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| NASB > SEC Filings for NASB > Form 10-Q on 9-Feb-2009 | All Recent SEC Filings |
9-Feb-2009
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 December 31, 2008, were $1,526.5
million, an increase of $9.7 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 three months ended December 31, 2008, the Bank originated and purchased $242.7 million in mortgage loans held for sale, $54.0 million in mortgage loans held for investment, and $948,000 in other loans. This total of $297.6 million in loans compares to $301.6 million in loans originated and purchased during the three months ended December 31, 2007.
Loans held for sale as of December 31, 2008 were $73.8 million, and consisted entirely of mortgage loans held for sale with servicing released. As of October 1, 2008, the Company elected to carry loans held for sale are at fair value, as permitted under FAS 159.
The Bank classifies problem assets as "substandard," "doubtful" or "loss." Substandard assets have one or more defined weaknesses, and it is possible that the Bank will sustain some loss unless the deficiencies are corrected. Doubtful assets have the same defects as substandard assets plus other weaknesses that make collection or full liquidation improbable. Assets classified as loss are considered uncollectible and of such little value that a specific loss allowance is warranted.
The following table summarizes the Bank's classified assets as reported to the OTS, plus any classified assets of the holding company. Dollar amounts are expressed in thousands.
12/31/08 9/30/08 12/31/07
-------------------------------------
Asset Classification:
Substandard $ 36,513 34,320 11,364
Doubtful -- -- --
Loss 1,231 1,442 791
-------------------------------------
37,744 35,762 12,155
Allowance for losses on
loans and real estate
owned (13,899) (14,476) (9,130)
-------------------------------------
$ 23,845 21,286 3,025
=====================================
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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.
12/31/08 9/30/08 12/31/07
----------------------------------------
Total Assets $ 1,526,454 1,516,761 1,528,729
========================================
Non-accrual loans $ 15,297 35,075 7,998
Troubled debt
restructurings -- -- --
Net real estate and
other assets acquired
through foreclosure 9,315 6,038 3,439
----------------------------------------
Total $ 24,612 41,113 11,437
========================================
Percent of total assets 1.61% 2.71% 0.75%
========================================
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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 increased $65.9 million
during the three months ended December 31, 2008. The weighted average
rate on customer and brokered deposits as of December 31, 2008, was
3.26%, a decrease from 4.21% as of December 31, 2007.
Advances from the FHLB were $496.1 million as of December 31, 2008, a decrease of $54.0 million from September 30, 2008. During the three- month period, the Bank borrowed $105.0 million of new advances and repaid $159.0 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 December 31, 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 $4.7 million as of December 31, 2008, a decrease of $5.0 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 December 31, 2008, was $154.4 million (10.1% 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 $19.62 on December 31, 2008, 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. Subsequent to the quarter ended December 31, 2008, the Company announced a cash dividend of $0.225 per share to be paid on February 27, 2009, to stockholders of record as of February 6, 2009.
Total stockholders' equity as of December 31, 2008, includes an unrealized loss of $313,000 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).
Three months ended
------------------------
12/31/08 12/31/07
------------------------
Return on assets 0.96% 0.49%
Return on equity 9.51% 5.00%
Equity-to-assets ratio 10.11% 9.79%
Dividend payout ratio 48.52% 94.70%
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RESULTS OF OPERATIONS - Comparison of three months ended December 31, 2008 and 2007.
For the three months ended December 31, 2008, the Company had net income of $3,648,000 or $0.46 per share. This compares to net income of 1,869,000 or $0.24 per share for the quarter ended December 31, 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 three months ended December 31, 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.
Three months ended 12/31/08 As of
--------------------------- 12/31/08
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,341,684 22,219 6.62% 6.14%
Mortgage-backed securities 56,639 545 3.85% 4.20%
Securities 25,098 104 1.66% 3.01%
Bank deposits 44,364 87 0.78% 0.01%
--------------------------------------
Total earning assets 1,467,785 22,955 6.26% 6.00%
---------------------------
Non-earning assets 64,117
----------
Total $1,531,902
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 163,499 420 1.03% 0.80%
Customer and brokered
certificates of deposit 656,030 6,479 3.95% 3.87%
FHLB Advances 522,146 5,161 3.95% 3.33%
Subordinated debentures 25,000 313 5.01% 5.12%
--------------------------------------
Total costing liabilities 1,366,675 12,373 3.62% 3.32%
---------------------------
Non-costing liabilities 12,287
Stockholders' equity 152,940
----------
Total $1,531,902
==========
Net earning balance $ 101,110
==========
Earning yield less costing rate 2.64% 2.68%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,467,785 10,582 2.88%
============================
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Three months ended 12/31/07 As of
--------------------------- 12/31/07
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,354,604 24,514 7.24% 7.02%
Mortgage-backed securities 79,201 670 3.38% 4.16%
Securities 25,351 297 4.69% 4.50%
Bank deposits 6,455 64 3.97% 3.74%
--------------------------------------
Total earning assets 1,465,611 25,545 6.97% 6.81%
---------------------------
Non-earning assets 62,051
----------
Total $1,527,662
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 166,975 635 1.52% 1.22%
Customer and brokered
certificates of deposit 640,832 7,978 4.98% 5.04%
FHLB Advances 525,230 6,412 4.88% 4.87%
Subordinated debentures 25,000 431 6.90% 6.63%
--------------------------------------
Total costing liabilities 1,358,037 15,456 4.55% 4.51%
---------------------------
Non-costing liabilities 20,061
Stockholders' equity 149,564
----------
Total $1,527,662
==========
Net earning balance $ 107,574
==========
Earning yield less costing rate 2.42% 2.30%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,465,611 10,089 2.75%
============================
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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.
Three months ended December 31, 2008, compared to
three months ended December 31, 2007
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (2,100) (234) 39 (2,295)
Mortgage-backed securities 93 (191) (27) (125)
Securities (192) (3) 2 (193)
Bank deposits (51) 376 (302) 23
-----------------------------------------------
Net change in interest income (2,250) (52) (288) (2,590)
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (1,797) 125 (42) (1,714)
FHLB Advances (1,221) (38) 8 (1,251)
Subordinated debentures (118) -- -- (118)
-----------------------------------------------
Net change in interest expense (3,136) 87 (34) (3,083)
-----------------------------------------------
Increase in net interest
margin $ 886 (139) (254) 493
===============================================
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Net interest margin before loan loss provision for the three months ended December 31, 2008, increased $493,000 from the same period in the prior year. Specifically, interest income decreased $2.6 million, which was offset by a $3.1 million decrease in interest expense for the period. Interest on loans decreased $2.3 million as the result of a 62 basis point decrease in the average yield and a $12.9 decrease in the average balance of loans receivable outstanding during the period. Interest on mortgage-backed securities decreased $125,000 due primarily to a $22.6 million decrease in the average balance of such securities. Interest on investment securities decreased $193,000 due primarily to a 303 basis point decrease in the average yield earned on such securities. Interest expense on customer and brokered deposit accounts decreased $1.7 million due primarily to a 95 basis point decrease in the average rate paid on such interest-costing liabilities. Interest expense on FHLB advances decreased $1.3 million primarily as the result of a 93 basis point decrease in the average rate paid on such liabilities. Interest expense on subordinated debentures decreased $118,000 due to a 189 basis point decrease in the average rate paid on such liabilities.
PROVISION FOR LOAN LOSSES
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 40.0% of total classified assets at
December 31, 2008, 36.8% at September 30, 2008, and 75.1% at December
31, 2007.
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 December 31, 2008,
increased $2.9 million from the same period in the prior year.
Specifically, gain on sale of loans held for sale increased $3.1 million
due to increased mortgage banking volume during the period. Provision
for loss on real estate owned decreased $300,000 due to a decrease in
charge-offs of foreclosed assets held for sale during the quarter.
Customer service fees and charges increased $102,000 due to an increase
in miscellaneous loan origination fees resulting from the increase in
mortgage banking volume. These increases were offset by a $158,000
decrease in loan servicing fees due 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. In addition, other income decreased $460,000 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," and to decreases in loan
prepayment penalties and official check processing fee income.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended December 31, 2008, increased $961,000 from the same period in the
prior year. Specifically, compensation, fringe benefits, and
commission-based mortgage banking compensation increased $844,000 due
primarily to an increase in mortgage banking volume for the period.
Advertising and business promotion expense increased $268,000 resulting
from an increase in mortgage banking volume for the quarter. These
increases were partially offset by a $96,000 decrease in premises and
equipment expense resulting primarily from a decrease in rent and
maintenance costs related to the continued consolidation of loan
origination offices in fiscal 2008.
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, 2009. Deposit insurance premiums are determined using a Risk-
Related Premium Schedule ("RRPS"), a matrix which places each insured
institution into one of three capital groups and one of three
supervisory groups. Currently, deposit insurance premiums range from 5
to 43 basis points of the institution's total deposit accounts,
depending on the institution's risk classification. The Bank is
currently considered "well capitalized," which is the most favorable
capital group and supervisory subgroup. DIF-insured institutions are
also assessed a premium to service the interest on Financing Corporation
("FICO") debt.
REGULATORY CAPITAL REQUIREMENTS
At December 31, 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 December 31,
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 December 31, 2008 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 155,448
Adjustment for regulatory capital:
Intangible assets (2,746)
Disallowed portion of servicing assets
and deferred tax assets (6,281)
Reverse the effect of SFAS No. 115 313
---------
Tangible capital 146,734
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 146,734
Qualifying general valuation allowance 11,840
---------
Risk-based capital $ 158,574
=========
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As of December 31, 2008
-------------------------------------------------------------------
Minimum required for Minimum required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 158,574 12.2% 103,703 >=8% 129,628 >=10%
Core capital to adjusted tangible assets 146,734 9.8% 59,811 >=4% 74,764 >=5%
Tangible capital to tangible assets 146,734 9.8% 22,429 >=1.5% -- --
Tier 1 capital to risk-weighted assets 146,734 11.3% -- -- 77,777 >=6%
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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
. . .
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