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 March 31, 2006
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
May 5, 2006, was 8,417,442.
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands)
March 31, September 30,
2006 2005
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 10,664 35,334
Securities available for sale 233 237
Stock in Federal Home Loan Bank, at cost 23,052 22,390
Mortgage-backed securities:
Available for sale, at fair value 110,924 129,302
Held to maturity (fair value of $386
and $447 at March 31, 2006, and
September 30, 2005, respectively) 375 431
Loans receivable:
Held for sale 53,361 94,130
Held for investment, net 1,304,573 1,234,050
Allowance for loan losses (7,409) (7,536)
Accrued interest receivable 7,746 6,997
Foreclosed asset held for sale, net 7,566 7,760
Premises and equipment, net 12,365 10,558
Investment in LLC 16,280 12,206
Mortgage servicing rights, net 940 911
Deferred income tax asset 2,928 2,671
Other assets 6,744 6,903
---------- ----------
$ 1,550,342 1,556,344
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 744,949 707,892
Brokered deposit accounts 162,337 94,802
Advances from Federal Home Loan Bank 477,634 465,907
Securities sold under agreements to
repurchase -- 122,000
Escrows 5,889 9,423
Income taxes payable 708 796
Accrued expenses and other liabilities 6,859 6,637
---------- ----------
Total liabilities 1,398,376 1,407,457
---------- ----------
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 authorized; 9,857,112
issued at March 31, 2006, 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 16,281 16,256
Retained earnings 155,564 151,331
Treasury stock, at cost; 1,439,670
shares and 1,419,670 shares at
March 31, 2006, and
September 30, 2005, respectively (18,721) (17,952)
Accumulated other comprehensive
loss (2,637) (2,227)
---------- ----------
Total stockholders' equity 151,966 148,887
---------- ----------
$ 1,550,342 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 Six months ended
March 31, March 31,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Interest on loans $ 23,061 18,298 45,495 35,981
Interest on mortgage-backed securities 1,097 1,508 2,257 3,083
Interest and dividends on securities 125 127 402 261
Other interest income 44 67 165 113
--------- --------- --------- ---------
Total interest income 24,327 20,000 48,319 39,438
--------- --------- --------- ---------
Interest on customer deposit accounts 7,259 3,787 13,626 7,117
Interest on advances from FHLB 5,269 2,687 10,028 4,832
Interest on securities sold under
agreements to repurchase 178 937 784 1,668
--------- --------- --------- ---------
Total interest expense 12,706 7,411 24,438 13,617
--------- --------- --------- ---------
Net interest income 11,621 12,589 23,881 25,821
Provision for loan losses 93 250 158 417
--------- --------- --------- ---------
Net interest income after provision
for loan losses 11,528 12,339 23,723 25,404
--------- --------- --------- ---------
Other income (expense):
Loan servicing fees, net 75 72 105 84
Impairment (loss) recovery on mortgage
servicing rights 5 (30) 6 (11)
Customer service fees and charges 1,478 1,659 3,154 3,280
Recovery on real estate owned -- 218 -- 899
Gain on sale of loans held for sale 3,271 3,782 7,123 7,436
Other 492 323 774 840
--------- --------- --------- ---------
Total other income 5,321 6,024 11,162 12,528
--------- --------- --------- ---------
General and administrative expenses:
Compensation and fringe benefits 4,308 3,977 8,800 8,170
Commission-based mortgage banking compensation 1,612 1,988 3,483 3,517
Premises and equipment 901 755 1,775 1,548
Advertising and business promotion 922 824 2,030 1,669
Federal deposit insurance premiums 26 25 52 51
Other 1,713 1,314 3,239 2,601
--------- --------- --------- ---------
Total general and administrative expenses 9,482 8,883 19,379 17,556
--------- --------- --------- ---------
Income before income tax expense 7,367 9,480 15,506 20,376
Income tax expense 2,652 3,413 5,582 7,390
--------- --------- --------- ---------
Net income $ 4,715 6,067 9,924 12,986
========= ========= ========= =========
Basic earnings per share $ 0.56 0.72 1.18 1.54
========= ========= ========= =========
Diluted earnings per share $ 0.56 0.71 1.17 1.53
========= ========= ========= =========
Basic weighted average shares outstanding 8,417,442 8,455,442 8,426,096 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 -- -- 9,924 -- -- 9,924
Other comprehensive income (loss),
net of tax:
Unrealized loss on securities -- -- -- -- (410) (410)
available for sale -------
Total comprehensive income -- -- -- -- -- 9,514
Cash dividends paid -- -- (5,691) -- -- (5,691)
Stock based compensation expense -- 25 -- -- -- 25
Purchase of common stock for
treasury -- -- -- (769) -- (769)
----------------------------------------------------------------------
Balance at March 31, 2006 $ 1,479 16,281 155,564 (18,721) (2,637) 151,966
======================================================================
See accompanying notes to consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
(In thousands, except share data)
Six months ended
March 31,
----------------------
2006 2005
(Restated)
----------------------
Cash flows from operating activities:
Net income $ 9,924 12,986
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 620 523
Amortization and accretion, net (804) (2,340)
Impairment loss (recovery) on mortgage
servicing rights (6) 11
Gain on sale of loans receivable held for sale (7,123) (7,436)
Provision for loan losses 158 417
Recovery on real estate owned -- (899)
Principal repayments of mortgage loans receivable 14 9,974
held for sale
Origination of loans receivable held for sale (503,943) (544,462)
Sale of loans receivable held for sale 551,807 495,216
Stock based compensation - stock options 25 --
Changes in:
Net fair value of loan related commitments 80 (216)
Accrued interest receivable (749) (341)
Accrued expenses and other liabilities and
income taxes payable 125 3,579
----------------------
Net cash provided by (used in) operating activities 50,128 (32,988)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 56 95
Available for sale 17,501 19,211
Principal repayments of mortgage loans receivable
held for investment 198,159 188,285
Principal repayments of other loans receivable 4,423 5,919
Maturity of investment securities available for sale 4 4
Loan origination - mortgage loans held for investment (272,694) (261,213)
Loan origination - other loans receivable (2,498) (7,146)
Purchase of mortgage loans receivable
held for investment -- (1,207)
Purchase of FHLB stock (662) (3,770)
Proceeds for sale of real estate owned 3,147 5,517
Purchases of premises and equipment, net of sales (2,427) (2,144)
Investment in LLC (4,074) (486)
Other (79) (39)
----------------------
Net cash used in investing activities (59,144) (56,974)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
(In thousands, except share data)
Six months ended
March 31,
----------------------
2006 2005
(Restated)
----------------------
Cash flows from financing activities:
Net increase in customer and
brokered deposit accounts 104,500 63,409
Proceeds from advances from FHLB 174,000 203,000
Repayment on advances from FHLB (162,160) (142,151)
Proceeds from sale of securities under
agreements to repurchase -- 267,400
Repayment of securities sold under
agreements to repurchase (122,000) (288,000)
Cash dividends paid (5,691) (10,358)
Purchase of common stock for treasury (769) --
Change in escrows (3,534) (2,302)
----------------------
Net cash provided by (used in) financing activities (15,654) 90,998
----------------------
Net increase (decrease) in cash and cash equivalents (24,670) 1,036
Cash and cash equivalents at beginning of the period 35,334 18,263
----------------------
Cash and cash equivalents at end of period $ 10,664 19,299
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 5,670 5,372
Cash paid for interest 24,440 13,007
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 1,524 6,878
Capitalization of mortgage servicing rights 118 103
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 six months ended March 31, 2006, 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 March 31, 2006, 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 Six months ended
---------------------- ----------------------
3/31/06 3/31/05 3/31/06 3/31/05
---------------------- ----------------------
Net income (in thousands) $ 4,715 6,067 9,924 12,986
Average common shares outstanding 8,417,442 8,455,442 8,426,096 8,455,442
Average common share stock options
outstanding 43,026 12,434 42,312 12,167
---------------------- ----------------------
Average diluted common shares 8,460,468 8,467,876 8,468,408 8,467,609
Earnings per share:
Basic $ 0.56 0.72 1.18 1.54
Diluted 0.56 0.71 1.17 1.53
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.
March 31, 2006
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Equity securities $ 180 -- -- 180
Municipal securities 53 -- -- 53
-------------------------------------------
Total $ 233 -- -- 233
===========================================
(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.
March 31, 2006
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 307 -- 2 305
Pass-through certificates
guaranteed by FNMA
- adjustable rate 15,667 -- 596 15,071
FHLMC participation
certificates
- fixed rate 1,368 -- 93 1,275
- adjustable rate 97,869 -- 3,596 94,273
-------------------------------------------
Total $ 115,211 -- 4,287 110,924
===========================================
(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.
March 31, 2006
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------------------------------------
FHLMC participation
certificates:
Balloon maturity and
adjustable rate $ 159 8 -- 167
FNMA pass-through
certificates:
Fixed rate 97 -- -- 97
Balloon maturity and
adjustable rate 77 -- -- 77
Pass-through certificates
guaranteed by GNMA
- fixed rate 42 3 -- 45
-------------------------------------------
Total $ 375 11 -- 386
===========================================
7
(6) LOANS RECEIVABLE
Loans receivable are as follows:
March 31,
2006
---------------------
(Dollars in thousands)
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 372,111
Business properties 477,794
Partially guaranteed by VA or
insured by FHA 2,505
Construction and development 531,577
----------
Total mortgage loans 1,383,987
Commercial loans 60,203
Installment loans to individuals 19,686
----------
Total loans held for investment 1,463,876
Less:
Undisbursed loan funds (154,864)
Unearned discounts and fees and costs
on loans, net (4,439)
----------
Net loans held for investment $1,304,573
==========
March 31,
2006
---------------------
(Dollars in thousands)
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 69,168
Less:
Undisbursed loan funds (15,799)
Unearned discounts and fees and costs
on loans, net (8)
----------
Net loans held for sale $ 53,361
==========
Included in the loans receivable balances at March 31, 2006, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the approximate amount of
$134,000. Loans and participations serviced for others amounted to
approximately $105.9 million at March 31, 2006.
(7) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following:
March 31,
2006
---------------------
(Dollars in thousands)
Real estate acquired through (or deed
in lieu of) foreclosure $ 7,776
Less: allowance for losses (210)
----------
Total $ 7,566
==========
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 March 31, 2006. Dollar amounts
are expressed in thousands.
Balance at October 1, 2005 $ 911
Additions:
Originated mortgage servicing rights 118
Impairment recovery 6
Reductions:
Amortization (95)
--------
Balance at March 31, 2006 $ 940
========
(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
March 31, 2006 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 11,602 -- -- 19 11,621
Provision for loan losses 93 -- -- -- 93
Other income 1,336 2,338 1,999 (352) 5,321
General and administrative
expenses 4,306 2,572 2,708 (104) 9,482
Income tax expense (benefit) 3,074 (84) (255) (83) 2,652
-----------------------------------------------------------
Net income $ 5,465 (150) (454) (146) 4,715
===========================================================
9
Local National
Three months ended Mortgage Mortgage Other and
March 31, 2005 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 12,561 -- -- 28 12,589
Provision for loan losses 250 -- -- -- 250
Other income 1,733 2,870 2,200 (779) 6,024
General and administrative
expenses 3,621 2,873 2,531 (142) 8,883
Income tax expense (benefit) 3,752 (1) (119) (219) 3,413
-----------------------------------------------------------
Net income $ 6,671 (2) (212) (390) 6,067
===========================================================
Local National
Six months ended Mortgage Mortgage Other and
March 31, 2006 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 23,845 -- -- 36 23,881
Provision for loan losses 158 -- -- -- 158
Other income 2,603 4,895 4,577 (913) 11,162
General and administrative
expenses 8,166 5,258 6,151 (196) 19,379
Income tax expense (benefit) 6,524 (131) (567) (244) 5,582
-----------------------------------------------------------
Net income $ 11,600 (232) (1,007) (437) 9,924
===========================================================
Local National
Six months ended Mortgage Mortgage Other and
March 31, 2005 Banking Banking Banking Eliminations Consolidated
------------------------------------------------------------------------------------
Net interest income $25,775 -- -- 46 25,821
Provision for loan losses 417 -- -- -- 417
Other income 4,000 5,943 4,271 (1,686) 12,528
General and administrative
expenses 7,272 5,893 4,782 (391) 17,556
Income tax expense 7,951 18 (184) (395) 7,390
--------------------------------------------------------
Net income $14,135 32 (327) (854) 12,986
========================================================
(10) RESTATEMENT
In connection with the preparation of the Company's Consolidated
Statements of Cash Flows, management reconsidered the classification of
repayments on its loans held for sale in accordance guidance under
Statement of Financial Accounting Standard No. 95, "Statement of Cash
Flows" ("SFAS 95").
The Company has historically classified principal repayments on its
loans held for sale in the investing section of the statement of cash
flows. The SEC has taken exception with this treatment, and informed
the Company that principal repayments on loans held for sale should be
classified in the operating section of the statement of cash flows in
accordance with guidance under SFAS 95. Additionally, as a result of
researching this classification issue, management discovered an error in
its calculation of originations and principal repayments of loans held
for sale reported in the statement of cash flows.
10
The following table illustrates the restatement made to the
Consolidated Statement of Cash Flows for the six month period ended
March 31, 2005:
Net cash from operating activities,
as previously reported $ (32,978)
Reclassification of principal repayments
of loans receivable held for sale 9,974
Correction of origination and principal
repayments of loans receivable held for sale (9,984)
--------
Reported net cash from operating activities $ (32,988)
========
Net cash from investing activities,
as previously reported $ (56,984)
Reclassification of principal repayments
of loans receivable held for sale (9,974)
Correction of origination and principal
repayments of loans receivable held for sale 9,984
--------
Reported net cash from investing activities $ (56,974)
========
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 March 31, 2006, were $1,550.3
million, a decrease of $6.0 million from September 30, 2005, the prior
fiscal year end.
11
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 six months ended March 31, 2006, the Bank
originated $539.6 million in mortgage loans held for sale, $272.7
million in mortgage loans held for investment, and $2.5 million in other
loans. This total of $814.8 million in loans originated compares to
$803.1 million in loans originated during the six months ended March 31,
2005.
Included in the $53.4 million in loans held for sale as of March
31, 2006, are $50.9 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.
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.
3/31/06 9/30/05 3/31/05
-------------------------------------
Asset Classification:
Substandard $ 12,236 13,346 15,110
Doubtful -- -- --
Loss 441 595 495
-------------------------------------
12,677 13,941 15,605
Allowance for losses (7,618) (7,731) (7,558)
-------------------------------------
$ 5,059 6,210 8,047
=====================================
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.
3/31/06 9/30/05 3/31/05
----------------------------------------
Total Assets $ 1,550,342 1,556,344 1,466,633
========================================
Non-accrual loans $ 2,603 5,643 10,387
Troubled debt
restructurings 3,478 74 74
Net real estate and
other assets acquired
through foreclosure 7,566 7,760 8,468
----------------------------------------
Total $ 13,647 13,477 18,929
========================================
Percent of total assets 0.88% 0.87% 1.29%
========================================
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.
12
The following table sets forth the activity in the allowance for
loan losses for the six months ending March 31, 2006, and 2005. Dollar
amounts are expressed in thousands.
2006 2005
-------------------------
Balance at beginning of year $ 7,536 8,221
Provision for loan losses 158 417
Recoveries 18 34
Charge-offs (303) (1,240)
-------------------------
Balance at March 31 $ 7,409 7,432
=========================
LIABILITIES AND EQUITY
Customer and brokered deposit accounts increased $104.6 million
during the six months ended March 31, 2006. The weighted average rate
on customer and brokered deposits as of March 31, 2006, was 3.52%, an
increase from 2.45% as of March 31, 2005.
Advances from the FHLB were $477.6 million as of March 31, 2006, an
increase of $11.7 million from September 30, 2005. During the six-month
period, the Bank borrowed $174.0 million of new advances and repaid
$162.2 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.
Escrows were $5.9 million as of March 31, 2006, a decrease of $3.5
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 March 31, 2006, was $152.0 million
(9.8% 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 $18.05 on March 31, 2006, 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, and $0.225 on February 24, 2006. Subsequent
to the quarter ended March 31, 2006, the Company announced a cash
dividend of $0.225 per share to be paid on May 26, 2006, to stockholders
of record as of May 5, 2006.
Total stockholders' equity as of March 31, 2006, includes an
unrealized loss of $2.6 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).
Six months ended
------------------------
3/31/06 3/31/05
------------------------
Return on assets 1.28% 1.84%
Return on equity 13.19% 18.58%
Equity-to-assets ratio 9.80% 9.58%
Dividend payout ratio 57.34% 79.76%
13
RESULTS OF OPERATIONS - Comparison of three and six months ended March
31, 2006 and 2005.
For the three months ended March 31, 2006, the Company had net
income of $4,715,000 or $0.56 per share. This compares to net income of
$6,067,000 or $0.72 per share for the quarter ended March 31, 2005.
For the six months ended March 31, 2006, the Company had net income
of $9,924,000 or $1.18 per share. This compares to net income of
$12,986,000 or $1.54 per share for the six months ended March 31, 2005.
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 six months ended March
31, 2006 and 2005. 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.
Six months ended 3/31/06 As of
--------------------------- 3/31/06
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,330,120 45,495 6.84% 6.94%
Mortgage-backed securities 120,137 2,257 3.76% 4.30%
Securities 23,173 402 3.47% 2.99%
Bank deposits 9,945 165 3.32% 4.13%
--------------------------------------
Total earning assets 1,483,375 48,319 6.51% 6.67%
---------------------------
Non-earning assets 58,501
----------
Total $1,541,876
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 186,873 985 1.05% 1.02%
Customer and brokered
certificates of deposit 670,282 12,641 3.77% 4.17%
FHLB Advances 477,896 10,028 4.20% 4.59%
Repurchase agreements 45,000 784 3.48% --%
--------------------------------------
Total costing liabilities 1,380,051 24,438 3.54% 3.89%
---------------------------
Non-costing liabilities 11,815
Stockholders' equity 150,010
----------
Total $1,541,876
==========
Net earning balance $ 103,324
==========
Earning yield less costing rate 2.97% 2.78%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,483,375 23,881 3.22%
============================
Six months ended 3/31/05 As of
--------------------------- 3/31/05
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,160,060 35,981 6.20% 6.18%
Mortgage-backed securities 161,808 3,083 3.81% 4.24%
Securities 20,825 261 2.51% 3.28%
Bank deposits 11,228 113 2.01% 2.13%
--------------------------------------
Total earning assets 1,353,921 39,438 5.83% 5.89%
---------------------------
Non-earning assets 45,824
----------
Total $1,399,745
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 202,938 713 0.70% 0.71%
Customer and brokered
certificates of deposit 491,166 6,404 2.61% 3.07%
FHLB Advances 413,709 4,832 2.34% 2.68%
Repurchase agreements 143,914 1,668 2.32% 2.87%
--------------------------------------
Total costing liabilities 1,251,727 13,617 2.18% 2.57%%
---------------------------
Non-costing liabilities 9,005
Stockholders' equity 139,013
----------
Total $1,399,745
==========
Net earning balance $ 102,194
==========
Earning yield less costing rate 3.65% 3.32%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,353,921 25,821 3.81%
============================
14
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.
Six months ended March 31, 2006, compared to
six months ended March 31, 2005
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ 3,712 5,272 530 9,514
Mortgage-backed securities (40) (794) 8 (826)
Securities 100 29 12 141
Bank deposits 74 (13) (9) 52
-----------------------------------------------
Net change in interest income 3,846 4,494 541 8,881
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts 3,922 1,671 916 6,509
FHLB Advances 3,847 751 598 5,196
Repurchase agreements 835 (1,147) (572) (884)
-----------------------------------------------
Net change in interest expense 8,604 1,275 942 10,821
-----------------------------------------------
Decrease in net interest
margin $ (4,758) 3,219 (401) (1,940)
===============================================
Net interest margin before loan loss provision for the three months
ended March 31, 2006, decreased $968,000 from the same period in the
prior year. Specifically, interest income increased $4.3 million due to
both an increase in the average balance of interest-earning assets and
an increase in the average rate earned on such assets. The increase in
interest income was offset by a $5.3 million increase in interest
expense, which resulted from both an increase in the average balance of
interest-costing liabilities and an increase in the average rate paid on
such liabilities.
Net interest margin before loan loss provision for the six months
ended March 31, 2006, decreased $1.9 million from the same period in the
prior year. Specifically, interest income increased $8.9 million. This
increase was the result of a $129.5 million increase in the average
balance of interest-earning assets and a 68 basis point increase in the
average rate earned on such assets. The increase in interest income was
offset by a $10.8 million increase in interest expense, which resulted
from a 136 basis point increase in the average rate paid on interest-
costing liabilities and a $128.3 million increase in the average balance
of such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $93,000 during
the quarter ended March 31, 2006, due to an increase in construction and
commercial real estate loans classified as "substandard." 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
60.1% of total classified assets at March 31, 2006, 55.5% at September
30, 2005, and 48.4% at March 31, 2005.
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.
15
OTHER INCOME
Other income for the three months ended March 31, 2006, decreased
$703,000 from the same period in the prior year. Gain on sale of loans
held for sale decreased $511,000 due to due to a decrease in mortgage
banking volume. Recovery on real estate owned decreased $218,000 due to
recoveries realized on the sale of foreclosed assets held for sale in
the prior fiscal year. Customer service fees and charges decreased
$181,000 due primarily to a decrease in residential and commercial
lending volumes. These decreases were offset by an increase in other
income of $169,000 due primarily to income recognized on the Company's
investment in Central Platte Holdings, LLC.
Other income for the six months ended March 31, 2006, decreased
$1.4 million from the same period in the prior year. Recovery on real
estate owned decreased $899,000 due to recoveries realized on the sale
of foreclosed assets held for sale in the prior fiscal year. Gain on
sale of loans held for sale decreased $313,000 due to a decrease in
mortgage banking volume. Customer service fees and charges decreased
$126,000 due primarily to a decrease in residential and commercial
lending volumes. Other income decreased $66,000 due primarily to a
$375,000 decrease in 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,"
which was largely offset by increases in income recognized on foreclosed
assets and on the Company's investment in Central Platte Holdings, LLC.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended March 31, 2006, increased $599,000 from the same period in the
prior year. Advertising increased $98,000 due to increased direct mail
and newspaper advertising. Premises and equipment expense increased
$146,000 due primarily to costs related to the Company's new loan
administration and construction lending building, which was completed in
March 2005. Additionally, other expense increased $399,000 due to an
increase in credit, appraisal, and underwriting costs related to
residential lending, 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.
Total general and administrative expenses for the six months ended
March 31, 2006, increased $1.8 million from the same period in the prior
year. Specifically, compensation, fringe benefits, and commission-based
mortgage banking compensation increased $596,000 due primarily to the
continued growth of the local and national mortgage banking operations,
and staffing increases in the Company's technology, audit, and
compliance departments. Advertising increased $361,000 due to increased
costs related to the national mortgage banking operation. Premises and
equipment expense increased $227,000 due primarily to costs related to
the Company's new loan administration and construction lending building,
which was completed in March 2005. Additionally, other expense
increased $638,000 due to an increase in credit, appraisal, and
underwriting costs related to residential lending, 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.
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.
16
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 March 31, 2006, 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 March 31, 2006,
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 March 31, 2006 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 133,314
Adjustment for regulatory capital:
Intangible assets (3,021)
Disallowed portion of servicing assets
and deferred tax assets (2,928)
Reverse the effect of SFAS No. 115 2,637
---------
Tangible capital 130,002
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 130,002
Qualifying general valuation allowance 6,969
---------
Risk-based capital $ 136,971
=========
As of March 31, 2006
-------------------------------------------------------------------
Minimum required for Minimum required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 136,971 11.0% 99,917 >=8% 124,896 >=10%
Core capital to adjusted tangible assets 130,002 8.5% 61,248 >=4% 76,560 >=5%
Tangible capital to tangible assets 130,002 8.5% 22,968 >=1.5% -- --
Tier 1 capital to risk-weighted assets 130,002 10.4% -- -- 74,938 >=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
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 the Company's loans-to-one-borrower limit by $10
million with regard to certain borrowers that meet prescribed loan-to-
value and property type specifications. This pilot program is set to
expire on September 10, 2007.
17
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 March 31, 2006, there was $111.1 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 March 31,
2006, the Bank has $162.3 million in brokered deposits, and it could
purchase up to $84.2 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
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
The annual stockholder's meeting was held on January 24, 2006. The
following persons were elected to NASB Financial Inc.'s Board of
Directors for three year terms:
Frederick V. Arbanas
W. Russell Welsh
Fletcher M. Lamkin
The following person was elected to NASB Financial Inc.'s Board of
Directors for a three year term:
Paul L. Thomas
The firm of BKD, LLP was ratified for appointment as independent
auditors for the fiscal year ended September 30, 2006.
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 January 24, 2006, which announced
a quarterly cash dividend of $0.225 per share payable on February 24,
2006 to shareholder's of record as of February 3, 2006.
A report on Form 8-K was filed on February 6, 2006, which announced
financial results for the quarter ended December 31, 2005.
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)
May 10, 2006 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
May 10, 2006 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
20
19