SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 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
August 5, 2009, was 7,867,614.
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
June 30, September 30,
2009 2008
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 12,862 21,735
Securities available for sale, at
fair value 80,004 35
Stock in Federal Home Loan Bank, at cost 26,640 26,284
Mortgage-backed securities:
Available for sale, at fair value 48,131 59,889
Held to maturity, at cost 123 135
Loans receivable:
Held for sale, at fair value at
June 30, 2009, and at lower
of amortized cost or fair value
at September 30, 2008 119,930 64,030
Held for investment, net 1,273,950 1,294,297
Allowance for loan losses (16,229) (13,807)
Accrued interest receivable 6,986 6,886
Foreclosed assets held for sale, net 12,037 6,038
Premises and equipment, net 13,651 14,599
Investment in LLCs 21,105 20,683
Mortgage servicing rights, net 445 716
Deferred income tax asset, net 4,952 6,293
Other assets 10,543 8,948
---------- ----------
$ 1,615,130 1,516,761
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 693,426 691,615
Brokered deposit accounts 246,749 77,764
Advances from Federal Home Loan Bank 467,042 550,091
Subordinated debentures 25,774 25,774
Escrows 8,074 9,776
Income taxes payable 2,562 4,002
Liability for unrecognized tax benefit 850 850
Accrued expenses and other liabilities 8,716 4,477
---------- ----------
Total liabilities 1,453,193 1,364,349
---------- ----------
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 authorized; 9,857,112
issued at June 30, 2009, and
September 30, 2008 1,479 1,479
Additional paid-in capital 16,557 16,484
Retained earnings 180,573 172,612
Treasury stock, at cost; 1,989,498
shares at June 30, 2009, and
at September 30, 2008 (38,418) (38,418)
Accumulated other comprehensive
income 1,746 255
---------- ----------
Total stockholders' equity 161,937 152,412
---------- ----------
$ 1,615,130 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 Nine months ended
June 30, June 30,
---------------------- ----------------------
2009 2008 2009 2008
--------- --------- --------- ---------
Interest on loans receivable $ 20,993 22,261 64,110 69,818
Interest on mortgage-backed securities 451 648 1,494 1,962
Interest and dividends on securities 1.081 232 1,542 824
Other interest income 2 47 94 143
--------- --------- --------- ---------
Total interest income 22,527 23,188 67,240 72,747
--------- --------- --------- ---------
Interest on customer and brokered
deposit accounts 6,246 7,169 19,543 23,980
Interest on advances from FHLB 3,920 5,866 13,212 18,697
Interest on subordinated debentures 173 295 709 1,071
--------- --------- --------- ---------
Total interest expense 10,339 13,330 33,464 43,748
--------- --------- --------- ---------
Net interest income 12,188 9,858 33,776 28,999
Provision for loan losses 4,000 1,600 5,250 3,000
--------- --------- --------- ---------
Net interest income after provision
for loan losses 8,188 8,258 28,526 25,999
--------- --------- --------- ---------
Other income (expense):
Loan servicing fees, net 112 172 (120) 51
Impairment (loss) recovery on mortgage
servicing rights (11) (36) 30 23
Customer service fees and charges 2,127 1,448 5,264 4,166
Provision for loss on real estate owned -- (400) (250) (1,250)
Gain on sale of securities available
for sale 548 -- 548 122
Gain from sale of loans receivable
held for sale 9,170 4,251 19,415 9,956
Other 796 1,337 2,284 1,382
--------- --------- --------- ---------
Total other income 12,742 6,772 27,171 14,450
--------- --------- --------- ---------
General and administrative expenses:
Compensation and fringe benefits 5,094 4,136 13,221 11,748
Commission-based mortgage banking compensation 4,695 2,214 10,318 5,741
Premises and equipment 928 1,004 2,991 3,113
Advertising and business promotion 1,079 1,144 3,473 3,106
Federal deposit insurance premiums 843 23 914 70
Other 1,393 1,387 4,258 3,913
--------- --------- --------- ---------
Total general and administrative expenses 14,032 9,908 35,175 27,691
--------- --------- --------- ---------
Income before income tax expense 6,898 5,122 20,522 12,758
Income tax expense 2,656 1,512 7,901 4,473
--------- --------- --------- ---------
Net income $ 4,242 3,610 12,621 8,285
========= ========= ========= =========
Basic earnings per share $ 0.54 0.46 1.60 1.05
========= ========= ========= =========
Diluted earnings per share $ 0.54 0.45 1.60 1.04
========= ========= ========= =========
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 equity
-----------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 2008 $ 1,479 16,484 172,612 (38,418) 255 152,412
Comprehensive income:
Net income -- -- 12,621 -- -- 12,621
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- 1,491 1,491
available for sale -------
Total comprehensive income 14,112
Cash dividends paid -- -- (5,310) -- -- (5,310)
Stock based compensation expense -- 73 -- -- -- 73
Adoption of FAS 159 -- -- 650 -- -- 650
----------------------------------------------------------------------
Balance at June 30, 2009 $ 1,479 16,557 180,573 (38,418) 1,746 161,937
======================================================================
See accompanying notes to condensed consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine months ended
June 30,
----------------------
2009 2008
----------------------
Cash flows from operating activities:
Net income $ 12,621 8,285
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 1,322 1,363
Amortization and accretion, net (3,520) (981)
Gain on sale of securities available for sale (548) (122)
Loss from investment in LLCs 54 119
Impairment recovery on mortgage
servicing rights (30) (23)
Gain from loans receivable held for sale (19,415) (9,956)
Provision for loan losses 5,250 3,000
Provision for loss on real estate owned 250 1,250
Origination of loans receivable held for sale (1,189,455) (681,837)
Sale of loans receivable held for sale 1,154,301 667,297
Stock based compensation - stock options 73 66
Changes in:
Net fair value of loan-related commitments (2,123) (716)
Accrued interest receivable (100) 1,514
Accrued expenses and other liabilities and
income taxes payable 3,051 (1,208)
----------------------
Net cash used in operating activities (38,269) (11,949)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 13 48
Available for sale 11,238 15,747
Principal repayments of mortgage loans receivable
held for investment 208,348 245,873
Principal repayments of other loans receivable 4,279 8,806
Maturity of investment securities available for sale 5 4
Loan origination - mortgage loans receivable
held for investment (199,295) (298,575)
Loan origination - other loans receivable (3,428) (6,529)
Purchase of mortgage loans receivable held for
investment (1,049) (330)
Purchase of Federal Home Loan Bank stock (356) (3,888)
Purchase of investment securities available for sale (104,412) --
Proceeds from sale of securities available for sale 28,262 122
Proceeds from sale of real estate owned 6,086 4,202
Purchases of premises and equipment, net (374) (388)
Investment in LLCs (476) (1,055)
Other 198 426
----------------------
Net cash used in investing activities (50,961) (35,537)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine months ended
June 30,
----------------------
2009 2008
----------------------
Cash flows from financing activities:
Net increase (decrease) in customer and
brokered deposit accounts 170,369 (24,305)
Proceeds from advances from Federal Home Loan Bank 319,000 324,000
Repayment on advances from Federal Home Loan Bank (402,000) (236,650)
Cash dividends paid (5,310) (5,311)
Change in escrows (1,702) (2,080)
----------------------
Net cash provided by financing activities 80,357 55,654
----------------------
Net (decrease) increase in cash and cash equivalents (8,873) 8,168
Cash and cash equivalents at beginning of the period 21,735 26,050
----------------------
Cash and cash equivalents at end of period $ 12,862 34,218
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 9,336 5,078
Cash paid for interest 32,072 45,287
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 15,716 8,413
Conversion of real estate owned to loans receivable 391 2,499
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 quarter and nine months ended
June 30, 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 June 30, 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.
Subsequent events have been evaluated through August 7, 2009, which
is the date the financial statements were issued.
Certain quarterly amounts for previous periods have been
reclassified to conform to the current quarter's presentation.
(2) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER
SHARE
The following table presents a reconciliation of basic earnings per
share to diluted earnings per share for the periods indicated.
Three months ended Nine months ended
---------------------- ----------------------
6/30/09 6/30/08 6/30/09 6/30/08
---------------------- ----------------------
Net income (in thousands) $ 4,242 3,610 12,621 8,285
Average common shares outstanding 7,867,614 7,867,614 7,867,614 7,867,614
Average common share stock options
outstanding -- 112,568 -- 109,257
---------------------- ----------------------
Average diluted common shares 7,867,614 7,980,182 7,867,614 7,976,871
Earnings per share:
Basic $ 0.54 0.46 1.60 1.05
Diluted 0.54 0.45 1.60 1.04
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 June 30, 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.
6
(3) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for sale.
Dollar amounts are expressed in thousands.
June 30, 2009
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Debt securities $ 77,113 2,866 (5) 79,974
Municipal securities 30 -- -- 30
------------------------------------------
Total $ 77,143 2,866 (5) 80,004
===========================================
During the quarter and nine month period ended June 30, 2009, the
Company realized gross gains of $548,000 and no gross losses on the sale
of securities available for sale.
The following tables present a summary of the fair value and gross
unrealized losses of those securities available for sale which had
unrealized losses at June 30, 2009. Dollar amounts are expressed in
thousands.
---------------------------------------------
Less Than 12 Months 12 Months or Longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Debt securities $ 1,524 5 $ -- --
=============================================
The scheduled maturities of securities available for sale at June
30, 2009, are presented in the following table. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due in less than one year $ 5 -- -- 5
Due from one to five years 45,262 1,136 -- 46,398
Due from five to ten years 31,876 1,730 (5) 33,601
-------------------------------------------
Total $ 77,143 2,866 (5) 80,004
===========================================
7
(4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed securities
available for sale. Dollar amounts are expressed in thousands.
June 30, 2009
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 119 -- -- 119
Pass-through certificates
guaranteed by FNMA
- adjustable rate 6,305 -- (16) 6,289
FHLMC participation
certificates:
- fixed rate 583 16 -- 599
- adjustable rate 41,145 19 (40) 41,124
------------------------------------------
Total $ 48,152 35 (56) 48,131
===========================================
There were no sales of mortgage-backed securities available for
sale during quarter or nine month period ended June 30, 2009.
The following tables present a summary of the fair value and gross
unrealized losses of those mortgage-backed securities available for sale
which had unrealized losses at June 30, 2009. Dollar amounts are
expressed in thousands.
---------------------------------------------
Less Than 12 Months 12 Months or Longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Pass-through certificates
guaranteed by FNMA -
adjustable rate $ 6,289 16 $ -- --
FHLMC participation
certificates -
adjustable rate 17,894 40 -- --
---------------------------------------------
Total $ 24,183 56 $ -- --
=============================================
The scheduled maturities of mortgage-backed securities available
for sale at June 30, 2009, are presented in the following table. Dollar
amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due from five to ten years $ 583 16 -- 599
Due after ten years 47,569 19 (56) 47,532
-------------------------------------------
Total $ 48,152 35 (56) 48,131
===========================================
Actual maturities of mortgage-backed securities available for sale
may differ from scheduled maturities depending on the repayment
characteristics and experience of the underlying financial instruments,
on which borrowers have the right to call or prepay certain obligations.
8
(5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity. Dollar amounts are expressed in thousands.
June 30, 2009
-------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation
certificates:
Balloon maturity and
adjustable rate $ 68 2 -- 70
FNMA pass-through
certificates:
Fixed rate 11 -- -- 11
Balloon maturity and
adjustable rate 44 -- -- 44
-------------------------------------------
Total $ 123 2 -- 125
===========================================
The scheduled maturities of mortgage-backed securities held to
maturity at June 30, 2009, are presented in the following table. Dollar
amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due from five to ten years $ 84 2 -- 86
Due after ten years 39 -- -- 39
---------------------------------------------
Total $ 123 2 -- 125
=============================================
Actual maturities of mortgage-backed securities held to maturity
may differ from scheduled maturities depending on the repayment
characteristics and experience of the underlying financial instruments,
on which borrowers have the right to call or prepay certain obligations.
(6) LOANS RECEIVABLE
Loans receivable are as follows:
June 30,
2009
---------------------
(Dollars in thousands)
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 364,536
Business properties 470,502
Partially guaranteed by VA or
insured by FHA 3,521
Construction and development 348,312
----------
Total mortgage loans 1,186,871
Commercial loans 125,399
Installment loans to individuals 14,069
----------
Total loans held for investment 1,326,339
Less:
Undisbursed loan funds (44,007)
Unearned discounts and fees and costs
on loans, net (8,382)
----------
Net loans held for investment $1,273,950
==========
9
June 30,
2009
---------------------
(Dollars in thousands)
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 178,007
Less:
Undisbursed loan funds (58,077)
----------
Net loans held for sale $ 119,930
==========
Included in the loans receivable balances at June 30, 2009, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the amount of $43,000. Loans
and participations serviced for others amounted to approximately $99.8
million at June 30, 2009.
The following table presents the activity in the allowance for
losses on loans for the period ended June 30, 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 5,250
Charge-offs (2,836)
Recoveries 8
--------
Balance at June 30, 2009 $ 16,229
========
(7) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following:
June 30,
2009
---------------------
(Dollars in thousands)
Real estate acquired through (or deed
in lieu of) foreclosure $ 12,184
Less: allowance for losses (147)
----------
Total $ 12,037
==========
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.
10
(8) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the period ended June 30, 2009. Dollar amounts are
expressed in thousands.
Balance at October 1, 2008 $ 716
Additions:
Impairment recovery 30
Reductions:
Amortization (301)
--------
Balance at June 30, 2009 $ 445
========
(9) 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.
(10) INCOME TAXES
As of June 30, 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 liability for 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
2006 through 2008 remain subject to examination by the Internal Revenue
Service and various state jurisdictions, based on the statute of
limitations.
11
(11) SEGMENT 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
June 30, 2009 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 12,349 -- (161) 12,188
Provision for loan losses 4,000 -- -- 4,000
Other income 1,517 11,735 (510) 12,742
General and administrative
expenses 5,772 8,522 (262) 14,032
Income tax expense (benefit) 1,576 1,237 (157) 2,656
---------------------------------------------------
Net income $ 2,518 1,976 (252) 4,242
===================================================
Three months ended Mortgage Other and
June 30, 2008 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 10,128 -- (270) 9,858
Provision for loan losses 1,600 -- -- 1,600
Other income 1,247 6,273 (748) 6,772
General and administrative
expenses 4,542 5,522 (156) 9,908
Income tax expense (benefit) 2,015 289 (792) 1,512
---------------------------------------------------
Net income $ 3,218 462 (70) 3,610
===================================================
Nine months ended Mortgage Other and
June 30, 2009 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 34,447 -- (671) 33,776
Provision for loan losses 5,250 -- -- 5,250
Other income 3,191 25,582 (1,602) 27,171
General and administrative
expenses 15,424 20,415 (664) 35,175
Income tax expense (benefit) 6,531 1,989 (619) 7,901
---------------------------------------------------
Net income $ 10,433 3,178 (990) 12,621
===================================================
Nine months ended Mortgage Other and
June 30, 2008 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 30,009 -- (1,010) 28,999
Provision for loan losses 3,000 -- -- 3,000
Other income 1,560 15,804 (2,914) 14,450
General and administrative
expenses 13,117 15,163 (589) 27,691
Income tax expense (benefit) 5,949 247 (1,723) 4,473
---------------------------------------------------
Net income $ 9,503 394 (1,612) 8,285
===================================================
12
(12) FAIR VALUE OPTION
On October 1, 2008, the Company 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 $1.9 million at June 30,
2009. Interest income on loans held for sale is included in interest on
loans receivable in the accompanying statements of income.
(13) 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 in accordance with GAAP, which
requires 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 an increase in other assets of $288,000, a decrease in other
liabilities of $17,000, and an increase in other income of $304,000 for
the quarter ended June 30, 2009. The Company recorded a decrease in
other assets of $21,000, an increase in other liabilities of $104,000,
and a decrease in other income of $125,000 for the nine month period
ended June 30, 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 $484,000, an
increase in other liabilities of $93,000, and an increase in other
income of $390,000 during the quarter ended June 30, 2009. The Company
recorded an increase in other assets of $1.9 million, a decrease in
other liabilities of $356,000, and an increase in other income of $2.2
million during the nine month period ended June 30, 2009.
The balance of derivative instruments related to commitments to
originate and sell loans at June 30, 2009, is disclosed in Footnote 14,
Fair Value Measurements.
13
(14) FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would likely be received to
sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date. GAAP
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.
GAAP 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 GAAP. 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.
14
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 June 30, 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 $ 80,004 80,004 -- --
Mortgage-backed securities
available for sale 48,131 -- 48,131 --
Loans held for sale 119,930 -- 119,930 --
Mortgage servicing rights 445 -- -- 445
Commitments to originate
loans 562 -- -- 562
Forward sales commitments 2,063 -- -- 2,063
-------------------------------------------------------
Total assets $ 251,135 80,004 168,061 3,070
=======================================================
Liabilities:
Commitments to originate
loans $ 360 -- -- 360
Forward sales commitments 134 -- -- 134
-------------------------------------------------------
Total liabilities $ 494 -- -- 494
=======================================================
15
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 (271) (125) 2,248
Included in other comprehensive
income -- -- --
Purchases, issuances, and settlements -- -- --
Transfers in (out) of Level 3 -- -- --
---------------------------------------------
Asset balance at June 30, 2009 $ 445 202 1,929
=============================================
Realized and unrealized gains and losses noted in the table above
and included in net income for the nine month period ended June 30,
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) $ (301) 30 2,123
========================================
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 $14.2 million at June 30,
2009.
16
The following table presents the carrying values and fair values of
the Company's financial instruments at June 30, 2009, presented in
accordance with GAAP. Dollar amounts are expressed in thousands.
Estimated
Carrying fair
value value
--------------------------
Financial Assets:
Cash and cash equivalents $ 12,862 12,862
Securities available for sale 80,004 80,004
Stock in Federal Home Loan Bank 26,640 26,640
Mortgage-backed securities:
Available for sale 48,131 48,131
Held to maturity 123 125
Loans receivable:
Held for sale 119,930 119,930
Held for investment 1,257,721 1,309,572
Mortgage servicing rights 445 445
Lending commitments on mortgage loans
held for sale - fixed rate 237 237
Lending commitments on mortgage loans
held for sale - floating rate 326 326
Commitments to sell loans 2,063 2,063
Financial Liabilities:
Customer deposit accounts 693,426 697,660
Brokered deposit accounts 246,749 246,209
Advances from FHLB 467,042 472,510
Subordinated debentures 25,774 25,774
Lending commitments on mortgage loans
held for sale - fixed rate 245 245
Lending commitments on mortgage loans
held for sale - floating rate 115 115
Commitments to sell loans 134 134
Contract or Estimated
notional unrealized
amount gain (loss)
--------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 12,127 (4)
Lending commitments - floating
rate -- --
Commitments to sell loans -- --
The fair value estimates presented are based on pertinent
information available to management as of June 30, 2009. Although
management is not aware of any factors that would significantly affect
the estimated fair values, such amounts have not been comprehensively
revalued for purposes of these consolidated financial statements since
that date. Therefore, current estimates of fair value may differ
significantly from the amounts presented above.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The principal business of the Company is to provide banking
services through the Bank. Specifically, the Bank obtains savings and
checking deposits from the public, then uses those funds to originate
and purchase real estate loans and other loans. The Bank also purchases
mortgage-backed securities ("MBS") and other investment securities from
time to time as conditions warrant. In addition to customer deposits,
the Bank obtains funds from the sale of loans held-for-sale, the sale of
securities available-for-sale, repayments of existing mortgage assets,
advances from the Federal Home Loan Bank ("FHLB"), and the purchase of
brokered deposit accounts. The Bank's primary sources of income are
interest on loans, MBS, and investment securities plus customer service
fees and income from mortgage banking activities. Expenses consist
primarily of interest payments on customer deposits and other borrowings
and general and administrative costs.
The Bank is regulated by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"), and is subject
to periodic examination by both entities. The Bank is also subject to
the regulations of the Board of Governors of the Federal Reserve System
("FRB"), which establishes rules regarding reserves that must be
maintained against customer deposits.
FINANCIAL CONDITION
ASSETS
The Company's total assets as of June 30, 2009, were $1,615.1
million, an increase of $98.4 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 nine months ended June 30, 2009, the Bank
originated and purchased $1,189.5 million in mortgage loans held for
sale, $200.3 million in mortgage loans held for investment, and $3.4
million in other loans. This total of $1,393.2 million in loans
compares to $987.2 million in loans originated and purchased during the
nine months ended June 30, 2008.
Loans held for sale as of June 30, 2009, were $119.9 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 at fair value, as permitted under GAAP.
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.
18
The following table summarizes the Bank's classified assets as
reported to the OTS, plus any classified assets of the holding company.
Dollar amounts are expressed in thousands.
6/30/09 9/30/08 6/30/08
-------------------------------------
Asset Classification:
Substandard $ 48,906 34,320 30,273
Doubtful -- -- --
Loss 2,900 1,442 215
-------------------------------------
51,806 35,762 30,488
Allowance for losses on
loans and real estate
owned (16,376) (14,476) (10,973)
-------------------------------------
$ 35,430 21,286 19,515
=====================================
The following table summarizes non-performing assets, troubled debt
restructurings, and real estate acquired through foreclosure or in-
substance foreclosure. Dollar amounts are expressed in thousands.
6/30/09 9/30/08 6/30/08
----------------------------------------
Total Assets $ 1,615,130 1,516,761 1,571,172
========================================
Non-accrual loans $ 30,377 35,075 10,936
Troubled debt
restructurings 4,004 -- --
Net real estate and
other assets acquired
through foreclosure 12,037 6,038 6,230
----------------------------------------
Total $ 46,418 41,113 17,166
========================================
Percent of total assets 2.87% 2.71% 1.09%
========================================
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 $170.8 million
during the nine months ended June 30, 2009. The weighted average rate
on customer and brokered deposits as of June 30, 2009, was 2.53%, a
decrease from 3.51% as of June 30, 2008.
Advances from the FHLB were $467.0 million as of June 30, 2009, a
decrease of $83.0 million from September 30, 2008. During the nine-
month period, the Bank borrowed $319.0 million of new advances and
repaid $402.0 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 June 30, 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.
19
Escrows were $8.1 million as of June 30, 2009, a decrease of $1.7
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 June 30, 2009, was $161.9 million
(10.0% 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 $20.58 on June 30, 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, February 27, 2009, and May 29, 2009.
Subsequent to the quarter ended June 30, 2009, the Company announced a
cash dividend of $0.225 per share to be paid on August 28, 2009, to
stockholders of record as of August 7, 2009.
Total stockholders' equity as of June 30, 2009, includes an
unrealized gain of $1.7 million net of deferred income taxes, on
available for sale securities. This amount is reflected in the line
item "Accumulated other comprehensive income."
RATIOS
The following table illustrates the Company's return on assets
(annualized net income divided by average total assets); return on
equity (annualized net income divided by average total equity); equity-
to-assets ratio (ending total equity divided by ending total assets);
and dividend payout ratio (dividends paid divided by net income).
Nine months ended
------------------------
6/30/09 6/30/08
------------------------
Return on assets 1.07% 0.72%
Return on equity 10.71% 7.31%
Equity-to-assets ratio 10.03% 9.72%
Dividend payout ratio 42.07% 64.10%
RESULTS OF OPERATIONS - Comparison of three and nine months ended June
30, 2009 and 2008.
For the three months ended June 30, 2009, the Company had net
income of $4,242,000 or $0.54 per share. This compares to net income of
$3,610,000 or $0.46 per share for the quarter ended June 30, 2008.
For the nine months ended June 30 2009, the Company had net income
of $12,621,000 or $1.60 per share. This compares to net income of
$8,285,000 or $1.05 per share for the nine months ended June 30, 2008.
20
NET INTEREST MARGIN
The Company's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS and investments and the
interest cost of customer and brokered deposits and other borrowings.
Management monitors net interest spreads and, although constrained by
certain market, economic, and competition factors, it establishes loan
rates and customer deposit rates that maximize net interest margin.
The following table presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities for the nine months ended June
30, 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.
Nine months ended 6/30/09 As of
--------------------------- 6/30/09
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,360,780 64,110 6.28% 6.19%
Mortgage-backed securities 53,183 1,494 3.75% 4.25%
Securities 53,231 1,542 3.86% 4.97%
Bank deposits 23,450 94 0.53% 0.01%
--------------------------------------
Total earning assets 1,490,644 67,240 6.01% 6.02%
---------------------------
Non-earning assets 64,720
----------
Total $1,555,364
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 166,856 1,114 0.89% 0.80%
Customer and brokered
certificates of deposit 685,973 18,429 3.58% 2.92%
FHLB Advances 508,432 13,212 3.46% 3.01%
Subordinated debentures 25,000 709 3.78% 2.69%
--------------------------------------
Total costing liabilities 1,386,261 33,464 3.22% 2.69%
---------------------------
Non-costing liabilities 12,817
Stockholders' equity 156,286
----------
Total $1,555,364
==========
Net earning balance $ 104,383
==========
Earning yield less costing rate 2.79% 3.33%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,490,644 33,776 3.02%
============================
Nine months ended 6/30/08 As of
--------------------------- 6/30/08
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,367,604 69,818 6.81% 6.39%
Mortgage-backed securities 74,217 1,962 3.52% 4.14%
Securities 25,923 824 4.23% 4.00%
Bank deposits 8,656 143 2.20% 1.63%
--------------------------------------
Total earning assets 1,476,400 72,747 6.57% 6.22%
---------------------------
Non-earning assets 60,775
----------
Total $1,537,175
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 166,160 1,478 1.19% 1.00%
Customer and brokered
certificates of deposit 643,638 22,502 4.66% 4.15%
FHLB Advances 535,499 18,697 4.66% 4.28%
Subordinated debentures 25,000 1,071 5.71% 4.55%
--------------------------------------
Total costing liabilities 1,370,297 43,748 4.26% 3.83%
---------------------------
Non-costing liabilities 16,060
Stockholders' equity 150,818
----------
Total $1,537,175
==========
Net earning balance $ 106,103
==========
Earning yield less costing rate 2.31% 2.39%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,476,400 28,999 2.62%
============================
21
The following table provides information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided on
changes attributable to (1) changes in rates (change in rate
multiplied by the old volume), and (2) changes in volume (change in
volume multiplied by the old rate), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
Nine months ended June 30, 2009, compared to
nine months ended June 30, 2008
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (5,436) (349) 77 (5,708)
Mortgage-backed securities 128 (555) (41) (468)
Securities (72) 866 (76) 718
Bank deposits (108) 244 (185) (49)
-----------------------------------------------
Net change in interest income (5,488) 206 (225) (5,507)
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (5,405) 1,275 (307) (4,437)
FHLB Advances (4,819) (946) 280 (5,485)
Subordinated debentures (362) -- -- (362)
-----------------------------------------------
Net change in interest expense (10,586) 329 (27) (10,284)
-----------------------------------------------
Increase in net interest
margin $ 5,098 (123) (198) 4,777
===============================================
Net interest margin before loan loss provision for the three months
ended June 30, 2009, increased $2.3 million from the same period in the
prior year. Specifically, interest income decreased $661,000 due
primarily to a decrease in the average rate earned on interest-earning
assets. The decrease in interest income was offset by a $3.0 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 nine months
ended June 30, 2009, increased $4.8 million from the same period in the
prior year. Specifically, interest income decreased $5.5 million, which
was offset by a $10.3 million decrease in interest expense for the
period. Interest on loans decreased $5.7 million as the result of a 53
basis point decrease in the average yield and a $6.8 million decrease in
the average balance of loans receivable outstanding during the period.
Interest on mortgage-backed securities decreased $468,000 due primarily
to a $21.0 million decrease in the average balance of such securities.
These decreases in interest income were partially offset by a $718,000
increase in interest on investment securities, due primarily to a $27.3
million increase in the average balance of such securities. Interest
expense on customer and brokered deposit accounts decreased $4.4 million
due primarily to an 89 basis point decrease in the average rate paid on
such interest-costing liabilities. Interest expense on FHLB advances
decreased $5.5 million as the result of a 120 basis point decrease in
the average rate paid on such liabilities and a $27.1 million decrease
in the average balance of FHLB advances outstanding during the period.
Interest expense on subordinated debentures decreased $362,000 due to a
193 basis point decrease in the average rate paid on such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $4.0 million
during the quarter ended June 30, 2009, in response to an increase in
loans classified as substandard or loss and an increase in loan charge
offs related to the residential construction and development and
commercial real estate loan portfolios. Management determined that the
increased provision was appropriate due to the continued deterioration
in the real estate market. 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 31.6% of total classified assets at
June 30, 2009, 40.5% at September 30, 2008, and 36.0% at June 30, 2008.
22
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.
OTHER INCOME
Other income for the three months ended June 30, 2009, increased
$6.0 million from the same period in the prior year. Specifically, gain
on sale of loans held for sale increased $4.9 million due to increased
mortgage banking volume during the period. Provision for loss on real
estate owned decreased $400,000 due to a decrease in charge-offs of
foreclosed assets held for sale during the period. Customer service
fees and charges increased $679,000 due to an increase in miscellaneous
loan origination fees resulting from the increase in mortgage banking
volume. Gain on sale of securities available for sale increased
$548,000 due to the sale of corporate debt securities during the
quarter. These increases were partially offset by a $541,000 decrease
in other income due to a decrease in loan prepayment penalties and 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."
Other income for the nine months ended June 30, 2009, increased
$12.7 million from the same period in the prior year. Specifically,
gain on sale of loans held for sale increased $9.5 million due to
increased mortgage banking volume during the period. Provision for loss
on real estate owned decreased $1.0 million due to a decrease in charge-
offs of foreclosed assets held for sale during the period. Customer
service fees and charges increased $1.1 million due primarily to an
increase in miscellaneous loan origination fees resulting from the
increase in mortgage banking volume. Gain on sale of securities
available for sale increased $426,000 due to the sale of corporate debt
securities during the quarter. In addition, other income increased
$902,000 due to a $1.4 million increase related to recording the net
fair value of certain loan-related commitments in accordance with FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which was partially offset by decreases in loan prepayment
penalties and income from foreclosed assets held for sale. These
increases in other income were offset by a $171,000 decrease in loan
servicing fees decreased 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 June 30, 2009, increased $4.1 million from the same period in the
prior year. Specifically, compensation and fringe benefits increased
$958,000 due primarily to the addition of personnel in the Company's
information technology, mortgage banking, training, and loan servicing
departments. Commission-based mortgage banking compensation increased
$2.5 million due primarily to an increase in mortgage banking volume for
the period. Federal deposit insurance premium expense increased
$820,000 related primarily to the FDIC special assessment, which was
imposed on all insured institutions' assets minus Tier I capital as of
June 30, 2009. The special assessment will paid on September 30, 2009.
Total general and administrative expenses for the nine months ended
June 30, 2009, increased $7.5 million from the same period in the prior
year. Specifically, compensation and fringe benefits increased $1.5
million due primarily to the addition of personnel in the Company's
information technology, mortgage banking, training, and loan servicing
departments. Commission-based mortgage banking compensation increased
$4.6 million due primarily to an increase in mortgage banking volume for
the period. Advertising and business promotion expense increased
$367,000 resulting from an increase in mortgage banking volume for the
period. Federal deposit insurance premium expense increased $844,000
related primarily to the FDIC special assessment. Additionally, other
expense increased $345,000 due primarily to increases in legal fees
related to the Company's lending operations.
23
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. 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, 2013. 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 May 22, 2009, the Federal Deposit Insurance Corporation (FDIC)
adopted a final rule imposing a five basis point special assessment on
all insured financial institutions' assets minus its Tier I capital as
of June 30, 2009, to be collected on September 30, 2009. The rule also
states that an additional special assessment of up to five basis points
later in 2009 is probable, but the exact amount is uncertain.
REGULATORY CAPITAL REQUIREMENTS
At June 30, 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 June 30, 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 June 30, 2009 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 162,810
Adjustment for regulatory capital:
Intangible assets (2,696)
Disallowed portion of servicing assets
and deferred tax assets (33)
Reverse the effect of SFAS No. 115 (1,746)
---------
Tangible capital 158,335
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 158,335
Qualifying general valuation allowance 13,329
---------
Risk-based capital $ 171,664
=========
24
As of June 30, 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 $ 171,664 11.9% 115,498 >=8% 144,372 >=10%
Core capital to adjusted tangible assets 158,335 10.0% 63,478 >=4% 79,348 >=5%
Tangible capital to tangible assets 158,335 10.0% 23,804 >=1.5% -- --
Tier 1 capital to risk-weighted assets 158,335 11.0% -- -- 86,623 >=6%
LOANS TO ONE BORROWER
Institutions are prohibited from lending to any one borrower in
excess of 15% of the Bank's unimpaired capital plus unimpaired surplus,
or 25% of unimpaired capital plus unimpaired surplus if the loan is
secured by certain readily marketable collateral. Renewals that exceed
the loans-to-one-borrower limit are permitted if the original borrower
remains liable and no additional funds are disbursed. The Bank has
received regulatory approval from the OTS under 12 CFR 560.93 to
increase 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 June 30, 2009, the Bank had $100.5 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 June 30,
2009, the Bank has $246.7 million in brokered deposits, and it could
purchase up to $214.3 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.
25
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.
26
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
(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
27
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NASB Financial, Inc.
(Registrant)
August 7, 2009 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
August 7, 2009 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
28
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