10-Q

 

 

Securities and Exchange Commission

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the period ended March 31, 2013

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

incorporation or organization)

 

(IRS Employer

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  x    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 May 3, 2013, was 7,867,614.

 

 

 


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

NASB Financial, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

 

     March 31,
2013
(Unaudited)
    September 30,
2012
 
     (Dollars in thousands)  

ASSETS

  

Cash and cash equivalents

   $ 50,720        8,716   

Securities:

    

Available for sale, at fair value

     245,026        214,190   

Stock in Federal Home Loan Bank, at cost

     6,984        7,073   

Mortgage-backed securities:

    

Available for sale, at fair value

     499        554   

Held to maturity, at cost

     11,808        25,921   

Loans receivable:

    

Held for sale, at fair value

     100,156        163,834   

Held for investment, net

     702,425        766,601   

Allowance for loan losses

     (20,726     (31,829
  

 

 

   

 

 

 

Total loans receivable, net

     781,855        898,606   
  

 

 

   

 

 

 

Accrued interest receivable

     4,226        4,402   

Foreclosed assets held for sale, net

     20,597        17,040   

Premises and equipment, net

     11,670        11,637   

Investment in LLCs

     16,928        17,222   

Deferred income tax asset, net

     13,625        17,199   

Other assets

     15,098        18,266   
  

 

 

   

 

 

 
   $ 1,179,036        1,240,826   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Customer deposit accounts

   $ 807,288        870,946   

Brokered deposit accounts

     10,000        21,367   

Advances from Federal Home Loan Bank

     125,000        127,000   

Subordinated debentures

     25,774        25,774   

Escrows

     4,811        8,760   

Income taxes payable

     3,546        3,490   

Accrued expenses and other liabilities

     12,299        11,986   
  

 

 

   

 

 

 

Total liabilities

     988,718        1,069,323   
  

 

 

   

 

 

 

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

     16,613        16,657   

Retained earnings

     208,851        189,516   

Treasury stock, at cost; 1,989,498 shares

     (38,418     (38,418

Accumulated other comprehensive loss

     1,793        2,269   
  

 

 

   

 

 

 

Total stockholders’ equity

     190,318        171,503   
  

 

 

   

 

 

 
   $ 1,179,036        1,240,826   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

1


NASB Financial, Inc. and Subsidiary

Condensed Consolidated Statements of Operations (Unaudited)

 

     Three months ended     Six months ended  
     March 31,     March 31,  
     2013     2012     2013     2012  
     (Dollars in thousands, except per share data)  

Interest on loans receivable

   $ 11,740        14,270        24,074        30,163   

Interest on mortgage-backed securities

     87        463        381        962   

Interest and dividends on securities

     1,085        498        2,048        1,466   

Other interest income

     1        4        3        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     12,913        15,235        26,506        32,597   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest on customer and brokered deposit accounts

     1,360        2,435        3,109        4,914   

Interest on advances from Federal Home Loan Bank

     532        566        1,063        1,201   

Interest on subordinated debentures

     125        137        254        266   

Other interest expense

     5        —          8        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,022        3,138        4,434        6,381   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     10,891        12,097        22,072        26,216   

Provision for loan losses

     (5,600     5,000        (9,600     7,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provision for loan losses

     16,491        7,097        31,672        18,716   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Loan servicing fees, net

     26        18        52        65   

Customer service fees and charges

     1,357        1,202        2,831        2,612   

Provision for loss on real estate owned

     (242     (2,069     (817     (3,423

Loss on sale of securities available for sale

     —          —          —          (343

Gain on sale of securities held to maturity

     257        —          257        —     

Gain from loans receivable held for sale

     19,281        8,565        35,387        19,836   

Impairment loss on investment in LLCs

     —          (200     —          (200

Other income (expense)

     (1,714     773        (2,248     291   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     18,965        8,289        35,462        18,838   
  

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses:

        

Compensation and fringe benefits

     6,502        5,473        12,858        10,821   

Commission-based mortgage banking compensation

     5,124        3,608        10,937        7,309   

Premises and equipment

     1,222        1,294        2,544        2,485   

Advertising and business promotion

     1,396        1,370        2,559        2,381   

Federal deposit insurance premiums

     664        400        1,250        787   

Other

     2,632        2,626        5,547        5,125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total general and administrative expenses

     17,540        14,771        35,695        28,908   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     17,916        615        31,439        8,646   

Income tax expense

     6,898        240        12,104        3,332   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 11,018        375        19,335        5,314   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 1.40        0.05        2.46        0.68   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 1.40        0.05        2.46        0.68   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 Statements of Comprehensive Income (Unaudited)

 

     Three months ended March 31,  
     2013     2012  
     (Dollars in thousands)  

Net income

   $ 11,018        375   
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Unrealized gain (loss) on available for sale securities, net of income tax expense (benefit) of $(323) and $503 at March 31, 2013 and 2012, respectively

  

 

(516

    803   

Reclassification adjustment for (gain) loss included in net income

     —          —     
  

 

 

   

 

 

 

Change in unrealized gain (loss) on available for sale securities, net of income tax expense (benefit) of $(323) and $503 at March 31, 2013 and 2012, respectively

     (516     803   
  

 

 

   

 

 

 

Comprehensive income

   $ 10,502        1,178   
  

 

 

   

 

 

 
     Six months ended March 31,  
     2013     2012  
     (Dollars in thousands)  

Net income

   $ 19,335        5,314   
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Unrealized gain (loss) on available for sale securities, net of income tax expense (benefit) of $(298) and $389 at March 31, 2013 and 2012, respectively

  

 

(476

    622   

Reclassification adjustment for loss included in net income, net of income tax benefit of $132 at March 31, 2012

     —          211   
  

 

 

   

 

 

 

Change in unrealized gain (loss) on available for sale securities, net of income tax expense (benefit) of $(298) and $521 at March 31, 2013 and 2012, respectively

     (476     833   
  

 

 

   

 

 

 

Comprehensive income

   $ 18,859        6,147   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


NASB Financial, Inc. and Subsidiary

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

 

                               Accumulated        
            Additional                  other     Total  
     Common      paid-in     Retained      Treasury     comprehensive     stockholders’  
     stock      capital     Earnings      stock     Income     equity  
     (Dollars in thousands)  

Balance at October 1, 2012

   $ 1,479         16,657        189,516         (38,418     2,269        171,503   

Comprehensive income:

              

Net income

     —           —          19,335         —          —          19,335   

Other comprehensive income, net of tax:

              

Unrealized gain on securities available for sale

     —           —          —           —          (476     (476
              

 

 

 

Total comprehensive income

                 18,859   

Stock based compensation

     —           (44     —           —          —          (44
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ 1,479         16,613        208,851         (38,418     1,793        190,318   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


NASB Financial, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     Six months ended March 31,  
     2013     2012  
     (Dollars in thousands)  

Cash flows from operating activities:

    

Net income

   $ 19,335        5,314   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation

     1,077        976   

Amortization and accretion, net

     510        (806

Loss on sale of securities available for sale

     —          343   

Gain on sale of securities held to maturity

     (257     —     

(Gain) loss from investment in LLCs

     300        (2

Impairment loss on investment in LLCs

     —          200   

Gain from loans receivable held for sale

     (35,387     (19,836

Provision for loan losses

     (9,600     7,500   

Provision for loss on real estate owned

     817        3,423   

Origination of loans receivable held for sale

     (1,044,057     (849,286

Sale of loans receivable held for sale

     1,143,123        850,565   

Stock based compensation – stock options

     (44     3   

Changes in:

    

Net fair value of loan-related commitments

     1,837        (231

Accrued interest receivable

     176        785   

Prepaid and accrued expenses, other liabilities, and income taxes payable

     5,159        (1,976
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     82,989        (3,028

Cash flows from investing activities:

    

Principal repayments of mortgage-backed securities:

    

Held to maturity

     3,456        6,343   

Available for sale

     48        88   

Principal repayments of mortgage loans receivable held for investment

     111,689        105,939   

Principal repayments of other loans receivable

     2,111        2,054   

Principal repayments of investment securities available for sale

     20,006        25,109   

Loan origination - mortgage loans receivable held for investment

     (57,393     (37,915

Loan origination - other loans receivable

     (1,148     (1,245

Purchase of mortgage loans receivable held for investment

     (647     (588

Proceeds from sale of Federal Home Loan Bank stock

     89        5,919   

Purchase of investment securities available for sale

     (52,525     (57,055

Proceeds from sale of investment securities available for sale

     —          19,678   

Proceeds from sale of mortgage-backed securities held to maturity

     10,800        —     

Proceeds from sale of real estate owned

     4,268        5,196   

Purchases of premises and equipment, net

     (65     (1,690

Investment in LLCs

     (6     (4

Other

     (1,107     (75
  

 

 

   

 

 

 

Net cash provided by investing activities

     39,576        71,754   

 

5


NASB Financial, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     Six months ended March 31,  
     2013     2012  
     (Dollars in thousands)  

Cash flows from financing activities:

  

Net increase (decrease) in customer and brokered deposit accounts

     (75,034     60,947   

Proceeds from advances from Federal Home Loan Bank

     25,000        —     

Repayment on advances from Federal Home Loan Bank

     (27,000     (122,000

Change in escrows

     (3,949     (5,128

Proceeds from other borrowings

     422        —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (80,561     (66,181
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     42,004        2,545   

Cash and cash equivalents at beginning of the period

     8,716        5,030   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 50,720        7,575   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for income taxes (net of refunds)

   $ 8,176        4,349   

Cash paid for interest

     4,247        6,432   

Supplemental schedule of non-cash investing and financing activities:

    

Conversion of loans receivable to real estate owned, net of specific reserves

   $ 9,168        12,747   

Conversion of real estate owned to loans receivable

     224        360   

See accompanying notes to condensed consolidated financial statements.

 

6


 

 

NASB Financial Inc

(1) BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include the accounts of NASB Financial, Inc. (the “Company”), its wholly-owned subsidiary, North American Savings Bank, F.S.B. (“North American” or the “Bank”), and the Bank’s wholly-owned subsidiary, Nor-Am Service Corporation. All significant inter-company transactions have been eliminated in consolidation. The consolidated financial statements do not include the accounts of our wholly-owned statutory trust, NASB Preferred Trust I (the “Trust”). The Trust qualifies as a special purpose entity that is not required to be consolidated in the financial statements of NASB Financial, Inc. The Trust Preferred Securities issued by the Trust are included in Tier I capital for regulatory capital purposes. See Footnote 8, Subordinated Debentures.

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 for the year ended September 30, 2012, filed with the Securities and Exchange Commission on December 14, 2012. Operating results for the six month period ended March 31, 2013, are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2013. The condensed consolidated balance sheet of the Company as of September 30, 2012, 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, valuation of foreclosed assets held for sale, accruals for loan recourse provisions, and fair values of financial instruments, among other items. Management believes that these estimates are adequate; however, future additions to the allowance or changes in the estimates 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 March 31, 2013, have remained unchanged from September 30, 2012. These policies relate to the allowance for loan losses, the valuation of foreclosed assets held for sale, the valuation of derivative instruments, and the valuation of equity method investments. Disclosure of these critical accounting policies is incorporated by reference under Item 8 “Financial Statements and Supplementary Data” in the Company’s Annual Report on Form 10-K for the Company’s year ended September 30, 2012.

Certain quarterly amounts for previous periods have been reclassified to conform to the current quarter’s presentation.

(2) RECONCILIATION OF BASIC EARNINGS PER SHARE TO DILUTED EARNINGS PER SHARE

The following table presents a reconciliation of basic earnings per share to diluted earnings per share for the periods indicated.

 

     Three months ended      Six months ended  
     3/31/13      3/31/12      3/31/13      3/31/12  

Net income (in thousands)

   $ 11,018         375         19,335         5,314   

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 per share:

           

Basic

   $ 1.40         0.05         2.46         0.68   

Diluted

     1.40         0.05         2.46         0.68   

 

7


At March 31, 2013 and 2012, options to purchase 41,138 and 47,538 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.

(3) SECURITIES AVAILABLE FOR SALE

The following table presents a summary of securities available for sale at March 31, 2013. Dollar amounts are expressed in thousands.

 

            Gross      Gross      Estimated  
     Amortized      unrealized      unrealized      fair  
     cost      gains      losses      value  

Corporate debt securities

   $ 69,293         3,193         184         72,302   

U.S. government sponsored agency securities

     172,422         476         596         172,302   

Municipal securities

     422         —           —           422   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 242,137         3,669         780         245,026   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents a summary of securities available for sale at September 30, 2012. Dollar amounts are expressed in thousands.

 

            Gross      Gross      Estimated  
     Amortized      unrealized      unrealized      fair  
     cost      gains      losses      value  

Corporate debt securities

   $ 57,983         3,035         —           61,018   

U.S. government sponsored agency securities

     152,546         624         4         153,166   

Municipal securities

     6         —           —           6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 210,535         3,659         4         214,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no sales of securities available for sale during the six month period ended March 31, 2013. During the six month period ended March 31, 2012, the Company realized gross gains of $227,000 and gross losses of $570,000 on the sale of securities available for sale.

The following table presents a summary of the fair value and gross unrealized losses of those securities available for sale which had unrealized losses at March 31, 2013. Dollar amounts are expressed in thousands.

 

     Less than 12 months      12 months or longer  
     Estimated      Gross      Estimated      Gross  
     fair      unrealized      fair      unrealized  
     value      Losses      value      losses  

Corporate debt securities

   $ 4,947         184       $ —           —     

U.S. government sponsored agency securities

     59,881         596         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 64,828         780       $ —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

8


The scheduled maturities of securities available for sale at March 31, 2013 are presented in the following table. Dollar amounts are expressed in thousands.

 

     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Estimated
fair
value
 

Due in less than one year

   $ 11,679         7         —           11,686   

Due from one to five years

     154,175         3,406         187         157,394   

Due from five to ten years

     24,991         254         —           25,245   

Due after ten years

     51,292         2         593         50,701   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 242,137         3,669         780         245,026   
  

 

 

    

 

 

    

 

 

    

 

 

 

(4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

The following table presents a summary of mortgage-backed securities available for sale at March 31, 2013. 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

   $ 74         2         —           76   

Pass-through certificates guaranteed by FNMA – adjustable rate

     132         7         —           139   

FHLMC participation certificates:

           

Fixed rate

     149         10         —           159   

Adjustable rate

     118         7         —           125   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 473         26         —           499   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents a summary of mortgage-backed securities available for sale at September 30, 2012. 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

   $ 78         3         —           81   

Pass-through certificates guaranteed by FNMA – adjustable rate

     143         9         —           152   

FHLMC participation certificates:

           

Fixed rate

     176         14         —           190   

Adjustable rate

     123         8         —           131   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 520         34         —           554   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no sales of mortgage-backed securities available for sale during the six month periods ended March 31, 2013 and 2012.

 

9


The scheduled maturities of mortgage-backed securities available for sale at March 31, 2013 are presented in the following table. Dollar amounts are expressed in thousands.

 

     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Estimated
fair
value
 

Due from one to five years

   $ 149         10         —           159   

Due after ten years

     324         16         —           340   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 473         26         —           499   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

(5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY

The following table presents a summary of mortgage-backed securities held to maturity at March 31, 2013. Dollar amounts are expressed in thousands.

 

            Gross      Gross      Estimated  
     Amortized      unrealized      unrealized      fair  
     cost      gains      losses      value  

FHLMC participation certificates:

           

Fixed rate

   $ 34         3         —           37   

FNMA pass-through certificates:

           

Fixed rate

     2         —           —           2   

Balloon maturity and adjustable rate

     22         —           —           22   

Collateralized mortgage obligations

     11,750         79         56         11,773   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,808         82         56         11,834   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents a summary of mortgage-backed securities held to maturity at September 30, 2012. Dollar amounts are expressed in thousands.

 

            Gross      Gross      Estimated  
     Amortized      unrealized      unrealized      fair  
     cost      gains      losses      value  

FHLMC participation certificates:

           

Fixed rate

   $ 37         3         —           40   

FNMA pass-through certificates:

           

Fixed rate

     3         —           —           3   

Balloon maturity and adjustable rate

     24         1         —           25   

Collateralized mortgage obligations

     25,857         390         198         26,049   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,921         394         198         26,117   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


During the six month period ended March 31, 2013, the Bank recognized a gain of $38,000 and a loss of $295,000 on the sale of two mortgage backed securities which were classified as held to maturity. The securities had a combined amortized cost of $10.5 million at the time of sale. The decision was made to sell the securities after it was determined that there was a significant deterioration in the issuer’s creditworthiness. There were no sales of mortgage-backed securities held to maturity during the six month period ended March 31, 2012.

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 March 31, 2013. 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

   $ —           —         $ 4,317         56   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —           —         $ 4,317         56   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management monitors the securities portfolio for impairment on an ongoing basis by evaluating market conditions and other relevant information, including external credit ratings, to determine whether or not a decline in value is other-than-temporary. When the fair value of a security is less than its amortized cost, an other-than-temporary impairment is considered to have occurred if the present value of expected cash flows is not sufficient to recover the entire amortized cost, or if the Company intends to, or will be required to, sell the security prior to the recovery of its amortized cost. The unrealized losses at March 31, 2013, are primarily the result of changes in market yields from the time of purchase. Management generally views changes in fair value caused by changes in interest rates as temporary. In addition, all scheduled payments for securities with unrealized losses at March 31, 2013, have been made, and it is anticipated that the Company will hold such securities to maturity and that the entire principal balance will be collected.

The scheduled maturities of mortgage-backed securities held to maturity at March 31, 2013, are presented in the following table. Dollar amounts are expressed in thousands.

 

     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Estimated
fair
value
 

Due from one to five years

   $ 25         2         —           27   

Due from five to ten years

     990         1         25         966   

Due after ten years

     10,793         79         31         10,841   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,808         82         56         11,834   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

(6) LOANS RECEIVABLE

The Bank has traditionally concentrated its lending activities on mortgage loans secured by residential and business property and, to a lesser extent, development lending. Residential mortgage loans have either long-term fixed or adjustable rates. The Bank also has a portfolio of mortgage loans that are secured by multifamily, construction, development, and commercial real estate properties. The remaining part of North American’s loan portfolio consists of non-mortgage commercial loans and installment loans.

 

11


The following table presents the Bank’s total loans receivable. Dollar amounts are expressed in thousands.

 

¨  

     3/31/13     9/30/12  

HELD FOR INVESTMENT

    

Mortgage loans:

    

Permanent loans on:

    

Residential properties

   $ 327,288        331,310   

Business properties

     281,555        321,559   

Partially guaranteed by VA or insured by FHA

     4,850        3,950   

Construction and development

     95,422        110,718   
  

 

 

   

 

 

 

Total mortgage loans

     709,115        767,537   

Commercial loans

     12,400        17,570   

Installment loans and lease financing to individuals

     6,419        7,753   
  

 

 

   

 

 

 

Total loans receivable held for investment

     727,934        792,860   

Less:

    

Undisbursed loan funds

     (20,787     (21,014

Unearned discounts and fees on loans, net of deferred costs

     (4,722     (5,245
  

 

 

   

 

 

 

Net loans receivable held for investment

   $ 702,425        766,601   
  

 

 

   

 

 

 

HELD FOR SALE

    

Mortgage loans:

    

Permanent loans on:

    

Residential properties

   $ 100,156        163,834   
  

 

 

   

 

 

 

Included in the loans receivable balances at March 31, 2013, are participating interests in mortgage loans and wholly-owned mortgage loans serviced by other institutions in the amount of $1.2 million. Loans and participations serviced for others amounted to approximately $27.3 million at March 31, 2013. Loans serviced for others are not included in the accompanying condensed consolidated balance sheets.

Lending Practices and Underwriting Standards

Residential real estate loans - The Bank offers a range of residential loan programs, including programs offering loans guaranteed by the Veterans Administration (“VA”) and loans insured by the Federal Housing Administration (“FHA”). The Bank’s residential loans come from several sources. The loans that the Bank originates are generally a result of direct solicitations of real estate brokers, builders, developers, or potential borrowers via the internet. North American periodically purchases real estate loans from other financial institutions or mortgage bankers.

The Bank’s residential real estate loan underwriters are grouped into three different levels, based upon each underwriter’s experience and proficiency. Underwriters within each level are authorized to approve loans up to prescribed dollar amounts. Any loan over $1 million must also be approved by either the CEO or the EVP/Chief Credit Officer. Conventional residential real estate loans are underwritten using FNMA’s Desktop Underwriter or FHLMC’s Loan Prospector automated underwriting systems, which analyze credit history, employment and income information, qualifying ratios, asset reserves, and loan-to-value ratios. If a loan does not meet the automated underwriting standards, it is underwritten manually. Full documentation to support each applicant’s credit history, income, and sufficient funds for closing is required on all loans. An appraisal report, performed in conformity with the Uniform Standards of Professional Appraisers Practice by an outside licensed appraiser, is required for all loans. Typically, the Bank requires borrowers to purchase private mortgage insurance when the loan-to-value ratio exceeds 80%.

NASB originates Adjustable Rate Mortgages (ARMs), which fully amortize and typically have initial rates that are fixed for one to seven years before becoming adjustable. Such loans are underwritten based on the initial interest rate and the borrower’s ability to repay based on the maximum first adjustment rate. Each underwriting decision takes into account the type of loan and the borrower’s ability to pay at higher rates. While lifetime rate caps are taken into consideration, qualifying ratios may not be calculated at this level due to an extended number of years required to reach the fully-indexed rate. NASB does not originate any hybrid loans, such as payment option ARMs, nor does the Bank originate any subprime loans, generally defined as high risk or loans of substantially impaired quality.

 

12


At the time a potential borrower applies for a residential mortgage loan, it is designated as either a portfolio loan, which is held for investment and carried at amortized cost, or a loan held-for-sale in the secondary market and carried at fair value. All the loans on single family property that the Bank holds for sale conform to secondary market underwriting criteria established by various institutional investors. All loans originated, whether held for sale or held for investment, conform to internal underwriting guidelines, which consider, among other things, a property’s value and the borrower’s ability to repay the loan.

Construction and development loans - Construction and land development loans are made primarily to builders/developers, who construct properties for resale. The Bank’s requirements for a construction loan are similar to those of a mortgage on an existing residence. In addition, the borrower must submit accurate plans, specifications, and cost projections of the property to be constructed. All construction and development loans are manually underwritten using NASB’s internal underwriting standards. All construction and development loans must be approved by the CEO and either the EVP/ Chief Credit Officer or SVP/Construction Lending. Prior approval is required from the Bank’s Board of Directors for newly originated construction and development loans with a proposed balance of $1.0 million or greater. The bank has adopted internal loan-to-value limits consistent with regulations, which are 65% for raw land, 75% for land development, and 85% for residential and non-residential construction. An appraisal report performed in conformity with the Uniform Standards of Professional Appraisers Practice by an outside licensed appraiser is required on all loans in excess of $250,000. Generally, the Bank will commit to an initial term of 12 to 18 months on construction loans, and an initial term of 24 to 48 months on land acquisition and development loans, with six month renewals thereafter. Interest rates on construction loans typically adjust daily and are tied to a predetermined index. NASB’s staff regularly performs inspections of each property during its construction phase to help ensure adequate progress is achieved before making scheduled loan disbursements.

When construction and development loans mature, the Bank typically considers extensions for short, six-month term periods. This allows the Bank to more frequently evaluate the loan, including creditworthiness and current market conditions and, if management believes it’s in the best interest of the Company, to modify the terms accordingly. This portfolio consists primarily of assets with rates tied to the prime rate and, in most cases, the conditions for loan renewal include an interest rate “floor” in accordance with the market conditions that exist at the time of renewal.

During the six month period ended March 31, 2013, the Bank renewed forty-two loans within its construction and land development portfolio due to slower home and lot sales in the current economic environment. Such extensions were accounted for as Troubled Debt Restructurings (“TDRs”) if the restructuring was related to the borrower’s financial difficulty, and if the Bank made concessions that it would not otherwise consider. In order to determine whether or not a renewal should be accounted for as a TDR, management reviewed the borrower’s current financial information, including an analysis of income and liquidity in relation to debt service requirements. The large majority of these modifications did not result in a reduction in the contractual interest rate or a write-off of the principal balance (although the Bank does commonly require the borrower to make a principal reduction at renewal).

Commercial real estate loans - The Bank purchases and originates several different types of commercial real estate loans. Permanent multifamily mortgage loans on properties of 5 to 36 dwelling units have a 50% risk-weight for risk-based capital requirements if they have an initial loan-to-value ratio of not more than 80% and if their annual average occupancy rate exceeds 80%. All other performing commercial real estate loans have 100% risk-weights.

The Bank’s commercial real estate loans are secured primarily by multi-family and nonresidential properties. Such loans are manually underwritten using NASB’s internal underwriting standards, which evaluate the sources of repayment, including the ability of income producing property to generate sufficient cash flow to service the debt, the capacity of the borrower or guarantors to cover any shortfalls in operating income, and, as a last resort, the ability to liquidate the collateral in such a manner as to completely protect the Bank’s investment. All commercial real estate loans must be approved by the CEO and either the EVP/ Chief Credit Officer or SVP/Commercial Lending. Prior approval is required from the Bank’s Board of Directors for newly originated commercial loans with a proposed balance of $1.0 million or greater. Typically, loan-to-value ratios do not exceed 80%; however, exceptions may be made when it is determined that the safety of the loan is not compromised, and the rationale for exceeding this limit is clearly documented. An appraisal report performed in conformity with the Uniform Standards of Professional Appraisers Practice by an outside licensed appraiser is required on all loans in excess of $250,000. Interest rates on commercial loans may be either fixed or tied to a predetermined index and adjusted daily.

 

13


The Bank typically obtains full personal guarantees from the primary individuals involved in the transaction. Guarantor financial statements and tax returns are reviewed annually to determine their continuing ability to perform under such guarantees. The Bank typically pursues repayment from guarantors when the primary source of repayment is not sufficient to service the debt. However, the Bank may decide not to pursue a guarantor if, given the guarantor’s financial condition, it is likely that the estimated legal fees would exceed the probable amount of any recovery. Although the Bank does not typically release guarantors from their obligation, the Bank may decide to delay the decision to pursue civil enforcement of a deficiency judgment.

At least once during each calendar year, a review is prepared for each borrower relationship in excess of $5 million and for each individual loan over $1 million. Collateral inspections are obtained on an annual basis for each loan over $1 million, and on a triennial basis for each loan between $500,000 and $1 million. Financial information, such as tax returns, is requested annually for all commercial real estate loans over $500,000, which is consistent with industry practice, and the Bank believes it has sufficient monitoring procedures in place to identify potential problem loans. A loan is deemed impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. Any loans deemed impaired, regardless of their balance, are reviewed by management at the time of the impairment determination, and monitored on a quarterly basis thereafter, including calculation of specific valuation allowances, if applicable.

Installment Loans - These loans consist primarily of loans on savings accounts and consumer lines of credit that are secured by a customer’s equity in their primary residence.

Allowance for Loan Losses

The Allowance for Loan and Lease Losses (“ALLL”) recognizes the inherent risks associated with lending activities for individually identified problem assets as well as the entire homogenous and non-homogenous loan portfolios. ALLLs are established by charges to the provision for loan losses and carried as contra assets. Management analyzes the adequacy of the allowance on a quarterly basis and appropriate provisions are made to maintain the ALLLs at adequate levels. At any given time, the ALLL should be sufficient to absorb at least all estimated credit losses on outstanding balances over the next twelve months. While management uses information currently available to determine these allowances, they can fluctuate based on changes in economic conditions and changes in the information available to management. Also, regulatory agencies review the Bank’s allowances for loan loss as part of their examination, and they may require the Bank to recognize additional loss provisions, within their regulatory filings, based on the information available at the time of their examinations.

The ALLL is determined based upon two components. The first is made up of specific reserves for loans which have been deemed impaired in accordance with GAAP. The second component is made up of general reserves for loans that are not impaired. A loan becomes impaired when management believes it will be unable to collect all principal and interest due according to the contractual terms of the loan. Once a loan has been deemed impaired, the impairment must be measured by comparing the recorded investment in the loan to the present value of the estimated future cash flows discounted at the loan’s effective rate, or to the fair value of the loan based on the loan’s observable market price, or to the fair value of the collateral if the loan is collateral dependent. Prior to the quarter ended March 31, 2012, the Bank recorded a specific allowance equal to the amount of measured impairment.

In July 2011, the Office of Thrift Supervision (“OTS”) merged with and into the Office of the Comptroller of the Currency (“OCC”), and the OCC became the Bank’s primary regulator. Beginning with the quarter ended March 31, 2012, the Bank was required to file a Consolidated Report of Condition and Income (“Call Report”) instead of the previously required Thrift Financial Report (“TFR”). With the adoption of the Call Report, the Bank was required to discontinue using specific valuation allowances on loans deemed impaired. The TFR had allowed any measured impairments to be carried as specific valuation allowances, whereas the Call Report required any measured impairments that are deemed “confirmed losses” to be charged-off and netted from their respective loan balances. For impaired loans that are collateral dependent, a “confirmed loss” is generally the amount by which the loan’s recorded investment exceeds the fair value of its collateral. If a loan is considered uncollectible, the entire balance is deemed a “confirmed loss” and is fully charged-off. During the quarter ended March 31, 2012, the Bank charged-off against ALLL the aggregate “confirmed losses” of $23.3 million that were carried as specific valuation allowances in prior periods, and netted them against their respective loan balances for reporting purposes. This change had no impact on net loans receivable as presented in the consolidated balance sheet. In addition, this change did not materially impact the analysis of ALLL, which is described in more detail in the following paragraph, as specific valuation allowances were previously considered in the determination of historical loss ratios.

 

14


Loans that are not impaired are evaluated based upon the Bank’s historical loss experience, as well as various subjective factors, to estimate potential unidentified losses within the various loan portfolios. These loans are categorized into pools based upon certain characteristics such as loan type, collateral type and repayment source. In addition to analyzing historical losses, the Bank also evaluates the following subjective factors for each loan pool to estimate future losses: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in management and other relevant staff, changes in the volume and severity of past due loans, changes in the quality of the Bank’s loan review system, changes in the value of the underlying collateral for collateral dependent loans, changes in the level of lending concentrations, and changes in other external factors such as competition and legal and regulatory requirements. Historical loss ratios are adjusted accordingly, based upon the effect that the subjective factors have in estimated future losses. These adjusted ratios are applied to the balances of the loan pools to determine the adequacy of the ALLL each quarter. For purposes of calculating historical loss ratios, specific valuation allowances established prior to March 31, 2012, are considered charge-offs during the periods in which they are established.

The Bank does not routinely obtain updated appraisals for their collateral dependent loans that are not adversely classified. However, when analyzing the adequacy of its allowance for loan losses, the Bank considers potential changes in the value of the underlying collateral for such loans as one of the subjective factors used to estimate future losses in the various loan pools.

The following table presents the balance in the allowance for loan losses for the three and six months ended March 31, 2013 and 2012. Dollar amounts are expressed in thousands.

 

           Residential     Commercial                          
           Held For     Real     Construction &                    
     Residential     Sale     Estate     Development     Commercial     Installment     Total  
Allowance for loan losses:               

Balance at January 1, 2013

   $ 8,493        —          7,429        11,205        65        661        27,853   

Provision for loan losses

     (610     —          326        (4,955     (5     (356     (5,600

Losses charged off

     (692     —          (505     (629     —          (1     (1,827

Recoveries

     189        —          3        6        —          102        300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ 7,380        —          7,253        5,627        60        406        20,726   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2012

   $ 5,382        18        21,404        27,650        2,536        955        57,945   

Provision for loan losses

     3,445        (15     2,273        1,306        (1,885     (124     5.000   

Losses charged off

     (1,955     —          (9,796     (13,787     —          (679     (26,217

Recoveries

     69        —          —          —          —          —          69   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 6,941        3        13,881        15,169        651        152        36,797   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 1, 2012

   $ 6,941        —          7,086        16,590        513        699        31,829   

Provision for loan losses

     1,346        —          492        (10,653     (453     (332     (9,600

Losses charged off

     (1,156     —          (574     (669     —          (87     (2,486

Recoveries

     249        —          249        359        —          126        983   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ 7,380        —          7,253        5,627        60        406        20,726   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 1, 2011

   $ 6,663        12        13,201        41,863        7,682        845        70,266   

Provision for loan losses

     2,714        (9     11,913        (2,661     (4,462     5        7,500   

Losses charged off

     (2,542     —          (11,233     (24,033     (2,569     (698     (41,075

Recoveries

     106        —          —          —          —          —          106   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 6,941        3        13,881        15,169        651        152        36,797   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method at March 31, 2013. Dollar amounts are expressed in thousands.

 

          Residential     Commercial                          
          Held For     Real     Construction &                    
    Residential     Sale     Estate     Development     Commercial     Installment     Total  

Allowances for loan losses:

             

Ending balance of allowance for loan losses related to loans at March 31, 2013:

             

Individually evaluated for impairment

  $ 231        —          351        4        25        —          611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

  $ 7,149        —          6,902        5,623        35        406        20,115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquired with deteriorated credit quality*

  $ 21        —          —          —          —          —          21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

             

Balance at March 31, 2013

  $ 329,369        100,156        279,629        74,608        12,400        6,419        802,581   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

             

Loans individually evaluated for impairment

  $ 24,617        —          13,739        32,772        11,251        —          82,379   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans collectively evaluated for impairment

  $ 304,752        100,156        265,890        41,836        1,149        6,419        720,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 3,696        —          —          —          —          —          3,696   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Included in ending balance of allowance for loan losses related to loans individually evaluated for impairment at March 31, 2013.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method at September 30, 2012. Dollar amounts are expressed in thousands.

 

          Residential     Commercial                          
          Held For     Real     Construction &                    
    Residential     Sale     Estate     Development     Commercial     Installment     Total  

Allowance for loan losses:

             

Ending balance of allowance for loan losses related to loans at September 30, 2012:

             

Individually evaluated for impairment

  $ 975        —          7        42        —          —          1,024   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment

  $ 5,966        —          7,079        16,548        513        699        30,805   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquired with deteriorated credit quality

  $ —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

             

Balance at September 30, 2012

  $ 332,320        163,834        319,272        89,689        17,567        7,753        930,435   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance:

             

Loans individually evaluated for impairment

  $ 18,440        —          24,895        42,267        —          69        85,671   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans collectively evaluated for impairment

  $ 310,635        163,834        294,377        47,422        17,567        7,684        841,519   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality

  $ 3,245        —          —          —          —          —          3,245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Classified Assets, Delinquencies, and Non-accrual Loans

Classified assets - In accordance with the Bank’s asset classification system, problem assets are classified with risk ratings of either “substandard,” “doubtful,” or “loss.” An asset is considered substandard if it is inadequately protected by the borrower’s ability to repay, or the value of collateral. Substandard assets include those characterized by a possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have the same weaknesses of those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are considered uncollectible and of little value. Prior to the quarter ended March 31, 2012, the Bank established a specific valuation allowance for such assets. In conjunction with the adoption of the Call Report during the quarter ended March 31, 2012, such assets are charged-off against the ALLL at the time they are deemed to be a “confirmed loss.”

In addition to the risk rating categories for problem assets noted above, loans may be assigned a risk rating of “pass,” “pass-watch,” or “special mention.” The pass category includes loans with borrowers and/or collateral that is of average quality or better. Loans in this category are considered average risk and satisfactory repayment is expected. Assets classified as pass-watch are those in which the borrower has the capacity to perform according to the terms and repayment is expected. However, one or more elements of uncertainty exist. Assets classified as special mention have a potential weakness that deserves management’s close attention. If left undetected, the potential weakness may result in deterioration of repayment prospects.

Each quarter, management reviews the problem loans in its portfolio to determine whether changes to the asset classifications or allowances are needed. The following table presents the credit risk profile of the Company’s loan portfolio based on risk rating category as of March 31, 2013. Dollar amounts are expressed in thousands.

 

            Residential      Commercial                              
            Held For      Real      Construction &                       
     Residential      Sale      Estate      Development      Commercial      Installment      Total  

Rating:

                    

Pass

   $ 272,804         100,156         205,774         14,879         —           6,419         600,032   

Pass – Watch

     25,790         —           57,252         21,796         1,149         —           105,987   

Special Mention

     228         —           3,670         —           —           —           3,898   

Substandard

     30,499         —           12,582         37,933         11,251         —           92,265   

Doubtful

     48         —           351         —           —           —           399   

Loss

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 329,369         100,156         279,629         74,608         12,400         6,419         802,581   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the credit risk profile of the Company’s loan portfolio based on risk rating category as of September 30, 2012. Dollar amounts are expressed in thousands.

 

            Residential      Commercial                              
            Held For      Real      Construction &                       
     Residential      Sale      Estate      Development      Commercial      Installment      Total  

Rating:

                    

Pass

   $ 283,771         163,834         256,158         14,370         1,318         7,621         727,072   

Pass – Watch

     11,076         —           28,439         19,054         —           —           58,569   

Special Mention

     4,689         —           323         —           —           —           5,012   

Substandard

     32,011         —           34,352         56,261         16,249         132         139,005   

Doubtful

     773         —           —           4         —           —           777   

Loss

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 332,320         163,834         319,272         89,689         17,567         7,753         930,435   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


The following table presents the Company’s loan portfolio aging analysis as of March 31, 2013. Dollar amounts are expressed in thousands.

 

                   Greater Than                    Total      Total Loans  
     30-59 Days      60-90 Days      90 Days      Total Past             Loans      > 90 Days  
     Past Due      Past Due      Past Due      Due      Current      Receivable      & Accruing  

Residential

   $ 2,095         337         6,449         8,881         320,488         329,369         155   

Residential held for sale

     2         —           —           2         100,154         100,156         —     

Commercial real estate

     —           —           700         700         278,929         279,629         —     

Construction & development

     368         —           2,546         2,914         71,694         74,608         —     

Commercial

     —           —           —           —           12,400         12,400         —     

Installment

     37         —           —           37         6,382         6,419         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,502         337         9,695         12,534         790,047         802,581         155   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loan portfolio aging analysis as of September 30, 2012. Dollar amounts are expressed in thousands.

 

     30-59 Days
Past Due
     60-90 Days
Past Due
     Greater Than
90 Days
Past Due
     Total Past
Due
     Current      Total
Loans
Receivable
     Total Loans
> 90 Days
& Accruing
 

Residential

   $ 1,727         1,439         16,430         19,596         312,724         332,320         5,183   

Residential held for sale

     —           —           —           —           163,834         163,834         —     

Commercial real estate

     217         714         6,082         7,013         312,259         319,272         —     

Construction & development

     567         633         5,487         6,687         83,002         89,689         1,931   

Commercial

     —           —           —           —           17,567         17,567         —     

Installment

     181         67         64         312         7,441         7,753         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,692         2,853         28,063         33,608         896,827         930,435         7,114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

When a loan becomes 90 days past due, or when full payment of interest and principal is not expected, the Bank stops accruing interest and establishes a reserve for the unpaid interest accrued-to-date. In some instances, a loan may become 90 days past due if it has exceeded its maturity date but the Bank and borrower are still negotiating the terms of an extension agreement. In those instances, the Bank typically continues to accrue interest, provided the borrower has continued making interest payments after the maturity date and full payment of interest and principal is expected.

The following table presents the Company’s loans meeting the regulatory definition of nonaccrual, which includes certain loans that are current and paying as agreed. This table does not include purchased impaired loans or troubled debt restructurings that are performing. Dollar amounts are expressed in thousands.

 

     3/31/13      9/30/12  

Residential

   $ 22,216         23,147   

Residential held for sale

     —           —     

Commercial real estate

     9,023         20,952   

Construction & development

     18,939         30,606   

Commercial

     —           —     

Installment

     —           62   
  

 

 

    

 

 

 

Total

   $ 50,178         74,767   
  

 

 

    

 

 

 

As of March 31, 2013, $39.3 million (78.3%) of the loans classified as nonaccrual were current and paying as agreed.

 

18


During the quarter ended March 31, 2012, the Company’s nonaccrual loans increased $41.4 million. This increase resulted from management’s decision to move certain impaired collateral dependent loans secured by land development, commercial real estate, and residential rental properties to nonaccrual, even though the majority of such loans were current and paying in accordance with their contractual terms. Due to the continued deterioration in the real estate markets, management determined that the full collection of principal and interest was uncertain. Such loans currently remain in non-accrual status, but may be moved back to a performing status upon sustained improvement in the real estate markets. In accordance with GAAP, these loans have been charged-down to the fair value of their underlying collateral, and therefore, the recorded investment in the loan is deemed fully collectable at March 31, 2013. Interest income is recognized on a cash-basis as payments are received.

A loan becomes impaired when management believes it will be unable to collect all principal and interest due according to the contractual terms of the loan. A restructuring of debt is considered a TDR if, because of a debtor’s financial difficulty, a creditor grants concessions that it would not otherwise consider. Loans modified in troubled debt restructurings are also considered impaired. Concessions granted in a TDR could include a reduction in interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Once a loan has been deemed impaired, the impairment must be measured by comparing the recorded investment in the loan to the present value of the estimated future cash flows discounted at the loan’s effective rate, or to the fair value of the loan based on the loan’s observable market price, or to the fair value of the collateral if the loan is collateral dependent. Unless the loan is performing prior to the restructure, TDRs are placed in non-accrual status at the time of restructuring and may only be returned to performing status after the borrower demonstrates sustained repayment performance for a reasonable period, generally six months.

The following table presents the recorded balance of troubled debt restructurings. Dollar amounts are expressed in thousands.

 

     3/31/13      9/30/12  

Troubled debt restructurings:

     

Residential

   $ 10,149         6,156   

Residential held for sale

     —           —     

Commercial real estate

     7,357         17,384   

Construction & development

     31,841         39,844   

Commercial

     11,251         —     

Installment

     —           —     
  

 

 

    

 

 

 

Total

   $ 60,598         63,384   
  

 

 

    

 

 

 

Performing troubled debt restructurings:

     

Residential

   $ 1,953         593   

Residential held for sale

     —           —     

Commercial real estate

     2,475         3,812   

Construction & development

     13,832         11,521   

Commercial

     11,251         —     

Installment

     —           —     
  

 

 

    

 

 

 

Total

   $ 29,511         15,926   
  

 

 

    

 

 

 

At March 31, 2013, the Bank had outstanding commitments of $3,000 to be advanced in connection with TDRs.

 

19


The following table presents the number of loans and the Company’s recorded investment in TDRs modified during the six month period ended March 31, 2013. Dollar amounts are expressed in thousands.

 

            Recorded      Recorded         
            Investment      Investment      Increase in  
     Number      Prior to      After      ALLL or  
     of Loans      Modification      Modification      Charge-offs  

Residential

     12       $ 4,562       $ 4,504       $ 19   

Residential held for sale

     —           —           —           —     

Commercial real estate

     2         746         746         —     

Construction & development

     14         18,328         18,328         —     

Commercial

     1         16,251         13,751         25   

Installment

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     29       $ 39,887       $ 37,329       $ 44   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the number of loans and the Company’s recorded investment in TDRs modified during the six month period ended March 31, 2012. Dollar amounts are expressed in thousands.

 

            Recorded      Recorded         
            Investment      Investment      Increase in  
     Number      Prior to      After      ALLL or  
     of Loans      Modification      Modification      Charge-offs  

Residential

     2       $ 155       $ 155       $ —     

Residential held for sale

     —           —           —           —     

Commercial real estate

     —           —           —           —     

Construction & development

     15         21,078         20,659         418   

Commercial

     1         3,000         1,500         —     

Installment

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     18       $ 24,233       $ 22,314       $ 418   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents TDRs restructured during the six month period ended March 31, 2013 by type of modification. Dollar amounts are expressed in thousands.

 

     Extension
of
Maturity
     Interest Only
Period
     Combination
of Terms
Modified
     Total
Recorded
Investment
Prior to
Modification
 

Residential

   $ 3,906         —           656         4,562   

Residential held for sale

     —           —           —           —     

Commercial real estate

     —           —           746         746   

Construction & development

     18,328         —           —           18,328   

Commercial

     —           —           16,251         16,251   

Installment

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,234         —           17,653         39,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


The following table presents TDRs restructured during the six month period ended March 31, 2012 by type of modification. Dollar amounts are expressed in thousands.

 

     Extension
of
Maturity
     Interest Only
Period
     Combination
of Terms
Modified
     Total
Recorded
Investment
Prior to
Modification
 

Residential

   $ 155         —           —           155   

Residential held for sale

     —           —           —           —     

Commercial real estate

     —           —           —           —     

Construction & development

     21,078         —           —           21,078   

Commercial

     —           —           3,000         3,000   

Installment

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,233         —           3,000         24,233   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s recorded investment and number of loans considered TDRs at March 31, 2013 and 2012, that defaulted during the six month period. Dollar amounts are expressed in thousands.

 

     March 31, 2013      March 31, 2012  
     Number      Recorded      Number      Recorded  
     of Loans      Investment      of Loans      Investment  

Residential

     21       $ 4,699         10       $ 3,040   

Residential held for sale

     —           —           —           —     

Commercial real estate

     3         646         2         3,696   

Construction & development

     2         1,760         7         5,010   

Commercial

     —           —           —           —     

Installment

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     26       $ 7,105         19       $ 11,746   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


The following table presents impaired loans, including troubled debt restructurings, as of March 31, 2013. Dollar amounts are expressed in thousands.

 

            Unpaid             YTD Average      Interest  
     Recorded      Principal      Specific      Investment in      Income  
     Balance      Balance      Allowance      Impaired Loans      Recognized  

Loans without a specific valuation allowance:

              

Residential

   $ 22,611         25,448         —           23,027         596   

Residential held for sale

     —           —           —           —           —     

Commercial real estate

     11,668         19,505         —           11,883         591   

Construction & development

     29,743         33,650         —           31,601         1,055   

Commercial

     —           —           —           —           —     

Installment

     —           436         —           56         29   

Loans with a specific valuation allowance:

              

Residential

   $ 2,006         2,029         231         2,039         53   

Residential held for sale

     —           —           —           —           —     

Commercial real estate

     2,071         2,155         351         2,089         67   

Construction & development

     3,029         3,163         4         3,029         61   

Commercial

     11,251         11,251         25         14,168         511   

Installment

     —           —           —           —           —     

Total:

              

Residential

   $ 24,617         27,477         231         25,066         649   

Residential held for sale

     —           —           —           —           —     

Commercial real estate

     13,739         21,660         351         13,972         658   

Construction & development

     32,772         36,813         4         34,630         1,116   

Commercial

     11,251         11,251         25         14,168         511   

Installment

     —           436         —           56         29   

The following table presents impaired loans, including troubled debt restructurings, as of September 30, 2012. Dollar amounts are expressed in thousands.

 

            Unpaid             YTD Average      Interest  
     Recorded      Principal      Specific      Investment in      Income  
     Balance      Balance      Allowance      Impaired Loans      Recognized  

Loans without a specific valuation allowance:

              

Residential

   $ 16,849         19,394         —           18,252         776   

Residential held for sale

     —           —           —           —           —     

Commercial real estate

     21,574         30,652         —           24,961         1,796   

Construction & development

     40,633         45,873         —           46,820         2,658   

Commercial

     —           —           —           —           —     

Installment

     68         570         —           69         17   

Loans with a specific valuation allowance:

              

Residential

   $ 4,836         4,910         974         4,836         260   

Residential held for sale

     —           —           —           —           —     

Commercial real estate

     3,322         3,955         7         3,949         215   

Construction & development

     1,634         1,668         42         1,698         100   

Commercial

     —           —           —           —           —     

Installment

     —           —           —           —           —     

Total:

              

Residential

   $ 21,685         24,304         974         23,088         1,036   

Residential held for sale

     —           —           —           —           —     

Commercial real estate

     24,896         34,607         7         28,910         2,011   

Construction & development

     42,267         47,541         42         48,518         2,758   

Commercial

     —           —           —           —           —     

Installment

     68         570         —           69         17   

 

22


(7) FORECLOSED ASSETS HELD FOR SALE

The following table presents real estate owned and other repossessed property. Dollar amounts are expressed in thousands.

 

     3/31/13      9/30/12  

Real estate acquired through (or deed in lieu of) foreclosure

   $ 20,597         17,040   

Less: allowance for losses

     —           —     
  

 

 

    

 

 

 

Total

   $ 20,597         17,040   
  

 

 

    

 

 

 

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.

With the adoption of the Call Report during the quarter ended March 31, 2012, the Bank was required to begin following regulatory guidance related to the Call Report requirements. One such requirement resulted in a change in the treatment of specific loss reserves for foreclosed assets held for sale. Previous Thrift Financial Report guidance allowed banks to reduce an asset’s carrying value through a specific allowance when the fair value declined to an amount less than its carrying value. Call Report guidance requires that the carrying value of foreclosed assets held for sale be written down to fair value through a charge to earnings. During the quarter ended March 31, 2012, the Bank charged-off the previously established specific allowances on such assets of $9.4 million. This change had no impact on net foreclosed assets held for sale as presented in the consolidated balance sheet.

(8) SUBORDINATED DEBENTURES

On December 13, 2006, the Company, through its wholly-owned statutory trust, NASB Preferred Trust I (the “Trust”), issued $25 million of pooled Trust Preferred Securities. The Trust used the proceeds from the offering to purchase a like amount of 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. In exchange for the capital contributions made to the Trust by the Company upon formation, the Company owns all the common securities of the Trust.

In accordance with Financial Accounting Standards Board ASC 810-10, the Trust qualifies as a special purpose entity that is not required to be consolidated in the financial statements of the Company. The $25.0 million Trust Preferred Securities issued by the Trust will remain on the records of the Trust. The Trust Preferred Securities are included in Tier I capital for regulatory capital purposes.

The Trust Preferred Securities have a variable interest rate of 1.65% over the 3-month LIBOR, and are mandatorily redeemable upon the 30-year term of the debentures, or upon earlier redemption as provided in the Indenture. The debentures are callable, in whole or in part, after five years of the issuance date. The Company did not incur a placement or annual trustee fee related to the issuance. The securities are subordinate to all other debt of the Company and interest may be deferred up to five years.

On July 11, 2012, the Company notified security holders that it was exercising its right to defer the payment of interest on its Trust Preferred Securities for a period of up to five years.

 

23


(9) INCOME TAXES

The Company’s federal and state income tax returns for fiscal years 2009 through 2011 remain subject to examination by the Internal Revenue Service and various state jurisdictions, based on the statute of limitations.

(10) 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.

 

           Mortgage      Other and        

Three months ended March 31, 2013

   Banking     Banking      Eliminations     Consolidated  

Net interest income

   $ 11,015        —           (124     10,891   

Provision for loan losses

     (5,600     —           —          (5,600

Other income

     735        18,782         (552     18,965   

General and administrative expenses

     6,469        11,144         (73     17,540   

Income tax expense

     4,189        2,941         (232     6,898   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 6,692        4,697         (371     11,018   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

           Mortgage      Other and        

Three months ended March 31, 2012

   Banking     Banking      Eliminations     Consolidated  

Net interest income

   $ 12,234        —           (137     12,097   

Provision for loan losses

     5,000        —           —          5,000   

Other income

     (1,560     10,397         (548     8,289   

General and administrative expenses

     6,542        8,411         (182     14,771   

Income tax expense (benefit)

     (334     765         (191     240   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (534     1,221         (312     375   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

           Mortgage      Other and        

Six months ended March 31, 2013

   Banking     Banking      Eliminations     Consolidated  

Net interest income

   $ 22,325        —           (253     22,072   

Provision for loan losses

     (9,600     —           —          (9,600

Other income

     785        35,803         (1,126     35,462   

General and administrative expenses

     13,219        22,832         (356     35,695   

Income tax expense

     7,504        4,994         (394     12,104   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 11,987        7,977         (629     19,335   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

24


           Mortgage      Other and        

Six months ended March 31, 2012

   Banking     Banking      Eliminations     Consolidated  

Net interest income

   $ 26,482        —           (266     26,216   

Provision for loan losses

     7,500        —           —          7,500   

Other income

     (2,332     22,082         (912     18,838   

General and administrative expenses

     12,574        16,675         (341     28,908   

Income tax expense

     1,569        2,082         (319     3,332   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 2,507        3,325         (518     5,314   
  

 

 

   

 

 

    

 

 

   

 

 

 

(11) 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 $659,000, a decrease in other liabilities of $636,000, and an increase in other income of $1.3 million for the quarter ended March 31, 2013. The Company recorded a decrease in other assets of $1.6 million, a decrease in other liabilities of $14,000, and a decrease in other income of $1.6 million for the six month period ended March 31, 2013. As a result of marking to market commitments to originate loans, the Company recorded a decrease in other assets of $1,000, an increase in other liabilities of $560,000, and a decrease in other income of $561,000 for the quarter ended March 31, 2012. The Company recorded a decrease in other assets of $662,000, an increase in other liabilities of $27,000, and a decrease in other income of $689,000 for the six month period ended March 31, 2012.

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 $2.8 million, an increase in other liabilities of $21,000, and a decrease in other income of $2.8 million during the quarter ended March 31, 2013. The Company recorded a decrease in other assets of $370,000, a decrease in other liabilities of $96,000, and a decrease in other income of $274,000 during the six month period ended March 31, 2013. Due to the mark to market adjustment on commitments to sell loans held for sale, the Company recorded an increase in other assets of $1.4 million, a decrease in other liabilities of $26,000, and an increase in other income of $1.4 million during the quarter ended March 31, 2012. The Company recorded an increase in other assets of $733,000, a decrease in other liabilities of $187,000, and an increase in other income of $920,000 during the six month period ended March 31, 2012.

The balance of derivative instruments related to commitments to originate and sell loans at March 31, 2013, is disclosed in Footnote 12, Fair Value Measurements.

(12) FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would likely be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. GAAP identifies three primary measurement techniques: the market approach, the income approach, and the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuations or techniques to convert future amounts, such as cash flows or earnings, to a single present amount. The cost approach is based on the amount that currently would be required to replace the service capability of an asset.

GAAP establishes a fair value hierarchy and prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to observable inputs such as quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The maximization of observable inputs and the minimization of the use of unobservable inputs are required. Classification within the fair value hierarchy is based upon the objectivity of the inputs that are significant to the valuation of an asset or liability as of the measurement date. The three levels within the fair value hierarchy are characterized as follows:

 

   

Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

25


   

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, U. S. government sponsored agency, and municipal securities. Such securities are valued using market prices in an active market, if available. This measurement is classified as Level 1 within the hierarchy. Less frequently traded securities are valued using industry standard models which utilize various assumptions such as historical prices of the same or similar securities, and observation of market prices of securities of the same issuer, market prices of same-sector issuers, and fixed income indexes. Substantially all of these assumptions are observable in the marketplace or can be derived from observable data. These measurements are classified as Level 2 within the hierarchy.

At March 31, 2012, mortgage-backed securities available for sale, which consist of agency pass-through and participation certificates issued by GNMA, FNMA, and FHLMC, were valued by using broker-dealer quotes for similar assets in markets that are not active. Although the Company did not validate these quotes, they were reviewed by management for reasonableness in relation to current market conditions. Additionally, they were obtained from experienced brokers who had an established relationship with the Bank and deal regularly with these types of securities. The Company did not make any adjustment to the quotes received from broker-dealers. These measurements are classified as Level 2. At March 31, 2013, mortgage-backed securities available for sale were valued by using industry standard models which utilize various inputs and assumptions such as historical prices of benchmark securities, prepayment estimates, loan type, and year of origination. Substantially all of these assumptions are observable in the marketplace or can be derived from observable data. These measurements are classified as Level 2 within the hierarchy.

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.

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, and average lives. Fall-out percentages, which range from ten to forty percent, are estimated based upon the difference between current market rates and committed rates. Average lives are based upon estimates for similar types of loans. These measurements use significant unobservable inputs and are classified as Level 3 within the hierarchy.

 

26


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 March 31, 2013 (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

           

U.S. government sponsored agency securities

   $ 172,302         101,623         70,679         —     

Corporate debt securities

     72,302         —           72,302         —     

Municipal securities

     422         —           422         —     

Mortgage-backed securities, available for sale

           

Pass through certificates guaranteed by GNMA – fixed rate

     76         —           76         —     

Pass through certificates guaranteed by FNMA – adjustable rate

     139         —           139         —     

FHLMC participation certificates:

           

Fixed rate

     159         —           159         —     

Adjustable rate

     125         —           125         —     

Loans held for sale

     100,156         —           100,156         —     

Commitments to originate loans

     982         —           —           982   

Forward sales commitments

     1,824         —           —           1,824   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 348,487         101,623         244,058         2,806   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Commitments to originate loans

   $ 498         —           —           498   

Forward sales commitments

     37         —           —           37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 535         —           —           535   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


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, 2012 (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

           

U.S. government sponsored agency securities

   $ 153,166         142,359         10,807         —     

Corporate debt securities

     61,018         —           61,018         —     

Municipal securities

     6         —           6         —     

Mortgage-backed securities, available for sale

           

Pass through certificates guaranteed by GNMA – fixed rate

     81         —           81         —     

Pass through certificates guaranteed by FNMA – adjustable rate

     152         —           152         —     

FHLMC participation certificates:

           

Fixed rate

     190         —           190         —     

Adjustable rate

     131         —           131         —     

Loans held for sale

     163,834         —           163,834         —     

Commitments to originate loans

     2,559         —           —           2,559   

Forward sales commitments

     2,194         —           —           2,194   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 383,331         142,359         236,219         4,753   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Commitments to originate loans

   $ 512         —           —           512   

Forward sales commitments

     133         —           —           133   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 645         —           —           645   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 six month periods ended March 31, 2013 and 2012 (in thousands):

 

     Commitments        
     to Originate     Forward Sales  
     Loans     Commitments  

Balance at October 1, 2012

   $ 2,047        2,061   

Total realized and unrealized losses:

    

Included in net income

     (1,563     (274
  

 

 

   

 

 

 

Balance at March 31, 2013

   $ 484        1,787   
  

 

 

   

 

 

 

 

     Commitments        
     to Originate     Forward Sales  
     Loans     Commitments  

Balance at October 1, 2011

   $ 360        1,328   

Total realized and unrealized gains (losses):

    

Included in net income

     (689     920   
  

 

 

   

 

 

 

Balance at March 31, 2012

   $ (329     2,248   
  

 

 

   

 

 

 

 

28


Realized and unrealized gains and losses noted in the table above and included in net income for the six month period ended March 31, 2013, are reported in the consolidated statements of income as follows (in thousands):

 

     Other  
     Income  

Total losses

   $ (1,837
  

 

 

 

Changes in unrealized losses relating to assets still held at the balance sheet date

   $ —     
  

 

 

 

Realized and unrealized gains and losses noted in the table above and included in net income for the six month period ended March 31, 2012, are reported in the consolidated statements of income as follows (in thousands):

 

     Other  
     Income  

Total gains

   $ 231   
  

 

 

 

Changes in unrealized 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. Appraisals are obtained when an impaired loan is deemed to be collateral dependent and at least annually thereafter. Fair value is generally the appraised value less estimated selling costs and may be discounted further if management believes any other factors or events have affected the fair 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 six month period ended March 31, 2013, was $26.7 million. The carrying value of impaired loans that were re-measured during the six month period ended March 31, 2012, was $78.7 million.

Foreclosed Assets Held For Sale

Foreclosed assets held for sale are initially recorded at fair value as of the date of foreclosure less any estimated selling costs (the “new basis”) and are subsequently carried at the lower of the new basis or fair value less selling costs on the current measurement date. Fair value is estimated through current appraisals, broker price opinions, or listing prices. Appraisals are obtained when the real estate is acquired and at least annually thereafter. 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 $20.6 million at March 31, 2013. Charge-offs related to foreclosed assets held for sale that were re-measured during the six month period ended March 31, 2013, totaled $713,000. Charge-offs and increases in specific reserves related to foreclosed assets held for sale that were re-measured during the six month period ended March 31, 2012, totaled $2.8 million.

 

29


Investment in LLCs

Investments in LLCs are accounted for using the equity method of accounting. These investments are analyzed for impairment in accordance with ASC 323-10-35-32, which states that an other than temporary decline in value of an equity method investment should be recognized. The Company utilizes a multi-faceted approach to measure the potential impairment. The internal model utilizes the following valuation methods: 1) liquidation or appraised values determined by an independent third party appraisal; 2) an on-going business, or discounted cash flows method wherein the cash flows are derived from the sale of fully-developed lots, the development and sale of partially-developed lots, the operation of the homeowner’s association, and the value of raw land obtained from an independent third party appraiser; and 3) an on-going business method, which utilizes the same inputs as method 2, but presumes that cash flows will first be generated from the sale of raw ground and then from the sale of fully-developed and partially-developed lots and the operation of the homeowner’s association. The significant inputs include raw land values, absorption rates of lot sales, and a market discount rate. Management believes this multi-faceted approach is reasonable given the highly subjective nature of the assumptions and the differences in valuation techniques that are utilized within each approach (e.g., order of distribution of assets upon potential liquidation). Investment in LLCs is classified within Level 3 of the fair value hierarchy.

The carrying value of the Company’s investment in LLCs was $16.9 million at March 31, 2013, and $17.2 million at September 30, 2012.

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value:

Cash and cash equivalents

The carrying amount reported in the consolidated balance sheets is a reasonable estimate of fair value.

Securities and mortgage-backed securities held to maturity

Securities that trade in an active market are valued using market prices, if available. Securities that do not trade in an active market were valued by using industry standard models which utilize various inputs and assumptions such as historical prices of similar securities, estimated delinquencies, defaults, and loss severity.

Stock in Federal Home Loan Bank (“FHLB”)

The carrying value of stock in Federal Home Loan Bank approximates its fair value.

Loans receivable held for investment

Fair values are computed for each loan category using market spreads to treasury securities for similar existing loans in the portfolio and management’s estimates of prepayments.

Customer and brokered deposit accounts

The estimated fair values of demand deposits and savings accounts are equal to the amount payable on demand at the reporting date. Fair values of certificates of deposit are computed at fixed spreads to treasury securities with similar maturities.

Advances from FHLB

The estimated fair values of advances from FHLB are determined by discounting the future cash flows of existing advances using rates currently available for new advances with similar terms and remaining maturities.

Subordinated debentures

Fair values are based on quotes from broker-dealers that reflect estimated offer prices.

Commitments to originate, purchase and sell loans

The estimated fair value of commitments to originate, purchase, or sell loans is based on the difference between current levels of interest rates and the committed rates.

 

30


The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2013 (in thousands):

 

            Fair Value Measurements Using  
            Quoted Prices in      Significant      Significant  
            Active Markets for      Other      Unobservable  
     Carrying      Identical Assets      Observable      Inputs  
     Value      (Level 1)      Inputs (Level 2)      (Level 3)  

Financial Assets:

           `      

Cash and cash equivalents

   $ 50,720         50,720         —           —     

Stock in Federal Home Loan Bank

     6,984         —           6,984         —     

Mortgage-backed securities held to maturity

     11,808         —           11,834         —     

Loans receivable held for investment

     681,699         —           —           704,361   

Financial Liabilities:

           

Customer deposit accounts

     807,288         —           —           808,933   

Brokered deposit accounts

     10,000         —           —           10,000   

Advances from FHLB

     125,000         —           —           127,847   

Subordinated debentures

     25,774         —           —           10,309   

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2012 (in thousands):

 

            Fair Value Measurements Using  
            Quoted Prices in      Significant      Significant  
            Active Markets for      Other      Unobservable  
     Carrying      Identical Assets      Observable      Inputs  
     Value      (Level 1)      Inputs (Level 2)      (Level 3)  

Financial Assets:

           `      

Cash and cash equivalents

   $ 8,716         8,716         —           —     

Stock in Federal Home Loan Bank

     7,073         —           7,073         —     

Mortgage-backed securities held to maturity

     25,921         —           26,117         —     

Loans receivable held for investment

     734,772         —           —           763,017   

Financial Liabilities:

           

Customer deposit accounts

     870,946         —           —           872,160   

Brokered deposit accounts

     21,367         —           —           21,365   

Advances from FHLB

     127,000         —           —           130,393   

Subordinated debentures

     25,774         —           —           9,021   

 

31


The following tables present the carrying values and fair values of the Company’s unrecognized financial instruments. Dollar amounts are expressed in thousands.

 

     March 31, 2013     September 30, 2012  
     Contract or      Estimated     Contract or      Estimated  
     notional      unrealized     notional      unrealized  
     amount      gain (loss)     amount      gain  

Unrecognized financial instruments:

          

Lending commitments – fixed rate, net

   $ 5,431         25      $ 2,446         11   

Lending commitments – floating rate

     2,242         (15     926         9   

Commitments to sell loans

     —           —          —           —     

The fair value estimates presented are based on pertinent information available to management as of March 31, 2013, and September 30, 2012. 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.

(13) INVESTMENT IN LLCs

The Company is a partner in two limited liability companies, Central Platte Holdings LLC (“Central Platte”) and NBH, LLC (“NBH”), which were formed for the purpose of purchasing and developing vacant land in Platte County, Missouri. These investments are accounted for using the equity method of accounting.

The Company’s investment in Central Platte consists of a 50% ownership interest in an entity that develops land for residential real estate sales. Sales of lots have not met previous expectations and, as a result, the Company evaluated its investment for impairment, in accordance with ASC 323-10-35-32, which provides guidance related to a loss in value of an equity method investment. The Company utilizes a multi-faceted approach to measure the potential impairment. The internal model utilizes the following valuation methods: 1) liquidation or appraised values determined by an independent third party appraisal; 2) an on-going business, or discounted cash flows method wherein the cash flows are derived from the sale of fully-developed lots, the development and sale of partially-developed lots, the operation of the homeowner’s association, and the value of raw land obtained from an independent third party appraiser; and 3) another on-going business method, which utilizes the same inputs as method 2, but presumes that cash flows will first be generated from the sale of raw ground and then from the sale of fully-developed and partially-developed lots and the operation of the homeowner’s association. The internal model also includes method 4, an on-going business method wherein the cash flows are derived from the sale of fully-developed lots, the development and sale of partially-developed lots, the operation of the homeowner’s association, and the development and sale of lots from the property that is currently raw land. However, management does not feel the results from this method provide a reliable indication of value because the time to “build-out” the development exceeds 18 years. Because of this unreliability, the results from method 4 are given a zero weighting in the final impairment analysis. The significant inputs include raw land values, absorption rates of lot sales, and a market discount rate. Management believes this multi-faceted approach is reasonable given the highly subjective nature of the assumptions and the differences in valuation techniques that are utilized within each approach (e.g., order of distribution of assets upon potential liquidation). It is management’s opinion that no one valuation method within the model is preferable to the other and that no one method is more likely to occur than the other. Therefore, the final estimate of value is determined by assigning an equal weight to the values derived from each of the first three methods described above.

As a result of this analysis, the Company determined that its investment in Central Platte was materially impaired and recorded an impairment charge of $2.0 million ($1.2 million, net of tax) during the year ended September 30, 2010. During the quarter ended March 31, 2012, list prices of fully-developed lots in Central Platte’s residential development were reduced. The Company incorporated these lower prices into its internal valuation model, which resulted in an additional impairment charge of $200,000 ($123,000, net of tax) during the quarter ended March 31, 2012. No other events have occurred that would indicate any additional impairment of the Company’s investment in Central Platte.

 

32


The following table displays the results derived from the Company’s internal valuation model at March 31, 2013, and the carrying value of its investment in Central Platte at March 31, 2013. Dollar amounts are expressed in thousands.

 

Method 1

   $ 15,017   

Method 2

     15,787   

Method 3

     18,129   

Average of methods 1, 2, and 3

   $ 16,311   
  

 

 

 

Carrying value of investment in Central Platte Holdings, LLC

   $ 15,562   
  

 

 

 

The Company’s investment in NBH consists of a 50% ownership interest in an entity that holds raw land, which is currently zoned as agricultural. The general managers intend to rezone this property for commercial and/or residential development. The raw land was purchased in 2002. The Company accounts for its investment in NBH under the equity method. Due to the overall economic conditions surrounding real estate, the Company evaluated its investment for impairment in accordance with ASC 323-10-35-32, which provides guidance related to a loss in value of an equity method investment. Potential impairment was measured based on liquidation or appraised values determined by an independent third party appraisal. As a result of this analysis, the Company determined that its investment in NBH was materially impaired and recorded an impairment charge of $1.1 million ($693,000, net of tax) during the year ended September 30, 2010. The results of this analysis as of September 30, 2012, did not indicate any additional impairment of the Company’s investment in NBH. No events have occurred during the six month period ended March 31, 2013, that would indicate any additional impairment of the Company’s investment. The carrying value of the Company’s investment in NBH was $1.4 million at March 31, 2013.

(14) REGULATORY AGREEMENTS

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 at that time. The agreement required, 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 directed the Bank to provide a plan to reduce its classified assets and its reliance on brokered deposits, and restricted 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.

On April 30, 2010, the Company’s Board of Directors entered into an agreement with the OTS, the Company’s primary regulator at that time. The agreement restricted the payment of dividends or other capital distributions by the Company and restricted the Company’s ability to incur, issue or renew any debt during the period of the agreement.

The Bank’s Supervisory Agreement and the Company’s agreement with the OTS were assigned to their new primary regulators, the Office of the Comptroller of the Currency (“OCC”) and Board of Governors of the Federal Reserve System (“Federal Reserve Board” or “FRB”), respectively, on July 21, 2011.

On May 22, 2012, the Board of Directors of the Bank agreed to a Consent Order with the OCC. This Consent Order replaces and terminates the previous Supervisory Agreement. The Consent Order requires that the Bank establish various plans and programs to improve its asset quality and to ensure the adequacy of allowances for loan and lease losses. It requires the Bank to obtain an independent third-party review of its non-homogenous loan portfolios and to enhance its credit administration systems. Among other items, it also requires a written capital maintenance plan to ensure that the Bank’s Tier 1 leverage capital and total risk-based capital ratios remain equal to or greater than 10% and 13%, respectively. As of March 31, 2013, the Bank’s actual Tier 1 leverage capital and total risk-based capital ratios were 16.5% and 20.7%, respectively. The Consent Order does not direct the Bank to raise capital, make management or board changes, or restrict lending.

 

33


On November 29, 2012 the Company’s Board of Directors entered into a formal written agreement with the Federal Reserve Bank of Kansas City, which replaces and terminates the Company’s previous agreement with the OTS. The agreement with FRB restricts the payment of dividends or other capital distributions by the Company, restricts the Company’s ability to incur, increase, or guarantee any debt, and restricts the Company’s ability to purchase or redeem any of its stock. In addition, the agreement restricts the Company and its wholly-owned statutory trust, NASB Preferred Trust I, from making distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities.

On February 1, 2013, the Board of Directors of the Bank signed an additional Consent Order with the OCC, effective as of that date. This Consent Order requires the Bank to take corrective action to enhance its program for compliance with the Bank Secrecy Act (“BSA”) and other anti-money laundering requirements. The Consent Order requires, among other things, that the Bank improve its processes to better identify and monitor accounts and transactions that pose a greater than normal risk for compliance with the BSA. The Consent Order also requires the Bank to maintain an effective risk assessment process, monitoring mechanisms, training programs and appropriate systems to review the activities of customer accounts.

 

34


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

We may from time to time make written or oral “forward-looking statements,” including statements contained in our filings with the Securities and Exchange Commission (“SEC”). These forward-looking statements may be included in this quarterly report and in other communications by the Company, which are made in good faith by us pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and similar expressions are intended to identify forward-looking statements. The following factors, as well as those discussed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2012, filed with the Securities and Exchange Commission, among others, could cause our financial performance to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:

 

   

the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

 

   

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

 

   

the effects of, and changes in, foreign and military policy of the United States Government; inflation, interest rate, market and monetary fluctuations;

 

   

the timely development and acceptance of our new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services;

 

   

the willingness of users to substitute competitors’ products and services for our products and services;

 

   

our success in gaining regulatory approval of our products, services and branching locations, when required;

 

   

the impact of changes in financial services’ laws and regulations, including laws concerning taxes, banking, securities and insurance;

 

   

technological changes;

 

   

acquisitions and dispositions;

 

   

changes in consumer spending and saving habits;

 

   

our success at managing the risks involved in our business; and

 

   

changes in the fair value or economic value of, impairments of, and risks associated with the Bank’s investments in real estate owned, mortgage backed securities and other assets.

This list of important factors is not all-inclusive. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. For further discussion of these factors, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2012, filed with the Securities and Exchange Commission, and in our Quarterly Reports, if applicable.

GENERAL

NASB Financial, Inc. was formed in 1998 as a unitary thrift holding company of North American Savings Bank, F.S.B. The Bank is a federally chartered stock savings bank, with its headquarters in the Kansas City area. The Bank began operating in 1927, and became a member of the Federal Home Loan Bank of Des Moines (“FHLB”) in 1940. Its customer deposit accounts are insured by the Deposit Insurance Fund (“DIF”), a division of the Federal Deposit Insurance Corporation (“FDIC”). The Bank converted to a stock form of ownership in September 1985.

The Bank’s primary market area includes the counties of Jackson, Cass, Clay, Buchanan, Andrew, Platte, and Ray in Missouri, and Johnson and Wyandotte counties in Kansas. The Bank currently has nine retail deposit offices in Missouri including one each in Grandview, Lee’s Summit, Independence, Harrisonville, Excelsior Springs, Platte City, and St. Joseph, and two in Kansas City. North American also operates loan production offices in Kansas City, Lee’s Summit and Springfield in Missouri. The economy of the Kansas City area is diversified with major employers in agribusiness, greeting cards, automobile production, transportation, telecommunications, and government.

 

35


The Bank’s principal business is to attract deposits from the general public and to originate real estate loans, other loans and short-term investments. The Bank obtains funds mainly from deposits received from the general public, sales of loans and loan participations, advances from the FHLB, and principal repayments on loans and mortgage-backed securities (“MBS”). The Bank’s primary sources of income include interest on loans, interest on MBS, interest on investment securities, customer service fees, and mortgage banking fees. Its primary expenses are interest payments on customer deposit accounts and borrowings and normal operating costs.

FINANCIAL CONDITION

Assets

The Company’s total assets as of March 31, 2013 were $1,179.0 million, a decrease of $61.8 million from September 30, 2012, the prior fiscal year end.

Loans receivable held for investment were $702.4 million as of March 31, 2013, a decrease of $64.2 million during the six month period. The weighted average rate on such loans as of March 31, 2013, was 5.61%, a decrease from 5.88% as of March 31, 2012.

Loans receivable held for sale as of March 31, 2013, were $100.2 million, a decrease of $63.7 million from September 30, 2012. This portfolio consists of residential mortgage loans originated by the Bank’s mortgage banking division that will be sold with servicing released. The Company has elected to carry loans held for sale at fair value, as permitted under GAAP.

As the Bank originates mortgage loans each month, management evaluates the existing market conditions to determine which loans will be held in the Bank’s portfolio and which loans will be sold in the secondary market. Loans sold in the secondary market can be sold with servicing released or converted into MBS and sold with the loan servicing retained by the Bank. At the time of each loan commitment, a decision is made to either hold the loan for investment, hold it for sale with servicing retained, or hold it for sale with servicing released. Management monitors market conditions to decide whether loans should be held in portfolio or sold and if sold, which method of sale is appropriate. During the six months ended March 31, 2013, the Bank originated and purchased $1,044.1 million in mortgage loans held for sale, $58.0 million in mortgage loans held for investment, and $1.1 million in other loans. This total of $1,103.2 million in loans compares to $889.0 million in loans originated and purchased during the six months ended March 31, 2012.

The Bank classifies problem assets as “substandard,” “doubtful” or “loss.” Substandard assets have one or more defined weaknesses, and it is possible that the Bank will sustain some loss unless the deficiencies are corrected. Doubtful assets have the same defects as substandard assets plus other weaknesses that make collection or full liquidation improbable. Assets classified as loss are considered uncollectible and of little value.

The following table summarizes the Bank’s classified assets, including foreclosed assets held for sale, as reported to their primary regulator, plus any classified assets of the holding company. Dollar amounts are expressed in thousands.

 

     3/31/13     9/30/12     3/31/12  

Asset Classification:

      

Substandard

   $ 113,368        156,117        167,826   

Doubtful

     400        777        —     

Loss*

     —          —          —     
  

 

 

   

 

 

   

 

 

 
     113,768        156,894        167,826   

Allowance for loan losses

     (20,726     (31,829     (36,797
  

 

 

   

 

 

   

 

 

 
   $ 93,042        125,065        131,029   
  

 

 

   

 

 

   

 

 

 

 

* Assets classified as loss represent the amount of measured impairment related to loans and foreclosed assets held for sale that have been deemed impaired. Prior to quarter ended March, 31 2012, the Bank established a specific valuation allowance for such assets. In conjunction with the adoption of the Call Report during the quarter ended March 31, 2012, such assets are charged-off against the ALLL at the time they are deemed to be a “confirmed loss.”

 

36


The following table summarizes non-performing assets, troubled debt restructurings, and real estate acquired through foreclosure, net of specific loss allowances. Dollar amounts are expressed in thousands.

 

     3/31/13     9/30/12     3/31/12  

Total Assets

   $ 1,179,036        1,240,826        1,192,208   
  

 

 

   

 

 

   

 

 

 

Non-accrual loans

     50,178        74,767        73,127   

Performing troubled debt restructurings

     29,511        15,926        27,636   

Net real estate and other assets acquired through foreclosure

     20,597        17,040        21,155   
  

 

 

   

 

 

   

 

 

 

Total

     100,286        107,733        121,918   
  

 

 

   

 

 

   

 

 

 

Percent of total assets

   $ 8.51     8.68     10.23
  

 

 

   

 

 

   

 

 

 

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 recognizes the inherent risks associated with lending activities for individually identified problem assets as well as the entire homogenous and non-homogenous loan portfolios. Management believes that the specific loss allowances and ALLL are adequate. While management uses available information to determine these allowances, future provisions may be necessary because of changes in economic conditions or changes in the information available to management. Also, regulatory agencies 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.

With the exception of certain residential loans, which are not deemed impaired until they reach 180 days past due, loans in non-accrual status are considered impaired. (At March 31, 2013, residential loans of $1.1 million in non-accrual status were not deemed impaired.) Once a loan has been deemed impaired, the impairment must be measured by comparing the recorded investment in the loan to the present value of the estimated future cash flows discounted at the loan’s effective rate, or to the fair value of the loan based on the loan’s observable market price, or to the fair value of the collateral if the loan is collateral dependent. Any measured impairment that is deemed a “confirmed loss” is charged off and netted from the respective loan balance. For collateral dependent loans, which make up the majority of the Bank’s impaired loans, a “confirmed loss” is generally the amount by which the loan’s recorded investment exceeds the fair value of its collateral. Therefore, risks associated with non-accrual loans have been addressed within Bank’s quarterly analysis of the adequacy of its ALLL, as essentially all were individually analyzed for impairment.

If loans classified as substandard are also impaired, they are individually analyzed for impairment, as noted above. At March 31, 2013, $75.8 million of loans classified as substandard have also been deemed impaired. In addition, the Bank utilizes a qualitative adjustment related to changes and trends in past due, non-accrual, and adversely classified loans. This adjustment is applied to the various pools of unimpaired loans when determining adequacy of the Bank’s ALLL.

Investment securities were $245.0 million as of March 31, 2013, an increase of $30.8 million from September 30, 2012. During the six month period, the Bank purchased $52.5 million of securities available for sale and received principal repayments related to such securities of $20.0 million. There were no sales of investment securities during the six month period ended March 31, 2013.

Mortgage-backed securities were $12.3 million as of March 31, 2013, a decrease of $14.2 million from the prior year end. During the six month period, the Bank sold $10.8 million of mortgage-backed securities held to maturity following significant deterioration in the issuer’s creditworthiness. There were no sales from the Company’s portfolio of mortgage-backed securities available for sale during the six month period ended March 31, 2013. The average yield on the mortgage-backed securities portfolio was 3.67% at March 31, 2013, a decrease from 4.78% at March 31, 2012.

 

37


The Company’s investment in LLCs, which is accounted for using the equity method, was $16.9 million at March 31, 2013, a decrease of $294,000 from September 30, 2012. During the year ended September 30, 2012, the Company recorded a $200,000 impairment charge related to its investment in LLCs. There have been no events subsequent to September 30, 2012, that would indicate an additional impairment in value of the Company’s investment in LLCs at March 31, 2013.

Liabilities and Equity

Customer and brokered deposit accounts decreased $75.0 million during the six months ended March 31, 2013. This decrease was due to a $128.1 million decrease in certificates of deposits during the period, which was partially offset by increases in savings, money market, and checking accounts. The weighted average rate on customer and brokered deposits as of March 31, 2013, was 0.60%, a decrease from 1.15% as of March 31, 2012.

Advances from the FHLB were $125.0 million as of March 31, 2013, a decrease of $2.0 million from September 30, 2012. During the six month period, the Bank borrowed $25.0 million of new advances and repaid $27.0 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 March 31, 2013. Such debentures resulted from the issuance of Trust Preferred Securities through the Company’s wholly-owned statutory trust, NASB Preferred Trust I. The Trust used the proceeds from the offering to purchase a like amount of the Company’s subordinated debentures. The debentures, which have a variable rate of 1.65% over the 3-month LIBOR and a 30-year term, are the sole assets of the Trust.

Escrows were $4.8 million as of March 31, 2013, a decrease of $3.9 million from September 30, 2012. This decrease is due to amounts paid for borrowers’ taxes during the fourth calendar quarter of 2012.

Total stockholders’ equity as of March 31, 2013, was $190.3 million (16.1% of total assets). This compares to $171.5 million (13.8% of total assets) at September 30, 2012. On a per share basis, stockholders’ equity was $24.19 on March 31, 2013, compared to $21.80 on September 30, 2012.

The Company did not pay any cash dividends to its stockholders during the six month period ended March 31, 2013. In accordance with the agreement, which is described more fully in Footnote 14, Regulatory Agreements, the Company is restricted from the payment of dividends or other capital distributions during the period of the agreement without prior written consent from its primary regulator.

Total stockholders’ equity as of March 31, 2013, includes an unrealized gain, net of deferred income taxes, on available for sale securities of $1.8 million. 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).

 

     Six months ended  
     3/31/13     3/31/12  

Return on assets

     3.20     0.87

Return on equity

     21.38     6.93

Equity-to-assets ratio

     16.14     13.13

Dividend payout ratio

     —       —  

RESULTS OF OPERATIONS - Comparison of three and six months ended March 31, 2013 and 2012.

For the three months ended March 31, 2013, the Company had net income of $11.0 million or $1.40 per share. This compares to a net income of $375,000 or $0.05 per share for the three month period ended March 31, 2012.

For the six months ended March 31, 2013, the Company had net income of $19.3 million or $2.46 per share. This compares to a net income of $5.3 million or $0.68 per share for the six month period ended March 31, 2012.

 

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Net Interest Margin

The Company’s net interest margin is comprised of the difference (“spread”) between interest income on loans, MBS and investments and the interest cost of customer and brokered deposits and other borrowings. Management monitors net interest spreads and, although constrained by certain market, economic, and competition factors, it establishes loan rates and customer deposit rates that maximize net interest margin.

The following table presents the total dollar amounts of interest income and expense on the indicated amounts of average interest-earning assets or interest-costing liabilities for the six months ended March 31, 2013 and 2012. Average yields reflect reductions due to non-accrual loans. Once a loan becomes 90 days delinquent, or when full payment of interest and principal is not expected, any interest that has accrued up to that time is reversed and no further interest income is recognized unless the loan is paid current. Average balances and weighted average yields for the periods include all accrual and non-accrual loans. The table also presents the interest-earning assets and yields for each respective period. Dollar amounts are expressed in thousands.

 

     Six months ended 3/31/13     As of     Six months ended 3/31/12     As of  
                         3/31/13                         3/31/12  
     Average             Yield/     Yield/     Average             Yield/     Yield/  
     Balance      Interest      Rate     Rate     Balance      Interest      Rate     Rate  

Interest-earning assets

                    

Loans

   $ 843,897         24,074         5.71     5.33   $ 995,651         30,163         6.06     5.59

Mortgage-backed securities

     24,559         381         3.10     3.67     36,123         962         5.33     4.78

Securities

     252,681         2,048         1.62     1.57     63,153         1,466         4.64     2.19

Bank deposits

     19,568         3         0.03     0.01     19,137         6         0.06     0.01
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total earning assets

     1,140,705         26,506         4.65     4.23     1,114,064         32,597         5.85     5.26
     

 

 

    

 

 

   

 

 

      

 

 

    

 

 

   

 

 

 

Non-earning assets

     73,425                98,596           
  

 

 

           

 

 

         

Total

   $ 1,214,130              $ 1,212,660           
  

 

 

           

 

 

         

Interest-costing liabilities

                    

Customer checking and savings deposit accounts

   $ 312,204         701         0.45     0.41   $ 258,090         610         0.47     0.43

Customer and brokered certificates of deposit

     543,037         2,408         0.89     0.74     587,151         4,304         1.47     1.47

FHLB Advances

     139,006         1,063         1.53     1.66     172,865         1,201         1.39     1.79

Subordinated debentures

     25,000         254         2.02     1.95     25,000         266         2.13     2.20

Other borrowings

     301         8         5.32     5.00     —           —           —       —  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total costing liabilities

     1,019,548         4,434         0.87     0.77     1,043,106         6,381         1.22     1.25
     

 

 

    

 

 

   

 

 

      

 

 

    

 

 

   

 

 

 

Non-costing liabilities

     15,115                13,920           

Stockholders’ equity

     179,467                155,634           
  

 

 

           

 

 

         

Total

   $ 1,214,130              $ 1,212,660           
  

 

 

           

 

 

         

Net earning balance

     121,157                70,958           
  

 

 

           

 

 

         

Earning yield less costing rate

           3.78     3.46           4.63     4.01
        

 

 

   

 

 

         

 

 

   

 

 

 

Average interest-earning assets, net interest, and net yield spread on average interest-earning assets

   $ 1,140,705         22,072         3.87     $ 1,114,064         26,216         4.71  
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

 

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The following table provides information regarding changes in interest income and interest expense. For each category of interest-earning asset and interest-costing liability, information is provided on changes attributable to (1) changes in rates (change in rate multiplied by the old volume), and (2) changes in volume (change in volume multiplied by the old rate), and (3) changes in rate and volume (change in rate multiplied by the change in volume). Average balances, yields and rates used in the preparation of this analysis come from the preceding table. Dollar amounts are expressed in thousands.

 

     Six months ended March 31, 2013, compared to
six months ended March 31, 2012
 
     Yield     Volume     Yield/
Volume
    Total  

Components of interest income:

        

Loans

   $ (1,742     (4,598     251        (6,089

Mortgage-backed securities

     (403     (308     130        (581

Securities

     (954     4,397        (2,861     582   

Bank deposits

     (3     —          —          (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in interest income

     (3,102     (509     (2,480     (6,091
  

 

 

   

 

 

   

 

 

   

 

 

 

Components of interest expense:

        

Customer and brokered deposit accounts

     (1,817     58        (46     (1,805

FHLB Advances

     121        (235     (24     (138

Subordinated debentures

     (13     —          1        (12

Other borrowings

     —          —          8        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in interest expense

     (1,709     (177     (61     (1,947
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase in net interest margin

   $ (1,393     (332     (2,419     (4,144
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest margin before loan loss provision for the six months ended March 31, 2013, decreased $4.1 million from the same period in the prior year. Specifically, interest income decreased $6.0 million, which was offset by a $1.9 million decrease in interest expense for the period. Interest on loans decreased $6.1 million as the result of a $151.8 million decrease in the average balance of loans receivable outstanding during the period and a 35 basis point decrease in the average rate earned on such loans during the period. Interest on mortgage-backed securities decreased $581,000 due to an $11.6 million decrease in the average balance of mortgage-backed securities during the period and a 223 basis point decrease in the average rate earned on such securities during the period. Interest earned on investment securities increased $582,000 resulting from a $189.5 million increase in the average balance of such securities during the period, the effect of which was offset by a 302 basis point decrease in the average rate earned on such securities. Interest expense on customer and brokered deposit accounts decreased $1.8 million due to a 43 basis point decrease in the average rate paid on such liabilities. Interest expense on FHLB advances decreased $138,000 as the result a $33.9 million decrease in the average balance of advances outstanding during the period, the effect of which was partially offset by a 14 basis point increase in the average rate paid of such liabilities.

Provision for Loan Losses

The Company recorded a negative provision for loan losses of $9.6 million during the six month period. Based upon management’s analysis, the resulting allowance for loan losses of $20.7 million is adequate at March 31, 2013.

The negative provision for loan loss for the current quarter was based upon the Bank’s ALLL methodology, which contains both qualitative and quantitative factors. Specifically, activity during the quarter reflected in quantitative factors included the following:

 

   

The Bank’s portfolio of loans held to maturity decreased $64.2 million during the six month period, to $702.4 million. This decrease consisted almost entirely of declines within the Bank’s commercial real estate and construction and land development portfolios, which historically have experienced higher credit losses than the Bank’s other portfolios.

 

   

The level of criticized loans (those classified as special mention, substandard, or doubtful) decreased $48.2 million during the six month period. Of this decline, $36.4 million related to loans within the Bank’s commercial real estate and construction and land development portfolios.

 

   

The Bank’s loss experience during the period was much better than the previous 36 months. During the six month period ended March 31, 2013, the Bank recorded net charge-offs of $1.5 million.

 

40


   

The level of nonperforming loans decreased $24.6 million during the six month period. Similar to the decrease in gross loan balances, this decline consisted almost entirely of loans within the Bank’s commercial real estate and construction and land development portfolios.

In addition to the quantitative factors noted above, management observed the following qualitative factors when determining the appropriate level of the Bank’s ALLL at March 31, 2013:

 

   

The housing market in the Kansas City metropolitan area, where all of the Bank’s construction and land development lending is concentrated, has shown renewed strength during the period. In terms of new building permits, the market experienced its best fourth calendar quarter since 2008, and the supply of new housing inventory has dropped below the equilibrium level, resulting in an increase in new housing starts. New building permits issued during the first calendar quarter of 2013 remained strong and were also at their highest level since 2008.

 

   

During the current period, an independent third party review was completed, which included approximately 80% of the loans within the Bank’s commercial real estate and construction and land development portfolios. This review resulted in no loan classification discrepancies, validating the effectiveness of the Bank’s internal asset review process.

The Company recorded a provision for loan losses of $5.0 million during the quarter ended March 31, 2012, due primarily to declines in the value of collateral securing impaired loans that are collateral dependent. This increase in the ALLL, resulting from the provision for loan loss, was offset by net charge offs of $26.2 million during the three month period, as the Bank’s elimination of the use of specific valuation allowances. Prior to the quarter ended March 31, 2012, measured impairments were recorded as specific valuation allowances and carried as contra-assets to reduce a loan’s carrying value to fair value. When the Bank adopted the Call Report, during the quarter ended March 31, 2012, the cumulative specific valuation allowance that were considered “confirmed losses” were charged-off and netted against their respective loans balances. For collateral dependent loans that are deemed impaired, a “confirmed loss” is defined as the amount by which the loan’s recorded investment exceeds the fair value of its collateral. If a loan is considered uncollectible, the entire balance is deemed a “confirmed loss” and is fully charged-off.

The Company recorded a provision for loan losses of $2.5 million during the three month period ended December 31, 2011, due primarily to increases in specific reserves related to impaired commercial real estate loans. This increase in the ALLL, resulting from the provision for loan loss, was offset by net charge offs of $14.8 million during the period, which primarily resulted from the foreclosure or sale of certain impaired collateral dependent commercial and land development loans which were being carried at the fair value of the collateral.

On a consolidated basis, the allowance for losses on loans and real estate owned was 18.2% of total classified assets at March 31, 2013, 20.3% at September 30, 2012, and 21.9% at March 31, 2012.

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 based on information available at the time of their examination.

Other Income

Other income for the three months ended March 31, 2013, increased $10.7 million from the same period in the prior year. Specifically, gain on sale of loans held for sale increased $10.7 million from the same period in the prior year due to increased mortgage banking volume and spreads. Provision for loss on real estate owned decreased $1.8 million due to fewer declines in the fair value of properties within the Bank’s portfolio of foreclosed assets held for sale during the period. Gain on sale of securities held to maturity increased $257,000 as compared to the same period in the prior year, due to the sales of two mortgage-backed securities held to maturity after it was determined that there was a significant deterioration in the issuer’s creditworthiness. Customer service fees and charges increased $155,000 from the same period in the prior year due primarily to an increase in miscellaneous fees related to an increase in residential mortgage origination volume. In addition, the Company recorded a $200,000 impairment charge related to its investment in Central Platte Holdings, LLC during the quarter ended March 31, 2012, resulting from a decrease in the sales price of fully-developed lots in Central Platte’s residential development. These increases were partially offset by a $2.5 million decrease in other income due primarily to the effect of recording the net fair value of certain loan-related commitments in accordance with GAAP.

 

41


Other income for the six months ended March 31, 2013, increased $16.6 million from the same period in the prior year. Specifically, gain on sale of loans held for sale increased $15.6 million from the same period in the prior year due to increased mortgage banking volume and spreads. Provision for loss on real estate owned decreased $2.6 million due to fewer declines in the fair value of properties within the Bank’s portfolio of foreclosed assets held for sale during the period. Gain on sale of securities held to maturity increased $257,000 as compared to the same period in the prior year, due to the sales of two mortgage-backed securities held to maturity after it was determined that there was a significant deterioration in the issuer’s creditworthiness. In addition, loss on sale of securities available for sale decreased $343,000 as compared to the same period in the prior year, due to the fact that there were no sales of such securities during the current period. Customer service fees and charges increased $219,000 from the same period in the prior year due primarily to an increase in miscellaneous fees related to an increase in residential mortgage origination volume. In addition, the Company recorded a $200,000 impairment charge related to its investment in Central Platte Holdings, LLC during the six month period ended March 31, 2012, resulting from a decrease in the sales price of fully-developed lots in Central Platte’s residential development. These increases were partially offset by a $2.5 million decrease in other income due primarily to the effect of recording the net fair value of certain loan-related commitments in accordance with GAAP and a decrease in loan prepayment penalties.

General and Administrative Expenses

Total general and administrative expenses for the three months ended March 31, 2013, increased $2.8 million from the same period in the prior year. Specifically, compensation and fringe benefits increased $1.0 million due to the addition of personnel in the Company’s residential lending, internal asset review, information technology, and loan servicing departments. Commission-based mortgage banking compensation increased $1.5 million due to an increase in residential mortgage loan origination volume from the same period in the prior year. Federal deposit insurance premiums increased $264,000, due primarily to an increase in premium rates from the same period in the prior year.

Total general and administrative expenses for the six months ended March 31, 2013, increased $6.8 million from the same period in the prior year. Specifically, compensation and fringe benefits increased $2.0 million due to the addition of personnel in the Company’s residential lending, internal asset review, information technology, and loan servicing departments. Commission-based mortgage banking compensation increased $3.6 million due to an increase in residential mortgage loan origination volume from the same period in the prior year. Advertising and business promotion expense increased $178,000 due primarily to the increase in advertising costs related to the mortgage banking operation. Federal deposit insurance premiums increased $463,000, due primarily to an increase in premium rates from the same period in the prior year. In addition, other expenses increased $422,000 primarily due to costs related to the increase in residential origination volume and costs incurred to move the Bank’s disaster recovery site during the current six month period.

REGULATION

Regulation of the Company

NASB Financial, Inc. is a unitary savings and loan holding company of North American Savings Bank, F.S.B. On July 21, 2011, supervisory responsibility for the Company was transferred from the Office of Thrift Supervision (the “OTS”) to the Board of Governors of the Federal Reserve System (“Federal Reserve Board” or “FRB”), as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Accordingly, the Company is required to register and file reports with the Federal Reserve Board and is subject to regulation and examination by the Federal Reserve Board. In addition, the Federal Reserve Board has enforcement authority over the Company, which also permits the Federal Reserve Board to restrict or prohibit activities that are determined to present a serious risk to the Bank.

Regulation of the Bank

The Bank is a federally chartered stock savings bank, formed under the authority provided in the Home Owners’ Loan Act (as amended, “HOLA”). On July 21, 2011, supervisory responsibility for the Bank was transferred from the OTS to the Office of the Comptroller of the Currency (“OCC”), as required by the Dodd-Frank Act. Although the Bank remains subject to regulations previously promulgated by the OTS, in general, those regulations are now enforced by the OCC.

 

42


Recent Legislation

On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

 

   

Centralize responsibility for consumer financial protection by creating the Consumer Financial Protection Bureau (“CFPB”), with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts. Smaller financial institutions, including the Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

 

   

Require new capital rules that apply the same leverage and risk-based capital requirements applicable to insured depository institutions to savings and loan holding companies.

 

   

Require the federal banking regulators to seek to make their capital requirements countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.

 

   

Provide for new disclosure and other requirements relating to executive compensation and corporate governance.

 

   

Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.

 

   

Effective July 21, 2011, repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

 

   

Require all depository institution holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the financial services industry more generally. The elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending on how the marketplace responds. Provisions in the legislation that require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the future.

On January 10, 2013, the CPPB issued a final rule that implements certain provision of the Dodd-Frank Act which prohibit creditors from making residential mortgage loans without regard to the borrower’s repayment ability. The rule sets forth specific verification requirements, product features, and underwriting criteria that a lender must follow for residential mortgage loans to be treated as “qualified mortgages” and, therefore, subject to certain protections from liability. The final rule is effective for residential mortgage loan applications received on or after January 10, 2014.

Capital Requirements

Regulations require that thrifts meet three minimum capital ratios.

Leverage Limit. The leverage limit requires that thrift maintain “core capital” of at least 4% of its adjusted tangible assets. “Core capital” includes (i) common stockholders’ equity, including retained earnings; non-cumulative preferred stock and related earnings; and minority interest in the equity accounts of consolidated subsidiaries, minus (ii) those intangibles (including goodwill) and investments in and loans to subsidiaries not permitted in computing capital for national banks, plus (iii) certain purchased mortgage servicing rights and certain qualifying supervisory goodwill.

Tangible Capital Requirement. The tangible capital requirement mandates that a thrift maintain tangible capital of at least 1.5% of tangible assets. For the purposes of this requirement, adjusted total assets are generally calculated on the same basis as for the leverage ratio requirement. Tangible capital is defined in the same manner as core capital, except that all goodwill and certain other intangible assets must be deducted.

 

43


Risk-Based Capital Requirement. OCC standards require that institutions maintain risk-based capital equal to at least 8% of risk-weighted assets. Total risk-based capital includes core capital plus supplementary capital. In determining risk-weighted assets, all assets including certain off-balance-sheet items are multiplied by a risk weight factor from 0% to 100%, based on risk categories assigned by the OCC. Banking regulations categorize banks with risk-based capital ratios over 10% as well capitalized, 8% to 10% as adequately capitalized, and under 8% as undercapitalized.

At March 31, 2013, the Bank exceeds all capital requirements prescribed by the OCC. To calculate these requirements, a thrift must deduct any investments in and loans to subsidiaries that are engaged in activities not permissible for a national bank. As of March 31, 2013, the Bank did not have any investments in or loans to subsidiaries engaged in activities not permissible for national banks.

On May 22, 2012, the Board of Directors of the Bank agreed to a Consent Order with the OCC, which is described more fully in Footnote 14, Regulatory Agreements. Among other items, the Consent Order requires that the Bank maintain a Tier 1 leverage capital ratio equal to or greater than 10% and a risk-based capital ratio equal to or greater than 13%. As of March 31, 2013, the Bank’s actual Tier 1 leverage capital and total risk-based capital ratios were 16.5% and 20.7%, respectively. The existence of individual minimum capital requirements means that the Bank may not be deemed well capitalized.

The following tables summarize the relationship between the Bank’s capital and regulatory requirements. Dollar amounts are expressed in thousands.

 

At March 31, 2013

   Amount  

GAAP capital (Bank only)

   $ 194,586   

Adjustment for regulatory capital:

  

Intangible assets

     (2,321

Reverse the effect of SFAS No. 115

     (1,793
  

 

 

 

Tangible capital

     190,472   

Qualifying intangible assets

     —     
  

 

 

 

Tier 1 capital (core capital)

     190,472   

Qualifying general valuation allowance

     12,360   
  

 

 

 

Risk-based capital

   $ 202,832   
  

 

 

 

 

     As of March 31, 2013  
     Actual     Minimum
Required for
Capital
Adequacy
    Minimum
Required to be
Well Capitalized
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total risk-based capital to risk-weighted assets

   $ 202,832         20.7     78,437         ³8     98,046         ³10

Tier 1 capital to adjusted tangible assets

     190,472         16.5     46,147         ³4     57,684         ³5

Tangible capital to tangible assets

     190,472         16.5     17,305         ³1.5     —           —     

Tier 1 capital to risk-weighted assets

     190,472         19.4     —           —          58,827         ³6

LIQUIDITY AND CAPITAL RESOURCES

The Bank maintains sufficient liquidity to ensure safe and sound operation. North American maintains a level of liquid assets adequate to meet the requirements of normal banking activities, including the repayment of maturing debt and potential deposit withdrawals. The Bank’s primary sources of liquidity are cash and cash equivalents, the sale and repayment of loans, the retention of existing or newly acquired retail deposits, and FHLB advances. Additional sources of liquidity include the sale of investment securities available for sale, reverse repurchase agreements, FRB advances, and the acquisition of deposits through a nationwide internet listing service.

 

44


Management continues to use FHLB advances as a primary source of short-term funding. FHLB advances are secured by a blanket pledge agreement covering portions of the loan and securities portfolio as collateral, supported by quarterly reporting of eligible collateral to FHLB. FHLB borrowings are limited based upon a percentage of the Bank’s assets and eligible collateral, as adjusted by collateral eligibility and maintenance levels. Management continually monitors the balance of eligible collateral relative to the amount of advances outstanding to determine the availability of additional FHLB advances. At March 31, 2013, the Bank had a total borrowing capacity at FHLB of $246.4 million, and outstanding advances of $125.0 million. As an additional source of liquidity, the Bank has $111.4 million of highly liquid short term U.S. Government sponsored agency securities in its portfolio at March 31, 2013.

In accordance with the Consent Order with the OCC, which is described more fully in Footnote 14, Regulatory Agreements, the Bank is required to meet and maintain specific capital levels. This requirement prohibits the Bank from accepting, renewing, or rolling over any brokered deposits. As of March 31, 2013, the Bank’s brokered deposits totaled $10.0 million. The Bank believes it will have adequate alternate funding sources available to replace such deposits upon their maturity.

Fluctuations in the level of interest rates typically impact prepayments on mortgage loans and mortgage related securities. During periods of falling rates, these prepayments increase and a greater demand exists for new loans. The Bank’s ability to attract and retain customer deposits is partially impacted by area competition and by other alternative investment sources that may be available to the Bank’s customers in various interest rate environments. 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 the Bank’s primary and additional liquidity sources, described above. Management is not currently aware of any other trends, market conditions, or other economic factors that could materially impact the Bank’s primary sources of funding or affect its future ability to meet obligations as they come due. Although future changes to the level of market interest rates are uncertain, management believes its sources of funding will continue to remain stable during upward and downward interest rate environments

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, 2012.

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, 2012.

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.

 

45


PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There were no material proceedings pending other than ordinary and routine litigation incidental to the business of the Company.

Item 1A. Risk Factors

There were no material changes during the period from the risk factors previously discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. 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
Exhibit 101.INS    – XBRL Instance Document
Exhibit 101.SCH    – XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL    – XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF    – XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB    – XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE    – XBRL Taxonomy Extension Presentation Linkbase Document

 

46


S I G N A T U R E S

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    NASB Financial, Inc.
    (Registrant)
May 10, 2013     By:   /s/ Paul L. Thomas
      Paul L. Thomas
      Chief Executive Officer
May 10, 2013     By:   /s/ Rhonda Nyhus
      Rhonda Nyhus
      Vice President and Treasurer

 

47