SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended December 31, 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)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition
of "accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer Accelerated filer X Non-accelerated filer
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares of Common Stock of the Registrant outstanding as of
February 6, 2006, was 8,417,442.
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands)
December 31, September 30,
2005 2005
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 38,437 35,334
Securities available for sale 237 237
Stock in Federal Home Loan Bank, at cost 23,411 22,390
Mortgage-backed securities:
Available for sale, at fair value 119,802 129,302
Held to maturity (fair value of $410
and $447 at December 31, 2005, and
September 30, 2005, respectively) 396 431
Loans receivable:
Held for sale 47,250 94,130
Held for investment, net 1,278,548 1,234,050
Allowance for loan losses (7,312) (7,536)
Accrued interest receivable 7,427 6,997
Foreclosed asset held for sale, net 8,410 7,760
Premises and equipment, net 11,058 10,558
Investment in LLC 14,559 12,206
Mortgage servicing rights, net 901 911
Deferred income tax asset 2,642 2,671
Other assets 7,120 6,903
---------- ----------
$ 1,552,886 1,556,344
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 721,374 707,892
Brokered deposit accounts 126,731 94,802
Advances from Federal Home Loan Bank 488,771 465,907
Securities sold under agreements to
repurchase 52,500 122,000
Escrows 3,594 9,423
Income taxes payable 3,430 796
Accrued expenses and other liabilities 6,908 6,637
---------- ----------
Total liabilities 1,403,308 1,407,457
---------- ----------
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 authorized; 9,857,112
issued at December 31, 2005, and
September 30, 2005 1,479 1,479
Serial preferred stock of $1.00 par
value: 7,500,000 shares authorized;
none issued or outstanding -- --
Additional paid-in capital 16,256 16,256
Retained earnings 152,744 151,331
Treasury stock, at cost; 1,439,670
shares and 1,419,670 shares at
December 31, 2005, and
September 30, 2005, respectively (18,721) (17,952)
Accumulated other comprehensive
loss (2,180) (2,227)
---------- ----------
Total stockholders' equity 149,578 148,887
---------- ----------
$ 1,552,886 1,556,344
========== ==========
See accompanying notes to consolidated financial statements.
1
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Income (Unaudited)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2005 2004
--------- ---------
Interest on loans $ 22,434 17,683
Interest on mortgage-backed securities 1,160 1,575
Interest and dividends on securities 277 134
Other interest income 121 46
--------- ---------
Total interest income 23,992 19,438
--------- ---------
Interest on customer and brokered
deposit accounts 6,367 3,330
Interest on advances from FHLB 4,759 2,145
Interest on securities sold under
agreements to repurchase 606 731
--------- ---------
Total interest expense 11,732 6,206
--------- ---------
Net interest income 12,260 13,232
Provision for loan losses 65 167
--------- ---------
Net interest income after provision
for loan losses 12,195 13,065
--------- ---------
Other income (expense):
Loan servicing fees, net 30 12
Impairment recovery on mortgage
servicing rights 1 19
Customer service fees and charges 1,676 1,621
Recovery on real estate owned -- 681
Gain on sale of loans held for sale 3,852 3,654
Other 282 517
--------- ---------
Total other income 5,841 6,504
--------- ---------
General and administrative expenses:
Compensation and fringe benefits 4,492 4,193
Commission-based mortgage banking
compensation 1,871 1,529
Premises and equipment 874 793
Advertising and business promotion 1,108 845
Federal deposit insurance premiums 26 26
Other 1,526 1,287
--------- ---------
Total general and administrative expenses 9,897 8,673
--------- ---------
Income before income tax expense 8,139 10,896
Income tax expense 2,930 3,977
--------- ---------
Net income $ 5,209 6,919
========= =========
Basic earnings per share $ 0.62 0.82
========= =========
Diluted earnings per share $ 0.61 0.82
========= =========
Basic weighted average shares outstanding 8,434,562 8,455,442
See accompanying notes to consolidated financial statements.
2
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Unaudited)
(In thousands, except share data)
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive stockholders
stock capital earnings stock income (loss) equity
-----------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 2005 $ 1,479 16,256 151,331 (17,952) (2,227) 148,887
Comprehensive income:
Net income -- -- 5,209 -- -- 5,209
Other comprehensive income (loss),
net of tax:
Unrealized loss on securities -- -- -- -- 47 47
available for sale -------
Total comprehensive income -- -- -- -- -- 5,256
Cash dividends paid -- -- (3,796) -- -- (3,796)
Purchase of common stock for
treasury -- -- -- (769) -- (769)
----------------------------------------------------------------------
Balance at December 31, 2005 $ 1,479 16,256 152,744 (18,721) (2,180) 149,578
======================================================================
See accompanying notes to consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2005 2004
----------------------
Cash flows from operating activities:
Net income $ 5,209 6,919
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 306 271
Amortization and accretion, net (541) (554)
Impairment recovery on mortgage servicing rights (1) (19)
Gain on sale of loans receivable held for sale (3,852) (3,654)
Provision for loan losses 65 167
Recovery on real estate owned -- (681)
Origination of loans held for sale (317,269) (269,298)
Sale of loans receivable held for sale 365,383 260,190
Changes in:
Net fair value of loan related commitments 52 (229)
Accrued interest receivable (430) (120)
Accrued expenses and other liabilities and
income taxes payable 5,588 4,129
----------------------
Net cash provided by (used in) operating activities 54,510 (2,879)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 35 51
Available for sale 9,458 9,174
Principal repayments of mortgage loans receivable 93,671 104,606
Principal repayments of other loans receivable 1,941 2,259
Loan origination - mortgage loans held for investment (141,023) (138,532)
Loan origination - other loans receivable (1,209) (2,921)
Purchase of mortgage loans held for investment -- (1,207)
Purchase of FHLB stock (1,021) (4,086)
Proceeds for sale of real estate owned 1,817 3,722
Purchases of premises and equipment, net of sales (805) (876)
Investment in LLC (2,354) (271)
Other (373) (861)
----------------------
Net cash used in investing activities (39,863) (28,942)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2005 2004
----------------------
Cash flows from financing activities:
Net increase (decrease) in customer and
brokered deposit accounts 45,428 (4,564)
Proceeds from advances from FHLB 150,000 185,000
Repayment on advances from FHLB (127,079) (117,075)
Proceeds from sale of securities under
agreements to repurchase -- 189,900
Repayment of securities sold under
agreements to repurchase (69,500) (195,900)
Cash dividends paid (3,796) (8,455)
Purchase of common stock for treasury (769) --
Change in escrows (5,828) (4,846)
----------------------
Net cash provided by (used in) financing activities (11,544) 44,060
----------------------
Net increase in cash and cash equivalents 3,103 12,239
Cash and cash equivalents at beginning of the period 35,334 18,263
----------------------
Cash and cash equivalents at end of period $ 38,437 30,502
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 296 --
Cash paid for interest 11,682 5,919
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 887 1,017
Capitalization of mortgage servicing rights 68 --
See accompanying notes to consolidated financial statements.
5
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are
prepared in accordance with instructions to Form 10-Q and do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America ("GAAP") for complete
financial statements. All adjustments are of a normal and recurring
nature and, in the opinion of management, the statements include all
adjustments considered necessary for fair presentation. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K to the Securities and Exchange Commission. Operating results
for the three months ended December 31, 2005, are not necessarily
indicative of the results that may be expected for the fiscal year
ending September 30, 2006. The consolidated balance sheet of the
Company as of September 30, 2005, has been derived from the audited
balance sheet of the Company as of that date.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of the allowances for losses on loans, real estate owned,
and valuation of mortgage servicing rights. Management believes that
these allowances are adequate, however, future additions to the
allowances may be necessary based on changes in economic conditions.
The Company's critical accounting policies involving the more
significant judgements and assumptions used in the preparation of the
consolidated financial statements as of December 31, 2005, have remained
unchanged from September 30, 2005. These policies relate to provision
for loan losses and mortgage servicing rights. Disclosure of these
critical accounting policies is incorporated by reference under Item 8
"Financial Statements and Supplementary Data" in the Company's Annual
Report on Form 10-K for the Company's year ended September 30, 2005.
Certain quarterly amounts for previous periods have been
reclassified to conform to the current quarter's presentation.
(2) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER
SHARE
The following table presents a reconciliation of basic earnings per
share to diluted earnings per share for the periods indicated.
Three months ended
----------------------
12/31/05 12/31/04
----------------------
Net income (in thousands) $ 5,209 6,919
Average common share outstanding 8,434,562 8,455,442
Average common share stock options
outstanding 42,303 12,148
----------------------
Average diluted common shares 8,476,865 8,467,590
Earnings per share:
Basic $ 0.62 0.82
Diluted 0.61 0.82
The dilutive securities included for each period presented above
consist entirely of stock options granted to employees as incentive
stock options under Section 442A of the Internal Revenue Code as
amended.
6
(3) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for
sale. Dollar amounts are expressed in thousands.
December 31, 2005
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Equity securities $ 180 -- -- 180
Municipal securities 57 -- -- 57
-------------------------------------------
Total $ 237 -- -- 237
===========================================
(4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed securities
available for sale. Dollar amounts are expressed in thousands.
December 31, 2005
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 327 -- 1 326
Pass-through certificates
guaranteed by FNMA
- adjustable rate 17,568 -- 519 17,049
FHLMC participation
certificates
- fixed rate 1,452 -- 89 1,363
- adjustable rate 104,000 -- 2,936 101,064
-------------------------------------------
Total $ 123,347 -- 3,545 119,802
===========================================
(5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity. Dollar amounts are expressed in thousands.
December 31, 2005
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------------------------------------
FHLMC participation
certificates:
Balloon maturity and
adjustable rate $ 171 11 -- 182
FNMA pass-through
certificates:
Fixed rate 100 -- -- 100
Balloon maturity and
adjustable rate 78 -- -- 78
Pass-through certificates
guaranteed by GNMA
- fixed rate 47 3 -- 50
-------------------------------------------
Total $ 396 14 -- 410
===========================================
7
(6) LOANS RECEIVABLE
Loans receivable are as follows:
December 31,
2005
---------------------
(Dollars in thousands)
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 385,573
Business properties 453,154
Partially guaranteed by VA or
insured by FHA 2,587
Construction and development 511,585
----------
Total mortgage loans 1,352,899
Commercial loans 55,819
Installment loans to individuals 20,681
----------
Total loans held for investment 1,429,399
Less:
Undisbursed loan funds (146,609)
Unearned discounts and fees and costs
on loans, net (4,242)
----------
Net loans held for investment $1,278,548
==========
December 31,
2005
---------------------
(Dollars in thousands)
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 64,651
Less:
Undisbursed loan funds (17,407)
Unearned discounts and fees and costs
on loans, net 6
----------
Net loans held for sale $ 47,250
==========
Included in the loans receivable balances at December 31, 2005, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the approximate amount of
$142,000. Loans and participations serviced for others amounted to
approximately $104.3 million at December 31, 2005.
(7) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following:
December 31,
2005
---------------------
(Dollars in thousands)
Real estate acquired through (or deed
in lieu of) foreclosure $ 8,582
Less: allowance for losses (172)
----------
Total $ 8,410
==========
8
Foreclosed assets held for sale are initially recorded at fair
value as of the date of foreclosure minus 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
(8) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the period ended December 31, 2005. Dollar amounts
are expressed in thousands.
Balance at October 1, 2005 $ 911
Additions:
Originated mortgage servicing rights 68
Impairment recovery 1
Reductions:
Amortization (79)
--------
Balance at December 31, 2005 $ 901
========
(9) REPURCHASE AGREEMENTS
During the three-month period ended December 31, 2005, the Bank
sold various adjustable-rate mortgage-backed securities under agreements
to repurchase. The outstanding balance of such repurchase agreements
was $52.5 million at December 31, 2005. These agreements have a
weighted average rate of 3.49% and a weighted average maturity of 36
days.
(10) SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified three
principal operating segments for purposes of financial reporting:
Banking, Local Mortgage Banking, and National Mortgage Banking. These
segments were determined based on the Company's internal financial
accounting and reporting processes and are consistent with the
information that is used to make operating decisions and to assess the
Company's performance by the Company's key decision makers.
The National Mortgage Banking segment originates mortgage loans via
the internet primarily for sale to investors. The Local Mortgage
Banking segment originates mortgage loans for sale to investors and for
the portfolio of the Banking segment. The Banking segment provides a
full range of banking services through the Bank's branch network,
exclusive of mortgage loan originations. A portion of the income
presented in the Mortgage Banking segment is derived from sales of loans
to the Banking segment based on a transfer pricing methodology that is
designed to approximate economic reality. The Other and Eliminations
segment includes financial information from the parent company plus
inter-segment eliminations.
The following table presents financial information from the
Company's operating segments for the periods indicated. Dollar amounts
are expressed in thousands.
Local National
Three months ended Mortgage Mortgage Other and
December 31, 2005 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 12,242 -- -- 18 12,260
Provision for loan losses 65 -- -- -- 65
Other income 1,267 2,558 2,578 (562) 5,841
General and administrative
expenses 3,860 2,686 3,443 (92) 9,897
Income tax expense (benefit) 3,450 (46) (311) (163) 2,930
-----------------------------------------------------------
Net income $ 6,134 (82) (554) (289) 5,209
===========================================================
9
Local National
Three months ended Mortgage Mortgage Other and
December 31, 2004 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 13,214 -- -- 18 13,232
Provision for loan losses 167 -- -- -- 167
Other income 2,266 3,073 2,071 (906) 6,504
General and administrative
expenses 3,650 3,020 2,250 (247) 8,673
Income tax expense (benefit) 4,257 19 (65) (234) 3,977
-----------------------------------------------------------
Net income $ 7,406 34 (114) (407) 6,919
===========================================================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The principal business of the Company is to provide banking
services through the Bank. Specifically, the Bank obtains savings and
checking deposits from the public, then uses those funds to originate
and purchase real estate loans and other loans. The Bank also purchases
mortgage-backed securities ("MBS") and other investment securities from
time to time as conditions warrant. In addition to customer deposits,
the Bank obtains funds from the sale of loans held-for-sale, the sale of
securities available-for-sale, repayments of existing mortgage assets,
and advances from the Federal Home Loan Bank ("FHLB"). The Bank's
primary sources of income are interest on loans, MBS, and investment
securities plus customer service fees and income from mortgage banking
activities. Expenses consist primarily of interest payments on customer
deposits and other borrowings and general and administrative costs.
The Bank is regulated by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"), and is subject
to periodic examination by both entities. The Bank is also subject to
the regulations of the Board of Governors of the Federal Reserve System
("FRB"), which establishes rules regarding reserves that must be
maintained against customer deposits.
FINANCIAL CONDITION
ASSETS
The Company's total assets as of December 31, 2005, were $1,552.9
million, a decrease of $3.5 million from September 30, 2005, the prior
fiscal year end.
As the Bank originates mortgage loans each month, management
evaluates the existing market conditions to determine which loans will
be held in the Bank's portfolio and which loans will be sold in the
secondary market. Loans sold in the secondary market can be sold with
servicing released or converted into MBS and sold with the loan
servicing retained by the Bank. At the time of each loan commitment, a
decision is made to either hold the loan for investment, hold it for
sale with servicing retained, or hold it for sale with servicing
released. Management monitors market conditions to decide whether loans
should be held in portfolio or sold and if sold, which method of sale is
appropriate. During the three months ended December 31, 2005, the Bank
originated $317.3 million in mortgage loans held for sale, $141.0
million in mortgage loans held for investment, and $1.2 million in other
loans. This total of $459.5 million in loans originated compares to
$411.9 million in loans originated during the three months ended
December 31, 2004.
Included in the $47.3 million in loans held for sale as of December
31, 2005, are $44.0 million in mortgage loans held for sale with
servicing released. All loans held for sale are carried at the lower of
cost or fair value.
The Bank classifies problem assets as "substandard," "doubtful" or
"loss." Substandard assets have one or more defined weaknesses, and it
is possible that the Bank will sustain some loss unless the deficiencies
are corrected. Doubtful assets have the same defects as substandard
assets plus other weaknesses that make collection or full liquidation
improbable. Assets classified as loss are considered uncollectible and
of such little value that a specific loss allowance is warranted.
10
The following table summarizes the Bank's classified assets as
reported to the OTS, plus any classified assets of the holding company.
Dollar amounts are expressed in thousands.
12/31/05 9/30/05 12/31/04
-------------------------------------
Asset Classification:
Substandard $ 11,872 13,346 16,511
Doubtful -- -- --
Loss 526 595 1,700
-------------------------------------
12,398 13,941 18,211
Allowance for losses (7,485) (7,731) (9,379)
-------------------------------------
$ 4,913 6,210 8,832
=====================================
The following table summarizes non-performing assets, troubled debt
restructurings, and real estate acquired through foreclosure or in-
substance foreclosure. Dollar amounts are expressed in thousands.
12/31/05 9/30/05 12/31/04
----------------------------------------
Total Assets $ 1,552,886 1,556,344 1,417,560
========================================
Non-accrual loans $ 2,805 5,643 11,668
Troubled debt
restructurings 3,479 74 3,602
Net real estate and
other assets acquired
through foreclosure 8,410 7,760 2,359
----------------------------------------
Total $ 14,694 13,477 17,629
========================================
Percent of total assets 0.95% 0.87% 1.24%
========================================
Management records a provision for loan losses in amounts
sufficient to cover current net charge-offs and an estimate of probable
losses based on an analysis of risks that management believes to be
inherent in the loan portfolio. The Allowance for Loan and Lease Losses
("ALLL") recognizes the inherent risks associated with lending
activities but, unlike specific allowances, have not been allocated to
particular problem assets but to a homogenous pool of loans. Management
believes that the specific loss allowances and ALLL are adequate. While
management uses available information to determine these allowances,
future allowances may be necessary because of changes in economic
conditions. Also, regulatory agencies (OTS and FDIC) review the Bank's
allowance for losses as part of their examinations, and they may require
the Bank to recognize additional loss provisions based on the
information available at the time of their examinations.
The following table sets forth the activity in the allowance for
loan losses for the three months ending December 31, 2005, and 2004.
Dollar amounts are expressed in thousands.
2005 2004
-------------------------
Balance at beginning of year $ 7,536 8,221
Provision for loan losses 65 167
Recoveries 9 13
Charge-offs (298) (13)
-------------------------
Balance at December 31 $ 7,312 8,388
=========================
11
LIABILITIES AND EQUITY
Customer and brokered deposit accounts increased $45.4 million
during the three months ended December 31, 2005. The weighted average
rate on customer and brokered deposits as of December 31, 2005, was
3.20%, an increase from 1.03% as of December 31, 2004.
Advances from the FHLB were $488.8 million as of December 31, 2005,
an increase of $22.9 million from September 30, 2005. During the three-
month period, the Bank borrowed $150.0 million of new advances and
repaid $127.1 million. Management regularly uses FHLB advances as an
alternate funding source to provide operating liquidity and to fund the
origination and purchase of mortgage loans.
Securities sold under agreements to repurchase were $52.5 million
as of December 31, 2005, a decrease of $69.5 million from September 30,
2005. This decrease was due to repayments of repurchase agreements
during the three-month period ended December 31, 2005.
Escrows were $3.6 million as of December 31, 2005, a decrease of
$5.8 million from September 30, 2005. This decrease is due to amounts
paid for borrowers' taxes during the fourth calendar quarter of 2005.
Total stockholders' equity as of December 31, 2005, was $149.6
million (9.6% of total assets). This compares to $148.9 million (9.6%
of total assets) at September 30, 2005. On a per share basis,
stockholders' equity was $17.77 on December 31, 2005, compared to $17.65
on September 30, 2005.
The Company paid cash dividends on its common stock of $0.45 per
share on November 25, 2005. Subsequent to the quarter ended December
31, 2005, the Company announced a cash dividend of $0.225 per share to
be paid on February 24, 2006, to stockholders of record as of February
3, 2006.
Total stockholders' equity as of December 31, 2005, includes an
unrealized loss of $2.2 million, net of deferred income taxes, on
available for sale securities. This amount is reflected in the line
item "Accumulated other comprehensive income."
RATIOS
The following table illustrates the Company's return on assets
(annualized net income divided by average total assets); return on
equity (annualized net income divided by average total equity); equity-
to-assets ratio (ending total equity divided by ending total assets);
and dividend payout ratio (dividends paid divided by net income).
Three months ended
------------------------
12/31/05 12/31/04
------------------------
Return on assets 1.34% 1.99%
Return on equity 13.96% 19.99%
Equity-to-assets ratio 9.63% 9.73%
Dividend payout ratio 72.87% 122.20%
RESULTS OF OPERATIONS - Comparison of three months ended December 31,
2005 and 2004.
For the three months ended December 31, 2005, the Company had net
income of $5,209,000 or $0.62 per share. This compares to net income of
$6,919,000 or $0.82 per share for the quarter ended December 31, 2004.
NET INTEREST MARGIN
The Company's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS and investments and the
interest cost of customer deposits and other borrowings. Management
monitors net interest spreads and, although constrained by certain
market, economic, and competition factors, it establishes loan rates and
customer deposit rates that maximize net interest margin.
12
The following table presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities for the three months ended
December 31, 2005 and 2004. Average yields reflect reductions due to
non-accrual loans. Once a loan becomes 90 days delinquent, any interest
that has accrued up to that time is reserved and no further interest
income is recognized unless the loan is paid current. Average balances
and weighted average yields for the periods include all accrual and non-
accrual loans. The table also presents the interest-earning assets and
yields for each respective period. Dollar amounts are expressed in
thousands.
Three months ended 12/31/05 As of
--------------------------- 12/31/05
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,322,660 22,434 6.78% 6.73%
Mortgage-backed securities 124,803 1,160 3.72% 4.26%
Securities 22,982 277 4.82% 2.79%
Bank deposits 13,785 121 3.51% 3.72%
--------------------------------------
Total earning assets 1,484,230 23,992 6.47% 6.41%
---------------------------
Non-earning assets 59,245
----------
Total $1,543,475
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 190,744 491 1.03% 1.04%
Customer and brokered
certificates of deposit 644,522 5,876 3.65% 3.82%
FHLB Advances 474,028 4,759 4.02% 4.39%
Repurchase agreements 72,000 606 3.37% 3.49%
--------------------------------------
Total costing liabilities 1,381,294 11,732 3.40% 3.63%
---------------------------
Non-costing liabilities 12,853
Stockholders' equity 149,328
----------
Total $1,543,475
==========
Net earning balance $ 102,936
==========
Earning yield less costing rate 3.07% 2.78%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,484,230 12,260 3.30%
============================
Three months ended 12/31/04 As of
--------------------------- 12/31/04
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,137,747 17,683 6.22% 5.95%
Mortgage-backed securities 167,252 1,575 3.77% 4.18%
Securities 20,288 134 2.64% 2.72%
Bank deposits 13,389 46 1.37% 1.82%
--------------------------------------
Total earning assets 1,338,676 19,438 5.81% 5.65%
---------------------------
Non-earning assets 42,867
----------
Total $1,381,543
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 207,443 365 0.70% 0.68%
Customer and brokered
certificates of deposit 469,912 2,965 2.52% 2.80%
FHLB Advances 401,650 2,145 2.14% 2.48%
Repurchase agreements 154,600 731 1.89% 2.03%
--------------------------------------
Total costing liabilities 1,233,605 6,206 2.01% 2.26%
---------------------------
Non-costing liabilities 9,452
Stockholders' equity 138,486
----------
Total $1,381,543
==========
Net earning balance $ 105,071
==========
Earning yield less costing rate 3.80% 3.39%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,338,676 13,232 3.95%
============================
The following table provides information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided on
changes attributable to (1) changes in rates (change in rate
multiplied by the old volume), and (2) changes in volume (change in
volume multiplied by the old rate), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
13
Three months ended December 31, 2005, compared to
three months ended December 31, 2004
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ 1,593 2,875 283 4,751
Mortgage-backed securities (21) (400) 6 (415)
Securities 111 18 14 143
Bank deposits 72 1 2 75
-----------------------------------------------
Net change in interest income 1,755 2,494 305 4,554
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts 1,829 778 430 3,037
FHLB Advances 1,888 387 339 2,614
Repurchase agreements 572 (390) (307) (125)
-----------------------------------------------
Net change in interest expense 4,289 775 462 5,526
-----------------------------------------------
Decrease in net interest
margin $ (2,534) 1,719 (157) (972)
===============================================
Net interest margin before loan loss provision for the three months ended
December 31, 2005, decreased $972,000 from the same period in the prior year.
Specifically, interest income increased $4.6 million. This increase was the
result of a $145.6 million increase in the average balance of interest-earning
assets and a 66 basis point increase in the average rate earned on such
assets. The increase in interest income was offset by a $5.5 million increase
in interest expense, which resulted from a 139 basis point increase in the
average rate paid on interest-costing liabilities and a $147.7 million
increase in the average balance of such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $65,000 during
the quarter ended December 31, 2005, due to an increase in commercial
real estate loans classified as "special mention." Management performs
an ongoing analysis of individual loans and of homogenous pools of loans
to assess for any impairment. On a consolidated basis, loan loss
reserve was 60.4% of total classified assets at December 31, 2005, 55.5%
at September 30, 2005, and 51.5% at December 31, 2004.
As stated above, management believes that the provisions for loan
losses is adequate. The provision can fluctuate based on changes in
economic conditions or changes in the information available to
management. Also, regulatory agencies review the Company's allowances
for losses as a part of their examination process and they may require
changes in loss provision amounts based on information available at the
time of their examination.
OTHER INCOME
Other income for the three months ended December 31, 2005,
decreased $663,000 from the same period in the prior year. Recovery on
real estate owned decreased $681,000 due to recoveries realized on the
sale of foreclosed assets held for sale in the prior fiscal year. Other
income decreased $235,000 due primarily 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 decreases in other income were offset by an
increase in gain on sale of loans held for sale of $198,000 due to an
increase in mortgage banking volume.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended December 31, 2005, increased $1.2 million from the same period in
the prior year. Specifically, compensation, fringe benefits, and
commission-based mortgage banking compensation increased $641,000 due
primarily to increased mortgage banking volume, and continued growth of
the local and national mortgage banking operations. Advertising
increased $263,000 due to increased costs related to the national
mortgage banking operation. Additionally, other expense increased
$239,000 due to an increase in costs attributable to the increased loan
origination volume, an increase in audit fees due to the implementation
of Section 404 of the Sarbanes-Oxley Act of 2002, and costs related to
the conversion of the Company's loan origination system.
14
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Savings Association Insurance Fund ("SAIF") of the
FDIC. The Bank is subject to regulation by the OTS as its chartering
authority. Since passage of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA" or the "Act"), the FDIC
also has regulatory control over the Bank. The transactions of SAIF-
insured institutions are limited by statute and regulations that may
require prior supervisory approval in certain instances. Institutions
also must file reports with regulatory agencies regarding their
activities and their financial condition. The OTS and FDIC make
periodic examinations of the Bank to test compliance with the various
regulatory requirements. The OTS can require an institution to re-value
its assets based on appraisals and to establish specific valuation
allowances. This supervision and regulation is intended primarily for
the protection of depositors. Also, savings institutions are subject to
certain reserve requirements under Federal Reserve Board regulations.
INSURANCE OF ACCOUNTS
The SAIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured member. Deposit insurance premiums are
determined using a Risk-Related Premium Schedule ("RRPS"), a matrix
which places each insured institution into one of three capital groups
and one of three supervisory groups. Currently, deposit insurance
premiums range from 0 to 27 basis points of the institution's total
deposit accounts, depending on the institution's risk classification.
The Bank is currently considered "well capitalized", which is the most
favorable capital group and supervisory subgroup. SAIF-insured
institutions are also assessed a premium to service the interest on
Financing Corporation ("FICO") debt.
REGULATORY CAPITAL REQUIREMENTS
At December 31, 2005, the Bank exceeds all capital requirements
prescribed by the OTS. To calculate these requirements, a thrift must
deduct any investments in and loans to subsidiaries that are engaged in
activities not permissible for a national bank. As of December 31,
2005, the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
At December 31, 2005 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 131,086
Adjustment for regulatory capital:
Intangible assets (3,046)
Disallowed portion of servicing assets
and deferred tax assets (2,642)
Reverse the effect of SFAS No. 115 2,180
---------
Tangible capital 127,578
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 127,578
Qualifying general valuation allowance 6,786
---------
Risk-based capital $ 134,364
=========
As of December 31, 2005
-------------------------------------------------------------------
Minimum required for Minimum required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 134,364 11.1% 96,860 >=8% 121,075 >=10%
Core capital to adjusted tangible assets 127,578 8.3% 61,399 >=4% 76,749 >=5%
Tangible capital to tangible assets 127,578 8.3% 23,025 >=1.5% -- --
Tier 1 capital to risk-weighted assets 127,578 10.5% -- -- 72,645 >=6%
15
LOANS TO ONE BORROWER
Institutions are prohibited from lending to any one borrower in
excess of 15% of the Bank's unimpaired capital plus unimpaired surplus,
or 25% of unimpaired capital plus unimpaired surplus if the loan is
secured by certain readily marketable collateral. Renewals that exceed
the loans-to-one-borrower limit are permitted if the original borrower
remains liable and no additional funds are disbursed. The Bank has
enrolled with the OTS to participate in the "Lending Limits Pilot
Program." This program allows a federally chartered institution to
increase it's loans-to-one-borrower limit by an additional amount equal
to the lesser of: a) $10 million; b) 10% of its unimpaired capital and
surplus; or c) the percentage of its capital and surplus, in excess of
15%, that a state institution is permitted to lend. Participation in
this program increased North American's loans-to-one-borrower limit by
$10 million. This pilot program is set to expire on September 10, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability to meet deposit withdrawals and
lending commitments. The Bank generates liquidity primarily from the
sale and repayment of loans, retention or newly acquired retail
deposits, and advances from FHLB of Des Moines' credit facility.
Management continues to use FHLB advances as a primary source of short-
term funding. At December 31, 2005, there was $82.0 million available
to the Bank in the form of FHLB advances. The Bank has established
relationships with various brokers, and, as a secondary source of
liquidity, the Bank purchases brokered deposit accounts. At December
31, 2005, the Bank has $126.7 million in brokered deposits, and it could
purchase up to $100.1 million in additional 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 MBS. During periods of falling
interest rates, these prepayments increase and a greater demand exists
for new loans. The Bank's customer deposits are partially impacted by
area competition. Management believes that the Bank will retain most of
its maturing time deposits in the foreseeable future. However, any
material funding needs that may arise in the future can be reasonably
satisfied through the use of additional FHLB advances and/or brokered
deposits. Management is not aware of any other current market or
economic conditions that could materially impact the Bank's future
ability to meet obligations as they come due.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a complete discussion of the Company's asset and liability
management policies, as well as the potential impact of interest rate
changes upon the market value of the Company's portfolio, see the
"Asset/Liability Management" section of the Company's Annual Report for
the year ended September 30, 2005.
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. 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. There have been no material changes in the market risk
information provided in the Annual Report for the year ended September
30, 2005.
Item 4. Controls and Procedures
An evaluation of the Company's disclosure controls and procedures
was carried out under the supervision and with the participation of the
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO")
within the 90-day period preceding the filing date of this quarterly
report. Based on that evaluation, the CEO and CFO have concluded that
the Company's disclosure controls and procedures are effective in
ensuring that the information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is (i)
accumulated and communicated to management in a timely manner, and (ii)
recorded, processed, summarized, and reported within the time periods
specified by the SEC. Since the date of this evaluation, there have not
been any significant changes in the Company's internal controls or in
other factors that could significantly affect those controls.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material proceedings pending other than ordinary and
routine litigation incidental to the business of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Exhibit 31.1 - Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
Exhibit 32.2 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
(b) Reports of Form 8-K
A report on Form 8-K was filed on October 25, 2005, which announced
a quarterly cash dividend of $0.225 per share and a special cash
dividend of $0.225 per share payable on November 25, 2005 to
shareholder's of record as of November 4, 2005.
A report on Form 8-K was filed on December 1, 2005, which announced
financial results for the quarter ended September 30, 2005.
17
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NASB Financial, Inc.
(Registrant)
February 9, 2006 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
February 9, 2006 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
18
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