 2,048
Cash and cash equivalents at beginning of period 1,041 2,452 404
-----------------------------
Cash and cash equivalents at end of period $ 933 1,041 2,452
=============================
41
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, 2005 and 2004,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended September 30,
2005. 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, 2005 and 2004, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
2005, 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), the effectiveness of NASB
Financial, Inc.'s internal control over financial reporting as of September
30, 2005 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 June 14, 2006 expressed an unqualified
opinion on management's assessment and an adverse opinion on the effectiveness
of the Company's internal control over financial reporting.
/s/ BKD LLP
June 14, 2006
Kansas City, Missouri
42
ITEM 9a. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures. Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange
Act of 1934. Based on this evaluation and in light of an identified material
weakness, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were not effective at the
end of the period covered by this annual report.
The original Form 10-K for the year ended September 30, 2005, initially
filed with the SEC December 14, 2005, had concluded that the Company's
disclosure controls and procedures were effective at September 30, 2005. As a
result of the identification of errors relating to the preparation of our
consolidated statement of cash flows included in the original Form 10-K, the
consolidated statement of cash flows was restated for the years ended September
30, 2005, 2004 and 2003. Therefore, the principal executive officer and
principal financial officer reassessed their conclusions and have determined
that a material weakness identified below existed at September 30, 2005 and
that, as a result, our disclosure controls and procedures were not effective as
of that date.
Management's Report on Internal Control Over Financial Reporting
(restated). Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded and reported in our original
Form 10-K for the year ended September 30, 2005, initially filed with the SEC
December 14, 2005, that our internal control over financial reporting
was effective as of September 30, 2005. As a result of the restatement of our
consolidated financial statements included in the original Form 10-K, which is
reported in this amendment, management reassessed its conclusion regarding the
effectiveness of internal control over financial reporting as of September 30,
2005. Based on this reassessment under the framework in Internal Control -
Integrated Framework, management has now concluded that our internal control
over financial reporting was not effective as of September 30, 2005, because of
the existence of a material weakness described below.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. As of September 30, 2005, we did not maintain effective
controls over the proper presentation of cash flow within our consolidated
statement of cash flows. Our controls did not ensure that the presentation of
cash flows related to the origination, sale and principal repayment of loans
held for sale were presented in accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows" ("SFAS 95").
Specifically, the Company has historically classified principal repayments of
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 of 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. This control deficiency resulted in the restatement
of our consolidated statement of cash flows for the years ended September 30,
2005, 2004 and 2003, as well as each of the interim periods within 2005.
Additionally, this control deficiency could result in a misstatement of the
company's operating and investing cash flows that would result in a material
misstatement to the annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, we have concluded that this
control deficiency constitutes a material weakness.
43
As concluded above, in the original Form 10-K for the year ended September
30, 2005, management had previously concluded that we maintained effective
internal control over financial reporting as of September 30, 2005. In
connection with the restatement of our consolidated financial statements,
as described in Note 22 to the consolidated financial statements, management
subsequently determined that the material weakness described above existed as
of September 30, 2005, and that, as a result, the Company did not maintain
effective internal control over financial reporting as of September 30,
2005, based upon the criteria established in Internal Control - Integrated
Framework. Accordingly, Management's Report on Internal Control Over Financial
Reporting has been restated.
Our management's assessment of the effectiveness of our internal control
over financial reporting as of September 30, 2005, has been audited by BKD,
LLP, an independent registered public accounting firm, as stated in their
updated report, which is included herein.
Remediation Plan for Identified Material Weakness. As a result of the
findings described above, management commenced a review of its processes in
order to better collect cash flow data related to the origination and sale of
loans held for sale. It was determined that the system utilized to accumulate
the data related to the origination and sale of loans held for sale was
erroneously excluding certain loans which were originated and sold within the
quarter. This misstatement resulted in an understatement of both the
origination and sale of loans held for sale. Management has revised its system
used to accumulate such data so that loans originated and sold within the
same quarter are properly reported as originations within the consolidated
statement of cash flows. Additionally, management has reclassified principal
repayments on loans held for sale in the operating section of the consolidated
statement of cash flows in accordance with guidance in SFAS 95.
44
Report of Independent Registered Public Accounting Firm
----------------------------------------------------------------------
Audit Committee, Board of Directors and Stockholders
NASB Financial, Inc.
Grandview, Missouri
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that NASB
Financial, Inc.(the Company) did not maintain effective internal control over
financial reporting as of September 30, 2005, because the Company did not
maintain effective controls over the proper presentation of cash flows within
the Company's consolidated statement of cash flows, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects. An audit includes obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
A company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weakness has been identified and
included in management's assessment. The Company did not maintain effective
controls over the proper presentation of cash flows within the Company's
consolidated statements of cash flows. The Company's controls did not ensure
that the presentation of cash flows related to the origination, sale and
principal repayments of its loans held for sale were presented in accordance
with accounting principles generally accepted in the United States of America.
This control deficiency resulted in the restatement of the Company's
consolidated statement of cash flows for the years ended September 30, 2005,
2004 and 2003, as well as each of the interim periods within 2005.
Additionally, this control deficiency could result in a misstatement of the
company's operating and investing cash flows that would result in a material
misstatement to the annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, management has concluded that
this control deficiency constitutes a material weakness. This material
weakness was considered in determining the nature, timing and extent of audit
tests applied in our audit of the 2005 consolidated financial statements, and
this report does not affect our report dated June 14, 2006, on those
consolidated financial statements.
45
In our opinion, management's assessment that NASB Financial, Inc. did not
maintain effective internal control over financial reporting as of September
30, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, because of the material weakness described above on the achievement of
the objectives of the control criteria, NASB Financial, Inc. has not maintained
effective internal control over financial reporting as of September 30, 2005,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ BKD LLP
Kansas City, Missouri
June 14, 2006
46
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements
The following consolidated financial statements of NASB
Financial, Inc. and the independent accountant's report thereon are
included in Part II, Item 8.
Consolidated Balance Sheets at September 30, 2005, and 2004
Consolidated Statements of Income for the years ended September
30, 2005, 2004, and 2003
Consolidated Statements of Cash Flows for the years ended
September 30, 2005, 2004, and 2003
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 2005, 2004, and 2003
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(2) Financial Statement Schedules
Schedules are provided in the Consolidated Financial Statements.
47
(3) EXHIBITS.
Exhibit
Number
---------
2) Agreement and Plan of Merger by and among North American Savings
Bank, F.S.B., NASB Interim Savings Bank, F.S.B., and NASB
Financial, Inc. Exhibit 2 to Form 8-K, dated April 15, 1998,
and incorporated herein by reference.
3) Federal Stock Savings Bank Charter and Bylaws. Exhibit 3 to
Form 10-K for fiscal year ended September 30, 1992, dated
December 27, 1992, and incorporated herein by reference.
3.1) Articles of Incorporation of NASB Financial, Inc. Exhibit 3.1
to Form 8-K, dated April 15, 1998, and incorporated herein by
reference.
3.2) Bylaws of NASB Financial, Inc. Exhibit 3.2 to Form 8-K, dated
April 15, 1998, and incorporated herein by reference.
10.1) Employees' Stock Option Plan and specimen copy of Option
Agreement entered into between the Company and the Plan
participants. (Exhibit 10.4 to Form 10-K for fiscal year ended
September 30, 1986, dated December 26, 1986, and incorporated
herein by reference).
10.2) Amended and Restated Retirement Income Plan for Employees of
North American Savings Bank dated September 30, 1988, dated
December 20, 1988, and incorporated herein by reference).
10.3) NASB Financial, Inc. Equity Incentive Compensation Plan
dated adopted on October 28, 2003. (Exhibit B to the Company's
Proxy Statement for the 2004 Annual Meeting and incorporated
herein by Reference).
13) 2005 Annual Report to Stockholders. (Exhibit 13 to Form 10-K
for fiscal year ended September 30, 2005, and dated December 14,
2005, and incorporated herein by reference).
22) Subsidiaries of the Registrant at September 30, 2005, listed on
page 1 of the Company's 10-K initially filed with the SEC on
December 14, 2005.
23) Proxy Statement of NASB Financial, Inc. for the 2006 Annual
Meeting of Stockholders filed with the SEC on December 30,
2005.
*31.1)Certification of Chief Executive Officer pursuant to Rules
13a-15(e) and 15d-15(e)
*31.2)Certification of the Chief Financial Officer pursuant to Rules
13a-15(e) and 15d-15(e)
*32.1)Certification of Chief Executive Officer pursuant to Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
*32.2)Certification of Chief Financial Officer pursuant to Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Filed Herewith
48
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NASB FINANCIAL, INC.
By: /s/ David H. Hancock
David H. Hancock
Chairman
Date: July 5, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on December 15, 2005, by the
following persons on behalf of the Registrant and in the capacities
indicated.
Signature Title
/s/ David H. Hancock Chairman and Chief
David H. Hancock Executive Officer
/s/ Rhonda Nyhus Chief Financial Officer
Rhonda Nyhus (Principal Accounting
Officer)
/s/ Keith B. Cox Director
Keith B. Cox
/s/ Paul L. Thomas Director
Paul L. Thomas
/s/ Frederick V. Arbanas Director
Frederick V. Arbanas
/s/ Barrett Brady Director
Barrett Brady
/s/ A. Ray Cecrle Director
A Ray Cecrle
/s/ Linda S. Hancock Director
Linda S. Hancock
/s/ Fletcher M. Lamkin Director
Fletcher M. Lamkin
/s/ W. Russell Welsh Director
W. Russell Welsh