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, 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
August 4, 2006, was 8,368,642.
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
June 30, September 30,
2006 2005
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 11,686 35,334
Securities available for sale 233 237
Stock in Federal Home Loan Bank, at cost 24,062 22,390
Mortgage-backed securities:
Available for sale, at fair value 103,568 129,302
Held to maturity (fair value of $359
and $447 at June 30, 2006, and
September 30, 2005, respectively) 349 431
Loans receivable:
Held for sale 67,765 94,130
Held for investment, net 1,298,562 1,234,050
Allowance for loan losses (7,658) (7,536)
Accrued interest receivable 7,947 6,997
Foreclosed asset held for sale, net 4,331 7,760
Premises and equipment, net 12,754 10,558
Investment in LLC 16,347 12,206
Mortgage servicing rights, net 937 911
Deferred income tax asset 3,080 2,671
Other assets 6,384 6,903
---------- ----------
$ 1,550,347 1,556,344
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 742,525 707,892
Brokered deposit accounts 144,374 94,802
Advances from Federal Home Loan Bank 495,496 465,907
Securities sold under agreements to
repurchase -- 122,000
Escrows 6,319 9,423
Income taxes payable 1,663 796
Accrued expenses and other liabilities 6,588 6,637
---------- ----------
Total liabilities 1,396,965 1,407,457
---------- ----------
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 authorized; 9,857,112
issued at June 30, 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 16,294 16,256
Retained earnings 158,849 151,331
Treasury stock, at cost; 1,488,470
shares and 1,419,670 shares at
June 30, 2006, and
September 30, 2005, respectively (20,361) (17,952)
Accumulated other comprehensive
loss (2,879) (2,227)
---------- ----------
Total stockholders' equity 153,382 148,887
---------- ----------
$ 1,550,347 1,556,344
========== ==========
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,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Interest on loans $ 23,884 20,039 69,379 56,020
Interest on mortgage-backed securities 1,023 1,328 3,280 4,411
Interest and dividends on securities 175 231 577 492
Other interest income 39 66 204 179
--------- --------- --------- ---------
Total interest income 25,121 21,664 73,440 61,102
--------- --------- --------- ---------
Interest on customer deposit accounts 7,995 4,491 21,621 11,608
Interest on advances from FHLB 5,505 2,912 15,533 7,744
Interest on securities sold under
agreements to repurchase -- 999 784 2,667
--------- --------- --------- ---------
Total interest expense 13,500 8,402 37,938 22,019
--------- --------- --------- ---------
Net interest income 11,621 13,262 35,502 39,083
Provision for loan losses 250 -- 408 417
--------- --------- --------- ---------
Net interest income after provision
for loan losses 11,371 13,262 35,094 38,666
--------- --------- --------- ---------
Other income (expense):
Loan servicing fees, net 32 (53) 137 31
Impairment recovery on mortgage
servicing rights 9 18 15 7
Customer service fees and charges 1,512 1,833 4,666 5,113
Recovery on foreclosed assets 277 -- 277 899
Gain on sale of loans held for sale 3,950 4,814 11,073 12,250
Other 842 278 1,616 1,118
--------- --------- --------- ---------
Total other income 6,622 6,890 17,784 19,418
--------- --------- --------- ---------
General and administrative expenses:
Compensation and fringe benefits 4,402 4,352 13,202 12,522
Commission-based mortgage banking compensation 1,827 2,414 5,310 5,931
Premises and equipment 869 778 2,644 2,326
Advertising and business promotion 821 1,079 2,851 2,748
Federal deposit insurance premiums 27 24 79 75
Other 1,625 1,503 4,864 4,104
--------- --------- --------- ---------
Total general and administrative expenses 9,571 10,150 28,950 27,706
--------- --------- --------- ---------
Income before income tax expense 8,422 10,002 23,928 30,378
Income tax expense 3,244 3,601 8,826 10,991
--------- --------- --------- ---------
Net income $ 5,178 6,401 15,102 19,387
========= ========= ========= =========
Basic earnings per share $ 0.61 0.75 1.79 2.29
========= ========= ========= =========
Diluted earnings per share $ 0.61 0.75 1.78 2.29
========= ========= ========= =========
Basic weighted average shares outstanding 8,396,165 8,447,893 8,416,356 8,452,926
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, 2005 $ 1,479 16,256 151,331 (17,952) (2,227) 148,887
Comprehensive income:
Net income -- -- 15,102 -- -- 15,102
Other comprehensive income (loss),
net of tax:
Unrealized loss on securities -- -- -- -- (652) (652)
available for sale -------
Total comprehensive income 14,450
Cash dividends paid -- -- (7,584) -- -- (7,584)
Stock based compensation expense -- 38 -- -- -- 38
Purchase of common stock for
treasury -- -- -- (2,409) -- (2,409)
----------------------------------------------------------------------
Balance at June 30, 2006 $ 1,479 16,294 158,849 (20,361) (2,879) 153,382
======================================================================
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,
----------------------
2006 2005
(Restated)
----------------------
Cash flows from operating activities:
Net income $ 15,102 19,387
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 938 793
Amortization and accretion, net (1,032) (2,773)
Impairment recovery on mortgage
servicing rights (15) (7)
Gain on sale of loans receivable held for sale (11,073) (12,250)
Provision for loan losses 408 417
Recovery on foreclosed assets (277) (899)
Principal repayments of mortgage loans receivable 19 22,090
held for sale
Origination of loans receivable held for sale (753,315) (893,627)
Sale of loans receivable held for sale 790,634 820,161
Stock based compensation - stock options 38 --
Changes in:
Net fair value of loan related commitments (18) (302)
Accrued interest receivable (950) (639)
Accrued expenses and other liabilities and
income taxes payable 860 5,108
----------------------
Net cash provided by (used in) operating activities 41,319 (42,541)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 82 138
Available for sale 24,373 28,560
Principal repayments of mortgage loans receivable
held for investment 325,641 313,989
Principal repayments of other loans receivable 6,200 9,955
Maturity of investment securities available for sale 4 4
Loan origination - mortgage loans held for investment (392,188) (422,324)
Loan origination - other loans receivable (4,093) (10,698)
Purchase of mortgage loans receivable
held for investment -- (1,310)
Purchase of FHLB stock (1,672) (5,298)
Proceeds for sale of real estate owned 5,032 6,661
Purchases of premises and equipment, net of sales (3,134) (2,843)
Investment in LLC (4,141) (1,734)
Other 282 108
----------------------
Net cash used in investing activities (43,614) (84,792)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (continued)
(In thousands, except share data)
Nine months ended
June 30,
----------------------
2006 2005
(Restated)
----------------------
Cash flows from financing activities:
Net increase in customer and
brokered deposit accounts 83,985 65,983
Proceeds from advances from FHLB 222,000 298,000
Repayment on advances from FHLB (192,241) (191,129)
Proceeds from sale of securities under
agreements to repurchase -- 292,400
Repayment of securities sold under
agreements to repurchase (122,000) (323,500)
Cash dividends paid (7,584) (12,258)
Purchase of common stock for treasury (2,409) (399)
Change in escrows (3,104) (1,784)
----------------------
Net cash provided by (used in) financing activities (21,353) 127,313
----------------------
Net decrease in cash and cash equivalents (23,648) (20)
Cash and cash equivalents at beginning of the period 35,334 18,263
----------------------
Cash and cash equivalents at end of period $ 11,686 18,243
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 7,958 10,144
Cash paid for interest 38,951 20,752
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 2,382 8,003
Conversion of real estate owned to loans receivable 2,170 --
Capitalization of mortgage servicing rights 139 253
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, 2006,
are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2006. The condensed 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
condensed consolidated financial statements as of June 30, 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 Nine months ended
---------------------- ----------------------
6/30/06 6/30/05 6/30/06 6/30/05
---------------------- ----------------------
Net income (in thousands) $ 5,178 6,401 15,102 19,387
Average common shares outstanding 8,396,165 8,447,893 8,416,356 8,452,926
Average common share stock options
outstanding 46,292 12,256 43,568 12,242
---------------------- ----------------------
Average diluted common shares 8,442,457 8,460,149 8,459,924 8,465,168
Earnings per share:
Basic $ 0.61 0.75 1.79 2.29
Diluted 0.61 0.75 1.78 2.29
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.
June 30, 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.
June 30, 2006
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 281 -- 4 277
Pass-through certificates
guaranteed by FNMA
- adjustable rate 14,366 -- 621 13,745
FHLMC participation
certificates
- fixed rate 1,268 -- 95 1,173
- adjustable rate 92,334 -- 3,961 88,373
-------------------------------------------
Total $ 108,249 -- 4,681 103,568
===========================================
(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.
June 30, 2006
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------------------------------------
FHLMC participation
certificates:
Balloon maturity and
adjustable rate $ 142 7 -- 149
FNMA pass-through
certificates:
Fixed rate 93 1 -- 94
Balloon maturity and
adjustable rate 76 -- -- 76
Pass-through certificates
guaranteed by GNMA
- fixed rate 38 2 -- 40
-------------------------------------------
Total $ 349 10 -- 359
===========================================
7
(6) LOANS RECEIVABLE
Loans receivable are as follows:
June 30,
2006
---------------------
(Dollars in thousands)
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 364,513
Business properties 487,694
Partially guaranteed by VA or
insured by FHA 2,301
Construction and development 520,607
----------
Total mortgage loans 1,375,115
Commercial loans 57,720
Installment loans to individuals 19,364
----------
Total loans held for investment 1,452,199
Less:
Undisbursed loan funds (149,125)
Unearned discounts and fees and costs
on loans, net (4,512)
----------
Net loans held for investment $1,298,562
==========
June 30,
2006
---------------------
(Dollars in thousands)
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 89,066
Less:
Undisbursed loan funds (21,297)
Unearned discounts and fees and costs
on loans, net (4)
----------
Net loans held for sale $ 67,765
==========
Included in the loans receivable balances at June 30, 2006, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the approximate amount of
$126,000. Loans and participations serviced for others amounted to
approximately $102.4 million at June 30, 2006.
The following table presents the activity in the allowance for
losses on loans for the period ended June 30, 2006. 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, 2005 $ 7,536
Provisions 408
Charge-offs (309)
Recoveries 23
--------
Balance at June 30, 2006 $ 7,658
========
8
(7) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following:
June 30,
2006
---------------------
(Dollars in thousands)
Real estate acquired through (or deed
in lieu of) foreclosure $ 4,512
Less: allowance for losses (181)
----------
Total $ 4,331
==========
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 June 30, 2006. Dollar amounts are
expressed in thousands.
Balance at October 1, 2005 $ 911
Additions:
Originated mortgage servicing rights 139
Impairment recovery 15
Reductions:
Amortization (128)
--------
Balance at June 30, 2006 $ 937
========
(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.
9
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, 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
Three months ended Mortgage Mortgage Other and
June 30, 2005 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 13,230 -- -- 32 13,262
Provision for loan losses -- -- -- -- --
Other income 1,133 3,757 2,940 (940) 6,890
General and administrative
expenses 3,974 3,259 3,127 (210) 10,150
Income tax expense (benefit) 3,740 179 (67) (251) 3,601
-----------------------------------------------------------
Net income $ 6,649 319 (120) (447) 6,401
===========================================================
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
===========================================================
Local National
Nine months ended Mortgage Mortgage Other and
June 30, 2005 Banking Banking Banking Eliminations Consolidated
------------------------------------------------------------------------------------
Net interest income $39,004 -- -- 79 39,083
Provision for loan losses 417 -- -- -- 417
Other income 5,133 9,701 7,212 (2,628) 19,418
General and administrative
expenses 11,245 9,153 7,910 (602) 27,706
Income tax expense (benefit) 11,691 197 (251) (646) 10,991
--------------------------------------------------------
Net income $20,784 351 (447) (1,301) 19,387
========================================================
(10) RESTATEMENT
In connection with the preparation of the Company's Condensed
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").
10
The Company has historically classified principal repayments on its
loans held for sale in the investing section of the statement of cash
flows. The SEC has taken exception with this treatment, and informed
the Company that principal repayments on loans held for sale should be
classified in the operating section of the statement of cash flows in
accordance with guidance under SFAS 95. Additionally, as a result of
researching this classification issue, management discovered an error in
its calculation of originations and principal repayments of loans held
for sale reported in the statement of cash flows.
The following table illustrates the restatement made to the
Condensed Consolidated Statement of Cash Flows for the nine-month period
ended June 30, 2005:
Net cash from operating activities,
as previously reported $ (51,307)
Reclassification of principal repayments
of loans receivable held for sale 22,090
Correction of origination and principal
repayments of loans receivable held for sale (13,324)
--------
Reported net cash from operating activities $ (42,541)
========
Net cash from investing activities,
as previously reported $ (76,026)
Reclassification of principal repayments
of loans receivable held for sale (22,090)
Correction of origination and principal
repayments of loans receivable held for sale 13,324
--------
Reported net cash from investing activities $ (84,792)
========
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, 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 nine months ended June 30, 2006, the Bank
originated $753.3 million in mortgage loans held for sale, $392.2
million in mortgage loans held for investment, and $4.1 million in other
loans. This total of $1,149.6 million in loans originated compares to
$1,328.0 million in loans originated and purchased during the nine
months ended June 30, 2005.
Included in the $67.8 million in loans held for sale as of June 30,
2006, are $64.9 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.
6/30/06 9/30/05 6/30/05
-------------------------------------
Asset Classification:
Substandard $ 8,665 13,346 11,305
Doubtful -- -- --
Loss 435 595 490
-------------------------------------
9,100 13,941 11,795
Allowance for losses (7,839) (7,731) (7,687)
-------------------------------------
$ 1,261 6,210 4,108
=====================================
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.
6/30/06 9/30/05 6/30/05
----------------------------------------
Total Assets $ 1,550,347 1,556,344 1,512,590
========================================
Non-accrual loans $ 2,931 5,643 6,437
Troubled debt
restructurings 3,477 74 74
Net real estate and
other assets acquired
through foreclosure 4,331 7,760 6,287
----------------------------------------
Total $ 10,739 13,477 12,798
========================================
Percent of total assets 0.69% 0.87% 0.85%
========================================
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 nine months ending June 30, 2006, and 2005. Dollar
amounts are expressed in thousands.
2006 2005
-------------------------
Balance at beginning of year $ 7,536 8,221
Provision for loan losses 408 417
Recoveries 23 58
Charge-offs (309) (1,240)
-------------------------
Balance at June 30 $ 7,658 7,456
=========================
LIABILITIES AND EQUITY
Customer and brokered deposit accounts increased $84.2 million
during the nine months ended June 30, 2006. The weighted average rate
on customer and brokered deposits as of June 30, 2006, was 3.71%, an
increase from 2.67% as of June 30, 2005.
Advances from the FHLB were $495.5 million as of June 30, 2006, an
increase of $29.6 million from September 30, 2005. During the nine-
month period, the Bank borrowed $222.0 million of new advances and
repaid $192.2 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 $6.3 million as of June 30, 2006, a decrease of $3.1
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 June 30, 2006, was $153.4 million
(9.9% 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 $18.33 on June 30, 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, and May 26,
2006. Subsequent to the quarter ended June 30, 2006, the Company
announced a cash dividend of $0.225 per share to be paid on August 25,
2006, to stockholders of record as of August 4, 2006.
Total stockholders' equity as of June 30, 2006, includes an
unrealized loss of $2.9 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).
Nine months ended
------------------------
6/30/06 6/30/05
------------------------
Return on assets 1.30% 1.80%
Return on equity 13.32% 18.19%
Equity-to-assets ratio 9.89% 9.60%
Dividend payout ratio 50.22% 63.23%
13
RESULTS OF OPERATIONS - Comparison of three and nine months ended June
30, 2006 and 2005.
For the three months ended June 30, 2006, the Company had net
income of $5,178,000 or $0.61 per share. This compares to net income of
$6,401,000 or $0.75 per share for the quarter ended June 30, 2005.
For the nine months ended June 30, 2006, the Company had net income
of $15,102,000 or $1.79 per share. This compares to net income of
$19,387,000 or $2.29 per share for the nine months ended June 30, 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 nine months ended June
30, 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.
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%
============================
Nine months ended 6/30/05 As of
--------------------------- 6/30/05
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,188,041 56,020 6.29% 6.24%
Mortgage-backed securities 156,888 4,411 3.75% 4.22%
Securities 21,017 492 3.12% 3.78%
Bank deposits 10,080 179 2.37% 2.38%
--------------------------------------
Total earning assets 1,376,026 61,102 5.92% 5.97%
---------------------------
Non-earning assets 47,118
----------
Total $1,423,144
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 201,129 1,083 0.72% 0.90%
Customer and brokered
certificates of deposit 512,280 10,525 2.74% 3.29%
FHLB Advances 420,336 7,744 2.46% 2.94%
Repurchase agreements 139,590 2,667 2.55% 3.03%
--------------------------------------
Total costing liabilities 1,273,335 22,019 2.31% 2.80%%
---------------------------
Non-costing liabilities 9,323
Stockholders' equity 140,486
----------
Total $1,423,144
==========
Net earning balance $ 102,691
==========
Earning yield less costing rate 3.61% 3.17%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,376,026 39,083 3.79%
============================
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.
Nine months ended June 30, 2006, compared to
nine months ended June 30, 2005
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ 5,613 7,000 746 13,359
Mortgage-backed securities 24 (1,150) (5) (1,131)
Securities 30 53 2 85
Bank deposits 59 (26) (8) 25
-----------------------------------------------
Net change in interest income 5,726 5,877 735 12,338
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts 6,100 2,544 1,369 10,013
FHLB Advances 5,895 1,065 829 7,789
Repurchase agreements 806 (2,067) (622) (1,883)
-----------------------------------------------
Net change in interest expense 12,801 1,542 1,576 15,919
-----------------------------------------------
Decrease in net interest
margin $ (7,075) 4,335 (841) (3,581)
===============================================
Net interest margin before loan loss provision for the three months
ended June 30, 2006, decreased $1.6 million from the same period in the
prior year. Specifically, interest income increased $3.5 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 $5.1 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 nine months
ended June 30, 2006, decreased $3.6 million from the same period in the
prior year. Specifically, interest income increased $12.3 million.
This increase was the result of a $108.3 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 $15.9 million increase in interest expense, which resulted
from a 136 basis point increase in the average rate paid on interest-
costing liabilities and a $106.0 million increase in the average balance
of such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $250,000 during
the quarter ended June 30, 2006, and $408,000 for the nine months ended
June 30, 2006, due primarily to an increase in the construction 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
86.1% of total classified assets at June 30, 2006, 55.5% at September
30, 2005, and 65.2% at June 30, 2005.
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 June 30, 2006, decreased
$268,000 from the same period in the prior year. Gain on sale of loans
held for sale and customer service fees and charges decreased $864,000
and $321,000, respectively, due primarily to a decrease in mortgage
banking volume. These decreases were offset by a $277,000 increase in
recoveries realized on the sale of foreclosed assets held for sale.
Additionally, other income increased $564,000 due primarily to a
$206,000 increase in income received on foreclosed assets held for sale,
a $161,000 increase in loan prepayment penalties, a $91,000 increase 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," and $67,000 recognized
on the Company's investment in Central Platte Holdings, LLC.
Other income for the nine months ended June 30, 2006, decreased
$1.6 million from the same period in the prior year. Gain on sale of
loans held for sale and customer service fees and charges decreased $1.2
million and $447,000, respectively, due primarily to a decrease in
mortgage banking volume. Recoveries on real estate owned decreased
$622,000 due recoveries realized on the sale of foreclosed assets held
for sale in the prior year. These decreases were offset by a $498,000
increase in other income due primarily to a $285,000 increase in income
received on foreclosed assets held for sale, a $154,000 increase in loan
prepayment penalties, and $140,000 recognized on the Company's
investment in Central Platte Holdings, LLC, which were partially offset
by 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," .
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended June 30, 2006, decreased $579,000 from the same period in the
prior year. Specifically, compensation, fringe benefits, and
commission-based mortgage banking compensation decreased $537,000 due
primarily to a decrease in commission-based mortgage banking
compensation resulting from a decrease in mortgage banking volume.
Advertising and business promotion expense decreased $258,000 due
primarily to a decrease in advertising costs related to the national
mortgage banking operation. These decreases were offset by a $122,000
increase in other expense due primarily to an increase in credit,
appraisal, and underwriting costs related to residential lending and an
increase in audit fees due to the implementation of Section 404 of the
Sarbanes-Oxley Act of 2002.
Total general and administrative expenses for the nine months ended
June 30, 2006, increased $1.2 million from the same period in the prior
year. Specifically, premises and equipment expense increased $318,000
due primarily to costs related to the Company's new loan administration
and construction lending building, which was completed in March 2005,
and increased costs related to the national mortgage banking operation.
Advertising and business promotion expense increased $103,000 due
primarily to increased costs related to the national mortgage banking
operation in the first and second quarters of the fiscal year.
Additionally, other expense increased $760,000 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 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.
16
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, 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 June 30, 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 June 30, 2006 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 132,825
Adjustment for regulatory capital:
Intangible assets (2,996)
Disallowed portion of servicing assets
and deferred tax assets (3,080)
Reverse the effect of SFAS No. 115 2,879
---------
Tangible capital 129,628
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 129,628
Qualifying general valuation allowance 7,224
---------
Risk-based capital $ 136,852
=========
As of June 30, 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 $ 136,852 10.9% 100,757 >=8% 125,947 >=10%
Core capital to adjusted tangible assets 129,628 8.5% 61,256 >=4% 76,570 >=5%
Tangible capital to tangible assets 129,628 8.5% 22,971 >=1.5% -- --
Tier 1 capital to risk-weighted assets 129,628 10.3% -- -- 75,568 >=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. Certain
exceptions are permitted with prior approval from the OTS, which limit
institutions from lending to any one borrower in excess of the lesser of
30% of the Bank's unimpaired capital or $30 million. As of June 30,
2006, the Bank has obtained one such exception to the loans-to-one-
borrower limit from the OTS.
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 June 30, 2006, there was $92.6 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 June 30,
2006, the Bank has $144.4 million in brokered deposits, and it could
purchase up to $68.8 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
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, 2006 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
August 9, 2006 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
20
19