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NASB > SEC Filings for NASB > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for NASB FINANCIAL INC


9-Aug-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 June 30, 2013 were $1,142.4 million, a decrease of $98.4 million from September 30, 2012, the prior fiscal year end.

Loans receivable held for investment were $695.6 million as of June 30, 2013, a decrease of $71.0 million during the nine month period. This decrease consisted almost entirely of repayments within the Bank's commercial real estate and construction and land development portfolios. The weighted average rate on such loans as of June 30, 2013, was 5.42%, a decrease from 5.86% as of June 30, 2012.

Loans receivable held for sale as of June 30, 2013, were $104.7 million, a decrease of $59.2 million from September 30, 2012, due primarily to decreases in origination volume during the current quarter. 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 nine months ended June 30, 2013, the Bank originated and purchased $1,494.9 million in mortgage loans held for sale, $108.7 million in mortgage loans held for investment, and $1.7 million in other loans. This total of $1,605.3 million in loans compares to $1,359.6 million in loans originated and purchased during the nine months ended June 30, 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.

                                        6/30/13        9/30/12        6/30/12
           Asset Classification:
           Substandard                 $  90,475        156,117        153,463
           Doubtful                          655            777            948
           Loss                               -              -              -

                                          91,130        156,894        154,411
           Allowance for loan losses     (20,650 )      (31,829 )      (34,816 )

                                       $  70,480        125,065        119,595


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.

                                                 6/30/13           9/30/12           6/30/12
Total Assets                                   $ 1,142,405         1,240,826         1,220,569

Non-accrual loans                                   36,728            74,767            63,360
Performing troubled debt restructurings             33,313            15,926            18,501
Net real estate and other assets acquired
through foreclosure                                 13,007            17,040            17,488

Total                                               83,048           107,733            99,349

Percent of total assets                        $      7.27 %            8.68 %            8.14 %

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 June 30, 2013, residential loans of $1.7 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 June 30, 2013, $63.4 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 $239.7 million as of June 30, 2013, an increase of $25.5 million from September 30, 2012. During the nine month period, the Bank purchased $72.5 million of securities available for sale and received principal repayments related to such securities of $42.5 million. There were no sales of investment securities during the nine month period ended June 30, 2013.

Mortgage-backed securities were $10.9 million as of June 30, 2013, a decrease of $15.6 million from the prior year end. During the nine month period ended June 30, 2013 and 2012, the Bank sold $10.8 million and $859,000 of mortgage-backed securities held to maturity, respectively, following significant deterioration in the issuer's creditworthiness. The average yield on the mortgage-backed securities portfolio was 3.68% at June 30, 2013, a decrease from 4.85% at June 30, 2012.

The Company's investment in LLCs, which is accounted for using the equity method, was $16.7 million at June 30, 2013, a decrease of $555,000 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 June 30, 2013.


Liabilities and Equity

Customer and brokered deposit accounts decreased $91.0 million during the nine months ended June 30, 2013. This decrease was due to a $143.3 million decrease in certificates of deposits during the period, which was partially offset by increases in savings, money market, and checking accounts. The decrease in customer and brokered deposit accounts is commensurate with decreases in loans receivable held for sale and loans receivable held for investment during the nine month period. The weighted average rate on customer and brokered deposits as of June 30, 2013, was 0.56%, a decrease from 0.98% as of June 30, 2012.

Advances from the FHLB were $100.0 million as of June 30, 2013, a decrease of $27.0 million from September 30, 2012. During the nine month period, the Bank borrowed $25.0 million of new advances and repaid $52.0 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, 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 $6.5 million as of June 30, 2013, a decrease of $2.3 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 June 30, 2013, was $190.6 million (16.7% 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 $24.22 on June 30, 2013, compared to $21.80 on September 30, 2012.

The Company did not pay any cash dividends to its stockholders during the nine month period ended June 30, 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 June 30, 2013, includes an unrealized gain, net of deferred income taxes, on available for sale securities of $275,000. 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
                                            6/30/13       6/30/12
                  Return on assets              2.36 %        1.12 %
                  Return on equity             15.55 %        8.87 %
                  Equity-to-assets ratio       16.68 %       13.21 %
                  Dividend payout ratio           -  %          -  %

RESULTS OF OPERATIONS - Comparison of three and nine months ended June 30, 2013 and 2012.

For the three months ended June 30, 2013, the Company had net income of $1.8 million or $0.23 per share. This compares to a net income of $5.1 million or $0.64 per share for the three month period ended June 30, 2012.

For the nine months ended June 30, 2013, the Company had net income of $21.1 million or $2.68 per share. This compares to a net income of $10.4 million or $1.32 per share for the nine month period ended June 30, 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 nine months ended June 30, 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.

                                                                                    As of                                                     As of
                                             Nine months ended 6/30/13             6/30/13             Nine months ended 6/30/12             6/30/12
                                         Average                     Yield/        Yield/          Average                     Yield/        Yield/
                                         Balance       Interest       Rate          Rate           Balance       Interest       Rate          Rate
Interest-earning assets
Loans                                  $   826,849        34,954        5.64 %         5.16 %    $   971,111        43,817        6.02 %         5.57 %
Mortgage-backed securities                  21,452           484        3.01 %         3.68 %         34,616         1,377        5.30 %         4.85 %
Securities                                 252,700         3,155        1.66 %         1.77 %         93,102         2,142        3.07 %         1.72 %
Bank deposits                               18,371             4        0.03 %         0.22 %         20,796            11        0.07 %         0.01 %

Total earning assets                     1,119,372        38,597        4.60 %         4.26 %      1,119,625        47,347        5.64 %         4.87 %

Non-earning assets                          74,741                                                    95,361

Total                                  $ 1,194,113                                               $ 1,214,986

Interest-costing liabilities
Customer checking and savings
deposit accounts                       $   325,875         1,088        0.45 %         0.40 %    $   263,667           950        0.48 %         0.46 %
Customer and brokered certificates
of deposit                                 511,226         3,200        0.83 %         0.71 %        589,367         6,205        1.40 %         1.24 %
FHLB Advances                              132,305         1,573        1.59 %         1.69 %        166,007         1,859        1.49 %         1.75 %
Subordinated debentures                     25,000           378        2.02 %         1.93 %         25,000           401        2.14 %         2.12 %
Other borrowings                               337            13        5.14 %         5.00 %             -             -           -  %           -  %

Total costing liabilities                  994,743         6,252        0.84 %         0.73 %      1,044,041         9,415        1.20 %         1.12 %

Non-costing liabilities                     15,642                                                    14,016
Stockholders' equity                       183,728                                                   156,929

Total                                  $ 1,194,113                                               $ 1,214,986

Net earning balance                        124,629                                                    75,584

Earning yield less costing rate                                         3.76 %         3.53 %                                     4.44 %         3.75 %

Average interest-earning assets, net
interest, and net yield spread on
average interest -earning assets       $ 1,119,372        32,345        3.85 %                   $ 1,119,625        37,932        4.52 %


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, 2013, compared to
                                                            nine months ended June 30, 2012
                                                                                    Yield/
                                                  Yield             Volume          Volume        Total
Components of interest income:
Loans                                          $    (2,768 )           (6,513 )         418        (8,863 )
Mortgage-backed securities                            (595 )             (523 )         225          (893 )
Securities                                            (985 )            3,675        (1,677 )       1,013
Bank deposits                                           (6 )               (1 )          -             (7 )

Net change in interest income                       (4,354 )           (3,362 )      (1,034 )      (8,750 )

Components of interest expense:
Customer and brokered deposit accounts              (2,815 )             (134 )          82        (2,867 )
FHLB Advances                                          125               (377 )         (34 )        (286 )
Subordinated debentures                                (23 )               -             -            (23 )
Other borrowings                                        -                  -             13            13

Net change in interest expense                      (2,713 )             (511 )          61        (3,163 )

Increase in net interest margin                $    (1,641 )           (2,851 )      (1,095 )      (5,587 )

Net interest margin before loan loss provision for the nine months ended June 30, 2013, decreased $5.6 million from the same period in the prior year. Specifically, interest income decreased $8.8 million, which was offset by a $3.2 million decrease in interest expense for the period. Interest on loans decreased $8.9 million as the result of a $144.3 million decrease in the average balance of loans receivable outstanding during the period and a 38 basis point decrease in the average rate earned on such loans during the period. Interest on mortgage-backed securities decreased $893,000 due to an $13.2 million decrease in the average balance of mortgage-backed securities during the period and a 229 basis point decrease in the average rate earned on such securities during the period. Interest earned on investment securities increased $1.0 million resulting from a $159.6 million increase in the average balance of such securities during the period, the effect of which was partially offset by a 141 basis point decrease in the average rate earned on such securities. Interest expense on customer and brokered deposit accounts decreased $2.9 million due primarily to a 44 basis point decrease in the average rate paid on such liabilities. Interest expense on FHLB advances decreased $286,000 as the result a $33.7 million decrease in the average balance of advances outstanding during the period, the effect of which was partially offset by a 10 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 nine month period. Based upon management's analysis, the resulting allowance for loan losses of $20.7 million is adequate at June 30, 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 $71.0 million during the nine month period, to $695.6 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 $66.1 million during the nine month period. Of this decline, $51.2 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 nine month period ended June 30, 2013, the Bank recorded net charge-offs of $1.6 million.



The level of nonperforming loans decreased $38.0 million during the nine 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.

In addition to the quantitative factors noted above, management observed the following qualitative factors when determining the appropriate level of the Bank's ALLL at June 30, 2013:

. . .

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