SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended December 31, 2010
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-24033
NASB Financial, Inc.
(Exact name of registrant as specified in its charter)
Missouri 43-1805201
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12498 South 71 Highway, Grandview, Missouri 64030
(Address of principal executive offices) (Zip Code)
(816) 765-2200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes No
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or non-accelerated filer, or a small
reporting company. See definition of "accelerated filer", "large
accelerated filer" and "small reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X
Non-accelerated filer Small reporting Company
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares of Common Stock of the Registrant outstanding as of
February 4, 2011, was 7,867,614.
EXPLANATORY NOTE REGARDING THIS FORM 10-Q/A
This Amendment No. 1 to the Quarterly Report on Form 10-Q/A amends
our Quarterly Report on Form 10-Q for the quarter ended December 31,
2010, initially filed with the Securities and Exchange Commission
("SEC") on February 9, 2011 (the "Original Filing"). We are filing this
Amendment No. 1 to restate our consolidated financial statements for the
quarters ended December 31, 2011, to appropriately reflect loans
classified as Troubled Debt Restructurings (TDRs) and to properly value
foreclosed assets held for sale following an examination by the Office
of Thrift Supervision ("OTS").
This Amendment No. 1 is the result of a regulatory examination of
NASB Financial, Inc. (the "Company") and its wholly-owned bank
subsidiary, North American Savings Bank, F.S.B. performed by the Office
of Thrift Supervision ("OTS") in April 2011. In May 2011, the OTS
informed the Company of its final determination to deem some borrowing
relationships, primarily from two large residential developers, as TDRs.
Management agreed to reclassify the loans as TDRs and to record an
additional $6.6 million charge, pre-tax, to the provision for loan
losses related primarily to the measured impairment of the
aforementioned loans. In addition, the Company became aware that
certain foreclosed real estate, which was acquired through foreclosure
of a participation loan, had declined in value. The Company agreed with
the OTS' recommendation to record an additional $1.6 million charge,
pre-tax, to the provision for loss on real estate owned, primarily
related to the devaluation of this property.
This Amendment No. 1 also adds additional disclosures related to
the Company's lending activities in Note 7, "Loans Receivable," which
were not included in the Original Filing.
This Amendment No. 1 amends and restates the Company's consolidated
financial statements for the quarter ended December 31, 2010, including
the notes thereto. Refer to Note 17, "Restatement," in this Amendment
No. 1 for further information on the restatement impact for the quarter
ended December 31, 2010.
This Amendment No. 1 also amends Part I, Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," related to the restatement of the Company's consolidated
financial statements noted above.
Pursuant to the rules of the Securities and Exchange Commission,
Item 6, "Exhibits," of Part II of the original Form
10-Q has been amended to contain updated certifications from our Chief
Executive Officer and Chief Financial Officer, as required by Sections
302 and 906 of the Sarbanes-Oxley Act of 2002.
This Amendment No. 1 only amends and restates the items described
above to reflect the effects of the restatement, and we have not
modified or updated other disclosures presented in our Original Filing.
This Amendment No. 1 does not reflect events occurring after the filing
of the Original Filing and does not modify or update those disclosures
affected by subsequent events, except as specifically referenced herein.
Information not affected by this Amendment No. 1 is unchanged and
reflects the disclosures made at the time of the Original Filing on
February 9, 2011.
1
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands)
December 31, September 30,
2010 2010
(Unaudited)
(Restated)
---------- -----------
ASSETS
Cash and cash equivalents $ 10,303 14,033
Securities:
Available for sale, at fair value 24,409 28,092
Held to maturity, at cost 1,076 1,232
Stock in Federal Home Loan Bank, at cost 13,203 15,873
Mortgage-backed securities:
Available for sale, at fair value 820 911
Held to maturity, at cost 41,186 46,276
Loans receivable:
Held for sale, at fair value 117,499 179,845
Held for investment, net 1,059,867 1,073,357
Allowance for loan losses (39,074) (32,316)
---------- -----------
Total loans receivable, net 1,138,292 1,220,886
---------- -----------
Accrued interest receivable 5,047 5,520
Foreclosed assets held for sale, net 32,379 38,362
Premises and equipment, net 14,045 13,836
Investment in LLCs 17,772 17,799
Mortgage servicing rights, net 271 263
Deferred income tax asset, net 16,381 14,758
Other assets 16,945 16,355
---------- ----------
$ 1,332,129 1,434,196
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 881,724 866,559
Brokered deposit accounts 16,922 66,894
Advances from Federal Home Loan Bank 228,000 286,000
Subordinated debentures 25,774 25,774
Escrows 5,039 11,149
Income taxes payable 310 504
Accrued expenses and other liabilities 9,598 9,554
---------- ----------
Total liabilities 1,167,367 1,266,434
---------- ----------
Stockholders' equity:
Common stock of $0.15 par value:
20,000,000 shares authorized;
9,857,112 shares issued 1,479 1,479
Additional paid-in capital 16,616 16,603
Retained earnings 184,639 187,674
Treasury stock, at cost;
1,989,498 shares (38,418) (38,418)
Accumulated other comprehensive
income 446 424
---------- ----------
Total stockholders' equity 164,762 167,762
---------- ----------
$ 1,332,129 1,434,196
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share data)
Three months ended
December 31,
----------------------
2010 2009
(Restated)
--------- ---------
Interest on loans receivable $ 18,071 20,606
Interest on mortgage-backed securities 552 884
Interest and dividends on securities 623 472
Other interest income 4 3
--------- ---------
Total interest income 19,250 21,965
--------- ---------
Interest on customer and brokered
deposit accounts 4,286 4,693
Interest on advances from FHLB 1,797 3,339
Interest on subordinated debentures 127 128
--------- ---------
Total interest expense 6,210 8,160
--------- ---------
Net interest income 13,040 13,805
Provision for loan losses 10,526 9,000
--------- ---------
Net interest income after provision
for loan losses 2,514 4,805
--------- ---------
Other income (expense):
Loan servicing fees, net 77 26
Impairment (loss) recovery on mortgage
servicing rights (1) 5
Customer service fees and charges 2,458 1,858
Provision for loss on real estate owned (2,043) --
Gain on sale of securities available for sale 280 3,088
Gain from loans receivable held for sale 7,335 6,967
Impairment loss on investment in LLCs -- (2,000)
Other 980 256
--------- ---------
Total other income 9,086 10,200
--------- ---------
General and administrative expenses:
Compensation and fringe benefits 5,115 4,501
Commission-based mortgage banking
compensation 6,172 4,116
Premises and equipment 1,036 990
Advertising and business promotion 1,267 1,369
Federal deposit insurance premiums 437 1,238
Other 2,508 1,443
--------- ---------
Total general and administrative expenses 16,535 13,657
--------- ---------
Income (loss) before income tax expense
(benefit) (4,935) 1,348
Income tax expense (benefit) (1,900) 19
--------- ---------
Net income (loss) $(3,035) 1,329
========= =========
Basic earnings (loss) per share $ (0.39) 0.17
========= =========
Diluted earnings (loss) per share $ (0.39) 0.17
========= =========
Basic weighted average shares outstanding 7,867,614 7,867,614
See accompanying notes to condensed consolidated financial statements.
3
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
(In thousands)
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive stockholders'
stock capital earnings stock income equity
-----------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 2010 $ 1,479 16,603 187,674 (38,418) 424 167,762
Comprehensive income:
Net loss -- -- (3,035) -- -- (3,035)
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- 22 22
available for sale -------
Total comprehensive loss (3,013)
Stock based compensation expense -- 13 -- -- -- 13
----------------------------------------------------------------------
Balance at December 31, 2010
(restated) $ 1,479 16,616 184,639 (38,418) 446 164,762
======================================================================
Three months ended
December 31, 2010
------------------
(Dollars in thousands)
Reclassification Disclosure:
Unrealized gain on available for sale securities,
net of income taxes of $122 $ 194
Reclassification adjustment for gain included in
net income, net of income taxes of $108 (172)
--------
Change in unrealized gain on available for sale
securities, net of income tax of $14 $ 22
========
See accompanying notes to condensed consolidated financial statements.
4
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended
December 31,
----------------------
2010 2009
(Restated)
----------------------
Cash flows from operating activities:
Net income (loss) $ (3,035) 1,329
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 467 444
Amortization and accretion, net (132) (1,006)
Gain on sale of securities available for sale (280) (3,088)
Loss from investment in LLCs 31 35
Impairment loss on investment in LLCs -- 2,000
Impairment loss (recovery) on mortgage
servicing rights 1 (5)
Gain from loans receivable held for sale (7,335) (6,967)
Provision for loan losses 10,526 9,000
Provision for loss on real estate owned 2,043 --
Origination of loans receivable held for sale (648,980) (435,609)
Sale of loans receivable held for sale 718,661 423,270
Stock based compensation - stock options 13 20
Changes in:
Net fair value of loan-related commitments (1,384) (315)
Accrued interest receivable 473 247
Prepaid and accrued expenses, other liabilities
and income taxes payable (800) (8,275)
----------------------
Net cash provided by (used in) operating activities 70,269 (18,920)
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 5,056 2,430
Available for sale 79 2,449
Principal repayments of mortgage loans receivable
held for investment 62,798 62,342
Principal repayments of other loans receivable 1,541 1,661
Principal repayments of investment securities
held to maturity 166 --
Loan origination - mortgage loans receivable
held for investment (62,189) (30,591)
Loan origination - other loans receivable (887) (457)
Purchase of mortgage loans receivable held for
investment -- (753)
Proceeds from sale of Federal Home Loan
Bank stock 2,670 4,851
Purchase of mortgage backed securities held
to maturity -- (35,796)
Purchase of investment securities available for sale (10,390) (15,080)
Proceeds from sale of investment securities available
for sale 14,456 21,336
Proceeds from sale of real estate owned 12,546 3,454
Purchases of premises and equipment, net (676) (292)
Investment in LLCs (5) (5)
Other (218) (619)
----------------------
Net cash provided by investing activities 24,947 14,930
5
NASB FINANCIAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended
December 31,
----------------------
2010 2009
(Restated)
----------------------
Cash flows from financing activities:
Net decrease in customer and brokered
deposit accounts (34,836) (32,409)
Proceeds from advances from Federal Home Loan Bank 17,000 10,000
Repayment on advances from Federal Home Loan Bank (75,000) (2,000)
Cash dividends paid -- (1,770)
Change in escrows (6,110) (5,279)
----------------------
Net cash used in financing activities (98,946) (31,458)
----------------------
Net decrease in cash and cash equivalents (3,730) (35,448)
Cash and cash equivalents at beginning of the period 14,033 63,250
----------------------
Cash and cash equivalents at end of period $ 10,303 27,802
======================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ (68) 2,266
Cash paid for interest 6,200 8,459
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 17,528 7,831
Conversion of real estate owned to loans receivable 763 --
Capitalization of originated mortgage servicing rights -- 5
See accompanying notes to condensed consolidated financial statements.
6
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements are prepared in accordance with instructions to Form 10-Q and
do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America
("GAAP") for complete financial statements. All adjustments are of a
normal and recurring nature and, in the opinion of management the
statements include all adjustments considered necessary for fair
presentation. These statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K to the Securities and Exchange
Commission. Operating results for the three month period ended December
31, 2010, are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2011. The condensed
consolidated balance sheet of the Company as of September 30, 2010, has
been derived from the audited balance sheet of the Company as of that
date.
In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of the allowances for losses on loans, real estate owned,
valuation of mortgage servicing rights, and unrecognized tax benefits.
Management believes that these allowances are adequate, however, future
additions to the allowances may be necessary based on changes in
economic conditions.
The Company's critical accounting policies involving the more
significant judgments and assumptions used in the preparation of the
condensed consolidated financial statements as of December 31, 2010,
have remained unchanged from September 30, 2010. These policies relate
to the allowance for loan losses, the valuation of derivative
instruments, and the valuation of equity method investments. Disclosure
of these critical accounting policies is incorporated by reference under
Item 8 "Financial Statements and Supplementary Data" in the Company's
Annual Report on Form 10-K for the Company's year ended September 30,
2010.
Certain quarterly amounts for previous periods have been
reclassified to conform to the current quarter's presentation.
(2) RECONCILIATION OF BASIC EARNINGS (LOSS) PER SHARE TO DILUTED
EARNINGS (LOSS) PER SHARE
The following table presents a reconciliation of basic earnings
(loss) per share to diluted earnings (loss) per share for the periods
indicated.
Three months ended
----------------------
12/31/10 12/31/09
(Restated)
----------------------
Net income (loss) (in thousands) $ (3,035) 1,329
Average common shares outstanding 7,867,614 7,867,614
Average common share stock options
outstanding -- --
----------------------
Average diluted common shares 7,867,614 7,867,614
Earnings (loss) per share:
Basic $ (0.39) 0.17
Diluted (0.39) 0.17
At December 31, 2010 and 2009, options to purchase 49,538 and
62,038 shares, respectively, of the Company's stock were outstanding.
These options were not included in the calculation of diluted earnings
per share because the option exercise price was greater than the average
market price of the common shares for the period, thus making the
options anti-dilutive.
7
(3) SECURITIES AVAILABLE FOR SALE
The following table presents a summary of securities available for
sale at December 31, 2010. Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Corporate debt securities $ 8,238 425 29 8,634
Trust preferred securities 15,461 302 11 15,752
Municipal securities 23 -- -- 23
------------------------------------------
Total $ 23,722 727 40 24,409
===========================================
The following table presents a summary of securities available for
sale at September 30, 2010. Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Corporate debt securities $ 17,347 376 -- 17,723
Trust preferred securities 10,084 282 20 10,346
Municipal securities 23 -- -- 23
------------------------------------------
Total $ 27,454 658 20 28,092
===========================================
During the three month period ended December 31, 2010, the Company
realized gross gains of $280,000 and no gross losses on the sale of
securities available for sale. The Company realized gross gains of $3.1
million and no gross losses on the sale of securities available for sale
during the three month period ended December 31, 2009.
The following table presents a summary of the fair value and gross
unrealized losses of those securities available for sale which had
unrealized losses at December 31, 2010. Dollar amounts are expressed in
thousands.
Less than 12 months 12 months or longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Corporate debt securities $ 3,056 29 $ -- --
Trust preferred securities 5,289 11 -- --
---------------------------------------------
Total $ 8,345 40 $ -- --
=============================================
8
The scheduled maturities of securities available for sale at
December 31, 2010, are presented in the following table. Dollar amounts
are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due in less than one year $ 5 -- -- 5
Due from one to five years 18 -- -- 18
Due from five to ten years 5,154 425 -- 5,579
Due after ten years 18,545 302 40 18,807
-------------------------------------------
Total $ 23,722 727 40 24,409
===========================================
(4) SECURITIES HELD TO MATURITY
The following table presents a summary of securities held to
maturity at December 31, 2010. Dollar amounts are expressed in
thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Asset-backed securities $ 1,076 399 -- 1,475
------------------------------------------
Total $ 1,076 399 -- 1,475
===========================================
The following table presents a summary of securities held to
maturity at September 30, 2010. Dollar amounts are expressed in
thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Asset-backed securities $ 1,232 329 -- 1,561
------------------------------------------
Total $ 1,232 329 -- 1,561
===========================================
The scheduled maturities of securities held to maturity at December
31, 2010, are presented in the following table. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due after ten years $ 1,076 399 -- 1,475
-------------------------------------------
Total $ 1,076 399 -- 1,475
===========================================
Actual maturities of securities held to maturity may differ from
scheduled maturities depending on the repayment characteristics and
experience of the underlying financial instruments which are callable.
There were no dispositions of securities held to maturity during
the three month periods ended December 31, 2010 and 2009.
9
(5) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table presents a summary of mortgage-backed
securities available for sale at December 31, 2010. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 94 2 -- 96
Pass-through certificates
guaranteed by FNMA
- adjustable rate 180 5 -- 185
FHLMC participation
Certificates:
Fixed rate 345 21 -- 366
Adjustable rate 163 10 -- 173
------------------------------------------
Total $ 782 38 -- 820
===========================================
The following table presents a summary of mortgage-backed
securities available for sale at September 30, 2010. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Pass-through certificates
guaranteed by GNMA
- fixed rate $ 98 3 -- 101
Pass-through certificates
guaranteed by FNMA
- adjustable rate 186 7 -- 193
FHLMC participation
certificates
Fixed rate 403 34 -- 437
Adjustable rate 173 7 -- 180
-------------------------------------------
Total $ 860 51 -- 911
===========================================
There were no sales of mortgage-backed securities available for
sale during the three month periods ended December 31, 2010 and 2009.
The scheduled maturities of mortgage-backed securities available
for sale at December 31, 2010, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due from five to ten years $ 345 21 -- 366
Due after ten years 437 17 -- 454
-------------------------------------------
Total $ 782 38 -- 820
===========================================
Actual maturities and pay-downs of mortgage-backed securities
available for sale will differ from scheduled maturities depending on
the repayment characteristics and experience of the underlying financial
instruments, on which borrowers have the right to prepay certain
obligations.
10
(6) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following table presents a summary of mortgage-backed
securities held to maturity at December 31, 2010. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation certificates:
Fixed rate $ 50 1 -- 51
FNMA pass-through certificates:
Fixed rate 7 -- -- 7
Balloon maturity and
adjustable rate 31 -- -- 31
Collateralized mortgage
obligations 41,098 231 302 41,027
------------------------------------------
Total $ 41,186 232 302 41,116
===========================================
The following table presents a summary of mortgage-backed
securities held to maturity at September 30, 2010. Dollar amounts are
expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
FHLMC participation certificates:
Fixed rate $ 52 2 -- 54
FNMA pass-through certificates:
Fixed rate 7 -- -- 7
Balloon maturity and
adjustable rate 32 1 -- 33
Collateralized mortgage
obligations 46,185 230 209 46,206
------------------------------------------
Total $ 46,276 233 209 46,300
===========================================
There were no sales of mortgage-backed securities held to maturity
during the three month periods ended December 31, 2010 and 2009.
The following table presents a summary of the fair value and gross
unrealized losses of those mortgage-backed securities held to maturity
which had unrealized losses at December 31, 2010. Dollar amounts are
expressed in thousands.
Less than 12 months 12 months or longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Collateralized mortgage
obligations $ 7,926 156 $ 8,193 146
---------------------------------------------
Total $ 7,926 156 $ 8,193 146
=============================================
11
Based upon available evidence at December 31, 2010, it is
management's opinion that the decline in value of these securities is
temporary. The decline in fair value resulted from increases in market
yields that occurred after the securities were purchased. Management
views changes in fair value caused solely by changes in interest rates
as temporary. In addition, it is anticipated that the entire principal
balance of these securities will be collected. Should the impairment of
these securities become other-than-temporary, the cost basis of the
investment will be reduced and the resulting loss recognized in the
period the other-than-temporary impairment is identified. The Company
does not intend to sell these securities, and it is management's opinion
that it is not more-likely-than-not that the Company will be required to
sell the securities prior to recovery of the remaining amortized cost,
which could be at maturity.
The scheduled maturities of mortgage-backed securities held to
maturity at December 31, 2010, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due from one to five years $ 7 -- -- 7
Due from five to ten years 81 1 -- 82
Due after ten years 41,098 231 302 41,027
---------------------------------------------
Total $ 41,186 232 302 41,116
=============================================
Actual maturities and pay-downs of mortgage-backed securities held
to maturity will differ from scheduled maturities depending on the
repayment characteristics and experience of the underlying financial
instruments, on which borrowers have the right to prepay certain
obligations.
(7) LOANS RECEIVABLE
The Bank has traditionally concentrated its lending activities on
mortgage loans secured by residential and business property and, to a
lesser extent, development lending. The residential mortgage loans
originated have predominantly long-term fixed and adjustable rates. The
Bank also has a portfolio of mortgage loans that are secured by
multifamily, construction, development, and commercial real estate
properties. The remaining part of North American's loan portfolio
consists of non-mortgage commercial loans and installment loans. The
following table presents the Bank's total loans receivable at December
31, 2010. Dollar amounts are expressed in thousands.
LOANS HELD FOR INVESTMENT:
Mortgage loans:
Permanent loans on:
Residential properties $ 337,892
Business properties 443,356
Partially guaranteed by VA or
insured by FHA 3,839
Construction and development 201,754
----------
Total mortgage loans 986,841
Commercial loans 90,938
Installment loans to individuals 10,919
----------
Total loans held for investment 1,088,698
Less:
Undisbursed loan funds (21,726)
Unearned discounts and fees and costs
on loans, net (7,105)
----------
Net loans held for investment $1,059,867
==========
12
LOANS HELD FOR SALE:
Mortgage loans:
Permanent loans on:
Residential properties $ 204,069
Less:
Undisbursed loan funds (86,570)
----------
Net loans held for sale $ 117,499
==========
Included in the loans receivable balances at December 31, 2010, are
participating interests in mortgage loans and wholly owned mortgage
loans serviced by other institutions in the amount of $11.2 million.
Loans and participations serviced for others amounted to approximately
$79.2 million at December 31, 2010.
Lending Practices and Underwriting Standards
--------------------------------------------
Residential real estate loans - The Bank offers a range of
residential loan programs, including programs offering loans guaranteed
by the Veterans Administration ("VA") and loans insured by the Federal
Housing Administration ("FHA"). The Bank's residential loans come from
several sources. The loans that the Bank originates are generally a
result of direct solicitations of real estate brokers, builders,
developers, or potential borrowers via the internet. North American
periodically purchases real estate loans from other financial
institutions or mortgage bankers.
The Bank's residential real estate loan underwriters are grouped
into three different levels, based upon each underwriter's experience
and proficiency. Underwriters within each level are authorized to
approve loans up to prescribed dollar amounts. Any loan over $1 million
must also be approved by either the CEO or the EVP/Chief Credit Officer.
Conventional residential real estate loans are underwritten using FNMA's
Desktop Underwriter or FHLMC's Loan Prospector automated underwriting
systems, which analyze credit history, employment and income
information, qualifying ratios, asset reserves, and loan-to-value
ratios. If a loan does not meet the automated underwriting standards,
it is underwritten manually. Full documentation to support each
applicant's credit history, income, and sufficient funds for closing is
required on all loans. An appraisal report, performed in conformity
with the Uniform Standards of Professional Appraisers Practice by an
outside licensed appraiser, is required for all loans. Typically, the
Bank requires borrowers to purchase private mortgage insurance when the
loan-to-value ratio exceeds 80%.
NASB originates Adjustable Rate Mortgages (ARMs), which fully
amortize and typically have initial rates that are fixed for one to
seven years before becoming adjustable. Such loans are underwritten
based on the initial interest rate and the borrower's ability to repay
based on the maximum first adjustment rate. Each underwriting decision
takes into account the type of loan and the borrower's ability to pay at
higher rates. While lifetime rate caps are taken into consideration,
qualifying ratios may not be calculated at this level due to an extended
number of years required to reach the fully-indexed rate. NASB does not
originate any hybrid loans, such as payment option ARMs, nor does the
Bank originate any subprime loans, generally defined as high risk or
loans of substantially impaired quality.
At the time a potential borrower applies for a single family
residential mortgage loan, it is designated as either a portfolio loan,
which is held for investment and carried at amortized cost, or a loan
held-for-sale in the secondary market and carried at fair value. All
the loans on single family property that the Bank holds for sale conform
to secondary market underwriting criteria established by various
institutional investors. All loans originated, whether held for sale or
held for investment, conform to internal underwriting guidelines, which
consider, among other things, a property's value and the borrower's
ability to repay the loan.
Construction and development loans - Construction and land
development loans are made primarily to builders/developers, who
construct properties for resale. The Bank originates both fixed and
variable rate construction loans, and most are due and payable within
one year. In some cases, extensions are permitted if payments are
current and construction has progressed satisfactorily.
13
The Bank's requirements for a construction loan are similar to
those of a mortgage on an existing residence. In addition, the borrower
must submit accurate plans, specifications, and cost projections of the
property to be constructed. All construction and development loans are
manually underwritten using NASB's internal underwriting standards. All
construction and development loans must be approved by the CEO and
either the EVP/ Chief Credit Officer or SVP/Construction Lending. The
bank has adopted internal loan-to-value limits consistent with
regulations, which are 65% for raw land, 75% for land development, and
85% for residential and non-residential construction. An appraisal
report performed in conformity with the Uniform Standards of
Professional Appraisers Practice by an outside licensed appraiser is
required on all loans in excess of $250,000. Generally, the Bank will
commit to an initial term of 12 to 18 months on construction loans, and
an initial term of 24 to 48 months on land acquisition and development
loans, with six month renewals thereafter. Interest rates on
construction loans typically adjust daily and are tied to a
predetermined index. NASB's staff regularly performs inspections of
each property during its construction phase to ensure adequate progress
is achieved before making scheduled loan disbursements.
During the three month period ended December 31, 2010, the Bank
renewed a large number of loans within its construction and land
development portfolio due to slower home and lot sales in the current
economic environment. Such extensions were accounted for as Troubled
Debt Restructurings ("TDRs") if the restructuring was related to the
borrower's financial difficulty, and if the Bank made concessions that
it would not otherwise consider. It has historically been the Bank's
practice to renew construction and development loans for a six-month
term upon maturity. This allows the Bank to more frequently evaluate
the loan, including creditworthiness and current market conditions, and
to modify the terms accordingly. This portfolio consists primarily of
prime-based assets, and in most cases, the conditions for loan renewal
included an increase in the interest rate "floor" in accordance with the
current market conditions. 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). If such concessions were made and the
modification was the result of the borrower's financial difficulty, the
renewal was accounted for as a TDR. The Bank expects to collect all
principal and interest, including accrued interest, during the term of
the extension for loans not accounted for as a TDR. See Note 17,
"Restatement of Previously Issued Financial Statements," for further
information regarding the decision to reclassify the extension of loans
related to two large residential developers as TDRs following our May
2011 OTS exam.
Commercial real estate loans - The Bank purchases and originates
several different types of commercial real estate loans. Permanent
multifamily mortgage loans on properties of 5 to 36 dwelling units have
a 50% risk-weight for risk-based capital requirements if they have an
initial loan-to-value ratio of not more than 80% and if their annual
average occupancy rate exceeds 80%. All other performing commercial
real estate loans have 100% risk-weights.
The Bank's commercial real estate loans are secured primarily by
multi-family and nonresidential properties. Such loans are manually
underwritten using NASB's internal underwriting standards, which
evaluate the sources of repayment, including the ability of income
producing property to generate sufficient cash flow to service the debt,
the capacity of the borrower or guarantors to cover any shortfalls in
operating income, and, as a last resort, the ability to liquidate the
collateral in such a manner as to completely protect the Bank's
investment. All commercial real estate loans must be approved by the
CEO and either the EVP/ Chief Credit Officer or SVP/Commercial Lending.
Typically, loan-to-value ratios do not exceed 80%; however, exceptions
may be made when it is determined that the safety of the loan is not
compromised, and the rational for exceeding this limit is clearly
documented. An appraisal report performed in conformity with the
Uniform Standards of Professional Appraisers Practice by an outside
licensed appraiser is required on all loans in excess of $250,000.
Interest rates on commercial loans may be either fixed or tied to a
predetermined index and adjusted daily.
The Bank typically obtains full personal guarantees from the
primary individuals involved in the transaction. Guarantor's financial
statements and tax returns are reviewed annually to determine their
continuing ability to perform under such guarantees. The Bank typically
pursues repayment from guarantors when the primary source of repayment
is not sufficient to service the debt. However, the Bank may decide not
to pursue a guarantor if, given the guarantor's financial condition, it
is likely that the estimated legal fees would exceed the probable amount
of any recovery. Although the Bank does not typically release
guarantors from their obligation, the Bank may decide to delay the
decision to pursue civil enforcement of a deficiency judgment.
14
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 thousand and $1 million. Financial
information, such as tax returns, is requested annually for all
commercial real estate loans over $500 thousand, which is consistent
with industry practice, and the Bank 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 based on the information available
at the time of their examinations.
The ALLL is determined based upon two components. The first is
made up of specific reserves for loans which have been deemed impaired
in accordance with Generally Accepted Accounting Principles ("GAAP").
The second component is made up of general reserves for loans that are
not impaired. A loan becomes impaired when management believes it will
be unable to collect all principal and interest due according to the
contractual terms of the loan. Once a loan has been deemed impaired,
the impairment must be measured by comparing the recorded investment in
the loan to the present value of the estimated future cash flows
discounted at the loan's effective rate, or to the fair value of the
loan based on the loan's observable market price, or to the fair value
of the collateral if the loan is collateral dependent. The Bank records
a specific allowance equal to the amount of measured impairment.
Loans that are not impaired are evaluated based upon the Bank's
historical loss experience, as well as various subjective factors, to
estimate potential unidentified losses with the various loan portfolios.
These loans are categorized into pools based upon certain
characteristics such as loan type, collateral type and repayment source.
The Bank's loss history is analyzed in terms of loss frequency and loss
severity. Loss frequency represents the likelihood of loans not
repaying in accordance with their original terms, which would result in
the foreclosure and subsequent liquidation of the property. Loss
severity represents any potential loss resulting from the loan's
foreclosure and subsequent liquidation. Management calculates estimated
loss frequency and loss severity ratios for each loan pool. In addition
to analyzing historical losses, the Bank also evaluates the following
subjective factors for each loan pool to estimate future losses: changes
in lending policies and procedures, changes in economic and business
conditions, changes in the nature and volume of the portfolio, changes
in management and other relevant staff, changes in the volume and
severity of past due loans, changes in the quality of the Bank's loan
review system, changes in the value of the underlying collateral for
collateral dependent loans, changes in the level of lending
concentrations, and changes in other external factors such as
competition and legal and regulatory requirements. Historical loss
ratios are adjusted accordingly, based upon the effect that the
subjective factors have in estimated future losses. These adjusted
ratios are applied to the balances of the loan pools to determine the
adequacy of the ALLL each quarter. In addition, the Bank applies ALLLs
for unimpaired loans classified as Special Mention, Substandard and
Doubtful in the amount of 2%, 10%, and 50%, respectively.
15
Based upon the significant increase in foreclosure frequency and
loss severity ratios within the Bank's portfolios and other qualitative
factors related to the current economic conditions, the Bank increased
its general component of allowance for loan losses during the three
month period ended December 31, 2010. The balance of general reserves
in the allowance for loan losses increased to $18.3 million, from $18.1
million at December 31, 2009. During the same time period, the balance
of loans receivable held to maturity decreased from $1,220.7 million at
December 31, 2009, to $1,059.9 million at December 31, 2010. The Bank
does not routinely obtain updated appraisals for their collateral
dependent loans. However, when analyzing the adequacy of its allowance
for loan losses, the Bank considers potential changes in the value of
the underlying collateral for such loans as one of the subjective
factors used to estimate future losses in the various loan pools.
The following table presents the activity in the allowance for
losses on loans for the period ended December 31, 2010. Allowance for
losses on mortgage loans includes specific valuation allowances and
valuation allowances associated with homogenous pools of loans. Dollar
amounts are expressed in thousands.
Balance at October 1, 2010 $ 32,316
Provisions 10,526
Charge-offs (3,801)
Recoveries 33
--------
Balance at December 31, 2010 (restated) $ 39,074
========
The following table presents the balance in the allowance for loan
losses and the recorded investment in loans based on portfolio segment
and impairment method at December 31, 2010. Dollar amounts are
expressed in thousands.
Residential Commercial
Held For Real Construction/
Residential Sale Estate Development Commercial Installment Total
-----------------------------------------------------------------------------------------------------------
Allowance for loan losses (restated):
------------------------------------
Balance at October 1, 2010 $ 4,427 10 6,708 19,018 1,015 1,138 32,316
Provision for loan losses 10 14 103 8,920 1,250 229 10,526
Loans charged off (273) -- (1,372) (1,887) -- (269) (3,801)
Recoveries -- -- -- 33 -- -- 33
-----------------------------------------------------------------------------
Balance at December 31, 2010 $ 4,164 24 5,439 26,084 2,265 1,098 39,074
=============================================================================
Ending Balance of allowance
for loan losses related
to loans:
Individually evaluated
for impairment $ 868 11 1,577 16,651 1,205 472 20,784
=============================================================================
Collectively evaluated
for impairment $ 3,296 13 3,862 9,433 1,060 626 18,290
=============================================================================
Acquired with deteriorated
credit quality $ 127 -- -- -- -- -- 127
=============================================================================
Loans:
-----
Balance at December 31, 2010 $ 338,236 117,499 439,014 181,250 90,483 10,884 1,177,366
=============================================================================
Ending Balance:
Loans individually evaluated
for impairment $ 12,712 11 3,223 95,348 7,994 721 120,009
=============================================================================
Loans collectively evaluated
for impairment $ 325,524 117,488 435,791 85,902 82,489 10,163 1,057,357
=============================================================================
Loans acquired with deteriorated
credit quality $ 1,626 -- -- -- -- -- 1,626
=============================================================================
16
Classified Assets, Delinquencies, and Non-accrual Loans
-------------------------------------------------------
Classified assets - In accordance with the asset classification
system outlined by the OTS, North American's problem assets are
classified with risk ratings of either "substandard," "doubtful," or
"loss." An asset is considered substandard if it is inadequately
protected by the borrower's ability to repay, or the value of
collateral. Substandard assets include those characterized by a
possibility that the institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have the
same weaknesses of those classified as substandard with the added
characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. Assets
classified as loss are considered uncollectible and of such little value
that their existence without establishing a specific loss allowance is
not warranted.
In addition to the risk rating categories for problem assets noted
above, loans may be assigned a risk rating of "pass," "pass-watch," or
"special mention." The pass category includes loans with borrowers
and/or collateral that is of average quality or better. Loans in this
category are considered average risk and satisfactory repayment is
expected. Assets classified as pass-watch are those in which the
borrower has the capacity to perform according to the terms and
repayment is expected. However, one or more elements of uncertainty
exist. Asset 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 December
31, 2010 (restated). Dollar amounts are expressed in thousands.
Residential Commercial
Held For Real Construction/
Residential Sale Estate Development Commercial Installment Total
-----------------------------------------------------------------------------------------------------------
Rating:
------
Pass $ 317,760 117,488 373,345 51,443 59,307 10,104 929,447
Pass - Watch 2,216 -- 27,114 17,710 -- -- 47,040
Special Mention 2,749 -- 24,494 6,364 23,182 258 57,047
Substandard 14,643 -- 12,484 89,082 6,789 50 123,048
Doubtful -- -- -- -- -- -- --
Loss 868 11 1,577 16,651 1,205 472 20,784
-----------------------------------------------------------------------------
Total $ 338,236 117,499 439,014 181,250 90,483 10,884 1,177,366
=============================================================================
The following table presents the Company's loan portfolio aging
analysis as of December 31, 2010. Dollar amounts are expressed in
thousands.
Greater Total Total Total Loans
30-59 Days 60-89 Days Than Past Loans >90 Days &
Past Due Past Due 90 Days Due Current Receivable Accruing
-----------------------------------------------------------------------------------------------------------
Residential $ 3,407 2,383 11,963 17,753 320,483 338,236 --
Residential held for sale 39 26 37 102 117,397 117,499 --
Commercial real estate 744 251 2,972 3,967 435,047 439,014 --
Construction & development -- 183 25,176 25,359 155,891 181,250 --
Commercial 7,903 -- 91 7,994 82,489 90,483 --
Installment 107 69 437 613 10,271 10,884 --
-----------------------------------------------------------------------------
Total $ 12,200 2,912 40,676 55,788 1,121,578 1,177,366 --
=============================================================================
17
When a loan becomes 90 days past due, the Bank stops accruing
interest and establishes a reserve for the interest accrued-to-date.
The following table presents the Company's nonaccrual loans at December
31, 2010. This table does not include purchased impaired loans or
troubled debt restructurings that are performing. Dollar amounts are
expressed in thousands.
Residential $ 11,963
Residential held for sale 37
Commercial real estate 2,972
Construction & development 25,176
Commercial 91
Installment 437
--------
Total $ 40,676
========
A loan becomes impaired when management believes it will be unable
to collect all principal and interest due according to the contractual
terms of the loan. Loans modified in troubled debt restructurings where
concessions have been granted to borrowers experiencing financial
difficulty are also considered impaired. These concessions could
include a reduction in interest rate on the loan, payment extensions,
forgiveness of principal, forbearance or other actions intended to
maximize collection. Once a loan has been deemed impaired, the
impairment must be measured by comparing the recorded investment in the
loan to the present value of the estimated future cash flows discounted
at the loan's effective rate, or to the fair value of the loan based on
the loan's observable market price, or to the fair value of the
collateral if the loan is collateral dependent. The Bank records a
specific loss allowance equal to the amount of measured impairment, if
applicable.
The following table presents impaired loans as of December 31, 2010
(restated). Dollar amounts are expressed in thousands.
Unpaid Average Interest
Recorded Principal Specific Investment in Income
Balance Balance Allowance Impaired Loans Recognized
---------------------------------------------------------------------------------------------------------
Loans without a specific valuation allowance:
--------------------------------------------
Residential $ 6,537 6,617 -- 6,531 28
Residential held for sale -- -- -- -- --
Commercial real estate -- -- -- -- --
Construction & development 31,122 31,131 -- 30,969 361
Commercial -- -- -- -- --
Installment 230 230 -- 231 3
Loans with a specific valuation allowance:
-----------------------------------------
Residential $ 5,307 6,270 868 5,535 37
Residential held for sale -- 11 11 12 --
Commercial real estate 1,646 3,230 1,577 1,696 15
Construction & development 47,576 64,243 16,651 53,892 680
Commercial 6,789 8,070 1,205 7,592 185
Installment 19 491 472 36 4
Total:
-----
Residential $ 11,844 12,887 868 12,066 65
Residential held for sale -- 11 11 12 --
Commercial real estate 1,646 3,230 1,577 1,696 15
Construction & development 78,698 95,374 16,651 84,861 1,041
Commercial 6,789 8,070 1,205 7,592 185
Installment 249 721 472 267 7
18
(8) FORECLOSED ASSETS HELD FOR SALE
Real estate owned and other repossessed property consisted of the
following at December 31, 2010 (restated). Dollar amounts are expressed
in thousands.
Real estate acquired through (or deed
in lieu of) foreclosure $ 36,055
Less: allowance for losses (3,676)
----------
Total $ 32,379
==========
Foreclosed assets held for sale are initially recorded at fair
value as of the date of foreclosure less any estimated selling costs
(the "new basis") and are subsequently carried at the lower of the new
basis or fair value less selling costs on the current measurement date.
When foreclosed assets are acquired any excess of the loan balance over
the new basis of the foreclosed asset is charged to the allowance for
loan losses. Subsequent adjustments for estimated losses are charged to
operations when the fair value declines to an amount less than the
carrying value. Costs and expenses related to major additions and
improvements are capitalized, while maintenance and repairs that do not
improve or extend the lives of the respective assets are expensed.
Applicable gains and losses on the sale of real estate owned are
realized when the asset is disposed of, depending on the adequacy of the
down payment and other requirements.
(9) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the period ended December 31, 2010. Dollar amounts
are expressed in thousands.
Balance at October 1, 2010 $ 263
Additions:
Amortization 9
Reductions:
Impairment loss (1)
--------
Balance at December 31, 2010 $ 271
========
(10) SUBORDINATED DEBENTURES
On December 13, 2006, NASB Financial, Inc. (the "Company"), through
its wholly owned statutory trust, NASB Preferred Trust I (the "Trust"),
issued $25.0 million of Trust Preferred Securities. The Trust used the
proceeds from the offering to purchase a like amount of NASB Financial
Inc.'s subordinated debentures. The debentures, which have a variable
rate of 1.65% over the 3-month LIBOR and a 30-year term, are the sole
assets of the Trust. In exchange for the capital contributions made to
the Trust by NASB Financial, Inc. upon formation, NASB Financial, Inc.
owns all the common securities of the Trust.
In accordance with Financial Accounting Standards Board ASC 810-
10, the Trust qualifies as a special purpose entity that is not required
to be consolidated in the financial statements of the Company. The
$25.0 million Trust Preferred Securities issued by the Trust will remain
on the records of the Trust. The Trust Preferred Securities are
included in Tier I capital for regulatory capital purposes.
The Trust Preferred Securities have a variable interest rate of
1.65% over the 3-month LIBOR, and are mandatorily redeemable upon the
30-year term of the debentures, or upon earlier redemption as provided
in the Indenture. The debentures are callable, in whole or in part,
after five years from the issuance date. The Company did not incur a
placement or annual trustee fee related to the issuance. The securities
are subordinate to all other debt of the Company and interest may be
deferred up to five years.
19
(11) INCOME TAXES
The Company's federal and state income tax returns for fiscal years
2007 through 2010 remain subject to examination by the Internal Revenue
Service and various state jurisdictions, based on the statute of
limitations.
(12) SEGMENT INFORMATION
The Company has identified two principal operating segments for
purposes of financial reporting: Banking and Mortgage Banking. These
segments were determined based on the Company's internal financial
accounting and reporting processes and are consistent with the
information that is used to make operating decisions and to assess the
Company's performance by the Company's key decision makers.
The Mortgage Banking segment originates mortgage loans for sale to
investors and for the portfolio of the Banking segment. The Banking
segment provides a full range of banking services through the Bank's
branch network, exclusive of mortgage loan originations. A portion of
the income presented in the Mortgage Banking segment is derived from
sales of loans to the Banking segment based on a transfer pricing
methodology that is designed to approximate economic reality. The Other
and Eliminations segment includes financial information from the parent
company plus inter-segment eliminations.
The following table presents financial information from the
Company's operating segments for the periods indicated. Dollar amounts
are expressed in thousands.
Three months ended Mortgage Other and
December 31, 2010 (restated) Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 13,157 -- (117) 13,040
Provision for loan losses 10,526 -- -- 10,526
Other income (1,305) 10,660 (269) 9,086
General and administrative
expenses 5,517 11,132 (114) 16,535
Income tax expense (benefit) (1,613) (182) (105) (1,900)
---------------------------------------------------
Net loss $ (2,578) (290) (167) (3,035)
===================================================
Three months ended Mortgage Other and
December 31, 2009 Banking Banking Eliminations Consolidated
-------------------------------------------------------------------------------
Net interest income $ 13,922 -- (117) 13,805
Provision for loan losses 9,000 -- -- 9,000
Other income 2,237 10,436 (2,473) 10,200
General and administrative
expenses 6,274 7,585 (202) 13,657
Income tax expense (benefit) (159) 1,098 (920) 19
---------------------------------------------------
Net income $ 1,044 1,753 (1,468) 1,329
===================================================
(13) DERIVATIVE INSTRUMENTS
The Company has commitments outstanding to extend credit that have
not closed prior to the end of the period. As the Company enters into
commitments to originate loans, it also enters into commitments to sell
the loans in the secondary market. Such commitments to originate loans
held for sale are considered derivative instruments in accordance with
GAAP, which requires the Company to recognize all derivative instruments
in the balance sheet and to measure those instruments at fair value.
The Company recorded a decrease in other assets of $2.0 million, an
increase in other liabilities of $1.3 million, and a decrease in other
income of $3.3 million for the three month period ended December 31,
2010.
20
Additionally, the Company has commitments to sell loans that have
closed prior to the end of the period. Due to the mark to market
adjustment on commitments to sell loans held for sale, the Company
recorded an increase in other assets of $3.5 million, a decrease in
other liabilities of $1.1 million, and an increase in other income of
$4.6 million during the three month period ended December 31, 2010.
The balance of derivative instruments related to commitments to
originate and sell loans at December 31, 2010, is disclosed in Footnote
14, Fair Value Measurements.
(14) FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would likely be received to
sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date. GAAP
identifies three primary measurement techniques: the market approach,
the income approach, and the cost approach. The market approach uses
prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities. The income
approach uses valuations or techniques to convert future amounts, such
as cash flows or earnings, to a single present amount. The cost
approach is based on the amount that currently would be required to
replace the service capability of an asset.
GAAP establishes a fair value hierarchy and prioritizes the inputs
to valuation techniques used to measure fair value into three broad
levels. The fair value hierarchy gives the highest priority to
observable inputs such as quoted prices in active markets for identical
assets or liabilities (Level 1) and the lowest priority to unobservable
inputs (Level 3). The maximization of observable inputs and the
minimization of the use of unobservable inputs are required.
Classification within the fair value hierarchy is based upon the
objectivity of the inputs that are significant to the valuation of an
asset or liability as of the measurement date. The three levels within
the fair value hierarchy are characterized as follows:
- Level 1 - Quoted prices in active markets for identical assets
or liabilities that the Company has the ability to access at the
measurement date.
- Level 2 - Inputs other than quoted prices included with Level 1
that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include: quoted prices for similar
assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities in markets that are not
active; inputs other than quoted prices that are observable for the
asset or liability; and inputs that are derived principally from,
or corroborated by, observable market data by correlation or other
means.
- Level 3 - Unobservable inputs for the asset or liability for which
there is little, if any, market activity for the asset or liability
at the measurement date. Unobservable inputs reflect the Company's
own assumptions about what market participants would use to price
the asset or liability. These inputs may include internally
developed pricing models, discounted cash flow methodologies, as
well as instruments for which the fair value determination requires
significant management judgment.
The Company measures certain financial assets and liabilities at
fair value in accordance with GAAP. These measurements involve various
valuation techniques and assume that the transactions would occur
between market participants in the most advantageous market for the
Company.
The following is a summary of valuation techniques utilized by the
Company for its significant financial assets and liabilities measured at
fair value on a recurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets and
liabilities pursuant to the valuation hierarchy:
Available for sale securities
Securities available for sale consist of corporate debt, trust
preferred and municipal securities and are valued using quoted market
prices in an active market. This measurement is classified as Level 1
within the hierarchy.
Mortgage-backed available for sale securities are valued by using
broker dealer quotes for similar assets in markets that are not active.
Such quotes are based on actual transactions for similar assets.
Although the Company does not validate these quotes, they are reviewed
by management for reasonableness in relation to current market
conditions. Additionally, they are obtained from experienced brokers
who have an established relationship with the Bank and deal regularly
with these types of securities. The Company does not make any
adjustment to the quotes received from broker dealers. These
measurements are classified as Level 2.
21
Loans held for sale
Loans held for sale are valued using quoted market prices for loans
with similar characteristics. This measurement is classified as Level 2
within the hierarchy.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active market with
readily observable market prices. Therefore, fair value is assessed
using a valuation model that calculates the discounted cash flow using
assumptions such as estimates of prepayment speeds, market discount
rates, servicing fee income, and cost of servicing. These measurements
are classified as Level 3. Mortgage servicing rights are initially
recorded at amortized cost and are amortized over the period of net
servicing income. They are evaluated for impairment monthly, and
valuation adjustments are recorded as necessary to reduce the carrying
value to fair value.
Commitments to Originate Loans and Forward Sales Commitments
Commitments to originate loans and forward sales commitments are
valued using a valuation model which considers differences between
current market interest rates and committed rates. The model also
includes assumptions which estimate fall-out percentages for commitments
to originate loans. These measurements use significant unobservable
inputs and are classified as Level 3 within the hierarchy.
The following table presents the fair value measurements of assets
recognized in the accompanying balance sheets measured at fair value on
a recurring basis and the level within the fair value hierarchy in which
the measurements fall at December 31, 2010 (in thousands):
Quoted Prices in Significant Significant
Active Markets for Other Unobservable
Fair Identical Assets Observable Inputs
Value (Level 1) Inputs (Level 2) (Level 3)
-------------------------------------------------------
Assets:
Securities, available for sale
Corporate debt securities $ 8,634 8,634 -- --
Trust preferred securities 15,752 15,752 -- --
Municipal securities 23 23 -- --
Mortgage-backed securities,
available for sale
Pass through certificates
guaranteed by GNMA -
fixed rate 96 -- 96 --
Pass through certificates
guaranteed by FNMA -
adjustable rate 185 -- 185 --
FHLMC participation certificates:
Fixed rate 366 -- 366 --
Adjustable rate 173 -- 173 --
Loans held for sale 117,499 -- 117,499 --
Mortgage servicing rights 271 -- -- 271
Commitments to originate loans 181 -- -- 181
Forward sales commitments 4,441 -- -- 4,441
-------------------------------------------------------
Total assets $ 147,621 24,409 118,319 4,893
=======================================================
Liabilities:
Commitments to originate
loans $ 1,916 -- -- 1,916
Forward sales commitments 16 -- -- 16
-------------------------------------------------------
Total liabilities $ 1,932 -- -- 1,932
=======================================================
22
The following table presents the fair value measurements of assets
recognized in the accompanying balance sheets measured at fair value on
a recurring basis and the level within the fair value hierarchy in which
the measurements fall at September 30, 2010 (in thousands):
Quoted Prices in Significant Significant
Active Markets for Other Unobservable
Fair Identical Assets Observable Inputs
Value (Level 1) Inputs (Level 2) (Level 3)
-------------------------------------------------------
Assets:
Securities, available for sale
Corporate debt securities $ 17,723 17,723 -- --
Trust preferred securities 10,346 10,346
Municipal securities 23 23
Mortgage-backed securities,
available for sale
Pass through certificates
guaranteed by GNMA -
fixed rate 101 -- 101 --
Pass through certificates
guaranteed by FNMA -
adjustable rate 193 -- 193 --
FHLMC participation certificates:
Fixed rate 437 -- 437 --
Adjustable rate 180 -- 180 --
Loans held for sale 179,845 -- 179,845 --
Mortgage servicing rights 263 -- -- 263
Commitments to originate loans 2,177 -- -- 2,177
Forward sales commitments 902 -- -- 902
-------------------------------------------------------
Total assets $ 212,190 28,092 180,756 3,342
=======================================================
Liabilities:
Commitments to originate
loans $ 630 -- -- 630
Forward sales commitments 1,142 -- -- 1,142
-------------------------------------------------------
Total liabilities $ 1,772 -- -- 1,772
=======================================================
The following tables present a reconciliation of the beginning and
ending balances of recurring fair value measurements recognized in the
accompanying balance sheet using significant unobservable (Level 3)
inputs for the three month periods ended December 31, 2010 and 2009 (in
thousands):
Mortgage Commitments
Servicing to Originate Forward Sales
Rights Loans Commitments
---------------------------------------------
Balance at October 1, 2010 $ 263 1,547 (240)
Total realized and unrealized
gains (losses):
Included in net income 8 (3,282) 4,665
---------------------------------------------
Balance at December 31, 2010 $ 271 (1,735) 4,425
=============================================
Mortgage Commitments
Servicing to Originate Forward Sales
Rights Loans Commitments
---------------------------------------------
Balance at October 1, 2009 $ 351 1,023 (378)
Total realized and unrealized
gains (losses):
Included in net income (36) (1,695) 2,010
Issuances 5 -- --
---------------------------------------------
Balance at December 31, 2009 $ 320 (672) 1,632
=============================================
23
Realized and unrealized gains and losses noted in the table above
and included in net income for the three month period ended December 31,
2010, are reported in the consolidated statements of income as follows
(in thousands):
Impairment
Loan Loss on
Servicing Mortgage Other
Fees Servicing Rights Income
----------------------------------------
Total gains (losses) $ 9 (1) 1,384
========================================
Changes in unrealized gains
(losses) relating to assets
still held at the balance
sheet date $ -- -- --
========================================
The following is a summary of valuation techniques utilized by the
Company for its significant financial assets and liabilities measured at
fair value on a nonrecurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets and
liabilities pursuant to the valuation hierarchy:
Impaired loans
Loans for which it is probable that the Company will not collect
principal and interest due according to contractual terms are measured
for impairment. If the impaired loan is identified as collateral
dependent, then the fair value method of measuring the amount of
impairment is utilized. This method requires obtaining a current
independent appraisal of the collateral and other internal assessments
of value. Impaired loans are classified within Level 3 of the fair
value hierarchy.
The carrying value of impaired loans that were re-measured during
the three month period ended December 31, 2010, was $78.6 million.
Foreclosed Assets Held For Sale
Foreclosed assets held for sale are initially recorded at fair
value as of the date of foreclosure less any estimated selling costs
(the "new basis") and are subsequently carried at the lower of the new
basis or fair value less selling costs on the current measurement date.
Fair value is estimated through current appraisals, broker price
opinions, or listing prices. Foreclosed assets held for sale are
classified within Level 3 of the fair value hierarchy.
The carrying value of foreclosed assets held for sale was $32.4
million at December 31, 2010. Charge-offs and increases in specific
reserves related to foreclosed assets held for sale that were re-
measured during the three month period ended December 31, 2010, totaled
$1.7 million.
Investment in LLCs
Investments in LLCs are accounted for using the equity method of
accounting. These investments are analyzed for impairment in accordance
with ASC 323-10-35-32, which states that an other than temporary decline
in value of an equity method investment should be recognized. The
Company utilizes a multi-faceted approach to measure the potential
impairment. The internal model utilizes the following valuation
methods: 1) liquidation or appraised values determined by an independent
third party appraisal; 2) an on-going business, or discounted cash flows
method wherein the cash flows are derived from the sale of fully-
developed lots, the development and sale of partially-developed lots,
the operation of the homeowner's association, and the value of raw land
obtained from an independent third party appraiser; and 3) an on-going
business method, which utilizes the same inputs as method 2, but
presumes that cash flows will first be generated from the sale of raw
ground and then from the sale of fully-developed and partially-developed
lots and the operation of the homeowner's association. The significant
inputs include raw land values, absorption rates of lot sales, and a
market discount rate. Management believes this multi-faceted approach
is reasonable given the highly subjective nature of the assumptions and
the differences in valuation techniques that are utilized within each
approach (e.g., order of distribution of assets upon potential
liquidation). Investment in LLCs is classified within Level 3 of the
fair value hierarchy.
The carrying value of the Company's investment in LLCs was $17.8
million at December 31, 2010.
24
The following methods were used to estimate the fair value of all
other financial instruments recognized in the accompanying balance
sheets at amounts other than fair value:
Cash and cash equivalents
The carrying amount reported in the consolidated balance sheets is a
reasonable estimate of fair value.
Securities and mortgage-backed securities held to maturity
Securities that trade in an active market are valued using quoted
market prices. Securities that do not trade in an active market are
valued using quotes from broker-dealers that reflect estimated offer
prices.
Stock in Federal Home Loan Bank ("FHLB")
The carrying value of stock in Federal Home Loan Bank approximates
its fair value.
Loans receivable held for investment
Fair values are computed for each loan category using market spreads
to treasury securities for similar existing loans in the portfolio
and management's estimates of prepayments.
Customer and brokered deposit accounts
The estimated fair values of demand deposits and savings accounts are
equal to the amount payable on demand at the reporting date. Fair
values of certificates of deposit are computed at fixed spreads to
treasury securities with similar maturities.
Advances from FHLB
The estimated fair values of advances from FHLB are determined by
discounting the future cash flows of existing advances using rates
currently available for new advances with similar terms and remaining
maturities.
Subordinated debentures
Fair values are based on quotes from broker-dealers that reflect
estimated offer prices.
Commitments to originate, purchase and sell loans
The estimated fair value of commitments to originate, purchase, or
sell loans is based on the difference between current levels of
interest rates and the committed rates.
The following table presents the carrying values and fair values of
the Company's financial instruments. Dollar amounts are expressed in
thousands.
December 31, 2010 September 30, 2010
(Restated)
-------------------------- -------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------------------------- -------------------------
Financial Assets:
Cash and cash equivalents $ 10,303 10,303 14,033 14,033
Securities held to maturity 1,076 1,475 1,232 1,561
Stock in Federal Home Loan Bank 13,203 13,203 15,873 15,873
Mortgage-backed securities held
to maturity 41,186 41,116 46,276 46,300
Loans receivable held for
investment 1,020,793 1,030,988 1,041,041 1,043,886
Financial Liabilities:
Customer deposit accounts $ 881,724 886,699 866,559 869,941
Brokered deposit accounts 16,922 16,927 66,894 66,797
Advances from FHLB 228,000 231,174 286,000 288,061
Subordinated debentures 25,774 10,000 25,774 10,310
25
December 31, 2010 September 30, 2010
-------------------------- -------------------------
Contract or Estimated Contract or Estimated
notional unrealized notional unrealized
amount gain amount gain (loss)
-------------------------- -------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 10,112 25 6,127 (5)
Lending commitments - floating
rate 937 12 417 6
Commitments to sell loans -- -- -- --
The fair value estimates presented are based on pertinent
information available to management as of December 31, 2010, and
September 30, 2010. Although management is not aware of any factors
that would significantly affect the estimated fair values, such amounts
have not been comprehensively revalued for purposes of these
consolidated financial statements since that date. Therefore, current
estimates of fair value may differ significantly from the amounts
presented above.
(15) INVESTMENT IN LLCs
The Company is a partner in two limited liability companies,
Central Platte Holdings LLC ("Central Platte") and NBH, LLC ("NBH"),
which were formed for the purpose of purchasing and developing vacant
land in Platte County, Missouri. These investments are accounted for
using the equity method of accounting.
The Company's investment in Central Platte consists of a 50%
ownership interest in an entity that develops land for residential real
estate sales. Sales of lots had not met previous expectations and, as a
result, the Company evaluated its investment for impairment, in
accordance with ASC 323-10-35-32, which provides guidance related to a
loss in value of an equity method investment. The Company utilizes a
multi-faceted approach to measure the potential impairment. The
internal model utilizes the following valuation methods: 1) liquidation
or appraised values determined by an independent third party appraisal;
2) an on-going business, or discounted cash flows method wherein the
cash flows are derived from the sale of fully-developed lots, the
development and sale of partially-developed lots, the operation of the
homeowner's association, and the value of raw land obtained from an
independent third party appraiser; and 3) another on-going business
method, which utilizes the same inputs as method 2, but presumes that
cash flows will first be generated from the sale of raw ground and then
from the sale of fully-developed and partially-developed lots and the
operation of the homeowner's association. The internal model also
includes an on-going business method wherein the cash flows are derived
from the sale of fully-developed lots, the development and sale of
partially-developed lots, the operation of the homeowner's association,
and the development and sale of lots from the property that is currently
raw land. However, management does not feel the results from this
method provide a reliable indication of value because the time to
"build-out" the development exceeds 18 years. Because of this
unreliability the results from this method are given a zero weighting in
the final impairment analysis. The significant inputs include raw land
values, absorption rates of lot sales, and a market discount rate.
Management believes this multi-faceted approach is reasonable given the
highly subjective nature of the assumptions and the differences in
valuation techniques that are utilized within each approach (e.g., order
of distribution of assets upon potential liquidation). It is
management's opinion that no one valuation method within the model is
preferable to the other and that no one method is more likely to occur
than the other. Therefore, the final estimate of value is determined by
assigning an equal weight to the values derived from each of the first
three methods described above.
As a result of this analysis, the Company determined that its
investment in Central Platte was materially impaired and recorded an
impairment charge of $2.0 million ($1.2 million, net of tax) during the
year ended September 30, 2010.
The following table displays the results derived from the Company's
internal valuation model and the carrying value of its investment in
Central Platte at December 31, 2010. Dollar amounts are expressed in
thousands.
Method 1 $ 17,064
Method 2 16,493
Method 3 18,621
Average of methods 1, 2, and 3 $ 17,393
========
Carrying value of investment in
Central Platte Holdings, LLC $ 16,405
========
26
The Company's investment in NBH consists of a 50% ownership
interest in an entity that holds raw land, which is currently zoned as
agricultural. The general managers intend to rezone this property for
commercial and/or residential development. The raw land was purchased
in 2002. The Company accounts for its investment in NBH under the
equity method. Due to the overall economic conditions surrounding real
estate, the Company evaluated its investment for impairment in
accordance with ASC 323-10-35-32, which provides guidance related to a
loss in value of an equity method investment. Potential impairment was
measured based on liquidation or appraised values determined by an
independent third party appraisal. As a result of this analysis, the
Company determined that its investment in NBH was materially impaired
and recorded an impairment charge of $1.1 million ($693,000, net of tax)
during the year ended September 30, 2010. No events have occurred
during the three months ended December 31, 2010, that would indicate any
additional impairment of the Company's investment in NBH. The carrying
value of the Company's investment in NBH was $1.4 million at December
31, 2010.
(16) SUPERVISORY AGREEMENT
On April 30, 2010, the Board of Directors of North American Savings
Bank, F.S.B. (the "Bank"), a wholly owned subsidiary of the Company,
entered into a Supervisory Agreement with the Office of Thrift
Supervision ("OTS"), the Bank's primary regulator, effective as of that
date. The agreement requires, among other things, that the Bank revise
its policies regarding internal asset review, obtain an independent
assessment of its allowance for loan and lease losses methodology and
conduct an independent third-party review of a portion of its commercial
and construction loan portfolios. The agreement also directs the Bank
to provide a plan to reduce its classified assets and its reliance on
brokered deposits, and restricts the payment of dividends or other
capital distributions by the Bank during the period of the agreement.
The agreement did not direct the Bank to raise capital, make management
or board changes, revise any loan policies or restrict lending growth.
The Bank received written communication from OTS that, notwithstanding
the existence of the Supervisory Agreement, the Bank will not be deemed
to be in "troubled condition."
On April 30, 2010, the Company's Board of Directors entered into an
agreement with the Office of Thrift Supervision ("OTS"), the Company's
primary regulator, effective as of that date. The agreement restricts
the payment of dividends or other capital distributions by the Company
and restricts the Company's ability to incur, issue or renew any debt
during the period of the agreement.
As of December 31, 2010, the Company and the subsidiary Bank are in
compliance with these regulatory agreements.
(17) RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
During April 2011, the OTS performed a regulatory examination of
the Company and its wholly-owned bank subsidiary, North American Savings
Bank, F.S.B. During its examination, the OTS reviewed whether the
circumstances surrounding the residential development loans of two large
borrowing relationships would qualify as Troubled Debt Restructurings
("TDRs"). In question was whether the circumstances regarding loan
extension constituted a concession and whether the borrowers had
demonstrated financial difficulty within the scope of existing guidance
for TDRs. The Company had not originally classified these loans as TDRs
as of December 31, 2010, because, at that time, based on the financial
positions of the respective guarantors, including their liquid assets,
unencumbered real estate, and projected cash flows, management believed
these borrowers lacked a level of financial difficulty necessary to
classify the loans as TDRs. Following multiple discussions with the
OTS examiners on-site and the OTS regional Accountant for the Western
Region, in May 2011, the OTS informed the Company of its final
determination to deem the loans from these borrowing relationships as
TDRs and the Company subsequently agreed. The reclassification of these
loans to TDR as of December 31, 2010, resulted in an additional $4.7
million charge, pre-tax, to the provision for loan losses related to the
measured impairment of the aforementioned loans.
27
In addition to the loans noted above, the restatement for December
31, 2010, includes the following items:
- The OTS instructed, and the Company agreed, to record a $1.1 million
charge, pre-tax, to the provision for loan losses related to the
measured impairment of five loans secured by five individual pieces of
ground zoned for commercial development during the quarter ended
December 31, 2010. The loans were modified in July 2010 to extend their
maturity dates to continue negotiations for a possible sale of a
significant portion of the property. The modification was considered a
TDR, and, therefore, the loans were deemed impaired. The Company
considered the loans collateral dependent and measured impairment based
upon the estimated fair value of the collateral, less costs to sell, in
accordance with ASC 310-10-35. The Company obtained an updated third-
party appraisal, which resulted in a $130,000 measured impairment.
However, the OTS believed that it was appropriate to use the bulk
discounted appraised values at December 31, 2010 when calculating the
measured impairment. The Company agreed with this conclusion, primarily
due to the fact that no other sales had materialized since the July 2010
restructuring and the likelihood of orderly disposition had diminished.
- The Company recorded an additional $270,000 charge, pre-tax, to the
provision for loan losses related to the impairment of six residential
development loans, which are secured by collateral within the same
subdivision. The loans were renewed for six months in August 2010. The
Company evaluated these loans for impairment under ASC 310-10-35, deemed
them to be impaired and recorded an impairment of $3.7 million. In
October 2010, the Company funded a new development loan, which was
secured by 5.3 acres that were included in a 153.5 acre piece of ground
that secured the development's original land loan. When management
calculated the measured impairment at December 31, 2010, the 5.3 acres
was not excluded from the value of the original land loan. The OTS also
informed the Company that committed (vs. disbursed) balances should have
been used for lots in process the process of being developed when
performing the impairment calculation, since the Company was using "as
developed" fair values to measure impairment. The Company agreed to
correct these oversights in the December 2010 quarter.
- The Company recorded a $99,000 charge, pre-tax, to the provision for
loan losses related to the impairment of one land loan, which is secured
by a subordinate lien on two pieces of developed ground. The Company
evaluated this loan for impairment under ASC 310-10-35, deemed it to be
impaired and recorded an impairment of $301,000. In February 2011, the
Company determined that, due to the minimal equity available in the
collateral and the subordinate position of the Bank's lien, the
probability of collection through foreclosure and liquidation of the
property was minimal. Accordingly, the carrying value of the loan was
reduced to zero. The OTS instructed, and the Company agreed, to record
this additional impairment as of December 31, 2010.
- The Company recorded an additional $422,000 charge, pre-tax, to the
provision for loan losses related to twelve individual single family and
consumer loans that the OTS deemed impaired at December 2010.
Historically, the Company has not evaluated single family loans for
impairment, unless they were deemed TDRs, due to immateriality. In
accordance with OTS guidance, the Company has agreed to change its
policy going forward and evaluate all single family loans over 180 days
past due for impairment. The Company will obtain updated collateral
values in order to calculate the impairment for such loans, which will
be deemed collateral dependent.
- During the OTS examination, the Company became aware that certain
real estate, which was acquired through foreclosure of a participation
loan, had declined in value. A December 2010 appraisal that reflected
the property's devaluation was in possession of the lead lender, but had
not been provided to the Company until after the date of Original
Filing. The OTS determined that, as of December 31, 2010, the Company
should record an additional $1.2 million charge, pre-tax, to the
provision for loss on real estate owned, and the Company subsequently
agreed.
- Two other foreclosed real estate properties had declined in value by
a total of approximately $450,000. The carrying value of the first
property was supported by an appraisal for $3.6 million performed in
April 2010. However, the Company's listed sale price for the property
was $3.3 million value at December 31, 2010. As a result, the Company
determined that it was appropriate to reduce its carrying value of the
property by $210,000, based upon the list price, in the December 2010
quarter. The second property consists of twenty undeveloped lots within
a development of triplexes. The Company received an updated appraisal
in October 2010, but had misinterpreted the appraised value to be "per
door" vs. "per unit." This error was discovered in January 2011 and the
total carrying value of the properties was decreased by $240,000.
However, the OTS instructed the Company to restate the carrying value of
the property in the December 2010 quarter, based upon the date of the
updated appraisal.
28
As a result of the restatement, the following financial statement
lines were adjusted (dollars in thousands, except per share data):
Previously Effect of
Restated Reported Change
-----------------------------------------
Condensed Consolidated Balance Sheet
------------------------------------
At December 31, 2010:
Allowance for loan losses $ (39,074) (32,498) (6,576)
Total loans receivable, net 1,138,292 1,144,868 (6,576)
Foreclosed assets held for sale, net 32,379 34,009 (1,630)
Deferred income tax asset, net 16,381 13,222 3,159
Total assets 1,332,129 1,337,176 (5,047)
Retained earnings 184,639 189,686 (5,047)
Total stockholders' equity 164,762 169,809 (5,047)
Total liabilities and stockholders' equity 1,332,129 1,337,176 (5,047)
Condensed Consolidated Statement of Operations
----------------------------------------------
Three months ended December 31, 2010:
Provision for loan losses $ 10,526 3,950 6,576
Net interest income after provision for loan losses 2,514 9,090 (6,576)
Provision for loss on real estate owned (2,043) (413) (1,630)
Total other income 9,086 10,716 (1,630)
Income (loss) before income tax expense (benefit) (4,935) 3,271 (8,206)
Income tax expense (benefit) (1,900) 1,259 (3,159)
Net income (loss) (3,035) 2,012 (5,047)
Basic earnings (loss) per share (0.39) 0.26 (0.65)
Diluted earnings (loss) per share (0.39) 0.26 (0.65)
Condensed Consolidated Statement of Stockholders' Equity
--------------------------------------------------------
Three months ended December 31, 2010:
Net income (loss) $ (3,035) 2,012 (5,047)
Total comprehensive income (loss) (3,013) 2,034 (5,047)
At December 31, 2010:
Retained earnings 184,639 189,686 (5,047)
Total stockholders' equity 164,762 169,809 (5,047)
Condensed Consolidated Statement of Cash Flows
----------------------------------------------
Three months ended December 31, 2010:
Net income (loss) $ (3,035) 2,012 (5,047)
Provision for loan losses 10,526 3,950 6,576
Provision for loss on real estate owned 2,043 413 1,630
Prepaid and accrued expenses, other liabilities and income
taxes payable (800) 2,359 (3,159)
29
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The principal business of the Company is to provide banking
services through the Bank. Specifically, the Bank obtains savings and
checking deposits from the public, then uses those funds to originate
and purchase real estate loans and other loans. The Bank also purchases
mortgage-backed securities ("MBS") and other investment securities from
time to time as conditions warrant. In addition to customer deposits,
the Bank obtains funds from the sale of loans held-for-sale, the sale of
securities available-for-sale, repayments of existing mortgage assets,
advances from the Federal Home Loan Bank ("FHLB"), and the purchase of
brokered deposit accounts. The Bank's primary sources of income are
interest on loans, MBS, and investment securities plus customer service
fees and income from mortgage banking activities. Expenses consist
primarily of interest payments on customer deposits and other borrowings
and general and administrative costs.
The Bank is regulated by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"), and is subject
to periodic examination by both entities. The Bank is also subject to
the regulations of the Board of Governors of the Federal Reserve System
("FRB"), which establishes rules regarding reserves that must be
maintained against customer deposits.
FINANCIAL CONDITION
ASSETS
The Company's total assets as of December 31, 2010, were $1,332.1
million, a decrease of $102.1 million from September 30, 2010, the prior
fiscal year end.
Loans receivable held for investment were $1,059.9 million as of
December 31, 2010, a decrease of $13.5 million during the three month
period. The weighted average rate on such loans as of December 31,
2010, was 6.23%, a decrease from 6.35% as of December 31, 2009.
Loans receivable held for sale as of December 31, 2010, were $117.5
million, a decrease of $62.3 million from September 30, 2010. This
portfolio consists of residential mortgage loans originated by the
Bank's mortgage banking division that will be sold with servicing
released. The Company has elected to carry loans held for sale at fair
value, as permitted under GAAP.
As the Bank originates mortgage loans each month, management
evaluates the existing market conditions to determine which loans will
be held in the Bank's portfolio and which loans will be sold in the
secondary market. Loans sold in the secondary market can be sold with
servicing released or converted into MBS and sold with the loan
servicing retained by the Bank. At the time of each loan commitment, a
decision is made to either hold the loan for investment, hold it for
sale with servicing retained, or hold it for sale with servicing
released. Management monitors market conditions to decide whether loans
should be held in portfolio or sold and if sold, which method of sale is
appropriate. During the three months ended December 31, 2010, the Bank
originated and purchased $649.0 million in mortgage loans held for sale,
$62.2 million in mortgage loans held for investment, and $887,000 in
other loans. This total of $712.1 million in loans compares to $467.4
million in loans originated and purchased during the three months ended
December 31, 2009.
The Bank classifies problem assets as "substandard," "doubtful" or
"loss." Substandard assets have one or more defined weaknesses, and it
is possible that the Bank will sustain some loss unless the deficiencies
are corrected. Doubtful assets have the same defects as substandard
assets plus other weaknesses that make collection or full liquidation
improbable. Assets classified as loss consist of the reserved portion
of loans classified as impaired pursuant to ASC 310-10-35.
30
The following table summarizes the Bank's classified assets as
reported to the OTS, plus any classified assets of the holding company.
Dollar amounts are expressed in thousands.
12/31/10 9/30/10 12/31/09
-------------------------------------
Asset Classification:
Substandard $ 155,426 142,085 122,175
Doubtful -- -- --
Loss* 24,461 16,965 10,977
-------------------------------------
179,887 159,050 133,152
Allowance for losses on
loans and real estate
owned (42,751) (34,643) (29,154)
-------------------------------------
$ 137,136 124,407 103,998
=====================================
*Assets classified as loss represent the amount of measured impairment
related to loans and foreclosed assets held for sale that have been
deemed impaired. The Bank records a specific loss allowance equal to
the amount of measured impairment. These specific allowances are
included in the balance of the allowance for losses on loans and real
estate owned above.
The following table summarizes non-performing assets, troubled debt
restructurings, and real estate acquired through foreclosure, net of
specific loss allowances. Dollar amounts are expressed in thousands.
12/31/10 9/30/10 12/31/09
----------------------------------------
Total Assets $ 1,332,129 1,434,196 1,527,170
========================================
Non-accrual loans $ 12,482 29,368 24,237
Troubled debt
restructurings 59,833 23,730 24,609
Net real estate and
other assets acquired
through foreclosure 32,379 38,362 13,860
----------------------------------------
Total $ 104,694 91,460 62,706
========================================
Percent of total assets 7.86% 6.38% 4.11%
========================================
Management records a provision for loan losses in amounts
sufficient to cover current net charge-offs and an estimate of probable
losses based on an analysis of risks that management believes to be
inherent in the loan portfolio. The Allowance for Loan and Lease Losses
("ALLL") recognizes the inherent risks associated with lending
activities, but, unlike specific allowances, have not been allocated to
particular problem assets but to a homogenous pool of loans. Management
believes that the specific loss allowances and ALLL are adequate. While
management uses available information to determine these allowances,
future allowances may be necessary because of changes in economic
conditions. Also, regulatory agencies (OTS and FDIC) review the Bank's
allowance for losses as part of their examinations, and they may require
the Bank to recognize additional loss provisions based on the
information available at the time of their examinations.
Investment securities were $25.5 million as of December 31, 2010, a
decrease of $3.8 million from September 30, 2010. During the three
month period, the Bank purchased securities of $10.2 million and sold
$13.9 million of securities available for sale. The Company realized
gross gains of $280,000 and no gross losses on the sale of securities
available for sale during the period.
Mortgage-backed securities were $42.0 million as of December 31,
2010, a decrease of $5.2 million from the prior year end. There were no
sales of mortgage-backed securities available for sale during the three
month periods ended December 31, 2010. The average yield on the
mortgage-backed securities portfolio was 4.90% at December 31, 2010, a
slight increase from 4.88% at September 30, 2010.
31
The Company's investment in LLCs, which is accounted for using the
equity method, was $17.8 million at December 31, 2010, a decrease of
$27,000 from September 30, 2010. During the fiscal year ended September
30, 2010, the Company recorded a $2.0 million impairment charge related
to its investment in Central Platte Holdings, LLC ("Central Platte") and
a $1.1 million impairment charge related to its investment in NBH, LLC
("NBH"). There have been no events subsequent to September 30, 2010,
that would indicate an additional impairment in value of the Company's
investments in Central Platte and NBH, which were $16.4 million and $1.4
million at December 31, 2010, respectively.
LIABILITIES AND EQUITY
Customer and brokered deposit accounts decreased $34.8 million
during the three months ended December 31, 2010. Specifically, customer
deposits increased $15.2 million during the period, primarily due to an
increase in retail certificates of deposits resulting from promotions
during the period. Brokered deposits decreased $50.0 million during the
period, as a result of the Company's effort to reduce its reliance on
this funding source. The weighted average rate on customer and brokered
deposits as of December 31, 2010, was 1.83%, a decrease from 2.04% as of
December 31, 2009.
Advances from the FHLB were $228.0 million as of December 31, 2010,
a decrease of $58.0 million from September 30, 2010. During the three
month period, the Bank borrowed $17.0 million of new advances and repaid
$75.0 million. Management regularly uses FHLB advances as an alternate
funding source to provide operating liquidity and to fund the
origination and purchase of mortgage loans.
Subordinated debentures were $25.8 million as of December 31, 2010.
Such debentures resulted from the issuance of Trust Preferred Securities
through the Company's wholly owned statutory trust, NASB Preferred Trust
I. The Trust used the proceeds from the offering to purchase a like
amount of the Company's subordinated debentures. The debentures, which
have a variable rate of 1.65% over the 3-month LIBOR and a 30-year term,
are the sole assets of the Trust.
Escrows were $5.0 million as of December 31, 2010, a decrease of
$6.1 million from September 30, 2010. This decrease is due to amounts
paid for borrowers' taxes during the fourth calendar quarter of 2010.
Total stockholders' equity as of December 31, 2010, was $164.8
million (12.4% of total assets). This compares to $167.8 million (11.7%
of total assets) at September 30, 2010. On a per share basis,
stockholders' equity was $20.94 on December 31, 2010, compared to $21.32
on September 30, 2010.
The Company did not pay any cash dividends to its stockholders
during the three month period ended December 31, 2010. In accordance
with the April 2010 agreement with the Office of Thrift Supervision, the
Company is restricted from the payment of dividends or other capital
distributions during the period of the agreement without prior written
consent from the Office of Thrift Supervision.
Total stockholders' equity as of December 31, 2010, includes an
unrealized gain, net of deferred income taxes, on available for sale
securities of $446,000. This amount is reflected in the line item
"Accumulated other comprehensive income."
RATIOS
The following table illustrates the Company's return on assets
(annualized net income divided by average total assets); return on
equity (annualized net income divided by average total equity); equity-
to-assets ratio (ending total equity divided by ending total assets);
and dividend payout ratio (dividends paid divided by net income).
Three months ended
------------------------
12/31/10 12/31/09
------------------------
Return on assets (0.88)% 0.34%
Return on equity (7.30)% 3.21%
Equity-to-assets ratio 12.37% 10.79%
Dividend payout ratio --% 133.18%
32
RESULTS OF OPERATIONS - Comparison of three months ended December 31,
2010 and 2009.
For the three months ended December 31, 2010, the Company had a net
loss of $3.0 million or $(0.39) per share. This compares to net income
of $1.3 million or $0.17 per share for the three month period ended
December 31, 2009.
NET INTEREST MARGIN
The Company's net interest margin is comprised of the difference
("spread") between interest income on loans, MBS and investments and the
interest cost of customer and brokered deposits and other borrowings.
Management monitors net interest spreads and, although constrained by
certain market, economic, and competition factors, it establishes loan
rates and customer deposit rates that maximize net interest margin.
The following table presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities for the three months ended
December 31, 2010 and 2009. Average yields reflect reductions due to
non-accrual loans. Once a loan becomes 90 days delinquent, any interest
that has accrued up to that time is reserved and no further interest
income is recognized unless the loan is paid current. Average balances
and weighted average yields for the periods include all accrual and non-
accrual loans. The table also presents the interest-earning assets and
yields for each respective period. Dollar amounts are expressed in
thousands.
Three months ended 12/31/10 As of
--------------------------- 12/31/10
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,182,666 18,071 6.11% 6.02%
Mortgage-backed securities 45,078 552 4.90% 4.90%
Securities 40,569 623 6.14% 5.74%
Bank deposits 19,721 4 0.08% 0.01%
--------------------------------------
Total earning assets 1,288,034 19,250 5.97% 5.94%
---------------------------
Non-earning assets 95,631
----------
Total $1,383,665
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 191,525 263 0.55% 0.50%
Customer and brokered
certificates of deposit 739,120 4,023 2.18% 2.20%
FHLB Advances 253,769 1,797 2.83% 2.31%
Subordinated debentures 25,000 127 2.03% 1.94%
--------------------------------------
Total costing liabilities 1,209,414 6,210 2.05% 1.93%
---------------------------
Non-costing liabilities 5,494
Stockholders' equity 168,757
----------
Total $1,383,665
==========
Net earning balance $ 78,620
==========
Earning yield less costing rate 3.92% 4.01%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,288,034 13,040 4.05%
============================
Three months ended 12/31/09 As of
--------------------------- 12/31/09
Average Yield/ Yield/
Balance Interest Rate Rate
-------------------------------------
Interest-earning assets
Loans $1,311,849 20,606 6.28% 6.24%
Mortgage-backed securities 81,295 884 4.35% 4.41%
Securities 45,115 472 4.18% 4.45%
Bank deposits 26,649 3 0.05% 0.01%
--------------------------------------
Total earning assets 1,464,908 21,965 5.99% 6.00%
---------------------------
Non-earning assets 68,841
----------
Total $1,533,749
==========
Interest-costing liabilities
Customer checking and savings
deposit accounts $ 181,511 346 0.76% 0.49%
Customer and brokered
certificates of deposit 702,941 4,347 2.47% 2.46%
FHLB Advances 443,052 3,339 3.01% 2.92%
Subordinated debentures 25,000 128 2.05% 1.93%
--------------------------------------
Total costing liabilities 1,352,504 8,160 2.41% 2.33%
---------------------------
Non-costing liabilities 13,084
Stockholders' equity 168,161
----------
Total $1,533,749
==========
Net earning balance $ 112,404
==========
Earning yield less costing rate 3.58% 3.67%
================
Average interest-earning assets,
net interest, and net yield
spread on average interest-
earning assets $1,464,908 13,805 3.77%
============================
33
The following table provides information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided on
changes attributable to (1) changes in rates (change in rate
multiplied by the old volume), and (2) changes in volume (change in
volume multiplied by the old rate), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
Three months ended December 31, 2010, compared to
three months ended December 31, 2009
-----------------------------------------------
Yield/
Yield Volume Volume Total
-----------------------------------------------
Components of interest income:
Loans $ (558) (2,028) 51 (2,535)
Mortgage-backed securities 112 (394) (50) (332)
Securities 221 (48) (22) 151
Bank deposits 2 (1) -- 1
-----------------------------------------------
Net change in interest income (223) (2,471) (21) (2,715)
-----------------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (619) 245 (33) (407)
FHLB Advances (199) (1,424) 81 (1,542)
Subordinated debentures (1) -- -- (1)
-----------------------------------------------
Net change in interest expense (819) (1,179) 48 (1,950)
-----------------------------------------------
Decrease in net interest
margin $ 596 (1,292) (69) (765)
===============================================
Net interest margin before loan loss provision for the three
months ended December 31, 2010, decreased $765,000 from the same period
in the prior year. Specifically, interest income decreased $2.7
million, which was offset by a $2.0 million decrease in interest expense
for the period. Interest on loans decreased $2.5 million as the result
of a $129.2 million decrease in the average balance of loans receivable
outstanding during the period and a 17 basis point decrease in the
average rate earned on such loans during the period. Interest on
mortgage-backed securities decreased $332,000 due primarily to a $36.2
million decrease in the average balance of such securities during the
period. These decreases in interest income were partially offset by a
$151,000 increase in interest on investment securities resulting from a
196 basis point increase in the average yield of such securities.
Interest expense on customer and brokered deposit accounts decreased
$407,000 due to a 28 basis point decrease in the average rate paid on
such interest-costing liabilities, the effect of which was partially
offset by a $46.2 million increase in the average balance of customer
and brokered deposit accounts during the period. Interest expense on
FHLB advances decreased $1.5 million as the result of a $189.3 million
decrease in the average balance and an 18 basis point decrease in the
average rate paid on such liabilities.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses of $10.5 million
during the three month period ended December 31, 2010, due primarily to
increases in specific reserves related to impaired construction and land
development loans. In addition, the Bank increased its general reserves
related to the commercial real estate and land development portfolios
based primarily upon its historical losses and other relevant
qualitative factors such as economic and business conditions. The
Company recorded a provision for loan losses of $9.0 million during the
quarter ended December 31, 2009, in response to a significant increase
in loans classified as substandard or loss. Additionally, management
determined that the increased provision was appropriate due to the
continued uncertainty in the real estate markets. Management performs
an ongoing analysis of individual loans and of homogenous pools of loans
to assess for any impairment. On a consolidated basis, the allowance
for losses on loans and real estate owned was 23.8% of total classified
assets at December 31, 2010, 21.8% at September 30, 2010, and 21.9% at
December 31, 2009.
Management believes that the allowance for losses on loans and real
estate owned is adequate. The provision can fluctuate based on changes
in economic conditions, changes in the level of classified assets,
changes in the amount of loan charge-offs and recoveries, or changes in
other information available to management. Also, regulatory agencies
review the Company's allowances for losses as a part of their
examination process and they may require changes in loss provision
amounts based on information available at the time of their examination.
34
OTHER INCOME
Other income for the three months ended December 31, 2010,
decreased $1.1 million from the same period in the prior year.
Specifically, gain on sale of securities available for sale decreased
$2.8 million due to a significant decrease in the volume of such sales
during the period. Additionally, provision for loss on real estate
owned increased $2.0 million due to primarily to declines in the value
of foreclosed assets held for sale. These decreases in other income
were offset by a $2.0 increase in impairment loss on investment in LLCs
due to an impairment charge related to the Company's investment in
Central Platte Holdings, LLC during the quarter ended December 31, 2009.
Other income increased $724,000 due primarily to the effect of recording
the net fair value of certain loan-related commitments in accordance
with GAAP, which was partially offset by an increase in expenses related
to foreclosed assets held for sale. Customer service fees and charges
increased $600,000 primarily due to an increase in miscellaneous loan
fees resulting from higher residential mortgage loan origination volume
during the period. The increase in gain on sale of loans held for sale
resulting from a significant increase in mortgage banking volume for the
period was largely offset by a $4.9 million decrease in the adjustment
to mark these loans to market value, resulting in only a $368,000
increase from the same period in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses for the three months
ended December 31, 2010, increased $2.9 million from the same period in
the prior year. Specifically, compensation and fringe benefits
increased $614,000 due primarily to the addition of personnel in the
Company's mortgage banking, information technology, and loan servicing
departments. Commission-based mortgage banking compensation increased
$2.1 million due primarily the significant increase in mortgage banking
spreads from the same period in the prior year. Other expense increased
$1.1 million due primarily to increases in data processing fees,
consulting fees, and other expenses related to the Company's lending
operations such as underwriting, credit, appraisal, and processing fees.
These increases in general and administrative expenses were offset by an
$801,000 decrease in federal deposit insurance premiums and a $102,000
decrease in advertising and business promotion expense from the same
period in the prior year.
REGULATION
The Bank is a member of the FHLB System and its customers' deposits
are insured by the Deposit Insurance Fund ("DIF") of the FDIC. The Bank
is subject to regulation by the OTS as its chartering authority. Since
passage of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA" or the "Act"), the FDIC also has regulatory
control over the Bank. The transactions of DIF-insured institutions are
limited by statute and regulations that may require prior supervisory
approval in certain instances. Institutions also must file reports with
regulatory agencies regarding their activities and their financial
condition. The OTS and FDIC make periodic examinations of the Bank to
test compliance with the various regulatory requirements. The OTS can
require an institution to re-value its assets based on appraisals and to
establish specific valuation allowances. This supervision and
regulation is intended primarily for the protection of depositors.
Also, savings institutions are subject to certain reserve requirements
under Federal Reserve Board regulations.
INSURANCE OF ACCOUNTS
The DIF insures the Bank's customer deposit accounts to a maximum
of $100,000 for each insured owner, with the exception of self-directed
retirement accounts, which are insured to a maximum of $250,000. On
October 3, 2008, the Emergency Economic Stabilization Act of 2008
temporarily raised the basic limit of federal deposit insurance coverage
from $100,000 to $250,000 per depositor. This legislation provided that
the basic deposit insurance limit would return to $100,000 after
December 31, 2013. On July 21, 2010, the Dodd-Frank Wall Street Reform
and Consumer Protection Act made permanent the maximum deposit insurance
amount of $250,000.
Deposit premiums are determined using a Risk-Related Premium
Schedule ("RRPS"), a matrix which places each insured institution into
one of three capital groups and one of three supervisory subgroups. The
capital groups are an objective measure of risk based on regulatory
capital calculations and include well capitalized, adequately
capitalized, and undercapitalized. The supervisory subgroups (A, B, and
C) are more subjective and are determined by the FDIC based on recent
regulatory examinations. Member institutions are eligible for
reclassification every six months. On March 25, 2010, North American
was moved from supervisory category A to category B, based upon the
results of the Bank's OTS examination.
35
Annual deposit insurance premiums range from 7 to 77.5 basis points
of insured deposits based on where an institution fits on the RRPS. In
addition to deposit insurance premiums, institutions are assessed a
premium, which is used to service the interest on the Financing
Corporation ("FICO") debt.
On May 22, 2009, the Federal Deposit Insurance Corporation (FDIC)
adopted a rule imposing a five basis point special assessment on all
insured financial institutions' assets minus its Tier I capital as of
June 30, 2009, which was collected on September 30, 2009. On November
12, 2009, the FDIC adopted a rule requiring insured institutions to
prepay their estimated quarterly risk-based assessments for the fourth
calendar quarter of 2009, and all of 2010, 2011, and 2012. The prepaid
assessment for these periods was collected on December 31, 2009, along
with each institution's regular quarterly risk-based deposit insurance
assessment for the third calendar quarter of 2009.
REGULATORY CAPITAL REQUIREMENTS
At December 31, 2010, the Bank exceeds all capital requirements
prescribed by the OTS. To calculate these requirements, a thrift must
deduct any investments in and loans to subsidiaries that are engaged in
activities not permissible for a national bank. As of December 31,
2010, the Bank did not have any investments in or loans to subsidiaries
engaged in activities not permissible for national banks.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
At December 31, 2010 Amount
----------------------------------------------------------------
GAAP capital (Bank only) $ 167,522
Adjustment for regulatory capital:
Intangible assets (2,546)
Disallowed portion of servicing assets
and deferred tax assets (24)
Reverse the effect of SFAS No. 115 (446)
---------
Tangible capital 164,506
Qualifying intangible assets --
---------
Tier 1 capital (core capital) 164,506
Qualifying general valuation allowance 15,883
---------
Risk-based capital $ 180,389
=========
As of December 31, 2010
-------------------------------------------------------------------
Minimum Required for Minimum Required to be
Actual Capital Adequacy "Well Capitalized"
------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------- ---------------------- -----------------------
Total capital to risk-weighted assets $ 180,389 14.2% 101,461 >=8% 126,827 >=10%
Core capital to adjusted tangible assets 164,506 12.6% 52,348 >=4% 65,435 >=5%
Tangible capital to tangible assets 164,506 12.6% 19,631 >=1.5% -- --
Tier 1 capital to risk-weighted assets 164,506 13.0% -- -- 76,096 >=6%
LOANS TO ONE BORROWER
Institutions are prohibited from lending to any one borrower in
excess of 15% of the Bank's unimpaired capital plus unimpaired surplus,
or 25% of unimpaired capital plus unimpaired surplus if the loan is
secured by certain readily marketable collateral. Renewals that exceed
the loans-to-one-borrower limit are permitted if the original borrower
remains liable and no additional funds are disbursed. The Bank has
received regulatory approval from the OTS under 12 CFR 560.93 to
increase its loans-to-one-borrower limit to $30 million for loans
secured by certain residential housing units. Such loans must not, in
the aggregate, exceed 150% of the Bank's unimpaired capital and surplus.
36
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("The
Dodd-Frank Act" or "The Act") was signed into law on July 21, 2010. The
Bank's primary federal regulator, the Office of Thrift Supervision, will
be eliminated and existing federal thrifts will be subject to regulation
and supervision by the Office of the Comptroller of the Currency, which
supervises and regulates all national banks. Existing savings and loan
holding companies will be subject to regulation and supervision by the
Federal Reserve Board. The Dodd-Frank Act creates a new Consumer
Financial Protection Bureau with broad powers to enforce consumer
protection laws and ensure that markets for consumer financial products
and services are fair, transparent, and competitive. The Act restricts
the ability of banks to apply trust preferred securities toward
regulatory capital requirements. However, Tier 1 capital treatment for
trust preferred securities issued before May 19, 2010 is grandfathered
for bank holding companies with assets under $15 billion. The Dodd-
Frank Act will require publically traded companies to give stockholders
a non-binding vote on executive compensation and so called "golden
parachute" payments. The Act authorizes the Securities and Exchange
Commission to promulgate rules that would allow stockholders to nominate
their own candidates using a company's proxy materials. The Dodd-Frank
Act also broadens the base for FDIC insurance assessments, which will be
based on average consolidated total assets less tangible equity capital,
rather than deposits. The Act also makes permanent the maximum deposit
insurance amount of $250,000 per depositor. The federal agencies are
given significant discretion in drafting the rules and regulations
required by The Dodd-Frank Act. Consequently, the full impact of this
legislation will not be known for some time.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability to meet deposit withdrawals and
lending commitments. The Bank generates liquidity primarily from the
sale and repayment of loans, retention or newly acquired retail
deposits, and advances from FHLB of Des Moines' credit facility.
Management continues to use FHLB advances as a primary source of short-
term funding. FHLB advances are secured by a blanket pledge agreement
of the loan and securities portfolio, as collateral, supported by
quarterly reporting of eligible collateral to FHLB. Available FHLB
borrowings are limited based upon a percentage of the Bank's assets and
eligible collateral, as adjusted by appropriate eligibility and
maintenance levels. Management continually monitors the balance of
eligible collateral relative to the amount of advances outstanding. At
December 31, 2010, the Bank had a total borrowing capacity at FHLB of
$457.3 million, and outstanding advances of $228.0 million. The Bank
has established relationships with various brokers, and, as a secondary
source of liquidity, the Bank may purchase brokered deposit accounts.
The Bank entered into a Supervisory Agreement with the Office of
Thrift Supervision on April 30, 2010, which, among other things,
required the Bank to reduce its reliance on brokered deposits. The OTS
subsequently approved the Bank's plan to reduce brokered deposits to
$145.0 million by June 30, 2010, $135.0 million by June 30, 2011 and
$125.0 million by June 30, 2012. As of December 31, 2010, the Bank's
brokered deposits totaled $16.9 million. Thus, the Bank could acquire
an additional $128.1 million in brokered deposits and still comply with
the plan as of December 31, 2010.
Fluctuations in the level of interest rates typically impact
prepayments on mortgage loans and MBS. During periods of falling
interest rates, these prepayments increase and a greater demand exists
for new loans. The Bank's customer deposits are partially impacted by
area competition. Management believes that the Bank will retain most of
its maturing time deposits in the foreseeable future. However, any
material funding needs that may arise in the future can be reasonably
satisfied through the use of additional FHLB advances and/or brokered
deposits. The Bank's contingency liquidity sources include the Federal
Reserve discount window and sales of securities available for sale.
Management is not aware of any other current market or economic
conditions that could materially impact the Bank's future ability to
meet obligations as they come due.
37
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a complete discussion of the Company's asset and liability
management policies, as well as the potential impact of interest rate
changes upon the market value of the Company's portfolio, see the
"Asset/Liability Management" section of the Company's Annual Report for
the year ended September 30, 2010.
Management recognizes that there are certain market risk factors
present in the structure of the Bank's financial assets and liabilities.
Since the Bank does not have material amounts of derivative securities,
equity securities, or foreign currency positions, interest rate risk
("IRR") is the primary market risk that is inherent in the Bank's
portfolio. On a quarterly basis, the Bank monitors the estimate of
changes that would potentially occur to its net portfolio value ("NPV")
of assets, liabilities, and off-balance sheet items assuming a sudden
change in market interest rates. Management presents a NPV analysis to
the Board of Directors each quarter and NPV policy limits are reviewed
and approved. There have been no material changes in the market risk
information provided in the Annual Report for the year ended September
30, 2010.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities and Exchange Act of 1934. Based on this
evaluation, our principal executive officer and our principal financial
officer originally concluded that our disclosure controls and procedures
were effective at the end of the period covered by this quarterly
report.
However, as discussed in the Explanatory Note on page 1 of this
Form 10-Q/A, based on the need to revise the unaudited condensed
consolidated financial statements for the three months ended December
31, 2010, the Company's management and the Audit Committee of the Board
of Directors have taken steps recently to re-evaluate the Company's
internal control over financial reporting, subsequent to December 31,
2010, and have concluded there are material weaknesses in their design
of such internal controls. The material weaknesses relates to the
identification and recognition of troubled debt restructurings and
impaired loans and timely receipt of appraisals for participated loans.
The Company's Board of Directors has implemented several steps to
improve the processes and thus will remediate the material weaknesses.
Included in these steps are the following:
- Revision of the Company's loan policy to more clearly define
procedures to obtain appraisals on participated loans from lead
banks.
- Revision of the Company's Internal Asset Review and Loan
Classification policies related to troubled debt restructurings
and other impaired loans and early adoption of ASU No. 2011-02,
A Creditor's Determination of Whether a Restructuring is a
Troubled Debt Restructuring for the quarter ended March
31, 2011.
Changes in the Company's internal controls over financial reporting
that have materially affected, or are reasonably likely to materially
affect, the Company's controls over financial reporting, were made
subsequent to the quarter ended December 31, 2010, and have been
described above. 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
reasonable likely to materially affect our internal control over
financial reporting.
38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material proceedings pending other than ordinary and
routine litigation incidental to the business of the Company.
Item 1A. Risk Factors
The following is a summary of risk factors relating to the operations of
the Bank and the Company. These risk factors are not necessarily
presented in their order of significance. In addition to the list
presented, below, there may be other risks and uncertainties that could
have a material adverse effect on the Company, our financial condition
and our results of operations, which could also impact the value or
market price of our common stock. To the extent that any of the
information contained in this report constitutes forward-looking
statements, the risk factors set forth are additional cautionary
statements that identify important factors that may cause the Company's
actual results to differ materially from those expressed in any forward-
looking statements made by or on behalf of the Company.
Difficult market conditions continue to adversely affect our industry.
We are exposed to downturns in the U.S. real estate market, particularly
related to existing residential homes, new residential construction,
residential development properties, and commercial real estate. The
housing market has experienced dramatic declines over the past three
years, greatly affected by falling home prices, increasing foreclosures,
and unemployment. All of these have impacted credit performance and
resulted in a significant level of write-downs of asset values by the
industry, in general, and by our Company, specifically. Because of the
concern about the stability of the financial markets, many lenders and
institutional investors have reduced or ceased providing credit to
borrowers, including to other financial institutions. The weakened U.S.
economy and tightening of credit have led to an increased level of
commercial and consumer delinquencies, a lack of consumer confidence,
increased market volatility and widespread reduction of overall business
activity. A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on our Company and
others in the financial institution industry, and could further
materially increase our loan losses and further negatively impact our
financial condition and operating results.
Recent changes in banking regulations could materially affect the
Company's business. The current political environment is demanding
increased regulation of the banking industry. Various new regulations
have been imposed over the past year, with much additional regulation
that has been proposed. Such changing regulation, along with possible
changes in tax laws and accounting rules, may have a significant impact
on the ways that financial institutions conduct their businesses,
implement strategic initiatives, engage in tax planning and make
financial disclosures. Complying with increased regulations may
increase our costs and limit the availability of our business
opportunities.
On July 21, 2010, The Dodd-Frank Wall Street Reform and Consumer
Protection Act was signed into law. Some of the provisions may have
consequences of increasing our expenses, decreasing our revenues, and
changing the activities in which we choose to engage. The specific
impact of the Dodd-Frank Act on our current activities and our financial
performance will depend on the manner in which relevant agencies develop
and implement required rules.
The Company's performance is dependent on the economic conditions in the
market in which it operates. The Company operates primarily within the
greater Kansas City area and is influenced by the general economic
conditions in Kansas City. Any further adverse changes in economic
conditions in our market area could impair our ability to collect loans,
obtain and retain customer deposits, and negatively impact our overall
financial condition.
39
The current real estate market makes our concentrations in real estate
lending susceptible to credit losses. Our loan portfolios are
concentrated in real estate lending, which has made, and will continue
to make, our loan portfolios susceptible to credit losses in the current
real estate market, particularly because of continuing declines in the
new home real estate market. Specifically, we have a concentration of
residential real estate construction loans and residential land
development, most of which are located within the metropolitan Kansas
City market area. Additionally, we have a concentration of commercial
real estate loans that are located around the country. Because of our
heightened exposure to credit losses in these concentrations, the
downturns in the real estate market and the general economy have
resulted in a significant increase in classified assets over the past
year. If the current economic environment continues for a prolonged
additional period, or deteriorates even further, the asset collateral
values may further decline and may result in increased credit losses and
foreclosures in these portfolios.
If our allowance for loan and lease losses ("ALLL") is not sufficient to
cover actual loan losses, our provision for losses could increase in
future periods, causing a negative impact on operating results. Our
borrowers may not repay their loans according to the terms of the loans
and, as a result of the declines in home prices, the collateral securing
the payment of these loans may be insufficient to pay remaining loan
balances. We may experience significant loan losses, which could have a
material adverse impact on our operating results. When determining the
adequacy of the ALLL, we make various assumptions and subjective
judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of real estate and other
assets that serve as collateral for the repayment of many of our loans.
In determining the adequacy of the ALLL, we rely on our loan quality
reviews, our experience, our evaluation of economic conditions, and
asset valuations and appraisals, among other factors. If our
assumptions prove to be incorrect, our ALLL may not be sufficient to
cover the losses inherent in our loan portfolio, which could result in
additions to our allowance through provisions for loan losses. Material
additions to our allowance would have a material adverse impact on our
operating results.
The OTS (soon to be merged into the Office of the Comptroller of the
Currency), as an integral part of the regulatory examination process,
periodically reviews our loan portfolio. Regulators may require us to
add to the allowance for loan losses based on their judgments and
interpretations of information available to them at the time of their
examinations. Any increase that the regulators require in our allowance
for loan losses would negatively impact our operating results in the
period in which the increase occurs.
The Company uses valuation methodologies, estimations and assumptions
for certain assets and loan collateral which are subject to differing
interpretations and could result in changes to asset or collateral
valuations that could have an adverse material impact on the Company's
financial condition or operating results. The Company uses estimates,
assumptions and judgments when measuring the fair value of financial
assets, liabilities and loan collateral. Fair values and the
information used to record valuation adjustments are based on quoted
market prices, third-party appraisals and/or other observable inputs
provided by third-party sources, when available. Any changes in
underlying factors, assumptions or estimates in any of these areas could
materially impact the Company's future financial condition and operating
results.
During periods of market disruption, it may be difficult to value
certain assets if comparable sales become less frequent and/or market
data becomes less observable. Certain classes of assets or loan
collateral that were in active markets with significant observable data
may become illiquid due to the current financial environment. In such
cases, asset valuations may require more estimation and subjective
judgment. The rapidly changing real estate market conditions could
materially impact the valuation of assets and loan collateral as
reported within the Company's financial statements and changes in
estimated values could vary significantly from one period to the next.
Decreases in value may have a material adverse impact on the Company's
future financial condition or operating results.
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The Company is subject to interest rate risk. Our results of operations
are largely dependent on net interest income, which is the difference
between the interest we earn on our earning-asset portfolios and the
interest paid on our cost of liability portfolios. Market interest
rates are beyond the Company's control, and they can fluctuate in
response to general economic conditions and the policies of various
governmental and regulatory agencies. Changes in monetary policy,
including changes in interest rates, will influence market rates and
prices for loan originations, purchases of investment securities, and
customer deposit accounts. Any substantial or prolonged change in
market interest rates could have a materially adverse effect on the
Company's financial condition or results from operations.
Changes in income tax laws or interpretations or in accounting standards
could materially affect our financial condition or results of
operations. Changes in income tax laws could be enacted or
interpretations of existing income tax laws could change causing an
adverse effect to our financial condition or results of operations.
Similarly, our accounting policies and methods are fundamental to how we
report our financial condition and results of operations. Some of these
policies require use of estimates and assumptions that may affect the
value of our assets, liabilities, and financial results. Periodically,
new accounting standards are imposed or existing standards are revised,
changing the methods for preparing our financial statements. Such
changes are not within our control and could significantly impact our
financial condition and results of operations.
The Company is subject to liquidity risk that could impair our ability
to fund operations. Liquidity is essential to our business and we rely
on a number of different sources in order to meet our potential
liquidity demands. Our primary sources of liquidity are our retail and
wholesale customer deposit accounts, cash flows from payments and sales
of loans and securities, and advances from the Federal Home Loan Bank.
Any inability to raise or retain funds through deposits, borrowings, the
sale of loans and other sources could have a substantial negative effect
on our liquidity. Our access to funding sources in amounts adequate to
finance our activities or on terms which are acceptable to us could be
impaired by factors that affect us specifically or by factors affecting
the financial services industry in general. Even if funding remains
available, issues of liquidity pricing could raise the Company's cost of
funds and have an adverse material impact on the Company's financial
condition and operating results.
Any loss of key personnel could adversely affect our operations. The
Company's success is, in large part, dependent on its ability to attract
and retain key employees. Management believes it has implemented
effective succession planning strategies to reduce the potential impact
of the loss of certain key personnel; however, because of their skill-
level and experience, the unexpected loss of key personnel could have an
adverse material impact on the Company's business.
We are subject to various legal claims and litigation. We are
periodically involved in routine litigation incidental to our business.
Regardless of whether these claims and legal actions are founded or
unfounded, if such legal actions are not resolved in a manner favorable
to us, they may result in significant financial liability and/or
adversely affect the Company's reputation. In addition, litigation can
be costly. Any financial liability, litigation costs or reputational
damage caused by these legal claims could have a material adverse impact
on our business, financial condition and results of operations.
The Company operates in a competitive industry and market area. The
financial services industry in which the Company operates is rapidly
changing with numerous types of competitors including banks, thrifts,
insurance companies, and mortgage bankers. Consolidation in the
industry is accelerating and there are many new changes in technology,
products, and regulations. We believe the competition for retail
deposit accounts is especially significant in our market area. The
Company must continue to invest in products and delivery systems in
order to remain competitive or its financial performance may be impacted
negatively.
41
Any electronic system failure or breach to our network security could
increase our operating costs or impair the Company's reputation. The
Bank provides customers with electronic banking options, including
online banking, bill payment services, online account opening and online
loan applications. Management has implemented all reasonable means of
protection for its electronic services; however, there can be no
absolute assurances that failures, interruptions, or electronic security
breaches will not occur. Should any of our electronic systems be
compromised, the Company's reputation could be damaged and/or
relationships with customers impaired. A loss of business could result
and the Company could incur significant expenses in remedying the
security breach.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to
Rules 13a-15(e) and 15d-15(e)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to
Rules 13a-15(e) and 15d-15(e)
Exhibit 32.1 - Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
42
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NASB Financial, Inc.
(Registrant)
June 30, 2011 By: /s/David H. Hancock
David H. Hancock
Chairman and
Chief Executive Officer
June 30, 2011 By: /s/Rhonda Nyhus
Rhonda Nyhus
Vice President and
Treasurer
43