SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 2007 or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 0-24033 NASB Financial, Inc. (Exact name of registrant as specified in its charter) Missouri 43-1805201 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 12498 South 71 Highway, Grandview, Missouri 64030 (Address of principal executive offices) (Zip Code) (816) 765-2200 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer X Non-accelerated filer Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X The number of shares of Common Stock of the Registrant outstanding as of May 4, 2007, was 8,009,820. NASB FINANCIAL, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets (In thousands) March 31, September 30, 2007 2006 (Unaudited) ---------- ----------- ASSETS Cash and cash equivalents $ 32,552 11,442 Securities available for sale 46 50 Stock in Federal Home Loan Bank, at cost 24,406 24,043 Mortgage-backed securities: Available for sale, at fair value 90,407 97,259 Held to maturity 289 325 Loans receivable: Held for sale 41,961 50,462 Held for investment, net 1,300,394 1,295,700 Allowance for loan losses (7,502) (7,991) Accrued interest receivable 8,119 8,205 Foreclosed asset held for sale, net 10,314 5,231 Premises and equipment, net 15,127 12,994 Investment in LLCs 18,652 16,737 Mortgage servicing rights, net 973 1,089 Deferred income tax asset 2,622 2,856 Other assets 7,537 6,394 ---------- ---------- $ 1,545,897 1,524,796 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Customer deposit accounts $ 686,259 722,799 Brokered deposit accounts 132,860 128,243 Advances from Federal Home Loan Bank 504,396 499,357 Subordinated debentures 25,774 -- Securities sold under agreements to repurchase 30,000 -- Escrows 6,505 8,910 Income taxes payable 2,238 2,602 Accrued expenses and other liabilities 6,941 6,313 ---------- ---------- Total liabilities 1,394,973 1,368,224 ---------- ---------- Stockholders' equity: Common stock of $0.15 par value: 20,000,000 authorized; 9,857,112 issued at March 31, 2007, and September 30, 2006 1,479 1,479 Serial preferred stock of $1.00 par value: 7,500,000 shares authorized; none issued or outstanding -- -- Additional paid-in capital 16,347 16,311 Retained earnings 167,230 162,631 Treasury stock, at cost; 1,818,819 shares at March 31, 2007, and 1,538,470 shares at September 30, 2006 (32,718) (22,061) Accumulated other comprehensive loss (1,414) (1,788) ---------- ---------- Total stockholders' equity 150,924 156,572 ---------- ---------- $ 1,545,897 1,524,796 ========== ========== See accompanying notes to condensed consolidated financial statements. 1 NASB FINANCIAL, INC. AND SUBSIDIARY Condensed Consolidated Statements of Income (Unaudited) (In thousands, except share data) Three months ended Six months ended March 31, March 31, ---------------------- ---------------------- 2007 2006 2007 2006 --------- --------- --------- --------- Interest on loans $ 24,601 23,061 49,531 45,495 Interest on mortgage-backed securities 828 1,097 1,682 2,257 Interest and dividends on securities 336 125 542 402 Other interest income 52 44 106 165 --------- --------- --------- --------- Total interest income 25,817 24,327 51,861 48,319 --------- --------- --------- --------- Interest on customer deposit accounts 7,885 7,259 16,130 13,626 Interest on advances from FHLB 6,868 5,269 13,876 10,028 Interest on subordinated debentures 439 -- 531 -- Interest on securities sold under agreements to repurchase 324 178 324 784 --------- --------- --------- --------- Total interest expense 15,516 12,706 30,861 24,438 --------- --------- --------- --------- Net interest income 10,301 11,621 21,000 23,881 Provision for loan losses 633 93 759 158 --------- --------- --------- --------- Net interest income after provision for loan losses 9,668 11,528 20,241 23,723 --------- --------- --------- --------- Other income (expense): Loan servicing fees, net (12) 75 22 105 Impairment recovery on mortgage servicing rights 18 5 26 6 Customer service fees and charges 1,429 1,478 2,843 3,154 Recovery on real estate owned -- -- (105) -- Gain on sale of loans held for sale 3,726 3,271 7,231 7,123 Other 250 492 889 774 --------- --------- --------- --------- Total other income 5,411 5,321 10,906 11,162 --------- --------- --------- --------- General and administrative expenses: Compensation and fringe benefits 3,799 4,308 7,696 8,800 Commission-based mortgage banking compensation 1,722 1,612 3,495 3,483 Premises and equipment 902 901 1,760 1,775 Advertising and business promotion 1,085 922 1,943 2,030 Federal deposit insurance premiums 26 26 54 52 Other 1,415 1,713 2,630 3,239 --------- --------- --------- --------- Total general and administrative expenses 8,949 9,482 17,578 19,379 --------- --------- --------- --------- Income before income tax expense 6,130 7,367 13,569 15,506 Income tax expense 2,361 2,652 5,226 5,582 --------- --------- --------- --------- Net income $ 3,769 4,715 8,343 9,924 ========= ========= ========= ========= Basic earnings per share $ 0.46 0.56 1.01 1.18 ========= ========= ========= ========= Diluted earnings per share $ 0.45 0.56 1.00 1.17 ========= ========= ========= ========= Basic weighted average shares outstanding 8,202,120 8,417,442 8,261,021 8,426,096 See accompanying notes to condensed consolidated financial statements. 2 NASB FINANCIAL, INC. AND SUBSIDIARY Condensed Consolidated Statements of Stockholders' Equity (Unaudited) (In thousands, except share data) Accumulated Additional other Total Common paid-in Retained Treasury comprehensive stockholders stock capital earnings stock income (loss) equity ----------------------------------------------------------------------- (Dollars in thousands) Balance at October 1, 2006 $ 1,479 16,311 162,631 (22,061) (1,788) 156,572 Comprehensive income: Net income -- -- 8,343 -- -- 8,343 Other comprehensive income (loss), net of tax: Unrealized gain on securities -- -- -- -- 374 374 available for sale ------- Total comprehensive income 8,717 Cash dividends paid -- -- (3,744) -- -- (3,744) Stock based compensation expense -- 36 -- -- -- 36 Repurchase of common stock for treasury -- -- -- (10,657) -- (10,657) ---------------------------------------------------------------------- Balance at March 31, 2007 $ 1,479 16,347 167,230 (32,718) (1,414) 150,924 ====================================================================== See accompanying notes to condensed consolidated financial statements. 3 NASB FINANCIAL, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands, except share data) Six months ended March 31, ---------------------- 2007 2006 ---------------------- Cash flows from operating activities: Net income $ 8,343 9,924 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 564 620 Amortization and accretion, net (1,327) (804) Impairment recovery on mortgage servicing rights (26) (6) Gain on sale of loans receivable held for sale (7,231) (7,123) Provision for loan losses 759 158 Provision for loss on real estate owned 105 -- Principal repayments of mortgage loans receivable -- 14 held for sale Origination of loans receivable held for sale (471,310) (503,943) Sale of loans receivable held for sale 487,042 551,807 Stock based compensation - stock options 36 25 Changes in: Net fair value of loan related commitments (105) 80 Accrued interest receivable 86 (749) Accrued expenses and other liabilities and income taxes payable 793 125 ---------------------- Net cash provided by operating activities 17,729 50,128 Cash flows from investing activities: Principal repayments of mortgage-backed securities: Held to maturity 37 56 Available for sale 7,195 17,501 Principal repayments of mortgage loans receivable held for investment 189,436 198,159 Principal repayments of other loans receivable 4,856 4,423 Maturity of investment securities available for sale 4 4 Loan origination - mortgage loans held for investment (202,932) (272,694) Loan origination - other loans receivable (3,764) (2,498) Purchase of FHLB stock (363) (662) Proceeds for sale of real estate owned 3,119 3,147 Purchases of premises and equipment, net (2,696) (2,427) Investment in LLCs (1,915) (4,074) Other (1,624) (79) ---------------------- Net cash used in investing activities (8,647) (59,144) 4 NASB FINANCIAL, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (continued) (In thousands, except share data) Six months ended March 31, ---------------------- 2007 2006 ---------------------- Cash flows from financing activities: Net (decrease) increase in customer and brokered deposit accounts (33,092) 104,500 Proceeds from advances from FHLB 130,000 174,000 Repayment on advances from FHLB (124,848) (162,160) Proceeds from subordinated debentures 25,774 -- Proceeds from sale of securities under agreements to repurchase 30,900 -- Repayment of securities sold under agreements to repurchase (900) (122,000) Cash dividends paid (3,744) (5,691) Purchase of common stock for treasury (10,657) (769) Change in escrows (2,405) (3,534) ---------------------- Net cash provided by (used in) financing activities 12,028 (15,654) ---------------------- Net increase (decrease) in cash and cash equivalents 21,110 (24,670) Cash and cash equivalents at beginning of the period 11,442 35,334 ---------------------- Cash and cash equivalents at end of period $ 32,552 10,664 ====================== Supplemental disclosure of cash flow information: Cash paid for income taxes (net of refunds) $ 5,590 5,670 Cash paid for interest 30,165 24,440 Supplemental schedule of non-cash investing and financing activities: Conversion of loans receivable to real estate owned $ 11,488 1,524 Conversion of real estate owned to loans receivable 3,513 -- Capitalization of mortgage servicing rights 6 118 See accompanying notes to condensed consolidated financial statements. 5 (1) BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. All adjustments are of a normal and recurring nature and, in the opinion of management, the statements include all adjustments considered necessary for fair presentation. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K to the Securities and Exchange Commission. Operating results for the six months ended March 31, 2007, are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2007. The condensed consolidated balance sheet of the Company as of September 30, 2006, has been derived from the audited balance sheet of the Company as of that date. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowances for losses on loans, real estate owned, and valuation of mortgage servicing rights. Management believes that these allowances are adequate, however, future additions to the allowances may be necessary based on changes in economic conditions. The Company's critical accounting policies involving the more significant judgements and assumptions used in the preparation of the condensed consolidated financial statements as of March 31, 2007, have remained unchanged from September 30, 2006. These policies relate to the allowance for loan losses and the valuation of mortgage servicing rights. Disclosure of these critical accounting policies is incorporated by reference under Item 8 "Financial Statements and Supplementary Data" in the Company's Annual Report on Form 10-K for the Company's year ended September 30, 2006. Certain quarterly amounts for previous periods have been reclassified to conform to the current quarter's presentation. (2) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER SHARE The following table presents a reconciliation of basic earnings per share to diluted earnings per share for the periods indicated. Three months ended Six months ended ---------------------- ---------------------- 3/31/07 3/31/06 3/31/07 3/31/06 ---------------------- ---------------------- Net income (in thousands) $ 3,769 4,715 8,343 9,924 Average common shares outstanding 8,202,120 8,417,442 8,261,021 8,426,096 Average common share stock options outstanding 58,729 43,026 55,755 42,312 ---------------------- ---------------------- Average diluted common shares 8,260,849 8,460,468 8,316,776 8,468,408 Earnings per share: Basic $ 0.46 0.56 1.01 1.18 Diluted 0.45 0.56 1.00 1.17 The dilutive securities included for each period presented above consist entirely of stock options granted to employees as incentive stock options under Section 442A of the Internal Revenue Code as amended. 6 (3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE The following table presents a summary of mortgage-backed securities available for sale. Dollar amounts are expressed in thousands. March 31, 2007 ------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ------------------------------------------- Pass-through certificates guaranteed by GNMA - fixed rate $ 224 5 -- 229 Pass-through certificates guaranteed by FNMA - adjustable rate 12,571 -- 321 12,250 FHLMC participation certificates - fixed rate 1,095 -- 70 1,025 - adjustable rate 78,817 -- 1,914 76,903 ------------------------------------------- Total $ 92,707 5 2,305 90,407 =========================================== (4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY The following table presents a summary of mortgage-backed securities held to maturity. Dollar amounts are expressed in thousands. March 31, 2007 ------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ------------------------------------------- FHLMC participation certificates: Balloon maturity and adjustable rate $ 110 3 -- 113 FNMA pass-through certificates: Fixed rate 83 -- -- 83 Balloon maturity and adjustable rate 72 -- -- 72 Pass-through certificates guaranteed by GNMA - fixed rate 24 1 -- 25 ------------------------------------------- Total $ 289 4 -- 293 =========================================== 7 (5) LOANS RECEIVABLE Loans receivable are as follows: March 31, 2007 --------------------- (Dollars in thousands) LOANS HELD FOR INVESTMENT: Mortgage loans: Permanent loans on: Residential properties $ 357,684 Business properties 504,787 Partially guaranteed by VA or insured by FHA 1,955 Construction and development 488,860 ---------- Total mortgage loans 1,353,286 Commercial loans 57,468 Installment loans to individuals 16,167 ---------- Total loans held for investment 1,426,921 Less: Undisbursed loan funds (121,634) Unearned discounts and fees and costs on loans, net (4,893) ---------- Net loans held for investment $1,300,394 ========== March 31, 2007 --------------------- (Dollars in thousands) LOANS HELD FOR SALE: Mortgage loans: Permanent loans on: Residential properties $ 76,730 Less: Undisbursed loan funds (34,769) ---------- Net loans held for sale $ 41,961 ========== Included in the loans receivable balances at March 31, 2007, are participating interests in mortgage loans and wholly owned mortgage loans serviced by other institutions in the approximate amount of $91,000. Loans and participations serviced for others amounted to approximately $92.7 million at March 31, 2007. The following table presents the activity in the allowance for losses on loans for the period ended March 31, 2007. Allowance for losses on mortgage loans includes specific valuation allowances and valuation allowances associated with homogenous pools of loans. Dollar amounts are expressed in thousands. Balance at October 1, 2006 $ 7,991 Provisions 759 Charge-offs (1,248) Recoveries -- -------- Balance at March 31, 2007 $ 7,502 ======== 8 (6) FORECLOSED ASSETS HELD FOR SALE Real estate owned and other repossessed property consisted of the following: March 31, 2007 --------------------- (Dollars in thousands) Real estate acquired through (or deed in lieu of) foreclosure $ 10,701 Less: allowance for losses (387) ---------- Total $ 10,314 ========== Foreclosed assets held for sale are initially recorded at fair value as of the date of foreclosure minus any estimated selling costs (the "new basis"), and are subsequently carried at the lower of the new basis or fair value less selling costs on the current measurement date. (7) MORTGAGE SERVICING RIGHTS The following provides information about the Bank's mortgage servicing rights for the period ended March 31, 2007. Dollar amounts are expressed in thousands. Balance at October 1, 2006 $ 1,089 Additions: Originated mortgage servicing rights 6 Impairment recovery 26 Reductions: Amortization (148) -------- Balance at March 31, 2007 $ 973 ======== (8) SUBORDINATED DEBENTURES On December 13, 2006, NASB Financial, Inc. (the "Company"), through its wholly owned statutory trust, NASB Preferred Trust I (the "Trust"), issued $25 million of pooled Trust Preferred Securities. The Trust used the proceeds from the offering to purchase a like amount of NASB Financial Inc.'s subordinated debentures. The debentures, which have a variable rate of 1.65% over the 3-month LIBOR and a 30-year term, are the sole assets of the Trust. In exchange for the capital contributions made to the Trust by NASB Financial, Inc. upon formation, NASB Financial. Inc. owns all the common securities of the Trust. In accordance with Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R), the Trust qualifies as a special purpose entity that is not required to be consolidated in the financial statements of the Company. The $25.0 million Trust Preferred Securities issued by the Trust will remain on the records of the Trust. The Trust Preferred Securities are included in Tier I capital for regulatory capital purposes. The Trust Preferred Securities have a variable interest rate of 1.65% over the 3-month LIBOR, and are mandatorily redeemable upon the 30-year term of the dentures, or upon earlier redemption as provided in the Indenture. The debentures are callable, in whole or in part, after five years of the issuance date. The Company did not incur a placement or annual trustee fee related to the issuance. The securities are subordinate to all other debt of the Company and interest may be deferred up to five years. 9 (9) REPURCHASE AGREEMENTS During the six-month period ended March 31, 2007, the Bank sold various adjustable-rate mortgage-backed securities under agreements to repurchase. The outstanding balance of such repurchase agreements was $30.0 million at March 31, 2007. These agreements have a weighted average rate of 5.37% and a weighted average maturity of 16 days. (10) SEGMENT INFORMATION In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has identified three principal operating segments for purposes of financial reporting: Banking, Local Mortgage Banking, and National Mortgage Banking. These segments were determined based on the Company's internal financial accounting and reporting processes and are consistent with the information that is used to make operating decisions and to assess the Company's performance by the Company's key decision makers. The National Mortgage Banking segment originates mortgage loans via the internet primarily for sale to investors. The Local Mortgage Banking segment originates mortgage loans for sale to investors and for the portfolio of the Banking segment. The Banking segment provides a full range of banking services through the Bank's branch network, exclusive of mortgage loan originations. A portion of the income presented in the Mortgage Banking segment is derived from sales of loans to the Banking segment based on a transfer pricing methodology that is designed to approximate economic reality. The Other and Eliminations segment includes financial information from the parent company plus inter-segment eliminations. The following table presents financial information from the Company's operating segments for the periods indicated. Dollar amounts are expressed in thousands. Local National Three months ended Mortgage Mortgage Other and March 31, 2007 Banking Banking Banking Eliminations Consolidated --------------------------------------------------------------------------------------- Net interest income $ 10,721 -- -- (420) 10,301 Provision for loan losses 633 -- -- -- 633 Other income 994 1,350 3,395 (328) 5,411 General and administrative expenses 4,005 1,609 3,343 (8) 8,949 Income tax expense (benefit) 2,725 (100) 20 (284) 2,361 ----------------------------------------------------------- Net income $ 4,352 (159) 32 (456) 3,769 =========================================================== Local National Three months ended Mortgage Mortgage Other and March 31, 2006 Banking Banking Banking Eliminations Consolidated --------------------------------------------------------------------------------------- Net interest income $ 11,602 -- -- 19 11,621 Provision for loan losses 93 -- -- -- 93 Other income 1,336 2,338 1,999 (352) 5,321 General and administrative expenses 4,306 2,572 2,708 (104) 9,482 Income tax expense (benefit) 3,074 (84) (255) (83) 2,652 ----------------------------------------------------------- Net income $ 5,465 (150) (454) (146) 4,715 =========================================================== 10 Local National Six months ended Mortgage Mortgage Other and March 31, 2007 Banking Banking Banking Eliminations Consolidated --------------------------------------------------------------------------------------- Net interest income $ 21,494 -- -- (494) 21,000 Provision for loan losses 759 -- -- -- 759 Other income 2,234 3,123 6,428 (879) 10,906 General and administrative expenses 7,926 3,438 6,298 (84) 17,578 Income tax expense (benefit) 5,792 (122) 50 (494) 5,226 ----------------------------------------------------------- Net income $ 9,251 (193) 80 (795) 8,343 =========================================================== Local National Six months ended Mortgage Mortgage Other and March 31, 2006 Banking Banking Banking Eliminations Consolidated ------------------------------------------------------------------------------------ Net interest income $ 23,845 -- -- 36 23,881 Provision for loan losses 158 -- -- -- 158 Other income 2,603 4,895 4,577 (913) 11,162 General and administrative expenses 8,166 5,258 6,151 (196) 19,379 Income tax expense (benefit) 6,524 (131) (567) (244) 5,582 ----------------------------------------------------------- Net income $ 11,600 (232) (1,007) (437) 9,924 =========================================================== Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. GENERAL The principal business of the Company is to provide banking services through the Bank. Specifically, the Bank obtains savings and checking deposits from the public, then uses those funds to originate and purchase real estate loans and other loans. The Bank also purchases mortgage-backed securities ("MBS") and other investment securities from time to time as conditions warrant. In addition to customer deposits, the Bank obtains funds from the sale of loans held-for-sale, the sale of securities available-for-sale, repayments of existing mortgage assets, advances from the Federal Home Loan Bank ("FHLB"), and the purchase of brokered deposit accounts. The Bank's primary sources of income are interest on loans, MBS, and investment securities plus customer service fees and income from mortgage banking activities. Expenses consist primarily of interest payments on customer deposits and other borrowings and general and administrative costs. The Bank is regulated by the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), and is subject to periodic examination by both entities. The Bank is also subject to the regulations of the Board of Governors of the Federal Reserve System ("FRB"), which establishes rules regarding reserves that must be maintained against customer deposits. FINANCIAL CONDITION ASSETS The Company's total assets as of March 31, 2007, were $1,545.9 million, an increase of $21.1 million from September 30, 2006, 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 six months ended March 31, 2007, the Bank originated $471.3 million in mortgage loans held for sale, $202.9 million in mortgage loans held for investment, and $3.8 million in other loans. This total of $678.0 million in loans originated compares to $779.1 million in loans originated and purchased during the six months ended March 31, 2006. 11 Loans held for sale as of March 31, 2006 were $42.0 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. 3/31/07 9/30/06 3/31/06 ------------------------------------- Asset Classification: Substandard $ 13,722 12,361 12,236 Doubtful -- -- -- Loss 209 434 441 ------------------------------------- 13,931 12,795 12,677 Allowance for losses (7,889) (8,266) (7,618) ------------------------------------- $ 6,042 4,529 5,059 ===================================== 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. 3/31/07 9/30/06 3/31/06 ---------------------------------------- Total Assets $ 1,545,897 1,524,796 1,550,342 ======================================== Non-accrual loans $ 2,453 6,396 2,603 Troubled debt restructurings 70 3,477 3,478 Net real estate and other assets acquired through foreclosure 10,314 5,231 7,566 ---------------------------------------- Total $ 12,837 15,104 13,647 ======================================== Percent of total assets 0.83% 0.99% 0.88% ======================================== 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. 12 LIABILITIES AND EQUITY Customer and brokered deposit accounts decreased $31.9 million during the six months ended March 31, 2007. The weighted average rate on customer and brokered deposits as of March 31, 2007, was 4.15%, an increase from 3.52% as of March 31, 2006. Advances from the FHLB were $504.4 million as of March 31, 2007, an increase of $5.0 million from September 30, 2006. During the six-month period, the Bank borrowed $130.0 million of new advances and repaid $124.8 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, 2007. 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. During the six-month period, the Bank sold $30.9 million of mortgage-backed securities sold under agreements to repurchase, and repurchase agreements of $900,000 were repaid. Escrows were $6.5 million as of March 31, 2007, a decrease of $2.4 million from September 30, 2006. This decrease is due to amounts paid for borrowers' taxes during the fourth calendar quarter of 2006. Total stockholders' equity as of March 31, 2007, was $150.9 million (9.8% of total assets). This compares to $156.6 million (10.3% of total assets) at September 30, 2006. On a per share basis, stockholders' equity was $18.78 on March 31, 2007, compared to $18.82 on September 30, 2006. The Company paid cash dividends on its common stock of $0.225 per share on November 24, 2006, and February 23, 2007. Subsequent to the quarter ended March 31, 2007, the Company announced a cash dividend of $0.225 per share to be paid on May 25, 2007, to stockholders of record as of May 4, 2007. Total stockholders' equity as of March 31, 2007, includes an unrealized loss of $1.4 million, 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). Six months ended ------------------------ 3/31/07 3/31/06 ------------------------ Return on assets 1.09% 1.28% Return on equity 10.85% 13.19% Equity-to-assets ratio 9.76% 9.80% Dividend payout ratio 44.88% 57.34% RESULTS OF OPERATIONS - Comparison of three and six months ended March 31, 2007 and 2006. For the three months ended March 31, 2007, the Company had net income of $3,769,000 or $0.46 per share. This compares to net income of $4,715,000 or $0.56 per share for the quarter ended March 31, 2006. For the six months ended March 31, 2007, the Company had net income of $8,343,000 or $1.01 per share. This compares to net income of $9,924,000 or $1.18 per share for the six months ended March 31, 2006. 13 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, 2007 and 2006. 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. Six months ended 3/31/07 As of --------------------------- 3/31/07 Average Yield/ Yield/ Balance Interest Rate Rate ------------------------------------- Interest-earning assets Loans $1,344,718 49,531 7.37% 7.21% Mortgage-backed securities 93,880 1,682 3.58% 4.24% Securities 25,765 542 4.21% 4.25% Bank deposits 4,968 106 4.27% 4.82% -------------------------------------- Total earning assets 1,469,331 51,861 7.06% 6.96% --------------------------- Non-earning assets 62,780 ---------- Total $1,532,111 ========== Interest-costing liabilities Customer checking and savings deposit accounts $ 169,650 1,143 1.35% 0.99% Customer and brokered certificates of deposit 640,169 14,987 4.68% 5.01% FHLB Advances 526,922 13,876 5.27% 5.21% Subordinated debentures 15,142 531 7.01% 7.01% Repurchase agreements 12,986 324 4.99% 5.37% -------------------------------------- Total costing liabilities 1,364,869 30,861 4.52% 4.62% --------------------------- Non-costing liabilities 10,809 Stockholders' equity 156,433 ---------- Total $1,532,111 ========== Net earning balance $ 104,462 ========== Earning yield less costing rate 2.54% 2.34% ================ Average interest-earning assets, net interest, and net yield spread on average interest- earning assets $1,469,331 21,000 2.86% ============================ Six months ended 3/31/06 As of --------------------------- 3/31/06 Average Yield/ Yield/ Balance Interest Rate Rate ------------------------------------- Interest-earning assets Loans $1,330,120 45,495 6.84% 6.94% Mortgage-backed securities 120,137 2,257 3.76% 4.30% Securities 23,173 402 3.47% 2.99% Bank deposits 9,945 165 3.32% 4.13% -------------------------------------- Total earning assets 1,483,375 48,319 6.51% 6.67% --------------------------- Non-earning assets 58,501 ---------- Total $1,541,876 ========== Interest-costing liabilities Customer checking and savings deposit accounts $ 186,873 985 1.05% 1.02% Customer and brokered certificates of deposit 670,282 12,641 3.77% 4.17% FHLB Advances 477,896 10,028 4.20% 4.59% Repurchase agreements 45,000 784 3.48% --% -------------------------------------- Total costing liabilities 1,380,051 24,438 3.54% 3.89% --------------------------- Non-costing liabilities 11,815 Stockholders' equity 150,010 ---------- Total $1,541,876 ========== Net earning balance $ 103,324 ========== Earning yield less costing rate 2.97% 2.78% ================ Average interest-earning assets, net interest, and net yield spread on average interest- earning assets $1,483,375 23,881 3.22% ============================ 14 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, 2007, compared to six months ended March 31, 2006 ----------------------------------------------- Yield/ Yield Volume Volume Total ----------------------------------------------- Components of interest income: Loans $ 3,525 499 12 4,036 Mortgage-backed securities (108) (494) 27 (575) Securities 86 45 9 140 Bank deposits 47 (83) (23) (59) ----------------------------------------------- Net change in interest income 3,550 (33) 25 3,542 ----------------------------------------------- Components of interest expense: Customer and brokered deposit accounts 3,429 (753) (172) 2,504 FHLB Advances 2,557 1,030 261 3,848 Subordinated debentures -- -- 531 531 Repurchase agreements 340 (558) (242) (460) ----------------------------------------------- Net change in interest expense 6,326 (281) 378 6,423 ----------------------------------------------- Decrease in net interest margin $ (2,776) 248 (353) (2,881) =============================================== Net interest margin before loan loss provision for the three months ended March 31, 2007, decreased $1.3 million from the same period in the prior year. Specifically, interest income increased $1.5 million due to both an increase in the average balance of interest-earning assets and an increase in the average rate earned on such assets. The increase in interest income was offset by a $2.8 million increase in interest expense, which resulted from both an increase in the average balance of interest-costing liabilities and an increase in the average rate paid on such liabilities. Net interest margin before loan loss provision for the six months ended March 31, 2007, decreased $2.9 million from the same period in the prior year. Specifically, interest income increased $3.5 million, which was offset by a $6.4 million increase in interest expense for the period. Interest on loans increased $4.0 million as the result of a $14.6 million increase in the average balance of loans receivable and 53 basis point increase in the average rate earned on such loans. This increase in interest income was partially offset by a $575,000 decrease in interest on mortgage-backed securities due to a $26.3 million decrease in the average balance of mortgage-backed securities and an 18 basis point decrease in the average rate earned on such assets. Interest expense on customer and brokered deposits increased $2.5 million due to a 63 basis point increase in the average rate paid on such deposits. Interest expense on FHLB advances increased $3.8 million as the result of a $49.0 million increase in the average balance of FHLB advances and a 107 basis point increase in the average rate paid on such liabilities. Interest on subordinated debentures increased $531,000 due to a $15.1 million increase in the average balance of such liabilities, which were issued in December 2006. These increases in interest expense were partially offset by a $460,000 decrease in interest expense on securities sold under agreements to repurchase due to a $32.0 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 $633,000 during the quarter ended March 31, 2007, due primarily to increases in construction and development loans classified as substandard, which were taken into the foreclosed assets held for sale portfolio prior to the end of the quarter. The Company recorded a provision for loan losses of $126,000 during the quarter ended December 31, 2006, due primarily to increases in the residential and commercial real estate loan portfolios. Management performs an ongoing analysis of individual loans and of homogenous pools of loans to assess for any impairment. On a consolidated basis, loan loss reserve was 56.6% of total classified assets at March 31, 2007, 64.6% at September 30, 2006, and 60.1% at March 31, 2006. 15 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 March 31, 2007, increased $90,000 from the same period in the prior year. Gain on sale of loans held for sale increased $455,000 due to a increase in mortgage banking volume for the quarter. This increase was offset by a $49,000 decrease in customer service fees and charges due primarily to a decrease in overdraft and return item charges. Additionally, loan servicing fees decreased $87,000 due 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 quarter. Other income decreased $242,000 due primarily to decreases in income received on foreclosed assets held for sale and income received from the Company's investment in LLCs. Other income for the six months ended March 31, 2007, decreased $256,000 from the same period in the prior year. Gain on sale of loans held for sale increased $108,000 due to increased spreads on residential mortgage loans sold to outside investors. Other income increased $115,000 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." These increases were offset by a $311,000 decrease in customer service fees and charges due primarily to a decrease in overdraft and return item charges. Additionally, provision for loss on real estate owned increased $105,000 due to an increase in foreclosed assets held for sale during the period. Loan servicing fees decreased $83,000 due to an increase in capitalized servicing amortization, which resulted from an increase in actual prepayments and estimated future repayments of the underlying mortgage loans during the period. GENERAL AND ADMINISTRATIVE EXPENSES Total general and administrative expenses for the three months ended March 31, 2007, decreased $533,000 from the same period in the prior year. Specifically, compensation, fringe benefits, and commission-based mortgage banking compensation decreased $399,000 due primarily to a decrease in employee benefit related costs during the quarter. Other expense decreased $298,000 due primarily to a decrease in credit, appraisal, underwriting legal and other costs related to the local and national mortgage banking operations and the construction and commercial real estate lending operations of the Bank. These decreases were offset by $163,000 increase in advertising and business promotion expense due to an increased costs related to the national mortgage banking operation, and costs associated with the new retail branch in Platte City, Missouri, which opened in February 2007. Total general and administrative expenses for the six months ended March 31, 2007, decreased $1.8 million from the same period in the prior year. Specifically, compensation, fringe benefits, and commission-based mortgage banking compensation decreased $1.1 million due to a reduction of staff in the local and national mortgage banking operations, a decrease in mortgage banking volume, and a reduction in employee benefit related costs for the period. Advertising and business promotion expense decreased $87,000 due primarily to a decrease in advertising costs related to the national mortgage banking operation. Other expense decreased $609,000 due primarily to a decrease in credit, appraisal, underwriting legal and other costs related to the local and national mortgage banking operations and the construction and commercial real estate lending operations of the Bank. 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. 16 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 0 to 27 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 March 31, 2007, 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 March 31, 2007, 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 March 31, 2007 Amount ---------------------------------------------------------------- GAAP capital (Bank only) $ 144,924 Adjustment for regulatory capital: Intangible assets (2,921) Disallowed portion of servicing assets and deferred tax assets (2,622) Reverse the effect of SFAS No. 115 1,414 --------- Tangible capital 140,795 Qualifying intangible assets -- --------- Tier 1 capital (core capital) 140,795 Qualifying general valuation allowance 7,293 --------- Risk-based capital $ 148,088 ========= As of March 31, 2007 ------------------------------------------------------------------- Minimum required for Minimum required to be Actual Capital Adequacy "Well Capitalized" ------------------- ---------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------------------- ---------------------- ----------------------- Total capital to risk-weighted assets $ 148,088 11.9% 99,929 >=8% 124,911 >=10% Core capital to adjusted tangible assets 140,795 9.3% 60,881 >=4% 76,102 >=5% Tangible capital to tangible assets 140,795 9.3% 22,831 >=1.5% -- -- Tier 1 capital to risk-weighted assets 140,795 11.3% -- -- 74,947 >=6% LOANS TO ONE BORROWER Institutions are prohibited from lending to any one borrower in excess of 15% of the Bank's unimpaired capital plus unimpaired surplus, or 25% of unimpaired capital plus unimpaired surplus if the loan is secured by certain readily marketable collateral. Renewals that exceed the loans-to-one-borrower limit are permitted if the original borrower remains liable and no additional funds are disbursed. The Bank has received regulatory approval from the OTS under 12 CFR 560.93 to increase it's 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. 17 LIQUIDITY AND CAPITAL RESOURCES Liquidity measures the ability to meet deposit withdrawals and lending commitments. The Bank generates liquidity primarily from the sale and repayment of loans, retention or newly acquired retail deposits, and advances from FHLB of Des Moines' credit facility. Management continues to use FHLB advances as a primary source of short- term funding. At March 31, 2007, there was $99.3 million available to the Bank in the form of additional FHLB advances. The Bank has established relationships with various brokers, and, as a secondary source of liquidity, the Bank purchases brokered deposit accounts. At March 31, 2007, the Bank has $132.9 million in brokered deposits, and it could purchase up to $200.1 million in additional brokered deposits and remain "well capitalized" as defined by the OTS. Fluctuations in the level of interest rates typically impact prepayments on mortgage loans and MBS. During periods of falling interest rates, these prepayments increase and a greater demand exists for new loans. The Bank's customer deposits are partially impacted by area competition. Management believes that the Bank will retain most of its maturing time deposits in the foreseeable future. However, any material funding needs that may arise in the future can be reasonably satisfied through the use of additional FHLB advances and/or brokered deposits. Management is not aware of any other current market or economic conditions that could materially impact the Bank's future ability to meet obligations as they come due. Item 3. Quantitative and Qualitative Disclosures About Market Risk For a complete discussion of the Company's asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company's portfolio, see the "Asset/Liability Management" section of the Company's Annual Report for the year ended September 30, 2006. Management recognizes that there are certain market risk factors present in the structure of the Bank's financial assets and liabilities. Since the Bank does not have material amounts of derivative securities, equity securities, or foreign currency positions, interest rate risk ("IRR") is the primary market risk that is inherent in the Bank's portfolio. On a quarterly basis, the Bank monitors the estimate of changes that would potentially occur to its net portfolio value ("NPV") of assets, liabilities, and off-balance sheet items assuming a sudden change in market interest rates. Management presents a NPV analysis to the Board of Directors each quarter and NPV policy limits are reviewed and approved. There have been no material changes in the market risk information provided in the Annual Report for the year ended September 30, 2006. Item 4. Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the end of the period covered by this quarterly report. There were no changes in the Company's internal control over financial reporting during the period covered by this quarterly report on Form 10- Q that have materially affected or are reasonable likely to materially affect our internal control over financial reporting. 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings There were no material proceedings pending other than ordinary and routine litigation incidental to the business of the Company. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders The annual stockholder's meeting was held on January 23, 2007. The following persons were elected to NASB Financial Inc.'s Board of Directors for three year terms: David H. Hancock Linda S. Hancock Paul L. Thomas The firm of BKD, LLP was ratified for appointment as independent auditors for the fiscal year ended September 30, 2007. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a)Exhibits Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Rules 13a-15(e) and 15d-15(e) Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e) Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 19 S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NASB Financial, Inc. (Registrant) May 9, 2007 By: /s/David H. Hancock David H. Hancock Chairman and Chief Executive Officer May 9, 2007 By: /s/Rhonda Nyhus Rhonda Nyhus Vice President and Treasurer 20 19