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 June 30, 2007
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
August 6, 2007, was 7,880,629.
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
June 30, September 30,
2007 2006
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 29,298 11,442
Securities available for sale 46 50
Stock in Federal Home Loan Bank, at cost 24,621 24,043
Mortgage-backed securities:
Available for sale, at fair value 85,819 97,259
Held to maturity 263 325
Loans receivable:
Held for sale 67,246 50,462
Held for investment, net 1,274,537 1,295,700
Allowance for loan losses (7,673) (7,991)
Accrued interest receivable 8,100 8,205
Foreclosed asset held for sale, net 7,631 5,231
Premises and equipment, net 15,769 12,994
Investment in LLCs 18,885 16,737
Mortgage servicing rights, net 1,005 1,089
Deferred income tax asset 2,609 2,856
Other assets 7,690 6,394
---------- ----------
$ 1,535,846 1,524,796
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 702,902 722,799
Brokered deposit accounts 146,470 128,243
Advances from Federal Home Loan Bank 493,990 499,357
Subordinated debentures 25,774 --
Escrows 7,032 8,910
Income taxes payable 1,388 2,602
Accrued expenses and other liabilities 9,099 6,313
---------- ----------
Total liabilities 1,386,655 1,368,224
---------- ----------
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 authorized; 9,857,112
issued at June 30, 2007, and
September 30, 2006 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 16,366 16,311
Retained earnings 169,208 162,631
Treasury stock, at cost; 1,924,883
shares at June 30, 2007, and
1,538,470 shares at September 30, 2006 (36,468) (22,061)
Accumulated other comprehensive
loss (1,394) (1,788)
---------- ----------
Total stockholders' equity 149,191 156,572
---------- ----------
$ 1,535,846 1,524,796
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except share data)
Three months ended Nine months ended
June 30, June 30,
---------------------- ----------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Interest on loans $ 24,706 23,884 74,237 69,379
Interest on mortgage-backed securities 763 1,023 2,445 3,280
Interest and dividends on securities 452 175 994 577
Other interest income 133 39 239 204
--------- --------- --------- ---------
Total interest income 26,054 25,121 77,915 73,440
--------- --------- --------- ---------
Interest on customer deposit accounts 8,534 7,995 24,664 21,621
Interest on advances from FHLB 6,569 5,505 20,445 15,533
Interest on subordinated debentures 443 -- 974 --
Interest on securities sold under
agreements to repurchase 72 -- 396 784
--------- --------- --------- ---------
Total interest expense 15,618 13,500 46,479 37,938
--------- --------- --------- ---------
Net interest income 10,436 11,621 31,436 35,502
Provision for loan losses 175 250 934 408
--------- --------- --------- ---------
Net interest income after provision
for loan losses 10,261 11,371 30,502 35,094
--------- --------- --------- ---------
Other income (expense):
Loan servicing fees, net 138 32 160 137
Impairment recovery on mortgage
servicing rights (28) 9 (2) 15
Customer service fees and charges 1,582 1,512 4,425 4,666
Recovery on real estate owned (340) 277 (445) 277
Gain on sale of loans held for sale 4,166 3,950 11,397 11,073
Other 340 842 1,229 1,616
--------- --------- --------- ---------
Total other income 5,858 6,622 16,764 17,784
--------- --------- --------- ---------
General and administrative expenses:
Compensation and fringe benefits 4,122 4,402 11,818 13,202
Commission-based mortgage banking compensation 2,075 1,827 5,570 5,310
Premises and equipment 953 869 2,713 2,644
Advertising and business promotion 1,220 821 3,163 2,851
Federal deposit insurance premiums 25 27 79 79
Other 1,566 1,625 4,196 4,864
--------- --------- --------- ---------
Total general and administrative expenses 9,961 9,571 27,539 28,950
--------- --------- --------- ---------
Income before income tax expense 6,158 8,422 19,727 23,928
Income tax expense 2,372 3,244 7,598 8,826
--------- --------- --------- ---------
Net income $ 3,786 5,178 12,129 15,102
========= ========= ========= =========
Basic earnings per share $ 0.47 0.61 1.48 1.79
========= ========= ========= =========
Diluted earnings per share $ 0.47 0.61 1.47 1.78
========= ========= ========= =========
Basic weighted average shares outstanding 7,986,967 8,396,165 8,169,670 8,416,356
See accompanying notes to condensed consolidated financial statements.
2
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed 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, 2006 $ 1,479 16,311 162,631 (22,061) (1,788) 156,572
Comprehensive income:
Net income -- -- 12,129 -- -- 12,129
Other comprehensive income (loss),
net of tax:
Unrealized gain on securities -- -- -- -- 394 394
available for sale -------
Total comprehensive income 12,523
Cash dividends paid -- -- (5,552) -- -- (5,552)
Stock based compensation expense -- 55 -- -- -- 55
Repurchase of common stock for
treasury -- -- -- (14,407) -- (14,407)
----------------------------------------------------------------------
Balance at June 30, 2007 $ 1,479 16,366 169,208 (36,468) (1,394) 149,191
======================================================================
See accompanying notes to condensed consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands, except share data)
Nine months ended
June 30,
----------------------
2007 2006
----------------------
Cash flows from operating activities:
Net income $ 12,129 15,102
Adjustments to reconcile net income to net cash
provided by (used in)operating activities:
Depreciation 863 938
Amortization and accretion, net (1,340) (1,032)
Impairment (loss) recovery on mortgage
servicing rights 2 (15)
Gain on sale of loans receivable held for sale (11,397) (11,073)
Provision for loan losses 934 408
Provision for loss (recovery) on real estate owned 445 (277)
Principal repayments of mortgage loans receivable
held for sale -- 19
Origination of loans receivable held for sale (754,225) (753,315)
Sale of loans receivable held for sale 748,838 790,634
Stock based compensation - stock options 55 38
Changes in:
Net fair value of loan related commitments (88) (18)
Accrued interest receivable 105 (950)
Accrued expenses and other liabilities and
income taxes payable 2,082 860
----------------------
Net cash provided by (used in) operating activities (1,597) 41,319
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 62 82
Available for sale 11,670 24,373
Principal repayments of mortgage loans receivable
held for investment 321,184 325,641
Principal repayments of other loans receivable 7,097 6,200
Maturity of investment securities available for sale 4 4
Loan origination - mortgage loans held for investment (307,631) (392,188)
Loan origination - other loans receivable (7,273) (4,093)
Purchase of FHLB stock (578) (1,672)
Proceeds for sale of real estate owned 5,869 5,032
Purchases of premises and equipment, net (3,744) (3,134)
Investment in LLCs (2,148) (4,141)
Other (1,857) 282
----------------------
Net cash provided by (used in) investing activities 22,655 (43,614)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (continued)
(In thousands, except share data)
Nine months ended
June 30,
----------------------
2007 2006
----------------------
Cash flows from financing activities:
Net (decrease) increase in customer and
brokered deposit accounts (1,941) 83,985
Proceeds from advances from FHLB 278,650 222,000
Repayment on advances from FHLB (283,848) (192,241)
Proceeds from subordinated debentures 25,774 --
Proceeds from sale of securities
under agreements to repurchase 30,900 --
Repayment of securities sold under
agreements to repurchase (30,900) (122,000)
Cash dividends paid (5,552) (7,584)
Purchase of common stock for treasury (14,407) (2,409)
Change in escrows (1,878) (3,104)
----------------------
Net cash used in financing activities (3,202) (21,353)
----------------------
Net increase (decrease) in cash and cash equivalents 17,856 (23,648)
Cash and cash equivalents at beginning of the period 11,442 35,334
----------------------
Cash and cash equivalents at end of period $ 29,298 11,686
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 8,812 7,958
Cash paid for interest 44,249 38,951
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 12,820 2,382
Conversion of real estate owned to loans receivable 4,461 2,170
Capitalization of mortgage servicing rights 6 139
See accompanying notes to condensed consolidated financial statements.
5
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed 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 nine months ended June 30, 2007,
are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2007. The condensed consolidated
balance sheet of the Company as of September 30, 2006, 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
condensed consolidated financial statements as of June 30, 2007, have
remained unchanged from September 30, 2006. These policies relate to
the allowance for loan losses and the valuation of 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, 2006.
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 Nine months ended
---------------------- ----------------------
6/30/07 6/30/06 6/30/07 6/30/06
---------------------- ----------------------
Net income (in thousands) $ 3,786 5,178 12,129 15,102
Average common shares outstanding 7,986,967 8,396,165 8,169,670 8,416,356
Average common share stock options
outstanding 63,293 46,292 58,086 43,568
---------------------- ----------------------
Average diluted common shares 8,050,260 8,442,457 8,227,756 8,459,924
Earnings per share:
Basic $ 0.47 0.61 1.48 1.79
Diluted 0.47 0.61 1.47 1.78
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) 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.
June 30, 2007
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 204 6 -- 210
Pass-through certificates
guaranteed by FNMA
- adjustable rate 12,028 -- 310 11,718
FHLMC participation
certificates
- fixed rate 1,025 -- 72 953
- adjustable rate 74,828 -- 1,890 72,938
-------------------------------------------
Total $ 88,085 6 2,272 85,819
===========================================
(4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity. Dollar amounts are expressed in thousands.
June 30, 2007
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation
certificates:
Balloon maturity and
adjustable rate $ 96 2 -- 98
FNMA pass-through
certificates:
Fixed rate 80 1 -- 81
Balloon maturity and
adjustable rate 71 -- -- 71
Pass-through certificates
guaranteed by GNMA
- fixed rate 16 1 -- 17
-------------------------------------------
Total $ 263 4 -- 267
===========================================
7
(5) LOANS RECEIVABLE
Loans receivable are as follows:
June 30,
2007
---------------------
(Dollars in thousands)
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 346,448
Business properties 485,642
Partially guaranteed by VA or
insured by FHA 1,609
Construction and development 493,366
----------
Total mortgage loans 1,327,065
Commercial loans 65,048
Installment loans to individuals 17,404
----------
Total loans held for investment 1,409,517
Less:
Undisbursed loan funds (129,785)
Unearned discounts and fees and costs
on loans, net (5,195)
----------
Net loans held for investment $1,274,537
==========
June 30,
2007
---------------------
(Dollars in thousands)
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 101,761
Less:
Undisbursed loan funds (34,515)
----------
Net loans held for sale $ 67,246
==========
Included in the loans receivable balances at June 30, 2007, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the approximate amount of
$85,000. Loans and participations serviced for others amounted to
approximately $88.1 million at June 30, 2007.
The following table presents the activity in the allowance for
losses on loans for the period ended June 30, 2007. 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.
Balance at October 1, 2006 $ 7,991
Provisions 934
Charge-offs (1,252)
Recoveries --
--------
Balance at June 30, 2007 $ 7,673
========
8
(6) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following:
June 30,
2007
---------------------
(Dollars in thousands)
Real estate acquired through (or deed
in lieu of) foreclosure $ 8,081
Less: allowance for losses (450)
----------
Total $ 7,631
==========
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.
(7) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the period ended June 30, 2007. Dollar amounts are
expressed in thousands.
Balance at October 1, 2006 $ 1,089
Additions:
Originated mortgage servicing rights 6
Reductions:
Amortization (88)
Impairment loss (2)
--------
Balance at June 30, 2007 $ 1,005
========
(8) SUBORDINATED DEBENTURES
On December 13, 2006, NASB Financial, Inc. (the "Company"), through
its wholly owned statutory trust, NASB Preferred Trust I (the "Trust"),
issued $25 million of pooled Trust Preferred Securities. The Trust used
the proceeds from the offering to purchase a like amount of NASB
Financial Inc.'s subordinated debentures. The debentures, which have a
variable rate of 1.65% over the 3-month LIBOR and a 30-year term, are
the sole assets of the Trust. In exchange for the capital contributions
made to the Trust by NASB Financial, Inc. upon formation, NASB
Financial. Inc. owns all the common securities of the Trust.
In accordance with Financial Accounting Standards Board
Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN
46R), the Trust qualifies as a special purpose entity that is not
required to be consolidated in the financial statements of the Company.
The $25.0 million Trust Preferred Securities issued by the Trust will
remain on the records of the Trust. The Trust Preferred Securities are
included in Tier I capital for regulatory capital purposes.
The Trust Preferred Securities have a variable interest rate of
1.65% over the 3-month LIBOR, and are mandatorily redeemable upon the
30-year term of the dentures, or upon earlier redemption as provided in
the Indenture. The debentures are callable, in whole or in part, after
five years of the issuance date. The Company did not incur a placement
or annual trustee fee related to the issuance. The securities are
subordinate to all other debt of the Company and interest may be
deferred up to five years.
9
(9) 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
June 30, 2007 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 10,862 -- -- (426) 10,436
Provision for loan losses 175 -- -- -- 175
Other income 1,025 1,863 3,543 (573) 5,858
General and administrative
expenses 4,354 2,037 3,627 (57) 9,961
Income tax expense (benefit) 2,833 (67) (32) (362) 2,372
-----------------------------------------------------------
Net income $ 4,525 (107) (52) (580) 3,786
===========================================================
Local National
Three months ended Mortgage Mortgage Other and
June 30, 2006 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 11,602 -- -- 19 11,621
Provision for loan losses 250 -- -- -- 250
Other income 1,916 2,714 2,324 (332) 6,622
General and administrative
expenses 4,174 2,775 2,747 (125) 9,571
Income tax expense (benefit) 3,601 (27) (176) (154) 3,244
-----------------------------------------------------------
Net income $ 5,493 (34) (247) (34) 5,178
===========================================================
Local National
Nine months ended Mortgage Mortgage Other and
June 30, 2007 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 32,356 -- -- (920) 31,436
Provision for loan losses 934 -- -- -- 934
Other income 3,260 4,987 9,971 (1,454) 16,764
General and administrative
expenses 12,282 5,476 9,925 (144) 27,539
Income tax expense (benefit) 8,624 (188) 18 (856) 7,598
-----------------------------------------------------------
Net income $ 13,776 (301) 28 (1,374) 12,129
===========================================================
10
Local National
Nine months ended Mortgage Mortgage Other and
June 30, 2006 Banking Banking Banking Eliminations Consolidated
------------------------------------------------------------------------------------
Net interest income $ 35,449 -- -- 53 35,502
Provision for loan losses 408 -- -- -- 408
Other income 4,519 7,610 6,901 (1,246) 17,784
General and administrative
expenses 12,340 8,033 8,898 (321) 28,950
Income tax expense (benefit) 10,126 (157) (743) (400) 8,826
-----------------------------------------------------------
Net income $ 17,094 (266) (1,254) (472) 15,102
===========================================================
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,
advances from the Federal Home Loan Bank ("FHLB"), and the purchase of
brokered deposit accounts. 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 June 30, 2007, were $1,535.8
million, an increase of $11.1 million from September 30, 2006, 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 nine months ended June 30, 2007, the Bank
originated $754.2 million in mortgage loans held for sale, $307.6
million in mortgage loans held for investment, and $7.3 million in other
loans. This total of $1,069.1 million in loans originated compares to
$1,149.6 million in loans originated and purchased during the nine
months ended June 30, 2006.
Loans held for sale as of June 30, 2007, were $67.2 million, and
consisted entirely of mortgage loans held for sale with servicing
released. All loans held for sale are carried at the lower of cost or
fair value.
The 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.
11
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.
6/30/07 9/30/06 6/30/06
-------------------------------------
Asset Classification:
Substandard $ 11,301 12,361 8,665
Doubtful -- -- --
Loss 427 434 435
-------------------------------------
11,728 12,795 9,100
Allowance for losses (8,123) (8,266) (7,839)
-------------------------------------
$ 3,605 4,529 1,261
=====================================
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.
6/30/07 9/30/06 6/30/06
----------------------------------------
Total Assets $ 1,535,846 1,524,796 1,550,347
========================================
Non-accrual loans $ 2,036 6,396 2,931
Troubled debt
restructurings 70 3,477 3,477
Net real estate and
other assets acquired
through foreclosure 7,631 5,231 4,331
----------------------------------------
Total $ 9,737 15,104 10,739
========================================
Percent of total assets 0.63% 0.99% 0.69%
========================================
Management records a provision for loan losses in amounts
sufficient to cover current net charge-offs and an estimate of probable
losses based on an analysis of risks that management believes to be
inherent in the loan portfolio. The Allowance for Loan and Lease Losses
("ALLL") recognizes the inherent risks associated with lending
activities, but, unlike specific allowances, have not been allocated to
particular problem assets but to a homogenous pool of loans. Management
believes that the specific loss allowances and ALLL are adequate. While
management uses available information to determine these allowances,
future allowances may be necessary because of changes in economic
conditions. Also, regulatory agencies (OTS and FDIC) review the Bank's
allowance for losses as part of their examinations, and they may require
the Bank to recognize additional loss provisions based on the
information available at the time of their examinations.
LIABILITIES AND EQUITY
Customer and brokered deposit accounts decreased $1.7 million
during the nine months ended June 30, 2007. The weighted average rate
on customer and brokered deposits as of June 30, 2007, was 4.22%, an
increase from 3.71% as of June 30, 2006.
Advances from the FHLB were $494.0 million as of June 30, 2007, a
decrease of $5.4 million from September 30, 2006. During the nine-month
period, the Bank borrowed $278.7 million of new advances and repaid
$283.8 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.
Subordinated debentures were $25.8 million as of June 30, 2007.
Such debentures resulted from the issuance of pooled Trust Preferred
Securities through the Company's wholly owned statutory trust, NASB
Preferred Trust I. The Trust used the proceeds from the offering to
purchase a like amount of the Company's subordinated debentures. The
debentures, which have a variable rate of 1.65% over the 3-month LIBOR
and a 30-year term, are the sole assets of the Trust.
Escrows were $7.0 million as of June 30, 2007, a decrease of $1.9
million from September 30, 2006. This decrease is due to amounts paid
for borrowers' taxes during the fourth calendar quarter of 2006.
12
Total stockholders' equity as of June 30, 2007, was $149.2 million
(9.7% of total assets). This compares to $156.6 million (10.3% of total
assets) at September 30, 2006. On a per share basis, stockholders'
equity was $18.81 on June 30, 2007, compared to $18.82 on September 30,
2006.
The Company paid cash dividends on its common stock of $0.225 per
share on November 24, 2006, February 23, 2007, and May 25, 2007.
Subsequent to the quarter ended June 30, 2007, the Company announced a
cash dividend of $0.225 per share to be paid on August 24, 2007, to
stockholders of record as of August 3, 2007.
Total stockholders' equity as of June 30, 2007, includes an
unrealized loss of $1.4 million, net of deferred income taxes, on
available for sale securities. This amount is reflected in the line
item "Accumulated other comprehensive loss."
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).
Nine months ended
------------------------
6/30/07 6/30/06
------------------------
Return on assets 1.06% 1.30%
Return on equity 10.58% 13.32%
Equity-to-assets ratio 9.71% 9.89%
Dividend payout ratio 45.78% 50.22%
RESULTS OF OPERATIONS - Comparison of three and nine months ended June
30, 2007 and 2006.
For the three months ended June 30, 2007, the Company had net
income of $3,786,000 or $0.47 per share. This compares to net income of
$5,178,000 or $0.61 per share for the quarter ended June 30, 2006.
For the nine months ended June 30, 2007, the Company had net income
of $12,129,000 or $1.48 per share. This compares to net income of
$15,102,000 or $1.79 per share for the nine months ended June 30, 2006.
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 and brokered deposits and other borrowings.
Management monitors net interest spreads and, although constrained by
certain market, economic, and competition factors, it establishes loan
rates and customer deposit rates that maximize net interest margin.
The following table presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities for the nine months ended June
30, 2007 and 2006. 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.
13
Nine months ended 6/30/07 As of
--------------------------- 6/30/07
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,342,913 74,237 7.37% 7.25%
Mortgage-backed securities 92,042 2,445 3.54% 4.24%
Securities 25,539 994 5.19% 4.25%
Bank deposits 6,955 239 4.58% 4.74%
--------------------------------------
Total earning assets 1,467,449 77,915 7.08% 7.01%
---------------------------
Non-earning assets 63,379
----------
Total $1,530,828
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 169,806 1,503 1.18% 1.03%
Customer and brokered
certificates of deposit 644,628 23,161 4.79% 5.08%
FHLB Advances 521,642 20,445 5.23% 5.14%
Subordinated debentures 18,500 974 7.01% 7.01%
Repurchase agreements 9,810 396 5.37% --%
--------------------------------------
Total costing liabilities 1,364,386 46,479 4.54% 4.61%
---------------------------
Non-costing liabilities 11,922
Stockholders' equity 154,520
----------
Total $1,530,828
==========
Net earning balance $ 103,063
==========
Earning yield less costing rate 2.54% 2.40%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,467,449 31,436 2.86%
============================
Nine months ended 6/30/06 As of
--------------------------- 6/30/06
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,336,420 69,379 6.92% 7.12%
Mortgage-backed securities 115,997 3,280 3.77% 4.33%
Securities 23,262 577 3.31% 3.78%
Bank deposits 8,641 204 3.15% 4.57%
--------------------------------------
Total earning assets 1,484,320 73,440 6.60% 6.86%
---------------------------
Non-earning assets 57,612
----------
Total $1,541,932
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 186,324 1,480 1.06% 1.04%
Customer and brokered
certificates of deposit 683,409 20,141 3.93% 4.42%
FHLB Advances 478,079 15,533 4.33% 4.87%
Repurchase agreements 31,500 784 3.32% --%
--------------------------------------
Total costing liabilities 1,379,312 37,938 3.67% 4.12%
---------------------------
Non-costing liabilities 11,718
Stockholders' equity 150,902
----------
Total $1,541,932
==========
Net earning balance $ 105,008
==========
Earning yield less costing rate 2.93% 2.74%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,484,320 35,502 3.19%
============================
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.
Nine months ended June 30, 2007, compared to
nine months ended June 30, 2006
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ 4,510 337 11 4,858
Mortgage-backed securities (200) (677) 42 (835)
Securities 328 57 32 417
Bank deposits 93 (40) (18) 35
-----------------------------------------------
Net change in interest income 4,731 (323) 67 4,475
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts 4,762 (1,373) (346) 3,043
FHLB Advances 3,227 1,415 270 4,912
Subordinated debentures -- -- 974 974
Repurchase agreements 484 (540) (332) (388)
-----------------------------------------------
Net change in interest expense 8,473 (498) 566 8,541
-----------------------------------------------
Decrease in net interest
margin $ (3,742) 175 (499) (4,066)
===============================================
14
Net interest margin before loan loss provision for the three months
ended June 30, 2007, decreased $1.2 million from the same period in the
prior year. Specifically, interest income increased $933,000 due
primarily to an increase in the average rate earned on such assets. The
increase in interest income was offset by a $2.1 million increase in
interest expense, which resulted from an increase in the average rate
paid on such liabilities.
Net interest margin before loan loss provision for the nine months
ended June 30, 2007, decreased $4.1 million from the same period in the
prior year. Specifically, interest income increased $4.5 million, which
was offset by a $8.5 million increase in interest expense for the
period. Interest on loans increased $4.9 million as the result of a
$6.5 million increase in the average balance of loans receivable and 45
basis point increase in the average rate earned on such loans. Interest
on securities increased $417,000 as the result of a $2.3 million
increase in the average balance of investment securities and 188 basis
point increase in the average rate earned on securities. These
increases in interest income were partially offset by an $835,000
decrease in interest on mortgage-backed securities due to a $24.0
million decrease in the average balance of mortgage-backed securities
and an 23 basis point decrease in the average rate earned on such
assets. Interest expense on customer and brokered deposits increased
$3.0 million due to a 51 basis point increase in the average rate paid
on such deposits. Interest expense on FHLB advances increased $4.9
million as the result of a $43.6 million increase in the average balance
of FHLB advances and a 90 basis point increase in the average rate paid
on such liabilities. Interest on subordinated debentures increased
$974,000 due to a $18.5 million increase in the average balance of such
liabilities, which were issued in December 2006. These increases in
interest expense were partially offset by a $388,000 decrease in
interest expense on securities sold under agreements to repurchase due
to a $21.7 million decrease in the average balance of securities sold
under agreements to repurchase.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $175,000 during
the quarter ended June 30, 2007, due primarily to increases in consumer
loans classified as loss. The Company recorded a provision for loan
losses of $633,000 during the quarter ended March 31, 2007, due
primarily to increases in construction and development loans classified
as substandard, which were taken into the foreclosed assets held for
sale portfolio prior to the end of the quarter. The Company recorded a
provision for loan losses of $126,000 during the quarter ended December
31, 2006, due primarily to increases in the residential and commercial
real estate loan portfolios. 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 69.3% of
total classified assets at June 30, 2007, 64.6% at September 30, 2006,
and 86.1% at June 30, 2006.
Management believes that the provisions for loan losses is
adequate. The provision can fluctuate based on changes in economic
conditions, changes in the level of classified assets, changes in the
amount of loan charge-offs and recoveries, or changes in other
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 June 30, 2007, decreased
$764,000 from the same period in the prior year. Provision for loss on
real estate owned increased $617,000 due to an increase in foreclosed
assets held for sale during the period. Other income decreased $502,000
due to a decrease in income received on foreclosed assets held for sale,
a decrease in income received from the Company's investment in LLCs, and
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 were
offset by a $216,000 increase in gain on sale of loans held for sale
resulting from an increase in mortgage banking volume for the quarter.
Additionally, loan servicing fees increased $106,000 due to a decrease
in capitalized servicing amortization, which resulted from a decrease in
actual prepayments and estimated future repayments of the underlying
mortgage loans during the quarter.
Other income for the nine months ended June 30, 2007, decreased
$1.0 million from the same period in the prior year. Provision for loss
on real estate owned increased $722,000 due to an increase in foreclosed
assets held for sale during the period. Customer service fees and
charges decreased $241,000 due primarily to a decrease in overdraft and
return item charges. Other income decreased $387,000 due to decreases
in income received on foreclosed assets held for sale and income
received from the Company's investment in LLCs. These decreases were
offset by a $324,000 increase in gain on sale of loans resulting from an
increase in mortgage banking volume for the period.
15
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended June 30, 2007, increased $390,000 from the same period in the
prior year. Specifically, compensation and fringe benefits decreased
$280,000 due primarily to a decrease in employee benefit related costs
and the closing of a residential loan origination office located in St.
Louis, Missouri during the third quarter of fiscal 2006. This decrease
was offset by a $248,000 increase in commission-based mortgage banking
compensations due primarily to an increase in mortgage-banking volume
during the quarter. Additionally, advertising and business promotion
expense increased $399,000 due to increased costs related to the
national mortgage banking operation and strategic direct marketing costs
related to the retail banking operation.
Total general and administrative expenses for the nine months ended
June 30, 2007, decreased $1.4 million from the same period in the prior
year. Specifically, compensation and fringe benefits decreased $1.4
million due primarily to a decrease in employee benefit related costs
and the closing of a residential loan origination office located in St.
Louis, Missouri during the third quarter of fiscal 2006. Other expense
decreased $668,000 due primarily to a decrease in credit, appraisal,
underwriting, legal and other costs related to the local and national
mortgage banking operations and the construction and commercial real
estate lending operations of the Bank. These decreases were offset by a
$260,000 increase in commission-based mortgage banking compensations due
primarily to an increase in mortgage-banking volume during the period.
Additionally, advertising and business promotion expense increased
$312,000 due to increased costs related to the national mortgage banking
operation and strategic direct marketing costs related to the retail
banking operation.
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Deposit Insurance Fund ("DIF") 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 DIF-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 DIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured owner, with the exception of self-directed
retirement accounts, which are insured to a maximum of $250,000.
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. DIF-insured institutions are also assessed a premium to
service the interest on Financing Corporation ("FICO") debt.
REGULATORY CAPITAL REQUIREMENTS
At June 30, 2007, 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 June 30, 2007,
the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
16
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
At June 30, 2007 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 149,032
Adjustment for regulatory capital:
Intangible assets (2,896)
Disallowed portion of servicing assets
and deferred tax assets (2,609)
Reverse the effect of SFAS No. 115 1,394
---------
Tangible capital 144,921
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 144,921
Qualifying general valuation allowance 7,246
---------
Risk-based capital $ 152,167
=========
As of June 30, 2007
-------------------------------------------------------------------
Minimum required for Minimum required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 152,167 12.2% 99,991 >=8% 124,989 >=10%
Core capital to adjusted tangible assets 144,921 9.6% 60,471 >=4% 75,589 >=5%
Tangible capital to tangible assets 144,921 9.6% 22,677 >=1.5% -- --
Tier 1 capital to risk-weighted assets 144,921 11.6% -- -- 74,993 >=6%
LOANS TO ONE BORROWER
Institutions are prohibited from lending to any one borrower in
excess of 15% of the Bank's unimpaired capital plus unimpaired surplus,
or 25% of unimpaired capital plus unimpaired surplus if the loan is
secured by certain readily marketable collateral. Renewals that exceed
the loans-to-one-borrower limit are permitted if the original borrower
remains liable and no additional funds are disbursed. The Bank has
received regulatory approval from the OTS under 12 CFR 560.93 to
increase it's loans-to-one-borrower limit to $30 million for loans
secured by certain residential housing units. Such loans must not, in
the aggregate, exceed 150% of the Bank's unimpaired capital and surplus.
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 June 30, 2007, there was $116.1 million available to
the Bank in the form of additional FHLB advances. The Bank has
established relationships with various brokers, and, as a secondary
source of liquidity, the Bank purchases brokered deposit accounts. At
June 30, 2007, the Bank has $146.5 million in brokered deposits, and it
could purchase up to $240.4 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.
17
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, 2006.
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, 2006.
Item 4. 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, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were
effective at the end of the period covered by this quarterly report.
There were no changes in the Company's internal control over financial
reporting during the period covered by this quarterly report on Form 10-
Q that have materially affected or are reasonable likely to materially
affect our internal control over financial reporting.
18
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 of Chief Executive Officer pursuant to
Rules 13a-15(e) and 15d-15(e)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Rules 13a-15(e) and 15d-15(e)
Exhibit 32.1 - Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
19
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)
August 9, 2007 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
August 9, 2007 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
20
19