UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2011
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 (I.R.S. 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, a non-accelerated filer, or a smaller
reporting company. See definition of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer Accelerated filer X
Non-accelerated filer Smaller 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
August 5, 2011, was 7,867,614.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
June 30, September 30,
2011 2010
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 7,149 14,033
Securities:
Available for sale, at fair value 64,602 28,092
Held to maturity, at cost -- 1,232
Stock in Federal Home Loan Bank, at cost 9,991 15,873
Mortgage-backed securities:
Available for sale, at fair value 736 911
Held to maturity, at cost 43,132 46,276
Loans receivable:
Held for sale, at fair value 77,894 179,845
Held for investment, net 1,024,289 1,073,357
Allowance for loan losses (71,864) (32,316)
---------- -----------
Total loans receivable, net 1,030,319 1,220,886
---------- -----------
Accrued interest receivable 5,253 5,520
Foreclosed assets held for sale, net 19,834 38,362
Premises and equipment, net 14,232 13,836
Investment in LLCs 17,748 17,799
Deferred income tax asset, net 17,236 14,758
Income taxes receivable 14,291 --
Other assets 12,475 16,618
---------- ----------
$ 1,256,998 1,434,196
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 881,987 866,559
Brokered deposit accounts -- 66,894
Advances from Federal Home Loan Bank 189,000 286,000
Subordinated debentures 25,774 25,774
Escrows 7,430 11,149
Income taxes payable -- 504
Accrued expenses and other liabilities 8,232 9,554
---------- ----------
Total liabilities 1,112,423 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 16,640 16,603
Retained earnings 164,521 187,674
Treasury stock, at cost;
1,989,498 shares (38,418) (38,418)
Accumulated other comprehensive
income 353 424
---------- ----------
Total stockholders' equity 144,575 167,762
---------- ----------
$ 1,256,998 1,434,196
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share data)
Three months ended Nine months ended
June 30, June 30,
---------------------- ----------------------
2011 2010 2011 2010
--------- --------- --------- ---------
Interest on loans receivable $ 16,339 19,804 50,605 59,671
Interest on mortgage-backed securities 601 829 1,730 2,492
Interest and dividends on securities 1,116 229 2,954 1,164
Other interest income 1 2 7 10
--------- --------- --------- ---------
Total interest income 18,057 20,864 55,296 63,337
--------- --------- --------- ---------
Interest on customer and brokered
deposit accounts 3,755 4,342 11,903 13,221
Interest on advances from FHLB 1,004 2,468 4,111 8,891
Interest on subordinated debentures 122 124 371 371
--------- --------- --------- ---------
Total interest expense 4,881 6,934 16,385 22,483
--------- --------- --------- ---------
Net interest income 13,176 13,930 38,911 40,854
Provision for loan losses 68 11,500 49,394 25,500
--------- --------- --------- ---------
Net interest income (loss) after
provision for loan losses 13,108 2,430 (10,483) 15,354
--------- --------- --------- ---------
Other income (loss):
Loan servicing fees, net (73) 21 (30) 100
Impairment recovery on mortgage
servicing rights 25 6 42 10
Customer service fees and charges 1,256 1,923 5,016 5,354
Provision for loss on real estate owned -- (1,486) (11,731) (1,694)
Gain on sale of securities available
for sale 203 867 673 5,519
Gain on sale of securities held to
maturity -- -- 411 --
Gain from sale of loans receivable
held for sale 5,325 10,682 21,174 24,766
Impairment loss on investments in LLCs -- -- -- (2,000)
Other (351) (491) (1,837) (1,019)
--------- --------- --------- ---------
Total other income (loss) 6,385 11,522 13,718 31,036
--------- --------- --------- ---------
General and administrative expenses:
Compensation and fringe benefits 4,696 4,890 14,572 13,868
Commission-based mortgage banking compensation 2,364 4,494 10,756 11,845
Premises and equipment 1,082 1,081 3,195 3,128
Advertising and business promotion 1,628 1,316 4,229 4,192
Federal deposit insurance premiums 404 438 1,307 2,110
Other 2,182 2,690 6,823 5,743
--------- --------- --------- ---------
Total general and administrative expenses 12,356 14,909 40,882 40,886
--------- --------- --------- ---------
Income (loss) before income tax expense 7,137 (957) (37,647) 5,504
Income tax expense (benefit) 2,748 (497) (14,494) 1,416
--------- --------- --------- ---------
Net income (loss) $ 4,389 (460) (23,153) 4,088
========= ========= ========= =========
Basic earnings (loss) per share $ 0.56 (0.06) (2.94) 0.52
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.56 (0.06) (2.94) 0.52
========= ========= ========= =========
Basic weighted average shares outstanding 7,867,614 7,867,614 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 loss -- -- (23,153) -- -- (23,153)
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- (71) (71)
available for sale -------
Total comprehensive loss (23,224)
Stock based compensation expense -- 37 -- -- -- 37
----------------------------------------------------------------------
Balance at June 30, 2011 $ 1,479 16,640 164,521 (38,418) 353 144,575
======================================================================
Nine months ended
June 30, 2011
------------------
(Dollars in thousands)
Reclassification Disclosure:
Unrealized gain on available for sale securities,
net of income taxes of $215 $ 343
Reclassification adjustment for gain included in
net income, net of income taxes of $259 (414)
--------
Change in unrealized gain (loss) on available for sale
securities, net of income tax of $(44) $ (71)
========
See accompanying notes to condensed consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine months ended
June 30,
----------------------
2011 2010
----------------------
Cash flows from operating activities:
Net income (loss) $(23,153) 4,088
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,390 1,426
Amortization and accretion, net (116) (1,076)
Gain on sale of securities available for sale (673) (5,519)
Gain on sale of securities held to maturity (411) --
Loss from investment in LLCs 57 60
Impairment loss on investment in LLCs -- 2,000
Impairment recovery on mortgage servicing rights (42) (10)
Gain from loans receivable held for sale (21,174) (24,766)
Provision for loan losses 49,394 25,500
Provision for loss on real estate owned 11,731 1,694
Origination of loans receivable held for sale (1,229,443) (1,183,591)
Sale of loans receivable held for sale 1,352,568 1,151,133
Stock based compensation - stock options 37 59
Changes in:
Net fair value of loan-related commitments 1,354 451
Accrued interest receivable 267 952
Prepaid and accrued expenses, other liabilities
and income taxes receivable and payable (15,862) (15,147)
----------------------
Net cash provided by (used in) operating activities 125,924 (42,746)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 11,871 8,338
Available for sale 159 3,681
Principal repayments of investment securities
Held to maturity 166 53
Available for sale 8,198 5
Principal repayments of mortgage loans receivable
held for investment 131,596 176,391
Principal repayments of other loans receivable 4,222 4,297
Loan origination - mortgage loans receivable
held for investment (104,550) (84,415)
Loan origination - other loans receivable (2,346) (1,969)
Purchase of mortgage loans receivable held for
investment (1,219) (1,002)
Proceeds from sale of Federal Home Loan
Bank stock 5,882 9,209
Purchase of mortgage backed securities held
to maturity (8,768) (54,806)
Purchase of investment securities available for sale (71,259) (28,923)
Proceeds from sale of investment securities held to
maturity 1,491 --
Proceeds from sale of investment securities available
for sale 26,916 46,379
Proceeds from sale of mortgage-backed securities
available for sale -- 47,122
Proceeds from sale of real estate owned 18,983 8,707
Purchases of premises and equipment, net (1,785) (992)
Investment in LLCs (6) (6)
Other (141) (258)
----------------------
Net cash provided by investing activities 19,410 131,811
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine months ended
June 30,
----------------------
2011 2010
----------------------
Cash flows from financing activities:
Net decrease in customer and brokered
deposit accounts (51,499) (45,525)
Proceeds from advances from Federal Home Loan Bank 56,000 48,000
Repayment on advances from Federal Home Loan Bank (153,000) (140,000)
Cash dividends paid -- (3,540)
Change in escrows (3,719) (1,740)
----------------------
Net cash used in financing activities (152,218) (142,805)
----------------------
Net decrease in cash and cash equivalents (6,884) (53,740)
Cash and cash equivalents at beginning of the period 14,033 63,250
----------------------
Cash and cash equivalents at end of period $ 7,149 9,510
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 2,728 12,221
Cash paid for interest 16,524 23,748
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 31,148 40,992
Conversion of real estate owned to loans receivable 4,220 344
Capitalization of originated mortgage servicing rights -- 5
Transfer of securities from held to maturity to
available for sale -- 4,360
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, except for the adoption of the amendments
in Accounting Standards Update No. 2011-02, A Creditor's Determination
of Whether a Restructuring Is a Troubled Debt Restructuring, and a
change in methodology for valuing residential development real estate
related assets, which are described in Footnote 2 and Footnote 8 to the
condensed consolidated financial statements. 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 for the year ended September
30, 2010, filed with the Securities and Exchange Commission on December
14, 2010. Operating results for the nine month period ended June 30,
2011, 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,
and valuation of mortgage servicing rights. Following the early
adoption of Accounting Standards Update ("ASU") No. 2011-02, A
Creditor's Determination of Whether a Restructuring Is a Troubled Debt
Restructuring ,and a change in methodology in valuing residential
development real estate related assets, which are described more fully
in Footnote 2 and Footnote 8 of the condensed consolidated financial
statements, management believes that these allowances are adequate at
June 30, 2011; however, future additions to the allowances may be
necessary based on changes in economic conditions.
The Company's critical accounting policies involve the more
significant judgments and assumptions used in the preparation of the
condensed consolidated financial statements as of June 30, 2011. 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. With the exception of the early adoption of ASU
2011-02 and the change in methodology in valuing residential development
real estate related assets, noted above, these policies have remained
unchanged from September 30, 2010.
Certain quarterly amounts for previous periods have been
reclassified to conform to the current quarter's presentation.
(2) RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2011, the Financial Accounting Standards Board issued
Accounting Standards Update No. 2011-02, A Creditor's Determination of
Whether a Restructuring Is a Troubled Debt Restructuring, which
clarifies the guidance on how creditors evaluate whether a restructuring
of debt qualifies as a Troubled Debt Restructuring ("TDR"). Examples of
restructurings include an extension of a loan's maturity date, a
reduction in the interest rate, forgiveness of a debt's face amount
and/or accrued interest, and a deferral or decrease in payments for a
period of time. The amendments clarify the definition of a TDR in ASC
310-40, which provides that a debt restructuring is considered a TDR if
the creditor, for economic or legal reasons related to the borrower's
financial difficulties, grants a concession to the borrower that it
would not otherwise consider. The framework for evaluating a
restructuring requires that a creditor determine if both of the
following conditions are met: 1) the borrower is experiencing financial
difficulties, and 2) the restructuring includes a concession by the
creditor to the borrower.
For public companies, this standard is effective for the first
interim or annual period beginning on or after June 15, 2011. The
Company early adopted the ASU in its second fiscal quarter, as permitted
by the standard.
6
As a result of adopting the amendments in ASU 2011-02, the Company
reassessed all restructurings that occurred on or after October 1, 2010,
the beginning of the current fiscal year, for identification as TDRs.
The Company identified as TDRs certain receivables for which the
allowance for credit losses had previously been measured under a general
allowance for credit losses methodology. Upon identifying those
receivables as TDRs, the Company identified them as impaired under the
guidance in ASC 310-10-35. The amendments in ASU 2011-02 require
prospective application of impairment measured in accordance with the
guidance of ASC 310-10-35 for the receivables that are newly identified
as impaired. The early adoption of the ASU resulted in a significant
increase in the number of loans within its construction and land
development portfolios that are considered TDRs and had a substantially
material impact on the Company's financial statements for the periods
ended March 31, 2011. At March 31, 2011, the period of adoption, the
recorded investment in receivables for which the allowance for credit
losses was previously measured under a general allowance for credit
losses methodology and are now impaired under ASC 310-10-35 was $28.1
million, and the resulting allowance for credit losses associated with
those receivables, on the basis of a current evaluation of loss, was
$8.0 million. In addition, the Company identified loans with a recorded
investment of $6.7 million which were previously deemed impaired under the
guidance in ASC 310-10-35, but were not considered TDRs. As a result of
adopting the amendments in ASU 2011-02, these loans were identified as TDRs
and the resulting increase in the allowance for credit losses associated with
those receivables, on the basis of a current evaluation of loss, was $3.3
million.
(3) RECONCILIATION OF BASIC EARNINGS (LOSS) PER SHARE TO DILUTED
EARNINGS (LOSS) PER SHARE
The following table presents a reconciliation of basic earnings
(loss) per share to diluted earnings (loss) per share for the periods
indicated.
Three months ended Nine months ended
---------------------- ----------------------
6/30/11 6/30/10 6/30/11 6/30/10
---------------------- ----------------------
Net income (loss) (in thousands) $ 4,389 (460) (23,153) 4,088
Average common shares outstanding 7,867,614 7,867,614 7,867,614 7,867,614
Average common share stock options
outstanding -- -- -- --
---------------------- ----------------------
Average diluted common shares 7,867,614 7,867,614 7,867,614 7,867,614
Earnings (loss) per share:
Basic $ 0.56 (0.06) (2.94) 0.52
Diluted 0.56 (0.06) (2.94) 0.52
At June 30, 2011 and 2010, 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.
(4) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for
sale at June 30, 2011. Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Corporate debt securities $ 38,473 528 69 38,932
Trust preferred securities 25,572 470 390 25,652
Municipal securities 18 -- -- 18
------------------------------------------
Total $ 64,063 995 459 64,602
===========================================
7
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 nine month period ended June 30, 2011, the Company
realized gross gains of $673,000 and no gross losses on the sale of
securities available for sale. The Company realized gross gains of $4.1
million and no gross losses on the sale of securities available for sale
during the nine month period ended June 30, 2010.
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 June 30, 2011. 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 $ 16,116 69 $ -- --
Trust preferred securities 7,871 390 -- --
---------------------------------------------
Total $ 23,987 459 $ -- --
=============================================
The scheduled maturities of securities available for sale at June
30, 2011, 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 $ 6 -- -- 6
Due from one to five years 12 -- -- 12
Due from five to ten years 38,473 528 69 38,932
Due after ten years 25,572 470 390 25,652
-------------------------------------------
Total $ 64,063 998 459 64,602
===========================================
(5) SECURITIES HELD TO MATURITY
There were no securities held to maturity at June 30, 2011. 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
===========================================
8
During the nine month period ended June 30, 2011, the Bank
recognized a gain of $411,000 on the sale of an asset backed security
which was classified as held to maturity. The security, which was
secured by a pool of trust preferred securities issued by various banks,
had an amortized cost of $1.1 million at the time of sale. The decision
was made to sell the security after it was determined that there was
significant deterioration in the issuer's creditworthiness. There were
no dispositions of securities held to maturity during the nine month
period ended June 30, 2010.
(6) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed
securities available for sale at June 30, 2011. 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 $ 88 1 -- 89
Pass-through certificates
guaranteed by FNMA
- adjustable rate 176 5 -- 181
FHLMC participation
certificates:
- fixed rate 290 24 -- 314
- adjustable rate 147 5 -- 152
------------------------------------------
Total $ 701 35 -- 736
===========================================
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 nine month periods ended June 30, 2011 and 2010.
The scheduled maturities of mortgage-backed securities available
for sale at June 30, 2011, 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 $ 140 11 -- 151
Due from five to ten years 150 13 -- 163
Due after ten years 411 11 -- 422
-------------------------------------------
Total $ 701 35 -- 736
===========================================
9
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.
(7) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity at June 30, 2011. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation certificates:
Fixed rate $ 46 6 -- 52
FNMA pass-through certificates:
Fixed rate 6 -- -- 6
Balloon maturity and
adjustable rate 28 -- -- 28
Collateralized mortgage
obligations 43,052 15 518 42,549
------------------------------------------
Total $ 43,132 21 518 42,635
===========================================
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 nine month periods ended June 30, 2011 and 2010.
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 June 30, 2011. 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 $ 36,132 518 $ -- --
---------------------------------------------
Total $ 36,132 518 $ -- --
=============================================
10
The scheduled maturities of mortgage-backed securities held to
maturity at June 30, 2011, 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 $ 6 -- -- 6
Due from five to ten years 3,756 6 107 3,655
Due after ten years 39,370 15 411 38,974
---------------------------------------------
Total $ 43,132 21 518 42,635
=============================================
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.
(8) LOANS RECEIVABLE
The Bank has traditionally concentrated its lending activities on
mortgage loans secured by residential and business property and, to a
lesser extent, development lending. The residential mortgage loans
originated have predominantly long-term fixed and adjustable rates. The
Bank also has a portfolio of mortgage loans that are secured by
multifamily, construction, development, and commercial real estate
properties. The remaining part of North American's loan portfolio
consists of non-mortgage commercial loans and installment loans. The
following table presents the Bank's total loans receivable at June 30,
2011. Dollar amounts are expressed in thousands.
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 336,636
Business properties 427,428
Partially guaranteed by VA or
insured by FHA 3,791
Construction and development 201,514
----------
Total mortgage loans 969,369
Commercial loans 78,344
Installment loans to individuals 9,697
----------
Total loans held for investment 1,057,410
Less:
Undisbursed loan funds (26,196)
Unearned discounts and fees and costs
on loans, net (6,925)
----------
Net loans held for investment $1,024,289
==========
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 116,256
Less:
Undisbursed loan funds (38,362)
----------
Net loans held for sale $ 77,894
==========
Included in the loans receivable balances at June 30, 2011, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the amount of $10.2 million.
Loans and participations serviced for others amounted to approximately
$67.6 million at June 30, 2011.
11
Lending Practices and Underwriting Standards
--------------------------------------------
Residential real estate loans - The Bank offers a range of
residential loan programs, including programs offering loans guaranteed
by the Veterans Administration ("VA") and loans insured by the Federal
Housing Administration ("FHA"). The Bank's residential loans come from
several sources. The loans that the Bank originates are generally a
result of direct solicitations of real estate brokers, builders,
developers, or potential borrowers via the internet. North American
periodically purchases real estate loans from other financial
institutions or mortgage bankers.
The bank's residential real estate loan underwriters are grouped
into three different levels, based upon each underwriter's experience
and proficiency. Underwriters within each level are authorized to
approve loans up to prescribed dollar amounts. Any loan over $1 million
must also be approved by either the CEO or the EVP/Chief Credit Officer.
Conventional residential real estate loans are underwritten using FNMA's
Desktop Underwriter or FHLMC's Loan Prospector automated underwriting
systems, which analyze credit history, employment and income
information, qualifying ratios, asset reserves, and loan-to-value
ratios. If a loan does not meet the automated underwriting standards,
it is underwritten manually. Full documentation to support each
applicant's credit history, income, and sufficient funds for closing is
required on all loans. An appraisal report, performed in conformity
with the Uniform Standards of Professional Appraisers Practice by an
outside licensed appraiser, is required for all loans. Typically, the
Bank requires borrowers to purchase private mortgage insurance when the
loan-to-value ratio exceeds 80%.
NASB originates Adjustable Rate Mortgages (ARMs), which fully
amortize and typically have initial rates that are fixed for one to
seven years before becoming adjustable. Such loans are underwritten
based on the initial interest rate and the borrower's ability to repay
based on the maximum first adjustment rate. Each underwriting decision
takes into account the type of loan and the borrower's ability to pay at
higher rates. While lifetime rate caps are taken into consideration,
qualifying ratios may not be calculated at this level due to an extended
number of years required to reach the fully-indexed rate. NASB does not
originate any hybrid loans, such as payment option ARMs, nor does the
Bank originate any subprime loans, generally defined as high risk or
loans of substantially impaired quality.
At the time a potential borrower applies for a residential mortgage
loan, it is designated as either a portfolio loan, which is held for
investment and carried at amortized cost, or a loan held-for-sale in the
secondary market and carried at fair value. All the loans on single
family property that the Bank holds for sale conform to secondary market
underwriting criteria established by various institutional investors.
All loans originated, whether held for sale or held for investment,
conform to internal underwriting guidelines, which consider, among other
things, a property's value and the borrower's ability to repay the loan.
Construction and development loans - Construction and land
development loans are made primarily to builders/developers, who
construct properties for resale. The Bank originates both fixed and
variable rate construction loans, and most are due and payable within
one year. In some cases, extensions are permitted if payments are
current and construction has progressed satisfactorily.
The Bank's requirements for a construction loan are similar to
those of a mortgage on an existing residence. In addition, the borrower
must submit accurate plans, specifications, and cost projections of the
property to be constructed. All construction and development loans are
manually underwritten using NASB's internal underwriting standards. All
construction and development loans must be approved by the CEO and
either the EVP/ Chief Credit Officer or SVP/Construction Lending. The
bank has adopted internal loan-to-value limits consistent with
regulations, which are 65% for raw land, 75% for land development, and
85% for residential and non-residential construction. An appraisal
report performed in conformity with the Uniform Standards of
Professional Appraisers Practice by an outside licensed appraiser is
required on all loans in excess of $250,000. Generally, the Bank will
commit to an initial term of 12 to 18 months on construction loans, and
an initial term of 24 to 48 months on land acquisition and development
loans, with six month renewals thereafter. Interest rates on
construction loans typically adjust daily and are tied to a
predetermined index. NASB's staff regularly performs inspections of
each property during its construction phase to ensure adequate progress
is achieved before making scheduled loan disbursements.
12
When construction and development loans mature, the Bank typically
considers extensions for short, six-month term periods. This allows the
Bank to more frequently evaluate the loan, including creditworthiness
and current market conditions and, if management believes it's in the
best interest of the Company, to modify the terms accordingly. This
portfolio consists primarily of assets with rates tied to the prime rate
and, in most cases, the conditions for loan renewal include an interest
rate "floor" in accordance with the market conditions that exist at the
time of renewal.
During the nine month period ended June 30, 2011, the Bank renewed
a large number of loans within its construction and land development
portfolio due to slower home and lot sales in the current economic
environment. Such extensions were accounted for as Troubled Debt
Restructurings ("TDRs") if the restructuring was related to the
borrower's financial difficulty, and if the Bank made concessions that
it would not otherwise consider. In order to determine whether or not a
renewal should be accounted for as a TDR, management reviewed the
borrower's current financial information, including an analysis of
income and liquidity in relation to debt service requirements. The
large majority of these modifications did not result in a reduction in
the contractual interest rate or a write-off of the principal balance
(although the Bank does commonly require the borrower to make a
principal reduction at renewal).
Commercial real estate loans - The Bank purchases and originates
several different types of commercial real estate loans. Permanent
multifamily mortgage loans on properties of 5 to 36 dwelling units have
a 50% risk-weight for risk-based capital requirements if they have an
initial loan-to-value ratio of not more than 80% and if their annual
average occupancy rate exceeds 80%. All other performing commercial
real estate loans have 100% risk-weights.
The Bank's commercial real estate loans are secured primarily by
multi-family and nonresidential properties. Such loans are manually
underwritten using NASB's internal underwriting standards, which
evaluate the sources of repayment, including the ability of income
producing property to generate sufficient cash flow to service the debt,
the capacity of the borrower or guarantors to cover any shortfalls in
operating income, and, as a last resort, the ability to liquidate the
collateral in such a manner as to completely protect the Bank's
investment. All commercial real estate loans must be approved by the
CEO and either the EVP/ Chief Credit Officer or SVP/Commercial Lending.
Typically, loan-to-value ratios do not exceed 80%; however, exceptions
may be made when it is determined that the safety of the loan is not
compromised, and the rational for exceeding this limit is clearly
documented. An appraisal report performed in conformity with the
Uniform Standards of Professional Appraisers Practice by an outside
licensed appraiser is required on all loans in excess of $250,000.
Interest rates on commercial loans may be either fixed or tied to a
predetermined index and adjusted daily.
The Bank typically obtains full personal guarantees from the
primary individuals involved in the transaction. Guarantor's financial
statements and tax returns are reviewed annually to determine their
continuing ability to perform under such guarantees. The Bank typically
pursues repayment from guarantors when the primary source of repayment
is not sufficient to service the debt. However, the Bank may decide not
to pursue a guarantor if, given the guarantor's financial condition, it
is likely that the estimated legal fees would exceed the probable amount
of any recovery. Although the Bank does not typically release
guarantors from their obligation, the Bank may decide to delay the
decision to pursue civil enforcement of a deficiency judgment.
At least once during each calendar year, a review is prepared for
each loan included in a borrower relationship in excess of $5 million
and for each individual loan over $1 million. Collateral inspections
are obtained on an annual basis for each loan over $1 million, and on a
triennial basis for each loan between $500 thousand and $1 million.
Financial information, such as tax returns, is requested annually for
all commercial real estate loans over $500 thousand, which is consistent
with industry practice, and the Bank believes it has sufficient
monitoring procedures in place to identify potential problem loans. A
loan is deemed impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due
in accordance with the contractual terms of the loan agreement. Any
loans deemed impaired, regardless of their balance, are reviewed by
management at the time of the impairment determination, and monitored on
a quarterly basis thereafter, including calculation of specific
valuation allowances, if applicable.
Installment Loans - These loans consist primarily of loans on
savings accounts and consumer lines of credit that are secured by a
customer's equity in their primary residence.
13
Allowance for Loan Losses
-------------------------
The Allowance for Loan and Lease Losses ("ALLL") recognizes the
inherent risks associated with lending activities for individually
identified problem assets as well as the entire homogenous and non-
homogenous loan portfolios. ALLLs are established by charges to the
provision for loan losses and carried as contra assets. Management
analyzes the adequacy of the allowance on a quarterly basis and
appropriate provisions are made to maintain the ALLLs at adequate
levels. At any given time, the ALLL should be sufficient to absorb at
least all estimated credit losses on outstanding balances over the next
twelve months. While management uses information currently available to
determine these allowances, they can fluctuate based on changes in
economic conditions and changes in the information available to
management. Also, regulatory agencies review the Bank's allowances for
loan loss as part of their examination, and they may require the Bank to
recognize additional loss provisions based on the information available
at the time of their examinations.
The ALLL is determined based upon two components. The first is
made up of specific reserves for loans which have been deemed impaired
in accordance with Generally Accepted Accounting Principles ("GAAP").
The second component is made up of general reserves for loans that are
not impaired. 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. 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 allowance equal to the amount of measured impairment.
Loans that are not impaired are evaluated based upon the Bank's
historical loss experience, as well as various subjective factors, to
estimate potential unidentified losses within the various loan
portfolios. These loans are categorized into pools based upon certain
characteristics such as loan type, collateral type and repayment source.
The Bank's loss history is analyzed in terms of loss frequency and loss
severity. Loss frequency represents the likelihood of loans not
repaying in accordance with their original terms, which would result in
the foreclosure and subsequent liquidation of the property. Loss
severity represents any potential loss resulting from the loan's
foreclosure and subsequent liquidation. Management calculates estimated
loss frequency and loss severity ratios for each loan pool. In addition
to analyzing historical losses, the Bank also evaluates the following
subjective factors for each loan pool to estimate future losses: changes
in lending policies and procedures, changes in economic and business
conditions, changes in the nature and volume of the portfolio, changes
in management and other relevant staff, changes in the volume and
severity of past due loans, changes in the quality of the Bank's loan
review system, changes in the value of the underlying collateral for
collateral dependent loans, changes in the level of lending
concentrations, and changes in other external factors such as
competition and legal and regulatory requirements. Historical loss
ratios are adjusted accordingly, based upon the effect that the
subjective factors have in estimated future losses. These adjusted
ratios are applied to the balances of the loan pools to determine the
adequacy of the ALLL each quarter.
During the quarter ended March 31, 2011, the Company adopted ASU
2011-02, as more fully described in Footnote 2 of the condensed
consolidated financial statements. The amendments in ASU 2011-02
require prospective application of the impairment measurement guidance
in ASC 310-10-35 for those receivables newly identified as impaired. As
a result of adopting ASU 2011-02, the Company reassessed all
restructurings that occurred on or after October 1, 2010, the beginning
of our current fiscal year, for identification as TDRs. The Company
identified as troubled debt restructurings certain receivables for which
the allowance for credit losses had previously been measured under a
general allowance for credit losses methodology. Upon identifying those
receivables as TDRs, the Company identified them as impaired under the
guidance in Section 310-10-35. At the end of March 31, 2011, the period
of adoption, the recorded investment in receivables for which the
allowance for credit losses was previously measured under a general
allowance for credit losses methodology and are now impaired under ASC
310-10-35 was $28.1 million, and the resulting increase in the allowance
for credit losses associated with those receivables, on the basis of a
current evaluation of loss, was $8.0 million. In addition, the Company
identified loans with a recorded investment of $6.7 million which were
previously deemed impaired under the guidance in ASC 310-10-35, but were not
considered TDRs. As a result of adopting the amendments in ASU 2011-02, these
loans were identified as TDRs and the resulting increase in the allowance for
credit losses associated with those receivables, on the basis of a current
evaluation of loss, was $3.3 million.
14
In addition to the adoption of ASU 2011-02, and in connection with
the determination of impairment, the Company performed a review of 1)
its historical residential development loan foreclosures since 2008; 2)
the realized sale prices versus both original and subsequent appraisals;
3) the valuation trends in unsold foreclosed assets; and 4) factors
affecting the current outlook for real estate development loans for the
foreseeable future. Given the current adverse economic environment and
negative outlook in the residential development real estate market, the
Company reassessed its methodology for the valuation of loans in its
real estate development portfolio and adopted a change in methodology
for their valuation as of March 31, 2011, that applies downward
"qualitative" adjustments to the real estate appraised values for
residential development loans that are deemed impaired. We believe that
these qualitative appraisal adjustments more accurately reflect real
estate values in light of the sales experience and economic conditions
that we have recently observed. This change in methodology increased
the provision for loan losses by $18.3 million during the quarter ended
March 31, 2011.
Based upon the significant increase in foreclosure frequency and
loss severity ratios within the Bank's portfolios and other qualitative
factors related to the current economic conditions, the Bank increased
its general component of allowance for loan losses during the nine month
period ended June 30, 2011. The balance of general reserves in the
allowance for loan losses increased to $30.2 million, from $17.4 million
at June 30, 2010. During the same time period, the balance of loans
receivable held to maturity decreased from $1,129.9 million at June 30,
2010, to $1,024.3 million at June 30, 2011. The Bank does not routinely
obtain updated appraisals for their collateral dependent loans that are
not adversely classified. However, when analyzing the adequacy of its
allowance for loan losses, the Bank considers potential changes in the
value of the underlying collateral for such loans as one of the
subjective factors used to estimate future losses in the various loan
pools.
The following table presents the activity in the allowance for
losses on loans for the period ended June 30, 2011. 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 49,394
Charge-offs (10,182)
Recoveries 336
--------
Balance at June 30, 2011 $ 71,864
========
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 June 30, 2011. 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 3,535 1 5,255 33,750 5,721 1,132 49,394
Losses charged off (1,290) -- (1,510) (6,949) (91) (342) (10,182)
Recoveries -- -- -- 327 -- 9 336
-----------------------------------------------------------------------------
Balance at June 30, 2011 $ 6,672 11 10,453 46,146 6,645 1,937 71,864
=============================================================================
Balance at April 1, 2011 $ 10,013 9 7,869 48,287 6,007 1,262 73,447
Provision for loan losses (2,775) 2 2,722 (1,285) 729 675 68
Losses charged off (566) -- (138) (1,106) (91) -- (1,901)
Recoveries -- -- -- 250 -- -- 250
-----------------------------------------------------------------------------
Balance at June 30, 2011 $ 6,672 11 10,453 46,146 6,645 1,937 71,864
=============================================================================
15
Ending balance of allowance
for loan losses related
to loans:
Individually evaluated
for impairment $ 1,570 11 3,187 31,989 4,049 832 41,638
=============================================================================
Collectively evaluated
for impairment $ 5,102 -- 7,266 14,158 2,596 1,104 30,226
=============================================================================
Acquired with deteriorated
credit quality $ 28 -- -- -- -- -- 28
=============================================================================
Loans:
-----
Balance at June 30, 2011 $ 336,368 77,894 422,993 177,325 77,937 9,666 1,102,183
=============================================================================
Ending Balance:
Loans individually evaluated
for impairment $ 11,353 11 11,297 114,981 8,725 893 147,260
=============================================================================
Loans collectively evaluated
for impairment $ 325,015 77,883 411,696 62,344 69,212 8,773 954,923
=============================================================================
Loans acquired with deteriorated
credit quality $ 2,701 -- -- -- -- -- 2,701
=============================================================================
Classified Assets, Delinquencies, and Non-accrual Loans
-------------------------------------------------------
Classified assets - In accordance with the asset classification
system outlined by the OTS, North American's problem assets are
classified with risk ratings of either "substandard," "doubtful," or
"loss." An asset is considered substandard if it is inadequately
protected by the borrower's ability to repay, or the value of
collateral. Substandard assets include those characterized by a
possibility that the institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have the
same weaknesses of those classified as substandard with the added
characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. Assets
classified as loss are considered uncollectible and of such little value
that their existence without establishing a specific loss allowance is
not warranted.
In addition to the risk rating categories for problem assets noted
above, loans may be assigned a risk rating of "pass," "pass-watch," or
"special mention." The pass category includes loans with borrowers
and/or collateral that is of average quality or better. Loans in this
category are considered average risk and satisfactory repayment is
expected. Assets classified as pass-watch are those in which the
borrower has the capacity to perform according to the terms and
repayment is expected. However, one or more elements of uncertainty
exist. Assets classified as special mention have a potential weakness
that deserves management's close attention. If left undetected, the
potential weakness may result in deterioration of repayment prospects.
The early adoption of ASU 2011-02 during the quarter ended March
31, 2011, and the prospectively applied impairment caused an increase in
loans considered TDRs, which also increased the assets classified as
"substandard." The increase in TDRs, and related increase in loan loss
provision, are discussed in Footnote 2 to the condensed consolidated
financial statements.
16
Each quarter, management reviews the problem loans in its portfolio
to determine whether changes to the asset classifications or allowances
are needed. The following table presents the credit risk profile of the
Company's loan portfolio based on risk rating category as of June 30,
2011. Dollar amounts are expressed in thousands.
Residential Commercial
Held For Real Construction/
Residential Sale Estate Development Commercial Installment Total
-----------------------------------------------------------------------------------------------------------
Rating:
------
Pass $ 318,500 77,883 362,856 37,982 43,158 8,772 849,151
Pass - Watch 2,392 -- 16,708 14,866 -- -- 33,966
Special Mention 1,272 -- 26,099 1,771 26,055 -- 55,197
Substandard 12,634 -- 14,143 90,717 4,675 62 122,231
Doubtful -- -- -- -- -- -- --
Loss 1,570 11 3,187 31,989 4,049 832 41,638
-----------------------------------------------------------------------------
Total $ 336,368 77,894 422,993 177,325 77,937 9,666 1,102,183
=============================================================================
The following table presents the Company's loan portfolio aging
analysis as of June 30, 2011. Dollar amounts are expressed in thousands.
Greater
Than Total Total Total loans
30-59 Days 60-89 Days 90 Days Past Loans >90 Days &
Past Due Past Due Past Due Due Current Receivable Accruing
-----------------------------------------------------------------------------------------------------------
Residential $ 3,298 1,390 10,648 15,336 321,032 336,368 --
Residential held for sale 3 3 13 19 77,875 77,894 --
Commercial real estate 126 -- 5,935 6,061 416,932 422,993 --
Construction & development -- -- 17,747 17,747 159,578 177,325 --
Commercial -- -- 7,903 7,903 70,034 77,937 --
Installment 30 26 242 298 9,368 9,666 --
-----------------------------------------------------------------------------
Total $ 3,457 1,419 42,488 47,364 1,054,819 1,102,183 --
=============================================================================
When a loan becomes 90 days past due, the Bank stops accruing
interest and establishes a reserve for the interest accrued-to-date.
The following table presents the Company's nonaccrual loans at June 30,
2011. This table does not include purchased impaired loans or troubled
debt restructurings that are performing. Dollar amounts are expressed
in thousands.
Residential $ 10,648
Residential held for sale 13
Commercial real estate 5,935
Construction & development 17,747
Commercial 7,903
Installment 242
--------
Total $ 42,488
========
17
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.
During the nine month period ended June 30, 2011, the Company
modified two residential loans, with a recorded investment of $416,000
prior to modification, which were deemed TDRs. The modifications, which
lowered the interest rate and extended the maturity date, resulted in
specific loss allowances of $21,000 based upon the present value of
expected future cash flows, discounted at the contractual interest rate
of the original loan agreement. In addition, the Company modified one
commercial real estate loan during the period, which had a recorded
investment of $3.2 million prior to modification and was deemed a TDR.
The Bank lowered the interest rate, extended the maturity for five
years, and disbursed additional funds for improvements to the property.
Prior to modification, this loan was considered impaired and collateral
dependant and had been written down to the fair value of the collateral,
less costs to sell. Also during the period ended June 30, 2011, the
Company modified ninety land development loans, with a recorded
investment of $97.6 million prior to modification, which were deemed
TDRs. These modifications were the result of extensions, typically for
a six-month period, and did not result in a reduction in the contractual
interest rate or a write-off of the principal balance. Such loans are
considered collateral dependent, and the modifications resulted in
specific loss allowances of $24.6 million, based upon the fair value of
the collateral. Specific loss allowances are included in the
calculation of estimated future loss ratios, which are applied to the
various loan portfolios for purposes of estimating future losses. TDRs
secured by residential properties with a recorded investment of
$395,000, TDRs secured by commercial properties with a recorded
investment of $3.2 million, and TDRs secured by land development
properties with a recorded investment of $8.9 million defaulted during
the period ended June 30, 2011. Management considers the level of
defaults within the various portfolios when evaluating qualitative
adjustments used to determine the adequacy of the Allowance for Loan and
Lease Losses.
The following table presents the recorded balance of troubled debt
restructurings as of June 30, 2011. Dollar amounts are expressed in
thousands.
Troubled debt restructurings:
Residential $ 4,192
Residential held for sale --
Commercial real estate 3,794
Construction & development 74,213
Commercial --
Installment --
--------
Total $ 82,199
========
Performing troubled debt restructurings:
Residential $ 631
Residential held for sale --
Commercial real estate 3,794
Construction & development 68,076
Commercial --
Installment --
--------
Total $ 72,501
========
18
The following table presents impaired loans, including troubled
debt restructurings, as of June 30, 2011. Dollar amounts are expressed
in thousands.
Unpaid YTD Average QTD Average Interest
Recorded Principal Specific Investment in Investment in Income
Balance Balance Allowance Impaired Loans Impaired Loans Recognized
-----------------------------------------------------------------------------------------------------------
Loans without a specific valuation allowance:
--------------------------------------------
Residential $ 5,751 5,804 -- 5,743 5,755 158
Residential held for sale -- -- -- -- -- --
Commercial real estate -- -- -- -- -- --
Construction & development 27,608 27,610 -- 26,744 25,998 969
Commercial -- -- -- -- --
Installment -- -- -- -- --
Loans with a specific valuation allowance:
-----------------------------------------
Residential $ 4,032 5,722 1,570 4,683 4,092 89
Residential held for sale -- 11 11 10 10 --
Commercial real estate 8,109 11,336 3,187 9,336 8,515 477
Construction & development 55,384 87,417 31,989 68,925 52,675 2,922
Commercial 4,675 8,801 4,049 6,525 4,676 81
Installment 62 896 832 272 71 26
Total:
-----
Residential $ 9,783 11,526 1,570 10,426 9,847 247
Residential held for sale -- 11 11 10 10 --
Commercial real estate 8,109 11,336 3,187 9,336 8,515 477
Construction & development 82,992 115,027 31,989 95,669 78,673 3,891
Commercial 4,675 8,801 4,049 6,525 4,676 81
Installment 62 896 832 272 71 26
(9) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following at June 30, 2011. Dollar amounts are expressed in thousands.
Real estate acquired through (or deed
in lieu of) foreclosure $ 31,622
Less: allowance for losses (11,788)
----------
Total $ 19,834
==========
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.
In determining fair values of foreclosed assets, the Company
performed a review of 1) its historical residential development loan
foreclosures since 2008; 2) the realized sale prices versus both
original and subsequent appraisals; 3) the valuation trends in unsold
foreclosed assets; and 4) factors affecting the current outlook for
real estate development loans for the foreseeable future. Given the
current adverse economic environment and negative outlook in the
residential development real estate market, as of March 31, 2011, the
Company reassessed its methodology for the valuation of assets in its
real estate development portfolio and adopted a change in methodology
for the valuation of the portfolio that applies downward "qualitative"
adjustments to the real estate appraised values for foreclosed
development properties. We believe that these qualitative appraisal
adjustments more accurately reflect real estate values in light of the
sales experience and economic conditions that we have recently observed.
This change in methodology increased the provision for loss on REO by
$7.2 million during the quarter ended March 31, 2011.
19
(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
2008 through 2010 remain subject to examination by the Internal Revenue
Service and various state jurisdictions, based on the statute of
limitations.
(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
June 30, 2011 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 13,293 -- (117) 13,176
Provision for loan losses -- -- 68 68
Other income 901 5,908 (424) 6,385
General and administrative
expenses 6,096 6,498 (238) 12,356
Income tax expense 3,118 (227) (143) 2,748
---------------------------------------------------
Net income $ 4,980 (363) (228) 4,389
===================================================
20
Three months ended Mortgage Other and
June 30, 2010 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 14,043 -- (113) 13,930
Provision for loan losses 11,500 -- -- 11,500
Other income 1,253 10,443 (174) 11,522
General and administrative
expenses 6,184 8,692 33 14,909
Income tax expense (benefit) (920) 674 (251) (497)
---------------------------------------------------
Net income (loss) $ (1,468) 1,077 (69) (460)
===================================================
Nine months ended Mortgage Other and
June 30, 2011 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 39,256 -- (345) 38,911
Provision for loan losses 49,326 -- 68 49,394
Other income (9,047) 23,799 (1,034) 13,718
General and administrative
expenses 17,443 23,941 (502) 40,882
Income tax expense (benefit)(14,076) (55) (363) (14,494)
---------------------------------------------------
Net income (loss) $(22,484) (87) (582) (23,153)
===================================================
Nine months ended Mortgage Other and
June 30, 2010 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 41,193 -- (339) 40,854
Provision for loan losses 25,500 -- -- 25,500
Other income 5,274 28,797 (3,035) 31,036
General and administrative
expenses 18,170 23,112 (396) 40,886
Income tax expense (benefit) 577 2,189 (1,350) 1,416
---------------------------------------------------
Net income $ 2,220 3,496 (1,628) 4,088
===================================================
(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. As
a result of marking to market commitments to originate loans, the
Company recorded an increase in other assets of $33,000, an increase in
other liabilities of $661,000, and a decrease in other income of
$627,000 for the quarter ended June 30, 2011. The Company recorded a
decrease in other assets of $1.9 million, an increase in other
liabilities of $553,000, and a decrease in other income of $2.4 million
for the nine month period ended June 30, 2011.
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 $328,000, an increase in other
liabilities of $99,000, and an increase in other income of $229,000
during the quarter ended June 30, 2011. The Company recorded an
increase in other assets of $90,000, a decrease in other liabilities
of $986,000, and an increase in other income of $1.1 million during the
nine month period ended June 30, 2011.
The balance of derivative instruments related to commitments to
originate and sell loans at June 30, 2011, is disclosed in Footnote 14,
Fair Value Measurements.
21
(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.
22
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
and liabilities 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 June 30, 2011 (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 $ 38,932 38,932 -- --
Trust preferred securities 25,652 25,652 -- --
Municipal securities 18 18 -- --
Mortgage-backed securities,
available for sale
Pass through certificates
guaranteed by GNMA -
fixed rate 89 -- 89 --
Pass through certificates
guaranteed by FNMA -
adjustable rate 181 -- 181 --
FHLMC participation certificates:
Fixed rate 314 -- 314 --
Adjustable rate 152 -- 152 --
Loans held for sale 77,894 -- 77,894 --
Mortgage servicing rights 99 -- -- 99
Commitments to originate loans 300 -- -- 300
Forward sales commitments 993 -- -- 993
-------------------------------------------------------
Total assets $ 144 624 64,602 78,630 1,392
=======================================================
Liabilities:
Commitments to originate
loans $ 1,183 -- -- 1,183
Forward sales commitments 156 -- -- 156
-------------------------------------------------------
Total liabilities $ 1,339 -- -- 1,339
=======================================================
23
The following table presents the fair value measurements of assets
and liabilities 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 nine month periods ended June 30, 2011 and 2010 (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 (164) (2,430) 1,077
---------------------------------------------
Balance at June 30, 2011 $ 99 (883) 837
=============================================
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 (79) (473) 22
Issuances 5 -- --
---------------------------------------------
Balance at June 30, 2010 $ 277 550 (356)
=============================================
24
Realized and unrealized gains and losses noted in the table above
and included in net income for the nine month period ended June 30,
2011, 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) $ (206) 42 (1,354)
========================================
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 nine month period ended June 30, 2011, was $102.3 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 $19.8
million at June 30, 2011. Charge-offs and increases in specific
reserves related to foreclosed assets held for sale that were re-
measured during the nine month period ended June 30, 2011, totaled $10.6
million.
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 $17.7
million at June 30, 2011.
25
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.
June 30, 2011 September 30, 2010
-------------------------- -------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------------------------- -------------------------
Financial Assets:
Cash and cash equivalents $ 7,149 7,149 14,033 14,033
Securities held to maturity -- -- 1,232 1,561
Stock in Federal Home Loan Bank 9,991 9,991 15,873 15,873
Mortgage-backed securities held
to maturity 43,132 42,635 46,276 46,300
Loans receivable held for
investment 952,425 963,511 1,041,041 1,043,886
Financial Liabilities:
Customer deposit accounts $ 881,987 887,352 866,559 869,941
Brokered deposit accounts -- -- 66,894 66,797
Advances from FHLB 189,000 190,873 286,000 288,061
Subordinated debentures 25,774 10,000 25,774 10,310
26
June 30, 2011 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 $ 10,525 38 6,127 (5)
Lending commitments - floating
rate -- -- 417 6
Commitments to sell loans -- -- -- --
The fair value estimates presented are based on pertinent
information available to management as of June 30, 2011, 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 member 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 June 30, 2011. Dollar amounts are expressed in
thousands.
Method 1 $ 15,178
Method 2 16,465
Method 3 18,633
Average of methods 1, 2, and 3 $ 16,759
========
Carrying value of investment in
Central Platte Holdings, LLC $ 16,381
========
27
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 nine months ended June 30, 2011, 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 June 30,
2011.
(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 June 30, 2011, the Company and the subsidiary Bank are in
compliance with these regulatory agreements.
28
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING STATEMENTS
We may from time to time make written or oral "forward-looking
statements," including statements contained in our filings with the
Securities and Exchange Commission ("SEC"). These forward-looking
statements may be included in this quarterly report to shareholders and
in other communications by the Company, which are made in good faith by
us pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements include statements about our
beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties, and are subject to change based on various factors, some
of which are beyond our control. The words "may," "could," "should,"
"would," "believe," "anticipate," "estimate," "expect," "intend,"
"plan," and similar expressions are intended to identify forward-looking
statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
goals, expectations, anticipations, estimates and intentions expressed
in the forward-looking statements:
- the strength of the U.S. economy in general and the strength of the
local economies in which we conduct operations;
- the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;?
- the effects of, and changes in, foreign and military policy of the
United States Government; inflation, interest rate, market and monetary
fluctuations;
- the timely development and acceptance of our new products and
services and the perceived overall value of these products and services
by users, including the features, pricing and quality compared to
competitors' products and services;
- the willingness of users to substitute competitors' products and
services for our products and services;
- our success in gaining regulatory approval of our products, services
and branching locations, when required;
- the impact of changes in financial services' laws and regulations,
including laws concerning taxes, banking, securities and insurance;
- technological changes;
- acquisitions and dispositions;
- changes in consumer spending and saving habits;
- our success at managing the risks involved in our business; and
- changes in the fair value or economic value of, impairments of, and
risks associated with the Bank's investments in real estate owned,
mortgage backed securities and other assets.
This list of important factors is not all-inclusive. We do not
undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on
behalf of the Company or the Bank.
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.
29
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States ("GAAP")
requires management to make significant judgments and assumptions in
certain circumstances that affect amounts reported in the accompanying
consolidated financial statements and related notes. In preparing these
financial statements, management has made its best estimates and
assumptions that affect the reported assets and liabilities. The most
significant assumptions and estimates relate to the allowance of loan
losses, the valuation of derivative instruments and the valuation of
equity method investments. Application of these assumptions requires
the exercise of judgment as to future uncertainties and, as a result,
actual results could differ from these estimates.
In April 2011, the Financial Accounting Standards Board issued
Accounting Standards Update No. 2011-02, A Creditor's Determination of
Whether a Restructuring Is a Troubled Debt Restructuring, which
clarifies the guidance on how creditors evaluate whether a restructuring
of debt qualifies as a Troubled Debt Restructuring ("TDR"). Examples of
restructurings include an extension of a loan's maturity date, a
reduction in the interest rate, forgiveness of a debt's face amount
and/or accrued interest, and a deferral or decrease in payments for a
period of time. The amendments clarify the definition of a TDR in ASC
310-40, which provides that a debt restructuring is considered a TDR if
the creditor, for economic or legal reasons related to the borrower's
financial difficulties, grants a concession to the borrower that it
would not otherwise consider. The framework for evaluating a
restructuring requires that a creditor determine if both of the
following conditions are met: 1) the borrower is experiencing financial
difficulties, and 2) the restructuring includes a concession by the
creditor to the borrower. For public companies, this standard is
effective for the first interim or annual period beginning on or after
June 15, 2011. The Company early adopted the ASU in its second fiscal
quarter, as permitted by the standard.
In addition to the adoption of ASU 2011-02, and in connection with
the determination of impairment, the Company performed a review of 1)
its historical residential development loan foreclosures since 2008; 2)
the realized sale prices versus both original and subsequent appraisals;
3) the valuation trends in unsold foreclosed assets; and 4) factors
affecting the current outlook for real estate development loans for the
foreseeable future. Given the current adverse economic environment and
negative outlook in the residential development real estate market, the
Company reassessed its methodology for the valuation of loans in its
real estate development portfolio and adopted a change in methodology
for their valuation as of March 31, 2011, that applies downward
"qualitative" adjustments to the real estate appraised values for
residential development loans that are deemed impaired. We believe that
these qualitative appraisal adjustments more accurately reflect real
estate values in light of the sales experience and economic conditions
that we have recently observed.
Our Annual Report on Form 10-K for the year ended September 30,
2010 contains a description of our critical accounting policies. Except
as described above, for the nine months ended June 30, 2011, there were
no material changes to these policies.
FINANCIAL CONDITION
ASSETS
The Company's total assets as of June 30, 2011 were $1,257.0
million, a decrease of $177.2 million from September 30, 2010, the prior
fiscal year end.
Loans receivable held for investment were $1,024.3 million as of
June 30, 2011, a decrease of $49.1 million during the nine month period.
The weighted average rate on such loans as of June 30, 2011, was 6.18%,
a decrease from 6.29% as of June 30, 2010.
Loans receivable held for sale as of June 30, 2011, were $77.9
million, a decrease of $102.0 million from September 30, 2010, resulting
primarily from a decrease in loan origination volume within the Bank's
mortgage banking division. 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.
30
As the Bank originates mortgage loans each month, management
evaluates the existing market conditions to determine which loans will
be held in the Bank's portfolio and which loans will be sold in the
secondary market. Loans sold in the secondary market can be sold with
servicing released or converted into MBS and sold with the loan
servicing retained by the Bank. At the time of each loan commitment, a
decision is made to either hold the loan for investment, hold it for
sale with servicing retained, or hold it for sale with servicing
released. Management monitors market conditions to decide whether loans
should be held in portfolio or sold and if sold, which method of sale is
appropriate. During the nine months ended June 30, 2011, the Bank
originated and purchased $1,229.4 million in mortgage loans held for
sale, $105.8 million in mortgage loans held for investment, and $2.3
million in other loans. This total of $1,337.5 million in loans
compares to $1,271.0 million in loans originated and purchased during
the nine months ended June 30, 2010.
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.
6/30/11 9/30/10 6/30/10
-------------------------------------
Asset Classification:
Substandard $ 142,615 142,085 148,440
Doubtful -- -- 300
Loss* 52,876 16,965 18,041
-------------------------------------
195,491 159,050 166,781
Allowance for losses on
loans and real estate
owned (83,652) (34,643) (35,395)
-------------------------------------
$ 111,839 124,407 131,386
=====================================
*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.
The following table summarizes non-performing assets, troubled debt
restructurings, and real estate acquired through foreclosure, net of
specific loss allowances. Dollar amounts are expressed in thousands.
6/30/11 9/30/10 6/30/10
----------------------------------------
Total Assets $ 1,256,998 1,434,196 1,415,928
========================================
Non-accrual loans (excluding
TDRs) $ 14,395 29,368 23,189
Troubled debt
restructurings 82,199 23,730 18,479
Net real estate and
other assets acquired
through foreclosure 19,834 38,362 25,120
----------------------------------------
Total $ 116,428 91,460 66,788
========================================
Percent of total assets 9.26% 6.38% 4.72%
========================================
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 at June
30, 2011. 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.
31
Investment securities were $64.6 million as of June 30, 2011, an
increase of $35.3 million from September 30, 2010. During the nine
month period, the Bank purchased securities of $71.3 million and sold
$26.9 million of securities available for sale. In addition, the Bank
sold $1.5 million of securities held to maturity following a significant
deterioration in the issuer's creditworthiness. The Company realized
gross gains of $1.1 million and no gross losses on the sale of
securities during the period.
Mortgage-backed securities were $43.9 million as of June 30, 2011,
a decrease of $3.3 million from the prior year end. During the nine
month period, the Bank purchased mortgage-backed securities of $8.8
million. There were no sales of mortgage-backed securities available
for sale during the nine month period ended June 30, 2011. The average
yield on the mortgage-backed securities portfolio was 4.70% at June 30,
2011, a decrease 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 June 30, 2011, a decrease of $51,000
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 or NBH, which were $16.4 million and $1.4
million at June 30, 2011, respectively.
LIABILITIES AND EQUITY
Customer and brokered deposit accounts decreased $51.5 million
during the nine months ended June 30, 2011. Specifically, customer
deposits increased $15.4 million during the period, primarily due to an
increase in retail certificates of deposits resulting from promotions
during the period. Brokered deposits decreased $66.9 million during the
period, as a result of the Bank's effort to reduce its reliance on this
funding source. The weighted average rate on customer and brokered
deposits as of June 30, 2011, was 1.70%, a decrease from 1.98% as of
June 30, 2010.
Advances from the FHLB were $189.0 million as of June 30, 2011, a
decrease of $97.0 million from September 30, 2010. During the nine
month period, the Bank borrowed $56.0 million of new advances and repaid
$153.0 million. Management regularly uses FHLB advances as an alternate
funding source to provide operating liquidity and to fund the
origination and purchase of mortgage loans.
Subordinated debentures were $25.8 million as of June 30, 2011.
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 $7.4 million as of June 30, 2011, a decrease of $3.7
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 June 30, 2011, was $144.6 million
(11.5% 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 $18.38 on June 30, 2011, compared to $21.32 on
September 30, 2010.
The Company did not pay any cash dividends to its stockholders
during the nine month period ended June 30, 2011. In accordance with
the April 2010 agreement with the OTS, 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 OTS.
Total stockholders' equity as of June 30, 2011, includes an
unrealized gain, net of deferred income taxes, on available for sale
securities of $353,000. 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).
32
Nine months ended
------------------------
6/30/11 6/30/10
------------------------
Return on assets (2.29)% 0.37%
Return on equity (19.77)% 3.29%
Equity-to-assets ratio 11.50% 11.68%
Dividend payout ratio --% 86.59%
RESULTS OF OPERATIONS - Comparison of three and nine months ended June
30, 2011 and 2010.
For the three months ended June 30, 2011, the Company had net
income of $4.4 million or $0.56 per share. This compares to a net loss
of $(460,000) or $(0.06) per share for the quarter ended June 30, 2010.
For the nine months ended June 30, 2011, the Company had a net loss
of $(23,153,000) or $(2.94) per share. This compares to net income of
$4,088,000 or $0.52 per share for the nine months ended June 30, 2010.
NET INTEREST MARGIN
The Company's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS and investments and the
interest cost of customer and brokered deposits and other borrowings.
Management monitors net interest spreads and, although constrained by
certain market, economic, and competition factors, it establishes loan
rates and customer deposit rates that maximize net interest margin.
The following table presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities for the nine months ended June
30, 2011 and 2010. 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.
Nine months ended 6/30/11 As of
--------------------------- 6/30/11
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,087,355 50,605 6.21% 6.05%
Mortgage-backed securities 45,111 1,730 5.11% 4.69%
Securities 64,211 2,954 6.13% 5.13%
Bank deposits 13,868 7 0.07% 0.01%
--------------------------------------
Total earning assets 1,210,545 55,296 6.09% 5.93%
---------------------------
Non-earning assets 110,978
----------
Total $1,321,523
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 200,213 826 0.55% 0.53%
Customer and brokered
certificates of deposit 699,944 11,077 2.11% 2.06%
FHLB Advances 223,913 4,111 2.45% 1.73%
Subordinated debentures 25,000 371 1.98% 1.92%
--------------------------------------
Total costing liabilities 1,149,070 16,385 1.90% 1.71%
---------------------------
Non-costing liabilities 14,447
Stockholders' equity 158,006
----------
Total $1,321,523
==========
Net earning balance $ 61,475
==========
Earning yield less costing rate 4.19% 4.22%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,210,545 38,911 4.29%
============================
Nine months ended 6/30/10 As of
--------------------------- 6/30/10
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,272,452 59,671 6.25% 6.12%
Mortgage-backed securities 70,086 2,492 4.74% 5.03%
Securities 37,146 1,164 4.18% 3.83%
Bank deposits 24,262 10 0.05% 0.01%
--------------------------------------
Total earning assets 1,403,946 63,337 6.02% 6.01%
---------------------------
Non-earning assets 75,744
----------
Total $1,479,690
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 184,056 849 0.62% 0.50%
Customer and brokered
certificates of deposit 696,535 12,372 2.37% 2.39%
FHLB Advances 399,738 8,891 2.97% 2.82%
Subordinated debentures 25,000 371 1.98% 1.98%
--------------------------------------
Total costing liabilities 1,305,329 22,483 2.30% 2.49%
---------------------------
Non-costing liabilities 6,406
Stockholders' equity 167,955
----------
Total $1,479,690
==========
Net earning balance $ 98,617
==========
Earning yield less costing rate 3.72% 3.52%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,403,946 40,854 3.88%
============================
33
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), (2) changes in volume (change in volume multiplied
by the old rate), and (3) changes in rate and volume (change in rate
multiplied by the change in volume). Average balances, yields and rates
used in the preparation of this analysis come from the preceding table.
Dollar amounts are expressed in thousands.
Nine months ended June 30, 2011, compared to
nine months ended June 30, 2010
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (382) (8,676) (8) (9,066)
Mortgage-backed securities 194 (888) (68) (762)
Securities 543 848 399 1,790
Bank deposits 4 (4) (3) (3)
-----------------------------------------------
Net change in interest income 359 (8,720) 320 (8,041)
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (1,585) 293 (26) (1,318)
FHLB Advances (1,559) (3,917) 696 (4,780)
Subordinated debentures -- -- -- --
-----------------------------------------------
Net change in interest expense (3,144) (3,624) 670 (6,098)
-----------------------------------------------
Decrease in net interest
margin $ 3,503 (5,096) (350) (1,943)
===============================================
Net interest margin before loan loss provision for the nine months
ended June 30, 2011, decreased $1.9 million from the same period in the
prior year. Specifically, interest income decreased $8.0 million, which
was offset by a $6.1 million decrease in interest expense for the
period. Interest on loans decreased $9.1 million as the result of a
$185.1 million decrease in the average balance of loans receivable
outstanding during the period and a 4 basis point decrease in the
average rate earned on such loans during the period. Interest on
mortgage-backed securities decreased $762,000 due to a $25.0 million
decrease in the average balance of such securities, the effect of which
was partially offset by a 37 basis point increase in average rate earned
on mortgage-backed securities during the period. These decreases in
interest income were partially offset by a $1.8 million increase in
interest on investment securities resulting from a $27.1 million
increase in the average balance and a 195 basis point increase in the
average yield earned on such securities during the period. Interest
expense on customer and brokered deposit accounts decreased $1.3 million
due to a 24 basis point decrease in the average rate paid on such
interest-costing liabilities, the effect of which was partially offset
by a $19.6 million increase in the average balance of customer and
brokered deposit accounts during the period. Interest expense on FHLB
advances decreased $4.8 million as the result of a $175.8 million
decrease in the average balance and a 52 basis point decrease in the
average rate paid on such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $68,000 during
the three month period ended June 30, 2011, which resulted from the
partial charge-off of a commercial real estate loan held by the Bank's
holding company, NASB Financial, Inc. During the period, the Bank
revised the methodology for calculating of the adequacy of its allowance
for loan and lease losses by incorporating multiple historical "look-
back" periods from which loss data is used to formulate estimated future
loss ratios. These ratios are applied to the various loan portfolios
for purposes of estimating future losses and calculating adequate levels
of allowance for loan and lease losses ("ALLL"). In addition, the Bank
eliminated the use of the 2%, 10%, and 50% ALLL ratios which were
applied to assets classified as special mention, substandard, and
doubtful, respectively. The Company is now using historical loss
severity and increased historical loss frequency ratios to calculate the
ALLL associated with such classified assets, which resulted in a $3.1
million increase in the ALLL during the quarter ended June 30, 2011.
These changes were made at the request of the OTS during their recent
examination, which concluded during the quarter ended June 30, 2011.
Based upon the increase in foreclosure frequency and loss severity
ratios within the Bank's portfolios and other qualitative factors
related to the current economic conditions, the Bank increased its
general component of allowance for loan losses during the quarter ended
June 30, 2011 to $30.2 million, from $24.0 million at March 31, 2011.
This increase in general reserves was offset by decreases in specific
reserves related to certain loans within the Company's land development
portfolio, which resulted in no additional required provision for loan
losses during the quarter ended June 30, 2011. The decrease in specific
reserves for certain land development loans was the result of the Bank
obtaining additional collateral during the quarter, which resulted in
decreasing the measured impairment at June 30, 2011.
34
During the quarter ended March 31, 2011, the Company adopted
Accounting Standards Update No. 2011-02, "A Creditor's Determination of
Whether a Restructuring Is a Troubled Debt Restructuring." This ASU
clarifies the guidance on how creditors evaluate whether a restructuring
of debt qualifies as a Troubled Debt Restructuring. The adoption of ASU
2011-02 increased the Company's provision for loan losses by
approximately $11.3 million. In addition to the early adoption of ASU
2011-02, and in connection with the prospective determination of
impairment, the Company adopted a change in methodology for the
valuation of loans in its development real estate portfolio. The
revised methodology applies downward "qualitative" adjustments to recent
real estate appraised values for residential development assets that the
Company has deemed impaired. The Company believes these qualitative
appraisal adjustments better reflect the continued uncertainty in real
estate values in light of adverse economic conditions that prevail.
This change in methodology increased the provision for loan losses by
approximately $18.3 million during the quarter ended March 31, 2011.
The Company recorded a provision for loan losses of $10.5 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.
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 42.8% of total classified assets at June 30, 2011, 21.8% at
September 30, 2010, and 21.2% at June 30, 2010.
Management believes that the allowance for losses on loans and real
estate owned is adequate as of June 30, 2011. 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.
The process for determining the amount of the ALLL includes various
assumptions and subjective judgments about the collectability of the
loan portfolio, including the creditworthiness of our borrowers and the
value of real estate and other assets that serve as loan collateral. In
determining the appropriate amount of the ALLL, management relies on
loan quality reviews, past experience, an evaluation of economic
conditions, and asset valuations and appraisals, among other factors.
Also, regulatory agencies review the Company's allowances for losses as
a part of their examination process and they may require changes in loss
provision amounts based on information available at the time of their
examination.
OTHER INCOME
Other income for the three months ended June 30, 2011, decreased
$5.1 million from the same period in the prior year. Specifically, gain
on sale of loans held for sale decreased $5.4 million, due primarily to
a decrease in the volume of residential mortgage loans originated and
sold by the Bank's mortgage banking division during the period. Gain on
sale of securities available for sale decreased $664,000 due to a
decline in the volume of such sales during the period. Customer service
fees and charges decreased $667,000 primarily due to a decrease in
miscellaneous loan fees resulting from lower residential mortgage loan
origination volume during the period. These decreases in other income
were partially offset by a $1.5 million decrease in provision for loss
on real estate owned. The Company did not record a provision for loss
on real estate owned in the June 30, 2011 quarter, as no events occurred
during the quarter that would indicate additional declines in value of
the Company's foreclosed assets held for sale. In addition, other
income increased $140,000 due primarily to a $289,000 decrease in
expenses related to foreclosed assets available for sale during the
period. This decrease was partially offset by the effect of recording
the net fair value of certain loan-related commitments in accordance
with GAAP.
Other income for the nine months ended June 30, 2011,
decreased $17.3 million from the same period in the prior year.
Specifically, provision for loss on real estate owned increased $10.0
million due to declines in value of foreclosed assets held for sale.
During the quarter ended March 31, 2011, the Company adopted a change in
methodology for the valuation of its residential development real estate
portfolio that applied downward "qualitative" adjustments to the real
estate appraised values for foreclosed development properties.
Management believed that these qualitative appraisal adjustments more
accurately reflect real estate values in light of the sales experience
and economic conditions that have recently been observed. Gain on sale
of securities available for sale decreased $4.4 million due to a
significant decline in the volume of such sales during the period. Gain
on sale of loans held for sale decreased $3.6 million, due primarily to
a decrease in the volume of residential mortgage loans originated and
sold by the Bank's mortgage banking division during the period.
Customer service fees and charges decreased $338,000 primarily due to a
decrease in miscellaneous loan fees resulting from the decrease in
residential mortgage loan origination volume as compared to the same
period in the prior year. Other income decreased $818,000 due primarily
to the effect of recording the net fair value of certain loan-related
commitments in accordance with GAAP. These decreases in other income
were partially offset by a $2.0 million decrease in impairment loss on
investment in resulting from an impairment charge related to the
Company's investment in Central Platte Holdings, LLC during the quarter
ended December 31, 2009.
35
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended June 30, 2011, decreased $2.5 million from the same period in the
prior year. Specifically, commission-based mortgage banking
compensation decreased $2.1 million due primarily to the decrease in
mortgage banking volume from the same period in the prior year. Other
expense decreased $508,000 due primarily to a decrease in legal fees
related to Bank's construction and land development portfolio, the
effect of which was partially offset by increases in data processing and
consulting fees. These decreases in general and administrative expenses
were partially offset by a $312,000 increase in advertising and business
promotion expense during the period, due primarily to a increase in
costs related to the mortgage banking operation.
Total general and administrative expenses for the nine months ended
June 30, 2011, decreased $4,000 from the same period in the prior year.
Specifically, compensation and fringe benefits increased $704,000 due
primarily to the addition of personnel in the Company's mortgage
banking, information technology, loan servicing, and internal asset
review departments. 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 credit and
appraisal fees, the effect of which was partially offset by a decrease
in legal fees related to the Bank's construction and land development
portfolio. These increases in general and administrative expenses were
offset by a $1.1 million decrease in commission-based mortgage banking
compensation, due primarily to the decrease in mortgage banking volume
from the same period in the prior year, and an $803,000 decrease in
federal deposit insurance premiums.
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 $250,000 for each insured owner. 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.
Based upon capital levels and supervisory evaluation, institutions are
placed within one of four risk categories. North American is currently
classified is risk category II.
Prior to April 1, 2011, annual deposit insurance premiums ranged
from 7 to 77.5 basis points of insured deposits based upon 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. Effective
April 1, 2011, deposit insurance premiums will be calculated based upon
an institution's average consolidated total assets minus average
tangible equity (tier I capital), as required by the Dodd-Frank Act. As
a result, the assessment rate was lowered to a range from 2.5 to 45
basis points based upon where an institution fits on the RRPS.
REGULATORY CAPITAL REQUIREMENTS
At June 30, 2011, 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 June 30, 2011,
the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
36
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
At June 30, 2011 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 147,574
Adjustment for regulatory capital:
Intangible assets (2,496)
Reverse the effect of SFAS No. 115 (353)
---------
Tangible capital 144,725
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 144,725
Qualifying general valuation allowance 13,671
---------
Risk-based capital $ 158,396
=========
As of June 30, 2011
-------------------------------------------------------------------
Minimum Required for Minimum Required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 158,396 14.7% 86,129 >=8% 107,661 >=10%
Tier 1 capital to adjusted tangible assets 144,725 11.7% 49,322 >=4% 61,652 >=5%
Tangible capital to tangible assets 144,725 11.7% 18,496 >=1.5% -- --
Tier 1 capital to risk-weighted assets 144,725 13.4% -- -- 64,597 >=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.
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.
Under the Act, The Bank's primary federal regulator, the OTS, 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.
37
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
June 30, 2011, the Bank had a total borrowing capacity at FHLB of $301.3
million, and outstanding advances of $189.0 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 OTS 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. The
Band had no brokered deposits as of June 30, 2011. Thus, the Bank could
acquire an additional $135.0 million in brokered deposits and still
comply with the plan as of June 30, 2011.
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.
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, filed with the Securities and
Exchange Commission on December 14, 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, filed with the Securities and Exchange Commission on December
14, 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 the effectiveness of the design
and operation 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 upon and as of the date of this evaluation,
our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed
by us in reports we file or submit under the Securities and Exchange Act
of 1934 is (1) recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and
forms, and (2) accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
38
Our disclosure controls were designed to provide reasonable
assurance that the controls and procedures would meet their objectives.
Our management, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls will
prevent all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the designed control objectives and management is required to
apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within
the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusions of two or more people, or by management override of the
control. Because of the inherent limitations in a cost-effective,
maturing control system, misstatements due to error or fraud may occur
and not be detected.
The Company's management and the Audit Committee of the Board of
Directors concluded there were material weaknesses in the design of such
internal controls as of December 31, 2010. The material weaknesses
related to the identification and recognition of troubled debt
restructurings and impaired loans and timely receipt of appraisals for
participated loans. The Company's Board of Directors implemented several
steps to improve the processes in June 2011, and thus remediated the
material weaknesses. Included in these steps are the following:
- Revision of the Company's loan policy to more clearly define
procedures to obtain appraisals on participated loans from lead
banks.
- Revision of the Company's Internal Asset Review and Loan
Classification policies related to troubled debt restructurings
and other impaired loans and early adoption of ASU No. 2011-02,
A Creditor's Determination of Whether a Restructuring is a
Troubled Debt Restructuring for the quarter ended March 31,
2011.
There were no other changes in the Company's internal control over
financial reporting during the period covered by this quarterly report
on Form 10-Q that have materially affected or are reasonable likely to
materially affect our internal control over financial reporting.
39
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 1A. Risk Factors.
The following is a summary of risk factors relating to the operations of
the Bank and the Company. These risk factors are not necessarily
presented in their order of significance. In addition to the list
presented, below, there may be other risks and uncertainties that could
have a material adverse effect on the Company, our financial condition
and our results of operations, which could also impact the value or
market price of our common stock. To the extent that any of the
information contained in this report constitutes forward-looking
statements, the risk factors set forth are additional cautionary
statements that identify important factors that may cause the Company's
actual results to differ materially from those expressed in any forward-
looking statements made by or on behalf of the Company.
Difficult market conditions continue to adversely affect our industry.
We are exposed to downturns in the U.S. real estate market, particularly
related to existing residential homes, new residential construction,
residential development properties, and commercial real estate. The
housing market has experienced dramatic declines over the past three
years, greatly affected by falling home prices, increasing foreclosures,
and unemployment. All of these have impacted credit performance and
resulted in a significant level of write-downs of asset values by the
industry, in general, and by our Company, specifically. Because of the
concern about the stability of the financial markets, many lenders and
institutional investors have reduced or ceased providing credit to
borrowers, including to other financial institutions. The weakened U.S.
economy and tightening of credit have led to an increased level of
commercial and consumer delinquencies, a lack of consumer confidence,
increased market volatility and widespread reduction of overall business
activity. A worsening of these conditions or prolonged economic
stagnation would likely exacerbate the adverse effects of these
difficult market conditions on our Company and others in the financial
institution industry, and could further materially increase our loan
losses and further negatively impact our financial condition and
operating results.
Recent changes in banking regulations could materially affect the
Company's business. The current political environment is demanding
increased regulation of the banking industry. Various new regulations
have been imposed over the past year, with much additional regulation
that has been proposed. Such changing regulation, along with possible
changes in tax laws and accounting rules, may have a significant impact
on the ways that financial institutions conduct their businesses,
implement strategic initiatives, engage in tax planning and make
financial disclosures. Complying with increased regulations may
increase our costs and limit the availability of our business
opportunities.
On July 21, 2010, The Dodd-Frank Wall Street Reform and Consumer
Protection Act was signed into law. Some of the provisions may have
consequences of increasing our expenses, decreasing our revenues, and
changing the activities in which we choose to engage. The specific
impact of the Dodd-Frank Act on our current activities and our financial
performance will depend on the manner in which relevant agencies develop
and implement required rules.
The Company's performance is dependent on the economic conditions in the
market in which it operates. The Company operates primarily within the
greater Kansas City area and is influenced by the general economic
conditions in Kansas City. Any further adverse changes in economic
conditions in our market area could impair our ability to collect loans,
obtain and retain customer deposits, and negatively impact our overall
financial condition.
40
The current real estate market makes our concentrations in real estate
lending susceptible to credit losses. Our loan portfolios are
concentrated in real estate lending, which has made, and will continue
to make, our loan portfolios susceptible to credit losses in the current
real estate market, particularly because of continuing declines in the
new home real estate market. Specifically, we have a concentration of
residential real estate construction loans and residential land
development, most of which are located within the metropolitan Kansas
City market area. Additionally, we have a concentration of commercial
real estate loans that are located around the country. Because of our
heightened exposure to credit losses in these concentrations, the
downturns in the real estate market and the general economy have
resulted in a significant increase in classified assets over the past
year. If the current economic environment continues for a prolonged
additional period, or deteriorates even further, the asset collateral
values may further decline and may result in increased credit losses and
foreclosures in these portfolios.
If our allowance for loan and lease losses ("ALLL") is not sufficient to
cover actual loan losses, our provision for losses could increase in
future periods, causing a negative impact on operating results. Our
borrowers may not repay their loans according to the terms of the loans
and, as a result of the declines in home prices, the collateral securing
the payment of these loans may be insufficient to pay remaining loan
balances. We may experience significant loan losses, which could have a
material adverse impact on our operating results. When determining the
adequacy of the ALLL, we make various assumptions and subjective
judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of real estate and other
assets that serve as collateral for the repayment of many of our loans.
In determining the adequacy of the ALLL, we rely on our loan quality
reviews, our experience, our evaluation of economic conditions, and
asset valuations and appraisals, among other factors. If our
assumptions prove to be incorrect, our ALLL may not be sufficient to
cover the losses inherent in our loan portfolio, which could result in
additions to our allowance through provisions for loan losses. Material
additions to our allowance would have a material adverse impact on our
operating results.
The OTS (soon to be merged into the Office of the Comptroller of the
Currency), as an integral part of the regulatory examination process,
periodically reviews our loan portfolio. Regulators may require us to
add to the allowance for loan losses based on their judgments and
interpretations of information available to them at the time of their
examinations. Any increase that the regulators require in our allowance
for loan losses would negatively impact our operating results in the
period in which the increase occurs.
The Company uses valuation methodologies, estimations and assumptions
for certain assets and loan collateral which are subject to differing
interpretations and could result in changes to asset or collateral
valuations that could have an adverse material impact on the Company's
financial condition or operating results. The Company uses estimates,
assumptions and judgments when measuring the fair value of financial
assets, liabilities and loan collateral. Fair values and the
information used to record valuation adjustments are based on quoted
market prices, third-party appraisals and/or other observable inputs
provided by third-party sources, when available. Any changes in
underlying factors, assumptions or estimates in any of these areas could
materially impact the Company's future financial condition and operating
results.
During periods of market disruption, it may be difficult to value
certain assets if comparable sales become less frequent and/or market
data becomes less observable. Certain classes of assets or loan
collateral that were in active markets with significant observable data
may become illiquid due to the current financial environment. In such
cases, asset valuations may require more estimation and subjective
judgment. The rapidly changing real estate market conditions could
materially impact the valuation of assets and loan collateral as
reported within the Company's financial statements and changes in
estimated values could vary significantly from one period to the next.
Decreases in value may have a material adverse impact on the Company's
future financial condition or operating results.
The Company is subject to interest rate risk. Our results of operations
are largely dependent on net interest income, which is the difference
between the interest we earn on our earning-asset portfolios and the
interest paid on our cost of liability portfolios. Market interest
rates are beyond the Company's control, and they can fluctuate in
response to general economic conditions and the policies of various
governmental and regulatory agencies. Changes in monetary policy,
including changes in interest rates, will influence market rates and
prices for loan originations, purchases of investment securities, and
customer deposit accounts. Any substantial or prolonged change in
market interest rates could have a materially adverse effect on the
Company's financial condition or results from operations.
41
Changes in income tax laws or interpretations or in accounting standards
could materially affect our financial condition or results of
operations. Changes in income tax laws could be enacted or
interpretations of existing income tax laws could change causing an
adverse effect to our financial condition or results of operations.
Similarly, our accounting policies and methods are fundamental to how we
report our financial condition and results of operations. Some of these
policies require use of estimates and assumptions that may affect the
value of our assets, liabilities, and financial results. Periodically,
new accounting standards are imposed or existing standards are revised,
changing the methods for preparing our financial statements. Such
changes are not within our control and could significantly impact our
financial condition and results of operations.
The Company is subject to liquidity risk that could impair our ability
to fund operations. Liquidity is essential to our business and we rely
on a number of different sources in order to meet our potential
liquidity demands. Our primary sources of liquidity are our retail and
wholesale customer deposit accounts, cash flows from payments and sales
of loans and securities, and advances from the Federal Home Loan Bank.
Any inability to raise or retain funds through deposits, borrowings, the
sale of loans and other sources could have a substantial negative effect
on our liquidity. Our access to funding sources in amounts adequate to
finance our activities or on terms which are acceptable to us could be
impaired by factors that affect us specifically or by factors affecting
the financial services industry in general. Even if funding remains
available, issues of liquidity pricing could raise the Company's cost of
funds and have an adverse material impact on the Company's financial
condition and operating results.
Any loss of key personnel could adversely affect our operations. The
Company's success is, in large part, dependent on its ability to attract
and retain key employees. Management believes it has implemented
effective succession planning strategies to reduce the potential impact
of the loss of certain key personnel; however, because of their skill-
level and experience, the unexpected loss of key personnel could have an
adverse material impact on the Company's business.
We are subject to various legal claims and litigation. We are
periodically involved in routine litigation incidental to our business.
Regardless of whether these claims and legal actions are founded or
unfounded, if such legal actions are not resolved in a manner favorable
to us, they may result in significant financial liability and/or
adversely affect the Company's reputation. In addition, litigation can
be costly. Any financial liability, litigation costs or reputational
damage caused by these legal claims could have a material adverse impact
on our business, financial condition and results of operations.
The Company operates in a competitive industry and market area. The
financial services industry in which the Company operates is rapidly
changing with numerous types of competitors including banks, thrifts,
insurance companies, and mortgage bankers. Consolidation in the
industry is accelerating and there are many new changes in technology,
products, and regulations. We believe the competition for retail
deposit accounts is especially significant in our market area. The
Company must continue to invest in products and delivery systems in
order to remain competitive or its financial performance may be impacted
negatively.
Any electronic system failure or breach to our network security could
increase our operating costs or impair the Company's reputation. The
Bank provides customers with electronic banking options, including
online banking, bill payment services, online account opening and online
loan applications. Management has implemented all reasonable means of
protection for its electronic services; however, there can be no
absolute assurances that failures, interruptions, or electronic security
breaches will not occur. Should any of our electronic systems be
compromised, the Company's reputation could be damaged and/or
relationships with customers impaired. A loss of business could result
and the Company could incur significant expenses in remedying the
security breach.
42
The FDIC's Changes in the Calculation of Deposit Insurance Premiums and
Ability to Levy Special Assessments Could Increase Our Non-Interest
Expense And May Reduce Our Profitability. The range of base assessment
rates currently varies from 12 to 45 basis points depending on an
institution's risk category, with newly added financial measures
resulting in increased assessment rates for institutions heavily relying
on brokered deposits to support rapid asset growth. However, the Dodd-
Frank Act requires the FDIC to amend its regulations to redefine the
assessment base used for calculating deposit insurance assessments. On
February 9, 2011, the FDIC adopted a final rule that defines the
assessment base as the average consolidated total assets during the
assessment period minus the average tangible equity of the insured
depository institution during the assessment period. The FDIC also
imposed a new assessment rate scale. Under the new system, banks will
pay assessments at a rate between 5 and 35 basis points per assets minus
tangible equity, depending upon an institution's risk category (the
final rule also includes progressively lower assessment rate schedules
when the FDIC's reserve ratio reaches certain levels). The rulemaking
changes the current assessment rate schedule so the schedule will result
in the collection of assessment revenue that is approximately the same
as generated under the current rate schedule and current assessment
base. Nearly all banks with assets less than $10 billion will pay
smaller deposit insurance assessments as a result of the new rule. The
majority of the changes in the FDIC's final rule became effective on
April 1, 2011. The FDIC has the statutory authority to impose special
assessments on insured depository institutions in an amount, and for
such purposes, as the FDIC may deem necessary. The change in the
calculation methodology for deposit insurance premiums and the possible
emergency special assessments could increase our non-interest expense
and may adversely affect our profitability.
We May Elect Or Be Compelled To Seek Additional Capital In The Future,
But That Capital May Not Be Available When It Is Needed. We are required
by our regulatory authorities to maintain adequate levels of capital to
support our operations. In addition, we may elect to raise additional
capital to support the growth of our business or to finance
acquisitions, if any, or we may elect to raise additional capital for
other reasons. In that regard, a number of financial institutions have
recently raised considerable amounts of capital as a result of a
deterioration in their results of operations and financial condition
arising from the turmoil in the mortgage loan market, deteriorating
economic conditions, declines in real estate values and other factors.
Although we are not aware of any requests for additional capital at this
time, should we elect or be required by regulatory authorities to raise
additional capital, we may seek to do so through the issuance of, among
other things, our common stock or securities convertible into our common
stock, which could dilute your ownership interest in the Company. The
future cost and availability of capital may be adversely affected by
illiquid credit markets, economic conditions and a number of other
factors, many of which are outside of our control. Accordingly, we
cannot assure you of our ability to raise additional capital if needed
or on terms acceptable to us. If we cannot raise additional capital
when needed or on terms acceptable to us, it may have a material adverse
effect on our financial condition and results of operations.
A downgrade of the United States' credit rating could have a material
adverse effect on our business, financial condition and results of
operations. In recent months, each of Moody's Investors Service,
Standard & Poor's Corp. and Fitch Ratings has publicly warned of the
possibility of a downgrade to the United States' credit rating. On
August 5, 2011, S&P downgraded its rating of the United States' debt to
AA+. Each of Moody's and Fitch has maintained its rating of U.S. debt at
AAA. Any credit downgrade (whether by S&P, Moody's, or Fitch), and the
attendant perceived risk that the United States may not pay its debt
obligations when due, could have a material adverse effect on financial
markets and economic conditions in the United States and throughout the
world. In turn, this could have a material adverse effect on our
business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a)
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
43
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)
August 9, 2011 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
August 9, 2011 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
44