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 June 30, 2010
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-24033
NASB Financial, Inc.
(Exact name of registrant as specified in its charter)
Missouri 43-1805201
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12498 South 71 Highway, Grandview, Missouri 64030
(Address of principal executive offices) (Zip Code)
(816) 765-2200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes No
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or non-accelerated filer, or a small
reporting company. See definition of "accelerated filer", "large
accelerated filer" and "small reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X
Non-accelerated filer Small reporting Company
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares of Common Stock of the Registrant outstanding as of
August 6, 2010, was 7,867,614.
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
June 30, September 30,
2010 2009
(Unaudited)
---------- -----------
ASSETS
Cash and cash equivalents $ 9,510 63,250
Securities:
Available for sale, at fair value 6,303 21,654
Held to maturity, at cost 1,268 1,290
Stock in Federal Home Loan Bank, at cost 17,431 26,640
Mortgage-backed securities:
Available for sale, at fair value 969 46,549
Held to maturity, at cost 53,376 11,125
Loans receivable:
Held for sale, at fair value 138,591 81,367
Held for investment, net 1,129,884 1,259,694
Allowance for loan losses (33,852) (20,699)
---------- -----------
Total loans receivable, net 1,234,623 1,320,362
---------- -----------
Accrued interest receivable 5,243 6,195
Foreclosed assets held for sale, net 25,120 10,140
Premises and equipment, net 12,939 13,393
Investment in LLCs 18,992 21,045
Mortgage servicing rights, net 277 351
Deferred income tax asset, net 13,546 6,651
Income taxes receivable 469 --
Other assets 15,862 10,917
---------- ----------
$ 1,415,928 1,559,562
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 811,800 696,781
Brokered deposit accounts 47,661 207,844
Advances from Federal Home Loan Bank 349,000 441,026
Subordinated debentures 25,774 25,774
Escrows 8,438 10,178
Income taxes payable -- 4,210
Accrued expenses and other liabilities 7,934 7,361
---------- ----------
Total liabilities 1,250,607 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 16,584 16,525
Retained earnings 185,439 184,891
Treasury stock, at cost;
1,989,498 shares (38,418) (38,418)
Accumulated other comprehensive
income 237 1,911
---------- ----------
Total stockholders' equity 165,321 166,388
---------- ----------
$ 1,415,928 1,559,562
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (Loss) (Unaudited)
(In thousands, except share data)
Three months ended Nine months ended
June 30, June 30,
---------------------- ----------------------
2010 2009 2010 2009
--------- --------- --------- ---------
Interest on loans receivable $ 19,804 20,993 59,671 64,110
Interest on mortgage-backed securities 829 451 2,492 1,494
Interest and dividends on securities 229 1,081 1,164 1,542
Other interest income 2 2 10 94
--------- --------- --------- ---------
Total interest income 20,864 22,527 63,337 67,240
--------- --------- --------- ---------
Interest on customer and brokered
deposit accounts 4,342 6,246 13,221 19,543
Interest on advances from FHLB 2,468 3,920 8,891 13,212
Interest on subordinated debentures 124 173 371 709
--------- --------- --------- ---------
Total interest expense 6,934 10,339 22,483 33,464
--------- --------- --------- ---------
Net interest income 13,930 12,188 40,854 33,776
Provision for loan losses 11,500 4,000 25,500 5,250
--------- --------- --------- ---------
Net interest income after provision
for loan losses 2,430 8,188 15,354 28,526
--------- --------- --------- ---------
Other income (expense):
Loan servicing fees, net 21 112 100 (120)
Impairment recovery (loss) on mortgage
servicing rights 6 (11) 10 30
Customer service fees and charges 1,923 2,127 5,354 5,264
Provision for loss on real estate owned (1,486) -- (1,694) (250)
Gain on sale of securities available
for sale 867 548 5,519 548
Gain from sale of loans receivable
held for sale 10,682 9,170 24,766 19,415
Impairment loss on investments in LLCs -- -- (2,000) --
Other (491) 796 (1,019) 2,284
--------- --------- --------- ---------
Total other income 11,522 12,742 31,036 27,171
--------- --------- --------- ---------
General and administrative expenses:
Compensation and fringe benefits 4,890 5,094 13,868 13,221
Commission-based mortgage banking compensation 4,494 4,695 11,845 10,318
Premises and equipment 1,081 928 3,128 2,991
Advertising and business promotion 1,316 1,079 4,192 3,473
Federal deposit insurance premiums 438 843 2,110 914
Other 2,690 1,393 5,743 4,258
--------- --------- --------- ---------
Total general and administrative expenses 14,909 14,032 40,886 35,175
--------- --------- --------- ---------
Income (loss) before income tax expense (957) 6,898 5,504 20,522
Income tax expense (benefit) (497) 2,656 1,416 7,901
--------- --------- --------- ---------
Net income (loss) $ (460) 4,242 4,088 12,621
========= ========= ========= =========
Basic earnings (loss) per share $ (0.06) 0.54 0.52 1.60
========= ========= ========= =========
Diluted earnings (loss) per share $ (0.06) 0.54 0.52 1.60
========= ========= ========= =========
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, 2009 $ 1,479 16,525 184,891 (38,418) 1,911 166,388
Comprehensive income:
Net income -- -- 4,088 -- -- 4,088
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- (1,674) (1,674)
available for sale -------
Total comprehensive income 2,414
Cash dividends paid ($0.45
per share) -- -- (3,540) -- -- (3,540)
Stock based compensation expense -- 59 -- -- -- 59
----------------------------------------------------------------------
Balance at June 30, 2010 $ 1,479 16,584 185,439 (38,418) 237 165,321
======================================================================
Nine months ended
June 30, 2010
------------------
(Dollars in thousands)
Reclassification Disclosure:
Unrealized gain on available for sale securities,
net of income taxes of $1,077 $ 1,720
Reclassification adjustment for gain included in
net income, net of income taxes of $2,125 (3,394)
--------
Change in unrealized gain (loss) on available for sale
securities, net of income tax of $(1,048) $ (1,674)
========
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,
----------------------
2010 2009
----------------------
Cash flows from operating activities:
Net income $ 4,088 12,621
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 1,426 1,322
Amortization and accretion, net (1,076) (3,520)
Gain on sale of securities available for sale (5,519) (548)
Loss from investment in LLCs 60 54
Impairment loss on investment in LLCs 2,000 --
Impairment recovery on mortgage
servicing rights (10) (30)
Gain from loans receivable held for sale (24,766) (19,415)
Provision for loan losses 25,500 5,250
Provision for loss on real estate owned 1,694 250
Origination of loans receivable held for sale (1,183,591) (1,189,455)
Sale of loans receivable held for sale 1,151,133 1,154,301
Stock based compensation - stock options 59 73
Changes in:
Net fair value of loan-related commitments 451 (2,123)
Accrued interest receivable 952 (100)
Prepaid and accrued expenses, other liabilities
and income taxes payable (15,147) 3,051
----------------------
Net cash used in operating activities (42,746) (38,269)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 8,338 13
Available for sale 3,681 11,238
Principal repayments of investment securities:
Held to maturity 53 --
Available for sale 5 5
Principal repayments of mortgage loans receivable
held for investment 176,391 208,348
Principal repayments of other loans receivable 4,297 4,279
Loan origination - mortgage loans receivable
held for investment (84,415) (199,295)
Loan origination - other loans receivable (1,969) (3,428)
Purchase of mortgage loans receivable held for
investment (1,002) (1,049)
Proceeds from sale (purchase) of Federal Home Loan
Bank stock 9,209 (356)
Purchase of mortgage backed securities held
to maturity (54,806) --
Purchase of investment securities available for sale (28,923) (104,412)
Proceeds from sale of investment securities available
for sale 46,379 28,262
Proceeds from sale of mortgage-backed securities
available for sale 47,122 --
Proceeds from sale of real estate owned 8,707 6,086
Purchases of premises and equipment, net (992) (374)
Investment in LLCs (6) (476)
Other (258) 198
----------------------
Net cash provided by (used in) investing activities 131,811 (50,961)
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine months ended
June 30,
----------------------
2010 2009
----------------------
Cash flows from financing activities:
Net increase (decrease) in customer and
brokered deposit accounts (45,525) 170,369
Proceeds from advances from Federal Home Loan Bank 48,000 319,000
Repayment on advances from Federal Home Loan Bank (140,000) (402,000)
Cash dividends paid (3,540) (5,310)
Change in escrows (1,740) (1,702)
----------------------
Net cash provided by (used in) financing activities (142,805) 80,357
----------------------
Net decrease in cash and cash equivalents (53,740) (8,873)
Cash and cash equivalents at beginning of the period 63,250 21,735
----------------------
Cash and cash equivalents at end of period $ 9,510 12,862
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 12,221 9,336
Cash paid for interest 23,748 32,072
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 40,992 15,716
Conversion of real estate owned to loans receivable 344 391
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 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 nine month period ended June 30,
2010, 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 June 30, 2010, have
remained unchanged from September 30, 2009. These policies relate to
the allowance for loan losses, the valuation of derivative instruments,
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 (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
---------------------- ----------------------
6/30/10 6/30/09 6/30/10 6/30/09
---------------------- ----------------------
Net income (loss) (in thousands) $ (460) 4,242 4,088 12,621
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 $ (0.06) 0.54 0.52 1.60
Diluted (0.06) 0.54 0.52 1.60
At June 30, 2010 and 2009, options to purchase 62,038 and 72,038
shares, respectively, of the Company's stock were outstanding. These
options were not included in the calculation of diluted earnings per
share because the option exercise price was greater than the average
market price of the common shares for the period, thus making the
options anti-dilutive.
6
(3) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for
sale at June 30, 2010. Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Corporate debt securities $ 3,187 175 -- 3,362
Trust preferred securities 2,758 159 -- 2,917
Municipal securities 24 -- -- 24
------------------------------------------
Total $ 5,969 334 -- 6,303
===========================================
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 nine month period ended June 30, 2010, the Company
realized gross gains of $4.1 million and no gross losses on the sale of
securities available for sale. The Company realized gross gains of
$548,000 and no gross losses on the sale of securities available for
sale during the nine month period ended June 30, 2009.
The scheduled maturities of securities available for sale at June
30, 2010, are presented in the following table. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due in less than one year $ 5 -- -- 5
Due from one to five years 19 -- -- 19
Due from five to ten years 3,187 175 -- 3,362
Due after ten years 2,758 159 -- 2,917
-------------------------------------------
Total $ 5,969 334 -- 6,303
===========================================
(4) SECURITIES HELD TO MATURITY
The following table presents a summary of securities held to
maturity at June 30, 2010. Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Asset-backed securities $ 1,268 228 -- 1,496
------------------------------------------
Total $ 1,268 228 -- 1,496
===========================================
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 June 30,
2010, are presented in the following table. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due after ten years $ 1,268 228 -- 1,496
-------------------------------------------
Total $ 1,268 228 -- 1,496
===========================================
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 nine month periods ended June 30, 2010 and 2009.
(5) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed
securities available for sale at June 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 $ 101 1 -- 102
Pass-through certificates
guaranteed by FNMA
- adjustable rate 198 6 -- 204
FHLMC participation
certificates:
- fixed rate 443 39 -- 482
- adjustable rate 175 6 -- 181
------------------------------------------
Total $ 917 52 -- 969
===========================================
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
===========================================
During nine month period ended June 30, 2010, the Company realized
gross gains of $1.4 million and gross losses of $8,000 on the sale of
mortgage-backed securities available for sale. There were no sales of
mortgage-backed securities available for sale during the nine month
period ended June 30, 2009.
During the quarter ended June 30, 2010, the Bank transferred a
mortgage-backed security with an amortized cost of $4.4 million from the
held to maturity category to the available for sale category. The
amortized cost of the security approximated its market value; thus,
there were no unrealized gains or losses at the date of transfer. The
decision was made to transfer the security after it was determined that
there was a significant deterioration in the underlying credit. The
mortgage-backed security was subsequently sold during the quarter ended
June 30, 2010 and a loss of $8,000 was recognized.
The scheduled maturities of mortgage-backed securities available
for sale at June 30, 2010, are presented in the following table. Dollar
amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due from five to ten years $ 443 39 -- 482
Due after ten years 474 13 -- 487
-------------------------------------------
Total $ 917 52 -- 969
===========================================
Actual maturities and pay-downs of mortgage-backed securities
available for sale will differ from scheduled maturities depending on
the repayment characteristics and experience of the underlying financial
instruments, on which borrowers have the right to prepay certain
obligations.
9
(6) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity at June 30, 2010. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation certificates:
Fixed rate $ 54 -- -- 54
FNMA pass-through certificates:
Fixed rate 8 -- -- 8
Balloon maturity and
adjustable rate 36 -- -- 36
Collateralized mortgage
obligations 53,278 63 (327) 53,014
------------------------------------------
Total $ 53,376 63 (327) 53,112
===========================================
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 nine month periods ended June 30, 2010 and 2009.
The following table presents a summary of the fair value and gross
unrealized losses of those mortgage-backed securities held to maturity
which had unrealized losses at June 30, 2010. Dollar amounts are
expressed in thousands.
Less than 12 months 12 months or longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Collateralized mortgage
obligations $ 43,057 327 $ -- --
---------------------------------------------
Total $ 43,057 327 $ -- --
=============================================
10
The scheduled maturities of mortgage-backed securities held to
maturity at June 30, 2010, are presented in the following table. Dollar
amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due from one to five years $ 8 -- -- 8
Due from five to ten years 90 -- -- 90
Due after ten years 53,278 63 (327) 53,014
---------------------------------------------
Total $53,376 63 (327) 53,112
=============================================
Actual maturities and pay-downs of mortgage-backed securities held
to maturity will differ from scheduled maturities depending on the
repayment characteristics and experience of the underlying financial
instruments, on which borrowers have the right to prepay certain
obligations.
(7) LOANS RECEIVABLE
Loans receivable are as follows at June 30, 2010. Dollar amounts
are expressed in thousands.
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 355,592
Business properties 455,834
Partially guaranteed by VA or
insured by FHA 3,988
Construction and development 241,026
----------
Total mortgage loans 1,056,440
Commercial loans 94,015
Installment loans to individuals 11,533
----------
Total loans held for investment 1,161,988
Less:
Undisbursed loan funds (24,777)
Unearned discounts and fees and costs
on loans, net (7,327)
----------
Net loans held for investment $1,129,884
==========
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 208,463
Less:
Undisbursed loan funds (69,872)
----------
Net loans held for sale $ 138,591
==========
Included in the loans receivable balances at June 30, 2010 are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the amount of $17.6 million.
Loans and participations serviced for others amounted to approximately
$77.2 million at June 30, 2010.
11
The following table presents the activity in the allowance for
losses on loans for the period ended June 30, 2010. Allowance for
losses on mortgage loans includes specific valuation allowances and
valuation allowances associated with homogenous pools of loans. Dollar
amounts are expressed in thousands.
Balance at October 1, 2009 $ 20,699
Provisions 25,500
Charge-offs (12,348)
Recoveries 1
--------
Balance at June 30, 2010 $ 33,852
========
(8) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following at June 30, 2010. Dollar amounts are expressed in thousands.
Real estate acquired through (or deed
in lieu of) foreclosure $ 26,663
Less: allowance for losses (1,543)
----------
Total $ 25,120
==========
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 June 30, 2010. Dollar amounts are
expressed in thousands.
Balance at October 1, 2009 $ 351
Additions:
Originated mortgage servicing rights 5
Impairment recovery 10
Reductions:
Amortization (89)
--------
Balance at June 30, 2010 $ 277
========
(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.
12
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
During the nine month period ended June 30, 2010, the Company's
liability for unrecognized tax benefit was eliminated as a result of the
settlements with various taxing authorities.
The Company's federal and state income tax returns for fiscal years
2007 through 2010 remain subject to examination by the Internal Revenue
Service and various state jurisdictions, based on the statute of
limitations.
(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, 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)
===================================================
Three months ended Mortgage Other and
June 30, 2009 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 12,349 -- (161) 12,188
Provision for loan losses 4,000 -- -- 4,000
Other income 1,517 11,735 (510) 12,742
General and administrative
expenses 5,772 8,522 (262) 14,032
Income tax expense (benefit) 1,576 1,237 (157) 2,656
---------------------------------------------------
Net income $ 2,518 1,976 (252) 4,242
===================================================
13
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
===================================================
Nine months ended Mortgage Other and
June 30, 2009 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 34,447 -- (671) 33,776
Provision for loan losses 5,250 -- -- 5,250
Other income 3,191 25,582 (1,602) 27,171
General and administrative
expenses 15,424 20,415 (664) 35,175
Income tax expense (benefit) 6,531 1,989 (619) 7,901
---------------------------------------------------
Net income $ 10,433 3,178 (990) 12,621
===================================================
(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 $1.1 million, a decrease
in other liabilities of $344,000, and an increase in other income of
$1.4 million for the quarter ended June 30, 2010. The Company recorded
an increase in other assets of $118,000, an increase in other
liabilities of $592,000, and a decrease in other income of $474,000 for
the nine month period ended June 30, 2010.
Additionally, the Company has commitments to sell loans that have
closed prior to the end of the period. Due to the mark to market
adjustment on commitments to sell loans held for sale, the Company
recorded a decrease in other assets of $949,000, an increase in other
liabilities of $687,000, and a decrease in other income of $1.6 million
during the quarter ended June 30, 2010. The Company recorded an
increase in other assets of $210,000, an increase in other liabilities
of $188,000, and an increase in other income of $22,000 during the nine
month period ended June 30, 2010.
The balance of derivative instruments related to commitments to
originate and sell loans at June 30, 2010, 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.
14
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.
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.
15
Commitments to Originate Loans and Forward Sales Commitments
Commitments to originate loans and forward sales commitments are
valued using a valuation model which considers differences between
current market interest rates and committed rates. The model also
includes assumptions which estimate fall-out percentages for commitments
to originate loans. These measurements use significant unobservable
inputs and are classified as Level 3 within the hierarchy.
The following table presents the fair value measurements of assets
recognized in the accompanying balance sheets measured at fair value on
a recurring basis and the level within the fair value hierarchy in which
the measurements fall at June 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 $ 3,362 3,362 -- --
Trust preferred securities 2,917 2,917 -- --
Municipal securities 24 24 -- --
Mortgage-backed securities,
available for sale
Pass through certificates
guaranteed by GNMA -
fixed rate 102 -- 102 --
Pass through certificates
guaranteed by FNMA -
adjustable rate 204 -- 204 --
FHLMC participation certificates:
Fixed rate 482 -- 482 --
Adjustable rate 181 -- 181 --
Loans held for sale 138,591 -- 138,591 --
Mortgage servicing rights 277 -- -- 277
Commitments to originate loans 1,348 -- -- 1,348
Forward sales commitments 470 -- -- 470
-------------------------------------------------------
Total assets $ 147,958 6,303 139,560 2,095
=======================================================
Liabilities:
Commitments to originate
loans $ 798 -- -- 798
Forward sales commitments 826 -- -- 826
-------------------------------------------------------
Total liabilities $ 1,624 -- -- 1,624
=======================================================
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 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, 2010 and 2009 (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 (79) (473) 22
Included in other comprehensive
income -- -- --
Purchases, issuances, and settlements 5 -- --
Transfers in (out) of Level 3 -- -- --
---------------------------------------------
Balance at June 30, 2010 $ 277 550 (356)
=============================================
17
Mortgage Commitments
Servicing to Originate Forward Sales
Rights Loans Commitments
---------------------------------------------
Balance at October 1, 2008 $ 716 327 (319)
Total realized and unrealized
gains (losses):
Included in net income (271) (125) 2,248
Included in other comprehensive
income -- -- --
Purchases, issuances, and settlements -- -- --
Transfers in (out) of Level 3 -- -- --
---------------------------------------------
Balance at June 30, 2009 $ 445 202 1,929
=============================================
Realized and unrealized gains and losses noted in the table above
and included in net income for the nine month period ended June 30,
2010, 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) $ (89) 10 (451)
========================================
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 was $56.2 million at June 30, 2010.
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 $25.1
million at June 30, 2010. During the nine month period ended June 30,
2010, charge-offs and increases in specific reserves related to
foreclosed assets held for sale that were re-measured during the period
totaled $1.5 million.
18
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 evaluates its investments in LLCs using a multi-faceted
approach. The internal model utilizes liquidation or appraised values
as determined by an independent third party appraiser; an on-going
business or discounted cash flows value; and a combination of both the
previous approaches. 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 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
are classified within Level 3 of the fair value hierarchy
The carrying value of the Company's investment in LLCs was $19.0
million at June 30, 2010. During the nine month period ended June 30,
2010, the Company recorded an impairment charge of $2.0 million on its
investment in LLCs (see Note 16).
The following table presents the carrying values and fair values of
the Company's financial instruments at June 30, 2010, which have not
been previously reported. Dollar amounts are expressed in thousands.
Estimated
Carrying fair
value value
--------------------------
Financial Assets:
Cash and cash equivalents $ 9,510 9,510
Securities:
Held to maturity 1,268 1,496
Stock in Federal Home Loan Bank 17,431 17,431
Mortgage-backed securities:
Held to maturity 53,376 53,112
Loans receivable:
Held for investment 1,096,032 1,125,353
Financial Liabilities:
Customer deposit accounts 811,800 816,203
Brokered deposit accounts 47,661 47,689
Advances from FHLB 349,000 353,983
Subordinated debentures 25,774 25,774
Contract or Estimated
notional unrealized
amount gain
--------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 6,972 21
Lending commitments - floating
rate 120 (1)
Commitments to sell loans -- --
19
The following table presents the carrying values and fair values of
the Company's financial instruments at September 30, 2009, which have
not been previously reported. Dollar amounts are expressed in
thousands.
Estimated
Carrying fair
value value
--------------------------
Financial Assets:
Cash and cash equivalents $ 63,250 63,250
Securities:
Held to maturity 1,290 1,375
Stock in Federal Home Loan Bank 26,640 26,640
Mortgage-backed securities:
Held to maturity 11,125 11,343
Loans receivable:
Held for investment 1,238,995 1,272,543
Financial Liabilities:
Customer deposit accounts 696,781 706,330
Brokered deposit accounts 207,844 208,634
Advances from FHLB 441,026 449,613
Subordinated debentures 25,774 25,774
Contract or Estimated
notional unrealized
amount gain
--------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 1,326 47
Lending commitments - floating
rate -- --
Commitments to sell loans -- --
The fair value estimates presented are based on pertinent
information available to management as of June 30, 2010 and September
30, 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 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."
20
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, 2010, the Company and the subsidiary Bank are in
compliance with these regulatory agreements.
(16) IMPAIRMENT OF INVESTMENT IN LLC
The Company is a partner in two limited liability companies, Central
Platte Holdings LLC ("Central Platte") and NBH, LLC ("NBH"), which were
formed for the purpose of purchasing and developing vacant land in
Platte County, Missouri. These investments are accounted for using the
equity method of accounting.
The Company's investment in Central Platte consists of a 50%
ownership interest in an entity that develops land for residential real
estate sales. Sales of lots had not met previous expectations and, as a
result, the Company evaluated its investment for impairment, in
accordance with ASC 323-10-35-32, which provides guidance related to a
loss in value of an equity method investment. The Company utilizes a
multi-faceted approach to measure the potential impairment. The
internal model utilizes liquidation or appraised values determined by an
independent third party appraisal; an on-going business, or discounted
cash flows value; and a combination of both the previous approaches.
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 the
assumptions and the differences in valuation techniques that are
utilized within each approach (e.g., order of distribution of assets
upon potential liquidation). 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 applied
the same methodology to Central Platte as of September 30, 2009, which
indicated no impairment. Inputs utilized in the model that differed
from September 30, 2009 to December 31, 2009, included slower estimates
of lot sales and an approximately 8.5% decrease in raw land values,
which was supported by comparable independent third-party appraisals
prepared during that period. The Company's investment in Central Platte
was $16.5 million at June 30, 2010.
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 land is generally located near the Central Platte
development and the Company intends 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 by utilizing comparable sales of raw land within the market
area. As a result of this analysis, the Company determined that its
investment in NBH was not materially impaired. The Company's investment
in NBH was $2.5 million at June 30, 2010.
21
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 June 30, 2010 were $1,415.9
million, a decrease of $143.6 million from September 30, 2009, the prior
fiscal year end.
Loans receivable held for investment were $1,129.9 million as of
June 30, 2010, a decrease of $129.8 million during the nine month
period. This decrease resulted primarily from decreases in the Bank's
commercial real estate and residential construction and land development
portfolios. The weighted average rate on such loans as of June 30, 2010
was 6.29%, a decrease from 6.32% as of June 30, 2009.
Loans receivable held for sale as of June 30, 2010 were $138.6
million, an increase of $57.2 million from September 30, 2009. This
portfolio consists of residential mortgage loans originated by the
Bank's mortgage banking division that will be sold with servicing
released. The increase from the prior year end is the result of
significant loan origination volumes during the nine month period. The
Company has elected to carry loans held for sale at fair value, as
permitted under GAAP.
As the Bank originates mortgage loans each month, management
evaluates the existing market conditions to determine which loans will
be held in the Bank's portfolio and which loans will be sold in the
secondary market. Loans sold in the secondary market can be sold with
servicing released or converted into MBS and sold with the loan
servicing retained by the Bank. At the time of each loan commitment, a
decision is made to either hold the loan for investment, hold it for
sale with servicing retained, or hold it for sale with servicing
released. Management monitors market conditions to decide whether loans
should be held in portfolio or sold and if sold, which method of sale is
appropriate. During the nine months ended June 30, 2010, the Bank
originated and purchased $1,183.6 million in mortgage loans held for
sale, $85.4 million in mortgage loans held for investment, and $2.0
million in other loans. This total of $1,271.0 million in loans
compares to $1,393.2 million in loans originated and purchased during
the nine months ended June 30, 2009.
The Bank classifies problem assets as "substandard," "doubtful" or
"loss." Substandard assets have one or more defined weaknesses, and it
is possible that the Bank will sustain some loss unless the deficiencies
are corrected. Doubtful assets have the same defects as substandard
assets plus other weaknesses that make collection or full liquidation
improbable. Assets classified as loss consist of the reserved portion
of loans classified as impaired pursuant to ASC 310-10-35.
22
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.
6/30/10 9/30/09 6/30/09
-------------------------------------
Asset Classification:
Substandard $ 148,440 69,158 48,906
Doubtful 300 -- --
Loss 18,041 6,415 2,900
-------------------------------------
166,781 75,573 51,806
Allowance for losses on
loans and real estate
owned (35,395) (20,699) (16,376)
-------------------------------------
$ 131,386 54,874 35,430
=====================================
The following table summarizes non-performing assets, troubled debt
restructurings, and real estate acquired through foreclosure. Dollar
amounts are expressed in thousands.
6/30/10 9/30/09 6/30/09
----------------------------------------
Total Assets $ 1,415,928 1,559,562 1,615,130
========================================
Non-accrual loans $ 23,189 29,618 30,377
Troubled debt
restructurings 18,479 23,366 4,004
Net real estate and
other assets acquired
through foreclosure 25,120 10,140 12,037
----------------------------------------
Total $ 66,788 63,124 46,418
========================================
Percent of total assets 4.72% 4.05% 2.87%
========================================
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.
In accordance with the Supervisory Agreement of April 30, 2010,
with the Office of Thrift Supervision, the Bank was required to engage a
third-party consultant to perform an independent review of a significant
portion of its non-homogenous loan portfolios, an independent assessment
of its internal asset review structure, and an independent assessment of
its allowance for loan and lease losses methodology. This review was
completed during the quarter ended June 30, 2010, and resulted in an
increase in classified assets, primarily in the Bank's residential land
development portfolio. As new home and lot sales continue to slow in the
current economic environment, management determined that the primary
source of repayment for such loans was weakened and that it was prudent
to classify them, typically as substandard. It should be noted that,
although they are adversely classified, many of these loans continue to
perform according to their contractual terms and, as such, are not
deemed impaired at June 30, 2010.
Investment securities were $7.6 million as of June 30, 2010, a
decrease of $15.4 million from September 30, 2009. During the nine
month period, the Bank purchased securities of $28.9 million and sold
$46.4 million 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 period. Funds resulting from
the sale of these securities were used to reduce Company's reliance on
brokered deposits.
23
Mortgage-backed securities were $54.3 million as of June 30, 2010,
a decrease of $3.3 million from the prior year end. During the nine
month period, the Bank purchased mortgage-backed securities of $54.8
million and sold $47.1 million of mortgage-backed securities available
for sale. This activity was related to a restructuring of the Company's
mortgage-backed securities portfolio which resulted in an increased
yield on such assets. The average yield on the mortgage-backed
securities portfolio was 5.03% at June 30, 2010, an increase from 4.48%
at September 30, 2009.
The Company's investment in LLCs, which is accounted for using the
equity method, was $19.0 million at June 30, 2010, a decrease of $2.0
million from September 30, 2009. During the quarter ended December 31,
2009, the Company recorded a $2.0 million impairment charge related to
its investment in Central Platte Holdings, LLC. There have been no
events subsequent to December 31, 2009, that would indicate an
additional impairment in value of the Company's investment in Central
Platte, which was $16.5 million at June 30, 2010. The Company's
investment in NBH, LLC was also evaluated for impairment and no material
impairment was identified. The Company's investment in NBH, LLC was
$2.5 million at June 30, 2010.
LIABILITIES AND EQUITY
Customer and brokered deposit accounts decreased $45.2 million
during the nine months ended June 30, 2010. Specifically, customer
deposits increased $115.0 million during the period, primarily due to an
increase in retail certificates of deposits resulting from promotions
during the period. Brokered deposits decreased $160.2 million during
the period, as a result of the Company's effort to reduce its reliance
on this funding source. The weighted average rate on customer and
brokered deposits as of June 30, 2010 was 1.98%, a decrease from 2.53%
as of June 30, 2009.
Advances from the FHLB were $349.0 million as of June 30, 2010, a
decrease of $92.0 million from September 30, 2009. During the nine
month period, the Bank borrowed $48.0 million of new advances and repaid
$140.0 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, 2010.
Such debentures resulted from the issuance of Trust Preferred Securities
through the Company's wholly owned statutory trust, NASB Preferred Trust
I. The Trust used the proceeds from the offering to purchase a like
amount of the Company's subordinated debentures. The debentures, which
have a variable rate of 1.65% over the 3-month LIBOR and a 30-year term,
are the sole assets of the Trust.
Escrows were $8.4 million as of June 30, 2010, a decrease of $1.7
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 June 30, 2010 was $165.3 million
(11.7% 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 $21.01 on June 30, 2010, 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 and February 26, 2010. In accordance with
the agreement with the Office of Thrift Supervision, the Company is
restricted from the payment of dividends or other capital distributions
during the period of the agreement.
Total stockholders' equity as of June 30, 2010 includes an
unrealized gain, net of deferred income taxes, on available for sale
securities of $237,000. This amount is reflected in the line item
"Accumulated other comprehensive income."
RATIOS
The following table illustrates the Company's return on assets
(annualized net income divided by average total assets); return on
equity (annualized net income divided by average total equity); equity-
to-assets ratio (ending total equity divided by ending total assets);
and dividend payout ratio (dividends paid divided by net income).
Nine months ended
------------------------
6/30/10 6/30/09
------------------------
Return on assets 0.37% 1.07%
Return on equity 3.29% 10.71%
Equity-to-assets ratio 11.68% 10.03%
Dividend payout ratio 86.59% 42.07%
24
RESULTS OF OPERATIONS - Comparison of three and nine months ended June
30, 2010 and 2009.
For the three months ended June 30, 2010, the Company had a net
loss of $(460,000) or $(0.06) per share. This compares to net income of
$4.2 million or $0.54 per share for the quarter ended June 30, 2009.
For the nine months ended June 30 2010, the Company had net income
of $4.1 million or $0.52 per share. This compares to net income of
$12.6 million or $1.60 per share for the nine months ended June 30,
2009.
NET INTEREST MARGIN
The Company's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS and investments and the
interest cost of customer and brokered deposits and other borrowings.
Management monitors net interest spreads and, although constrained by
certain market, economic, and competition factors, it establishes loan
rates and customer deposit rates that maximize net interest margin.
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, 2010 and 2009. Average yields reflect reductions due to non-accrual
loans. Once a loan becomes 90 days delinquent, any interest that has
accrued up to that time is reserved and no further interest income is
recognized unless the loan is paid current. Average balances and
weighted average yields for the periods include all accrual and non-
accrual loans. The table also presents the interest-earning assets and
yields for each respective period. Dollar amounts are expressed in
thousands.
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%
============================
Nine months ended 6/30/09 As of
--------------------------- 6/30/09
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,360,780 64,110 6.28% 6.19%
Mortgage-backed securities 53,183 1,494 3.75% 4.25%
Securities 53,231 1,542 3.86% 4.97%
Bank deposits 23,450 94 0.53% 0.01%
--------------------------------------
Total earning assets 1,490,644 67,240 6.01% 6.02%
---------------------------
Non-earning assets 64,720
----------
Total $1,555,364
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 166,856 1,114 0.89% 0.80%
Customer and brokered
certificates of deposit 685,973 18,429 3.58% 2.92%
FHLB Advances 508,432 13,212 3.46% 3.01%
Subordinated debentures 25,000 709 3.78% 2.69%
--------------------------------------
Total costing liabilities 1,386,261 33,464 3.22% 2.69%
---------------------------
Non-costing liabilities 12,817
Stockholders' equity 156,286
----------
Total $1,555,364
==========
Net earning balance $ 104,383
==========
Earning yield less costing rate 2.79% 3.33%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,490,644 33,776 3.02%
============================
25
The following table provides information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided on
changes attributable to (1) changes in rates (change in rate
multiplied by the old volume), and (2) changes in volume (change in
volume multiplied by the old rate), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
Nine months ended June 30, 2010, compared to
nine months ended June 30, 2009
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (306) (4,160) 27 (4,439)
Mortgage-backed securities 395 475 128 998
Securities 128 (466) (40) (378)
Bank deposits (84) 3 (3) (84)
-----------------------------------------------
Net change in interest income 133 (4,148) 112 (3,903)
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (6,780) 637 (179) (6,322)
FHLB Advances (1,868) (2,821) 368 (4,321)
Subordinated debentures (338) -- -- (338)
-----------------------------------------------
Net change in interest expense (8,986) (2,184) 189 (10,981)
-----------------------------------------------
Increase in net interest
margin $ 9,119 (1,964) (77) 7,078
===============================================
Net interest margin before loan loss provision for the nine months
ended June 30, 2010 increased $7.1 million from the same period in the
prior year. Specifically, interest income decreased $3.9 million, which
was offset by an $11.0 million decrease in interest expense for the
period. Interest on loans decreased $4.4 million primarily as the
result of an $88.3 million decrease in the average balance of loans
receivable outstanding during the period. Interest on investment
securities decreased $378,000 due primarily to a $16.1 million decrease
in the average balance of such securities during the period. These
decreases in interest income were partially offset by a $998,000
increase in interest on mortgage-backed securities due to a $16.9
million increase in the average balance and a 99 basis point increase in
the average yield of such securities. Interest expense on customer and
brokered deposit accounts decreased $6.3 million due primarily to a 106
basis point decrease in the average rate paid on such interest-costing
liabilities. Interest expense on FHLB advances decreased $4.3 million
as the result of a $108.7 million decrease in the average balance and a
49 basis point decrease in the average rate paid on such liabilities.
Interest expense on subordinated debentures decreased $338,000 due to a
180 basis point decrease in the average rate paid on such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $11.5 million
during the quarter ended June 30, 2010, due primarily to increases in
loans classified as substandard or loss related to the commercial real
estate, residential construction and land development portfolios. In
addition, the Company enhanced its ALLL methodology during the quarter
to incorporate a shorter historical loss "look-back" period, and to more
formally document qualitative factors used to determine the appropriate
level of allowance for losses on loans. The Company recorded a
provision for loan losses of $5.0 million during the quarter ended March
31, 2010, due primarily to a significant write-down of one loan within
the Bank's land development portfolio. The property that collateralized
this loan was acquired by the Bank by a deed in lieu of foreclosure
during the quarter ended March 31, 2010. At that time, the Bank
obtained an independent third-party appraisal of the property, resulting
in a $6.6 million write-down, of which $1.4 million was specifically
reserved in the prior quarter. The original plan for the property was a
high-end residential development, which proved infeasible in the current
market. Thus, the appraised value declined significantly due to longer
estimated absorption periods, lower estimated lot prices, and the
decline in demand for speculative development ground. 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. 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 21.2% of total classified assets at
June 30, 2010, 27.4% at September 30, 2009, and 31.6% at June 30, 2009.
The decrease in this ratio at June 30, 2010, is the result of an
increase in classified assets in the Bank's residential land development
portfolio during the period. However, as noted above, although they are
adversely classified, many of these loans continue to perform in
accordance with their contractual terms and, as such, are not deemed
impaired at June 30, 2010.
26
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.
OTHER INCOME
Other income for the three months ended June 30, 2010 decreased
$1.2 million from the same period in the prior year. Specifically,
provision for loss on real estate owned increased $1.5 million due to
deterioration in the value of foreclosed assets held for sale. Other
income decreased $1.3 million due to the effect of recording the net
fair value of certain loan-related commitments in accordance with GAAP
and an increase in expenses related to foreclosed assets held for sale.
Customer service fees and charges decreased $204,000 primarily due to
decrease in miscellaneous loan fees resulting from lower mortgage loan
origination volume during the period. These decreases in other income
were partially offset by a $1.5 million increase in gain on sale of
loans held for sale due primarily to increased mortgage banking spreads
during the period. In addition, gain on sale of securities available
for sale increased $319,000 due to the sale of securities available for
sale during the period.
Other income for the nine months ended June 30, 2010 increased $3.9
million from the same period in the prior year. Specifically, gain on
sale of loans held for sale increased $5.4 million due to increased
mortgage banking spreads during the period. Gain on sale of securities
available for sale increased $5.0 million due to the sale of securities
available for sale during the period. Loan servicing fees increased
$220,000 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. These increases were offset by a $3.3 million decrease in other
income, due to the effect of recording the net fair value of certain
loan-related commitments in accordance with GAAP and an increase in
expenses related to foreclosed assets held for sale. Provision for loss
on real estate owned increased $1.4 million due to deterioration in the
value of foreclosed assets held for sale during the period. In addition,
the Company recorded a $2.0 million impairment charge related to the
Company's investment in LLCs during the quarter ended December 31, 2009.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended June 30, 2010 increased $877,000 from the same period in the prior
year. Specifically, other expense increased $1.3 million due primarily
to increases in legal and consulting fees and other expenses related to
the Company's lending operations. Advertising and business promotion
expense increased $237,000 due to costs related the Company's rebranding
efforts and due to an increase in costs related to the mortgage banking
operation. Premises and equipment expenses increased $153,000 due
primarily to software related maintenance cost. These increases were
partially offset by a $405,000 decrease in federal deposit insurance
premium expense due to a special assessment that was accrued during the
same period in the prior year. In addition, compensation and fringe
benefits decreased $204,000 due primarily to a decrease in accrued bonus
expense in the period. Commission-based mortgage banking compensation
decreased $201,000 due primarily to a decrease in mortgage banking
volume from the same period in the prior year.
Total general and administrative expenses for the nine months ended
June 30, 2010 increased $5.7 million from the same period in the prior
year. Specifically, compensation and fringe benefits increased $647,000
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 $1.5 million
due primarily to an increase in mortgage banking spreads from the same
period in the prior year. Federal deposit insurance premium expense
increased $1.2 million related primarily to an increase in premium
rates. Advertising and business promotion expense increased $719,000
due to costs related the Company's rebranding efforts and due to an
increase in costs related to the mortgage banking operation. Premises
and equipment expenses increased $137,000 due primarily to software
related maintenance cost. Additionally, other expense increased $1.5
million due primarily to increases in legal and consulting fees and
other expenses related to the Company's lending operations.
27
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Deposit Insurance Fund ("DIF") of the FDIC. The Bank
is subject to regulation by the OTS as its chartering authority. Since
passage of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA" or the "Act"), the FDIC also has regulatory
control over the Bank. The transactions of DIF-insured institutions are
limited by statute and regulations that may require prior supervisory
approval in certain instances. Institutions also must file reports with
regulatory agencies regarding their activities and their financial
condition. The OTS and FDIC make periodic examinations of the Bank to
test compliance with the various regulatory requirements. The OTS can
require an institution to re-value its assets based on appraisals and to
establish specific valuation allowances. This supervision and
regulation is intended primarily for the protection of depositors.
Also, savings institutions are subject to certain reserve requirements
under Federal Reserve Board regulations.
INSURANCE OF ACCOUNTS
The DIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured owner, with the exception of self-directed
retirement accounts, which are insured to a maximum of $250,000. On
October 3, 2008, the Emergency Economic Stabilization Act of 2008
temporarily raised the basic limit of federal deposit insurance coverage
from $100,000 to $250,000 per depositor. This legislation provided that
the basic deposit insurance limit would return to $100,000 after
December 31, 2013. On July 21, 2010, the Dodd-Frank Wall Street Reform
and Consumer Protection Act made permanent the maximum deposit insurance
amount of $250,000.
Deposit 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.
REGULATORY CAPITAL REQUIREMENTS
At June 30, 2010, the Bank exceeds all capital requirements
prescribed by the OTS. To calculate these requirements, a thrift must
deduct any investments in and loans to subsidiaries that are engaged in
activities not permissible for a national bank. As of June 30, 2010,
the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
At June 30, 2010 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 167,181
Adjustment for regulatory capital:
Intangible assets (2,596)
Disallowed portion of servicing assets
and deferred tax assets (24)
Reverse the effect of SFAS No. 115 (237)
---------
Tangible capital 164,324
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 164,324
Qualifying general valuation allowance 14,946
---------
Risk-based capital $ 179,270
=========
28
As of June 30, 2010
-------------------------------------------------------------------
Minimum Required for Minimum Required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 179,270 15.0% 95,464 >=8% 119,330 >=10%
Core capital to adjusted tangible assets 164,324 11.8% 55,665 >=4% 69,581 >=5%
Tangible capital to tangible assets 164,324 11.8% 20,874 >=1.5% -- --
Tier 1 capital to risk-weighted assets 164,324 13.7% -- -- 71,598 >=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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability to meet deposit withdrawals and
lending commitments. The Bank generates liquidity primarily from the
sale and repayment of loans, retention or newly acquired retail
deposits, and advances from FHLB of Des Moines' credit facility.
Management continues to use FHLB advances as a primary source of short-
term funding. At June 30, 2010, the Bank had $133.8 million available
in the form of additional FHLB advances. The Bank has established
relationships with various brokers, and, as a secondary source of
liquidity, the Bank purchases brokered deposit accounts.
The Bank entered into a Supervisory Agreement with the Office of
Thrift Supervision on April 30, 2010, which, among other things,
required the Bank to reduce its reliance on brokered deposits. The OTS
subsequently approved the Bank's plan to reduce brokered deposits to
$145.0 million by June 30, 3010, $135.0 million by June 30, 2011 and
$125.0 million by June 30, 2012. As of June 30, 2010, the Bank's
brokered deposits totaled $47.4 million. Thus, the Bank could acquire
an additional $97.6 million in brokered deposits and still comply with
the plan as of June 30, 2010.
Fluctuations in the level of interest rates typically impact
prepayments on mortgage loans and MBS. During periods of falling
interest rates, these prepayments increase and a greater demand exists
for new loans. The Bank's customer deposits are partially impacted by
area competition. Management believes that the Bank will retain most of
its maturing time deposits in the foreseeable future. However, any
material funding needs that may arise in the future can be reasonably
satisfied through the use of additional FHLB advances and/or brokered
deposits. The Bank's contingency liquidity sources include the Federal
Reserve discount window and sales of securities available for sale.
Management is not aware of any other current market or economic
conditions that could materially impact the Bank's future ability to
meet obligations as they come due.
29
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.
30
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
31
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, 2010 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
August 9, 2010 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
32
19
19