SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended December 31, 2009
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-24033
NASB Financial, Inc.
(Exact name of registrant as specified in its charter)
Missouri 43-1805201
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12498 South 71 Highway, Grandview, Missouri 64030
(Address of principal executive offices) (Zip Code)
(816) 765-2200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes No
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or non-accelerated filer, or a small
reporting company. See definition of "accelerated filer", "large
accelerated filer" and "small reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X
Non-accelerated filer Small reporting Company
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares of Common Stock of the Registrant outstanding as of
February 5, 2010, was 7,867,614.
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
December 31, September 30,
2009 2009
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 27,802 63,250
Securities:
Available for sale, at fair value 16,497 21,654
Held to maturity, at cost 1,301 1,290
Stock in Federal Home Loan Bank, at cost 21,789 26,640
Mortgage-backed securities:
Available for sale, at fair value 44,440 46,549
Held to maturity, at cost 44,535 11,125
Loans receivable:
Held for sale, at fair value 100,673 81,367
Held for investment, net 1,220,674 1,259,694
Allowance for loan losses (29,082) (20,699)
---------- -----------
Total loans receivable, net 1,292,265 1,320,362
---------- -----------
Accrued interest receivable 5,948 6,195
Foreclosed assets held for sale, net 13,860 10,140
Premises and equipment, net 13,240 13,393
Investment in LLCs 19,015 21,045
Mortgage servicing rights, net 320 351
Deferred income tax asset, net 9,333 6,651
Other assets 16,825 10,917
---------- ----------
$ 1,527,170 1,559,562
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 706,930 696,781
Brokered deposit accounts 165,427 207,844
Advances from Federal Home Loan Bank 449,009 441,026
Subordinated debentures 25,774 25,774
Escrows 4,900 10,178
Income taxes payable 3,903 4,210
Accrued expenses and other liabilities 6,375 7,361
---------- ----------
Total liabilities 1,362,318 1,393,174
---------- ----------
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 16,545 16,525
Retained earnings 184,450 184,891
Treasury stock, at cost;
1,989,498 shares (38,418) (38,418)
Accumulated other comprehensive
income 796 1,911
---------- ----------
Total stockholders' equity 164,852 166,388
---------- ----------
$ 1,527,170 1,559,562
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2009 2008
--------- ---------
Interest on loans receivable $ 20,606 22,219
Interest on mortgage-backed securities 884 545
Interest and dividends on securities 472 104
Other interest income 3 87
--------- ---------
Total interest income 21,965 22,955
--------- ---------
Interest on customer and brokered
deposit accounts 4,693 6,899
Interest on advances from FHLB 3,339 5,161
Interest on subordinated debentures 128 313
--------- ---------
Total interest expense 8,160 12,373
--------- ---------
Net interest income 13,805 10,582
Provision for loan losses 9,000 250
--------- ---------
Net interest income after provision
for loan losses 4,805 10,332
--------- ---------
Other income (expense):
Loan servicing fees, net 26 (212)
Impairment recovery on mortgage
servicing rights 5 23
Customer service fees and charges 1,858 1,397
Provision for loss on real estate owned -- (250)
Gain on sale of securities available for sale 3,088 --
Gain from loans held for sale 6,967 4,743
Impairment loss on investment in LLCs (2,000) --
Other 256 (502)
--------- ---------
Total other income 10,200 5,199
--------- ---------
General and administrative expenses:
Compensation and fringe benefits 4,501 3,861
Commission-based mortgage banking
compensation 4,116 2,188
Premises and equipment 990 967
Advertising and business promotion 1,369 1,296
Federal deposit insurance premiums 1,238 34
Other 1,443 1,253
--------- ---------
Total general and administrative expenses 13,657 9,599
--------- ---------
Income before income tax expense 1,348 5,932
Income tax expense 19 2,284
--------- ---------
Net income $ 1,329 3,648
========= =========
Basic earnings per share $ 0.17 0.46
========= =========
Diluted earnings per share $ 0.17 0.46
========= =========
Basic weighted average shares outstanding 7,867,614 7,867,614
See accompanying notes to condensed consolidated financial statements.
2
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
(In thousands)
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive stockholders'
stock capital earnings stock income equity
-----------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 2009 $ 1,479 16,525 184,891 (38,418) 1,911 166,388
Comprehensive income:
Net income -- -- 1,329 -- -- 1,329
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- (1,115) (1,115)
available for sale -------
Total comprehensive income 214
Cash dividends paid ($0.225
per share) -- -- (1,770) -- -- (1,770)
Stock based compensation expense -- 20 -- -- -- 20
----------------------------------------------------------------------
Balance at December 31, 2009 $ 1,479 16,545 184,450 (38,418) 796 164,852
======================================================================
Three months ended
December 31, 2009
------------------
(Dollars in thousands)
Reclassification disclosure:
Unrealized gain on available for sale securities,
net of income taxes of $491 $ 784
Reclassification adjustment for gain included in
net income, net of income taxes of $1,189 (1,899)
--------
Change in unrealized gain (loss) on available for sale
securities, net of income tax of $(698) $ (1,115)
========
See accompanying notes to condensed consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended
December 31,
----------------------
2009 2008
----------------------
Cash flows from operating activities:
Net income $ 1,329 3,648
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 444 441
Amortization and accretion, net (1,006) (1,078)
Gain on sale of securities available for sale (3,088) --
Loss from investment in LLCs 35 48
Impairment loss on investment in LLCs 2,000 --
Impairment recovery on mortgage
servicing rights (5) (23)
Gain from loans receivable held for sale (6,967) (4,743)
Provision for loan losses 9,000 250
Provision for loss on real estate owned -- 250
Origination of loans receivable held for sale (435,609) (242,682)
Sale of loans receivable held for sale 423,270 239,017
Stock based compensation - stock options 20 25
Changes in:
Net fair value of loan-related commitments (315) 432
Accrued interest receivable 247 215
Prepaid and accrued expenses, other liabilities
and income taxes payable (8,275) 422
----------------------
Net cash used in operating activities (18,920) (3,778)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 2,430 5
Available for sale 2,449 4,831
Principal repayments of mortgage loans receivable
held for investment 62,342 41,866
Principal repayments of other loans receivable 1,661 1,501
Loan origination - mortgage loans receivable
held for investment (30,591) (53,982)
Loan origination - other loans receivable (457) (948)
Purchase of mortgage loans receivable held for
investment (753) --
Proceeds from sale of Federal Home Loan Bank stock 4,851 2,403
Purchase of mortgage backed securities held
to maturity (35,796) --
Purchase of investment securities available for sale (15,080) --
Proceeds from sale of securities available for sale 21,336 --
Proceeds from sale of real estate owned 3,454 1,702
Purchases of premises and equipment, net (292) (114)
Investment in LLCs (5) (373)
Other (619) (194)
----------------------
Net cash provided by (used in) investing activities 14,930 (3,303)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended
December 31,
----------------------
2009 2008
----------------------
Cash flows from financing activities:
Net increase (decrease) in customer and
brokered deposit accounts (32,409) 65,757
Proceeds from advances from Federal Home Loan Bank 10,000 105,000
Repayment on advances from Federal Home Loan Bank (2,000) (159,000)
Cash dividends paid (1,770) (1,770)
Change in escrows (5,279) (5,045)
----------------------
Net cash provided by (used in) financing activities (31,458) 4,942
----------------------
Net decrease in cash and cash equivalents (35,448) (2,139)
Cash and cash equivalents at beginning of the period 63,250 21,735
----------------------
Cash and cash equivalents at end of period $ 27,802 19,596
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 2,266 2,771
Cash paid for interest 8,459 11,409
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 7,831 6,391
Capitalization of originated mortgage servicing rights 5 --
See accompanying notes to condensed consolidated financial statements.
5
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements are prepared in accordance with instructions to Form 10-Q and
do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America
("GAAP") for complete financial statements. All adjustments are of a
normal and recurring nature and, in the opinion of management, the
statements include all adjustments considered necessary for fair
presentation. These statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K to the Securities and Exchange
Commission. Operating results for the quarter ended December 31, 2009,
are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2010. The condensed consolidated
balance sheet of the Company as of September 30, 2009, has been derived
from the audited balance sheet of the Company as of that date.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of the allowances for losses on loans, real estate owned,
valuation of mortgage servicing rights, and unrecognized tax benefits.
Management believes that these allowances are adequate, however, future
additions to the allowances may be necessary based on changes in
economic conditions.
The Company's critical accounting policies involving the more
significant judgments and assumptions used in the preparation of the
condensed consolidated financial statements as of December 31, 2009,
have remained unchanged from September 30, 2009. These policies relate
to the allowance for loan losses and the valuation of mortgage servicing
rights. Disclosure of these critical accounting policies is
incorporated by reference under Item 8 "Financial Statements and
Supplementary Data" in the Company's Annual Report on Form 10-K for the
Company's year ended September 30, 2009.
Certain quarterly amounts for previous periods have been
reclassified to conform to the current quarter's presentation.
(2) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER
SHARE
The following table presents a reconciliation of basic earnings per
share to diluted earnings per share for the periods indicated.
Three months ended
----------------------
12/31/09 12/31/08
----------------------
Net income (in thousands) $ 1,329 3,648
Average common shares outstanding 7,867,614 7,867,614
Average common share stock options
outstanding -- --
----------------------
Average diluted common shares 7,867,614 7,867,614
Earnings per share:
Basic $ 0.17 0.46
Diluted 0.17 0.46
At December 31, 2009, options to purchase 62,038 shares of the
Company's stock were outstanding. These options were not included in
the calculation of diluted earnings per share, as they were considered
anti-dilutive.
6
(3) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for
sale at December 31, 2009. Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Corporate debt securities $ 1,016 134 -- 1,150
Trust preferred securities 15,079 239 -- 15,318
Municipal securities 29 -- -- 29
------------------------------------------
Total $ 16,124 373 -- 16,497
===========================================
The following table presents a summary of securities available for
sale at September 30, 2009. Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Corporate debt securities $ 19,099 2,526 -- 21,625
Municipal securities 29 -- -- 29
------------------------------------------
Total $ 19,128 2,526 -- 21,654
===========================================
During the three month period ended December 31, 2009, the Company
realized gross gains of $3.1 million and no gross losses on the sale of
securities available for sale. There were no sales of securities
available for sale during the three month period ended December 31,
2008.
The scheduled maturities of securities available for sale at
December 31, 2009, are presented in the following table. Dollar amounts
are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due in less than one year $ 5 -- -- 5
Due from one to five years 1,040 134 -- 1,174
Due after ten years 15,079 239 -- 15,318
-------------------------------------------
Total $ 16,124 373 -- 16,497
===========================================
(4) SECURITIES HELD TO MATURITY
The following table presents a summary of securities held to
maturity at December 31, 2009. Dollar amounts are expressed in
thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Asset backed securities $ 1,301 166 -- 1,467
------------------------------------------
Total $ 1,301 166 -- 1,467
===========================================
7
The following table presents a summary of securities held to
maturity at September 30, 2009. Dollar amounts are expressed in
thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Asset backed securities $ 1,290 85 -- 1,375
------------------------------------------
Total $ 1,290 85 -- 1,375
===========================================
The scheduled maturities of securities held to maturity at December
31, 2009, are presented in the following table. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due after ten years $ 1,301 166 -- 1,467
-------------------------------------------
Total $ 1,301 166 -- 1,467
===========================================
Actual maturities of securities held to maturity may differ from
scheduled maturities depending on the repayment characteristics and
experience of the underlying financial instruments which are callable.
There were no dispositions of securities held to maturity during
the three month periods ended December 31, 2009 and 2008.
(5) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed
securities available for sale at December 31, 2009. 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 $ 108 -- -- 108
Pass-through certificates
guaranteed by FNMA
- adjustable rate 5,683 117 -- 5,800
FHLMC participation
certificates:
- fixed rate 507 36 -- 543
- adjustable rate 37,221 768 -- 37,989
------------------------------------------
Total $ 43,519 921 -- 44,440
===========================================
8
The following table presents a summary of mortgage-backed
securities available for sale at September 30, 2009. 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 $ 114 -- -- 114
Pass-through certificates
guaranteed by FNMA
- adjustable rate 5,924 67 -- 5,991
FHLMC participation
certificates:
- fixed rate 546 33 -- 579
- adjustable rate 39,384 481 -- 39,865
------------------------------------------
Total $ 45,968 581 -- 46,549
===========================================
There were no sales of mortgage-backed securities available for
sale during the three month periods ended December 31, 2009 and 2008.
The scheduled maturities of mortgage-backed securities available
for sale at December 31, 2009, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due from five to ten years $ 507 35 -- 542
Due after ten years 43,012 886 -- 43,898
-------------------------------------------
Total $ 43,519 921 -- 44,440
===========================================
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.
(6) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity at December 31, 2009. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation certificates:
Fixed rate $ 58 -- -- 58
FNMA pass-through certificates:
Fixed rate 9 -- -- 9
Balloon maturity and
adjustable rate 42 -- -- 42
Collateralized mortgage
obligations 44,426 293 (37) 44,682
------------------------------------------
Total $ 44,535 293 (37) 44,791
===========================================
9
The following table presents a summary of mortgage-backed
securities held to maturity at September 30, 2009. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation certificates:
Fixed rate $ 59 4 -- 63
FNMA pass-through certificates:
Fixed rate 10 -- -- 10
Balloon maturity and
adjustable rate 43 -- -- 43
Collateralized mortgage
obligations 11,013 214 -- 11,227
------------------------------------------
Total $ 11,125 218 -- 11,343
===========================================
There were no sales of mortgage-backed securities held to maturity
during the three month periods ended December 31, 2009 and 2008.
The following tables present a summary of the fair value and gross
unrealized losses of those mortgage-backed securities held to maturity
which had unrealized losses at December 31, 2009. 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 $ 9,484 37 $ -- --
---------------------------------------------
Total $ 9,484 37 $ -- --
=============================================
The scheduled maturities of mortgage-backed securities held to
maturity at December 31, 2009, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due from five to ten years $ 109 -- -- 109
Due after ten years 44,426 293 (37) 44,682
---------------------------------------------
Total $44,535 293 (37) 44,791
=============================================
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.
10
(7) LOANS RECEIVABLE
Loans receivable are as follows at December 31, 2009. Dollar
amounts are expressed in thousands.
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 365,293
Business properties 461,472
Partially guaranteed by VA or
insured by FHA 4,877
Construction and development 302,093
----------
Total mortgage loans 1,133,735
Commercial loans 118,699
Installment loans to individuals 12,657
----------
Total loans held for investment 1,265,091
Less:
Undisbursed loan funds (36,230)
Unearned discounts and fees and costs
on loans, net (8,187)
----------
Net loans held for investment $1,220,674
==========
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 146,666
Less:
Undisbursed loan funds (45,993)
----------
Net loans held for sale $ 100,673
==========
Included in the loans receivable balances at December 31, 2009, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the amount of $21.9 million.
Loans and participations serviced for others amounted to approximately
$85.5 million at December 31, 2009.
The following table presents the activity in the allowance for
losses on loans for the period ended December 31, 2009. 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, 2009 $ 20,699
Provisions 9,000
Charge-offs (617)
Recoveries --
--------
Balance at December 31, 2009 $ 29,082
========
11
(8) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following at December 31, 2009. Dollar amounts are expressed in
thousands.
Real estate acquired through (or deed
in lieu of) foreclosure $ 13,932
Less: allowance for losses (72)
----------
Total $ 13,860
==========
Foreclosed assets held for sale are initially recorded at fair
value as of the date of foreclosure less any estimated selling costs
(the "new basis") and are subsequently carried at the lower of the new
basis or fair value less selling costs on the current measurement date.
When foreclosed assets are acquired any excess of the loan balance over
the new basis of the foreclosed asset is charged to the allowance for
loan losses. Subsequent adjustments for estimated losses are charged to
operations when the fair value declines to an amount less than the
carrying value. Costs and expenses related to major additions and
improvements are capitalized, while maintenance and repairs that do not
improve or extend the lives of the respective assets are expensed.
Applicable gains and losses on the sale of real estate owned are
realized when the asset is disposed of, depending on the adequacy of the
down payment and other requirements.
(9) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the period ended December 31, 2009. Dollar amounts
are expressed in thousands.
Balance at October 1, 2009 $ 351
Additions:
Originated mortgage servicing rights 5
Impairment recovery 5
Reductions:
Amortization (41)
--------
Balance at December 31, 2009 $ 320
========
(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 million of pooled Trust Preferred Securities. The Trust used
the proceeds from the offering to purchase a like amount of NASB
Financial Inc.'s subordinated debentures. The debentures, which have a
variable rate of 1.65% over the 3-month LIBOR and a 30-year term, are
the sole assets of the Trust. In exchange for the capital contributions
made to the Trust by NASB Financial, Inc. upon formation, NASB
Financial. Inc. owns all the common securities of the Trust.
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.
12
(11) INCOME TAXES
As of December 31, 2009, the Company's liability for unrecognized tax
benefits of $74,000 consists entirely of interest and penalties. The
Company's policy is to recognize interest and penalties related to
unrecognized tax benefits within income tax expense in the consolidated
statements of income.
The Company's liability for unrecognized tax benefit is expected to
decrease in the next twelve months as a result of the settlements with various
taxing authorities.
The Company's federal and state income tax returns for fiscal years 2006
through 2009 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
December 31, 2009 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 13,922 -- (117) 13,805
Provision for loan losses 9,000 -- -- 9,000
Other income 2,237 10,436 (2,473) 10,200
General and administrative
expenses 6,274 7,585 (202) 13,657
Income tax expense (benefit) (159) 1,098 (920) 19
---------------------------------------------------
Net income $ 1,044 1,753 (1,468) 1,329
===================================================
Three months ended Mortgage Other and
December 31, 2008 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 10,882 -- (300) 10,582
Provision for loan losses 250 -- -- 250
Other income (26) 5,971 (746) 5,199
General and administrative
expenses 4,848 5,012 (261) 9,599
Income tax expense (benefit) 2,216 369 (301) 2,284
---------------------------------------------------
Net income $ 3,542 590 (484) 3,648
===================================================
13
(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 a decrease in other assets of $1.0 million, an increase
in other liabilities of $687,000, and a decrease in other income of $1.7
million for the three month period ended December 31, 2009.
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 $1.5 million, a decrease in
other liabilities of $559,000, and an increase in other income of $2.0
million during the three month period ended December 31, 2009.
The balance of derivative instruments related to commitments to
originate and sell loans at December 31, 2009, is disclosed in Footnote
14, Fair Value Measurements.
(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.
14
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 using
broker dealer quotes for similar assets in markets that are not active.
Such quotes are based on actual transactions for similar assets, and 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.
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.
15
The following table presents the fair value measurements of assets
recognized in the accompanying balance sheets measured at fair value on
a recurring basis and the level within the fair value hierarchy in which
the measurements fall at December 31, 2009 (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 $ 1,150 1,150 -- --
Trust preferred securities 15,318 15,318 -- --
Municipal securities 29 29 -- --
Mortgage-backed securities,
available for sale
Pass through certificates
guaranteed by GNMA -
fixed rate 108 -- 108 --
Pass through certificates
guaranteed by FNMA -
adjustable rate 5,800 -- 5,800 --
FHLMC participation certificates:
Fixed rate 543 -- 543 --
Adjustable rate 37,989 -- 37,989 --
Loans held for sale 100,673 -- 100,673 --
Mortgage servicing rights 320 -- -- 320
Commitments to originate loans 221 -- -- 221
Forward sales commitments 1,711 -- -- 1,711
-------------------------------------------------------
Total assets $ 163,862 16,497 145,113 2,252
=======================================================
Liabilities:
Commitments to originate
loans $ 893 -- -- 893
Forward sales commitments 79 -- -- 79
-------------------------------------------------------
Total liabilities $ 972 -- -- 972
=======================================================
16
The following table presents the fair value measurements of assets
recognized in the accompanying balance sheets measured at fair value on
a recurring basis and the level within the fair value hierarchy in which
the measurements fall at September 30, 2009 (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 $ 21,625 21,625 -- --
Municipal securities 29 29
Mortgage-backed securities,
available for sale
Pass through certificates
guaranteed by GNMA -
fixed rate 114 -- 114 --
Pass through certificates
guaranteed by FNMA -
adjustable rate 5,991 -- 5,991 --
FHLMC participation certificates:
Fixed rate 579 -- 579 --
Adjustable rate 39,865 -- 39,865 --
Loans held for sale 81,367 -- 81,367 --
Mortgage servicing rights 351 -- -- 351
Commitments to originate loans 1,230 -- -- 1,230
Forward sales commitments 260 -- -- 260
-------------------------------------------------------
Total assets $ 151,411 21,654 127,916 1,841
=======================================================
Liabilities:
Commitments to originate
loans $ 206 -- -- 206
Forward sales commitments 638 -- -- 638
-------------------------------------------------------
Total liabilities $ 844 -- -- 844
=======================================================
The following table is 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 (in thousands):
Mortgage Commitments
Servicing to Originate Forward Sales
Rights Loans Commitments
---------------------------------------------
Balance at October 1, 2009 $ 351 1,023 (378)
Total realized and unrealized
gains (losses):
Included in net income (36) (1,695) 2,010
Included in other comprehensive
income -- -- --
Purchases, issuances, and settlements 5 -- --
Transfers in (out) of Level 3 -- -- --
---------------------------------------------
Balance at December 31, 2009 $ 320 (672) 1,632
=============================================
17
Realized and unrealized gains and losses noted in the table above
and included in net income for the three month period ended December 31,
2009, are reported in the consolidated statements of income as follows
(in thousands):
Impairment
Loan Recovery
Servicing on Mortgage Other
Fees Servicing Rights Income
----------------------------------------
Total gains (losses) $ (41) 5 315
========================================
Changes in unrealized gains
(losses) relating to assets
still held at the balance
sheet date $ -- -- --
========================================
The following is a summary of valuation techniques utilized by the
Company for its significant financial assets and liabilities measured at
fair value on a nonrecurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets and
liabilities pursuant to the valuation hierarchy:
Impaired loans
Loans for which it is probable that the Company will not collect
principal and interest due according to contractual terms are measured
for impairment. If the impaired loan is identified as collateral
dependent, then the fair value method of measuring the amount of
impairment is utilized. This method requires obtaining a current
independent appraisal of the collateral and other internal assessments
of value. Impaired loans are classified within Level 3 of the fair
value hierarchy.
The carrying value of impaired loans that were re-measured during
the three month period was $45.4 million at December 31, 2009.
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 $13.9
million at December 31, 2009. During the three month period ended
December 31, 2009, charge-offs related to foreclosed assets held for
sale that were re-measured during the period totaled $15,000.
The following table presents the carrying values and fair values of
the Company's financial instruments at December 31, 2009, which have not
been previously reported. Dollar amounts are expressed in thousands.
Estimated
Carrying fair
value value
--------------------------
Financial Assets:
Cash and cash equivalents $ 27,802 27,802
Securities:
Held to maturity 1,301 1,467
Stock in Federal Home Loan Bank 21,789 21,789
Mortgage-backed securities:
Held to maturity 44,535 44,791
Loans receivable:
Held for investment 1,191,592 1,227,844
Financial Liabilities:
Customer deposit accounts 706,930 717,160
Brokered deposit accounts 165,427 165,966
Advances from FHLB 449,009 455,548
Subordinated debentures 25,774 25,774
18
Contract or Estimated
notional unrealized
amount gain
--------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 9,034 45
Lending commitments - floating
rate -- --
Commitments to sell loans -- --
The fair value estimates presented are based on pertinent
information available to management as of December 31, 2009. 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. The method of
estimating fair values does not incorporate the exit-price concept of
fair value prescribed by ASC 820, Fair Value Measures and Disclosures.
(15) 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 or the Company 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."
(16) IMPAIRMENT OF INVESTMENT IN LLC
The Company's investment in Central Platte Holdings LLC ("Central
Platte) consists of a 50% ownership interest in an entity that develops
land for residential real estate sales. The Company accounts for its
investment in Central Platte under the equity method. Sales of lots
have not met previous expectations and, as a result, the Company
evaluated its investment for impairment. The Company performed a
valuation analysis of its investment in Central Platte in accordance
with ASC 323-10-35-32, which provides guidance related to a loss in
value of an equity method investment. 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 quarter ended December 31, 2009. The
Company's investment in Central Platte, after the impairment charge, was
$16.5 million at December 31, 2009.
19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The principal business of the Company is to provide banking
services through the Bank. Specifically, the Bank obtains savings and
checking deposits from the public, then uses those funds to originate
and purchase real estate loans and other loans. The Bank also purchases
mortgage-backed securities ("MBS") and other investment securities from
time to time as conditions warrant. In addition to customer deposits,
the Bank obtains funds from the sale of loans held-for-sale, the sale of
securities available-for-sale, repayments of existing mortgage assets,
advances from the Federal Home Loan Bank ("FHLB"), and the purchase of
brokered deposit accounts. The Bank's primary sources of income are
interest on loans, MBS, and investment securities plus customer service
fees and income from mortgage banking activities. Expenses consist
primarily of interest payments on customer deposits and other borrowings
and general and administrative costs.
The Bank is regulated by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"), and is subject
to periodic examination by both entities. The Bank is also subject to
the regulations of the Board of Governors of the Federal Reserve System
("FRB"), which establishes rules regarding reserves that must be
maintained against customer deposits.
FINANCIAL CONDITION
ASSETS
The Company's total assets as of December 31, 2009, were $1,527.2
million, a decrease of $32.4 million from September 30, 2009, the prior
fiscal year end.
Loans receivable held for investment were $1,220.7 million as of
December 31, 2009, a decrease of $39.0 million during the three month
period. The weighted average rate on such loans as of December 31, 2009
was 6.35%, an increase from 6.17% as of December 31, 2008.
Loans receivable held for sale as of December 31, 2009 were $100.7
million, an increase of $19.3 million from September 30, 2009. The
Company has elected to carry loans held for sale at fair value, as
permitted under GAAP.
As the Bank originates mortgage loans each month, management
evaluates the existing market conditions to determine which loans will
be held in the Bank's portfolio and which loans will be sold in the
secondary market. Loans sold in the secondary market can be sold with
servicing released or converted into MBS and sold with the loan
servicing retained by the Bank. At the time of each loan commitment, a
decision is made to either hold the loan for investment, hold it for
sale with servicing retained, or hold it for sale with servicing
released. Management monitors market conditions to decide whether loans
should be held in portfolio or sold and if sold, which method of sale is
appropriate. During the three months ended December 31, 2009, the Bank
originated and purchased $435.6 million in mortgage loans held for sale,
$31.3 million in mortgage loans held for investment, and $457,000 in
other loans. This total of $467.4 million in loans compares to $297.6
million in loans originated and purchased during the three months ended
December 31, 2008.
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.
20
The following table summarizes the Bank's classified assets as
reported to the OTS, plus any classified assets of the holding company.
Dollar amounts are expressed in thousands.
12/31/09 9/30/09 12/31/08
-------------------------------------
Asset Classification:
Substandard $ 122,175 69,158 36,513
Doubtful -- -- --
Loss 10,977 6,415 1,231
-------------------------------------
133,152 75,573 37,744
Allowance for losses on
loans and real estate
owned (29,154) (20,699) (13,899)
-------------------------------------
$ 103,998 54,874 23,845
=====================================
The increase in classified assets during the three month period
ended December 31, 2009, was primarily the result of an increase in
impaired loans within the Bank's commercial real estate and residential
construction and development loan portfolios.
The following table summarizes non-performing assets, troubled debt
restructurings, and real estate acquired through foreclosure. Dollar
amounts are expressed in thousands.
12/31/09 9/30/09 12/31/08
----------------------------------------
Total Assets $ 1,527,170 1,559,562 1,526,454
========================================
Non-accrual loans $ 24,237 29,618 15,297
Troubled debt
restructurings 24,609 23,366 --
Net real estate and
other assets acquired
through foreclosure 13,860 10,140 9,315
----------------------------------------
Total $ 62,706 63,124 24,612
========================================
Percent of total assets 4.11% 4.05% 1.61%
========================================
Management records a provision for loan losses in amounts
sufficient to cover current net charge-offs and an estimate of probable
losses based on an analysis of risks that management believes to be
inherent in the loan portfolio. The Allowance for Loan and Lease Losses
("ALLL") recognizes the inherent risks associated with lending
activities, but, unlike specific allowances, have not been allocated to
particular problem assets but to a homogenous pool of loans. Management
believes that the specific loss allowances and ALLL are adequate. While
management uses available information to determine these allowances,
future allowances may be necessary because of changes in economic
conditions. Also, regulatory agencies (OTS and FDIC) review the Bank's
allowance for losses as part of their examinations, and they may require
the Bank to recognize additional loss provisions based on the
information available at the time of their examinations.
Investment securities were $17.8 million as of December 31, 2009, a
decrease of $5.1 million from September 30, 2009. During the three
month period, the Bank purchased trust preferred securities of $15.1
million and sold $21.3 million of corporate debt securities.
Mortgage-backed securities were $89.0 million as of December 31,
2009, an increase of $31.3 million from the prior year end. During the
three month period, the Bank purchased collateralized mortgage
obligations of $35.8 million.
21
The Company's investment in LLCs, which is accounted for using the
equity method, was $19.0 million at December 31, 2009, a decrease of
$2.0 million from September 30, 2009. During the quarter, the Company
recorded a $2.0 million impairment charge related to its investment in
Central Platte Holdings, LLC. The Company and its independent audit
firm, BKD, LLP, consulted with the U.S. Securities and Exchange
Commission's Office of the Chief Accountant regarding their
interpretation of accounting guidance for measuring impairment of an
equity method investment. As a result, the Company evaluated its
methodology for measuring impairment of its investment in Central
Platte. The Company prepared an analysis of the value of its investment
in Central Platte based upon various scenarios. As a result, the
Company determined that an impairment charge of $2.0 million ($1.2
million, net of tax) was appropriate for the quarter ended December 31,
2009. The Company performed a similar analysis of its investment in
Central Platte as of September 30, 2009, and determined that it was not
materially impaired as of that date. The Company's investment in
Central Platte, after the impairment charge, was $16.5 million at
December 31, 2009.
LIABILITIES AND EQUITY
Customer and brokered deposit accounts decreased $32.3 million
during the three months ended December 31, 2009. The weighted average
rate on customer and brokered deposits as of December 31, 2009 was
2.04%, a decrease from 3.26% as of December 31, 2008.
Advances from the FHLB were $449.0 million as of December 31, 2009,
an increase of $8.0 million from September 30, 2009. During the three
month period, the Bank borrowed $10.0 million of new advances and repaid
$2.0 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 December 31, 2009.
Such debentures resulted from the issuance of Trust Preferred Securities
through the Company's wholly owned statutory trust, NASB Preferred Trust
I. The Trust used the proceeds from the offering to purchase a like
amount of the Company's subordinated debentures. The debentures, which
have a variable rate of 1.65% over the 3-month LIBOR and a 30-year term,
are the sole assets of the Trust.
Escrows were $4.9 million as of December 31, 2009, a decrease of
$5.3 million from September 30, 2009. This decrease is due to amounts
paid for borrowers' taxes during the fourth calendar quarter of 2009.
Total stockholders' equity as of December 31, 2009 was $164.9
million (10.8% of total assets). This compares to $166.4 million (10.7%
of total assets) at September 30, 2009. On a per share basis,
stockholders' equity was $20.95 on December 31, 2009, compared to $21.15
on September 30, 2009.
The Company paid cash dividends on its common stock of $0.225 per
share on November 27, 2009. Subsequent to the quarter ended December
31, 2009, the Company announced a cash dividend of $0.225 per share to
be paid on February 26, 2010, to stockholders of record as of February
5, 2010.
Total stockholders' equity as of December 31, 2009 includes an
unrealized gain, net of deferred income taxes, on available for sale
securities of $796,000. This amount is reflected in the line item
"Accumulated other comprehensive income."
RATIOS
The following table illustrates the Company's return on assets
(annualized net income divided by average total assets); return on
equity (annualized net income divided by average total equity); equity-
to-assets ratio (ending total equity divided by ending total assets);
and dividend payout ratio (dividends paid divided by net income).
Three months ended
------------------------
12/31/09 12/31/08
------------------------
Return on assets 0.34% 0.96%
Return on equity 3.21% 9.51%
Equity-to-assets ratio 10.79% 10.11%
Dividend payout ratio 133.18% 48.52%
22
RESULTS OF OPERATIONS - Comparison of three months ended December 31,
2009 and 2008.
For the three months ended December 31, 2009, the Company had net
income of $1,329,000 or $0.17 per share. This compares to net income of
$3,648,000 or $0.46 per share for the three months ended December 31,
2008.
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 three months ended
December 31, 2009 and 2008. Average yields reflect reductions due to
non-accrual loans. Once a loan becomes 90 days delinquent, any interest
that has accrued up to that time is reserved and no further interest
income is recognized unless the loan is paid current. Average balances
and weighted average yields for the periods include all accrual and non-
accrual loans. The table also presents the interest-earning assets and
yields for each respective period. Dollar amounts are expressed in
thousands.
Three months ended 12/31/09 As of
--------------------------- 12/31/09
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,311,849 20,606 6.28% 6.24%
Mortgage-backed securities 81,295 884 4.35% 4.41%
Securities 45,115 472 4.18% 4.45%
Bank deposits 26,649 3 0.05% 0.01%
--------------------------------------
Total earning assets 1,464,908 21,965 5.99% 6.00%
---------------------------
Non-earning assets 68,841
----------
Total $1,533,749
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 181,511 346 0.76% 0.49%
Customer and brokered
certificates of deposit 702,941 4,347 2.47% 2.46%
FHLB Advances 443,052 3,339 3.01% 2.92%
Subordinated debentures 25,000 128 2.05% 1.93%
--------------------------------------
Total costing liabilities 1,352,504 8,160 2.41% 2.33%
---------------------------
Non-costing liabilities 13,084
Stockholders' equity 168,161
----------
Total $1,533,749
==========
Net earning balance $ 112,404
==========
Earning yield less costing rate 3.58% 3.67%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,464,908 13,805 3.77%
============================
Three months ended 12/31/08 As of
--------------------------- 12/31/08
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,341,684 22,219 6.62% 6.14%
Mortgage-backed securities 56,639 545 3.85% 4.20%
Securities 25,098 104 1.66% 3.01%
Bank deposits 44,364 87 0.78% 0.01%
--------------------------------------
Total earning assets 1,467,785 22,955 6.26% 6.00%
---------------------------
Non-earning assets 64,117
----------
Total $1,531,902
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 163,499 420 1.03% 0.80%
Customer and brokered
certificates of deposit 656,030 6,479 3.95% 3.87%
FHLB Advances 522,146 5,161 3.95% 3.33%
Subordinated debentures 25,000 313 5.01% 5.12%
--------------------------------------
Total costing liabilities 1,366,675 12,373 3.62% 3.32%
---------------------------
Non-costing liabilities 12,287
Stockholders' equity 152,940
----------
Total $1,531,902
==========
Net earning balance $ 101,110
==========
Earning yield less costing rate 2.64% 2.68%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,467,785 10,582 2.88%
============================
23
The following table provides information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided on
changes attributable to (1) changes in rates (change in rate
multiplied by the old volume), and (2) changes in volume (change in
volume multiplied by the old rate), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
Three months ended December 31, 2009, compared to
three months ended December 31, 2008
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (1,140) (494) 21 (1,613)
Mortgage-backed securities 71 237 31 339
Securities 158 83 127 368
Bank deposits (81) (35) 32 (84)
-----------------------------------------------
Net change in interest income (992) (209) 211 (990)
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (2,561) 547 (192) (2,206)
FHLB Advances (1,227) (781) 186 (1,822)
Subordinated debentures (185) -- -- (185)
-----------------------------------------------
Net change in interest expense (3,973) (234) (6) (4,213)
-----------------------------------------------
Increase in net interest
margin $ 2,981 25 217 3,223
===============================================
Net interest margin before loan loss provision for the three months
ended December 31, 2009 increased $3.2 million from the same period in
the prior year. Specifically, interest income decreased $990,000, which
was offset by a $4.2 million decrease in interest expense for the
period. Interest on loans decreased $1.6 million as the result of a 34
basis point decrease in the average yield and a $29.8 million decrease
in the average balance of loans receivable outstanding during the
period. This decrease in interest income was partially offset by a
$339,000 increase in interest on mortgage-backed securities due to a
$24.7 million increase in the average balance and a 50 basis point
increase in the average yield of such securities. In addition, interest
on investment securities increased $368,000 due to a $20.0 million
increase in the average balance and a 252 basis point increase in the
average yield of such securities. Interest expense on customer and
brokered deposit accounts decreased $2.2 million due to a $64.9 million
decrease in the average balance and a 125 basis point decrease in the
average rate paid on such interest-costing liabilities. Interest
expense on FHLB advances decreased $1.8 million as the result of a $79.1
million decrease in the average balance and a 94 basis point decrease in
the average rate paid on such liabilities. Interest expense on
subordinated debentures decreased $185,000 due to a 296 basis point
decrease in the average rate paid on such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $9.0 million
during the quarter ended December 31, 2009 in response to a significant
increase in loans classified as substandard or loss. Additionally,
management determined that the increased provision was appropriate due
to the continued uncertainty in the real estate market. The Company
recorded a provision for loan losses of $250,000 during the quarter
ended December 31, 2008, due primarily to increases in commercial real
estate and residential construction and development loans classified as
special mention. 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 21.9% of total classified assets at December 31, 2009, 27.4%
at September 30, 2009, and 36.8% at December 31, 2008.
Management believes that the allowance for losses on loans and real
estate owned is adequate. The provision can fluctuate based on changes
in economic conditions, changes in the level of classified assets,
changes in the amount of loan charge-offs and recoveries, or changes in
other information available to management. Also, regulatory agencies
review the Company's allowances for losses as a part of their
examination process and they may require changes in loss provision
amounts based on information available at the time of their examination.
24
OTHER INCOME
Other income for the three months ended December 31, 2009 increased $5.0
million from the same period in the prior year. Specifically, gain on sale of
securities available for sale increased $3.1 million due to the sale of
corporate debt securities during the period. Gain on sale of loans held for
sale increased $2.2 million due to increased mortgage banking volume during
the period. Customer service fees and charges increased $461,000 due
primarily to an increase in miscellaneous loan origination fees resulting from
the increase in mortgage banking volume. Provision for loss on real estate
owned decreased $250,000 due to a decrease in charge-offs of foreclosed assets
held for sale during the period. Loan servicing fees increased $238,000 due
primarily to a decrease in capitalized servicing amortization, which resulted
from a decrease in actual prepayments and estimated future repayments of the
underlying mortgage loans during the period. In addition, other income
increased $758,000 due primarily to recording the net fair value of certain
loan-related commitments in accordance with GAAP. These increases in other
income were partially offset by a $2.0 million impairment charge related the
Company's investment in LLCs.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended December 31, 2009 increased $4.1 million from the same period in
the prior year. Specifically, compensation and fringe benefits
increased $640,000 due primarily to the addition of personnel in the
Company's mortgage banking, information technology, and loan servicing
departments. Commission-based mortgage banking compensation increased
$1.9 million due primarily to an increase in mortgage banking volume for
the period. Federal deposit insurance premium expense increased $1.2
million related to an increase in premium rates and a one-time
adjustment to allocate accrued premium expense to the proper period.
Additionally, other expense increased $190,000 due primarily to
increases in legal, consulting, and other fees related to the Company's
lending operations.
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Deposit Insurance Fund ("DIF") of the FDIC. The Bank
is subject to regulation by the OTS as its chartering authority. Since
passage of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA" or the "Act"), the FDIC also has regulatory
control over the Bank. The transactions of DIF-insured institutions are
limited by statute and regulations that may require prior supervisory
approval in certain instances. Institutions also must file reports with
regulatory agencies regarding their activities and their financial
condition. The OTS and FDIC make periodic examinations of the Bank to
test compliance with the various regulatory requirements. The OTS can
require an institution to re-value its assets based on appraisals and to
establish specific valuation allowances. This supervision and
regulation is intended primarily for the protection of depositors.
Also, savings institutions are subject to certain reserve requirements
under Federal Reserve Board regulations.
INSURANCE OF ACCOUNTS
The DIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured owner, with the exception of self-directed
retirement accounts, which are insured to a maximum of $250,000. On
October 3, 2008, the Emergency Economic Stabilization Act of 2008
temporarily raised the basic limit of federal deposit insurance coverage
from $100,000 to $250,000 per depositor. This legislation provides that
the basic deposit insurance limit will return to $100,000 after December
31, 2013. Deposit insurance premiums are determined using a Risk-
Related Premium Schedule ("RRPS"), a matrix which places each insured
institution into one of three capital groups and one of three
supervisory groups. Currently, deposit insurance premiums range from 7
to 77.5 basis points of the institution's total deposit accounts,
depending on the institution's risk classification. The Bank is
currently considered "well capitalized," which is the most favorable
capital group and supervisory subgroup. DIF-insured institutions are
also assessed a premium to service the interest on Financing Corporation
("FICO") debt.
On May 22, 2009, the Federal Deposit Insurance Corporation (FDIC)
adopted a rule imposing a five basis point special assessment on all
insured financial institutions' assets minus its Tier I capital as of
June 30, 2009, which was collected on September 30, 2009. On November
12, 2009, the FDIC adopted a rule requiring insured institutions to
prepay their estimated quarterly risk-based assessments for the fourth
calendar quarter of 2009, and all of 2010, 2011, and 2012. The prepaid
assessment for these periods was collected on December 31, 2009, along
with each institution's regular quarterly risk-based deposit insurance
assessment for the third calendar quarter of 2009.
25
REGULATORY CAPITAL REQUIREMENTS
At December 31, 2009, the Bank exceeds all capital requirements
prescribed by the OTS. To calculate these requirements, a thrift must
deduct any investments in and loans to subsidiaries that are engaged in
activities not permissible for a national bank. As of December 31,
2009, the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
At December 31, 2009 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 166,738
Adjustment for regulatory capital:
Intangible assets (2,646)
Disallowed portion of servicing assets
and deferred tax assets (25)
Reverse the effect of SFAS No. 115 (796)
---------
Tangible capital 163,271
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 163,271
Qualifying general valuation allowance 15,804
---------
Risk-based capital $ 179,075
=========
As of December 31, 2009
-------------------------------------------------------------------
Minimum required for Minimum required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 179,075 14.2% 100,957 >=8% 126,197 >=10%
Core capital to adjusted tangible assets 163,271 10.9% 60,086 >=4% 75,107 >=5%
Tangible capital to tangible assets 163,271 10.9% 22,532 >=1.5% -- --
Tier 1 capital to risk-weighted assets 163,271 12.9% -- -- 75,718 >=6%
Fluctuations in the level of interest rates typically impact
prepayments on mortgage loans and MBS. During periods of falling
interest rates, these prepayments increase and a greater demand exists
for new loans. The Bank's customer deposits are partially impacted by
area competition. Management believes that the Bank will retain most of
its maturing time deposits in the foreseeable future. However, any
material funding needs that may arise in the future can be reasonably
satisfied through the use of additional FHLB advances and/or brokered
deposits. Management is not aware of any other current market or
economic conditions that could materially impact the Bank's future
ability to meet obligations as they come due.
SUBSEQUENT EVENT
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 or the Company 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 14, 2010, the audit committee of the board of directors of
NASB Financial, Inc. recommended and the board of directors subsequently
approved the dismissal of the Company's independent accountant, KPMG LLP
("KPMG"), who was engaged on September 22, 2009, as the principal
accountant to audit the consolidated financial statements of the Company
for the fiscal year ending September 30, 2010. On April 14, 2010, the
Company re-engaged BKD to serve as its principal independent accountant
to review the Company's consolidated financial statements for the
quarter ended December 31, 2009, and for the duration of the year ending
September 30, 2010. BKD previously served as the Company's independent
accountant prior to the Company's engagement of KPMG. The Company filed
a Form 8-K with the Securities and Exchange Commission on April 20,
2010, which fully describes the change in independent accountants.
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, 2009.
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, 2009.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities and Exchange Act of 1934. Based on this
evaluation, our principal executive officer and our principal financial
officer concluded that our disclosure controls and procedures were
effective at the end of the period covered by this quarterly report.
There were no changes in the Company's internal control over financial
reporting during the period covered by this quarterly report on Form 10-
Q that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material proceedings pending other than ordinary and
routine litigation incidental to the business of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Rules 13a-15(e) and 15d-15(e)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Rules 13a-15(e) and 15d-15(e)
Exhibit 32.1 - Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
28
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)
June 4, 2010 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
June 4, 2010 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
29
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