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NASB > SEC Filings for NASB > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for NASB FINANCIAL INC


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

We may from time to time make written or oral "forward-looking statements," including statements contained in our filings with the Securities and Exchange Commission ("SEC"). These forward-looking statements may be included in this quarterly report and in other communications by the Company, which are made in good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," and similar expressions are intended to identify forward-looking statements. The following factors, as well as those discussed under Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2012, filed with the Securities and Exchange Commission, among others, could cause our financial performance to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:

the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

the effects of, and changes in, foreign and military policy of the United States Government; inflation, interest rate, market and monetary fluctuations;

the timely development and acceptance of our new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services;

the willingness of users to substitute competitors' products and services for our products and services;

our success in gaining regulatory approval of our products, services and branching locations, when required;

the impact of changes in financial services' laws and regulations, including laws concerning taxes, banking, securities and insurance;

technological changes;

acquisitions and dispositions;

changes in consumer spending and saving habits;

our success at managing the risks involved in our business; and

changes in the fair value or economic value of, impairments of, and risks associated with the Bank's investments in real estate owned, mortgage backed securities and other assets.

This list of important factors is not all-inclusive. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. For further discussion of these factors, see "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2012, filed with the Securities and Exchange Commission, and in our Quarterly Reports, if applicable.

GENERAL

NASB Financial, Inc. was formed in 1998 as a unitary thrift holding company of North American Savings Bank, F.S.B. The Bank is a federally chartered stock savings bank, with its headquarters in the Kansas City area. The Bank began operating in 1927, and became a member of the Federal Home Loan Bank of Des Moines ("FHLB") in 1940. Its customer deposit accounts are insured by the Deposit Insurance Fund ("DIF"), a division of the Federal Deposit Insurance Corporation ("FDIC"). The Bank converted to a stock form of ownership in September 1985.

The Bank's primary market area includes the counties of Jackson, Cass, Clay, Buchanan, Andrew, Platte, and Ray in Missouri, and Johnson and Wyandotte counties in Kansas. The Bank currently has nine retail deposit offices in Missouri including one each in Grandview, Lee's Summit, Independence, Harrisonville, Excelsior Springs, Platte City, and St. Joseph, and two in Kansas City. North American also operates loan production offices in Kansas City, Lee's Summit and Springfield in Missouri. The economy of the Kansas City area is diversified with major employers in agribusiness, greeting cards, automobile production, transportation, telecommunications, and government.


The Bank's principal business is to attract deposits from the general public and to originate real estate loans, other loans and short-term investments. The Bank obtains funds mainly from deposits received from the general public, sales of loans and loan participations, advances from the FHLB, and principal repayments on loans and mortgage-backed securities ("MBS"). The Bank's primary sources of income include interest on loans, interest on MBS, interest on investment securities, customer service fees, and mortgage banking fees. Its primary expenses are interest payments on customer deposit accounts and borrowings and normal operating costs.

FINANCIAL CONDITION

Assets

The Company's total assets as of March 31, 2013 were $1,179.0 million, a decrease of $61.8 million from September 30, 2012, the prior fiscal year end.

Loans receivable held for investment were $702.4 million as of March 31, 2013, a decrease of $64.2 million during the six month period. The weighted average rate on such loans as of March 31, 2013, was 5.61%, a decrease from 5.88% as of March 31, 2012.

Loans receivable held for sale as of March 31, 2013, were $100.2 million, a decrease of $63.7 million from September 30, 2012. This portfolio consists of residential mortgage loans originated by the Bank's mortgage banking division that will be sold with servicing released. The Company has elected to carry loans held for sale at fair value, as permitted under GAAP.

As the Bank originates mortgage loans each month, management evaluates the existing market conditions to determine which loans will be held in the Bank's portfolio and which loans will be sold in the secondary market. Loans sold in the secondary market can be sold with servicing released or converted into MBS and sold with the loan servicing retained by the Bank. At the time of each loan commitment, a decision is made to either hold the loan for investment, hold it for sale with servicing retained, or hold it for sale with servicing released. Management monitors market conditions to decide whether loans should be held in portfolio or sold and if sold, which method of sale is appropriate. During the six months ended March 31, 2013, the Bank originated and purchased $1,044.1 million in mortgage loans held for sale, $58.0 million in mortgage loans held for investment, and $1.1 million in other loans. This total of $1,103.2 million in loans compares to $889.0 million in loans originated and purchased during the six months ended March 31, 2012.

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 little value.

The following table summarizes the Bank's classified assets, including foreclosed assets held for sale, as reported to their primary regulator, plus any classified assets of the holding company. Dollar amounts are expressed in thousands.

                                        3/31/13        9/30/12        3/31/12
           Asset Classification:
           Substandard                 $ 113,368        156,117        167,826
           Doubtful                          400            777             -
           Loss*                              -              -              -

                                         113,768        156,894        167,826
           Allowance for loan losses     (20,726 )      (31,829 )      (36,797 )

                                       $  93,042        125,065        131,029

* Assets classified as loss represent the amount of measured impairment related to loans and foreclosed assets held for sale that have been deemed impaired. Prior to quarter ended March, 31 2012, the Bank established a specific valuation allowance for such assets. In conjunction with the adoption of the Call Report during the quarter ended March 31, 2012, such assets are charged-off against the ALLL at the time they are deemed to be a "confirmed loss."


The following table summarizes non-performing assets, troubled debt restructurings, and real estate acquired through foreclosure, net of specific loss allowances. Dollar amounts are expressed in thousands.

                                                 3/31/13           9/30/12           3/31/12
Total Assets                                   $ 1,179,036         1,240,826         1,192,208

Non-accrual loans                                   50,178            74,767            73,127
Performing troubled debt restructurings             29,511            15,926            27,636
Net real estate and other assets acquired
through foreclosure                                 20,597            17,040            21,155

Total                                              100,286           107,733           121,918

Percent of total assets                        $      8.51 %            8.68 %           10.23 %

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 recognizes the inherent risks associated with lending activities for individually identified problem assets as well as the entire homogenous and non-homogenous loan portfolios. Management believes that the specific loss allowances and ALLL are adequate. While management uses available information to determine these allowances, future provisions may be necessary because of changes in economic conditions or changes in the information available to management. Also, regulatory agencies 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.

With the exception of certain residential loans, which are not deemed impaired until they reach 180 days past due, loans in non-accrual status are considered impaired. (At March 31, 2013, residential loans of $1.1 million in non-accrual status were not deemed impaired.) Once a loan has been deemed impaired, the impairment must be measured by comparing the recorded investment in the loan to the present value of the estimated future cash flows discounted at the loan's effective rate, or to the fair value of the loan based on the loan's observable market price, or to the fair value of the collateral if the loan is collateral dependent. Any measured impairment that is deemed a "confirmed loss" is charged off and netted from the respective loan balance. For collateral dependent loans, which make up the majority of the Bank's impaired loans, a "confirmed loss" is generally the amount by which the loan's recorded investment exceeds the fair value of its collateral. Therefore, risks associated with non-accrual loans have been addressed within Bank's quarterly analysis of the adequacy of its ALLL, as essentially all were individually analyzed for impairment.

If loans classified as substandard are also impaired, they are individually analyzed for impairment, as noted above. At March 31, 2013, $75.8 million of loans classified as substandard have also been deemed impaired. In addition, the Bank utilizes a qualitative adjustment related to changes and trends in past due, non-accrual, and adversely classified loans. This adjustment is applied to the various pools of unimpaired loans when determining adequacy of the Bank's ALLL.

Investment securities were $245.0 million as of March 31, 2013, an increase of $30.8 million from September 30, 2012. During the six month period, the Bank purchased $52.5 million of securities available for sale and received principal repayments related to such securities of $20.0 million. There were no sales of investment securities during the six month period ended March 31, 2013.

Mortgage-backed securities were $12.3 million as of March 31, 2013, a decrease of $14.2 million from the prior year end. During the six month period, the Bank sold $10.8 million of mortgage-backed securities held to maturity following significant deterioration in the issuer's creditworthiness. There were no sales from the Company's portfolio of mortgage-backed securities available for sale during the six month period ended March 31, 2013. The average yield on the mortgage-backed securities portfolio was 3.67% at March 31, 2013, a decrease from 4.78% at March 31, 2012.


The Company's investment in LLCs, which is accounted for using the equity method, was $16.9 million at March 31, 2013, a decrease of $294,000 from September 30, 2012. During the year ended September 30, 2012, the Company recorded a $200,000 impairment charge related to its investment in LLCs. There have been no events subsequent to September 30, 2012, that would indicate an additional impairment in value of the Company's investment in LLCs at March 31, 2013.

Liabilities and Equity

Customer and brokered deposit accounts decreased $75.0 million during the six months ended March 31, 2013. This decrease was due to a $128.1 million decrease in certificates of deposits during the period, which was partially offset by increases in savings, money market, and checking accounts. The weighted average rate on customer and brokered deposits as of March 31, 2013, was 0.60%, a decrease from 1.15% as of March 31, 2012.

Advances from the FHLB were $125.0 million as of March 31, 2013, a decrease of $2.0 million from September 30, 2012. During the six month period, the Bank borrowed $25.0 million of new advances and repaid $27.0 million. Management regularly uses FHLB advances as an alternate funding source to provide operating liquidity and to fund the origination and purchase of mortgage loans.

Subordinated debentures were $25.8 million as of March 31, 2013. Such debentures resulted from the issuance of 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 $4.8 million as of March 31, 2013, a decrease of $3.9 million from September 30, 2012. This decrease is due to amounts paid for borrowers' taxes during the fourth calendar quarter of 2012.

Total stockholders' equity as of March 31, 2013, was $190.3 million (16.1% of total assets). This compares to $171.5 million (13.8% of total assets) at September 30, 2012. On a per share basis, stockholders' equity was $24.19 on March 31, 2013, compared to $21.80 on September 30, 2012.

The Company did not pay any cash dividends to its stockholders during the six month period ended March 31, 2013. In accordance with the agreement, which is described more fully in Footnote 14, Regulatory Agreements, the Company is restricted from the payment of dividends or other capital distributions during the period of the agreement without prior written consent from its primary regulator.

Total stockholders' equity as of March 31, 2013, includes an unrealized gain, net of deferred income taxes, on available for sale securities of $1.8 million. 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).



                                               Six months ended
                                            3/31/13       3/31/12
                   Return on assets             3.20 %        0.87 %
                   Return on equity            21.38 %        6.93 %
                   Equity-to-assets ratio      16.14 %       13.13 %
                   Dividend payout ratio          -  %          -  %

RESULTS OF OPERATIONS - Comparison of three and six months ended March 31, 2013 and 2012.

For the three months ended March 31, 2013, the Company had net income of $11.0 million or $1.40 per share. This compares to a net income of $375,000 or $0.05 per share for the three month period ended March 31, 2012.

For the six months ended March 31, 2013, the Company had net income of $19.3 million or $2.46 per share. This compares to a net income of $5.3 million or $0.68 per share for the six month period ended March 31, 2012.


Net Interest Margin

The Company's net interest margin is comprised of the difference ("spread") between interest income on loans, MBS and investments and the interest cost of customer and brokered deposits and other borrowings. Management monitors net interest spreads and, although constrained by certain market, economic, and competition factors, it establishes loan rates and customer deposit rates that maximize net interest margin.

The following table presents the total dollar amounts of interest income and expense on the indicated amounts of average interest-earning assets or interest-costing liabilities for the six months ended March 31, 2013 and 2012. Average yields reflect reductions due to non-accrual loans. Once a loan becomes 90 days delinquent, or when full payment of interest and principal is not expected, any interest that has accrued up to that time is reversed and no further interest income is recognized unless the loan is paid current. Average balances and weighted average yields for the periods include all accrual and non-accrual loans. The table also presents the interest-earning assets and yields for each respective period. Dollar amounts are expressed in thousands.

                                             Six months ended 3/31/13               As of              Six months ended 3/31/12               As of
                                                                                   3/31/13                                                   3/31/12
                                         Average                     Yield/        Yield/          Average                     Yield/        Yield/
                                         Balance       Interest       Rate          Rate           Balance       Interest       Rate          Rate
Interest-earning assets
Loans                                  $   843,897        24,074        5.71 %         5.33 %    $   995,651        30,163        6.06 %         5.59 %
Mortgage-backed securities                  24,559           381        3.10 %         3.67 %         36,123           962        5.33 %         4.78 %
Securities                                 252,681         2,048        1.62 %         1.57 %         63,153         1,466        4.64 %         2.19 %
Bank deposits                               19,568             3        0.03 %         0.01 %         19,137             6        0.06 %         0.01 %

Total earning assets                     1,140,705        26,506        4.65 %         4.23 %      1,114,064        32,597        5.85 %         5.26 %

Non-earning assets                          73,425                                                    98,596

Total                                  $ 1,214,130                                               $ 1,212,660

Interest-costing liabilities
Customer checking and savings
deposit accounts                       $   312,204           701        0.45 %         0.41 %    $   258,090           610        0.47 %         0.43 %
Customer and brokered certificates
of deposit                                 543,037         2,408        0.89 %         0.74 %        587,151         4,304        1.47 %         1.47 %
FHLB Advances                              139,006         1,063        1.53 %         1.66 %        172,865         1,201        1.39 %         1.79 %
Subordinated debentures                     25,000           254        2.02 %         1.95 %         25,000           266        2.13 %         2.20 %
Other borrowings                               301             8        5.32 %         5.00 %             -             -           -  %           -  %

Total costing liabilities                1,019,548         4,434        0.87 %         0.77 %      1,043,106         6,381        1.22 %         1.25 %

Non-costing liabilities                     15,115                                                    13,920
Stockholders' equity                       179,467                                                   155,634

Total                                  $ 1,214,130                                               $ 1,212,660

Net earning balance                        121,157                                                    70,958

Earning yield less costing rate                                         3.78 %         3.46 %                                     4.63 %         4.01 %

Average interest-earning assets, net
interest, and net yield spread on
average interest-earning assets        $ 1,140,705        22,072        3.87 %                   $ 1,114,064        26,216        4.71 %


The following table provides information regarding changes in interest income and interest expense. For each category of interest-earning asset and interest-costing liability, information is provided on changes attributable to
(1) changes in rates (change in rate multiplied by the old volume), and
(2) changes in volume (change in volume multiplied by the old rate), and
(3) changes in rate and volume (change in rate multiplied by the change in volume). Average balances, yields and rates used in the preparation of this analysis come from the preceding table. Dollar amounts are expressed in thousands.

                                                      Six months ended March 31, 2013, compared to
                                                            six months ended March 31, 2012
                                                                                    Yield/
                                                  Yield             Volume          Volume        Total
Components of interest income:
Loans                                          $    (1,742 )           (4,598 )         251        (6,089 )
Mortgage-backed securities                            (403 )             (308 )         130          (581 )
Securities                                            (954 )            4,397        (2,861 )         582
Bank deposits                                           (3 )               -             -             (3 )

Net change in interest income                       (3,102 )             (509 )      (2,480 )      (6,091 )

Components of interest expense:
Customer and brokered deposit accounts              (1,817 )               58           (46 )      (1,805 )
FHLB Advances                                          121               (235 )         (24 )        (138 )
Subordinated debentures                                (13 )               -              1           (12 )
Other borrowings                                        -                  -              8             8

Net change in interest expense                      (1,709 )             (177 )         (61 )      (1,947 )

Increase in net interest margin                $    (1,393 )             (332 )      (2,419 )      (4,144 )

Net interest margin before loan loss provision for the six months ended March 31, 2013, decreased $4.1 million from the same period in the prior year. Specifically, interest income decreased $6.0 million, which was offset by a $1.9 million decrease in interest expense for the period. Interest on loans decreased $6.1 million as the result of a $151.8 million decrease in the average balance of loans receivable outstanding during the period and a 35 basis point decrease in the average rate earned on such loans during the period. Interest on mortgage-backed securities decreased $581,000 due to an $11.6 million decrease in the average balance of mortgage-backed securities during the period and a 223 basis point decrease in the average rate earned on such securities during the period. Interest earned on investment securities increased $582,000 resulting from a $189.5 million increase in the average balance of such securities during the period, the effect of which was offset by a 302 basis point decrease in the average rate earned on such securities. Interest expense on customer and brokered deposit accounts decreased $1.8 million due to a 43 basis point decrease in the average rate paid on such liabilities. Interest expense on FHLB advances decreased $138,000 as the result a $33.9 million decrease in the average balance of advances outstanding during the period, the effect of which was partially offset by a 14 basis point increase in the average rate paid of such liabilities.

Provision for Loan Losses

The Company recorded a negative provision for loan losses of $9.6 million during the six month period. Based upon management's analysis, the resulting allowance for loan losses of $20.7 million is adequate at March 31, 2013.

The negative provision for loan loss for the current quarter was based upon the Bank's ALLL methodology, which contains both qualitative and quantitative factors. Specifically, activity during the quarter reflected in quantitative factors included the following:

The Bank's portfolio of loans held to maturity decreased $64.2 million during the six month period, to $702.4 million. This decrease consisted almost entirely of declines within the Bank's commercial real estate and construction and land development portfolios, which historically have experienced higher credit losses than the Bank's other portfolios.

The level of criticized loans (those classified as special mention, substandard, or doubtful) decreased $48.2 million during the six month period. Of this decline, $36.4 million related to loans within the Bank's commercial real estate and construction and land development portfolios.

The Bank's loss experience during the period was much better than the previous 36 months. During the six month period ended March 31, 2013, the Bank recorded net charge-offs of $1.5 million.



The level of nonperforming loans decreased $24.6 million during the six month period. Similar to the decrease in gross loan balances, this decline consisted almost entirely of loans within the Bank's commercial real estate and construction and land development portfolios.

. . .

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