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| NASB > SEC Filings for NASB > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
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, 2008, were $1,571.2
million, an increase of $64.7 million from September 30, 2007, 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, 2008, the Bank originated and purchased $681.8 million in mortgage loans held for sale, $298.9 million in mortgage loans held for investment, and $6.5 million in other loans. This total of $987.2 million in loans compares to $1,069.1 million in loans originated and purchased during the nine months ended June 30, 2007.
Loans held for sale as of June 30, 2008 were $71.7 million, and consisted entirely of mortgage loans held for sale with servicing released. All loans held for sale are carried at the lower of cost or fair value.
The Bank classifies problem assets as "substandard," "doubtful" or "loss." Substandard assets have one or more defined weaknesses, and it is possible that the Bank will sustain some loss unless the deficiencies are corrected. Doubtful assets have the same defects as substandard assets plus other weaknesses that make collection or full liquidation improbable. Assets classified as loss are considered uncollectible and of such little value that a specific loss allowance is warranted.
The following table summarizes the Bank's classified assets as reported to the OTS, plus any classified assets of the holding company. Dollar amounts are expressed in thousands.
6/30/08 9/30/07 6/30/07
-------------------------------------
Asset Classification:
Substandard $ 30,273 11,726 11,301
Doubtful -- -- --
Loss 215 357 427
-------------------------------------
30,488 12,083 11,728
Allowance for losses on
loans and real estate
owned (10,973) (8,301) (8,123)
-------------------------------------
$ 19,515 3,782 3,605
=====================================
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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.
6/30/08 9/30/07 6/30/07
----------------------------------------
Total Assets $ 1,571,172 1,506,483 1,535,846
========================================
Non-accrual loans $ 10,936 3,284 2,036
Troubled debt
restructurings -- -- 70
Net real estate and
other assets acquired
through foreclosure 6,230 6,511 7,631
----------------------------------------
Total $ 17,166 9,795 9,737
========================================
Percent of total assets 1.09% 0.65% 0.63%
========================================
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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 decreased $24.0 million
during the nine months ended June 30, 2008. The weighted average rate
on customer and brokered deposits as of June 30, 2008, was 3.51%, a
decrease from 4.22% as of June 30, 2007.
Advances from the FHLB were $546.1 million as of June 30, 2008, an increase of $87.2 million from September 30, 2007. During the nine- month period, the Bank borrowed $324.0 million of new advances and repaid $236.7 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, 2008. 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 $7.4 million as of June 30, 2008, a decrease of $2.1 million from September 30, 2007. This decrease is due to amounts paid for borrowers' taxes during the fourth calendar quarter of 2007.
Total stockholders' equity as of June 30, 2008, was $152.8 million (9.7% of total assets). This compares to $149.4 million (9.9% of total assets) at September 30, 2007. On a per share basis, stockholders' equity was $19.42 on June 30, 2008, compared to $18.99 on September 30, 2007.
The Company paid cash dividends on its common stock of $0.225 per share on November 30, 2007, February 22, 2008, and May 23, 2008. Subsequent to the quarter ended June 30, 2008, the Company announced a cash dividend of $0.225 per share to be paid on August 22, 2008, to stockholders of record as of August 1, 2008.
Total stockholders' equity as of June 30, 2008, includes an unrealized loss of $126,000 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).
Nine months ended
------------------------
6/30/08 6/30/07
------------------------
Return on assets 0.72% 1.06%
Return on equity 7.31% 10.58%
Equity-to-assets ratio 9.72% 9.71%
Dividend payout ratio 64.10% 45.78%
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RESULTS OF OPERATIONS - Comparison of three and nine months ended June 30, 2008 and 2007.
For the three months ended June 30, 2008, the Company had net income of $3,610,000 or $0.46 per share. This compares to net income of $3,786,000 or $0.47 per share for the quarter ended June 30, 2007.
For the nine months ended June 30, 2008, the Company had net income of $8,285,000 or $1.05 per share. This compares to net income of $12,129,000 or $1.48 per share for the nine months ended June 30, 2007.
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, 2008 and 2007. 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 6/30/08 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%
============================
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Nine months ended 6/30/07 As of
--------------------------- 6/30/07
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,342,913 74,237 7.37% 7.25%
Mortgage-backed securities 92,042 2,445 3.54% 4.24%
Securities 25,539 994 5.19% 4.25%
Bank deposits 6,955 239 4.58% 4.74%
--------------------------------------
Total earning assets 1,467,449 77,915 7.08% 7.01%
---------------------------
Non-earning assets 63,379
----------
Total $1,530,828
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 169,806 1,503 1.18% 1.03%
Customer and brokered
certificates of deposit 644,628 23,161 4.79% 5.08%
FHLB Advances 521,642 20,445 5.23% 5.14%
Subordinated debentures 18,500 974 7.01% 7.01%
Repurchase agreements 9,810 396 5.37% --%
--------------------------------------
Total costing liabilities 1,364,386 46,479 4.54% 4.61%
---------------------------
Non-costing liabilities 11,922
Stockholders' equity 154,520
----------
Total $1,530,828
==========
Net earning balance $ 103,063
==========
Earning yield less costing rate 2.54% 2.40%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,467,449 31,436 2.86%
============================
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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, 2008, compared to
nine months ended June 30, 2007
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (5,640) 1,365 (144) (4,419)
Mortgage-backed securities (14) (473) 4 (483)
Securities (184) 15 (1) (170)
Bank deposits (124) 58 (30) (96)
-----------------------------------------------
Net change in interest income (5,962) 965 (171) (5,168)
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (550) (140) 6 (684)
FHLB Advances (2,230) 544 (62) (1,748)
Subordinated debentures (180) 342 (65) 97
Repurchase agreements -- -- (396) (396)
-----------------------------------------------
Net change in interest expense (2,960) 746 (517) (2,731)
-----------------------------------------------
Decrease in net interest
margin $ (3,002) 219 346 (2,437)
===============================================
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Net interest margin before loan loss provision for the three months ended June 30, 2008, decreased $578,000 from the same period in the prior year. Specifically, interest income decreased $2.9 million due to a decrease in the average rate earned on interest-earning assets, which was partially offset by an increase in the average balance of such assets. The decrease in interest income was largely offset by a $2.3 million decrease in interest expense, which resulted primarily from decreases in the average rate paid on interest-costing liabilities.
Net interest margin before loan loss provision for the nine months ended June 30, 2008, decreased $2.4 million from the same period in the prior year. Specifically, interest income decreased $5.2 million, which was partially offset by a $2.7 million decrease in interest expense for the period. Interest on loans decreased $4.4 million as the result of a 56 basis point decrease in the average yield earned on loans outstanding during the period. The effect of this decrease was partially offset by a $24.7 million increase in the average balance of loans receivable. Interest on mortgage-backed securities decreased $483,000 due primarily to a $17.8 million decrease in the average balance of such securities. Interest on investment securities decreased $170,000 due primarily to a 96 basis point decrease in the average yield earned on such securities. Interest expense on FHLB advances decreased $1.7 million primarily as the result of a 57 basis point decrease in the average rate paid on such liabilities. The effect of this decrease was partially offset by a $13.9 million increase in the average balance of FHLB advances outstanding. Interest expense on customer and brokered deposit accounts decreased $684,000 due to a 71 basis point decrease in the average rate and $4.6 million decrease in the average balance of such interest- costing liabilities. Interest expense on securities sold under agreements to repurchase decreased $396,000 due to a $9.8 million decrease in the average balance of securities sold under agreements to repurchase.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $1.6 million
during the quarter ended June 30, 2008, due primarily to increases in
residential construction and development loans classified as
substandard. The Company recorded a provision for loan losses of
$700,000 during both the quarter ended December 31,2007 and the quarter
ended March 31, 2008, due to increases in loan charge-offs related to
the residential construction and development loan portfolio and
increases in commercial real estate loans and residential construction
and development loans classified as substandard. 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 36.0% of total classified
assets at June 30, 2008, 68.7% at September 30, 2007, and 69.3% at June
30, 2007.
Management believes that the provisions for loan losses is adequate. The provision can fluctuate based on changes in economic conditions, changes in the level of classified assets, changes in the amount of loan charge-offs and recoveries, or changes in other information available to management. Also, regulatory agencies review the Company's allowances for losses as a part of their examination process and they may require changes in loss provision amounts based on information available at the time of their examination.
OTHER INCOME
Other income for the three months ended June 30, 2008, increased
$914,000 from the same period in the prior year. Specifically, other
income increased $997,000 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. This was offset by a decrease in customer service
fees and charges of $134,000, which resulted primarily from a decrease
in miscellaneous loan origination fees resulting from the decrease in
mortgage banking volume.
Other income for the nine months ended June 30, 2008, decreased $2.3 million from the same period in the prior year. Specifically, gain on sale of loans held for sale decreased $1.4 million due to decreased mortgage banking volume during the period. Provision for loss on real estate owned increased $805,000 due to an increase in charge-offs of foreclosed assets held for sale during the period. Customer service fees and charges decreased $259,000 due to a decrease in miscellaneous loan origination fees resulting from the decrease in mortgage banking volume, and a decrease in appraisal fee income resulting from the elimination of the Company's internal appraisal department in March 2008. 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. These decreases were partially offset by a $122,000 increase in gain on sale of securities due to the redemption of Visa, Inc. common stock during their initial public offering in March 2008. In addition, other income increased $153,000 due to a $628,000 increase in the effect of recording the net fair value of certain loan-related commitments in accordance with FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was largely offset by decreases in income received on foreclosed assets held for sale, loan prepayment penalties, and official check processing fee income.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended June 30, 2008, decreased $53,000 from the same period in the prior
year. Specifically, other expense decreased $179,000 due primarily to
decreases in credit, appraisal, underwriting, and other costs related to
the consolidation of loan origination offices in fiscal 2007. This
decrease was partially offset by a $153,000 increase in compensation,
fringe benefits, and commission-based mortgage banking compensation due
primarily to an increase in mortgage banking spreads for the quarter.
Total general and administrative expenses for the nine months ended June 30, 2008, increased $152,000 from the same period in the prior year. Specifically, compensation, fringe benefits, and commission-based mortgage banking compensation increased $101,000 due primarily to an increase in mortgage banking spreads for the period. Premises and equipment expense increased $400,000 due primarily to costs related to a new loan origination system implemented in fiscal 2007. These increases were partially offset by a $283,000 decrease in other expense due to decreases in professional fees and other lending-related costs resulting from the consolidation of loan origination offices in fiscal 2007 and from the decrease in mortgage banking volume for the period.
REGULATION
The Bank is a member of the FHLB System and its customers' deposits are insured by the Deposit Insurance Fund ("DIF") of the FDIC. The Bank is subject to regulation by the OTS as its chartering authority. Since passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA" or the "Act"), the FDIC also has regulatory control over the Bank. The transactions of DIF-insured institutions are limited by statute and regulations that may require prior supervisory approval in certain instances. Institutions also must file reports with regulatory agencies regarding their activities and their financial condition. The OTS and FDIC make periodic examinations of the Bank to test compliance with the various regulatory requirements. The OTS can require an institution to re-value its assets based on appraisals and to establish specific valuation allowances. This supervision and regulation is intended primarily for the protection of depositors. Also, savings institutions are subject to certain reserve requirements under Federal Reserve Board regulations.
INSURANCE OF ACCOUNTS
The DIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured owner, with the exception of self-directed
retirement accounts, which are insured to a maximum of $250,000.
Deposit insurance premiums are determined using a Risk-Related Premium
Schedule ("RRPS"), a matrix which places each insured institution into
one of three capital groups and one of three supervisory groups.
Currently, deposit insurance premiums range from 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.
REGULATORY CAPITAL REQUIREMENTS
At June 30, 2008, 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, 2008,
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, 2008 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 155,776
Adjustment for regulatory capital:
Intangible assets (2,796)
Disallowed portion of servicing assets
and deferred tax assets (2,426)
. . .
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