SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended December 31, 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
February 5, 2007, was 8,318,642.
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
December 31, September 30,
2006 2006
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 18,653 11,442
Securities available for sale 50 50
Stock in Federal Home Loan Bank, at cost 26,053 24,043
Mortgage-backed securities:
Available for sale, at fair value 93,505 97,259
Held to maturity 305 325
Loans receivable:
Held for sale 62,970 50,462
Held for investment, net 1,304,328 1,295,700
Allowance for loan losses (7,697) (7,991)
Accrued interest receivable 8,408 8,205
Foreclosed asset held for sale, net 8,932 5,231
Premises and equipment, net 14,426 12,994
Investment in LLCs 18,303 16,737
Mortgage servicing rights, net 1,048 1,089
Deferred income tax asset 2,706 2,856
Other assets 7,664 6,394
---------- ----------
$ 1,559,654 1,524,796
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 692,368 722,799
Brokered deposit accounts 121,116 128,243
Advances from Federal Home Loan Bank 544,453 499,357
Subordinated debentures 25,774 --
Escrows 3,933 8,910
Income taxes payable 5,224 2,602
Accrued expenses and other liabilities 7,254 6,313
---------- ----------
Total liabilities 1,400,122 1,368,224
---------- ----------
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 authorized; 9,857,112
issued at December 31, 2006, and
September 30, 2006 1,479 1,479
Serial preferred stock of $1.00 par
value: 7,500,000 shares authorized;
none issued or outstanding -- --
Additional paid-in capital 16,329 16,311
Retained earnings 165,333 162,631
Treasury stock, at cost; 1,538,470
shares at December 31, 2006, and
September 30, 2006 (22,061) (22,061)
Accumulated other comprehensive
loss (1,548) (1,788)
---------- ----------
Total stockholders' equity 159,532 156,572
---------- ----------
$ 1,559,654 1,524,796
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2006 2005
--------- ---------
Interest on loans $ 24,930 22,434
Interest on mortgage-backed securities 854 1,160
Interest and dividends on securities 206 277
Other interest income 54 121
--------- ---------
Total interest income 26,044 23,992
--------- ---------
Interest on customer and brokered
deposit accounts 8,245 6,367
Interest on advances from FHLB 7,008 4,759
Interest on subordinated debentures 92 --
Interest on securities sold under
agreements to repurchase -- 606
--------- ---------
Total interest expense 15,345 11,732
--------- ---------
Net interest income 10,699 12,260
Provision for loan losses 126 65
--------- ---------
Net interest income after provision
for loan losses 10,573 12,195
--------- ---------
Other income (expense):
Loan servicing fees, net 34 30
Impairment recovery on mortgage
servicing rights 8 1
Customer service fees and charges 1,414 1,676
Provision fro loss on real estate owned (105) --
Gain on sale of loans held for sale 3,505 3,852
Other 639 282
--------- ---------
Total other income 5,495 5,841
--------- ---------
General and administrative expenses:
Compensation and fringe benefits 3,897 4,492
Commission-based mortgage banking
compensation 1,773 1,871
Premises and equipment 858 874
Advertising and business promotion 858 1,108
Federal deposit insurance premiums 28 26
Other 1,215 1,526
--------- ---------
Total general and administrative expenses 8,629 9,897
--------- ---------
Income before income tax expense 7,439 8,139
Income tax expense 2,865 2,930
--------- ---------
Net income $ 4,574 5,209
========= =========
Basic earnings per share $ 0.55 0.62
========= =========
Diluted earnings per share $ 0.55 0.61
========= =========
Basic weighted average shares outstanding 8,318,642 8,434,562
See accompanying notes to condensed consolidated financial statements.
2
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
(In thousands, except share data)
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive stockholders
stock capital earnings stock income (loss) equity
-----------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 2006 $ 1,479 16,311 162,631 (22,061) (1,788) 156,572
Comprehensive income:
Net income -- -- 4,574 -- -- 4,574
Other comprehensive income (loss),
net of tax:
Unrealized gain on securities -- -- -- -- 240 240
available for sale -------
Total comprehensive income 4,814
Cash dividends paid -- -- (1,872) -- -- (1,872)
Stock based compensation expense -- 18 -- -- -- 18
----------------------------------------------------------------------
Balance at December 31, 2006 $ 1,479 16,329 165,333 (22,061) (1,548) 159,532
======================================================================
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)
Three months ended
December 31,
----------------------
2006 2005
(Restated)
----------------------
Cash flows from operating activities:
Net income $ 4,574 5,209
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 278 306
Amortization and accretion, net (639) (541)
Impairment recovery on mortgage
servicing rights (8) (1)
Gain on sale of loans receivable held for sale (3,505) (3,852)
Provision for loan losses 126 65
Provision for loss on foreclosed assets 105 --
Principal repayments of mortgage loans receivable -- 7
held for sale
Origination of loans receivable held for sale (222,182) (317,333)
Sale of loans receivable held for sale 213,179 365,383
Stock based compensation - stock options 18 --
Changes in:
Net fair value of loan related commitments (102) 52
Accrued interest receivable (203) (430)
Accrued expenses and other liabilities and
income taxes payable 4,092 5,588
----------------------
Net cash provided by (used in) operating activities (4,267) 54,453
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 20 35
Available for sale 4,007 9,458
Principal repayments of mortgage loans receivable
held for investment 64,725 93,728
Principal repayments of other loans receivable 2,098 1,941
Loan origination - mortgage loans held for investment (79,634) (141,023)
Loan origination - other loans receivable (1,282) (1,209)
Purchase of FHLB stock (2,009) (1,021)
Proceeds for sale of real estate owned 2,130 1,817
Purchases of premises and equipment, net (1,710) (805)
Investment in LLCs (1,566) (2,354)
Other (1,724) (373)
----------------------
Net cash used in investing activities (14,945) (39,806)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (continued)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2006 2005
(Restated)
----------------------
Cash flows from financing activities:
Net (decrease) increase in customer and
brokered deposit accounts (37,654) 45,428
Proceeds from advances from FHLB 130,000 150,000
Repayment on advances from FHLB (84,848) (127,079)
Proceeds from subordinated debentures 25,774 --
Repayment of securities sold under
agreements to repurchase -- (69,500)
Cash dividends paid (1,872) (3,796)
Purchase of common stock for treasury -- (769)
Change in escrows (4,977) (5,828)
----------------------
Net cash provided by (used in) financing activities 26,423 (11,544)
----------------------
Net increase in cash and cash equivalents 7,211 3,103
Cash and cash equivalents at beginning of the period 11,442 35,334
----------------------
Cash and cash equivalents at end of period $ 18,653 38,437
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 335 296
Cash paid for interest 14,016 11,682
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 5,723 887
Capitalization of mortgage servicing rights -- 68
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 three months ended December 31,
2006, are not necessarily indicative of the results that may be expected
for the fiscal year ending September 30, 2007. The condensed
consolidated balance sheet of the Company as of September 30, 2006, has
been derived from the audited balance sheet of the Company as of that
date.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of the allowances for losses on loans, real estate owned,
and valuation of mortgage servicing rights. Management believes that
these allowances are adequate, however, future additions to the
allowances may be necessary based on changes in economic conditions.
The Company's critical accounting policies involving the more
significant judgements and assumptions used in the preparation of the
condensed consolidated financial statements as of December 31, 2006,
have remained unchanged from September 30, 2006. These policies relate
to the allowance for loan losses and the valuation of mortgage servicing
rights. Disclosure of these critical accounting policies is
incorporated by reference under Item 8 "Financial Statements and
Supplementary Data" in the Company's Annual Report on Form 10-K for the
Company's year ended September 30, 2006.
Certain quarterly amounts for previous periods have been
reclassified to conform to the current quarter's presentation.
(2) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER
SHARE
The following table presents a reconciliation of basic earnings per
share to diluted earnings per share for the periods indicated.
Three months ended
----------------------
12/31/06 12/31/05
----------------------
Net income (in thousands) $ 4,574 5,209
Average common shares outstanding 8,318,642 8,434,562
Average common share stock options
outstanding 53,151 42,303
----------------------
Average diluted common shares 8,371,793 8,476,865
Earnings per share:
Basic $ 0.55 0.62
Diluted 0.55 0.61
The dilutive securities included for each period presented above
consist entirely of stock options granted to employees as incentive
stock options under Section 442A of the Internal Revenue Code as
amended.
6
(3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed securities
available for sale. Dollar amounts are expressed in thousands.
December 31, 2006
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 242 5 -- 247
Pass-through certificates
guaranteed by FNMA
- adjustable rate 13,023 -- 345 12,678
FHLMC participation
certificates
- fixed rate 1,146 -- 75 1,071
- adjustable rate 81,702 -- 2,193 79,509
-------------------------------------------
Total $ 96,113 5 2,613 93,505
===========================================
(4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity. Dollar amounts are expressed in thousands.
December 31, 2006
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------------------------------------
FHLMC participation
certificates:
Balloon maturity and
adjustable rate $ 118 4 -- 122
FNMA pass-through
certificates:
Fixed rate 86 -- -- 86
Balloon maturity and
adjustable rate 73 -- -- 73
Pass-through certificates
guaranteed by GNMA
- fixed rate 28 1 -- 29
-------------------------------------------
Total $ 305 5 -- 310
===========================================
7
(5) LOANS RECEIVABLE
Loans receivable are as follows:
December 31,
2006
---------------------
(Dollars in thousands)
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 366,312
Business properties 483,809
Partially guaranteed by VA or
insured by FHA 1,824
Construction and development 511,034
----------
Total mortgage loans 1,362,979
Commercial loans 59,971
Installment loans to individuals 16,476
----------
Total loans held for investment 1,439,426
Less:
Undisbursed loan funds (130,371)
Unearned discounts and fees and costs
on loans, net (4,727)
----------
Net loans held for investment $1,304,328
==========
December 31,
2006
---------------------
(Dollars in thousands)
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 92,964
Less:
Undisbursed loan funds (29,991)
Unearned discounts and fees and costs
on loans, net (3)
----------
Net loans held for sale $ 62,970
==========
Included in the loans receivable balances at December 31, 2006, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the approximate amount of
$109,000. Loans and participations serviced for others amounted to
approximately $96.9 million at December 31, 2006.
The following table presents the activity in the allowance for
losses on loans for the period ended December 31, 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, 2006 $ 7,991
Provisions 126
Charge-offs (420)
Recoveries --
--------
Balance at December 31, 2006 $ 7,697
========
8
(6) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following:
December 31,
2006
---------------------
(Dollars in thousands)
Real estate acquired through (or deed
in lieu of) foreclosure $ 9,226
Less: allowance for losses (294)
----------
Total $ 8,932
==========
Foreclosed assets held for sale are initially recorded at fair
value as of the date of foreclosure minus any estimated selling costs
(the "new basis"), and are subsequently carried at the lower of the new
basis or fair value less selling costs on the current measurement date.
(7) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the period ended December 31, 2006. Dollar amounts
are expressed in thousands.
Balance at October 1, 2006 $ 1,089
Additions:
Originated mortgage servicing rights --
Impairment recovery 8
Reductions:
Amortization (49)
--------
Balance at December 31, 2006 $ 1,048
========
(8) SUBORDINATED DEBENTURES
On December 13, 2006, NASB Financial, Inc. (the "Company"), through
its wholly owned statutory trust, NASB Preferred Trust I (the "Trust"),
issued $25 million of pooled Trust Preferred Securities. The Trust used
the proceeds from the offering to purchase a like amount of NASB
Financial Inc.'s subordinated debentures. The debentures, which have a
variable rate of 1.65% over the 3-month LIBOR and a 30-year term, are
the sole assets of the Trust. In exchange for the capital contributions
made to the Trust by NASB Financial, Inc. upon formation, NASB
Financial. Inc. owns all the common securities of the Trust.
In accordance with Financial Accounting Standards Board
Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN
46R), the Trust qualifies as a special purpose entity that is not
required to be consolidated in the financial statements of the Company.
The $25.0 million Trust Preferred Securities issued by the Trust will
remain on the records of the Trust. The Trust Preferred Securities are
included in Tier I capital for regulatory capital purposes.
The Trust Preferred Securities have a variable interest rate of
1.65% over the 3-month LIBOR, and are mandatorily redeemable upon the
30-year term of the dentures, or upon earlier redemption as provided in
the Indenture. The debentures are callable, in whole or in part, after
five years of the issuance date. The Company did not incur a placement
or annual trustee fee related to the issuance. The securities are
subordinate to all other debt of the Company and interest may be
deferred up to five years.
9
(9) SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified three
principal operating segments for purposes of financial reporting:
Banking, Local Mortgage Banking, and National Mortgage Banking. These
segments were determined based on the Company's internal financial
accounting and reporting processes and are consistent with the
information that is used to make operating decisions and to assess the
Company's performance by the Company's key decision makers.
The National Mortgage Banking segment originates mortgage loans via
the internet primarily for sale to investors. The Local Mortgage
Banking segment originates mortgage loans for sale to investors and for
the portfolio of the Banking segment. The Banking segment provides a
full range of banking services through the Bank's branch network,
exclusive of mortgage loan originations. A portion of the income
presented in the Mortgage Banking segment is derived from sales of loans
to the Banking segment based on a transfer pricing methodology that is
designed to approximate economic reality. The Other and Eliminations
segment includes financial information from the parent company plus
inter-segment eliminations.
The following table presents financial information from the
Company's operating segments for the periods indicated. Dollar amounts
are expressed in thousands.
Local National
Three months ended Mortgage Mortgage Other and
December 31, 2006 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 10,773 -- -- (74) 10,699
Provision for loan losses 126 -- -- -- 126
Other income 1,240 1,773 3,032 (550) 5,495
General and administrative
expenses 3,922 1,829 2,955 (77) 8,629
Income tax expense (benefit) 3,066 (21) 30 (210) 2,865
-----------------------------------------------------------
Net income $ 4,899 (35) 47 (337) 4,574
===========================================================
Local National
Three months ended Mortgage Mortgage Other and
December 31, 2005 Banking Banking Banking Eliminations Consolidated
---------------------------------------------------------------------------------------
Net interest income $ 12,242 -- -- 18 12,260
Provision for loan losses 65 -- -- -- 65
Other income 1,267 2,558 2,578 (562) 5,841
General and administrative
expenses 3,860 2,686 3,443 (92) 9,897
Income tax expense (benefit) 3,450 (46) (311) (163) 2,930
-----------------------------------------------------------
Net income $ 6,134 (82) (554) (289) 5,209
===========================================================
(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").
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
Condensed Consolidated Statement of Cash Flows for the three-month
period ended December 31, 2005. Dollar amounts are expressed in
thousands.
Net cash from operating activities,
as previously reported $ 54,510
Reclassification of principal repayments
of loans receivable held for sale 7
Correction of origination and principal
repayments of loans receivable held for sale (64)
--------
Reported net cash from operating activities $ 54,453
========
Net cash from investing activities,
as previously reported $ (39,863)
Reclassification of principal repayments
of loans receivable held for sale (7)
Correction of origination and principal
repayments of loans receivable held for sale 64
--------
Reported net cash from investing activities $ (39,806)
========
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 December 31, 2006, were $1,559.7
million, an increase of $34.9 million from September 30, 2006, 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 three months ended December 31, 2006, the Bank
originated $222.2 million in mortgage loans held for sale, $79.6 million
in mortgage loans held for investment, and $1.3 million in other loans.
This total of $303.1 million in loans originated compares to $459.5
million in loans originated and purchased during the three months ended
December 31, 2005.
Included in the $63.0 million in loans held for sale as of December
31, 2006, are $62.5 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.
12/31/06 9/30/06 12/31/05
-------------------------------------
Asset Classification:
Substandard $ 13,220 12,361 11,872
Doubtful -- -- --
Loss 322 434 526
-------------------------------------
13,542 12,795 12,398
Allowance for losses (7,992) (8,266) (7,485)
-------------------------------------
$ 5,550 4,529 4,913
=====================================
The following table summarizes non-performing assets, troubled debt
restructurings, and real estate acquired through foreclosure or in-
substance foreclosure. Dollar amounts are expressed in thousands.
12/31/06 9/30/06 12/31/05
----------------------------------------
Total Assets $ 1,559,654 1,524,796 1,552,886
========================================
Non-accrual loans $ 2,451 6,396 2,805
Troubled debt
restructurings 71 3,477 3,479
Net real estate and
other assets acquired
through foreclosure 8,932 5,231 8,410
----------------------------------------
Total $ 11,454 15,104 14,694
========================================
Percent of total assets 0.73% 0.99% 0.95%
========================================
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 three months ending December 31, 2006, and 2005.
Dollar amounts are expressed in thousands.
2006 2005
-------------------------
Balance at beginning of year $ 7,991 7,536
Provision for loan losses 126 65
Recoveries -- 9
Charge-offs (420) (298)
-------------------------
Balance at December 31 $ 7,697 7,312
=========================
LIABILITIES AND EQUITY
Customer and brokered deposit accounts decreased $37.6 million
during the three months ended December 31, 2006. The weighted average
rate on customer and brokered deposits as of December 31, 2006, was
4.06%, an increase from 3.20% as of December 31, 2005.
Advances from the FHLB were $544.5 million as of December 31, 2006,
an increase of $45.1 million from September 30, 2006. During the three-
month period, the Bank borrowed $130.0 million of new advances and
repaid $84.8 million. Management regularly uses FHLB advances as an
alternate funding source to provide operating liquidity and to fund the
origination and purchase of mortgage loans.
Subordinated debentures were $25.8 million as of December 31, 2006.
Such debentures resulted from the issuance during the quarter of pooled
Trust Preferred Securities through the Company's wholly owned statutory
trust, NASB Preferred Trust I. The Trust used the proceeds from the
offering to purchase a like amount of the Company's subordinated
debentures. The debentures, which have a variable rate of 1.65% over
the 3-month LIBOR and a 30-year term, are the sole assets of the Trust.
Escrows were $3.9 million as of December 31, 2006, a decrease of
$5.0 million from September 30, 2006. This decrease is due to amounts
paid for borrowers' taxes during the fourth calendar quarter of 2006.
Total stockholders' equity as of December 31, 2006, was $159.5
million (10.2% of total assets). This compares to $156.6 million (10.3%
of total assets) at September 30, 2006. On a per share basis,
stockholders' equity was $19.18 on December 31, 2006, compared to $18.82
on September 30, 2006.
The Company paid cash dividends on its common stock of $0.225 per
share on November 24, 2006. Subsequent to the quarter ended December
31, 2006, the Company announced a cash dividend of $0.225 per share to
be paid on February 23, 2007, to stockholders of record as of February
2, 2007.
Total stockholders' equity as of December 31, 2006, includes an
unrealized loss of $1.5 million, net of deferred income taxes, on
available for sale securities. This amount is reflected in the line
item "Accumulated other comprehensive income."
RATIOS
The following table illustrates the Company's return on assets
(annualized net income divided by average total assets); return on
equity (annualized net income divided by average total equity); equity-
to-assets ratio (ending total equity divided by ending total assets);
and dividend payout ratio (dividends paid divided by net income).
Three months ended
------------------------
12/31/06 12/31/05
------------------------
Return on assets 1.19% 1.34%
Return on equity 11.58% 13.96%
Equity-to-assets ratio 10.23% 9.63%
Dividend payout ratio 40.93% 72.87%
13
RESULTS OF OPERATIONS - Comparison of three months ended December 31,
2006 and 2005.
For the three months ended December 31, 2006, the Company had net
income of $4,574,000 or $0.55 per share. This compares to net income of
$5,209,000 or $0.62 per share for the quarter ended December 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 three months ended
December 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.
Three months ended 12/31/06 As of
--------------------------- 12/31/06
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,343,390 24,930 7.42% 7.19%
Mortgage-backed securities 95,433 854 3.58% 4.25%
Securities 25,979 206 3.17% 4.25%
Bank deposits 5,701 54 3.79% 4.80%
--------------------------------------
Total earning assets 1,470,503 26,044 7.08% 6.95%
---------------------------
Non-earning assets 62,333
----------
Total $1,532,736
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 171,792 491 1.14% 1.00%
Customer and brokered
certificates of deposit 655,512 7,754 4.73% 4.86%
FHLB Advances 525,908 7,008 5.33% 5.23%
Subordinated debentures 5,250 92 7.01% 7.01%
--------------------------------------
Total costing liabilities 1,358,462 15,345 4.52% 4.57%
---------------------------
Non-costing liabilities 16,246
Stockholders' equity 158,028
----------
Total $1,532,736
==========
Net earning balance $ 112,041
==========
Earning yield less costing rate 2.56% 2.38%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,470,503 10,699 2.91%
============================
Three months ended 12/31/05 As of
--------------------------- 12/31/05
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,322,660 22,434 6.78% 6.73%
Mortgage-backed securities 124,803 1,160 3.72% 4.26%
Securities 22,982 277 4.82% 2.79%
Bank deposits 13,785 121 3.51% 3.72%
--------------------------------------
Total earning assets 1,484,230 23,992 6.47% 6.41%
---------------------------
Non-earning assets 59,245
----------
Total $1,543,475
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 190,744 491 1.03% 1.04%
Customer and brokered
certificates of deposit 644,522 5,876 3.65% 3.82%
FHLB Advances 474,028 4,759 4.02% 4.39%
Repurchase agreements 72,000 606 3.37% 3.49%
--------------------------------------
Total costing liabilities 1,381,294 11,732 3.40% 3.63%
---------------------------
Non-costing liabilities 12,853
Stockholders' equity 149,328
----------
Total $1,543,475
==========
Net earning balance $ 102,936
==========
Earning yield less costing rate 3.07% 2.78%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,484,230 12,260 3.30%
============================
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.
Three months ended December 31, 2006, compared to
three months ended December 31, 2005
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ 2,116 351 29 2,496
Mortgage-backed securities (44) (273) 11 (306)
Securities (95) 36 (12) (71)
Bank deposits 10 (71) (6) (67)
-----------------------------------------------
Net change in interest income 1,987 43 22 2,052
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts 1,963 (61) (24) 1,878
FHLB Advances 1,552 521 176 2,249
Subordinated debentures -- -- 92 92
Repurchase agreements (606) (606) 606 (606)
-----------------------------------------------
Net change in interest expense 2,909 (146) 850 3,613
-----------------------------------------------
Decrease in net interest
margin $ (922) 189 (828) (1,561)
===============================================
Net interest margin before loan loss provision for the three months
ended December 31, 2006, decreased $1.6 million from the same period in
the prior year. Specifically, interest income increased $2.0 million,
which was offset by a $3.6 increase in interest expense for the period.
Interest on loans increased $2.5 million as the result of a $20.7
million increase in the average balance of loans receivable and 64 basis
point increase in the average rate earned on such loans. This increase
in interest income was partially offset by a $306,000 decrease in
interest on mortgage-backed securities due to a $29.4 million decrease
in the average balance of mortgage-backed securities and a 14 basis
point decrease in the average rate earned on such assets. Interest
expense on customer and brokered deposits increased $1.9 million due to
an 86 basis point increase in the average rate paid on such deposits.
Interest expense on FHLB advances increased $2.2 million as the result
of a $51.9 million increase in the average balance of FHLB advances and
a 131 basis point increase in the average rate paid on such liabilities.
These increases in interest expense were partially offset by a $606.000
decrease in interest expense on securities sold under agreements to
repurchase, which were paid-off during the prior fiscal year.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $126,000 during
the quarter ended December 31, 2006, due primarily to increases in the
residential and commercial real estate loan portfolios. Management
performs an ongoing analysis of individual loans and of homogenous pools
of loans to assess for any impairment. On a consolidated basis, loan
loss reserve was 59.0% of total classified assets at December 31, 2006,
64.6% at September 30, 2006, and 60.4% at December 31, 2005.
Management believes that the provisions for loan losses is
adequate. The provision can fluctuate based on changes in economic
conditions, changes in the level of classified assets, changes in the
amount of loan charge-offs and recoveries, or changes in other
information available to management. Also, regulatory agencies review
the Company's allowances for losses as a part of their examination
process and they may require changes in loss provision amounts based on
information available at the time of their examination.
15
OTHER INCOME
Other income for the three months ended December 31, 2006,
decreased $346,000 from the same period in the prior year. Gain on sale
of loans held for sale decreased $347,000 due to a decrease in mortgage
banking volume. Customer service fees and charges decreased $262,000
due to a $138,000 decrease in overdraft and return item charges, and a
decrease in miscellaneous loan origination fees resulting from the
decrease in mortgage banking volume. Provision for loss on real estate
owned increased $105,000 due an increase in foreclosed assets held for
sale during the period. These decreases were offset by a $357,000
increase in other income due primarily to a $115,000 increase in income
received on foreclosed assets held for sale, a $54,000 increase in loan
prepayment penalties, and a $154,000 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."
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended December 31, 2006, decreased $1.3 million from the same period in
the prior year. Specifically, compensation, fringe benefits, and
commission-based mortgage banking compensation decreased $693,000 due
primarily to a reduction of staff in the local and national mortgage
banking operations and a decrease in mortgage banking volume.
Advertising and business promotion expense decreased $250,000 due
primarily to a decrease in advertising costs related to the national
mortgage banking operation. Other expense decreased $311,000 due
primarily to a decrease in credit, appraisal, underwriting and other
costs related to the local and national mortgage banking operations.
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Deposit Insurance Fund ("DIF") of the FDIC. The Bank
is subject to regulation by the OTS as its chartering authority. Since
passage of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA" or the "Act"), the FDIC also has regulatory
control over the Bank. The transactions of DIF-insured institutions are
limited by statute and regulations that may require prior supervisory
approval in certain instances. Institutions also must file reports with
regulatory agencies regarding their activities and their financial
condition. The OTS and FDIC make periodic examinations of the Bank to
test compliance with the various regulatory requirements. The OTS can
require an institution to re-value its assets based on appraisals and to
establish specific valuation allowances. This supervision and
regulation is intended primarily for the protection of depositors.
Also, savings institutions are subject to certain reserve requirements
under Federal Reserve Board regulations.
INSURANCE OF ACCOUNTS
The DIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured owner, with the exception of self-directed
retirement accounts, which are insured to a maximum of $250,000.
Deposit insurance premiums are determined using a Risk-Related Premium
Schedule ("RRPS"), a matrix which places each insured institution into
one of three capital groups and one of three supervisory groups.
Currently, deposit insurance premiums range from 0 to 27 basis points of
the institution's total deposit accounts, depending on the institution's
risk classification. The Bank is currently considered "well
capitalized", which is the most favorable capital group and supervisory
subgroup. DIF-insured institutions are also assessed a premium to
service the interest on Financing Corporation ("FICO") debt.
16
REGULATORY CAPITAL REQUIREMENTS
At December 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 December 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 December 31, 2006 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 161,695
Adjustment for regulatory capital:
Intangible assets (2,946)
Disallowed portion of servicing assets
and deferred tax assets (2,706)
Reverse the effect of SFAS No. 115 1,548
---------
Tangible capital 157,591
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 157,591
Qualifying general valuation allowance 7,376
---------
Risk-based capital $ 164,967
=========
As of December 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 $ 164,967 13.1% 100,904 >=8% 126,131 >=10%
Core capital to adjusted tangible assets 157,591 10.3% 61,450 >=4% 76,813 >=5%
Tangible capital to tangible assets 157,591 10.3% 23,044 >=1.5% -- --
Tier 1 capital to risk-weighted assets 157,591 12.5% -- -- 75,678 >=6%
LOANS TO ONE BORROWER
Institutions are prohibited from lending to any one borrower in
excess of 15% of the Bank's unimpaired capital plus unimpaired surplus,
or 25% of unimpaired capital plus unimpaired surplus if the loan is
secured by certain readily marketable collateral. Renewals that exceed
the loans-to-one-borrower limit are permitted if the original borrower
remains liable and no additional funds are disbursed. The Bank has
received regulatory approval from the OTS under 12 CFR 560.93 which
increased it's loans-to-one-borrower limit to $30 million for loans
secured by certain residential housing units. Such loans must, in the
aggregate, not exceed 150% of the Bank's unimpaired capital and surplus.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability to meet deposit withdrawals and
lending commitments. The Bank generates liquidity primarily from the
sale and repayment of loans, retention or newly acquired retail
deposits, and advances from FHLB of Des Moines' credit facility.
Management continues to use FHLB advances as a primary source of short-
term funding. At December 31, 2006, there was $58.1 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 December
31, 2006, the Bank has $121.1 million in brokered deposits, and it could
purchase up to $355.6 million in additional brokered deposits and remain
"well capitalized" as defined by the OTS.
17
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, 2006.
Management recognizes that there are certain market risk factors
present in the structure of the Bank's financial assets and liabilities.
Since the Bank does not have material amounts of derivative securities,
equity securities, or foreign currency positions, interest rate risk
("IRR") is the primary market risk that is inherent in the Bank's
portfolio. On a quarterly basis, the Bank monitors the estimate of
changes that would potentially occur to its net portfolio value ("NPV")
of assets, liabilities, and off-balance sheet items assuming a sudden
change in market interest rates. Management presents a NPV analysis to
the Board of Directors each quarter and NPV policy limits are reviewed
and approved. There have been no material changes in the market risk
information provided in the Annual Report for the year ended September
30, 2006.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities and Exchange Act of 1934. Based on this
evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were
effective at the end of the period covered by this quarterly report.
There were no changes in the Company's internal control over financial
reporting during the period covered by this quarterly report on Form 10-
Q that have materially affected or are reasonable likely to materially
affect our internal control over financial reporting.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material proceedings pending other than ordinary and
routine litigation incidental to the business of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Rules 13a-15(e) and 15d-15(e)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Rules 13a-15(e) and 15d-15(e)
Exhibit 32.1 - Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
19
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NASB Financial, Inc.
(Registrant)
February 9, 2007 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
February 9, 2007 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
20
19