SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended March 31, 2009
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 has submitted
electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes No
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or non-accelerated filer, or a small
reporting company. See definition of "accelerated filer", "large
accelerated filer" and "small reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X
Non-accelerated filer Small reporting Company
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares of Common Stock of the Registrant outstanding as of
May 6, 2009, was 7,867,614.
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
March 31, September 30,
2009 2008
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 9,668 21,735
Securities available for sale, at
fair value 36,925 35
Stock in Federal Home Loan Bank, at cost 26,640 26,284
Mortgage-backed securities:
Available for sale, at fair value 51,762 59,889
Held to maturity, at cost 126 135
Loans receivable:
Held for sale, at fair value at
March 31, 2009, and at lower
of amortized cost or fair value
at September 30, 2008 71,688 64,030
Held for investment, net 1,298,176 1,294,297
Allowance for loan losses (13,050) (13,807)
Accrued interest receivable 6,603 6,886
Foreclosed assets held for sale, net 9,901 6,038
Premises and equipment, net 13,970 14,599
Investment in LLCs 21,059 20,683
Mortgage servicing rights, net 416 716
Deferred income tax asset, net 6,049 6,293
Other assets 9,815 8,948
---------- ----------
$ 1,549,748 1,516,761
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 712,983 691,615
Brokered deposit accounts 153,967 77,764
Advances from Federal Home Loan Bank 479,059 550,091
Subordinated debentures 25,774 25,774
Escrows 7,342 9,776
Income taxes payable 3,201 4,002
Liability for unrecognized tax benefit 850 850
Accrued expenses and other liabilities 8,883 4,477
---------- ----------
Total liabilities 1,392,059 1,364,349
---------- ----------
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 authorized; 9,857,112
issued at March 31, 2009, and
September 30, 2008 1,479 1,479
Additional paid-in capital 16,533 16,484
Retained earnings 178,101 172,612
Treasury stock, at cost; 1,989,498
shares at March 31, 2009, and
at September 30, 2008 (38,418) (38,418)
Accumulated other comprehensive
income (loss) (6) 255
---------- ----------
Total stockholders' equity 157,689 152,412
---------- ----------
$ 1,549,748 1,516,761
========== ==========
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 Six months ended
March 31, March 31,
---------------------- ----------------------
2009 2008 2009 2008
--------- --------- --------- ---------
Interest on loans receivable $ 20,898 23,043 43,117 47,557
Interest on mortgage-backed securities 498 644 1,043 1,314
Interest and dividends on securities 357 295 461 592
Other interest income 5 32 92 96
--------- --------- --------- ---------
Total interest income 21,758 24,014 44,713 49,559
--------- --------- --------- ---------
Interest on customer and brokered
deposit accounts 6,398 8,198 13,297 16,811
Interest on advances from FHLB 4,131 6,419 9,292 12,831
Interest on subordinated debentures 223 345 536 776
--------- --------- --------- ---------
Total interest expense 10,752 14,962 23,125 30,418
--------- --------- --------- ---------
Net interest income 11,006 9,052 21,588 19,141
Provision for loan losses 1,000 700 1,250 1,400
--------- --------- --------- ---------
Net interest income after provision
for loan losses 10,006 8,352 20,338 17,741
--------- --------- --------- ---------
Other income (expense):
Loan servicing fees, net (20) (69) (232) (123)
Impairment recovery on mortgage
servicing rights 18 24 41 61
Customer service fees and charges 1,740 1,423 3,137 2,718
Provision for loss on real estate owned -- (300) (250) (850)
Gain on sale of securities available
for sale -- 122 -- 122
Gain from sale of loans receivable
held for sale 5,502 4,103 10,245 5,705
Other 1,990 87 1,488 45
--------- --------- --------- ---------
Total other income 9,230 5,390 14,429 7,678
--------- --------- --------- ---------
General and administrative expenses:
Compensation and fringe benefits 4,266 3,872 8,127 7,612
Commission-based mortgage banking compensation 3,435 2,062 5,623 3,527
Premises and equipment 1,096 1,046 2,063 2,109
Advertising and business promotion 1,098 934 2,394 1,962
Federal deposit insurance premiums 37 24 71 47
Other 1,612 1,207 2,865 2,526
--------- --------- --------- ---------
Total general and administrative expenses 11,544 9,145 21,143 17,783
--------- --------- --------- ---------
Income before income tax expense 7,692 4,597 13,624 7,636
Income tax expense 2,961 1,791 5,245 2,961
--------- --------- --------- ---------
Net income $ 4,731 2,806 8,379 4,675
========= ========= ========= =========
Basic earnings per share $ 0.60 0.36 1.06 0.59
========= ========= ========= =========
Diluted earnings per share $ 0.60 0.35 1.06 0.59
========= ========= ========= =========
Basic weighted average shares outstanding 7,867,614 7,867,614 7,867,614 7,867,614
See accompanying notes to condensed consolidated financial statements.
2
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
(In thousands)
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, 2008 $ 1,479 16,484 172,612 (38,418) 255 152,412
Comprehensive income:
Net income -- -- 8,379 -- -- 8,379
Other comprehensive income (loss),
net of tax:
Unrealized gain on securities -- -- -- -- (261) (261)
available for sale -------
Total comprehensive income 8,118
Cash dividends paid -- -- (3,540) -- -- (3,540)
Stock based compensation expense -- 49 -- -- -- 49
Adoption of FAS 159 -- -- 650 -- -- 650
----------------------------------------------------------------------
Balance at March 31, 2009 $ 1,479 16,533 178,101 (38,418) (6) 157,689
======================================================================
See accompanying notes to condensed consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six months ended
March 31,
----------------------
2009 2008
----------------------
Cash flows from operating activities:
Net income $ 8,379 4,675
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 880 901
Amortization and accretion, net (2,295) (541)
Gain on sale of securities available for sale -- (122)
Loss from investment in LLCs 19 86
Impairment recovery on mortgage
servicing rights (41) (61)
Gain from loans receivable held for sale (10,245) (5,705)
Provision for loan losses 1,250 1,400
Provision for loss on real estate owned 250 850
Origination of loans receivable held for sale (649,904) (397,782)
Sale of loans receivable held for sale 653,822 399,067
Stock based compensation - stock options 49 48
Changes in:
Net fair value of loan-related commitments (1,428) 354
Accrued interest receivable 283 1,470
Accrued expenses and other liabilities and
income taxes payable 3,933 (980)
----------------------
Net cash provided by operating activities 4,952 3,660
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 9 26
Available for sale 8,133 9,950
Principal repayments of mortgage loans receivable
held for investment 142,283 158,139
Principal repayments of other loans receivable 2,971 3,830
Maturity of investment securities available for sale 5 4
Loan origination - mortgage loans receivable
held for investment (153,770) (212,114)
Loan origination - other loans receivable (2,299) (3,661)
Purchase of mortgage loans receivable held for
investment (580) (128)
Purchase of Federal Home Loan Bank stock (356) (3,955)
Purchase of investment securities available for sale (37,252) --
Proceeds from sale of securities available for sale -- 122
Proceeds from sale of real estate owned 3,935 2,711
Purchases of premises and equipment, net (251) (261)
Investment in LLCs (395) (774)
Other 183 639
----------------------
Net cash used in investing activities (37,384) (45,472)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six months ended
March 31,
----------------------
2009 2008
----------------------
Cash flows from financing activities:
Net increase (decrease) in customer and
brokered deposit accounts 97,339 (39,358)
Proceeds from advances from Federal Home Loan Bank 193,000 188,000
Repayment on advances from Federal Home Loan Bank (264,000) (108,000)
Cash dividends paid (3,540) (3,540)
Change in escrows (2,434) (2,756)
----------------------
Net cash provided by financing activities 20,365 34,346
----------------------
Net decrease in cash and cash equivalents (12,067) (7,466)
Cash and cash equivalents at beginning of the period 21,735 26,050
----------------------
Cash and cash equivalents at end of period $ 9,668 18,584
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 6,041 2,205
Cash paid for interest 21,446 31,434
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 10,736 5,506
Conversion of real estate owned to loans receivable 383 2,134
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 six months ended March 31, 2009,
are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2009. The condensed consolidated
balance sheet of the Company as of September 30, 2008, 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,
valuation of mortgage servicing rights, and unrecognized tax benefits.
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 March 31, 2009, have
remained unchanged from September 30, 2008. 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, 2008.
Certain quarterly amounts for previous periods have been
reclassified to conform to the current quarter's presentation.
(2) RECENTLY ISSUED ACCOUNTING STANDARDS
On April 9, 2009, the FASB issued FSP FAS 107-1 which amends SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS
107") to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as
in annual financial statements. This FSP also amends Accounting
Principles Board Opinion No. 28, "Interim Financial Reporting", to
require those disclosures in summarized financial information at
interim reporting periods. FSP FAS 107-1 is effective for interim
reporting periods ending after June 15, 2009, (effective June 30, 2009,
for the Company).
On April 9, 2009, the FASB issued FSP FAS 115-2 which amends the
other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt
and equity securities in the financial statements. This FSP does not
amend existing recognition and measurement guidance related to other-
than-temporary impairments of equity securities. FSP FAS 115-2 is
effective for interim and annual reporting periods ending after
June 15, 2009 (effective June 30, 2009, for the Company). Management
does not anticipate that this FSP will have a material impact on the
Company's consolidated financial statements.
On April 9, 2009, the FASB issued FSP FAS 157-4, which provides
additional guidance for estimating fair value in accordance with SFAS
No. 157 "Fair Value Measurement" ("SFAS 157") when the volume and level
of activity for the asset or liability have significantly decreased.
This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. FSP FAS 157-4 is effective for
interim and annual reporting periods ending after June 15, 2009
(effective June 30, 2009, for the Company), and should be applied
prospectively. Management does not anticipate that this FSP will have a
material impact on the Company's consolidated financial statements.
6
In March 2008, the FASB issued SFAS No. 161, "Disclosures About
Derivative Instruments and Hedging Activities," ("SFAS No. 161"). This
statement establishes, among other things, the disclosure requirements
for derivative instruments and hedging activities. This statement is
effective at the beginning of the first interim period beginning after
November 15, 2008, or January 1, 2009 for the Company. The Company's
disclosures about derivative instruments and hedging activities reflect
the adoption of this statement.
(3) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER
SHARE
The following table presents a reconciliation of basic earnings per
share to diluted earnings per share for the periods indicated.
Three months ended Six months ended
---------------------- ----------------------
3/31/09 3/31/08 3/31/09 3/31/08
---------------------- ----------------------
Net income (in thousands) $ 4,731 2,806 8,379 4,675
Average common shares outstanding 7,867,614 7,867,614 7,867,614 7,867,614
Average common share stock options
outstanding -- 118,160 -- 105,435
---------------------- ----------------------
Average diluted common shares 7,867,614 7,985,774 7,867,614 7,973,049
Earnings per share:
Basic $ 0.60 0.36 1.06 0.59
Diluted 0.60 0.35 1.06 0.59
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.
At March 31, 2009, options to purchase 72,038 shares of the
Company's stock were outstanding. These options were not included in
the calculation of diluted earnings per share, as they were considered
anti-dilutive.
(4) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for sale.
Dollar amounts are expressed in thousands.
March 31, 2009
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Debt securities $ 37,395 259 (759) 36,895
Municipal securities 30 -- -- 30
------------------------------------------
Total $ 37,425 259 (759) 36,925
===========================================
7
(5) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed securities
available for sale. Dollar amounts are expressed in thousands.
March 31, 2009
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 123 -- -- 123
Pass-through certificates
guaranteed by FNMA
- adjustable rate 6,674 54 -- 6,728
FHLMC participation
certificates:
- fixed rate 630 1 (1) 630
- adjustable rate 43,844 437 -- 44,281
------------------------------------------
Total $ 51,271 492 (1) 51,762
===========================================
(6) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity. Dollar amounts are expressed in thousands.
March 31, 2009
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation
certificates:
Balloon maturity and
adjustable rate $ 70 5 -- 75
FNMA pass-through
certificates:
Fixed rate 11 -- -- 11
Balloon maturity and
adjustable rate 45 -- -- 45
-------------------------------------------
Total $ 126 5 -- 131
===========================================
(7) LOANS RECEIVABLE
Loans receivable are as follows:
March 31,
2009
---------------------
(Dollars in thousands)
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 373,666
Business properties 474,082
Partially guaranteed by VA or
insured by FHA 3,442
Construction and development 357,176
----------
Total mortgage loans 1,208,366
Commercial loans 129,495
Installment loans to individuals 14,249
----------
Total loans held for investment 1,352,110
Less:
Undisbursed loan funds (45,431)
Unearned discounts and fees and costs
on loans, net (8,503)
----------
Net loans held for investment $1,298,176
==========
8
March 31,
2009
---------------------
(Dollars in thousands)
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 123,483
Less:
Undisbursed loan funds (51,795)
----------
Net loans held for sale $ 71,688
==========
Included in the loans receivable balances at March 31, 2009, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the amount of $57,000. Loans
and participations serviced for others amounted to approximately $100.8
million at March 31, 2009.
The following table presents the activity in the allowance for
losses on loans for the period ended March 31, 2009. 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, 2008 $ 13,807
Provisions 1,250
Charge-offs (2,011)
Recoveries 4
--------
Balance at March 31, 2009 $ 13,050
========
(8) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following:
March 31,
2009
---------------------
(Dollars in thousands)
Real estate acquired through (or deed
in lieu of) foreclosure $ 10,364
Less: allowance for losses (463)
----------
Total $ 9,901
==========
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.
9
(9) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the period ended March 31, 2009. Dollar amounts
are expressed in thousands.
Balance at October 1, 2008 $ 716
Additions:
Impairment recovery 41
Reductions:
Amortization (341)
--------
Balance at March 31, 2009 $ 416
========
(10) 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 debentures 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 debentures, or upon earlier redemption as provided
in the Indenture. The debentures are callable, in whole or in part,
after five years from 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.
(11) INCOME TAXES
Effective October 1, 2007, the Company adopted Financial Accounting
Standards Board Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes" (FIN 48). As of March 31, 2009, the Company's liability
for unrecognized tax benefits of $850,000 included $149,000 of related
interest and penalties. The Company's policy is to recognize interest
and penalties related to unrecognized tax benefits within income tax
expense in the consolidated statements of income.
The Company's unrecognized tax benefit is expected to decrease in
the next twelve months as a result of the settlements with various
taxing authorities.
The Company's federal and state income tax returns for fiscal years
2005 through 2007 remain subject to examination by the Internal Revenue
Service and various state jurisdictions, based on the statute of
limitations.
10
(12) SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified two
principal operating segments for purposes of financial reporting:
Banking and 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 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.
Three months ended Mortgage Other and
March 31, 2009 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 11,216 -- (210) 11,006
Provision for loan losses 1,000 -- -- 1,000
Other income 1,702 7,876 (348) 9,230
General and administrative
expenses 4,803 6,881 (140) 11,544
Income tax expense (benefit) 2,739 383 (161) 2,961
---------------------------------------------------
Net income $ 4,376 612 (257) 4,731
===================================================
Three months ended Mortgage Other and
March 31, 2008 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 9,379 -- (327) 9,052
Provision for loan losses 700 -- -- 700
Other income 969 5,325 (904) 5,390
General and administrative
expenses 4,230 5,097 (182) 9,145
Income tax expense (benefit) 2,086 88 (383) 1,791
---------------------------------------------------
Net income $ 3,332 140 (666) 2,806
===================================================
Six months ended Mortgage Other and
March 31, 2009 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 22,098 -- (510) 21,588
Provision for loan losses 1,250 -- -- 1,250
Other income 1,674 13,847 (1,092) 14,429
General and administrative
expenses 9,652 11,893 (402) 21,143
Income tax expense (benefit) 4,955 752 (462) 5,245
---------------------------------------------------
Net income $ 7,915 1,202 (738) 8,379
===================================================
Six months ended Mortgage Other and
March 31, 2008 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 19,881 -- (740) 19,141
Provision for loan losses 1,400 -- -- 1,400
Other income 313 9,531 (2,166) 7,678
General and administrative
expenses 8,575 9,641 (433) 17,783
Income tax expense (benefit) 3,934 (42) (931) 2,961
---------------------------------------------------
Net income $ 6,285 (68) (1,542) 4,675
===================================================
11
(13) FAIR VALUE OPTION
On October 1, 2008, the Company adopted Statement of Financial
Accounting Standards No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities - Including an Amendment of FASB Statement No.
115 (FAS 159). FAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value.
In accordance with FAS 159, the Company has elected to measure
loans held for sale at fair value. This portfolio is made up entirely
of mortgage loans held for immediate sale with servicing released. Such
loans are sold prior to origination at a contracted price to outside
investors on a best-efforts basis (i.e., the loan becomes mandatorily
deliverable to the investor only when, and if, it closes) and remain on
the Company's balance sheet for a very short period of time, typically
less than one month. It is management's opinion, given the short-term
nature of these loans, that fair value provides a reasonable measure of
the economic value of these assets. In addition, carrying such loans at
fair value eliminates some measure of volatility created by the timing
of sales proceeds from outside investors, which typically occur in the
month following origination.
The Company elected the fair value option for the following item
(in thousands):
Balance Sheet Balance Sheet
Prior to Adoption Gain Upon After Adoption
10/1/08 Adoption 10/1/08
--------------------------------------------
Loans held for sale $ 64,030 1,058 65,088
============================================
Pre-tax cumulative effect of
adoption $ 1,058
Decrease in deferred tax asset (408)
------
Cumulative effect of adoption $ 650
======
The difference between the aggregate fair value and the aggregate
unpaid principal balance of these loans was $1.0 million at March 31,
2009. Interest income on loans held for sale is included in interest on
loans receivable in the accompanying statements of income.
(14) DERIVATIVE INSTRUMENTS
The Company has commitments outstanding to extend credit that have
not closed prior to the end of the period. As the Company enters into
commitments to originate loans, it also enters into commitments to sell
the loans in the secondary market on a best-efforts basis. Such
commitments to originate and sell loans on a best efforts basis are
considered derivative instruments under Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138 and SFAS
No. 149. These statements require the Company to recognize all
derivative instruments in the balance sheet and to measure those
instruments at fair value. As a result of marking to market
commitments to originate loans, the Company recorded a decrease in other
assets of $354,000, an increase in other liabilities of $94,000, and a
decrease in other income of $448,000 for the quarter ended March 31,
2009. The Company recorded a decrease in other assets of $309,000, an
increase in other liabilities of $120,000, and a decrease in other
income of $429,000 for the six month period ended March 31, 2009.
Additionally, the Company has commitments to sell loans that have
closed prior to the end of the period on a best efforts basis. Due to
the mark to market adjustment on commitments to sell loans held for
sale, the Company recorded an increase in other assets of $1.4 million,
a decrease in other liabilities of $916,000, and an increase in other
income of $2.3 million during the quarter ended March 31, 2009. The
Company recorded an increase in other assets of $1.4 million, a decrease
in other liabilities of $449,000, and an increase in other income of
$1.9 million sale during the six month period ended March 31, 2009.
The balance of derivative instruments related to commitments to
originate and sell loans at March 31, 2009, is disclosed in Footnote 15,
Fair Value Measurements.
12
(15) FAIR VALUE MEASUREMENTS
On October 1, 2008, the Company adopted Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS
157 establishes a framework for measuring fair value and expands
disclosures about fair value measurements. FAS 157 defines fair value
as the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market
participants at the measurement date. FAS 157 identifies three primary
measurement techniques: the market approach, the income approach, and
the cost approach. The market approach uses prices and other relevant
information generated by market transactions involving identical or
comparable assets or liabilities. The income approach uses valuations
or techniques to convert future amounts, such as cash flows or earnings,
to a single present amount. The cost approach is based on the amount
that currently would be required to replace the service capability of an
asset.
FAS 157 establishes a fair value hierarchy and prioritizes the
inputs to valuation techniques used to measure fair value into three
broad levels. The fair value hierarchy gives the highest priority to
observable inputs such as quoted prices in active markets for identical
assets or liabilities (Level 1) and the lowest priority to unobservable
inputs (Level 3). The maximization of observable inputs and the
minimization of the use of unobservable inputs are required.
Classification within the fair value hierarchy is based upon the
objectivity of the inputs that are significant to the valuation of an
asset or liability as of the measurement date. The three levels within
the fair value hierarchy are characterized as follows:
- Level 1 - Quoted prices in active markets for identical assets
or liabilities that the Company has the ability to access at the
measurement date.
- Level 2 - Inputs other than quoted prices included with Level 1
that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include: quoted prices for similar
assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities in markets that are not
active; inputs other than quoted prices that are observable for the
asset or liability; and inputs that are derived principally from,
or corroborated by, observable market data by correlation or other
means.
- Level 3 - Unobservable inputs for the asset or liability for which
there is little, if any, market activity for the asset or liability
at the measurement date. Unobservable inputs reflect the Company's
own assumptions about what market participants would use to price
the asset or liability. These inputs may include internally
developed pricing models, discounted cash flow methodologies, as
well as instruments for which the fair value determination requires
significant management judgment.
The Company measures certain financial assets and liabilities at
fair value in accordance with FAS 157. These measurements involve
various valuation techniques and assume that the transactions would
occur between market participants in the most advantageous market for
the Company.
The following is a summary of valuation techniques utilized by the
Company for its significant financial assets and liabilities measured at
fair value on a recurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets and
liabilities pursuant to the valuation hierarchy:
Available for sale securities
Securities available for sale consist of corporate debt securities
and are valued using quoted market prices in an active market. This
measurement is classified as Level 1 within the hierarchy.
Mortgage-backed available for sale securities are valued using
industry-standard pricing models that consider assumptions, including
market yield and prepayment speeds. These measurements are classified as
Level 2.
Loans held for sale
Loans held for sale are valued using quoted market prices for loans
with similar characteristics. This measurement is classified as Level 2
within the hierarchy.
13
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active market with
readily observable market prices. Therefore, fair value is assessed
using a valuation model that calculates the discounted cash flow using
assumption such as estimates of prepayment speeds, market discount
rates, servicing fee income, and cost of servicing. These measurements
are classified as Level 3. Mortgage servicing rights are carried on the
Company's books at fair value and are amortized over the period of net
servicing income. Additionally, they are evaluated for impairment
monthly.
Commitments to Originate Loans and Forward Sales Commitments
Commitments to originate loans and forward sales commitments are
valued using a valuation model which considers differences between
current market interest rates and committed rates. The model also
includes assumptions which estimate fall-out percentages for commitments
to originate loans. These measurements use significant unobservable
inputs and are classified as Level 3 within the hierarchy.
The following table presents the fair value measurements of assets
recognized in the accompanying balance sheets measured at fair value on
a recurring basis and the level within the fair value hierarchy in which
the measurements fall at March 31, 2009 (in thousands):
Quoted Prices in Significant Significant
Active Markets for Other Unobservable
Fair Identical Assets Observable Inputs
Value (Level 1) Inputs (Level 2) (Level 3)
-------------------------------------------------------
Assets:
Securities available for
sale $ 36,925 36,925 -- --
Mortgage-backed securities
available for sale 51,762 -- 51,762 --
Loans held for sale 71,688 -- 71,688 --
Mortgage servicing rights 416 -- -- 416
Commitments to originate
loans 275 -- -- 275
Forward sales commitments 1,580 -- -- 1,580
-------------------------------------------------------
Total assets $ 162,646 36,925 123,450 2,271
=======================================================
Liabilities:
Commitments to originate
loans $ 377 -- -- 377
Forward sales commitments 41 -- -- 41
-------------------------------------------------------
Total liabilities $ 418 -- -- 418
=======================================================
The following table is a reconciliation of the beginning and ending
balances of recurring fair value measurements recognized in the
accompanying balance sheet using significant unobservable (Level 3)
inputs (in thousands):
Mortgage Commitments
Servicing to Originate Forward Sales
Rights Loans Commitments
---------------------------------------------
Asset balance at October 1, 2008 $ 716 327 (319)
Total realized and unrealized
gains (losses):
Included in net income (300) (429) 1,858
Included in other comprehensive
income -- -- --
Purchases, issuances, and settlements -- -- --
Transfers in (out) of Level 3 -- -- --
---------------------------------------------
Asset balance at March 31, 2009 $ 416 (102) 1,539
=============================================
14
Realized and unrealized gains and losses noted in the table above
and included in net income for the period ended March 31, 2009, are
reported in the consolidated statements of income as follows (in
thousands):
Impairment
Loan Recovery
Servicing on Mortgage Other
Fees Servicing Rights Income
----------------------------------------
Total gains (losses) $ (341) 41 1,428
========================================
Changes in unrealized gains
(losses) relating to assets
still held at the balance
sheet date $ -- -- --
========================================
The following is a summary of valuation techniques utilized by the
Company for its significant financial assets and liabilities measured at
fair value on a nonrecurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets and
liabilities pursuant to the valuation hierarchy:
Impaired loans
Loans for which it is probable that the Company will not collect
principal and interest due according to contractual terms are measured
for impairment in accordance with Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan.
Allowable methods for estimating fair value include using the fair value
of the collateral for collateral dependent loans, or, where the loan is
determined not to be collateral dependent, using the discounted cash
flows.
If the impaired loan is identified as collateral dependent, then
the fair value method of measuring the amount of impairment is utilized.
This method requires obtaining a current independent appraisal of the
collateral and other internal assessments of value. If the impaired
loan is determined not to be collateral dependent, then the discounted
cash flow method is used. This method requires the impaired loan to be
recorded at the present value of expected future cash flows discounted
at the loans effective interest rate. Impaired loans are classified
within Level 3 of the fair value hierarchy.
The carrying value of impaired loans was $4.9 million at March 31,
2009.
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.
15
FINANCIAL CONDITION
ASSETS
The Company's total assets as of March 31, 2009, were $1,549.7
million, an increase of $33.0 million from September 30, 2008, the prior
fiscal year end.
As the Bank originates mortgage loans each month, management
evaluates the existing market conditions to determine which loans will
be held in the Bank's portfolio and which loans will be sold in the
secondary market. Loans sold in the secondary market can be sold with
servicing released or converted into MBS and sold with the loan
servicing retained by the Bank. At the time of each loan commitment, a
decision is made to either hold the loan for investment, hold it for
sale with servicing retained, or hold it for sale with servicing
released. Management monitors market conditions to decide whether loans
should be held in portfolio or sold and if sold, which method of sale is
appropriate. During the six months ended March 31, 2009, the Bank
originated and purchased $650.0 million in mortgage loans held for sale,
$154.4 million in mortgage loans held for investment, and $2.3 million
in other loans. This total of $806.7 million in loans compares to
$613.7 million in loans originated and purchased during the six months
ended March 31, 2008.
Loans held for sale as of March 31, 2009 were $71.7 million, and
consisted entirely of mortgage loans held for sale with servicing
released. As of October 1, 2008, the Company elected to carry loans
held for sale are at fair value, as permitted under FAS 159.
The Bank classifies problem assets as "substandard," "doubtful" or
"loss." Substandard assets have one or more defined weaknesses, and it
is possible that the Bank will sustain some loss unless the deficiencies
are corrected. Doubtful assets have the same defects as substandard
assets plus other weaknesses that make collection or full liquidation
improbable. Assets classified as loss are considered uncollectible and
of such little value that a specific loss allowance is warranted.
The following table summarizes the Bank's classified assets as
reported to the OTS, plus any classified assets of the holding company.
Dollar amounts are expressed in thousands.
3/31/09 9/30/08 3/31/08
-------------------------------------
Asset Classification:
Substandard $ 40,638 34,320 19,543
Doubtful -- -- --
Loss 1,424 1,442 375
-------------------------------------
42,062 35,762 19,918
Allowance for losses on
loans and real estate
owned (13,513) (14,476) (9,544)
-------------------------------------
$ 28,549 21,286 10,374
=====================================
The following table summarizes non-performing assets, troubled debt
restructurings, and real estate acquired through foreclosure or in-
substance foreclosure. Dollar amounts are expressed in thousands.
3/31/09 9/30/08 3/31/08
----------------------------------------
Total Assets $ 1,549,748 1,516,761 1,547,377
========================================
Non-accrual loans $ 18,249 35,075 13,033
Troubled debt
restructurings -- -- --
Net real estate and
other assets acquired
through foreclosure 9,901 6,038 6,171
----------------------------------------
Total $ 28,150 41,113 19,204
========================================
Percent of total assets 1.81% 2.71% 1.24%
========================================
16
Management records a provision for loan losses in amounts
sufficient to cover current net charge-offs and an estimate of probable
losses based on an analysis of risks that management believes to be
inherent in the loan portfolio. The Allowance for Loan and Lease Losses
("ALLL") recognizes the inherent risks associated with lending
activities, but, unlike specific allowances, have not been allocated to
particular problem assets but to a homogenous pool of loans. Management
believes that the specific loss allowances and ALLL are adequate. While
management uses available information to determine these allowances,
future allowances may be necessary because of changes in economic
conditions. Also, regulatory agencies (OTS and FDIC) review the Bank's
allowance for losses as part of their examinations, and they may require
the Bank to recognize additional loss provisions based on the
information available at the time of their examinations.
LIABILITIES AND EQUITY
Customer and brokered deposit accounts increased $97.6 million
during the six months ended March 31, 2009. The weighted average rate
on customer and brokered deposits as of March 31, 2009, was 2.99%, a
decrease from 3.91% as of March 31, 2008
Advances from the FHLB were $479.1 million as of March 31, 2009, a
decrease of $71.0 million from September 30, 2008. During the six-month
period, the Bank borrowed $193.0 million of new advances and repaid
$264.0 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 March 31, 2009.
Such debentures resulted from the issuance of pooled Trust Preferred
Securities through the Company's wholly owned statutory trust, NASB
Preferred Trust I. The Trust used the proceeds from the offering to
purchase a like amount of the Company's subordinated debentures. The
debentures, which have a variable rate of 1.65% over the 3-month LIBOR
and a 30-year term, are the sole assets of the Trust.
Escrows were $7.3 million as of March 31, 2009, a decrease of $2.4
million from September 30, 2008. This decrease is due to amounts paid
for borrowers' taxes during the fourth calendar quarter of 2008.
Total stockholders' equity as of March 31, 2009, was $157.7 million
(10.2% of total assets). This compares to $152.4 million (10.0% of
total assets) at September 30, 2008. On a per share basis,
stockholders' equity was $20.04 on March 31, 2009, compared to $19.37 on
September 30, 2008.
The Company paid cash dividends on its common stock of $0.225 per
share on November 28, 2008, and February 27, 2009. Subsequent to the
quarter ended March 31, 2009, the Company announced a cash dividend of
$0.225 per share to be paid on May 29, 2009, to stockholders of record
as of May 8, 2009.
Total stockholders' equity as of March 31, 2009, includes an
unrealized loss of $6,000 net of deferred income taxes, on available for
sale securities. This amount is reflected in the line item "Accumulated
other comprehensive loss."
RATIOS
The following table illustrates the Company's return on assets
(annualized net income divided by average total assets); return on
equity (annualized net income divided by average total equity); equity-
to-assets ratio (ending total equity divided by ending total assets);
and dividend payout ratio (dividends paid divided by net income).
Six months ended
------------------------
3/31/09 3/31/08
------------------------
Return on assets 1.09% 0.61%
Return on equity 10.81% 6.22%
Equity-to-assets ratio 10.18% 9.77%
Dividend payout ratio 42.25% 75.72%
17
RESULTS OF OPERATIONS - Comparison of three and six months ended March
31, 2009 and 2008.
For the three months ended March 31, 2009, the Company had net
income of $4,731,000 or $0.60 per share. This compares to net income of
$2,806,000 or $0.36 per share for the quarter ended March 31, 2008.
For the six months ended March 31 2009, the Company had net income
of $8,379,000 or $1.06 per share. This compares to net income of
$4,675,000 or $0.59 per share for the six months ended March 31, 2008.
NET INTEREST MARGIN
The Company's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS and investments and the
interest cost of customer and brokered deposits and other borrowings.
Management monitors net interest spreads and, although constrained by
certain market, economic, and competition factors, it establishes loan
rates and customer deposit rates that maximize net interest margin.
The following table presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities for the six months ended March
31, 2009 and 2008. Average yields reflect reductions due to non-accrual
loans. Once a loan becomes 90 days delinquent, any interest that has
accrued up to that time is reserved and no further interest income is
recognized unless the loan is paid current. Average balances and
weighted average yields for the periods include all accrual and non-
accrual loans. The table also presents the interest-earning assets and
yields for each respective period. Dollar amounts are expressed in
thousands.
Six months ended 3/31/09 As of
--------------------------- 3/31/09
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,352,788 43,117 6.37% 6.23%
Mortgage-backed securities 54,548 1,043 3.82% 4.25%
Securities 38,300 461 2.41% 3.81%
Bank deposits 28,075 92 0.66% 0.01%
--------------------------------------
Total earning assets 1,473,711 44,713 6.07% 6.04%
---------------------------
Non-earning assets 63,840
----------
Total $1,537,551
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 164,315 755 0.92% 0.78%
Customer and brokered
certificates of deposit 667,973 12,542 3.76% 3.53%
FHLB Advances 513,565 9,292 3.62% 3.41%
Subordinated debentures 25,000 536 4.29% 2.82%
--------------------------------------
Total costing liabilities 1,370,853 23,125 3.37% 3.14%
---------------------------
Non-costing liabilities 12,221
Stockholders' equity 154,477
----------
Total $1,537,551
==========
Net earning balance $ 102,858
==========
Earning yield less costing rate 2.70% 2.90%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,473,711 21,588 2.93%
============================
Six months ended 3/31/08 As of
--------------------------- 3/31/08
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,365,354 47,557 6.97% 6.36%
Mortgage-backed securities 76,838 1,314 3.42% 4.12%
Securities 25,734 592 4.60% 4.50%
Bank deposits 6,240 96 3.08% 1.63%
--------------------------------------
Total earning assets 1,474,166 49,559 6.72% 6.20%
---------------------------
Non-earning assets 61,274
----------
Total $1,535,440
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 165,214 1,025 1.24% 1.06%
Customer and brokered
certificates of deposit 648,089 15,786 4.87% 4.64%
FHLB Advances 529,637 12,831 4.85% 4.60%
Subordinated debentures 25,000 776 6.21% 4.90%
--------------------------------------
Total costing liabilities 1,367,940 30,418 4.45% 4.19%
---------------------------
Non-costing liabilities 17,363
Stockholders' equity 150,137
----------
Total $1,535,440
==========
Net earning balance $ 106,226
==========
Earning yield less costing rate 2.27% 2.01%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,474,166 19,141 2.60%
============================
18
The following table provides information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided on
changes attributable to (1) changes in rates (change in rate
multiplied by the old volume), and (2) changes in volume (change in
volume multiplied by the old rate), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
Six months ended March 31, 2009, compared to
six months ended March 31, 2008
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (4,096) (438) 94 (4,440)
Mortgage-backed securities 154 (381) (44) (271)
Securities (282) 289 (138) (131)
Bank deposits (76) 336 (264) (4)
-----------------------------------------------
Net change in interest income (4,300) (194) (352) (4,846)
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (3,782) 392 (124) (3,514)
FHLB Advances (3,257) (390) 108 (3,539)
Subordinated debentures (240) -- -- (240)
-----------------------------------------------
Net change in interest expense (7,279) 2 (16) (7,293)
-----------------------------------------------
Increase in net interest
margin $ 2,979 (196) (336) 2,447
===============================================
Net interest margin before loan loss provision for the three months
ended March 31, 2009, increased $2.0 million from the same period in the
prior year. Specifically, interest income decreased $2.2 million due
primarily to a decrease in the average rate earned on interest-earning
assets. The decrease in interest income was offset by a $4.2 million
decrease in interest expense, which resulted primarily from a decrease
in the average rate paid on interest-costing liabilities.
Net interest margin before loan loss provision for the six months
ended March 31, 2009, increased $2.4 million from the same period in the
prior year. Specifically, interest income decreased $4.8 million, which
was offset by a $7.3 million decrease in interest expense for the
period. Interest on loans decreased $4.4 million as the result of a 60
basis point decrease in the average yield and a $12.6 million decrease
in the average balance of loans receivable outstanding during the
period. Interest on mortgage-backed securities decreased $271,000 due
primarily to a $22.3 million decrease in the average balance of such
securities. Interest expense on customer and brokered deposit accounts
decreased $3.5 million due primarily to a 92 basis point decrease in the
average rate paid on such interest-costing liabilities. Interest
expense on FHLB advances decreased $3.5 million as the result of a 123
basis point decrease in the average rate paid on such liabilities and a
$16.1 million decrease in the average balance of FHLB advances
outstanding during the period. Interest expense on subordinated
debentures decreased $240,000 due to a 192 basis point decrease in the
average rate paid on such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $1.0 million
during the quarter ended March 31, 2009, due primarily to increases in
loan charge offs related to the residential construction and development
and commercial real estate loan portfolios. The Company recorded a
provision for loan losses of $250,000 during the quarter ended December
31, 2008, due primarily to increases in commercial real estate and
residential construction and development loans classified as special
mention. Management performs an ongoing analysis of individual loans
and of homogenous pools of loans to assess for any impairment. On a
consolidated basis, the allowance for losses on loans and real estate
owned was 32.1% of total classified assets at March 31, 2009, 40.5% at
September 30, 2008, and 47.9% at March 31, 2008.
Management believes that the allowance for losses on loans and real
estate owned 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.
19
OTHER INCOME
Other income for the three months ended March 31, 2009, increased
$3.8 million from the same period in the prior year. Specifically, gain
on sale of loans held for sale increased $1.4 million due to increased
mortgage banking volume during the period. Provision for loss on real
estate owned decreased $300,000 due to a decrease in charge-offs of
foreclosed assets held for sale during the quarter. Customer service
fees and charges increased $317,000 due to an increase in miscellaneous
loan origination fees resulting from the increase in mortgage banking
volume. In addition, other income increased $1.9 million due primarily
to the effect of recording the net fair value of certain loan-related
commitments in accordance with FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." These increases were
offset by a $122,000 decrease in gain on sale of securities available
for sale, which resulted from the redemption of Visa, Inc. common stock
during their initial public offering in March 2008.
Other income for the six months ended March 31, 2009, increased
$6.8 million from the same period in the prior year. Specifically, gain
on sale of loans held for sale increased $4.5 million due to increased
mortgage banking volume during the period. Provision for loss on real
estate owned decreased $600,000 due to a decrease in charge-offs of
foreclosed assets held for sale during the period. Customer service
fees and charges increased $419,000 due to an increase in miscellaneous
loan origination fees resulting from the increase in mortgage banking
volume. In addition, other income increased $1.4 million due primarily
to the effect of recording the net fair value of certain loan-related
commitments in accordance with FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." These increases were
offset by a $122,000 decrease in gain on sale of securities available
for sale, which resulted from the redemption of Visa, Inc. common stock
during their initial public offering in March 2008. In addition, loan
servicing fees decreased $109,000 due primarily to an increase in
capitalized servicing amortization, which resulted from an increase in
actual prepayments and estimated future repayments of the underlying
mortgage loans during the period.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended March 31, 2009, increased $2.4 million from the same period in the
prior year. Specifically, compensation and fringe benefits increased
$394,000 due primarily to the addition of personnel in the Company's
information technology, training, and loan servicing departments.
Commission-based mortgage banking compensation increased $1.4 million
due primarily to an increase in mortgage banking volume for the period.
Advertising and business promotion expense increased $164,000 resulting
from an increase in mortgage banking volume for the quarter.
Additionally, other expense increased $405,000 due primarily to
increases in legal fees related to the Company's lending operations.
Total general and administrative expenses for the six months ended
March 31, 2009, increased $3.4 million from the same period in the prior
year. Specifically, compensation and fringe benefits increased $515,000
due primarily to the addition of personnel in the Company's information
technology, training, and loan servicing departments. Commission-based
mortgage banking compensation increased $2.1 million due primarily to an
increase in mortgage banking volume for the period. Advertising and
business promotion expense increased $432,000 resulting from an increase
in mortgage banking volume for the quarter. Additionally, other expense
increased $339,000 due primarily to increases in legal fees related to
the Company's lending 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.
20
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. On
October 3, 2008, the Emergency Economic Stabilization Act of 2008
temporarily raised the basic limit of federal deposit insurance coverage
from $100,000 to $250,000 per depositor. This legislation provides that
the basic deposit insurance limit will return to $100,000 after December
31, 2009. 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 5
to 43 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.
On February 27, 2009, the Federal Deposit Insurance Corporation
(FDIC) adopted an interim rule imposing a 20 basis point special
assessment on the deposits of insured financial institutions as of June
30, 2009, to be collected on September 30, 2009. The interim rule also
permits the FDIC to impose additional emergency special assessments
after June 30, 2009, of up to 10 basis points. The interim rule was
available for comment for thirty days, and a final rule is expected to
be adopted in the near future.
REGULATORY CAPITAL REQUIREMENTS
At March 31, 2009, the Bank exceeds all capital requirements
prescribed by the OTS. To calculate these requirements, a thrift must
deduct any investments in and loans to subsidiaries that are engaged in
activities not permissible for a national bank. As of March 31, 2009,
the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
At March 31, 2009 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 158,659
Adjustment for regulatory capital:
Intangible assets (2,724)
Disallowed portion of servicing assets
and deferred tax assets (6,085)
Reverse the effect of SFAS No. 115 6
---------
Tangible capital 149,856
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 149,856
Qualifying general valuation allowance 11,626
---------
Risk-based capital $ 161,482
=========
As of March 31, 2009
-------------------------------------------------------------------
Minimum required for Minimum required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 161,482 11.5% 112,042 >=8% 140,052 >=10%
Core capital to adjusted tangible assets 149,856 9.9% 60,730 >=4% 75,912 >=5%
Tangible capital to tangible assets 149,856 9.9% 22,774 >=1.5% -- --
Tier 1 capital to risk-weighted assets 149,856 10.7% -- -- 84,031 >=6%
21
LOANS TO ONE BORROWER
Institutions are prohibited from lending to any one borrower in
excess of 15% of the Bank's unimpaired capital plus unimpaired surplus,
or 25% of unimpaired capital plus unimpaired surplus if the loan is
secured by certain readily marketable collateral. Renewals that exceed
the loans-to-one-borrower limit are permitted if the original borrower
remains liable and no additional funds are disbursed. The Bank has
received regulatory approval from the OTS under 12 CFR 560.93 to
increase its loans-to-one-borrower limit to $30 million for loans
secured by certain residential housing units. Such loans must not, in
the aggregate, exceed 150% of the Bank's unimpaired capital and surplus.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability to meet deposit withdrawals and
lending commitments. The Bank generates liquidity primarily from the
sale and repayment of loans, retention or newly acquired retail
deposits, and advances from FHLB of Des Moines' credit facility.
Management continues to use FHLB advances as a primary source of short-
term funding. At March 31, 2009, the Bank had $73.5 million available
in the form of additional FHLB advances. The Bank has established
relationships with various brokers, and, as a secondary source of
liquidity, the Bank purchases brokered deposit accounts. At March 31,
2009, the Bank has $154.0 million in brokered deposits, and it could
purchase up to $258.2 million in additional brokered deposits and remain
"well capitalized" as defined by the OTS.
Fluctuations in the level of interest rates typically impact
prepayments on mortgage loans and MBS. During periods of falling
interest rates, these prepayments increase and a greater demand exists
for new loans. The Bank's customer deposits are partially impacted by
area competition. Management believes that the Bank will retain most of
its maturing time deposits in the foreseeable future. However, any
material funding needs that may arise in the future can be reasonably
satisfied through the use of additional FHLB advances and/or brokered
deposits. Management is not aware of any other current market or
economic conditions that could materially impact the Bank's future
ability to meet obligations as they come due.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a complete discussion of the Company's asset and liability
management policies, as well as the potential impact of interest rate
changes upon the market value of the Company's portfolio, see the
"Asset/Liability Management" section of the Company's Annual Report for
the year ended September 30, 2008.
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, 2008.
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 reasonably likely to materially
affect our internal control over financial reporting.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material proceedings pending other than ordinary and
routine litigation incidental to the business of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The annual stockholder's meeting was held on January 27, 2009. The
following persons were elected to NASB Financial Inc.'s Board of
Directors for three-year terms:
Frederick V. Arbanas
Laura Brady
W. Russell Welsh
The firm of BKD, LLP was ratified for appointment as independent
auditors for the fiscal year ended September 30, 2009.
Item 5. Other Information
None.
Item 6. Exhibits
(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
23
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NASB Financial, Inc.
(Registrant)
May 8, 2009 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
May 8, 2009 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
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