Attached files
(LOGO)
December 14, 2010
Dear Shareholder:
While we had positive results in many areas during the past year,
our net income decreased by 66%, to $6,323,000. This reduction in
income is primarily the result of a $30.5 million charge for loan
losses and to provide for future, potential losses. These provisions
are the result of the significant changes in real estate values, of new
standards imposed by our regulators, and by underwriting decisions made
by your management.
Earnings were further diminished by reductions in the values of
our two real estate investments in Platte County. While we remain
optimistic that our "Seven Bridges" residential development will
ultimately be successful, there is no dispute that our project, as with
most real estate developments, is less active than projected.
As we enter 2011, we are encouraged that we can build on several
positive factors and improve our future results:
1) Earnings before loan loss provisions, expenses of repossessed real
estate, impairment loss on LLCs, and income taxes increased by $6.6
million from the previous year, to $49.2 million. Net income, before
the loss provisions for loans and repossessed real estate, but after
tax considerations, produced returns on equity and assets of
15.07%/1.77%;
2) Retail deposits increased by approximately $170 million (24.4%).
This decreased dependence on wholesale funding will provide more
stability to the liability side of our company, and conforms more
closely to expectations of our regulators;
3) Despite the poor financial performance in 2010, we did increase our
book value per share, from $21.15 to $21.32. While this was a below
average year, we have increased our book value, after allowing for
dividends, by 15.4%, compounded annually, over the past ten years. The
compound return over this period compares quite favorably with other
institutions in our industry;
4) Total assets decreased to $1.43 billion, from $1.56 billion the
previous year. This decrease is primarily due to a $120.4 million
decrease in residential construction and development loans. The 37%
reduction in this category reflects the decreased activity in this
industry, and the exit from this business of many marginal companies.
It is not an indication that we do not intend to remain active in this
area. NASB has strong relationships with many of the best builders and
developers in the Kansas City area, and intends to continue in this
business;
5) We increased our net interest margin from 3.18%, to 3.89%. We
should continue this trend in 2011, as we have significant re-pricing
opportunities in the early part of this year;
6) During our fiscal 2010 we increased the Bank's core capital to
$167.4 million. This 11.9% equity ratio significantly exceeds the
newly increased requirements imposed by the new financial regulations,
and continues to provide a strong foundation for our future success.
We are disappointed in our 2010 financial results. I assure you
that your management is diligently working to attempt better
performance in the future.
Thank you for your continuing support of NASB.
Sincerely,
/s/ David H. Hancock
David H. Hancock
Board Chairman
1
NASB FINANCIAL, INC.
2010 ANNUAL REPORT
-------------------------------------------------------------------
CONTENTS
1 Letter to Shareholders
2 Contents and Financial Highlights
3 Selected Consolidated Financial and Other Data
4-15 Management's Discussion and Analysis of Financial Condition and
Results of Operations
16-54 Consolidated Financial Statements
55 Report of Independent Registered Public Accounting Firm
56 Summary of Unaudited Quarterly Operating Results and Listing
of Directors
57 Listing of Officers
58 Listing of Branch Offices, Investor Information, and Common
Stock Prices and Dividends
FINANCIAL HIGHLIGHTS
2010 2009 2008 2007 2000 1990
---------------------------------------------------------------
Dollars in thousands, except per share data
For the year ended September 30:
Net interest income $ 53,848 47,405 39,015 41,679 35,838 7,983
Net interest spread 3.73% 2.95% 2.36% 2.53% 3.71% 1.99%
Other income $ 43,580 40,494 18,407 21,198 9,409 2,774
General and administrative expenses 57,667 46,716 36,819 36,329 20,120 8,169
Net income (loss) 6,323 18,790 9,296 15,319 14,721 (369)
Basic earnings per share 0.80 2.38 1.18 1.89 1.66 (0.18)
Cash dividends paid 3,540 7,080 7,080 7,337 3,370 --
Dividend payout ratio 55.99% 37.84% 76.16% 47.90% 22.89% --
At year end:
Assets $ 1,434,196 1,559,562 1,516,761 1,506,483 984,525 388,477
Loans, net 1,220,886 1,320,362 1,344,520 1,316,592 914,012 180,348
Investment securities 76,511 80,618 60,059 80,881 20,451 179,599
Customer and brokered deposit accounts 933,453 904,625 769,379 855,536 621,665 333,634
Stockholders' equity 167,762 166,388 152,412 149,392 83,661 16,772
Book value per share 21.32 21.15 19.37 18.99 9.84 1.83
Basic shares outstanding (in thousands) 7,868 7,868 7,868 7,868 8,500 9,148
Other financial data:
Return on average assets 0.42% 1.22% 0.61% 1.01% 1.63% (0.20)%
Return on average equity 3.78% 11.74% 6.16% 10.01% 18.12% (2.50)%
Stockholders' equity to assets 11.70% 10.67% 10.05% 9.92% 8.50% 4.30%
Average shares outstanding (in thousands) 7,868 7,868 7,868 8,101 8,863 8,116
Selected year end information:
Stock price per share: Bid $ 15.90 25.96 29.41 35.76 14.50 1.03
Ask 16.79 26.27 31.00 35.80 15.50 1.13
Per share amounts have been adjusted to give retroactive effect to the
four-for-one stock split, which occurred during the fiscal year ended
September 30, 1999.
2
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables include selected information concerning the
financial position of NASB Financial, Inc., (including consolidated data
from the operations of subsidiaries) for the years ended September 30.
Dollar amounts are expressed in thousands, except per share data.
SUMMARY STATEMENT OF OPERATIONS 2010 2009 2008 2007 2006
-----------------------------------------------------------------------------------------
Interest income $ 83,216 89,825 95,521 103,818 99,132
Interest expense 29,368 42,420 56,506 62,139 52,521
------------------------------------------------
Net interest income 53,848 47,405 39,015 41,679 46,611
Provision for loan losses 30,500 11,250 6,200 1,634 745
------------------------------------------------
Net interest income after provision
for loan losses 23,348 36,155 32,815 40,045 45,866
Other income 43,580 40,494 18,407 21,198 24,524
General and administrative expenses 57,667 46,716 36,819 36,329 37,248
------------------------------------------------
Income before income tax expense 9,261 29,933 14,403 24,914 33,142
Income tax expense 2,938 11,224 5,107 9,595 12,374
------------------------------------------------
Net income $ 6,323 18,709 9,296 15,319 20,768
================================================
Earnings per share:
Basic $ 0.80 2.38 1.18 1.89 2.47
Diluted 0.80 2.38 1.18 1.88 2.46
Average shares outstanding (in thousands) 7,868 7,868 7,868 8,101 8,397
SUMMARY BALANCE SHEET 2010 2009 2008 2007 2006
-----------------------------------------------------------------------------------------
Assets:
Bank deposits $ 9,669 60,771 6,331 18,847 6,511
Stock in Federal Home Loan Bank 15,873 26,640 26,284 22,307 24,043
Securities 76,511 80,618 60,059 80,881 97,584
Loans receivable held for sale, net 179,845 81,367 64,030 47,233 50,462
Loans receivable held for
investment, net 1,041,041 1,238,995 1,280,490 1,269,359 1,287,709
Non-interest earning assets 111,257 71,171 79,567 67,856 58,487
-------------------------------------------------
Total assets $1,434,196 1,559,562 1,516,761 1,506,483 1,524,796
=================================================
Liabilities:
Customer & brokered deposit accounts $ 933,453 904,625 769,379 855,536 851,042
Advances from Federal Home Loan Bank 286,000 441,026 550,091 458,933 499,357
Subordinated debentures 25,774 25,774 25,774 25,774 --
Non-interest costing liabilities 21,207 21,749 19,105 16,848 17,825
-------------------------------------------------
Total liabilities 1,266,434 1,393,174 1,364,349 1,357,091 1,368,224
Stockholders' equity 167,762 166,388 152,412 149,392 156,572
-------------------------------------------------
Total liabilities and
stockholders' equity $1,434,196 1,559,562 1,516,761 1,506,483 1,524,796
=================================================
Book value per share $ 21.32 21.15 19.37 18.99 18.82
=================================================
OTHER DATA 2010 2009 2008 2007 2006
-------------------------------------------------
Loans serviced for others $ 60,637 93,350 65,253 84,735 101,076
Number of full service branches 9 9 9 9 8
Number of employees (full-time
equivalents) 398 367 322 312 362
Basic shares outstanding (in thousands) 7,868 7,868 7,868 7,868 8,319
3
GENERAL
NASB Financial, Inc. ("the Company") was formed in April 1998 to
become a unitary thrift holding company of North American Savings Bank,
F.S.B. ("the Bank" or "North American"). The Company's principal
business is to provide banking services through the Bank.
Specifically, the Bank obtains savings and checking deposits from the
public and 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, and advances from the
Federal Home Loan Bank ("FHLB"). The Bank's primary sources of income
are interest on loans, MBS, and investment securities plus income from
lending activities and customer service fees. Expenses consist
primarily of interest payments on customer and brokered deposits and
other borrowings and general and administrative costs.
The Bank operates nine deposit branch locations, three residential
loan origination offices, and one residential construction loan
origination office, primarily in the greater Kansas City area. The
Bank also operates one commercial real estate loan origination office
at it's headquarters in Grandview, Missouri. Consumer loans are also
offered through the Bank's branch network. Customer deposit accounts
are insured up to allowable limits by the Deposit Insurance Fund
("DIF"), a division of the Federal Deposit Insurance Corporation
("FDIC"). The Bank is regulated by the Office of Thrift Supervision
("OTS") and the FDIC.
FORWARD-LOOKING STATEMENTS
We may from time to time make written or oral "forward-looking
statements", including statements contained in our filings with the
Securities and Exchange Commission ("SEC"). These forward-looking
statements may be included in this annual report to shareholders and in
other communications by the Company, which are made in good faith by us
pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements include statements about our
beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties, and are subject to change based on various factors, some
of which are beyond our control. The words "may," "could," "should,"
"would," "believe," "anticipate," "estimate," "expect," "intend,"
"plan," and similar expressions are intended to identify forward-
looking statements. The following factors, among others, could cause
our financial performance to differ materially from the plans,
objectives, goals, expectations, anticipations, estimates and
intentions expressed in the forward-looking statements:
- the strength of the U.S. economy in general and the strength of the
local economies in which we conduct operations;
- the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
- the effects of, and changes in, foreign and military policy of the
United States Government; inflation, interest rate, market and monetary
fluctuations;
- the timely development and acceptance of our new products and
services and the perceived overall value of these products and services
by users, including the features, pricing and quality compared to
competitors' products and services;
- the willingness of users to substitute competitors' products and
services for our products and services;
- our success in gaining regulatory approval of our products, services
and branching locations, when required;
- the impact of changes in financial services' laws and regulations,
including laws concerning taxes, banking, securities and insurance;
- technological changes;
- acquisitions and dispositions;
- changes in consumer spending and saving habits; and
- our success at managing the risks involved in our business.
This list of important factors is not all-inclusive. We do not
undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company
or the Bank.
4
FINANCIAL CONDITION
Total assets as of September 30, 2010, were $1,434.2 million, a
decrease of $125.4 million from the prior year-end. Average interest-
earning assets decreased $107.0 million from the prior year to $1,384.1
million.
As the Bank originates 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.
Residential mortgage loans sold in the secondary market are sold with
servicing released or converted into mortgage-backed securities ("MBS")
and sold with the 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 the portfolio or sold and if
sold, which method of sale is appropriate. During the year ended
September 30, 2010, the Bank originated and purchased $1,765.6 million
in mortgage loans held for sale, $103.8 million in mortgage loans held
for investment, and $3.1 million in other loans. This total of
$1,872.5 million in loan originations was an increase of $68.3 million
over the prior fiscal year.
Loans held for sale as of September 30, 2010, were $179.8 million,
an increase of $98.5 million from September 30, 2009. This portfolio
consisted entirely of residential mortgage loans originated by the
Company'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.
The balance of total loans held for investment at September 30,
2010, was $1,073.4 million, a decrease of $186.3 million from September
30, 2009. This decrease related primarily to the Bank's residential
construction and development loan portfolio. During fiscal 2010, total
originations and purchases of mortgage loans and other loans held for
investment were $106.9 million. The gross balance of loans on business
properties was $450.3 million at September 30, 2010, compared to $474.5
million as of the previous year-end. The gross balance of construction
and development loans was $208.0 million at September 30, 2010, a
decrease of $121.4 million.
Investment securities were $29.3 million as of September 30, 2010,
an increase of $6.4 million from September 30, 2009. During fiscal
year 2010, the Bank purchased securities of $50.4 million and sold
$46.5 million of securities available for sale. The Company realized
gross gains of $4.1 million and no gross losses on the sale of
securities available for sale during the year. Funds resulting from
the sale of these securities were used to reduce Company's reliance on
brokered deposits.
Mortgage-backed securities were $47.2 million as of September 30,
2010, a decrease of $10.5 million from the prior year end. During
fiscal 2010, the Bank purchased mortgage-backed securities of $54.8
million and sold $51.2 million of mortgage-backed securities available
for sale. The Company realized gross gains of $1.4 million and gross
losses of $8,000 on the sale of mortgage-backed securities available
for sale during the year. This activity was related to a restructuring
of the Company's mortgage-backed securities portfolio which resulted in
an increased yield on such assets. The average yield on the mortgage-
backed securities portfolio was 4.88% at September 30, 2010, compared
to 4.48% at September 30, 2009.
The Company's investment in LLCs, which is accounted for using the
equity method, was $17.8 million at September 30, 2010, a decrease of
$3.2 million from September 30, 2009. During fiscal year 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
Holdings, LLC ("NBH"). The Company's investment in Central Platte was
$16.4 million at September 30, 2010. The Company's investment in NBH
was $1.3 million at September 30, 2010.
The balance of mortgage servicing rights at September 30, 2010,
was $263,000, a decrease of $88,000 from September 30, 2009.
Originated mortgage servicing rights of $5,000 were capitalized during
the year ended September 30, 2010. The total outstanding balance of
mortgage loans serviced for others was $60.6 million, a decrease of
$32.7 million from the prior fiscal year-end.
5
The following graphs summarize the Company's total assets as of
September 30, 2010 and 2009:
Total Assets - Fiscal 2010
Percent of
Asset Category Total Assets
-------------- -------------
Permanent loans on business properties 31%
Permanent loans on residential properties 36%
Construction and development loans 12%
Cash and investments 7%
Other loans 6%
Other non-earning assets 8%
------
100%
======
Total Assets - Fiscal 2009
Percent of
Asset Category Total Assets
-------------- -------------
Permanent loans on business properties 30%
Permanent loans on residential properties 28%
Construction and development loans 18%
Cash and investments 11%
Other loans 9%
Other non-earning assets 4%
------
100%
======
6
Total liabilities were $1,266.4 million at September 30, 2010, a
decrease of $126.7 million from the previous year. Average interest-
costing liabilities during fiscal year 2010 were $1,289.4 million, a
decrease of $94.5 million from fiscal 2009.
Total customer deposit accounts at September 30, 2010, were $866.6
million, an increase of $169.8 million from the prior year-end. The
total change in customer deposits was comprised of increases of $157.7
million in certificates of deposit, $7.2 million in savings accounts
and $5.0 million in money market demand accounts, offset by a decrease
of $253,000 in demand deposit accounts. The Company held a total of
$66.9 million in brokered deposits at September 30, 2010, a decrease of
$141.0 million from September 30, 2009. This decrease was the result
of the Company's efforts to reduce its reliance on brokered deposits.
The average interest rate on customer and brokered deposits at
September 30, 2010, was 1.86%, a decrease of 37 basis points from the
prior year-end. The average balance of customer and brokered deposits
during fiscal 2010 was $884.3 million, an increase of $16.4 million
from fiscal 2009.
Advances from the FHLB were $286.0 million at September 30, 2010,
a decrease of $155.0 million from the prior fiscal year-end. During
fiscal year 2010, the Bank borrowed $98.0 million of new advances and
made $253.0 million of repayments. Management continues to use FHLB
advances as a primary funding source to provide operating liquidity and
to fund the origination of mortgage loans.
Subordinated debentures were $25.8 million as of September 30,
2010. Such debentures resulted from the issuance of pooled Trust
Preferred Securities through the Company's wholly owned statutory
trust, NASB Preferred Trust I during fiscal 2007. 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. The debentures are callable, in whole or in part, after
five years from the issuance date.
Total stockholders' equity as of September 30, 2010 was $167.8
million (11.7% of total assets). This compares to $166.4 million
(10.7% of total assets) at September 30, 2009. On a per share basis,
stockholders' equity was $21.32 on September 30, 2010, compared to
$21.15 on September 30, 2009.
During the year ended September 30, 2010, the Company paid a total
of $3.5 million in cash dividends to its stockholders. In accordance
with the April 2010 agreement with the Office of Thrift Supervision,
which is described more fully in Footnote 26, 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.
NET INTEREST MARGIN
The Bank'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, FHLB advances, 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.
During fiscal year 2010, average interest-earning assets exceeded
average interest-costing liabilities by $94.7 million, which was 6.5%
of average total assets. In fiscal year 2009, average interest-earning
assets exceeded average interest-costing liabilities by $107.1 million,
which was 6.9% of average total assets.
The net interest spread (earning yield less costing rate) for the
fiscal year ended September 30, 2010, was 3.73%, an increase of 78
basis points from the prior year. The net interest spread for the
fiscal year ended September 30, 2009, was 2.95%, an increase of 59
basis points from the prior year.
7
The table below presents the total dollar amounts of interest
income and expense on the indicated amounts of average interest-earning
assets or interest-costing liabilities, with the average interest rates
for the year and at the end of each year. Average yields reflect yield
reductions due to non-accrual loans. Average balances and weighted
average yields at year-end include all accrual and non-accrual loans.
Dollar amounts are expressed in thousands.
As of
Fiscal 2010 9/30/10
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
----------------------------------------
Interest-earning assets:
Loans receivable $ 1,262,456 78,508 6.22% 5.97%
Mortgage-backed securities 65,420 3,175 4.85% 4.88%
Investments 35,806 1,521 4.25% 5.20%
Bank deposits 20,384 12 0.06% 0.01%
----------------------------------------
Total earning assets 1,384,066 83,216 6.01% 5.86%
-----------------------------
Non-earning assets 79,656
----------
Total $ 1,463,722
==========
Interest-costing liabilities:
Customer checking and savings
deposit accounts $ 185,281 1,110 0.60% 0.50%
Customer and brokered
certificates of deposit 699,011 16,366 2.34% 2.21%
FHLB advances 380,112 11,388 3.00% 3.44%
Subordinated debentures 25,000 504 2.02% 2.13%
----------------------------------------
Total costing liabilities 1,289,404 29,368 2.28% 2.23%
-----------------------------
Non-costing liabilities 6,269
Stockholders' equity 168,049
----------
Total $ 1,463,722
==========
Net earning balance $ 94,662
==========
Earning yield less costing rate 3.73% 3.63%
===================
Average interest-earning
assets $ 1,384,066
==========
Net interest 53,848
========
Net yield spread on avg.
Interest-earning assets 3.89%
========
As of
Fiscal 2009 9/30/09
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
----------------------------------------
Interest-earning assets:
Loans receivable $ 1,352,561 84,934 6.28% 6.29%
Mortgage-backed securities 54,674 2,042 3.73% 4.48%
Investments 57,554 2,750 4.78% 3.51%
Bank deposits 26,264 99 0.38% 0.01%
----------------------------------------
Total earning assets 1,491,053 89,825 6.02% 5.88%
-----------------------------
Non-earning assets 65,063
----------
Total $ 1,556,116
==========
Interest-costing liabilities:
Customer checking and savings
deposit accounts $ 169,124 1,487 0.88% 0.80%
Customer and brokered
certificates of deposit 698,747 23,524 3.37% 2.58%
FHLB advances 491,040 16,552 3.37% 2.99%
Subordinated debentures 25,000 857 3.42% 2.14%
----------------------------------------
Total costing liabilities 1,383,911 42,420 3.07% 2.47%
-----------------------------
Non-costing liabilities 13,617
Stockholders' equity 158,588
----------
Total $ 1,556,116
==========
Net earning balance $ 107,142
==========
Earning yield less costing rate 2.95% 3.41%
===================
Average interest-earning
assets $ 1,491,053
==========
Net interest 47,405
========
Net yield spread on avg.
Interest-earning assets 3.18%
========
As of
Fiscal 2008 9/30/08
---------------------------
Average Yield/ Yield/
Balance Interest Rate Rate
----------------------------------------
Interest-earning assets:
Loans receivable $ 1,363,032 91,635 6.72% 6.49%
Mortgage-backed securities 71,196 2,546 3.58% 4.10%
Investments 25,909 1,086 4.19% 4.00%
Bank deposits 11,953 254 2.12% 1.22%
----------------------------------------
Total earning assets 1,472,090 95,521 6.49% 6.32%
-----------------------------
Non-earning assets 61,057
----------
Total $ 1,533,147
==========
Interest-costing liabilities:
Customer checking and savings
deposit accounts $ 166,076 1,925 1.16% 1.01%
Customer and brokered
certificates of deposit 639,113 28,814 4.51% 4.21%
FHLB advances 536,344 24,410 4.55% 4.07%
Subordinated debentures 25,000 1,357 5.43% 4.45%
----------------------------------------
Total costing liabilities 1,366,533 56,506 4.13% 3.77%
-----------------------------
Non-costing liabilities 15,291
Stockholders' equity 151,323
----------
Total $ 1,533,147
==========
Net earning balance $ 105,557
==========
Earning yield less costing rate 2.36% 2.55%
===================
Average interest-earning
assets $ 1,472,090
==========
Net interest 39,015
========
Net yield spread on avg.
Interest-earning assets 2.65%
========
The following tables set forth information regarding changes in
interest income and interest expense. For each category of interest-
earning asset and interest-costing liability, information is provided
on changes attributable to (1) changes in rates (change in rate
multiplied by the old volume), (2) changes in volume (change in volume
multiplied by the old rate), and (3) changes in rate and volume
(change in rate multiplied by the change in volume). Average balances,
yields and rates used in the preparation of this analysis come from the
preceding table. Dollar amounts are expressed in thousands.
Year ended September 30, 2010
compared to
year ended September 30, 2009
----------------------------------------
Rate/
Rate Volume Volume Total
----------------------------------------
Components of interest income:
Loans receivable $ (812) (5,659) 45 (6,426)
Mortgage-backed securities 612 401 120 1,133
Investments (305) (1,040) 116 (1,229)
Bank deposits (84) (22) 19 (87)
----------------------------------------
Net change in interest income (589) (6,320) 300 (6,609)
----------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (7,811) 473 (197) (7,535)
FHLB advances (1,817) (3,738) 391 (5,164)
Subordinated debentures (350) -- (3) (353)
----------------------------------------
Net change in
interest expense (9,978) (3,265) 191 (13,052)
----------------------------------------
Increase (decrease) in net
interest income $ 9,389 (3,055) 109 6,443
========================================
8
Year ended September 30, 2009
compared to
year ended September 30, 2008
----------------------------------------
Rate/
Rate Volume Volume Total
----------------------------------------
Components of interest income:
Loans receivable $ (5,998) (704) 1 (6,701)
Mortgage-backed securities 107 (591) (20) (504)
Investments 153 1,326 185 1,664
Bank deposits (208) 303 (250) (155)
----------------------------------------
Net change in interest income (5,946) 334 (84) (5,696)
----------------------------------------
Components of interest expense:
Customer and brokered
deposit accounts (7,568) 2,394 (554) (5,728)
FHLB advances (6,329) (2,061) 532 (7,858)
Subordinated debentures (503) -- 3 (500)
----------------------------------------
Net change in
interest expense (14,400) 333 (19) (14,086)
----------------------------------------
Increase (decrease) in net
interest income $ 8,454 1 (65) 8,390
========================================
COMPARISON OF YEARS ENDED SEPTEMBER 30, 2010 AND 2009
For the fiscal year ended September 30, 2010, the Company had net
income of $6.3 million, or $0.80 per share, compared to net income
$18.7 million, or $2.38 per share in the prior year.
Total interest income for the year ended September 30, 2010, was
$83.2 million, a decrease of $6.6 million from fiscal year 2009. The
average yield on interest-earning assets decreased slightly during
fiscal 2010 to 6.01% from 6.02% during fiscal 2009, which resulted in a
decrease in interest income of $589,000. The average balance of
interest-earning assets decreased from $1,491.1 million during fiscal
2009 to $1,384.1 million during fiscal 2010, resulting in a decrease in
interest income of $6.3 million.
Interest income on loans decreased $6.4 million to $78.5 million
in fiscal 2010, compared to $84.9 million during fiscal 2009. A
decrease of $5.7 million resulted from a $90.1 million decrease in the
average balance of loans outstanding over the prior year.
Additionally, a decrease of $812,000 resulted from a 6 basis point
decrease in the average yield on loans outstanding during the fiscal
year. The weighted average rate on loans receivable at September 30,
2010, was 5.97%, a 32 basis point decrease from September 30, 2009.
Interest income on mortgage-backed securities increased $1.1 million to
$3.2 million in fiscal 2010, compared to $2.0 million during fiscal
2009. An increase of $401,000 resulted from a $10.7 million increase
in the average balance of mortgage-backed securities from the prior
year. Additionally, an increase of $612,000 was the result of a 112
basis point increase in the average yield on mortgage-backed securities
during the fiscal year. Interest and dividend income on investment
securities decreased $1.2 million to $1.5 million in fiscal 2010,
compared to $2.8 million during fiscal 2009. A decrease of $1.0
million resulted from a $21.7 million decrease in the average balance
of investment securities from the prior year. In addition, interest
and dividend income on investment securities decreased as a result of a
53 basis point decrease in the average yield on investment securities
during the fiscal year.
Total interest expense during the year ended September 30, 2010,
decreased $13.1 million from the prior year. Specifically, interest on
customer and brokered deposit accounts decreased $7.5 million during
fiscal 2010. Of that decrease, approximately $7.8 million resulted
from a 90 basis point decrease in the average rate paid on such
interest-costing liabilities. This decrease was partially offset by a
$473,000 increase in interest on customer and brokered deposits which
resulted from a $16.4 million increase in the average balance of such
liabilities. A decrease in interest on FHLB advances of approximately
$3.7 million resulted from a $110.9 million decrease in the average
balance of FHLB advances over the prior year. Additionally, the
average rate paid on FHLB advances decreased 37 basis points, which
resulted in a decrease in interest on FHLB advances of approximately
$1.8 million from fiscal year 2009. Management continues to use FHLB
advances as a primary source of short-term financing. Interest
expense on subordinated debentures decreased $353,000 resulting from a
140 basis point decrease in the average rate paid on such liabilities
from the prior year.
The Bank's net interest income is impacted by changes in market
interest rates, which have varied greatly over time. Changing interest
rates also affect the level of loan prepayments and the demand for new
loans. Management monitors the Bank's net interest spreads (the
difference between yields received on assets and paid on liabilities)
and, although constrained by market conditions, economic conditions,
and prudent underwriting standards, it offers deposit rates and loan
rates that maximize net interest income. Since the relative spread
between financial assets and liabilities is constantly changing, North
American's current net interest spread may not be an indication of
future net interest income.
9
The provision for losses on loans was $30.5 million during the
year ended September 30, 2010, compared to $11.3 million during fiscal
2009. The allowance for loan losses was $32.3 million or 3.01% of the
total loan portfolio held for investment and approximately 110% of
total nonaccrual loans as of September 30, 2010. This compares with an
allowance for loan losses of $20.7 million or 1.64% of the total loan
portfolio held for investment and approximately 51% of the total
nonaccrual loans as of September 30, 2009. The increase in the
allowance for loan loss of $11.6 million resulted from the $30.5
million provision for loss, which was partially offset by net charge-
offs for the year of $18.9 million. The increase in the provision for
loss from the prior year resulted primarily from increases in loans
classified as substandard or loss during fiscal 2010. In addition,
the Company enhanced its ALLL methodology during the fiscal year to
incorporate a shorter historical loss "look-back" period, and to more
formally document qualitative factors used to determine the appropriate
level of allowance for losses on loans. Management believes that the
provision for loan losses is sufficient to provide for a level of loan
loss allowance at year end that would adequately absorb all estimated
credit losses on outstanding balances over the subsequent twelve-month
period. 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
In accordance with the Supervisory Agreement of April 30, 2010,
with the Office of Thrift Supervision, which is described more fully in
Footnote 26, the Bank was required to engage a third-party consultant
to perform an independent review of a significant portion of its non-
homogenous loan portfolios, an independent assessment of its internal
asset review structure, and an independent assessment of its allowance
for loan and lease losses methodology. This review was completed
during the quarter ended June 30, 2010, and resulted in an increase in
classified assets, primarily in the Bank's residential land development
portfolio. As new home and lot sales continue to slow in the current
economic environment, management determined that the primary source of
repayment for such loans was weakened and that it was prudent to
classify them, typically as substandard. It should be noted that,
although they are adversely classified, many of these loans continue to
perform according to their contractual terms and, as such, are not
deemed impaired at September 30, 2010.
With regard to loan portfolio concentrations at September 30,
2010, loans secured by business properties made up 32% of the Bank's
total loans receivable, and 21% of the allowance for loan losses was
allocated to such loans. This compares to 34% of total loans
receivable and 43% of the allowance at September 30, 2009. At
September 30, 2010, loans secured by residential properties made up 46%
percent of the Bank's total loans receivable, and 14% of the allowance
for loan losses was allocated to such loans. This compares to 34% of
total loans receivable and 18% of the allowance at September 30, 2009.
At September 30, 2010, construction and development loans made up 15%
of the Bank's total loans receivable, and 59% percent of the allowance
for loan losses was allocated to such loans. This compares to 23% of
total loans receivable and 30% of the allowance at September 30, 2009.
Total other income for fiscal year 2010 was $43.6 million, an
increase of $3.1 million from the amount earned in fiscal year 2009.
Specifically, gain on sale of loans held for sale increased $7.6
million due to increased mortgage banking volume and spreads from the
prior year. Gain on sale of securities available for sale increased
$993,000 due to an increased volume of securities sold during the year.
Customer service fees and charges increased $753,000 due primarily to
an increase in miscellaneous loan origination fees resulting from the
increase in mortgage banking volume. Loan servicing fees increased
$295,000 due primarily to a decrease in capitalized servicing
amortization, which resulted from a decrease in actual prepayments and
estimated future repayments of the underlying mortgage loans during the
period. These increases were partially offset by a $1.5 million
decrease in other income related resulting from an increase in expenses
related to foreclosed assets held for sale. Provision for loss on real
estate owned increased $1.9 million due primarily to deterioration in
the value of foreclosed assets held for sale during the year. In
addition, the Company recorded a $3.1 million impairment charge related
to the Company's investment in LLCs during fiscal 2010.
Total general and administrative expenses for fiscal 2010 were
$57.7 million, an increase of $11.0 million from the prior year.
Specifically, compensation and fringe benefits increased $1.1 million
due primarily to the addition of personnel in the Company's information
technology, mortgage banking, and loan servicing departments.
Commission-based mortgage banking compensation increased $4.5 million
due primarily to an increase in mortgage banking volume and spreads
from the prior year. Federal deposit insurance premium expense
increased $1.6 million due to an increase in insurance rates during the
year. Advertising and business promotion expense increased $869,000
from the prior year due to costs related the Company's rebranding
efforts and due to an increase in costs related to the mortgage banking
operation. Premises and equipment expenses increased $248,000 due
primarily to increased depreciation and maintenance costs related to
the Company's software applications. Additionally, other expense
increased $2.7 million from the prior year due primarily to increases
in legal, consulting, and audit fees and other operating expenses
related to the Company's lending operations.
10
COMPARISON OF YEARS ENDED SEPTEMBER 30, 2009 AND 2008
For the fiscal year ended September 30, 2009, the Company had net
income of $18.7 million, or $2.38 per share, compared to net income
$9.3 million, or $1.18 per share in the prior year.
Total interest income for the year ended September 30, 2009, was
$89.8 million, a decrease of $5.7 million from fiscal year 2008. The
average yield on interest-earning assets decreased during fiscal 2009
to 6.02% from 6.49% during fiscal 2008, which resulted in a decrease in
interest income of $5.9 million. The average balance of interest-
earning assets increased from $1,472.1 million during fiscal 2008 to
$1,491.1 million during fiscal 2009, resulting in an increase in
interest income of $334,000.
Interest income on loans decreased $6.7 million to $84.9 million
in fiscal 2009, compared to $91.6 million during fiscal 2008. A
decrease of $6.0 million resulted from a 44 basis point decrease in the
average yield on loans outstanding during the fiscal year. The
weighted average rate on loans receivable at September 30, 2009, was
6.29%, a 20 basis point decrease from September 30, 2008.
Additionally, interest income on loans decreased $704,000 resulting
from a $10.5 million decrease in the average balance of loans
outstanding over the prior year. Interest income on mortgage-backed
securities decreased $504,000 to $2.0 million in fiscal 2009, compared
to $2.5 million during fiscal 2008. A decrease of $591,000 resulted
from a $16.5 million decrease in the average balance of mortgage-backed
securities from the prior year. This decrease was partially offset by
a 15 basis point increase in the average yield on mortgage-backed
securities during the fiscal year. Interest and dividend income on
investment securities increased $1.7 million to $2.8 million in fiscal
2009, compared to $1.1 million during fiscal 2008. An increase of $1.3
million resulted from a $31.6 million increase in the average balance
of investment securities from the prior year. In addition, interest
and dividend income on investment securities increased as a result of a
59 basis point increase in the average yield on investment securities
during the fiscal year.
Total interest expense during the year ended September 30, 2009,
decreased $14.1 million from the prior year. Specifically, interest on
customer and brokered deposit accounts decreased $5.7 million during
fiscal 2009. Of that decrease, approximately $7.6 million resulted
from a 94 basis point decrease in the average rate paid on such
interest-costing liabilities. This decrease was partially offset by a
$62.7 million increase in the average balance of customer and brokered
deposits accounts from the prior year. The average rate paid on FHLB
advances decreased 118 basis points, which resulted in a decrease in
interest on FHLB advances of approximately $6.3 million from fiscal
year 2008. In addition, a decrease in interest on FHLB advances of
approximately $2.1 resulted from a $45.3 million decrease in the
average balance of FHLB advances over the prior period. Management
continues to use FHLB advances as a primary source of short-term
financing. Interest expense on subordinated debentures decreased
$500,000 resulting from a 201 basis point decrease in the average rate
paid on such liabilities from the prior year.
The provision for losses on loans was $11.3 million during
the year ended September 30, 2009, compared to $6.2 million during
fiscal 2008. The allowance for loan losses was $20.7 million or 1.64%
of the total loan portfolio held for investment and approximately 51%
of total nonaccrual loans as of September 30, 2009. This compares with
an allowance for loan losses of $13.8 million or 1.07% of the total
loan portfolio held for investment and approximately 39% of the total
nonaccrual loans as of September 30, 2008. The increase in the
allowance for loan loss of $6.9 million resulted from the $11.3 million
provision for loss, which was partially offset by net charge-offs for
the year of $4.4 million. The increase in the provision for loss from
the prior year related primarily to significant increases in loans
classified as substandard or loss. Additionally, management determined
that the significant increase in the allowance for loan loss was
appropriate due to the continued deterioration in the real estate
markets. With regard to loan portfolio concentrations at September 30,
2009, loans secured by business properties made up 34% of the Bank's
total loans receivable, and 43% of the allowance for loan losses was
allocated to such loans. This compares to 34% of total loans
receivable and 41% of the allowance at September 30, 2008. At
September 30, 2009, loans secured by residential properties made up 34%
of the Bank's total loans receivable, and 18% of the allowance for loan
losses was allocated to such loans. This compares to 31% of total
loans receivable and 9% of the allowance at September 30, 2008. At
September 30, 2009, construction and development loans made up 23% of
the Bank's total loans receivable, and 30% of the allowance for loan
losses was allocated to such loans. This compares to 27% of total
loans receivable and 41% of the allowance at September 30, 2008.
Management believes that the provision for loan losses is sufficient to
provide for a level of loan loss allowance at year end that would
adequately absorb all estimated credit losses on outstanding balances
over the subsequent twelve-month period.
11
Total other income for fiscal year 2009 was $40.5 million, an
increase of $22.1 million from the amount earned in fiscal year 2008.
Specifically, gain on sale of loans held for sale increased $15.0
million due to increased mortgage banking volume from the prior year.
Gain on sale of securities available for sale increased $4.4 million
due to the sale of corporate debt securities during the year.
Provision for loss on real estate owned decreased $1.3 million due to a
decrease in charge-offs of foreclosed assets during the year and due to
the elimination of general reserves related to foreclosed assets held
for sale, which are carried at fair value less estimated selling costs.
Customer service fees and charges increased $1.3 million due primarily
to an increase in miscellaneous loan origination fees resulting from
the increase in mortgage banking volume.
Total general and administrative expenses for fiscal 2009 were
$46.7 million, an increase of $9.9 million from the prior year.
Specifically, compensation and fringe benefits increased $2.1 million
due primarily to the addition of personnel in the Company's information
technology, mortgage banking, training, and loan servicing departments.
Commission-based mortgage banking compensation increased $6.0 million
due primarily to an increase in mortgage banking volume from the prior
year. Additionally, advertising and business promotion expense
increased $438,000 due primarily to increased costs related to the
mortgage banking operation. Federal deposit insurance premium expense
increased $1.1 million due to an increase in insurance rates during the
year and due to a $717,000 special assessment that was payable on
September 30, 2009.
ASSET/LIABILITY MANAGEMENT
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.
The objective of the Bank's IRR management process is to maximize
net interest income over a range of possible interest rate paths. The
monitoring of interest rate sensitivity on both the interest-earning
assets and the interest-costing liabilities are key to effectively
managing IRR. Management maintains an IRR policy, which outlines a
methodology for monitoring interest rate risk. The Board of Directors
reviews this policy and approves changes on a quarterly basis. The IRR
policy also identifies the duties of the Bank's Asset/Liability
Committee ("ALCO"). Among other things, the ALCO is responsible for
developing the Bank's annual business plan and investment strategy,
monitoring anticipated weekly cashflows, establishing prices for the
Bank's various products, and implementing strategic IRR decisions.
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.
The following table is an interest rate sensitivity analysis,
which summarizes information provided by the OTS that estimates the
changes in NPV of the Bank's portfolio of assets, liabilities, and off-
balance sheet items given a range of assumed changes in market interest
rates. These computations estimate the effect on the Bank's NPV of an
instantaneous and sustained change in market interest rates of plus and
minus 300 basis points, as well as the Bank's current IRR policy limits
on such estimated changes. The computations of the estimated effects
of interest rate changes are based on numerous assumptions, including a
constant relationship between the levels of various market interest
rates and estimates of prepayments of financial assets. The OTS
compiled this information using data from the Bank's Thrift Financial
Report as of September 30, 2010. The model output data associated with
the -200 and -300 basis point scenarios was suppressed because of the
relatively low current interest rate environment. Dollar amounts are
expressed in thousands.
NPV as % of PV of assets
Changes in Net portfolio value ------------------------
market ------------------------------------ Board approved
interest rates $ Amount $ Change % Change Actual minimum
---------------------------------------------------- ------------------------
+ 3% 182,898 (69,937) -28% 13.0% 6%
+ 2% 205,242 (47,593) -19% 14.2% 6%
+ 1% 230,074 (22,761) -9% 15.6% 7%
no change 252,836 -- -- 16.8% 8%
- 1% 270,778 17,942 +7% 17.6% 8%
- 2% -- -- -- -- 8%
- 3% -- -- -- -- 8%
12
Management cannot predict future interest rates and the
effect of changing interest rates on future net interest
margin, net income, or NPV can only be estimated. However,
management believes that its overall system of monitoring and
managing IRR is effective.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented
have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement
of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of
money over time due to inflation. Unlike most industrial companies,
most of the Bank's assets and liabilities are monetary in nature.
Except for inflation's impact on general and administrative expenses,
interest rates have a more significant impact on the Bank's performance
than do the effects of inflation. However, the level of interest rates
may be significantly affected by the potential changes in the monetary
policies of the Board of Governors of the Federal Reserve System in an
attempt to impact inflation. Interest rates do not necessarily move in
the same direction or in the same magnitude as the prices of goods and
services.
Changing interest rates impact the demand for new loans, which
affect the value and profitability of North American's loan origination
department. Rate fluctuations inversely affect the value of the Bank's
mortgage servicing portfolio because of their impact on mortgage
prepayments. Falling rates usually stimulate a demand for new loans,
which makes the mortgage banking operation more valuable, but also
encourages mortgage prepayments, which depletes the value of mortgage
servicing rights. Rising rates generally have the opposite effect on
these operations.
IMPACT OF CURRENT ECONOMIC CONDITIONS
The current protracted economic decline continues to present
financial institutions with unprecedented circumstances and challenges
which in some cases have resulted in large declines in the fair values
of investments and other assets, constraints on liquidity and
significant credit quality problems, including severe volatility in the
valuation of real estate and other collateral supporting loans. The
financial statements have been prepared using values and information
currently available to the Company.
Given the volatility of current economic conditions, the values of
assets and liabilities recorded in the financial statements could
change rapidly, resulting in material future adjustments in asset
values, the allowance for loan losses, and capital that could
negatively impact the Company's ability to meet regulatory capital
requirements and maintain sufficient liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Effective July 18, 2001, the OTS adopted a rule that removed the
regulation to maintain a specific average daily balance of liquid
assets, but retained a provision that requires institutions to maintain
sufficient liquidity to ensure their safe and sound operation. North
American maintains a level of liquid assets adequate to meet the
requirements of normal banking activities, including the repayment of
maturing debt and potential deposit withdrawals. The Bank's primary
sources of liquidity are the sale and repayment of loans, retention of
existing or newly acquired retail deposits, and FHLB advances.
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 September 30, 2010, the Bank had a total borrowing capacity at FHLB
of $495.0 million, and outstanding advances of $286.0 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, to $135.0 million by June 30, 2011 and
to $125.0 million by June 30, 2012. As of September 30, 2010, the
Bank's brokered deposits totaled $66.9 million. Thus, the Bank could
acquire an additional $78.1 million in brokered deposits and still
comply with the plan as of September 30, 2010.
13
Fluctuations in the level of interest rates typically impact
prepayments on mortgage loans and mortgage related securities. During
periods of falling rates, these prepayments increase and a greater
demand exists for new loans. The Bank's ability to attract and retain
customer deposits is partially impacted by area competition and by
other alternative investment sources that may be available to the
Bank's customers in various interest rate environments. Management
believes that the Bank will retain most of its maturing time deposits
in the foreseeable future. However, any material funding needs that
may arise in the future can be reasonably satisfied through the use of
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
currently aware of any other trends, market conditions, or other
economic factors that could materially impact the Bank's primary
sources of funding or affect its future ability to meet obligations as
they come due. Although future changes to the level of market interest
rates is uncertain, management believes its sources of funding will
continue to remain stable during upward and downward interest rate
environments
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Various commitments and contingent liabilities arise in the normal
course of business, which are not required to be recorded on the
balance sheet. The most significant of these are loan commitments and
standby letters of credit. The bank had outstanding commitments to
originate mortgage loans for its portfolio and standby letters of
credit totaling $5.9 million and $1.3 million, respectively, at
September 30, 2010. In addition, the Bank had outstanding commitments
to originate mortgage loans totaling $298.1 million at September 30,
2010, which it had committed to sell to outside investors. Since
commitments may expire unused or be only partially used, these totals
do not necessarily reflect future cash requirements. Management does
not anticipate any material losses arising from commitments and
contingent liabilities and believes that there are no material
commitments to extend credit that represent risk of an unusual nature.
Management anticipates that the Company will continue to have
sufficient funds through repayments and maturities of loans and
securities, deposits and borrowings, to meet its commitments.
The following table discloses payments due on the Company's
contractual obligations at September 30, 2010:
Due in Due from Due from Due in
Total < 1 year 1-3 years 3-5 years > 5 years
----------------------------------------------------------
Advances from FHLB $ 286,000 186,000 100,000 -- --
Subordinated debentures 25,774 -- -- -- 25,774
Operating leases 2,242 452 1,286 504 --
----------------------------------------------------------
Total contractual obligations $ 314,016 186,452 101,286 504 25,774
==========================================================
CRITICAL ACOOUNTING POLICIES
The Company has identified the accounting policies below as
critical to the Company's operations and to understanding the Company's
consolidated financial statements. Following is an explanation of the
methods and assumptions underlying their application.
ALLOWANCE FOR LOAN AND LEASE 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.
14
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.
VALUATION OF DERIVATIVE INSTRUMENTS
The Bank has commitments outstanding to extend credit that have
not closed prior to the end of the period. As the Bank enters into
commitments to originate loans, it also enters into commitments to sell
the loans in the secondary market. Additionally, the Bank has
commitments to sell loans that have closed prior to the end of the
period. Such commitments to originate loans held for sale and to sell
loans are considered derivative instruments in accordance with GAAP,
which requires the Bank to recognize all derivative instruments in the
balance sheet and to measure those instruments at fair value.
Commitments to originate loans held for sale 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.
VALUATION OF EQUITY METHOD INVESTMENTS
The Company is a partner in two limited liability companies, 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 evaluates its investments for impairment, in
accordance with ASC 323-10-35-32, which provides guidance related to a
loss in value of an equity method investment. The Company utilizes a
multi-faceted approach to measure the potential impairment. The
internal model utilizes liquidation or appraised values determined by
an independent third party appraisal; an on-going business, or
discounted cash flows value; and a combination of both the previous
approaches. The significant inputs include raw land values, absorption
rates of lot sales, and a market discount rate. Management believes
this multi-faceted approach is reasonable given the highly subjective
nature 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).
15
NASB Financial, Inc. and Subsidiary
Consolidated Balance Sheets
September 30,
-----------------------
2010 2009
-----------------------
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 14,033 63,250
Securities:
Available for sale, at fair value 28,092 21,654
Held to maturity, at cost 1,232 1,290
Stock in Federal Home Loan Bank, at cost 15,873 26,640
Mortgage-backed securities:
Available for sale, at fair value 911 46,549
Held to maturity, at cost 46,276 11,125
Loans receivable:
Held for sale, at fair value 179,845 81,367
Held for investment, net 1,073,357 1,259,694
Allowance for loan losses (32,316) (20,699)
Accrued interest receivable 5,520 6,195
Foreclosed assets held for sale, net 38,362 10,140
Premises and equipment, net 13,836 13,393
Investment in LLCs 17,799 21,045
Mortgage servicing rights, net 263 351
Deferred income tax asset, net 14,758 6,651
Other assets 16,355 10,917
-----------------------
$ 1,434,196 1,559,562
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Customer deposit accounts $ 866,559 696,781
Brokered deposit accounts 66,894 207,844
Advances from Federal Home Loan Bank 286,000 441,026
Subordinated debentures 25,774 25,774
Escrows 11,149 10,178
Income taxes payable 504 4,210
Liability for unrecognized tax benefits -- 326
Accrued expenses and other liabilities 9,554 7,035
-----------------------
Total liabilities 1,266,434 1,393,174
-----------------------
Stockholders' equity:
Common stock of $0.15 par value: 20,000,000 authorized; 9,857,112
shares issued at September 30, 2010 and 2009 1,479 1,479
Additional paid-in capital 16,603 16,525
Retained earnings 187,674 184,891
Treasury stock, at cost; 1,989,498 shares at September 30, 2010
and 2009 (38,418) (38,418)
Accumulated other comprehensive income 424 1,911
-----------------------
Total stockholders' equity 167,762 166,388
-----------------------
$ 1,434,196 1,559,562
=======================
See accompanying notes to consolidated financial statements.
16
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended September 30,
------------------------------------
2010 2009 2008
------------------------------------
(Dollars in thousands, except per share data)
Interest on loans receivable $ 78,508 84,934 91,635
Interest on mortgage-backed securities 3,175 2,042 2,546
Interest and dividends on securities 1,521 2,750 1,086
Other interest income 12 99 254
------------------------------------
Total interest income 83,216 89,825 95,521
------------------------------------
Interest on customer and brokered deposit accounts 17,476 25,011 30,739
Interest on advances from Federal Home Loan Bank 11,388 16,552 24,410
Interest on subordinated debentures 504 857 1,357
------------------------------------
Total interest expense 29,368 42,420 56,506
------------------------------------
Net interest income 53,848 47,405 39,015
Provision for loan losses 30,500 11,250 6,200
------------------------------------
Net interest income after provision
for loan losses 23,348 36,155 32,815
------------------------------------
Other income (expense):
Loan servicing fees, net 122 (173) 18
Impairment recovery on mortgage servicing
rights 12 43 48
Customer service fees and charges 7,626 6,873 5,547
Provision for loss on real estate owned (2,649) (727) (2,050)
Gain on sale of securities available for sale 5,558 4,565 122
Gain from loans receivable held for sale 36,617 29,042 14,043
Impairment loss on investments in LLCs (3,126) -- --
Other (580) 871 679
------------------------------------
Total other income 43,580 40,494 18,407
------------------------------------
General and administrative expenses:
Compensation and fringe benefits 18,715 17,615 15,553
Commission-based mortgage banking compensation 17,981 13,518 7,482
Premises and equipment 4,220 3,972 4,147
Advertising and business promotion 5,612 4,743 4,305
Federal deposit insurance premiums 2,854 1,246 104
Other 8,285 5,622 5,228
------------------------------------
Total general and administrative expenses 57,667 46,716 36,819
------------------------------------
Income before income tax expense 9,261 29,933 14,403
------------------------------------
Income tax expense (benefit):
Current 10,111 13,027 9,989
Deferred (7,173) (1,803) (4,882)
------------------------------------
Total income tax expense 2,938 11,224 5,107
------------------------------------
Net income $ 6,323 18,709 9,296
====================================
Basic earnings per share $ 0.80 2.38 1.18
====================================
Diluted earnings per share $ 0.80 2.38 1.18
====================================
Basic weighted average shares outstanding 7,867,614 7,867,614 7,867,614
====================================
See accompanying notes to consolidated financial statements.
17
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years ended September 30,
---------------------------------
2010 2009 2008
---------------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 6,323 18,709 9,296
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,779 1,768 1,809
Amortization and accretion, net (1,385) (5,387) (1,068)
Deferred income tax benefit (7,173) (1,803) (4,882)
Gain on sale of securities available for sale (5,558) (4,565) (122)
Loss from investment in LLCs 128 117 265
Impairment loss on investment in LLCs 3,126 -- --
Impairment recovery on mortgage servicing rights (12) (43) (48)
Gain from loans receivable held for sale (36,617) (29,042) (14,043)
Provision for loan losses 30,500 11,250 6,200
Provision for loss on real estate owned 2,649 727 2,050
Origination of loans receivable held for sale (1,765,568) (1,563,400) (884,725)
Sale of loans receivable held for sale 1,703,708 1,576,436 899,486
Stock based compensation - stock options 78 41 84
Changes in:
Net fair value of loan-related commitments (661) (637) 31
Accrued interest receivable 675 691 1,512
Accrued expenses, other liabilities and
income taxes payable (5,982) 2,144 996
---------------------------------
Net cash provided by (used in) operating activities (73,990) 7,006 16,841
---------------------------------
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity 11,445 649 82
Available for sale 3,738 13,408 21,972
Principal repayments of mortgage loans receivable held
for investment 225,700 256,076 309,108
Principal repayments of other loans receivable 5,446 5,415 10,524
Principal repayments of investment securities:
Held to maturity 99 -- --
Available for sale 6 6 7
Loan origination - mortgage loans receivable
held for investment (102,550) (234,868) (342,219)
Loan origination - other loans receivable (3,158) (4,355) (7,847)
Purchase of mortgage loans receivable held for investment (1,236) (1,610) (9,500)
Proceeds from sale (purchase) of Federal Home Loan
Bank stock 10,766 (356) (3,977)
Purchase of mortgage-backed securities held to maturity (54,806) (11,632) --
Purchase of securities available for sale (50,403) (110,005) --
Purchase of securities held to maturity -- (1,283) --
Proceeds from sale of mortgage-backed securities
available for sale 51,154 -- --
Proceeds from sale of securities available for sale 46,461 96,135 122
Proceeds from sale of real estate owned 13,881 10,259 5,427
Purchase of premises and equipment, net (2,242) (562) (643)
Investment in LLC (7) (479) (1,890)
Other (392) (1,334) (330)
---------------------------------
Net cash provided by (used in) investing activities 153,902 15,464 (19,164)
---------------------------------
18
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
Years ended September 30,
---------------------------------
2010 2009 2008
---------------------------------
(Dollars in thousands)
Cash flows from financing activities:
Net (decrease) increase in customer and brokered
deposit accounts 28,440 134,723 (86,570)
Proceeds from advances from Federal Home Loan Bank 98,000 444,000 378,000
Repayment of advances from Federal Home Loan Bank (253,000) (553,000) (286,650)
Cash dividends paid (3,540) (7,080) (7,080)
Change in escrows 971 402 308
---------------------------------
Net cash provided by (used in) financing activities (129,129) 19,045 (1,992)
---------------------------------
Net increase (decrease) in cash and cash equivalents (49,217) 41,515 (4,315)
Cash and cash equivalents at beginning of period 63,250 21,735 26,050
---------------------------------
Cash and cash equivalents at end of period $ 14,033 63,250 21,735
=================================
Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds) $ 14,100 13,114 6,613
Cash paid for interest 30,704 41,812 58,686
Supplemental schedule of non-cash investing and financing
activities:
Conversion of loans receivable to real estate owned $ 59,357 18,884 10,465
Conversion of real estate owned to loans receivable 344 391 2,772
Capitalization of originated mortgage servicing rights 5 10 --
Transfer of loans from held for investment to held for
sale -- -- 17,515
Transfer of securities from held to maturity to
available for sale 8,361 -- --
See accompanying notes to consolidated financial statements.
19
NASB Financial, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive stockholders'
stock capital earnings stock (loss) income equity
---------------------------------------------------------------------
(Dollars in thousands)
Balance at October 1, 2007 $ 1,479 16,400 170,613 (38,418) (682) 149,392
Comprehensive income:
Net income -- -- 9,296 -- -- 9,296
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- 937 937
----------
Total comprehensive income 10,233
Cash dividends paid -- -- (7,080) -- -- (7,080)
Stock based compensation expense -- 84 -- -- -- 84
Adjustment for the adoption of
FIN 48 -- -- (217) -- -- (217)
---------------------------------------------------------------------
Balance at September 30, 2008 $ 1,479 16,484 172,612 (38,418) 255 152,412
Comprehensive income:
Net income -- -- 18,709 -- -- 18,709
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- 1,656 1,656
----------
Total comprehensive income 20,365
Cash dividends paid -- -- (7,080) -- -- (7,080)
Stock based compensation expense -- 41 -- -- -- 41
Adjustment for the adoption of
FAS 159, net of tax -- -- 650 -- -- 650
---------------------------------------------------------------------
Balance at September 30, 2009 $ 1,479 16,525 184,891 (38,418) 1,911 166,388
Comprehensive income:
Net income -- -- 6,323 -- -- 6,323
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- -- (1,487) (1,487)
----------
Total comprehensive income 4,836
Cash dividends paid -- -- (3,540) -- -- (3,540)
Stock based compensation expense -- 78 -- -- -- 78
---------------------------------------------------------------------
Balance at September 30, 2010 $ 1,479 16,603 187,674 (38,418) 424 167,762
======================================================================
Year ended
September 30, 2010
------------------
Reclassification disclosure:
Unrealized gain on available for sale securities,
net of income taxes of $1,209 $ 1,931
Reclassification adjustment for gain included in
net income, net of income taxes of $2,140 (3,418)
--------
Change in unrealized gain (loss) on available for sale
securities, net of income tax of $(931) $ (1,487)
========
Year ended
September 30, 2009
------------------
Reclassification disclosure:
Unrealized gain on available for sale securities,
net of income taxes of $2,794 $ 4,463
Reclassification adjustment for gain included in
net income, net of income taxes of $1,758 (2,807)
--------
Change in unrealized gain (loss) on available for sale
securities, net of income tax of $1,037 $ 1,656
========
See accompanying notes to consolidated financial statements.
20
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NASB
Financial, Inc. (the "Company"), its wholly-owned subsidiary, North
American Savings Bank, F.S.B. (the "Bank"), and the Bank's wholly-owned
subsidiary, Nor-Am Service Corporation. All significant inter-company
transactions have been eliminated in consolidation. The consolidated
financial statements do not include the accounts of our wholly owned
statutory trust, NASB Preferred Trust I (the "Trust"). The Trust
qualifies as a special purpose entity that is not required to be
consolidated in the financial statements of NASB Financial, Inc. The
Trust Preferred Securities issued by the Trust are included in Tier I
capital for regulatory capital purposes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand plus interest-
bearing deposits in the Federal Home Loan Bank of Des Moines totaling
$9.7 million and $60.8 million as of September 30, 2010 and 2009,
respectively. The Federal Reserve Board ("FRB") requires federally
chartered savings banks to maintain non-interest-earning cash reserves
at specified levels against their transaction accounts. Required
reserves may be maintained in the form of vault cash, a non-interest-
bearing account at a Federal Reserve Bank, or a pass-through account,
as defined by FRB. At September 30, 2010, the Bank's reserve
requirement was $3.7 million.
SECURITIES AND MORTGAGE-BACKED SECURITIES
Securities and mortgage-backed securities are classified as held
to maturity when the Company has the positive intent and ability to
hold the securities to maturity. Securities and mortgage-backed
securities not classified as held to maturity or trading are classified
as available for sale. As of September 30, 2010 and 2009, the Company
had no assets designated as trading. Securities and mortgage-backed
securities held to maturity are stated at cost. Securities and
mortgage-backed securities classified as available for sale are
recorded at their fair values, with unrealized gains and losses, net of
income taxes, reported as accumulated other comprehensive income or
loss.
Premiums and discounts are recognized as adjustments to interest
income over the life of the securities using a method that approximates
the level yield method. Gains or losses on the disposition of
securities are based on the specific identification method. 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.
Management monitors the securities and mortgage-backed securities
portfolios for impairment on an ongoing basis. This process involves
monitoring market conditions and other relevant information, including
external credit ratings, to determine whether or not a decline in value
is other than temporary. If management intends to sell an impaired
security or mortgage-backed security, or if it is more likely than not
that management will be required to sell the impaired security prior to
recovery of its amortized cost basis, the Bank will recognize a loss in
earnings. If management does not intend to sell a debt security or
mortgage-backed security, or if it is more likely than not that
management will not be required to sell the impaired security prior to
recovery of its amortized costs basis, regardless of whether the
security is classified as available for sale or held to maturity, the
Bank will recognize the credit component of the loss in earnings and
the remaining portion in other comprehensive income. The credit loss
component recognized in earnings is the amount of principal cash flows
not expected to be received over the remaining life of the security.
The amount of other than temporary impairment included in other
comprehensive income is amortized over the remaining life of the
security.
LOANS RECEIVABLE HELD FOR SALE
As the Bank originates 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 are sold with servicing released or
converted into mortgage-backed securities ("MBS") and sold with the
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 the portfolio or sold and if sold, which method
of sale is appropriate.
Loans held for sale are carried at fair value. Gains or losses on
such sales are recognized using the specific identification method.
Transfers of loan receivable held for sale are accounted for as sales
when control over the asset has been surrendered. The Bank issues
various representations and warranties and standard recourse provisions
associated with the sale of loans, which are described more fully in
Footnote 6.
21
LOANS RECEIVABLE HELD FOR INVESTMENT, NET
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount
of unpaid principal less an allowance for loan losses, undisbursed loan
funds and unearned discounts and loan fees, net of certain direct loan
origination costs. Interest on loans is credited to income as earned
and accrued only when it is deemed collectible. Loans are placed on
nonaccrual status when, in the opinion of management, the full timely
collection of principal or interest is in doubt. The accrual of
interest is discontinued when principal or interest payments become
doubtful. As a general rule, this occurs when the loan becomes ninety
days past due. When a loan is placed on nonaccrual status, previously
accrued but unpaid interest is reversed against current income.
Subsequent collections of cash may be applied as reductions to the
principal balance, interest in arrears or recorded as income, depending
on Bank management's assessment of the ultimate collectibility of the
loan. Nonaccrual loans may be restored to accrual status when
principal and interest become current and the full payment of principal
and interest is expected.
Net loan fees and direct loan origination costs are deferred and
amortized as yield adjustments to interest income using the level-yield
method over the contractual lives of the related loans.
ALLOWANCE FOR LOAN LOSSES
The Bank considers a loan to be impaired when management believes
it will be unable to collect all principal and interest due according
to the contractual terms of the loan. If a loan is impaired, the Bank
records a loss valuation equal to the excess of the loan's carrying
value over the present value of the estimated future cash flows
discounted at the loan's initial effective rate, or the loan's
observable market price, or the fair value of the collateral if the
loan is collateral dependent. One-to-four family residential loans and
consumer loans are collectively evaluated for impairment. Loans on
residential properties with greater than four units, on construction
and development and commercial properties are evaluated for impairment
on a loan by loan basis. The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is
based on the Bank's past loan loss experience, known and inherent
losses in the portfolio, and various subjective factors such as
economic and business conditions. Assessing the adequacy of the
allowance for loan losses is inherently subjective as it requires
making material estimates, including the amount and timing of future
cash flows expected to be received on impaired loans that may be
susceptible to significant change. In management's opinion, the
allowance, when taken as a whole, is adequate to absorb reasonable
estimated loan losses inherent in the Bank's loan portfolio.
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.
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.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost, less accumulated
depreciation. Depreciation of premises and equipment is provided over
the estimated useful lives (from three to forty years for buildings and
improvements, and from three to ten years for furniture, fixtures, and
equipment) of the respective assets using the straight-line method.
Maintenance and repairs are charged to expense. Major renewals and
improvements are capitalized. Gains and losses on dispositions are
credited or charged to earnings as incurred.
INVESTMENT IN LLCs
The Company is a partner in two limited liability companies, 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.
STOCK OPTIONS
The Company has a stock-based employee compensation plan which is
described more fully in Footnote 18. The Company recognizes
compensation cost over the five-year service period for its stock
option awards. Stock based compensation expense for stock options
totaled $78 thousand ($48 thousand, net of tax), $41 thousand ($25
thousand, net of tax) and $84 thousand ($52 thousand, net of tax)
during the years ended September 30, 2010, 2009 and 2008, respectively.
22
INCOME TAXES
The Company files a consolidated Federal income tax return with
its subsidiaries using the accrual method of accounting.
The Company provides for income taxes using the asset/liability
method. Deferred income taxes are recognized for the tax consequences
of temporary differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities.
The Bank's bad debt deduction for the years ended September 30,
2010, 2009 and 2008, was based on the specific charge off method. The
percentage method for additions to the tax bad debt reserve was used
prior to the fiscal year ended September 30, 1997. Under the current
tax rules, Banks are required to recapture their accumulated tax bad
debt reserve, except for the portion that was established prior to
1988, the "base-year." The recapture of the excess reserve was
completed over a six-year phase-in-period that began with the fiscal
year ended September 30, 1999. A deferred income tax liability is
required to the extent the tax bad debt reserve exceeds the 1988 base
year amount. Retained earnings include approximately $3.7 million
representing such bad debt reserve for which no deferred taxes have
been provided. Distributing the Bank's capital in the form of stock
redemptions caused the Bank to recapture a significant amount of its
bad debt reserve prior to the phase-in period.
MORTGAGE SERVICING RIGHTS
Servicing assets and other retained interests in transferred
assets are measured by allocating the previous carrying amount between
the assets sold, if any, and retained interest, if any, based on their
relative fair values at the date of the transfer, and servicing assets
and liabilities are subsequently measured by (1) amortization in
proportion to and over the period of estimated net servicing income or
loss, and (2) assessment for asset impairment or increased obligation
based on their fair values.
Originated mortgage servicing rights are recorded at cost based
upon the relative fair values of the loans and the servicing rights.
Servicing release fees paid on comparable loans and discounted cash
flows are used to determine estimates of fair values. Purchased
mortgage servicing rights are acquired from independent third-party
originators and are recorded at the lower of cost or fair value. These
rights are amortized in proportion to and over the period of expected
net servicing income or loss.
Impairment Evaluation - The Bank evaluates the carrying value of
capitalized mortgage servicing rights on a periodic basis based on
their estimated fair value. For purposes of evaluating and measuring
impairment of capitalized servicing rights, the Bank stratifies the
rights based on their predominant risk characteristics. The
significant risk characteristics considered by the Bank are loan type,
period of origination and stated interest rate. If the fair value
estimated, using a discounted cash flow methodology, is less than the
carrying amount of the portfolio, the portfolio is written down to the
amount of the discounted expected cash flows utilizing a valuation
allowance. The Bank utilizes consensus market prepayment assumptions
and discount rates to evaluate its capitalized servicing rights, which
considers the risk characteristics of the underlying servicing rights.
During the years ended September 30, 2010 and 2009, the value of
mortgage servicing rights increased, which resulted in a recovery of
valuation allowance of $12,000 and $43,000, respectively.
DERIVATIVE INSTRUMENTS
The Bank regularly enters into commitments to originate and sell
loans held for sale. Such commitments are considered derivative
instruments under GAAP, which requires the Bank to recognize all
derivative instruments in the balance sheet and to measure those
instruments at fair value. As of September 30, 2010 and 2009, the fair
value of loan related commitments resulted in a net asset of $1.3
million and $645,000, respectively
REVENUE RECOGNITION
Interest income, loan servicing fees, customer service fees and
charges and ancillary income related to the Bank's deposits and lending
activities are accrued as earned.
EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted-
average common shares outstanding during the year. Diluted earnings
per share is computed using the weighted average common shares and all
potential dilutive common shares outstanding during the year. Dilutive
securities consist entirely of stock options granted to employees as
incentive stock options under Section 442A of the Internal Revenue Code
as amended.
23
The computations of basic and diluted earnings per share are
presented in the following table. Dollar amounts are expressed in
thousands, except per share data.
Year Ended September 30,
--------------------------------------
2010 2009 2008
--------------------------------------
Net income $ 6,323 18,709 9,296
Average common shares outstanding 7,867,614 7,867,614 7,867,614
Average common share stock
options outstanding -- -- --
--------------------------------------
Average diluted common shares 7,867,614 7,867,614 7,867,614
Earnings per share:
Basic earnings per share $ 0.80 2.38 1.18
Diluted earnings per share 0.80 2.38 1.18
At September 30, 2010 and 2009, options to purchase 49,538 shares
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, as they were considered anti-dilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Codification ("ASC") 860-10, ASC 860-40 and
ASC 860-50 which enhances information reported to users of financial
statements by providing greater transparency about transfers of
financial assets and the company's continuing involvement in
transferred assets. This standard removes the concept of qualifying
special purpose entity, changes the requirements for derecognizing
financial assets, and requires enhanced disclosures to provide
financial statement users with greater transparency about transfers of
financial assets and a transferor's continuing involvement with
transfers of financial assets accounted for as sales. This standard is
effective for annual reporting periods beginning after November 15,
2009, for interim periods within the first annual reporting period and
for interim and annual reporting periods thereafter (effective October
1, 2010 for the Company). Management does not anticipate it will have
a material impact on the Company's consolidated financial statements.
In June 2009, the FASB issued ASC 805-20 and ASC 810-10 which
requires a company to perform a qualitative analysis when determining
whether it must consolidate a variable interest entity. This analysis
identifies the primary beneficiary of a variable interest entity as the
company that has both the power to direct the activities of the
variable interest entity that most significantly impact the entity's
economic performance, and the obligation to absorb losses of the entity
that could be significant to the variable interest entity or the right
to receive benefits from the entity that could potentially be
significant to the variable interest entity. This standard requires
the company to perform ongoing reassessments to determine if it must
consolidate a variable interest entity. This standard requires
disclosures about the company's involvement with the variable interest
entities and any significant changes in risk exposure due to that
involvement, how the involvement affects the company's financial
statements, and significant judgments and assumptions made in
determining whether it must consolidate the variable interest entity.
This standard is effective for annual reporting periods beginning after
November 15, 2009, for interim periods within the first annual
reporting period and for interim and annual reporting periods
thereafter (effective October 1, 2010 for the Company). Management
does not anticipate that this update will have a material impact on the
Company's consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update
("ASU") which requires a company to disaggregate, by portfolio segment
or class of financing receivable, certain existing disclosure and
provide certain new disclosures about its financing receivables and
related allowance for credit losses. Existing disclosures are amended
to require an entity to provide a roll-forward schedule of the
allowance for credit losses on a portfolio segment basis, with the
ending balance further disaggregated by impairment method. In
addition, the related recorded investment in financing receivables for
each portfolio or class of financing receivable must be disclosed,
along with the balance of impaired financing receivables and those in
nonaccrual status. The ASU also requires an entity to provide the
following additional disclosures about its financing receivables: the
credit quality indicators of financing receivables by class, the aging
of past due financing receivables at the end of the reporting period by
class, the nature and extent of troubled debt restructurings that
occurred during the period by class and their effect on the allowance
for credit losses, the nature and extent of financing receivables
modified as troubled debt restructurings within the previous 12 months
that defaulted during the reporting period by class and their effect on
the allowance for credit losses, and significant purchases and sales of
financing receivables during the period disaggregated by portfolio
segment. For public companies, this standard is effective for interim
and annual reporting periods ending on or after December 15, 2010.
Management does not anticipate that this update will have a material
impact on the Company's consolidated financial statements.
24
USE OF ESTIMATES
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions
that affect the amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported amounts of revenues
and expenses during the reported periods. Estimates were used to
establish loss reserves, the valuation of mortgage servicing rights,
accruals for loan recourse provisions, and fair values of financial
instruments. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts for 2009 and 2008 have been reclassified to
conform to the current year presentation.
(2) SECURITIES AVAILABLE FOR SALE
The following tables present a summary of securities available for
sale. Dollar amounts are expressed in thousands.
September 30, 2010
-----------------------------------------------------
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
=====================================================
September 30, 2009
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
Corporate debt securities $ 19,099 2,526 -- 21,625
Municipal securities 29 -- -- 29
-----------------------------------------------------
Total $ 19,128 2,526 -- 21,654
=====================================================
During the year ended September 30, 2010, the Company realized
gross gains of $4.1 million and no gross losses on the sale of
securities available for sale. During the year ended September 30,
2009, the Company realized gross gains of $4.6 million and no gross
losses on the sale of securities available for sale. There were no
sales of securities available for sale during the year ended September
30, 2008.
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 September 30, 2010. Dollar amounts are expressed
in thousands.
Less Than 12 Months 12 Months or Longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Trust preferred
securities $ 7,232 20 $ -- --
=============================================
25
The scheduled maturities of securities available for sale at
September 30, 2010, are presented in the following table. Dollar
amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due in less than one year $ 5 -- -- 5
Due from one to five years 18 -- -- 18
Due from five to ten years 3,170 194 -- 3,364
Due after ten years 24,261 464 20 24,705
-------------------------------------------
Total $ 27,454 658 20 28,092
===========================================
The principal balances of securities available for sale that are
pledged to secure certain obligations of the Bank as of September 30 are
as follows. Dollar amounts are expressed in thousands.
September 30, 2010
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
FRB Advances $ 6,002 475 -- 6,477
==============================================
(3) SECURITIES HELD TO MATURITY
The following tables present a summary of securities held to
maturity. Dollar amounts are expressed in thousands.
September 30, 2010
-----------------------------------------------------
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
=====================================================
September 30, 2009
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
Asset-backed securities $ 1,290 85 -- 1,375
----------------------------------------------------
Total $ 1,290 85 -- 1,375
=====================================================
The scheduled maturities of securities held to maturity at
September 30, 2010, are presented in the following table. Dollar
amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due after ten years $ 1,232 329 -- 1,561
============================================
26
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 years ended September 30, 2010 and 2009.
The principal balances of securities held to maturity that are
pledged to secure certain obligations of the Bank as of September 30
are as follows. Dollar amounts are expressed in thousands.
September 30, 2010
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
FRB Advances $ 1,232 329 -- 1,561
==============================================
(4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following tables present a summary of mortgage-backed
securities available for sale. Dollar amounts are expressed in
thousands.
September 30, 2010
-----------------------------------------------------
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
=====================================================
September 30, 2009
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
Pass-through certificates guaranteed
by GNMA - fixed rate $ 114 -- -- 114
Pass-through certificates guaranteed
by FNMA - adjustable rate 5,924 67 -- 5,991
FHLMC participation certificates:
Fixed rate 546 33 -- 579
Adjustable rate 39,384 481 -- 39,865
-----------------------------------------------------
Total $ 45,968 581 -- 46,549
=====================================================
27
During the year ended September 30, 2010, the Company realized
gross gains of $1.4 million and gross losses of $8,000 on the sale of
securities available for sale. There were no sales of mortgage-backed
securities available for sale during the years ended September 30, 2009
and 2008.
During the year ended September 30, 2010, the Bank transferred two
mortgage-backed securities with a total amortized cost of $8.4 million
from the held to maturity category to the available for sale category.
The amortized cost of the securities approximated its market value;
thus, there were no unrealized gains or losses at the date of transfer.
The decision was made to transfer the securities after it was
determined that there was a significant deterioration in the issuer's
creditworthiness, as ratings agencies had downgraded the security to
below investment grade. The mortgage-backed securities were
subsequently sold during the year ended September 30, 2010. The Bank
recognized a gain of $39,000 and a loss of $8,000 on the sale of these
securities.
The scheduled maturities of mortgage-backed securities available
for sale at September 30, 2010, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------------------------------------------
Due from five to ten years $ 403 34 -- 437
Due after ten years 457 17 -- 474
-------------------------------------------
Total $ 860 51 -- 911
===========================================
Actual maturities of mortgage-backed securities available for sale
may 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.
The principal balances of mortgage-backed securities available for
sale that are pledged to secure certain obligations of the Bank as of
September 30 are as follows. Dollar amounts are expressed in thousands.
September 30, 2010
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 447 20 -- 467
==============================================
September 30, 2009
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 984 14 -- 998
FHLB advances 43,468 527 -- 43,995
---------------------------------------------
Total $ 44,452 541 -- 44,993
==============================================
28
(5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
The following tables present a summary of mortgage-backed
securities held to maturity. Dollar amounts are expressed in
thousands.
September 30, 2010
-----------------------------------------------------
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
=====================================================
September 30, 2009
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-----------------------------------------------------
FHLMC participation certificates:
Fixed rate $ 59 4 -- 63
FNMA pass-through certificates:
Fixed rate 10 -- -- 10
Balloon maturity and
adjustable rate 43 -- -- 43
Collateralized mortgage obligations 11,013 214 -- 11,227
----------------------------------------------------
Total $ 11,125 218 -- 11,343
=====================================================
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 September 30, 2010. Dollar
amounts are expressed in thousands.
Less Than 12 Months 12 Months or Longer
--------------------- --------------------
Estimated Gross Estimated Gross
fair unrealized fair unrealized
value losses value losses
---------------------------------------------
Collateralized mortgage
obligations $ 15,755 209 $ -- --
=============================================
The scheduled maturities of mortgage-backed securities held to
maturity at September 30, 2010, are presented in the following table.
Dollar amounts are expressed in thousands.
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------------------------------------------
Due from one to five years $ 7 -- -- 7
Due from five to ten years 84 2 -- 86
Due after ten years 46,185 231 209 46,207
---------------------------------------------
Total $ 46,276 233 209 46,300
=============================================
29
Actual maturities of mortgage-backed securities held to maturity
may 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.
The principal balances of mortgage-backed securities held to
maturity that are pledged to secure certain obligations of the Bank as
of September 30 are as follows. Dollar amounts are expressed in
thousands.
September 30, 2010
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 24 -- -- 24
FRB advances 46,185 231 209 46,207
----------------------------------------------
Total $ 46,209 231 209 46,231
==============================================
September 30, 2009
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------------------------------------
Customer deposit accounts $ 37 2 -- 39
==============================================
All dispositions of mortgage-backed securities held to maturity
during fiscal 2010, 2009, and 2008 were the result of maturities, with
the exception of the transfers noted in Footnote 4.
(6) LOANS RECEIVABLE
The following table provides a detail of loans receivable as of
September 30. Dollar amounts are expressed in thousands.
HELD FOR INVESTMENT 2010 2009
---------------------------
Mortgage loans:
Permanent loans on:
Residential properties $ 347,177 363,132
Business properties 450,305 474,487
Partially guaranteed by VA or
insured by FHA 3,801 4,771
Construction and development 208,039 329,457
---------------------------
Total mortgage loans 1,009,322 1,171,847
Commercial loans 79,138 121,168
Installment loans and lease financing
to individuals 11,573 13,861
---------------------------
Total loans receivable held
for investment 1,100,033 1,306,876
Less:
Undisbursed loan funds (19,650) (38,807)
Unearned discounts and fees on
loans, net of deferred costs (7,026) (8,375)
---------------------------
Net loans receivable held
for investment $ 1,073,357 1,259,694
===========================
30
HELD FOR SALE 2010 2009
---------------------------
Mortgage loans:
Permanent loans on:
Residential properties $ 286,766 129,526
Less:
Undisbursed loan funds (106,921) (48,159)
--------------------------
Net loans receivable held for sale $ 179,845 81,367
==========================
Included in the loans receivable balances are participating
interests in mortgage loans and wholly owned mortgage loans serviced
by other institutions of approximately $16.4 million and $26.6 million
at September 30, 2010 and 2009, respectively.
Whole loans and participations serviced for others were
approximately $60.6 million and $93.3 million at September 30, 2010
and 2009, respectively. Loans serviced for others are not included in
the accompanying consolidated balance sheets.
First mortgage loans were pledged to secure FHLB advances in the
amount of approximately $847.2 million and $808.8 million at September
30, 2010 and 2009, respectively.
Aggregate loans to executive officers, directors and their
associates, including companies in which they have partial ownership
interest, did not exceed 5% of equity as of September 30, 2010 and
2009. Such loans were made under terms and conditions substantially
the same as loans made to parties not affiliated with the Bank.
As of September 30, 2010 and 2009, loans with an aggregate
principal balance of approximately $29.4 million and $40.6 million,
respectively, were on nonaccrual status. Gross interest income would
have increased by $1.8 million, $2.3 million and $1.8 million for the
years ended September 30, 2010, 2009 and 2008, respectively, if the
nonaccrual loans had been performing. As of September 30, 2010 and
2009, the Bank has no loans in its portfolio that are 90 days or more
past due and still accruing.
The following table presents the activity in the allowance for
losses on loans for 2010, 2009, and 2008. 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.
2010 2009 2008
---------------------------------
Balance at beginning of year $ 20,699 13,807 8,097
Provisions 30,500 11,250 6,200
Charge-offs (18,884) (4,377) (504)
Recoveries 1 19 14
---------------------------------
Balance at end of year $ 32,316 20,699 13,807
=================================
31
The following tables provide a summary of information on impaired
loans. Dollar amounts are expressed in thousands.
September 30,
-----------------
2010 2009
-----------------
Impaired loans with a valuation allowance $ 59,686 40,691
Impaired loans without a valuation allowance 24,753 11,400
-----------------
$ 84,439 52,091
=================
Allowance for loan losses applicable to
impaired loans $ 14,629 5,825
=================
2010 2009 2008
------------------------
Average balance of impaired loans $ 57,744 52,605 10,842
Interest income recognized on
impaired loans 4,019 1,946 489
Interest income received on a cash basis
on impaired loans 4,218 2,320 635
A restructuring of debt is considered a Troubled Debt
Restructuring (TDR) if, because of a debtor's financial difficulty, a
creditor grants concessions that it would not otherwise consider.
Included in the loans receivable balances are TDRs of approximately
$23.7 million and $23.4 million at September 30, 2010 and 2009,
respectively. At September 30, 2010 and 2009, no additional funds
were committed to be advanced in connection with TDRs.
Although the Bank has a diversified loan portfolio, a substantial
portion is secured by real estate. The following table presents
information as of September 30 about the location of real estate that
secures loans in the Bank's mortgage loan portfolio. The line item
"Other" includes total investments in other states of less than $10
million each. Dollar amounts are expressed in thousands.
2010
-------------------------------------------------------------
Residential
---------------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
------------------------------------------------------------------------------
Missouri $ 157,444 32,806 62,281 82,174 334,705
Kansas 42,539 5,978 31,579 114,966 195,062
Texas 17,127 7,697 46,632 6,088 77,544
Colorado 5,903 1,769 51,502 -- 59.174
Arizona 10,400 533 16,507 4,811 32,251
Oklahoma 2,727 3,953 19,837 -- 26,517
Florida 14,330 896 9,699 -- 24,925
North Carolina 8,202 -- 16,715 -- 24,917
Illinois 8,100 200 11,406 -- 19,706
California 16,988 -- 2,304 -- 19,292
Ohio 3,479 -- 14,532 -- 18,011
Indiana 2,260 -- 14,142 -- 16,402
Washington 5,123 -- 9,963 -- 15,086
Georgia 4,840 884 5,533 -- 11,257
Michigan 381 -- 9,760 -- 10,141
Other 65,663 4,361 54,308 -- 124,332
-------------------------------------------------------------
$ 365,506 59,077 376,700 208,039 1,009,322
=============================================================
32
2009
-------------------------------------------------------------
Residential
---------------------- Construction
1-4 5 or more Commercial and
State family family real estate development Total
------------------------------------------------------------------------------
Missouri $ 165,424 30,606 71,003 134,556 401,589
Kansas 43,945 10,378 24,090 176,163 254,576
Texas 16,880 8,611 51,153 6,088 82,732
Colorado 4,963 2,039 59,957 -- 66,959
Arizona 11,623 584 19,306 6,050 37,563
Florida 19,215 917 14,552 -- 34,684
Oklahoma 2,891 3,006 20,774 -- 26,671
North Carolina 6,632 -- 17,076 -- 23,708
Illinois 5,969 332 11,969 -- 18,270
Indiana 2,397 -- 14,591 -- 16,988
California 14,564 -- 2,358 -- 16,922
Iowa 3,619 3,603 6,423 2,650 16,295
Washington 5,090 -- 10,294 -- 15,384
Ohio 3,470 -- 9,308 -- 12,778
Georgia 6,032 964 5,731 -- 12,727
Michigan 500 -- 9,982 -- 10,482
Other 63,516 219 55,834 3,950 123,519
-------------------------------------------------------------
$ 376,730 61,259 404,401 329,457 1,171,847
=============================================================
Proceeds from the sale of loans receivable held for sale during
fiscal 2010, 2009 and 2008, were $1,703.7 million, $1,576.4 million,
and $899.5 million, respectively. In fiscal 2010, the Bank realized
gross gains of $36.6 million and $17,000 of gross losses. In fiscal
2009, the Bank realized gross gains of $29.1 million and $53,000 of
gross losses. In fiscal 2008, the Bank realized gross gains of $14.3
million and gross losses of $312,000 on those sales
The Bank issues various representations and warranties and
standard recourse provisions associated with the sale of loans to
outside investors, which may require the Bank to repurchase a loan that
defaults or has identified defects, or to indemnify the investor in the
event of a material breach of contractual representations and
warranties. Such provisions related to early payoff and early payment
default typically expire 90 to 180 days after purchase. Repurchase
obligations related to fraud or misrepresentation remain outstanding
during the life of the loan. During the fiscal year ended September
30, 2010 and 2009, the Bank established reserves related to various
representations and warranties that reflect management's estimate of
losses based on various factors. Such factors include estimated level
of defects, historical repurchase demand, success rate in avoiding
claims, and projected loss severity. Reserves are established at the
time loans are sold, and updated during their estimated life. Although
an investor may demand repurchase at any time, most occur within the
first two to three years following origination. During the last six
fiscal years, the Bank sold loans with recourse totaling $7.3 billion,
of which $4.3 billion and $3.9 billion remain outstanding at September
30, 2010 and 2009, respectively. It is management's estimate that the
total recourse associated with such loans was $2.2 million and $1.1
million at September 30, 2010 and 2009, respectively. The reserve for
such losses is included in "Accrued expenses and other liabilities" in
the Bank's consolidated financial statements. Prior to fiscal 2009,
losses related to such representations and warranties were minimal.
During the fiscal years ended September 30, 2010 and 2009, the
Bank experienced increased losses resulting from investor charges for
loans with defects, repurchased loans, and early prepayment and early
default penalties. This trend accelerated during the last half of the
fiscal 2009 and continued through fiscal 2010. The Company repurchased
or incurred losses on loans with balances of $6.1 million and $12.4
million during fiscal year 2010 and 2009, respectively. Total losses
incurred on these loans were $754,000 and $841,000 during fiscal year
2010 and 2009, respectively. Repurchased loans are recorded at fair
value and evaluated for impairment in accordance with GAAP.
33
The following table presents the activity in the reserve related
to representations and warranties for the year ended September 30.
Dollar amounts are expressed in thousands.
2010 2009
-------------------
Balance at beginning of year $ 1,063 --
Additions to reserve 1,848 1,904
Losses and penalties incurred (754) (841)
--------------------
Balance at end of year $ 2,157 1,063
====================
The increase in repurchase loans and settlement losses related
primarily to weak economic conditions, as investors made increased
demands associated with the higher level of loans in default. The Bank
has had some success in avoiding claims. During fiscal 2009, the Bank
successfully cleared nine out of thirty-two, or twenty-eight percent,
of the repurchase requests that it received. During Fiscal 2010, the
Bank successfully cleared eighteen out of forty-nine, or thirty-seven
percent, of the repurchase and make whole requests that it received.
This success rate is one indicator of future losses, but it is affected
by various factors such as the type of claim and the investor making
the claim. To the extent that economic conditions, particularly the
housing market, do not recover, it is management's opinion that the
Bank will continue to have increased loss severity on repurchased
loans, resulting in further additions to the reserve. However, the
Bank began to tighten underwriting standards in mid 2008, so it expects
a lower level of repurchase requests for loans originated thereafter.
(7) FORECLOSED ASSETS HELD FOR SALE
The following table presents real estate owned and other
repossessed property as of September 30. Dollar amounts are expressed
in thousands.
2010 2009
-------------------
Real estate acquired through (or deed in
lieu of) foreclosure $ 40,689 10,140
Less: allowance for losses (2,327) --
--------------------
Total $ 38,362 10,140
====================
The allowance for losses on real estate owned includes the
following activity for the years ended September 30. Dollar amounts
are expressed in thousands.
2010 2009 2008
--------------------------
Balance at beginning of year $ -- 669 204
Provision for loss (recovery) 2,649 727 2,050
Charge-offs (1,060) (1,691) (1,819)
Recoveries 738 295 234
--------------------------
Balance at end of year $ 2,327 -- 669
==========================
In addition to the provision for loss noted above, the Company
incurred net expenses of $2.0 million, $335,000, and $207,000 related
to foreclosed assets held for sale during the fiscal years ended
September 30, 2010, 2009 and 2008, respectively.
34
(8) PREMISES AND EQUIPMENT
The following table summarizes premises and equipment as of
September 30. Dollar amounts are expressed in thousands.
2010 2009
-------------------
Land $ 4,308 4,308
Buildings and improvements 12,671 12,428
Furniture, fixtures and equipment 10,911 9,220
-------------------
27,890 25,956
Accumulated depreciation (14,054) (12,563)
-------------------
Total $ 13,836 13,393
===================
Certain facilities of the Bank are leased under various operating
leases. Amounts paid for rent expense for the fiscal years ended
September 30, 2010, 2009, and 2008, were approximately $552,000,
$568,000, and $622,000, respectively.
Future minimum rental commitments under noncancelable leases are
presented in the following table. Dollar amounts are expressed in
thousands.
Fiscal year ended
September 30, Amount
-----------------------------------
2011 $ 452
2012 654
2013 632
2014 434
2015 70
Thereafter --
(9) 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 liquidation or appraised values determined by
an independent third party appraisal; an on-going business, or
discounted cash flows value; and a combination of both the previous
approaches. The significant inputs include raw land values, absorption
rates of lot sales, and a market discount rate. Management believes
this multi-faceted approach is reasonable given the highly subjective
nature 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). 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
Company's investment in Central Platte was $16.4 million at September
30, 2010.
35
The Company's investment in NBH consists of a 50% ownership
interest in an entity that holds raw land, which is currently zoned as
agricultural. The general managers intend to rezone this property for
commercial and/or residential development. The raw land was purchased
in 2002. The Company accounts for its investment in NBH under the
equity method. Due to the overall economic conditions surrounding real
estate, the Company evaluated its investment for impairment in
accordance with ASC 323-10-35-32, which provides guidance related to a
loss in value of an equity method investment. Potential impairment was
measured based on liquidation or appraised values determined by an
independent third party appraisal. As a result of this analysis, the
Company determined that its investment in NBH was materially impaired
and recorded an impairment charge of $1.1 million ($693,000, net of
tax) during the year ended September 30, 2010. The Company's
investment in NBH was $1.4 million at September 30, 2010.
(10) MORTGAGE SERVICING RIGHTS
The following provides information about the Bank's mortgage
servicing rights for the years ended September 30. Dollar amounts are
expressed in thousands.
2010 2009 2008
----------------------------
Balance at beginning of year $ 351 716 911
Originated mortgage servicing rights 5 10 --
Amortization (105) (418) (243)
Impairment recovery 12 43 48
----------------------------
Balance at end of year $ 263 351 716
============================
(11) CUSTOMER AND BROKERED DEPOSIT ACCOUNTS
Customer and brokered deposit accounts as of September 30 are
illustrated in the following table. Dollar amounts are expressed in
thousands.
2010 2009
----------------- ----------------
Amount % Amount %
-------------------------------------------------------------------
Demand deposit accounts $ 79,948 8 80,201 9
Savings accounts 88,814 10 81,572 9
Money market demand accounts 20,033 2 14,991 2
Certificate accounts 677,764 73 520,017 57
Brokered accounts 66,894 7 207,844 23
----------------- -----------------
$ 933,453 100 904,625 100
================= =================
Weighted average interest rate 1.86% 2.23%
=========== ============
The aggregate amount of certificate accounts in excess of $100,000
was approximately $201.5 million and $102.2 million as of September 30,
2010 and 2009, respectively.
The following table presents contractual maturities of certificate
and brokered accounts as of September 30, 2010. Dollar amounts are
expressed in thousands.
Maturing during the fiscal year ended September 30,
---------------------------------------------------------
2016 and
2011 2012 2013 2014 2015 after Total
---------------------------------------------------------
Certificate
accounts $470,326 161,797 28,211 4,219 11,789 1,422 677,764
Brokered
accounts 66,894 -- -- -- -- -- 66,894
---------------------------------------------------------
Total $537,220 161,797 28,211 4,219 11,789 1,422 744,658
=========================================================
36
The following table presents interest expense on customer deposit
accounts for the years ended September 30. Dollar amounts are
expressed in thousands.
2010 2009 2008
--------------------------------
Savings accounts $ 690 886 1,123
Money market demand and
demand deposit accounts 320 500 701
Certificate and brokered
accounts 16,466 23,625 28,915
--------------------------------
$ 17,476 25,011 30,739
================================
(12) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the FHLB are secured by all stock held in the FHLB,
mortgage-backed securities and first mortgage loans with aggregate
unpaid principal balances equal to approximately 160% of outstanding
advances not secured by FHLB stock. The following table provides a
summary of advances by year of maturity as of September 30. Dollar
amounts are expressed in thousands.
2010 2009
----------------- -----------------
Weighted Weighted
average average
Year ended September 30, Amount rate Amount rate
--------------------------------------------------------------------
2010 $ -- -- $ 230,026 2.02%
2011 186,000 4.30% 186,000 4.30%
2012 25,000 2.18% 25,000 2.18%
2013 25,000 1.54% -- --%
2014 -- --% -- --%
2015 50,000 1.83% -- --%
------------------ -----------------
$ 286,000 3.44% $ 441,026 2.99%
================== =================
The Bank's advances have a fixed interest rate and require monthly
interest payments, with a single principal payment due at maturity. At
September 30, 2009,the Bank had advances totaling $5.0 million that are
callable at the option of the Federal Home Loan Bank. These advances
matured during the year ended September 30, 2010.
(13) SUBORDINATED DEBENTURES
On December 13, 2006, NASB Financial, Inc., through its wholly
owned statutory trust, NASB Preferred Trust I (the "Trust"), issued $25
million of pooled Trust Preferred Securities. The Trust used the
proceeds from the offering to purchase a like amount of NASB Financial
Inc.'s subordinated debentures. The debentures, which have a variable
rate of 1.65% over the 3-month LIBOR and a 30-year term, are the sole
assets of the Trust. In exchange for the capital contributions made to
the Trust by NASB Financial, Inc. upon formation, NASB Financial. Inc.
owns all the common securities of the Trust.
In accordance with Financial Accounting Standards Board
Interpretation No. 46R, Consolidation of Variable Interest Entities
(FIN 46R), 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 dentures, or upon earlier redemption as provided in
the Indenture. The debentures are callable, in whole or in part, after
five years of the issuance date. The Company did not incur a placement
or annual trustee fee related to the issuance. The securities are
subordinate to all other debt of the Company and interest may be
deferred up to five years.
37
(14) INCOME TAXES PAYABLE
The differences between the effective income tax rates and the
statutory federal corporate tax rate for the years ended September 30
are as follows:
2010 2009 2008
--------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.2 3.1 3.0
Other, net (6.5) (0.6) (2.5)
--------------------------
31.7% 37.5% 35.5%
==========================
Deferred income tax expense (benefit) results from temporary
differences in the recognition of income and expense for tax purposes
and financial statement purposes. The following table lists these
temporary differences and their related tax effect for the years ended
September 30. Dollar amounts are expressed in thousands.
2010 2009 2008
----------------------------
Deferred loan fees and costs $ (11) 30 101
Accrued interest receivable 21 463 (726)
Tax depreciation vs. book
depreciation 124 41 80
Basis difference on investments (10) (3) (5)
Loan loss reserves (6,332) (2,402) (3,160)
Mark-to-market adjustment 460 186 (1,008)
Mortgage servicing rights (21) (99) (51)
Impairment loss on investments in LLCs (1,207) -- --
Accrued expenses (135) (166) --
Other (62) 147 (113)
----------------------------
$ (7,173) (1,803) (4,882)
============================
The tax effect of significant temporary differences representing
deferred tax assets and liabilities are presented in the following
table. Dollar amounts are expressed in thousands.
2010 2009
-----------------
Deferred income tax assets:
Loan loss reserves $ 14,322 7,990
Book depreciation in excess of tax depreciation 36 160
Accrued interest receivable 440 461
Accrued expenses 301 166
Impairment loss on LLCs 1,207 --
-----------------
16,306 8,777
-----------------
Deferred income tax liabilities:
Mortgage servicing rights (64) (85)
Basis difference on investments (10) (20)
Deferred loan fees and costs (419) (430)
Unrealized gain on securities available for sale (266) (1,200)
Mark-to-market adjustment (485) (25)
Other (304) (366)
----------------
(1,548) (2,126)
----------------
Net deferred tax asset $ 14,758 6,651
================
38
The following table reconciles the liability for unrecognized tax
benefits from the beginning to the end of the fiscal year ended
September 30. Dollar amounts are expressed in thousands.
2010 2009
-----------------
Balance at beginning of year $ 326 850
Reductions attributable to tax positions taken
during a prior period -- (300)
Settlements attributable to tax positions taken
during a prior period (251) (224)
Adjustment for over-accrual of liability for
unrecognized tax benefits (75) --
------- -------
Liability for unrecognized tax benefits at
end of year $ -- 326
======== =======
During the year ended September 30, 2010, the Company's liability
for unrecognized tax benefit was eliminated due to settlements with
various taxing authorities.
The Company's liability for unrecognized tax benefits included
$96,000 of related interest and penalties as of September 30, 2009.
The Company's policy is to recognize interest and penalties related to
unrecognized tax benefits within income tax expense in the consolidated
statements of income.
The Company's federal and state income tax returns for fiscal
years 2007 through 2009 remain subject to examination by the Internal
Revenue Service and various state jurisdictions, based on the statute
of limitations.
(15) STOCKHOLDERS' EQUITY
During fiscal 2010, the Company paid quarterly cash dividends on
common stock of $0.225 per share on November 27, 2009, and February 26,
2010. In accordance with the agreement with the Office of Thrift
Supervision, the Company is restricted from the payment of dividends or
other capital distributions during the period of the agreement without
prior written consent from the Office of Thrift Supervision.
During fiscal 2009, the Company paid quarterly cash dividends on
common stock of $0.225 per share on November 28, 2008, February 27,
2009, May 29, 2009, and August 28, 2009.
During fiscal 2008, the Company paid quarterly cash dividends on
common stock of $0.225 per share on November 30, 2007, February 22,
2008, May 23, 2008, and August 22, 2008.
During fiscal 2010, 2009 and 2008, the Company did not repurchase
any shares of its own stock.
(16) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements as
administered by Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by the regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by regulators
about components, risk weightings, and other factors.
39
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum capital amounts and
ratios (set forth in the table below). The Bank's primary regulatory
agency, the Office of Thrift Supervision ("OTS"), requires that the
Bank maintain minimum ratios of tangible capital (as defined in the
regulations) of 1.5%, core capital (as defined) of 4%, and total risk-
based capital (as defined) of 8%. The Bank is also subject to prompt
corrective action capital requirement regulations set forth by the
FDIC. The FDIC requires the Bank to maintain a minimum of Tier 1,
total and core capital (as defined) to risk-weighted assets (as
defined), and of core capital (as defined) to adjusted tangible assets
(as defined). Management believes that, as of September 30, 2010, the
Bank meets all capital adequacy requirements, to which it is subject.
As of September 30, 2010 and 2009, the most recent guidelines from
the OTS categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table.
Management does not believe that there are any conditions or events
occurring since notification that would change the Bank's category.
The following tables summarize the relationship between the Bank's
capital and regulatory requirements. Dollar amounts are expressed in
thousands.
September 30,
------------------
2010 2009
-------------------------------------------------------------
GAAP capital (Bank only) $170,419 167,168
Adjustment for regulatory capital:
Intangible assets (2,571) (2,671)
Disallowed servicing and deferred
tax assets (23) (39)
Reverse the effect of SFAS No. 115 (424) (1,911)
------------------
Tangible capital 167,401 162,547
Qualifying intangible assets -- --
------------------
Tier 1 capital (core capital) 167,401 162,547
Qualifying valuation allowance 16,227 14,284
------------------
Risk-based capital $183,628 176,831
==================
As of September 30, 2010
--------------------------------------------------------------
Actual Minimum Required for Minimum Required to be
Capital Adequacy "Well Capitalized"
---------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ ---------------------
Total capital to risk-weighted assets $183,628 14.2% 103,738 >=8% 129,673 >=10%
Core capital to adjusted tangible assets 167,401 11.9% 56,444 >=4% 70,555 >=5%
Tangible capital to tangible assets 167,401 11.9% 21,167 >=1.5% -- --
Tier 1 capital to risk-weighted assets 167,401 12.9% -- -- 77,804 >=6%
As of September 30, 2009
--------------------------------------------------------------
Actual Minimum Required for Minimum Required to be
Capital Adequacy "Well Capitalized"
---------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ ---------------------
Total capital to risk-weighted assets $176,831 13.5% 105,140 >=8% 131,425 >=10%
Core capital to adjusted tangible assets 162,547 10.6% 61,236 >=4% 76,545 >=5%
Tangible capital to tangible assets 162,547 10.6% 22,963 >=1.5% -- --
Tier 1 capital to risk-weighted assets 162,547 12.4% -- -- 78,855 >=6%
(17) EMPLOYEES' RETIREMENT PLAN
Substantially all of the Bank's full-time employees participate in
a 401(k) retirement plan (the "Plan"). The Plan is administered by
Standard Insurance Company, through which employees can choose from a
variety of retail mutual funds to invest their fund contributions.
Under the terms of the Plan, the Bank makes monthly contributions for
the benefit of each participant in an amount that matches one-half of
the participant's contribution, not to exceed 3% of the participants'
monthly base salary. All contributions made by participants are
immediately vested and cannot be forfeited. Contributions made by the
Bank, and related earnings thereon, become vested to the participants
according to length of service requirements as specified in the Plan.
Any forfeited portions of the contributions made by the Bank and the
allocated earnings thereon are used to reduce future contribution
requirements of the Bank. The Plan may be modified, amended or
terminated at the discretion of the Bank.
The Bank's contributions to the Plan amounted to $583,000,
$468,000, and $337,000 for the years ended September 30, 2010, 2009,
and 2008, respectively. These amounts have been included as
compensation and fringe benefits expense in the accompanying
consolidated statements of income.
(18) STOCK OPTION PLAN
On January 27, 2004, the Company's stockholders approved an equity
stock option plan through which options to purchase up to 250,000
shares of common stock may be granted to officers and employees of the
Company. Options may be granted over a period of ten years. The
option price may not be less than 100% of the fair market value of the
shares on the date of the grant.
The following table summarizes Option Plan activity during fiscal
years 2010, 2009, and 2008.
Weighted avg. Range of
Number exercise price exercise price
of shares per share per share
-------------------------------------
Options outstanding
at October 1, 2007 78,657 $ 36.30 $ 30.33-42.53
Forfeited (6,619) 35.08 30.33-42.17
-------------------------------------
Options outstanding
at September 30, 2008 72,038 $ 36.42 $ 30.33-42.53
Forfeited (10,000) 35.50 35.50
-------------------------------------
Options outstanding
at September 30, 2009 62,038 $ 36.56 $ 30.33-42.53
Forfeited (12,500) 42.17 42.17
-------------------------------------
Options outstanding
at September 30, 2010 49,538 $ 35.15 $ 30.33-42.53
=====================================
The weighted average remaining contractual life of options
outstanding at September 30, 2010, 2009 and 2008 were 5.8 years, 5.6
years and 5.8 years, respectively.
The following table provides information regarding the expiration
dates of the stock options outstanding at September 30, 2010.
Number Weighted average
of shares exercise price
-------------------------------------
Expiring on:
July 27, 2014 3,000 $ 35.50
November 30, 2014 500 39.79
August 1, 2015 10,000 42.17
August 4, 2015 500 42.53
July 21, 2016 15,500 32.91
November 29, 2016 6,000 39.33
July 24, 2017 14,038 30.33
-------------------------------------
49,538 $ 35.15
=====================================
41
Of the options outstanding at September 30, 2010, 38,423 are
immediately exercisable and 11,115 are exercisable at future dates in
accordance with the vesting schedules outlined in each stock option
agreement.
The following table illustrates the range of exercise prices and
the weighted average remaining contractual lives for options
outstanding under the Option Plan as of September 30, 2010.
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Weighted avg. Weighted avg. Weighted avg.
Range of remaining exercise exercise
exercise prices Number contractual life price Number price
-------------------------------------------------------------- ---------------------------
$ 35.50 3,000 3.8 years $ 35.50 3,000 $ 35.50
39.79 500 4.2 years 39.79 500 39.79
42.17-42.53 10,500 4.8 years 42.18 10,500 42.18
32.91 15,500 5.8 years 32.91 12,400 32.91
39.33 6,000 6.2 years 39.33 3,600 39.33
30.33 14,038 6.8 years 30.33 8,423 30.33
--------- ---------
49,538 38,423
========= =========
(19) 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 years ended September 30, 2010,
2009, and 2008. Dollar amounts are expressed in thousands.
Year ended Mortgage Other and
September 30, 2010 Banking Banking Eliminations Consolidated
------------------------------------------------------------------------
Net interest income $ 54,310 -- (462) 53,848
Provision for
loan losses 30,500 -- -- 30,500
Other income 5,532 42,444 (4,396) 43,580
General and admin.
expenses 24,345 33,838 (516) 57,667
Income tax expense 1,349 3,313 (1,724) 2,938
---------------------------------------------------
Net income (loss)$ 3,648 5,293 (2,618) 6,323
====================================================
Total assets $ 1,413,199 1,192 19,805 1,434,196
====================================================
42
Year ended Mortgage Other and
September 30, 2009 Banking Banking Eliminations Consolidated
------------------------------------------------------------------------
Net interest income $ 48,213 -- (808) 47,406
Provision for
loan losses 11,250 -- -- 11,250
Other income 8,419 34,212 (2,137) 40,494
General and admin.
expenses 20,941 26,667 (892) 46,716
Income tax expense 9,410 2,905 (1,091) 11,224
---------------------------------------------------
Net income (loss)$ 15,031 4,640 (962) 18,709
====================================================
Total assets $ 1,536,640 1,716 21,206 1,559,562
====================================================
Year ended Mortgage Other and
September 30, 2008 Banking Banking Eliminations Consolidated
------------------------------------------------------------------------
Net interest income $ 40,299 -- (1,284) 39,015
Provision for
loan losses 6,200 -- -- 6,200
Other income 1,157 21,114 (3,864) 18,407
General and admin.
expenses 17,494 20,159 (834) 36,819
Income tax expense 6,838 368 (2,099) 5,107
---------------------------------------------------
Net income (loss)$ 10,924 587 (2,215) 9,296
====================================================
Total assets $ 1,494,589 2,617 19,555 1,516,761
====================================================
(20) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank has entered into
financial agreements with off-balance-sheet risk to meet the financing
needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. Those instruments involve, to varying degrees, elements of
credit risk, interest rate risk, and liquidity risk, which may exceed
the amount recognized in the consolidated financial statements. The
contract amounts or notional amounts of those instruments express the
extent of involvement the Bank has in particular classes of financial
instruments.
With regard to financial instruments for commitments to extend
credit, standby letters of credit, and financial guarantees, the Bank's
exposure to credit loss because of non-performance by another party is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
As of September 30, 2010, the Bank had outstanding commitments to
originate $4.0 million in commercial real estate loans, $228.5 million
of fixed rate residential first mortgage loans and $71.4 million of
adjustable rate residential first mortgage loans. Commercial real
estate loan commitments have approximate average committed rates of
5.5%. Residential mortgage loan commitments have an approximate
average committed rate of 4.2% and approximate average fees and
discounts of 0.1%. The interest rate commitments on residential loans
generally expire 60 days after the commitment date. Interest rate
commitments on commercial real estate loans have varying terms to
expiration. As of September 30, 2010, the Bank had outstanding
commitments related to stand-by letters of credit of $1.3 million.
As of September 30, 2009, the Bank had outstanding commitments to
originate $140.4 million of fixed rate residential first mortgage loans
and $15.9 million of adjustable rate residential first mortgage loans.
Such commitments have an approximate average committed rate of 4.9% and
approximate average fees and discounts of 0.3%. The interest rate
commitments on residential loans generally expire 60 days after the
commitment date. As of September 30, 2009, the Bank had outstanding
commitments related to stand-by letters of credit of $2.3 million.
At September 30, 2010 and 2009, the Bank had commitments to sell
loans of approximately $298.1 million and $154.7 million, respectively.
These instruments contain an element of risk in the event that other
parties are unable to meet the terms of such agreements. In such
event, the Bank's loans receivable held for sale would be exposed to
market fluctuations. Management does not expect any other party to
default on its obligations and, therefore, does not expect to incur any
costs due to such possible default.
43
(21) LEGAL CONTINGENCIES
Various legal claims arise from time to time within the normal
course of business which, in the opinion of management, will have no
material effect on the Company's consolidated financial statements.
(22) SIGNIFICANT ESTIMATES AND CONCENTRATIONS
The current protracted economic decline continues to present
financial institutions with unprecedented circumstances and
challenges which in some cases have resulted in large declines in
the fair values of investments and other assets, constraints on
liquidity and significant credit quality problems, including
severe volatility in the valuation of real estate and other
collateral supporting loans. The financial statements have been
prepared using values and information currently available to the
Company.
Given the volatility of current economic conditions, the values of
assets and liabilities recorded in the financial statements could
change rapidly, resulting in material future adjustments in asset
values, the allowance for loan losses, and capital that could
negatively impact the Company's ability to meet regulatory capital
requirements and maintain sufficient liquidity.
(23) FAIR VALUE OPTION
On October 1, 2008, the Company elected to measure loans held for
sale at fair value. This portfolio is made up entirely of mortgage
loans held for immediate sale with servicing released. Such loans are
sold prior to origination at a contracted price to outside investors on
a best-efforts basis (i.e., the loan becomes mandatorily deliverable to
the investor only when, and if, it closes) and remain on the Company's
balance sheet for a very short period of time, typically less than one
month. It is management's opinion, given the short-term nature of
these loans, that fair value provides a reasonable measure of the
economic value of these assets. In addition, carrying such loans at
fair value eliminates some measure of volatility created by the timing
of sales proceeds from outside investors, which typically occur in the
month following origination.
The Company elected the fair value option for the following item
(in thousands):
Balance Sheet Balance Sheet
Prior to Adoption Gain Upon After Adoption
10/1/08 Adoption 10/1/08
--------------------------------------------
Loans held for sale $ 64,030 1,058 65,088
============================================
Pre-tax cumulative effect of
adoption $ 1,058
Decrease in deferred tax asset (408)
------
Cumulative effect of adoption $ 650
======
The difference between the aggregate fair value and the aggregate
unpaid principal balance of these loans was $5.0 million and $2.0
million at September 30, 2010 and 2009, respectively. Interest income
on loans held for sale is included in interest on loans receivable in
the accompanying statements of income.
44
(24) DERIVATIVE INSTRUMENTS
The Company has commitments outstanding to extend credit that have
not closed prior to the end of the period. As the Company enters into
commitments to originate loans, it also enters into commitments to sell
the loans in the secondary market. Such commitments to originate loans
held for sale are considered derivative instruments in accordance with
GAAP, which requires the Company to recognize all derivative
instruments in the balance sheet and to measure those instruments at
fair value. As a result of marking to market commitments to originate
loans, the Company recorded an increase in other assets of $948,000, an
increase in other liabilities of $424,000, and an increase in other
income of $524,000 for the year ended September 30, 2010. The Company
recorded an increase in other assets of $646,000, a decrease in other
liabilities of $50,000, and an increase in other income of $696,000 for
the year ended September 30, 2009.
Additionally, the Company has commitments to sell loans that have
closed prior to the end of the period. Due to the mark to market
adjustment on commitments to sell loans held for sale, the Company
recorded an increase in other assets of $642,000, an increase in other
liabilities of $505,000, and an increase in other income of $138,000
during the year ended September 30, 2010. The Company recorded an
increase in other assets of $89,000, an increase in other liabilities
of $147,000, and a decrease in other income of $59,000 during the year
ended September 30, 2009
The balance of derivative instruments related to commitments to
originate and sell loans at September 30, 2010 and 2009, is disclosed
in Footnote 25, Fair Value Measurements.
(25) 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.
45
The Company measures certain financial assets and liabilities at
fair value in accordance with GAAP. These measurements involve various
valuation techniques and assume that the transactions would occur
between market participants in the most advantageous market for the
Company.
The following is a summary of valuation techniques utilized by the
Company for its significant financial assets and liabilities measured
at fair value on a recurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets
and liabilities pursuant to the valuation hierarchy:
Available for sale securities
Securities available for sale consist of corporate debt, trust
preferred and municipal securities and are valued using quoted market
prices in an active market. This measurement is classified as Level 1
within the hierarchy.
Mortgage-backed available for sale securities are valued by using
broker dealer quotes for similar assets in markets that are not active.
Such quotes are based on actual transactions for similar assets.
Although the Company does not validate these quotes, they are reviewed
by management for reasonableness in relation to current market
conditions. Additionally, they are obtained from experienced brokers
who have an established relationship with the Bank and deal regularly
with these types of securities. The Company does not make any
adjustment to the quotes received from broker dealers. These
measurements are classified as Level 2.
Loans held for sale
Loans held for sale are valued using quoted market prices for
loans with similar characteristics. This measurement is classified as
Level 2 within the hierarchy.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active market with
readily observable market prices. Therefore, fair value is assessed
using a valuation model that calculates the discounted cash flow using
assumptions such as estimates of prepayment speeds, market discount
rates, servicing fee income, and cost of servicing. These measurements
are classified as Level 3. Mortgage servicing rights are initially
recorded at amortized cost and are amortized over the period of net
servicing income. They are evaluated for impairment monthly, and
valuation adjustments are recorded as necessary to reduce the carrying
value to fair value.
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.
46
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
=======================================================
47
The following table presents the fair value measurements of assets recognized
in the accompanying balance sheets measured at fair value on a recurring basis
and the level within the fair value hierarchy in which the measurements fall at
September 30, 2009 (in thousands):
Quoted Prices in Significant Significant
Active Markets for Other Unobservable
Fair Identical Assets Observable Inputs
Value (Level 1) Inputs (Level 2) (Level 3)
-------------------------------------------------------
Assets:
Securities, available for sale
Corporate debt securities $ 21,625 21,625 -- --
Municipal securities 29 29
Mortgage-backed securities,
available for sale
Pass through certificates
guaranteed by GNMA -
fixed rate 114 -- 114 --
Pass through certificates
guaranteed by FNMA -
adjustable rate 5,991 -- 5,991 --
FHLMC participation certificates:
Fixed rate 579 -- 579 --
Adjustable rate 39,865 -- 39,865 --
Loans held for sale 81,367 -- 81,367 --
Mortgage servicing rights 351 -- -- 351
Commitments to originate loans 1,230 -- -- 1,230
Forward sales commitments 260 -- -- 260
-------------------------------------------------------
Total assets $ 151,411 21,654 127,916 1,841
=======================================================
Liabilities:
Commitments to originate
loans $ 206 -- -- 206
Forward sales commitments 638 -- -- 638
-------------------------------------------------------
Total liabilities $ 844 -- -- 844
=======================================================
The following table is a reconciliation of the beginning and
ending balances of recurring fair value measurements recognized in the
accompanying balance sheet using significant unobservable (Level 3)
inputs (in thousands):
Mortgage Commitments
Servicing to Originate Forward Sales
Rights Loans Commitments
---------------------------------------------
Balance at October 1, 2008 $ 716 327 (319)
Total realized and unrealized
gains (losses):
Included in net income (375) 696 (59)
Issuances 10 -- --
---------------------------------------------
Balance at September 30, 2009 $ 351 1,023 (378)
Total realized and unrealized
gains (losses):
Included in net income (93) 524 138
Issuances 5 -- --
---------------------------------------------
Balance at September 30, 2010 $ 263 1,547 (240)
=============================================
48
Realized and unrealized gains and losses noted in the table above
and included in net income for the year ended September 30, 2010, are
reported in the consolidated statements of income as follows (in
thousands):
Impairment
Loan Recovery
Servicing on Mortgage Other
Fees Servicing Rights Income
----------------------------------------
Total gains (losses) $ (105) 12 662
========================================
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 year ended September 30, 2010 was $67.6 million. There were no
impaired loans that were re-measured during the year ended September
30, 2009.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are initially recorded at fair
value as of the date of foreclosure less any estimated selling costs
(the "new basis") and are subsequently carried at the lower of the new
basis or fair value less selling costs on the current measurement date.
Fair value is estimated through current appraisals, broker price
opinions, or listing prices. Foreclosed assets held for sale are
classified within Level 3 of the fair value hierarchy.
The carrying value of foreclosed assets held for sale was $38.3
million at September 30, 2010. During fiscal 2010, charge-offs and
increases in specific reserves related to foreclosed assets held for
sale that were re-measured during the period totaled $2.3 million.
During fiscal 2009, charge-offs related to foreclosed assets held for
sale that were re-measured during the period totaled $293,000.
Investment in LLCs
Investments in LLCs are accounted for using the equity method of
accounting. These investments are analyzed for impairment in
accordance with ASC 323-10-35-32, which states that an other than
temporary decline in value of an equity method investment should be
recognized. The Company evaluates its investments in LLCs using a
multi-faceted approach. The internal model utilizes liquidation or
appraised values as determined by an independent third party appraiser;
an on-going business or discounted cash flows value; and a combination
of both the previous approaches. The significant inputs include raw
land values, absorption rates of lot sales, and a market discount rate.
Management believes this multi-faceted approach is reasonable given the
highly subjective nature the assumptions and the differences in
valuation techniques that are utilized within each approach (e.g.,
order of distribution of assets upon potential liquidation).
Investment in LLCs are classified within Level 3 of the fair value
hierarchy.
The carrying value of the Company's investment in LLCs was $17.8
million at September 30, 2010. During fiscal 2010, the Company
recorded an impairment charge of $3.1 million on its investment in LLCs
(see Footnote 9).
49
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 FEDERAL HOME LOAN BANK
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 tables present the carrying values and fair values of
the Company's financial instruments. Dollar amounts are expressed in
thousands.
September 30, 2010 September 30, 2009
-------------------------- -------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------------------------- -------------------------
Financial Assets:
Cash and cash equivalents $ 14,033 14,033 63,250 63,250
Securities held to maturity 1,232 1,561 1,290 1,375
Stock in Federal Home Loan Bank 15,873 15,873 26,640 26,640
Mortgage-backed securities held
to maturity 46,276 46,300 11,125 11,343
Loans receivable held for
investment 1,041,041 1,043,886 1,238,995 1,272,543
Financial Liabilities:
Customer deposit accounts $ 866,559 869,941 696,781 706,330
Brokered deposit accounts 66,894 66,797 207,844 208,634
Advances from FHLB 286,000 288,061 441,026 449,613
Subordinated debentures 25,774 10,310 25,774 25,774
50
September 30, 2010 September 30, 2009
-------------------------- -------------------------
Contract or Estimated Contract or Estimated
notional unrealized notional unrealized
amount gain amount gain
-------------------------- -------------------------
Unrecognized financial instruments:
Lending commitments - fixed
rate, net $ 6,127 (5) 1,326 47
Lending commitments - floating
rate 417 6 -- --
Commitments to sell loans -- -- -- --
The fair value estimates presented are based on pertinent
information available to management as of September 30, 2010 and 2009.
Although management is not aware of any factors that would
significantly affect the estimated fair values, such amounts have not
been comprehensively revalued for purposes of these consolidated
financial statements since that date. Therefore, current estimates of
fair value may differ significantly from the amounts presented above.
(26) 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 September 30, 2010, the Company and the subsidiary Bank are
in compliance with these regulatory agreements.
51
(27) PARENT COMPANY FINANCIAL INFORMATION
NASB Financial, Inc.
Balance Sheets
NASB Financial, Inc.
Statements of Income
Years Ended September 30,
------------------------------------
2010 2009 2008
------------------------------------
(Dollars in thousands)
Income:
Income from subsidiary $ 8,659 19,360 10,326
Interest and dividend income 42 49 73
Gain on sale of real estate 70 -- --
Impairment loss on investment in LLCs (3,126) -- --
Loss from investment in LLCs (128) (117) (265)
------------------------------------
Total income 5,517 19,292 10,134
------------------------------------
Expenses:
Interest on subordinated debentures 504 856 1,357
Professional fees 87 70 63
Other expense 65 64 63
------------------------------------
Total general expenses 656 990 1,483
------------------------------------
Income before income tax expense 4,861 18,302 8,651
Income tax benefit (1,462) (407) (645)
------------------------------------
Net income $ 6,323 18,709 9,296
====================================
53
NASB Financial, Inc.
Statements of Cash Flows
Years ended September 30,
-----------------------------
2010 2009 2008
-----------------------------
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 6,323 18,709 9,296
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of real estate (70) -- --
Loss from investment in LLCs 128 117 265
Impairment loss on investment in LLCs 3,126 -- --
Equity in undistributed earnings of subsidiary (4,659) (11,361) (326)
Change in income taxes payable (1,278) (50) (62)
Change in accrued interest payable -- (102) (111)
Other (161) -- --
-----------------------------
Net cash provided by operating activities 3,409 7,313 9,062
-----------------------------
Cash flows from investing activities:
Principal repayments of loans receivable 26 166 275
Investment in LLC (7) (479) (1,890)
Other -- (302) --
-----------------------------
Net cash provided by (used in) investing activities 19 (615) (1,615)
-----------------------------
Cash flows from financing activities:
Cash dividends paid (3,540) (7,080) (7,080)
Change in escrows -- (5) 1
-----------------------------
Net cash used in financing activities (3,540) (7,085) (7,079)
-----------------------------
Net increase (decrease) in cash and cash equivalents (112) (387) 368
Cash and cash equivalents at beginning of period 2,172 2,559 2,191
-----------------------------
Cash and cash equivalents at end of period $ 2,060 2,172 2,559
=============================
54
Report of Independent Registered Public Accounting Firm
----------------------------------------------------------------------
Audit Committee, Board of Directors and Stockholders
NASB Financial, Inc.
Grandview, Missouri
We have audited the accompanying consolidated balance sheets of
NASB Financial, Inc. (the "Company") as of September 30, 2010 and 2009,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended
September 30, 2010. The Company's management is responsible for these
financial statements. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. Our audits included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of NASB Financial, Inc. as of September 30, 2010 and 2009, and the
results of its operations and its cash flows for each of the three
years in the period ended September 30, 2010, in conformity with
accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), NASB
Financial, Inc.'s internal control over financial reporting as of
September 30, 2010 based on criteria established in, Internal Control-
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated
December 14, 2010 expressed an unqualified opinion on the effectiveness
of the Company's internal
control over financial reporting.
/s/ BKD LLP
Kansas City, Missouri
December 14, 2010
55
SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS
----------------------------------------------------------------------
The following tables include certain information concerning the
quarterly consolidated results of operations of the Company at the
dates indicated. Dollar amounts are expressed in thousands except per
share data.
First Second Third Fourth
2010 Quarter Quarter Quarter Quarter Total
-------------------------------------------------------------------------------------
Interest income $ 21,965 20,508 20,864 19,879 83,216
Interest expense 8,160 7,389 6,934 6,885 29,368
--------------------------------------------------------
Net interest income 13,805 13,119 13,930 12,994 53,848
Provision for loan losses 9,000 5,000 11,500 5,000 30,500
--------------------------------------------------------
Net interest income after
provision for loan losses 4,805 8,119 2,430 7,994 23,348
Other income 10,200 9,314 11,522 12,544 43,580
General and administrative
expenses 13,657 12,320 14,909 16,781 57,667
--------------------------------------------------------
Income before income taxes 1,348 5,113 (957) 3,757 9,261
Income tax expense 19 1,894 (497) 1,522 2,938
--------------------------------------------------------
Net income $ 1,329 3,219 (460) 2,235 6,323
========================================================
Earnings per share - basic $ 0.17 0.41 (0.06) 0.28 0.80
========================================================
Average shares outstanding 7,868 7,868 7,868 7,868 7,868
First Second Third Fourth
2009 Quarter Quarter Quarter Quarter Total
-------------------------------------------------------------------------------------
Interest income $ 22,955 21,758 22,527 22,585 89,825
Interest expense 12,373 10,752 10,339 8,956 42,420
--------------------------------------------------------
Net interest income 10,582 11,006 12,188 13,629 47,405
Provision for loan losses 250 1,000 4,000 6,000 11,250
--------------------------------------------------------
Net interest income after
provision for loan losses 10,332 10,006 8,188 7,629 36,155
Other income 5,199 9,230 12,742 13,323 40,494
General and administrative
expenses 9,599 11,544 14,032 11,541 46,716
--------------------------------------------------------
Income before income taxes 5,932 7,692 6,898 9,411 29,933
Income tax expense 2,284 2,961 2,656 3,323 11,224
--------------------------------------------------------
Net income $ 3,648 4,731 4,242 6,088 18,709
========================================================
Earnings per share - basic $ 0.46 0.60 0.54 0.77 2.38
========================================================
Average shares outstanding 7,868 7,868 7,868 7,868 7,868
BOARD OF DIRECTORS OF NASB FINANCIAL INC., AND NORTH AMERICAN SAVINGS
BANK, F.S.B.
----------------------------------------------------------------------
DAVID H. HANCOCK
Chairman and Chief Executive Officer
NASB Financial, Inc. and North American Savings Bank
KEITH B. COX
President
NASB Financial, Inc. and North American Savings Bank
PAUL L. THOMAS
Vice President
NASB Financial, Inc.
Executive Vice President and Chief Credit Officer
North American Savings Bank
FREDERICK V. ARBANAS
Retired
Jackson County Legislature
BARRETT BRADY
Retired
LAURA BRADY
President and Chief Executive Officer, Medical Positioning, Inc.
Kansas City, Missouri
LINDA S. HANCOCK
Linda Smith Hancock Interiors
Kansas City, Missouri
W. RUSSELL WELSH
Chairman & Chief Executive Officer, Polsinelli Shughart PC
Kansas City, Missouri
56
OFFICERS OF NASB FINANCIAL, INC.
--------------------------------------------------------------------
DAVID H. HANCOCK
Chairman
Chief Executive Officer
KEITH B. COX
President
RHONDA NYHUS
Vice President and Treasurer
SHAUNA OLSON
Corporate Secretary
MIKE ANDERSON
Vice President
WADE HALL
Vice President
JOHN M. NESSELRODE
Vice President
DENA SANDERS
Vice President
BRUCE THIELEN
Vice President
PAUL L. THOMAS
Vice President
OFFICERS OF NORTH AMERICAN SAVINGS BANK, F.S.B.
--------------------------------------------------------------------
DAVID H. HANCOCK
Chairman
Chief Executive Officer
KEITH B. COX
President
PAUL L. THOMAS
Executive Vice President
Chief Credit Officer
RHONDA NYHUS
Senior Vice President
Chief Financial Officer
SHAUNA OLSON
Corporate Secretary
MIKE ANDERSON
Senior Vice President, Construction Lending
WADE HALL
Senior Vice President, Commercial Lending
JOHN M. NESSELRODE
Senior Vice President, Chief Investment Officer
DENA SANDERS
Senior Vice President, Retail Banking
BRUCE THIELEN
Senior Vice President, Residential Lending
MICHAEL BRAMAN
Vice President, Loan Servicing
PHIL CRAVEN
Vice President, Commercial Lending
SHERRIE EIMER
Vice President, Branch Administration
CATHLEEN GWIN
Vice President, Residential Lending
SCOTT HAASE
Vice President, Residential Lending
JEFF JACKSON
Vice President, Information Technology
KAREN JACOBSON
Vice President, Branch Operations
RACHEL JONES
Vice President, Loan Servicing
LISA LILLARD
Vice President, Information Technology
MARQUISE MANSAW
Vice President, Residential Lending
LUKE MILLER
Vice President, Internal Asset Review
DAN MORTON
Vice President, Information Technology
DAN REYNOLDSON
Vice President, Residential Lending
CHRISTINE SCHABEN
Vice President, Human Resources
RICK SPECIALE
Vice President, Internal Audit
RON STAFFORD
Vice President, Residential Lending
CHRISTINE TODD
Vice President, Risk Management
DRAKE VIDRINE
Vice President, Construction Lending
JAMES A. WATSON
Vice President, Banking Compliance
LORI WEST
Vice President, Loan Servicing
DONNA WILLIAMS
Vice President, Construction Lending
57
BRANCH OFFICES
----------------------------------------------------------------------
Headquarters
12498 South 71 Highway
Grandview, Missouri
646 N. 291 Highway
Lee's Summit, Missouri
1001 North Jesse James Road
Excelsior Springs, Missouri
920 North Belt
St. Joseph, Missouri
11400 East 23rd Street
Independence, Missouri
2002 East Mechanic
Harrisonville, Missouri
8501 North Oak Trafficway
Kansas City, Missouri
7012 NW Barry Road
Kansas City, Missouri
2707 NW Prairie View Road
Platte City, Missouri
RESIDENTIAL LENDING
10950 El Monte, Suite 210
Overland Park, Kansas
789 NE Rice Road
Lee's Summit, Missouri
4350 S National Avenue, Suite A100
Springfield, Missouri
CONSTRUCTION LENDING
12520 South 71 Highway
Grandview, Missouri
LOAN ADMINISTRATION
12520 South 71 Highway
Grandview, Missouri
INVESTOR INFORMATION
-------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS:
The Annual Meeting of Stockholders will be held on Thursday,
January 20, 2011, at 8:30 a.m. in the lobby of North American Savings
Bank, 12498 South 71 Highway, Grandview, Missouri.
ANNUAL REPORT ON 10-K:
Copies of NASB Financial, Inc. Form 10-K Report to the Securities
and Exchange Commission are available without charge upon written
request to Keith B. Cox, President, NASB Financial, Inc., 12498 South
71 Highway, Grandview, Missouri 64030.
TRANSFER AGENT:
Registrar & Transfer Co., 10 Commerce Drive, Cranford, New Jersey
07016
STOCK TRADING INFORMATION:
The common stock of NASB Financial, Inc. and subsidiaries is
traded in the over-the-counter market. The Company's symbol is NASB.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
BKD LLP, 1201 Walnut, Suite 1700, Kansas City, Missouri 64106
SHAREHOLDER AND FINANCIAL INFORMATION:
Contact Keith B. Cox, NASB Financial, Inc., 12498 South 71
Highway, Grandview, Missouri 64030, (816) 765-2200.
COMMON STOCK PRICES AND DIVIDENDS
-------------------------------------------------------------------
At September 30, 2010, stockholders held 7,867,614 outstanding
shares of NASB Financial, Inc. common stock. The company paid cash
dividends of $0.225 per share in February, May, August, and November
2008. Cash dividends of $0.225 per share were paid in February, May,
August, and November 2009. The Company paid cash dividends of $0.225
per share in February 2010.
The table below reflects the Company's high and low bid prices.
The quotations represent intra-dealer quotations without retail
markups, markdowns or commissions, and do not necessarily represent
actual transactions.
Fiscal 2010 Fiscal 2009
---------------- ----------------
Quarter ended High Low High Low
-----------------------------------------------------------
December 31 $ 27.24 22.47 29.74 21.00
March 31 24.08 18.85 26.81 12.48
June 30 24.40 14.96 31.10 20.60
September 30 15.97 13.05 31.94 23.55
58