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 December 31, 2010
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 has submitted
electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes No
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or non-accelerated filer, or a small
reporting company. See definition of "accelerated filer", "large
accelerated filer" and "small reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X
Non-accelerated filer Small reporting Company
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
February 4, 2011, was 7,867,614.
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
December 31, September 30,
2010 2010
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 10,303 14,033
Securities:
Available for sale, at fair value 24,409 28,092
Held to maturity, at cost 1,076 1,232
Stock in Federal Home Loan Bank, at cost 13,203 15,873
Mortgage-backed securities:
Available for sale, at fair value 820 911
Held to maturity, at cost 41,186 46,276
Loans receivable:
Held for sale, at fair value 117,499 179,845
Held for investment, net 1,059,867 1,073,357
Allowance for loan losses (32,498) (32,316)
---------- -----------
Total loans receivable, net 1,144,868 1,220,886
---------- -----------
Accrued interest receivable 5,047 5,520
Foreclosed assets held for sale, net 34,009 38,362
Premises and equipment, net 14,045 13,836
Investment in LLCs 17,772 17,799
Mortgage servicing rights, net 271 263
Deferred income tax asset, net 13,222 14,758
Other assets 16,945 16,355
---------- ----------
$ 1,337,176 1,434,196
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 881,724 866,559
Brokered deposit accounts 16,922 66,894
Advances from Federal Home Loan Bank 228,000 286,000
Subordinated debentures 25,774 25,774
Escrows 5,039 11,149
Income taxes payable 310 504
Accrued expenses and other liabilities 9,598 9,554
---------- ----------
Total liabilities 1,167,367 1,266,434
---------- ----------
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 shares authorized;
9,857,112 shares issued 1,479 1,479
Additional paid-in capital 16,616 16,603
Retained earnings 189,686 187,674
Treasury stock, at cost;
1,989,498 shares (38,418) (38,418)
Accumulated other comprehensive
income 446 424
---------- ----------
Total stockholders' equity 169,809 167,762
---------- ----------
$ 1,337,176 1,434,196
========== ==========
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
December 31,
----------------------
2010 2009
--------- ---------
Interest on loans receivable $ 18,071 20,606
Interest on mortgage-backed securities 552 884
Interest and dividends on securities 623 472
Other interest income 4 3
--------- ---------
Total interest income 19,250 21,965
--------- ---------
Interest on customer and brokered
deposit accounts 4,286 4,693
Interest on advances from FHLB 1,797 3,339
Interest on subordinated debentures 127 128
--------- ---------
Total interest expense 6,210 8,160
--------- ---------
Net interest income 13,040 13,805
Provision for loan losses 3,950 9,000
--------- ---------
Net interest income after provision
for loan losses 9,090 4,805
--------- ---------
Other income (expense):
Loan servicing fees, net 77 26
Impairment (loss) recovery on mortgage
servicing rights (1) 5
Customer service fees and charges 2,458 1,858
Provision for loss on real estate owned (413) --
Gain on sale of securities available for sale 280 3,088
Gain from loans receivable held for sale 7,335 6,967
Impairment loss on investment in LLCs -- (2,000)
Other 980 256
--------- ---------
Total other income 10,716 10,200
--------- ---------
General and administrative expenses:
Compensation and fringe benefits 5,115 4,501
Commission-based mortgage banking
compensation 6,172 4,116
Premises and equipment 1,036 990
Advertising and business promotion 1,267 1,369
Federal deposit insurance premiums 437 1,238
Other 2,508 1,443
--------- ---------
Total general and administrative expenses 16,535 13,657
--------- ---------
Income before income tax expense 3,271 1,348
Income tax expense 1,259 19
--------- ---------
Net income $ 2,012 1,329
========= =========
Basic earnings per share $ 0.26 0.17
========= =========
Diluted earnings per share $ 0.26 0.17
========= =========
Basic weighted average shares outstanding 7,867,614 7,867,614
See accompanying notes to condensed consolidated financial statements.
2
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
(In thousands)
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive stockholders'
stock capital earnings stock income equity
-----------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 2010 $ 1,479 16,603 187,674 (38,418) 424 167,762
Comprehensive income:
Net income -- -- 2,012 -- -- 2,012
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- 22 22
available for sale -------
Total comprehensive income 2,034
Stock based compensation expense -- 13 -- -- -- 13
----------------------------------------------------------------------
Balance at December 31, 2010 $ 1,479 16,616 189,686 (38,418) 446 169,809
======================================================================
Three months ended
December 31, 2010
------------------
(Dollars in thousands)
Reclassification Disclosure:
Unrealized gain on available for sale securities,
net of income taxes of $122 $ 194
Reclassification adjustment for gain included in
net income, net of income taxes of $108 (172)
--------
Change in unrealized gain on available for sale
securities, net of income tax of $14 $ 22
========
See accompanying notes to condensed consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended
December 31,
----------------------
2010 2009
----------------------
Cash flows from operating activities:
Net income $ 2,012 1,329
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 467 444
Amortization and accretion, net (132) (1,006)
Gain on sale of securities available for sale (280) (3,088)
Loss from investment in LLCs 31 35
Impairment loss on investment in LLCs -- 2,000
Impairment loss (recovery) on mortgage
servicing rights 1 (5)
Gain from loans receivable held for sale (7,335) (6,967)
Provision for loan losses 3,950 9,000
Provision for loss on real estate owned 413 --
Origination of loans receivable held for sale (648,980) (435,609)
Sale of loans receivable held for sale 718,661 423,270
Stock based compensation - stock options 13 20
Changes in:
Net fair value of loan-related commitments (1,384) (315)
Accrued interest receivable 473 247
Prepaid and accrued expenses, other liabilities
and income taxes payable 2,359 (8,275)
----------------------
Net cash provided by (used in) operating activities 70,269 (18,920)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 5,056 2,430
Available for sale 79 2,449
Principal repayments of mortgage loans receivable
held for investment 62,798 62,342
Principal repayments of other loans receivable 1,541 1,661
Principal repayments of investment securities
held to maturity 166 --
Loan origination - mortgage loans receivable
held for investment (62,189) (30,591)
Loan origination - other loans receivable (887) (457)
Purchase of mortgage loans receivable held for
investment -- (753)
Proceeds from sale of Federal Home Loan
Bank stock 2,670 4,851
Purchase of mortgage backed securities held
to maturity -- (35,796)
Purchase of investment securities available for sale (10,390) (15,080)
Proceeds from sale of investment securities available
for sale 14,456 21,336
Proceeds from sale of real estate owned 12,546 3,454
Purchases of premises and equipment, net (676) (292)
Investment in LLCs (5) (5)
Other (218) (619)
----------------------
Net cash provided by investing activities 24,947 14,930
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended
December 31,
----------------------
2010 2009
----------------------
Cash flows from financing activities:
Net decrease in customer and brokered
deposit accounts (34,836) (32,409)
Proceeds from advances from Federal Home Loan Bank 17,000 10,000
Repayment on advances from Federal Home Loan Bank (75,000) (2,000)
Cash dividends paid -- (1,770)
Change in escrows (6,110) (5,279)
----------------------
Net cash used in financing activities (98,946) (31,458)
----------------------
Net decrease in cash and cash equivalents (3,730) (35,448)
Cash and cash equivalents at beginning of the period 14,033 63,250
----------------------
Cash and cash equivalents at end of period $ 10,303 27,802
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ (68) 2,266
Cash paid for interest 6,200 8,459
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 17,528 7,831
Conversion of real estate owned to loans receivable 763 --
Capitalization of originated mortgage servicing rights -- 5
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 three month period ended December
31, 2010, are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2011. The condensed
consolidated balance sheet of the Company as of September 30, 2010, 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,
valuation of mortgage servicing rights, and unrecognized tax benefits.
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 judgments and assumptions used in the preparation of the
condensed consolidated financial statements as of December 31, 2010,
have remained unchanged from September 30, 2010. These policies relate
to the allowance for loan losses, the valuation of derivative
instruments, and the valuation of equity method investments. 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,
2010.
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
----------------------
12/31/10 12/31/09
----------------------
Net income (in thousands) $ 2,012 1,329
Average common shares outstanding 7,867,614 7,867,614
Average common share stock options
outstanding -- --
----------------------
Average diluted common shares 7,867,614 7,867,614
Earnings per share:
Basic $ 0.26 0.17
Diluted 0.26 0.17
At December 31, 2010 and 2009, options to purchase 49,538 and
62,038 shares, respectively, of the Company's stock were outstanding.
These options were not included in the calculation of diluted earnings
per share because the option exercise price was greater than the average
market price of the common shares for the period, thus making the
options anti-dilutive.
6
(3) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for
sale at December 31, 2010. Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Corporate debt securities $ 8,238 425 29 8,634
Trust preferred securities 15,461 302 11 15,752
Municipal securities 23 -- -- 23
------------------------------------------
Total $ 23,722 727 40 24,409
===========================================
The following table presents a summary of securities available for
sale at September 30, 2010. Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Corporate debt securities $ 17,347 376 -- 17,723
Trust preferred securities 10,084 282 20 10,346
Municipal securities 23 -- -- 23
------------------------------------------
Total $ 27,454 658 20 28,092
===========================================
During the three month period ended December 31, 2010, the Company
realized gross gains of $280,000 and no gross losses on the sale of
securities available for sale. The Company realized gross gains of $3.1
million and no gross losses on the sale of securities available for sale
during the three month period ended December 31, 2009.
The following table presents a summary of the fair value and gross
unrealized losses of those securities available for sale which had
unrealized losses at December 31, 2010. Dollar amounts are expressed in
thousands.
Less than 12 months 12 months or longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Corporate debt securities $ 3,056 29 $ -- --
Trust preferred securities 5,289 11 -- --
---------------------------------------------
Total $ 8,345 40 $ -- --
=============================================
7
The scheduled maturities of securities available for sale at
December 31, 2010, are presented in the following table. Dollar amounts
are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due in less than one year $ 5 -- -- 5
Due from one to five years 18 -- -- 18
Due from five to ten years 5,154 425 -- 5,579
Due after ten years 18,545 302 40 18,807
-------------------------------------------
Total $ 23,722 727 40 24,409
===========================================
(4) SECURITIES HELD TO MATURITY
The following table presents a summary of securities held to
maturity at December 31, 2010. Dollar amounts are expressed in
thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Asset-backed securities $ 1,076 399 -- 1,475
------------------------------------------
Total $ 1,076 399 -- 1,475
===========================================
The following table presents a summary of securities held to
maturity at September 30, 2010. Dollar amounts are expressed in
thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Asset-backed securities $ 1,232 329 -- 1,561
------------------------------------------
Total $ 1,232 329 -- 1,561
===========================================
The scheduled maturities of securities held to maturity at December
31, 2010, are presented in the following table. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due after ten years $ 1,076 399 -- 1,475
-------------------------------------------
Total $ 1,076 399 -- 1,475
===========================================
Actual maturities of securities held to maturity may differ from
scheduled maturities depending on the repayment characteristics and
experience of the underlying financial instruments which are callable.
There were no dispositions of securities held to maturity during
the three month periods ended December 31, 2010 and 2009.
8
(5) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed
securities available for sale at December 31, 2010. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 94 2 -- 96
Pass-through certificates
guaranteed by FNMA
- adjustable rate 180 5 -- 185
FHLMC participation
certificates:
- fixed rate 345 21 -- 366
- adjustable rate 163 10 -- 173
------------------------------------------
Total $ 782 38 -- 820
===========================================
The following table presents a summary of mortgage-backed
securities available for sale at September 30, 2010. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 98 3 -- 101
Pass-through certificates
guaranteed by FNMA
- adjustable rate 186 7 -- 193
FHLMC participation
certificates:
- fixed rate 403 34 -- 437
- adjustable rate 173 7 -- 180
-------------------------------------------
Total $ 860 51 -- 911
===========================================
There were no sales of mortgage-backed securities available for
sale during the three month periods ended December 31, 2010 and 2009.
The scheduled maturities of mortgage-backed securities available
for sale at December 31, 2010, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due from five to ten years $ 345 21 -- 366
Due after ten years 437 17 -- 454
-------------------------------------------
Total $ 782 38 -- 820
===========================================
Actual maturities and pay-downs of mortgage-backed securities
available for sale will differ from scheduled maturities depending on
the repayment characteristics and experience of the underlying financial
instruments, on which borrowers have the right to prepay certain
obligations.
9
(6) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity at December 31, 2010. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation certificates:
Fixed rate $ 50 1 -- 51
FNMA pass-through certificates:
Fixed rate 7 -- -- 7
Balloon maturity and
adjustable rate 31 -- -- 31
Collateralized mortgage
obligations 41,098 231 302 41,027
------------------------------------------
Total $ 41,186 232 302 41,116
===========================================
The following table presents a summary of mortgage-backed
securities held to maturity at September 30, 2010. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation certificates:
Fixed rate $ 52 2 -- 54
FNMA pass-through certificates:
Fixed rate 7 -- -- 7
Balloon maturity and
adjustable rate 32 1 -- 33
Collateralized mortgage
obligations 46,185 230 209 46,206
------------------------------------------
Total $ 46,276 233 209 46,300
===========================================
There were no sales of mortgage-backed securities held to maturity
during the three month periods ended December 31, 2010 and 2009.
The following table presents a summary of the fair value and gross
unrealized losses of those mortgage-backed securities held to maturity
which had unrealized losses at December 31, 2010. Dollar amounts are
expressed in thousands.
Less than 12 months 12 months or longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Collateralized mortgage
obligations $ 7,926 156 $ 8,193 146
---------------------------------------------
Total $ 7,926 156 $ 8,193 146
=============================================
10
Based upon available evidence at December 31, 2010, it is
management's opinion that the decline in value of these securities is
temporary. The decline in fair value resulted from increases in market
yields that occurred after the securities were purchased. Management
views changes in fair value caused solely by changes in interest rates
as temporary. In addition, it is anticipated that the entire principal
balance of these securities will be collected. Should the impairment of
these securities become other-than-temporary, the cost basis of the
investment will be reduced and the resulting loss recognized in the
period the other-than-temporary impairment is identified. The Company
does not intend to sell these securities, and it is management's opinion
that it is not more-likely-than-not that the Company will be required to
sell the securities prior to recovery of the remaining amortized cost,
which could be at maturity.
The scheduled maturities of mortgage-backed securities held to
maturity at December 31, 2010, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due from one to five years $ 7 -- -- 7
Due from five to ten years 81 1 -- 82
Due after ten years 41,098 231 302 41,027
---------------------------------------------
Total $ 41,186 232 302 41,116
=============================================
Actual maturities and pay-downs of mortgage-backed securities held
to maturity will differ from scheduled maturities depending on the
repayment characteristics and experience of the underlying financial
instruments, on which borrowers have the right to prepay certain
obligations.
(7) LOANS RECEIVABLE
Loans receivable are as follows at December 31, 2010. Dollar
amounts are expressed in thousands.
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 337,892
Business properties 443,356
Partially guaranteed by VA or
insured by FHA 3,839
Construction and development 201,754
----------
Total mortgage loans 986,841
Commercial loans 90,938
Installment loans to individuals 10,919
----------
Total loans held for investment 1,088,698
Less:
Undisbursed loan funds (21,726)
Unearned discounts and fees and costs
on loans, net (7,105)
----------
Net loans held for investment $1,059,867
==========
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 204,069
Less:
Undisbursed loan funds (86,570)
----------
Net loans held for sale $ 117,499
==========
11
Included in the loans receivable balances at December 31, 2010, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the amount of $11.2 million.
Loans and participations serviced for others amounted to approximately
$79.2 million at December 31, 2010.
The following table presents the activity in the allowance for
losses on loans for the period ended December 31, 2010. 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, 2010 $ 32,316
Provisions 3,950
Charge-offs (3,801)
Recoveries 33
--------
Balance at December 31, 2010 $ 32,498
========
The following table presents the balance in the allowance for loan
losses and the recorded investment in loans based on portfolio segment
and impairment method at December 31, 2010. Dollar amounts are
expressed in thousands.
Residential Commercial
Held For Real Construction/
Residential Sale Estate Development Commercial Installment Total
-----------------------------------------------------------------------------------------------------------
Allowance for loan losses:
-------------------------
Balance at October 1, 2010 $ 4,427 10 6,708 19,018 1,015 1,138 32,316
Provision for loan losses (258) 12 162 2,644 1,262 128 3,950
Loans charged off (273) -- (1,372) (1,887) -- (269) (3,801)
Recoveries -- -- -- 33 -- -- 33
-----------------------------------------------------------------------------
Balance at December 31, 2010 $ 3,896 22 5,498 19,808 2,277 997 32,498
=============================================================================
Ending Balance of allowance
for loan losses related
to loans:
Individually evaluated
for impairment $ 543 11 1,577 10,405 1,205 468 14,209
=============================================================================
Collectively evaluated
for impairment $ -- -- -- -- -- -- --
=============================================================================
Acquired with deteriorated
credit quality $ 127 -- -- -- -- -- 127
=============================================================================
Loans:
-----
Balance at December 31, 2010 $ 338,236 117,499 439,014 181,250 90,483 10,884 1,177,366
=============================================================================
Ending Balance:
Loans individually evaluated
for impairment $ 9,034 11 3,223 65,644 7,994 721 86,627
=============================================================================
Loans collectively evaluated
for impairment $ -- -- -- -- -- -- --
=============================================================================
Loans acquired with deteriorated
credit quality $ 1,626 -- -- -- -- -- 1,626
=============================================================================
12
The following table presents the credit risk profile of the
Company's loan portfolio based on risk rating category as of December
31, 2010. Dollar amounts are expressed in thousands.
Residential Commercial
Held For Real Construction/
Residential Sale Estate Development Commercial Installment Total
-----------------------------------------------------------------------------------------------------------
Rating:
------
Pass $ 317,760 117,488 377,669 51,692 57,071 10,104 931,784
Pass - Watch 2,445 -- 27,114 20,461 -- -- 50,020
Special Mention 3,938 -- 21,010 27,581 24,598 258 77,385
Substandard 13,550 -- 11,644 71,111 7,609 54 103,968
Doubtful -- -- -- -- -- -- --
Loss 543 11 1,577 10,405 1,205 468 14,209
-----------------------------------------------------------------------------
Total $ 338,236 117,499 439,014 181,250 90,483 10,884 1,177,366
=============================================================================
The following table presents the Company's loan portfolio aging
analysis as of December 31, 2010. Dollar amounts are expressed in
thousands.
Greater Total Total Total loans
30-59 Days 60-89 Days Than Past Loans >90 Days &
Past Due Past Due 90 Days Due Current Receivable Accruing
-----------------------------------------------------------------------------------------------------------
Residential $ 3,407 2,383 11,963 17,753 320,483 338,236 --
Residential held for sale 39 26 37 102 117,397 117,499 --
Commercial real estate 744 251 2,972 3,967 435,047 439,014 --
Construction & development -- 183 25,176 25,359 155,891 181,250 --
Commercial 7,903 -- 91 7,994 82,489 90,483 --
Installment 107 69 437 613 10,271 10,884 --
-----------------------------------------------------------------------------
Total $ 12,200 2,912 40,676 55,788 1,121,578 1,177,366 --
=============================================================================
A loan becomes impaired when management believes it will be unable
to collect all principal and interest due according to the contractual
terms of the loan. Loans modified in troubled debt restructurings where
concessions have been granted to borrowers experiencing financial
difficulty are also considered impaired. These concessions could
include a reduction in interest rate on the loan, payment extensions,
forgiveness of principal, forbearance or other actions intended to
maximize collection. 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. The Bank records a
specific loss allowance equal to the amount of measured impairment, if
applicable.
13
The following table presents impaired loans as of December 31,
2010. Dollar amounts are expressed in thousands.
Unpaid Average Interest
Recorded Principal Specific Investment in Income
Balance Balance Allowance Impaired Loans Recognized
---------------------------------------------------------------------------------------------------------
Loans without a specific valuation allowance:
--------------------------------------------
Residential $ 4,078 4,119 -- 4,072 28
Residential held for sale -- -- -- -- --
Commercial real estate -- -- -- -- --
Construction & development 22,589 22,598 -- 22,397 178
Commercial -- -- -- -- --
Installment 230 230 -- 231 3
Loans with a specific valuation allowance:
-----------------------------------------
Residential $ 4,413 5,027 543 4,425 37
Residential held for sale -- 11 11 12 --
Commercial real estate 1,646 3,230 1,577 1,696 15
Construction & development 32,652 43,072 10,405 34,710 461
Commercial 6,789 8,070 1,205 7,592 185
Installment 23 491 468 38 4
Total:
-----
Residential $ 8,491 9,146 543 8,497 65
Residential held for sale -- 11 11 12 --
Commercial real estate 1,646 3,230 1,577 1,696 15
Construction & development 55,241 65,670 10,405 57,107 639
Commercial 6,789 8,070 1,205 7,592 185
Installment 253 721 468 269 7
The following table presents the Company's nonaccrual loans at
December 31, 2010. This table does not include purchased impaired loans
or troubled debt restructurings that are performing. Dollar amounts are
expressed in thousands.
Residential $ 11,963
Residential held for sale 37
Commercial real estate 2,972
Construction & development 25,176
Commercial 91
Installment 437
--------
Total $ 40,676
========
(8) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following at December 31, 2010. Dollar amounts are expressed in
thousands.
Real estate acquired through (or deed
in lieu of) foreclosure $ 36,055
Less: allowance for losses (2,046)
----------
Total $ 34,009
==========
14
Foreclosed assets held for sale are initially recorded at fair
value as of the date of foreclosure less 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.
When foreclosed assets are acquired any excess of the loan balance over
the new basis of the foreclosed asset is charged to the allowance for
loan losses. Subsequent adjustments for estimated losses are charged to
operations when the fair value declines to an amount less than the
carrying value. Costs and expenses related to major additions and
improvements are capitalized, while maintenance and repairs that do not
improve or extend the lives of the respective assets are expensed.
Applicable gains and losses on the sale of real estate owned are
realized when the asset is disposed of, depending on the adequacy of the
down payment and other requirements.
(9) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the period ended December 31, 2010. Dollar amounts
are expressed in thousands.
Balance at October 1, 2010 $ 263
Additions:
Amortization 9
Reductions:
Impairment loss (1)
--------
Balance at December 31, 2010 $ 271
========
(10) SUBORDINATED DEBENTURES
On December 13, 2006, NASB Financial, Inc. (the "Company"), through
its wholly owned statutory trust, NASB Preferred Trust I (the "Trust"),
issued $25.0 million of 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 ASC 810-
10, 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 debentures, or upon earlier redemption as provided
in the Indenture. The debentures are callable, in whole or in part,
after five years from 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.
(11) INCOME TAXES
The Company's federal and state income tax returns for fiscal years
2007 through 2010 remain subject to examination by the Internal Revenue
Service and various state jurisdictions, based on the statute of
limitations.
15
(12) SEGMENT INFORMATION
The Company has identified two principal operating segments for
purposes of financial reporting: Banking and 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 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.
Three months ended Mortgage Other and
December 31, 2010 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 13,157 -- (117) 13,040
Provision for loan losses 3,950 -- -- 3,950
Other income 325 10,660 (269) 10,716
General and administrative
expenses 5,517 11,132 (114) 16,535
Income tax expense (benefit) 1,546 (182) (105) 1,259
---------------------------------------------------
Net income $ 2,469 (290) (167) 2,012
===================================================
Three months ended Mortgage Other and
December 31, 2009 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 13,922 -- (117) 13,805
Provision for loan losses 9,000 -- -- 9,000
Other income 2,237 10,436 (2,473) 10,200
General and administrative
expenses 6,274 7,585 (202) 13,657
Income tax expense (benefit) (159) 1,098 (920) 19
---------------------------------------------------
Net income $ 1,044 1,753 (1,468) 1,329
===================================================
(13) DERIVATIVE INSTRUMENTS
The Company has commitments outstanding to extend credit that have
not closed prior to the end of the period. As the Company enters into
commitments to originate loans, it also enters into commitments to sell
the loans in the secondary market. Such commitments to originate loans
held for sale are considered derivative instruments in accordance with
GAAP, which requires the Company to recognize all derivative instruments
in the balance sheet and to measure those instruments at fair value.
The Company recorded a decrease in other assets of $2.0 million, an
increase in other liabilities of $1.3 million, and a decrease in other
income of $3.3 million for the three month period ended December 31,
2010.
Additionally, the Company has commitments to sell loans that have
closed prior to the end of the period. Due to the mark to market
adjustment on commitments to sell loans held for sale, the Company
recorded an increase in other assets of $3.5 million, a decrease in
other liabilities of $1.1 million, and an increase in other income of
$4.6 million during the three month period ended December 31, 2010.
The balance of derivative instruments related to commitments to
originate and sell loans at December 31, 2010, is disclosed in Footnote
14, Fair Value Measurements.
16
(14) FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would likely be received to
sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date. GAAP
identifies three primary measurement techniques: the market approach,
the income approach, and the cost approach. The market approach uses
prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities. The income
approach uses valuations or techniques to convert future amounts, such
as cash flows or earnings, to a single present amount. The cost
approach is based on the amount that currently would be required to
replace the service capability of an asset.
GAAP establishes a fair value hierarchy and prioritizes the inputs
to valuation techniques used to measure fair value into three broad
levels. The fair value hierarchy gives the highest priority to
observable inputs such as quoted prices in active markets for identical
assets or liabilities (Level 1) and the lowest priority to unobservable
inputs (Level 3). The maximization of observable inputs and the
minimization of the use of unobservable inputs are required.
Classification within the fair value hierarchy is based upon the
objectivity of the inputs that are significant to the valuation of an
asset or liability as of the measurement date. The three levels within
the fair value hierarchy are characterized as follows:
- Level 1 - Quoted prices in active markets for identical assets
or liabilities that the Company has the ability to access at the
measurement date.
- Level 2 - Inputs other than quoted prices included with Level 1
that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include: quoted prices for similar
assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities in markets that are not
active; inputs other than quoted prices that are observable for the
asset or liability; and inputs that are derived principally from,
or corroborated by, observable market data by correlation or other
means.
- Level 3 - Unobservable inputs for the asset or liability for which
there is little, if any, market activity for the asset or liability
at the measurement date. Unobservable inputs reflect the Company's
own assumptions about what market participants would use to price
the asset or liability. These inputs may include internally
developed pricing models, discounted cash flow methodologies, as
well as instruments for which the fair value determination requires
significant management judgment.
The Company measures certain financial assets and liabilities at
fair value in accordance with GAAP. These measurements involve various
valuation techniques and assume that the transactions would occur
between market participants in the most advantageous market for the
Company.
The following is a summary of valuation techniques utilized by the
Company for its significant financial assets and liabilities measured at
fair value on a recurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets and
liabilities pursuant to the valuation hierarchy:
Available for sale securities
Securities available for sale consist of corporate debt, trust
preferred and municipal securities and are valued using quoted market
prices in an active market. This measurement is classified as Level 1
within the hierarchy.
Mortgage-backed available for sale securities are valued by using
broker dealer quotes for similar assets in markets that are not active.
Such quotes are based on actual transactions for similar assets.
Although the Company does not validate these quotes, they are reviewed
by management for reasonableness in relation to current market
conditions. Additionally, they are obtained from experienced brokers
who have an established relationship with the Bank and deal regularly
with these types of securities. The Company does not make any
adjustment to the quotes received from broker dealers. These
measurements are classified as Level 2.
Loans held for sale
Loans held for sale are valued using quoted market prices for loans
with similar characteristics. This measurement is classified as Level 2
within the hierarchy.
17
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active market with
readily observable market prices. Therefore, fair value is assessed
using a valuation model that calculates the discounted cash flow using
assumptions such as estimates of prepayment speeds, market discount
rates, servicing fee income, and cost of servicing. These measurements
are classified as Level 3. Mortgage servicing rights are initially
recorded at amortized cost and are amortized over the period of net
servicing income. They are evaluated for impairment monthly, and
valuation adjustments are recorded as necessary to reduce the carrying
value to fair value.
Commitments to Originate Loans and Forward Sales Commitments
Commitments to originate loans and forward sales commitments are
valued using a valuation model which considers differences between
current market interest rates and committed rates. The model also
includes assumptions which estimate fall-out percentages for commitments
to originate loans. These measurements use significant unobservable
inputs and are classified as Level 3 within the hierarchy.
The following table presents the fair value measurements of assets
recognized in the accompanying balance sheets measured at fair value on
a recurring basis and the level within the fair value hierarchy in which
the measurements fall at December 31, 2010 (in thousands):
Quoted Prices in Significant Significant
Active Markets for Other Unobservable
Fair Identical Assets Observable Inputs
Value (Level 1) Inputs (Level 2) (Level 3)
-------------------------------------------------------
Assets:
Securities, available for sale
Corporate debt securities $ 8,634 8,634 -- --
Trust preferred securities 15,752 15,752 -- --
Municipal securities 23 23 -- --
Mortgage-backed securities,
available for sale
Pass through certificates
guaranteed by GNMA -
fixed rate 96 -- 96 --
Pass through certificates
guaranteed by FNMA -
adjustable rate 185 -- 185 --
FHLMC participation certificates:
Fixed rate 366 -- 366 --
Adjustable rate 173 -- 173 --
Loans held for sale 117,499 -- 117,499 --
Mortgage servicing rights 271 -- -- 271
Commitments to originate loans 181 -- -- 181
Forward sales commitments 4,441 -- -- 4,441
-------------------------------------------------------
Total assets $ 147,621 24,409 118,319 4,893
=======================================================
Liabilities:
Commitments to originate
loans $ 1,916 -- -- 1,916
Forward sales commitments 16 -- -- 16
-------------------------------------------------------
Total liabilities $ 1,932 -- -- 1,932
=======================================================
18
The following table presents the fair value measurements of assets
recognized in the accompanying balance sheets measured at fair value on
a recurring basis and the level within the fair value hierarchy in which
the measurements fall at September 30, 2010 (in thousands):
Quoted Prices in Significant Significant
Active Markets for Other Unobservable
Fair Identical Assets Observable Inputs
Value (Level 1) Inputs (Level 2) (Level 3)
-------------------------------------------------------
Assets:
Securities, available for sale
Corporate debt securities $ 17,723 17,723 -- --
Trust preferred securities 10,346 10,346
Municipal securities 23 23
Mortgage-backed securities,
available for sale
Pass through certificates
guaranteed by GNMA -
fixed rate 101 -- 101 --
Pass through certificates
guaranteed by FNMA -
adjustable rate 193 -- 193 --
FHLMC participation certificates:
Fixed rate 437 -- 437 --
Adjustable rate 180 -- 180 --
Loans held for sale 179,845 -- 179,845 --
Mortgage servicing rights 263 -- -- 263
Commitments to originate loans 2,177 -- -- 2,177
Forward sales commitments 902 -- -- 902
-------------------------------------------------------
Total assets $ 212,190 28,092 180,756 3,342
=======================================================
Liabilities:
Commitments to originate
loans $ 630 -- -- 630
Forward sales commitments 1,142 -- -- 1,142
-------------------------------------------------------
Total liabilities $ 1,772 -- -- 1,772
=======================================================
The following tables present a reconciliation of the beginning and
ending balances of recurring fair value measurements recognized in the
accompanying balance sheet using significant unobservable (Level 3)
inputs for the three month periods ended December 31, 2010 and 2009 (in
thousands):
Mortgage Commitments
Servicing to Originate Forward Sales
Rights Loans Commitments
---------------------------------------------
Balance at October 1, 2010 $ 263 1,547 (240)
Total realized and unrealized
gains (losses):
Included in net income 8 (3,282) 4,665
---------------------------------------------
Balance at December 31, 2010 $ 271 (1,735) 4,425
=============================================
Mortgage Commitments
Servicing to Originate Forward Sales
Rights Loans Commitments
---------------------------------------------
Balance at October 1, 2009 $ 351 1,023 (378)
Total realized and unrealized
gains (losses):
Included in net income (36) (1,695) 2,010
Issuances 5 -- --
---------------------------------------------
Balance at December 31, 2009 $ 320 (672) 1,632
=============================================
19
Realized and unrealized gains and losses noted in the table above
and included in net income for the three month period ended December 31,
2010, are reported in the consolidated statements of income as follows
(in thousands):
Impairment
Loan Loss on
Servicing Mortgage Other
Fees Servicing Rights Income
----------------------------------------
Total gains (losses) $ 9 (1) 1,384
========================================
Changes in unrealized gains
(losses) relating to assets
still held at the balance
sheet date $ -- -- --
========================================
The following is a summary of valuation techniques utilized by the
Company for its significant financial assets and liabilities measured at
fair value on a nonrecurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets and
liabilities pursuant to the valuation hierarchy:
Impaired loans
Loans for which it is probable that the Company will not collect
principal and interest due according to contractual terms are measured
for impairment. If the impaired loan is identified as collateral
dependent, then the fair value method of measuring the amount of
impairment is utilized. This method requires obtaining a current
independent appraisal of the collateral and other internal assessments
of value. Impaired loans are classified within Level 3 of the fair
value hierarchy.
The carrying value of impaired loans that were re-measured during
the three month period ended December 31, 2010, was $41.6 million.
Foreclosed Assets Held For Sale
Foreclosed assets held for sale are initially recorded at fair
value as of the date of foreclosure less 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.
Fair value is estimated through current appraisals, broker price
opinions, or listing prices. Foreclosed assets held for sale are
classified within Level 3 of the fair value hierarchy.
The carrying value of foreclosed assets held for sale was $34.0
million at December 31, 2010. Charge-offs and increases in specific
reserves related to foreclosed assets held for sale that were re-
measured during the three month period ended December 31, 2010, totaled
$83,000.
Investment in LLCs
Investments in LLCs are accounted for using the equity method of
accounting. These investments are analyzed for impairment in accordance
with ASC 323-10-35-32, which states that an other than temporary decline
in value of an equity method investment should be recognized. The
Company utilizes a multi-faceted approach to measure the potential
impairment. The internal model utilizes the following valuation
methods: 1) liquidation or appraised values determined by an independent
third party appraisal; 2) an on-going business, or discounted cash flows
method wherein the cash flows are derived from the sale of fully-
developed lots, the development and sale of partially-developed lots,
the operation of the homeowner's association, and the value of raw land
obtained from an independent third party appraiser; and 3) an on-going
business method, which utilizes the same inputs as method 2, but
presumes that cash flows will first be generated from the sale of raw
ground and then from the sale of fully-developed and partially-developed
lots and the operation of the homeowner's association. The significant
inputs include raw land values, absorption rates of lot sales, and a
market discount rate. Management believes this multi-faceted approach
is reasonable given the highly subjective nature of the assumptions and
the differences in valuation techniques that are utilized within each
approach (e.g., order of distribution of assets upon potential
liquidation). Investment in LLCs is classified within Level 3 of the
fair value hierarchy.
The carrying value of the Company's investment in LLCs was $17.8
million at December 31, 2010.
20
The following methods were used to estimate the fair value of all
other financial instruments recognized in the accompanying balance
sheets at amounts other than fair value:
Cash and cash equivalents
The carrying amount reported in the consolidated balance sheets is a
reasonable estimate of fair value.
Securities and mortgage-backed securities held to maturity
Securities that trade in an active market are valued using quoted
market prices. Securities that do not trade in an active market are
valued using quotes from broker-dealers that reflect estimated offer
prices.
Stock in Federal Home Loan Bank ("FHLB")
The carrying value of stock in Federal Home Loan Bank approximates
its fair value.
Loans receivable held for investment
Fair values are computed for each loan category using market spreads
to treasury securities for similar existing loans in the portfolio
and management's estimates of prepayments.
Customer and brokered deposit accounts
The estimated fair values of demand deposits and savings accounts are
equal to the amount payable on demand at the reporting date. Fair
values of certificates of deposit are computed at fixed spreads to
treasury securities with similar maturities.
Advances from FHLB
The estimated fair values of advances from FHLB are determined by
discounting the future cash flows of existing advances using rates
currently available for new advances with similar terms and remaining
maturities.
Subordinated debentures
Fair values are based on quotes from broker-dealers that reflect
estimated offer prices.
Commitments to originate, purchase and sell loans
The estimated fair value of commitments to originate, purchase, or
sell loans is based on the difference between current levels of
interest rates and the committed rates.
The following table presents the carrying values and fair values of
the Company's financial instruments. Dollar amounts are expressed in
thousands.
December 31, 2010 September 30, 2010
-------------------------- -------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------------------------- -------------------------
Financial Assets:
Cash and cash equivalents $ 10,303 10,303 14,033 14,033
Securities held to maturity 1,076 1,475 1,232 1,561
Stock in Federal Home Loan Bank 13,203 13,203 15,873 15,873
Mortgage-backed securities held
to maturity 41,186 41,116 46,276 46,300
Loans receivable held for
investment 1,027,369 1,037,564 1,041,041 1,043,886
Financial Liabilities:
Customer deposit accounts $ 881,724 886,699 866,559 869,941
Brokered deposit accounts 16,922 16,927 66,894 66,797
Advances from FHLB 228,000 231,174 286,000 288,061
Subordinated debentures 25,774 10,000 25,774 10,310
21
December 31, 2010 September 30, 2010
-------------------------- -------------------------
Contract or Estimated Contract or Estimated
notional unrealized notional unrealized
amount gain amount gain (loss)
-------------------------- -------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 10,112 25 6,127 (5)
Lending commitments - floating
rate 937 12 417 6
Commitments to sell loans -- -- -- --
The fair value estimates presented are based on pertinent
information available to management as of December 31, 2010, and
September 30, 2010. Although management is not aware of any factors
that would significantly affect the estimated fair values, such amounts
have not been comprehensively revalued for purposes of these
consolidated financial statements since that date. Therefore, current
estimates of fair value may differ significantly from the amounts
presented above.
(15) INVESTMENT IN LLCs
The Company is a partner in two limited liability companies,
Central Platte Holdings LLC ("Central Platte") and NBH, LLC ("NBH"),
which were formed for the purpose of purchasing and developing vacant
land in Platte County, Missouri. These investments are accounted for
using the equity method of accounting.
The Company's investment in Central Platte consists of a 50%
ownership interest in an entity that develops land for residential real
estate sales. Sales of lots had not met previous expectations and, as a
result, the Company evaluated its investment for impairment, in
accordance with ASC 323-10-35-32, which provides guidance related to a
loss in value of an equity method investment. The Company utilizes a
multi-faceted approach to measure the potential impairment. The
internal model utilizes the following valuation methods: 1) liquidation
or appraised values determined by an independent third party appraisal;
2) an on-going business, or discounted cash flows method wherein the
cash flows are derived from the sale of fully-developed lots, the
development and sale of partially-developed lots, the operation of the
homeowner's association, and the value of raw land obtained from an
independent third party appraiser; and 3) another on-going business
method, which utilizes the same inputs as method 2, but presumes that
cash flows will first be generated from the sale of raw ground and then
from the sale of fully-developed and partially-developed lots and the
operation of the homeowner's association. The internal model also
includes an on-going business method wherein the cash flows are derived
from the sale of fully-developed lots, the development and sale of
partially-developed lots, the operation of the homeowner's association,
and the development and sale of lots from the property that is currently
raw land. However, management does not feel the results from this
method provide a reliable indication of value because the time to
"build-out" the development exceeds 18 years. Because of this
unreliability the results from this method are given a zero weighting in
the final impairment analysis. The significant inputs include raw land
values, absorption rates of lot sales, and a market discount rate.
Management believes this multi-faceted approach is reasonable given the
highly subjective nature of the assumptions and the differences in
valuation techniques that are utilized within each approach (e.g., order
of distribution of assets upon potential liquidation). It is
management's opinion that no one valuation method within the model is
preferable to the other and that no one method is more likely to occur
than the other. Therefore, the final estimate of value is determined by
assigning an equal weight to the values derived from each of the first
three methods described above.
As a result of this analysis, the Company determined that its
investment in Central Platte was materially impaired and recorded an
impairment charge of $2.0 million ($1.2 million, net of tax) during the
year ended September 30, 2010.
The following table displays the results derived from the Company's
internal valuation model and the carrying value of its investment in
Central Platte at December 31, 2010. Dollar amounts are expressed in
thousands.
Method 1 $ 17,064
Method 2 16,493
Method 3 18,621
Average of methods 1, 2, and 3 $ 17,393
========
Carrying value of investment in
Central Platte Holdings, LLC $ 16,405
========
22
The Company's investment in NBH consists of a 50% ownership
interest in an entity that holds raw land, which is currently zoned as
agricultural. The general managers intend to rezone this property for
commercial and/or residential development. The raw land was purchased
in 2002. The Company accounts for its investment in NBH under the
equity method. Due to the overall economic conditions surrounding real
estate, the Company evaluated its investment for impairment in
accordance with ASC 323-10-35-32, which provides guidance related to a
loss in value of an equity method investment. Potential impairment was
measured based on liquidation or appraised values determined by an
independent third party appraisal. As a result of this analysis, the
Company determined that its investment in NBH was materially impaired
and recorded an impairment charge of $1.1 million ($693,000, net of tax)
during the year ended September 30, 2010. No events have occurred
during the three months ended December 31, 2010, that would indicate any
additional impairment of the Company's investment in NBH. The carrying
value of the Company's investment in NBH was $1.4 million at December
31, 2010.
(16) SUPERVISORY AGREEMENT
On April 30, 2010, the Board of Directors of North American Savings
Bank, F.S.B. (the "Bank"), a wholly owned subsidiary of the Company,
entered into a Supervisory Agreement with the Office of Thrift
Supervision ("OTS"), the Bank's primary regulator, effective as of that
date. The agreement requires, among other things, that the Bank revise
its policies regarding internal asset review, obtain an independent
assessment of its allowance for loan and lease losses methodology and
conduct an independent third-party review of a portion of its commercial
and construction loan portfolios. The agreement also directs the Bank
to provide a plan to reduce its classified assets and its reliance on
brokered deposits, and restricts the payment of dividends or other
capital distributions by the Bank during the period of the agreement.
The agreement did not direct the Bank to raise capital, make management
or board changes, revise any loan policies or restrict lending growth.
The Bank received written communication from OTS that, notwithstanding
the existence of the Supervisory Agreement, the Bank will not be deemed
to be in "troubled condition."
On April 30, 2010, the Company's Board of Directors entered into an
agreement with the Office of Thrift Supervision ("OTS"), the Company's
primary regulator, effective as of that date. The agreement restricts
the payment of dividends or other capital distributions by the Company
and restricts the Company's ability to incur, issue or renew any debt
during the period of the agreement.
As of December 31, 2010, the Company and the subsidiary Bank are in
compliance with these regulatory agreements.
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.
23
FINANCIAL CONDITION
ASSETS
The Company's total assets as of December 31, 2010, were $1,337.2
million, a decrease of $97.0 million from September 30, 2010, the prior
fiscal year end.
Loans receivable held for investment were $1,059.9 million as of
December 31, 2010, a decrease of $13.5 million during the three month
period. The weighted average rate on such loans as of December 31,
2010, was 6.23%, a decrease from 6.35% as of December 31, 2009.
Loans receivable held for sale as of December 31, 2010, were $117.5
million, a decrease of $62.3 million from September 30, 2010. 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 three months ended December 31, 2010, the Bank
originated and purchased $649.0 million in mortgage loans held for sale,
$62.2 million in mortgage loans held for investment, and $887,000 in
other loans. This total of $712.1 million in loans compares to $467.4
million in loans originated and purchased during the three months ended
December 31, 2009.
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 consist of the reserved portion
of loans classified as impaired pursuant to ASC 310-10-35.
The following table summarizes the Bank's classified assets as
reported to the OTS, plus any classified assets of the holding company.
Dollar amounts are expressed in thousands.
12/31/10 9/30/10 12/31/09
-------------------------------------
Asset Classification:
Substandard $ 137,996 142,085 122,175
Doubtful -- -- --
Loss* 16,254 16,965 10,977
-------------------------------------
154,250 159,050 133,152
Allowance for losses on
loans and real estate
owned (34,545) (34,643) (29,154)
-------------------------------------
$ 119,705 124,407 103,998
=====================================
*Assets classified as loss represent the amount of measured impairment
related to loans and foreclosed assets held for sale that have been
deemed impaired. The Bank records a specific loss allowance equal to
the amount of measured impairment. These specific allowances are
included in the balance of the allowance for losses on loans and real
estate owned above.
24
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.
12/31/10 9/30/10 12/31/09
----------------------------------------
Total Assets $ 1,337,176 1,434,196 1,527,170
========================================
Non-accrual loans $ 12,779 29,368 24,237
Troubled debt
restructurings 24,643 23,730 24,609
Net real estate and
other assets acquired
through foreclosure 34,009 38,362 13,860
----------------------------------------
Total $ 71,431 91,460 62,706
========================================
Percent of total assets 5.34% 6.38% 4.11%
========================================
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.
Investment securities were $25.5 million as of December 31, 2010, a
decrease of $3.8 million from September 30, 2010. During the three
month period, the Bank purchased securities of $10.2 million and sold
$13.9 million of securities available for sale. The Company realized
gross gains of $280,000 and no gross losses on the sale of securities
available for sale during the period.
Mortgage-backed securities were $42.0 million as of December 31,
2010, a decrease of $5.2 million from the prior year end. There were no
sales of mortgage-backed securities available for sale during the three
month periods ended December 31, 2010. The average yield on the
mortgage-backed securities portfolio was 4.90% at December 31, 2010, a
slight increase from 4.88% at September 30, 2010.
The Company's investment in LLCs, which is accounted for using the
equity method, was $17.8 million at December 31, 2010, a decrease of
$27,000 from September 30, 2010. During the fiscal year ended September
30, 2010, the Company recorded a $2.0 million impairment charge related
to its investment in Central Platte Holdings, LLC ("Central Platte") and
a $1.1 million impairment charge related to its investment in NBH, LLC
("NBH"). There have been no events subsequent to September 30, 2010,
that would indicate an additional impairment in value of the Company's
investments in Central Platte and NBH, which were $16.4 million and $1.4
million at December 31, 2010, respectively.
LIABILITIES AND EQUITY
Customer and brokered deposit accounts decreased $34.8 million
during the three months ended December 31, 2010. Specifically, customer
deposits increased $15.2 million during the period, primarily due to an
increase in retail certificates of deposits resulting from promotions
during the period. Brokered deposits decreased $50.0 million during the
period, as a result of the Company's effort to reduce its reliance on
this funding source. The weighted average rate on customer and brokered
deposits as of December 31, 2010, was 1.83%, a decrease from 2.04% as of
December 31, 2009.
Advances from the FHLB were $228.0 million as of December 31, 2010,
a decrease of $58.0 million from September 30, 2010. During the three
month period, the Bank borrowed $17.0 million of new advances and repaid
$75.0 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.
25
Subordinated debentures were $25.8 million as of December 31, 2010.
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 $5.0 million as of December 31, 2010, a decrease of
$6.1 million from September 30, 2010. This decrease is due to amounts
paid for borrowers' taxes during the fourth calendar quarter of 2010.
Total stockholders' equity as of December 31, 2010, was $169.8
million (12.7% of total assets). This compares to $167.8 million (11.7%
of total assets) at September 30, 2010. On a per share basis,
stockholders' equity was $21.58 on December 31, 2010, compared to $21.32
on September 30, 2010.
The Company did not pay any cash dividends to its stockholders
during the three month period ended December 31, 2010. In accordance
with the April 2010 agreement with the Office of Thrift Supervision, the
Company is restricted from the payment of dividends or other capital
distributions during the period of the agreement without prior written
consent from the Office of Thrift Supervision.
Total stockholders' equity as of December 31, 2010, includes an
unrealized gain, net of deferred income taxes, on available for sale
securities of $446,000. 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).
Three months ended
------------------------
12/31/10 12/31/09
------------------------
Return on assets 0.58% 0.34%
Return on equity 4.77% 3.21%
Equity-to-assets ratio 12.70% 10.79%
Dividend payout ratio --% 133.18%
RESULTS OF OPERATIONS - Comparison of three months ended December 31,
2010 and 2009.
For the three months ended December 31, 2010, the Company had net
income of $2.0 million or $0.26 per share. This compares to net income
of $1.3 million or $0.17 per share for the three month period ended
December 31, 2009.
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.
26
The following table presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities for the three months ended
December 31, 2010 and 2009. Average yields reflect reductions due to
non-accrual loans. Once a loan becomes 90 days delinquent, any interest
that has accrued up to that time is reserved and no further interest
income is recognized unless the loan is paid current. Average balances
and weighted average yields for the periods include all accrual and non-
accrual loans. The table also presents the interest-earning assets and
yields for each respective period. Dollar amounts are expressed in
thousands.
Three months ended 12/31/10 As of
--------------------------- 12/31/10
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,184,717 18,071 6.10% 6.02%
Mortgage-backed securities 45,078 552 4.90% 4.90%
Securities 40,569 623 6.14% 5.74%
Bank deposits 19,721 4 0.08% 0.01%
--------------------------------------
Total earning assets 1,290,085 19,250 5.97% 5.94%
---------------------------
Non-earning assets 95,631
----------
Total $1,385,716
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 191,525 263 0.55% 0.50%
Customer and brokered
certificates of deposit 739,120 4,023 2.18% 2.20%
FHLB Advances 253,769 1,797 2.83% 2.31%
Subordinated debentures 25,000 127 2.03% 1.94%
--------------------------------------
Total costing liabilities 1,209,414 6,210 2.05% 1.93%
---------------------------
Non-costing liabilities 6,283
Stockholders' equity 170,019
----------
Total $1,385,716
==========
Net earning balance $ 80,671
==========
Earning yield less costing rate 3.92% 4.01%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,290,085 13,040 4.04%
============================
Three months ended 12/31/09 As of
--------------------------- 12/31/09
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,311,849 20,606 6.28% 6.24%
Mortgage-backed securities 81,295 884 4.35% 4.41%
Securities 45,115 472 4.18% 4.45%
Bank deposits 26,649 3 0.05% 0.01%
--------------------------------------
Total earning assets 1,464,908 21,965 5.99% 6.00%
---------------------------
Non-earning assets 68,841
----------
Total $1,533,749
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 181,511 346 0.76% 0.49%
Customer and brokered
certificates of deposit 702,941 4,347 2.47% 2.46%
FHLB Advances 443,052 3,339 3.01% 2.92%
Subordinated debentures 25,000 128 2.05% 1.93%
--------------------------------------
Total costing liabilities 1,352,504 8,160 2.41% 2.33%
---------------------------
Non-costing liabilities 13,084
Stockholders' equity 168,161
----------
Total $1,533,749
==========
Net earning balance $ 112,404
==========
Earning yield less costing rate 3.58% 3.67%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,464,908 13,805 3.77%
============================
27
The following table provides information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided on
changes attributable to (1) changes in rates (change in rate
multiplied by the old volume), and (2) changes in volume (change in
volume multiplied by the old rate), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
Three months ended December 31, 2010, compared to
three months ended December 31, 2009
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (590) (1,996) 51 (2,535)
Mortgage-backed securities 112 (394) (50) (332)
Securities 221 (48) (22) 151
Bank deposits 2 (1) -- 1
-----------------------------------------------
Net change in interest income (255) (2,439) (21) (2,715)
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (619) 245 (33) (407)
FHLB Advances (199) (1,424) 81 (1,542)
Subordinated debentures (1) -- -- (1)
-----------------------------------------------
Net change in interest expense (819) (1,179) 48 (1,950)
-----------------------------------------------
Decrease in net interest
margin $ 564 (1,260) (69) (765)
===============================================
Net interest margin before loan loss provision for the three
months ended December 31, 2010, decreased $765,000 from the same period
in the prior year. Specifically, interest income decreased $2.7
million, which was offset by a $2.0 million decrease in interest expense
for the period. Interest on loans decreased $2.5 million as the result
of a $127.0 million decrease in the average balance of loans receivable
outstanding during the period and an 18 basis point decrease in the
average rate earned on such loans during the period. Interest on
mortgage-backed securities decreased $332,000 due primarily to a $36.2
million decrease in the average balance of such securities during the
period. These decreases in interest income were partially offset by a
$151,000 increase in interest on investment securities resulting from a
196 basis point increase in the average yield of such securities.
Interest expense on customer and brokered deposit accounts decreased
$407,000 due to a 28 basis point decrease in the average rate paid on
such interest-costing liabilities, the effect of which was partially
offset by a $46.2 million increase in the average balance of customer
and brokered deposit accounts during the period. Interest expense on
FHLB advances decreased $1.5 million as the result of a $189.3 million
decrease in the average balance and an 18 basis point decrease in the
average rate paid on such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $4.0 million
during the three month period ended December 31, 2010, due primarily to
increases in specific reserves related to impaired construction and land
development loans. In addition, the Bank increased its general reserves
related to the commercial real estate and land development portfolios
based primarily upon its historical losses and other relevant
qualitative factors such as economic and business conditions. The
Company recorded a provision for loan losses of $9.0 million during the
quarter ended December 31, 2009, in response to a significant increase
in loans classified as substandard or loss. Additionally, management
determined that the increased provision was appropriate due to the
continued uncertainty in the real estate markets. Management performs
an ongoing analysis of individual loans and of homogenous pools of loans
to assess for any impairment. On a consolidated basis, the allowance
for losses on loans and real estate owned was 22.4% of total classified
assets at December 31, 2010, 21.8% at September 30, 2010, and 21.9% at
December 31, 2009.
Management believes that the allowance for losses on loans and real
estate owned is adequate. The provision can fluctuate based on changes
in economic conditions, changes in the level of classified assets,
changes in the amount of loan charge-offs and recoveries, or changes in
other information available to management. Also, regulatory agencies
review the Company's allowances for losses as a part of their
examination process and they may require changes in loss provision
amounts based on information available at the time of their examination.
28
OTHER INCOME
Other income for the three months ended December 31, 2010,
decreased $516,000 from the same period in the prior year.
Specifically, impairment loss on investment in LLCs increased $2.0
million due to an impairment charge related to the Company's investment
in Central Platte Holdings, LLC during the quarter ended December 31,
2009. Other income increased $724,000 due primarily to the effect of
recording the net fair value of certain loan-related commitments in
accordance with GAAP, which was partially offset by an increase in
expenses related to foreclosed assets held for sale. Customer service
fees and charges increased $600,000 primarily due to an increase in
miscellaneous loan fees resulting from higher residential mortgage loan
origination volume during the period. The increase in gain on sale of
loans held for sale resulting from a significant increase in mortgage
banking volume for the period was largely offset by a $4.9 million
decrease in the adjustment to mark these loans to market value,
resulting in only a $368,000 increase from the same period in the prior
year. These increases were offset by a $2.8 million decrease in gain on
sale of securities available for sale due to a significant decrease in
the volume of such sales during the period. Additionally, provision for
loss on real estate owned increased $413,000 due primarily to charge-
offs resulting from the sale of foreclosed assets held for sale.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended December 31, 2010, increased $2.9 million from the same period in
the prior year. Specifically, compensation and fringe benefits
increased $614,000 due primarily to the addition of personnel in the
Company's mortgage banking, information technology, and loan servicing
departments. Commission-based mortgage banking compensation increased
$2.1 million due primarily the significant increase in mortgage banking
spreads from the same period in the prior year. Other expense increased
$1.1 million due primarily to increases in data processing fees,
consulting fees, and other expenses related to the Company's lending
operations such as underwriting, credit, appraisal, and processing fees.
These increases in general and administrative expenses were offset by an
$801,000 decrease in federal deposit insurance premiums and a $102,000
decrease in advertising and business promotion expense from the same
period in the prior year.
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Deposit Insurance Fund ("DIF") of the FDIC. The Bank
is subject to regulation by the OTS as its chartering authority. Since
passage of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA" or the "Act"), the FDIC also has regulatory
control over the Bank. The transactions of DIF-insured institutions are
limited by statute and regulations that may require prior supervisory
approval in certain instances. Institutions also must file reports with
regulatory agencies regarding their activities and their financial
condition. The OTS and FDIC make periodic examinations of the Bank to
test compliance with the various regulatory requirements. The OTS can
require an institution to re-value its assets based on appraisals and to
establish specific valuation allowances. This supervision and
regulation is intended primarily for the protection of depositors.
Also, savings institutions are subject to certain reserve requirements
under Federal Reserve Board regulations.
INSURANCE OF ACCOUNTS
The DIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured owner, with the exception of self-directed
retirement accounts, which are insured to a maximum of $250,000. On
October 3, 2008, the Emergency Economic Stabilization Act of 2008
temporarily raised the basic limit of federal deposit insurance coverage
from $100,000 to $250,000 per depositor. This legislation provided that
the basic deposit insurance limit would return to $100,000 after
December 31, 2013. On July 21, 2010, the Dodd-Frank Wall Street Reform
and Consumer Protection Act made permanent the maximum deposit insurance
amount of $250,000.
Deposit 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 subgroups. The
capital groups are an objective measure of risk based on regulatory
capital calculations and include well capitalized, adequately
capitalized, and undercapitalized. The supervisory subgroups (A, B, and
C) are more subjective and are determined by the FDIC based on recent
regulatory examinations. Member institutions are eligible for
reclassification every six months. On March 25, 2010, North American
was moved from supervisory category A to category B, based upon the
results of the Bank's OTS examination.
29
Annual deposit insurance premiums range from 7 to 77.5 basis points
of insured deposits based on where an institution fits on the RRPS. In
addition to deposit insurance premiums, institutions are assessed a
premium, which is used to service the interest on the Financing
Corporation ("FICO") debt.
On May 22, 2009, the Federal Deposit Insurance Corporation (FDIC)
adopted a rule imposing a five basis point special assessment on all
insured financial institutions' assets minus its Tier I capital as of
June 30, 2009, which was collected on September 30, 2009. On November
12, 2009, the FDIC adopted a rule requiring insured institutions to
prepay their estimated quarterly risk-based assessments for the fourth
calendar quarter of 2009, and all of 2010, 2011, and 2012. The prepaid
assessment for these periods was collected on December 31, 2009, along
with each institution's regular quarterly risk-based deposit insurance
assessment for the third calendar quarter of 2009.
REGULATORY CAPITAL REQUIREMENTS
At December 31, 2010, the Bank exceeds all capital requirements
prescribed by the OTS. To calculate these requirements, a thrift must
deduct any investments in and loans to subsidiaries that are engaged in
activities not permissible for a national bank. As of December 31,
2010, the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
At December 31, 2010 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 172,569
Adjustment for regulatory capital:
Intangible assets (2,546)
Disallowed portion of servicing assets
and deferred tax assets (24)
Reverse the effect of SFAS No. 115 (446)
---------
Tangible capital 169,553
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 169,553
Qualifying general valuation allowance 15,946
---------
Risk-based capital $ 185,499
=========
As of December 31, 2010
-------------------------------------------------------------------
Minimum Required for Minimum Required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 185,499 14.6% 101,869 >=8% 127,337 >=10%
Core capital to adjusted tangible assets 169,553 12.9% 52,550 >=4% 65,687 >=5%
Tangible capital to tangible assets 169,553 12.9% 19,706 >=1.5% -- --
Tier 1 capital to risk-weighted assets 169,553 13.3% -- -- 76,402 >=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 its loans-to-one-borrower limit to $30 million for loans
secured by certain residential housing units. Such loans must not, in
the aggregate, exceed 150% of the Bank's unimpaired capital and surplus.
30
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("The
Dodd-Frank Act" or "The Act") was signed into law on July 21, 2010. The
Bank's primary federal regulator, the Office of Thrift Supervision, will
be eliminated and existing federal thrifts will be subject to regulation
and supervision by the Office of the Comptroller of the Currency, which
supervises and regulates all national banks. Existing savings and loan
holding companies will be subject to regulation and supervision by the
Federal Reserve Board. The Dodd-Frank Act creates a new Consumer
Financial Protection Bureau with broad powers to enforce consumer
protection laws and ensure that markets for consumer financial products
and services are fair, transparent, and competitive. The Act restricts
the ability of banks to apply trust preferred securities toward
regulatory capital requirements. However, Tier 1 capital treatment for
trust preferred securities issued before May 19, 2010 is grandfathered
for bank holding companies with assets under $15 billion. The Dodd-
Frank Act will require publically traded companies to give stockholders
a non-binding vote on executive compensation and so called "golden
parachute" payments. The Act authorizes the Securities and Exchange
Commission to promulgate rules that would allow stockholders to nominate
their own candidates using a company's proxy materials. The Dodd-Frank
Act also broadens the base for FDIC insurance assessments, which will be
based on average consolidated total assets less tangible equity capital,
rather than deposits. The Act also makes permanent the maximum deposit
insurance amount of $250,000 per depositor. The federal agencies are
given significant discretion in drafting the rules and regulations
required by The Dodd-Frank Act. Consequently, the full impact of this
legislation will not be known for some time.
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. FHLB advances are secured by a blanket pledge agreement
of the loan and securities portfolio, as collateral, supported by
quarterly reporting of eligible collateral to FHLB. Available FHLB
borrowings are limited based upon a percentage of the Bank's assets and
eligible collateral, as adjusted by appropriate eligibility and
maintenance levels. Management continually monitors the balance of
eligible collateral relative to the amount of advances outstanding. At
December 31, 2010, the Bank had a total borrowing capacity at FHLB of
$457.3 million, and outstanding advances of $228.0 million. The Bank
has established relationships with various brokers, and, as a secondary
source of liquidity, the Bank may purchase brokered deposit accounts.
The Bank entered into a Supervisory Agreement with the Office of
Thrift Supervision on April 30, 2010, which, among other things,
required the Bank to reduce its reliance on brokered deposits. The OTS
subsequently approved the Bank's plan to reduce brokered deposits to
$145.0 million by June 30, 2010, $135.0 million by June 30, 2011 and
$125.0 million by June 30, 2012. As of December 31, 2010, the Bank's
brokered deposits totaled $16.9 million. Thus, the Bank could acquire
an additional $128.1 million in brokered deposits and still comply with
the plan as of December 31, 2010.
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. The Bank's contingency liquidity sources include the Federal
Reserve discount window and sales of securities available for sale.
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.
31
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, 2010.
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, 2010.
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 reasonably likely to materially
affect our internal control over financial reporting.
32
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
None.
Item 5. Other Information
None.
Item 6. Exhibits
(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
33
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)
February 9, 2011 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
February 9, 2011 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
34
19
19