Edgar Filing: NASB FINANCIAL INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the period ended June 30, 2014

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

For the transition period from to

Commission File Number 0-24033

NASB Financial, Inc.

(Exact name of registrant as specified in its charter)

Missouri

43-1805201

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

12498 South 71 Highway, Grandview, Missouri 64030

(Address of principal executive offices) (Zip Code)

(816) 765-2200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of Common Stock of the Registrant outstanding as of August 4, 2014, was 7,867,614.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

NASB Financial, Inc. and Subsidiary

Condensed Consolidated Balance Sheets


	June 30, 2014 (Unaudited)			September 30, 2013
	(Dollars in thousands)
ASSETS
Cash and cash equivalents	$	8,627			6,347
Securities:
Available for sale, at fair value		239,896			252,696
Held to maturity, at cost		36,013			—
Stock in Federal Home Loan Bank, at cost		9,994			7,679
Mortgage-backed securities:
Available for sale, at fair value		342			433
Held to maturity, at cost		37,311			43,074
Loans receivable:
Held for sale, at fair value		78,204			69,079
Held for investment, net		748,138			715,713
Allowance for loan losses		(14,190	)		(20,383	)
Accrued interest receivable		4,591			4,098
Foreclosed assets held for sale, net		10,276			11,252
Premises and equipment, net		11,532			12,033
Investment in LLCs		16,571			16,499
Deferred income tax asset, net		7,875			12,273
Other assets		11,755			13,362

	$	1,206,935			1,144,155

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Customer deposit accounts	$	744,406			748,193
Advances from Federal Home Loan Bank		215,000			155,000
Subordinated debentures		25,774			25,774
Escrows		7,356			8,458
Income taxes payable		1,422			70
Accrued expenses and other liabilities		7,451			11,143

Total liabilities		1,001,409			948,638

Stockholders’ equity:
Common stock of $0.15 par value: 20,000,000 shares authorized; 9,857,112 shares issued		1,479			1,479
Additional paid-in capital		16,550			16,613
Retained earnings		224,404			217,143
Treasury stock, at cost; 1,989,498 shares		(38,418	)		(38,418	)
Accumulated other comprehensive gain (loss)		1,511			(1,300	)

Total stockholders’ equity		205,526			195,517

	$	1,206,935			1,144,155

See accompanying notes to condensed consolidated financial statements.

NASB Financial, Inc. and Subsidiary

Condensed Consolidated Statements of Operations (Unaudited)


	Three months ended June 30,						Nine months ended June 30,
	2014			2013			2014			2013
	(Dollars in thousands, except per share data)
Interest on loans receivable	$	10,665			10,880			31,515			34,954
Interest on mortgage-backed securities		374			103			1,179			484
Interest and dividends on securities		1,640			1,107			4,632			3,155
Other interest income		3			1			9			4

Total interest income		12,682			12,091			37,335			38,597

Interest on customer and brokered deposit accounts		961			1,179			2,845			4,288
Interest on advances from Federal Home Loan Bank		488			510			1,424			1,573
Interest on subordinated debentures		118			124			362			378
Other interest expense		5			5			16			13

Total interest expense		1,572			1,818			4,647			6,252

Net interest income		11,110			10,273			32,688			32,345
Provision for loan losses		—			—			(5,000	)		(9,600	)

Net interest income after provision for loan losses		11,110			10,273			37,688			41,945

Other income (expense):
Loan servicing fees, net		25			27			73			79
Customer service fees and charges		751			1,279			2,383			4,110
Provision for loss on real estate owned		(11	)		(139	)		(166	)		(956	)
Gain on sale of securities available for sale		—			—			616			—
Gain (loss) on sale of securities held to maturity		—			—			(10	)		257
Gain from loans receivable held for sale		9,886			11,232			24,082			46,619
Other income (expense), net		228			(1,402	)		(33	)		(3,650	)

Total other income		10,879			10,997			26,945			46,459

General and administrative expenses:
Compensation and fringe benefits		6,132			6,954			18,698			19,812
Commission-based mortgage banking compensation		3,258			4,544			8,676			15,481
Premises and equipment		1,412			1,452			4,349			3,996
Advertising and business promotion		1,746			1,930			5,585			4,489
Federal deposit insurance premiums		128			589			787			1,839
Other		2,254			2,915			6,900			8,462

Total general and administrative expenses		14,930			18,384			44,995			54,079

Income before income tax expense		7,059			2,886			19,638			34,325
Income tax expense		2,471			1,111			6,870			13,215

Net income	$	4,588			1,775			12,768			21,110

Basic earnings per share	$	0.58			0.23			1.62			2.68

Diluted earnings per share	$	0.58			0.23			1.62			2.68

Basic weighted average shares outstanding		7,867,614			7,867,614			7,867,614			7,867,614

See accompanying notes to condensed consolidated financial statements.

NASB Financial, Inc. and Subsidiary

Condensed Consolidated Statements of Comprehensive Income (Unaudited)


	Three months ended June 30,
	2014			2013
	(Dollars in thousands)
Net income	$	4,588			1,775

Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities, net of income tax expense (benefit) of $761 and $(950) at June 30, 2014 and 2013, respectively		1,413			(1,518	)
Adjustment for gain included in net income		—			—

Change in unrealized gain (loss) on available for sale securities, net of income tax expense (benefit) of $761 and $(950) at June 30, 2014 and 2013, respectively		1,413			(1,518	)

Comprehensive income	$	6,001			257


	Nine months ended June 30,
	2014			2013
	(Dollars in thousands)
Net income	$	12,768			21,110

Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities, net of income tax expense (benefit) of $1,729 and $(1,248) at June 30, 2014 and 2013, respectively		3,211			(1,994	)
Adjustment for gain included in net income, net of income tax expense of $216 at March 31, 2014		(400	)		—

Change in unrealized gain (loss) on available for sale securities, net of income tax expense (benefit) of $1,513 and $(1,248) at June 30, 2014 and 2013, respectively		2,811			(1,994	)

Comprehensive income	$	15,579			19,116

See accompanying notes to condensed consolidated financial statements.

NASB Financial, Inc. and Subsidiary

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)


												Accumulated
			Additional									other			Total
	Common		paid-in			Retained			Treasury			comprehensive			stockholders’
	stock		capital			earnings			stock			gain (loss)			equity
	(Dollars in thousands)
Balance at October 1, 2013	$	1,479		16,613			217,143			(38,418	)		(1,300	)		195,517
Comprehensive income:
Net income		—		—			12,768			—			—			12,768
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale		—		—			—			—			2,811			2,811

Total comprehensive income																15,579
Cash dividends paid		—		—			(5,507	)		—			—			(5,507	)
Stock based compensation		—		(63	)		—			—			—			(63	)

Balance at June 30, 2014	$	1,479		16,550			224,404			(38,418	)		1,511			205,526

See accompanying notes to condensed consolidated financial statements.

NASB Financial, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Nine months ended June 30,
	2014			2013
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	12,768			21,110
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		990			1,720
Amortization and accretion, net		490			621
Gain on sale of securities available for sale		(616	)		—
(Gain) loss on sale of securities held to maturity		10			(257	)
(Income) loss from investment in LLCs		(18	)		563
Gain from loans receivable held for sale		(24,082	)		(46,619	)
Provision for loan losses		(5,000	)		(9,600	)
Provision for loss on real estate owned		166			956
Origination of loans receivable held for sale		(827,788	)		(1,494,860	)
Sale of loans receivable held for sale		842,745			1,600,655
Stock based compensation – stock options		(63	)		(44	)
Changes in:
Net fair value of loan-related commitments		972			3,299
Accrued interest receivable		(492	)		391
Prepaid and accrued expenses, other liabilities, and income taxes payable		587			2,103

Net cash provided by operating activities		669			80,038
Cash flows from investing activities:
Principal repayments of mortgage-backed securities:
Held to maturity		1,156			4,851
Available for sale		219			68
Principal repayments of mortgage loans receivable held for investment		141,429			169,266
Principal repayments of other loans receivable		1,276			2,686
Principal repayments of investment securities available for sale		25,937			42,468
Loan origination—mortgage loans receivable held for investment		(174,919	)		(108,088	)
Loan origination—other loans receivable		(1,239	)		(1,712	)
Purchase of mortgage loans receivable held for investment		(700	)		(647	)
Proceeds from sale (purchase) of Federal Home Loan Bank stock		(2,315	)		1,145
Purchase of investment securities available for sale		(61,427	)		(72,525	)
Purchase of investment securities held to maturity		(36,101	)		—
Proceeds from sale of investment securities available for sale		52,551			—
Proceeds from sale of mortgage-backed securities available for sale		4,351			—
Proceeds from sale of mortgage-backed securities held to maturity		508			10,800
Proceeds from sale of real estate owned		2,332			11,905
Purchases of premises, equipment, and software, net		(751	)		(957	)
Investment in LLCs		(55	)		(7	)
Other		(245	)		(91	)

Net cash provided by (used in) investing activities		(47,993	)		59,162

NASB Financial, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Nine months ended June 30,
	2014			2013
	(Dollars in thousands)
Cash flows from financing activities:
Net decrease in customer and brokered deposit accounts		(3,787	)		(90,975	)
Proceeds from advances from Federal Home Loan Bank		316,000			25,000
Repayment on advances from Federal Home Loan Bank		(256,000	)		(52,000	)
Cash dividends paid		(5,507	)		—
Change in escrows		(1,102	)		(2,292	)
Proceeds from other borrowings		—			422

Net cash provided by (used in) financing activities		49,604			(119,845	)

Net increase in cash and cash equivalents		2,280			19,355
Cash and cash equivalents at beginning of period		6,347			8,716

Cash and cash equivalents at end of period	$	8,627			28,071

Supplemental disclosure of cash flow information:
Cash paid for income taxes (net of refunds)	$	3,646			13,602
Cash paid for interest		5,304			5,981
Supplemental schedule of non-cash investing and financing activities:
Conversion of loans receivable to real estate owned, net of specific reserves	$	1,913			9,335
Conversion of real estate owned to loans receivable		—			224
Transfer of mortgage-backed securities from held to maturity to available for sale		4,410			—

See accompanying notes to condensed consolidated financial statements.

(1) BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include the accounts of NASB Financial, Inc. (the “Company”), its wholly-owned subsidiary, North American Savings Bank, F.S.B. (“North American” or the “Bank”), and the Bank’s wholly-owned subsidiary, Nor-Am Service Corporation. All significant inter-company transactions have been eliminated in consolidation. The consolidated financial statements do not include the accounts of our wholly-owned statutory trust, NASB Preferred Trust I (the “Trust”). The Trust qualifies as a special purpose entity that is not required to be consolidated in the financial statements of NASB Financial, Inc. The Trust Preferred Securities issued by the Trust are included in Tier I capital for regulatory capital purposes. See Footnote 10, Subordinated Debentures.

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. All adjustments are of a normal and recurring nature, and, in the opinion of management, the statements include all adjustments considered necessary for fair presentation. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013, filed with the Securities and Exchange Commission on December 16, 2013. Operating results for the nine month period ended June 30, 2014, are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2014. The condensed consolidated balance sheet of the Company as of September 30, 2013, has been derived from the audited balance sheet of the Company as of that date.

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowances for losses on loans, valuation of foreclosed assets held for sale, accruals for loan recourse provisions, and fair values of financial instruments, among other items. Management believes that these estimates are adequate; however, future additions to the allowance or changes in the estimates may be necessary based on changes in economic conditions.

The Company’s critical accounting policies involving the more significant judgments and assumptions used in the preparation of the condensed consolidated financial statements as of June 30, 2014, have remained unchanged from September 30, 2013. These policies relate to the allowance for loan losses, the valuation of foreclosed assets held for sale, the valuation of derivative instruments, and the valuation of equity method investments.

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

(2) RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting reclassification out of accumulated other comprehensive income. The new standard is effective for fiscal years beginning after December 15, 2012, including interim periods within those years. The amendments should be prospectively applied. The amendments do not change the current requirement for reporting net income or other comprehensive income. The amendments require an organization to present on the face of the financial statements, or in the footnotes, the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income if the item reclassified is required to be reclassified to net income in its entirety in the same reporting period. Additionally, for other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required to provide additional detail about those amounts. The adoption of this standard during the quarter ended December 31, 2013, did not have a material impact on the Company’s consolidated financial statements.

In January 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU No. 2014-04 clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. For public companies, this standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Management does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial statements.

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

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


	Three months ended				Nine months ended
	6/30/14		6/30/13		6/30/14		6/30/13
Net income (in thousands)	$	4,588		1,775		12,768		21,110
Average common shares outstanding		7,867,614		7,867,614		7,867,614		7,867,614
Average common share stock options outstanding		—		—		—		—

Average diluted common shares		7,867,614		7,867,614		7,867,614		7,867,614
Earnings per share:
Basic	$	0.58		0.23		1.62		2.68
Diluted		0.58		0.23		1.62		2.68

At June 30, 2014 and 2013, options to purchase 35,138 and 41,138 shares of the Company’s stock were outstanding, respectively. These options were not included in the calculation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares for the period, thus making the options anti-dilutive.

(4) SECURITIES AVAILABLE FOR SALE

The following table presents a summary of securities available for sale at June 30, 2014. Dollar amounts are expressed in thousands.


			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
Corporate debt securities	$	76,151		2,803		—		78,954
U.S. government sponsored agency securities		161,014		820		1,314		160,520
Municipal securities		422		—		—		422

Total	$	237,587		3,623		1,314		239,896

The following table presents a summary of securities available for sale at September 30, 2013. Dollar amounts are expressed in thousands.


			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		Value
Corporate debt securities	$	67,320		2,482		692		69,110
U.S. government sponsored agency securities		187,087		322		4,245		183,164
Municipal securities		422		—		—		422

Total	$	254,829		2,804		4,937		252,696

During the nine month period ended June 30, 2014 the Company recognized gross gains of $544,000 and no gross losses on the sale of securities available for sale. There were no sales of securities available for sale during the nine month period ended June 30, 2013.

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 June 30, 2014. 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
U.S. government sponsored agency securities	$	—		—	$	59,186		1,314

Total	$	—		—	$	59,186		1,314

Management monitors the securities portfolio for impairment on an ongoing basis by evaluating market conditions and other relevant information, including external credit ratings, to determine whether or not a decline in value is other-than-temporary. When the fair value of a security is less than its amortized cost, an other-than-temporary impairment is considered to have occurred if the present value of expected cash flows is not sufficient to recover the entire amortized cost, or if the Company intends to, or will be required to, sell the security prior to the recovery of its amortized cost. The unrealized losses at June 30, 2014, are primarily the result of changes in market yields from the time of purchase. Management generally views changes in fair value caused by changes in interest rates as temporary. In addition, all scheduled payments for securities with unrealized losses at June 30, 2014, have been made, and it is anticipated that the Company will hold such securities to maturity and that the entire principal balance will be collected.

The scheduled maturities of securities available for sale at June 30, 2014 are presented in the following table. Dollar amounts are expressed in thousands.


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Due in less than one year	$	30,035		80		—		30,115
Due from one to five years		88,902		2,826		—		91,728
Due from five to ten years		58,150		717		—		58,867
Due after ten years		60,500		—		1,314		59,186

Total	$	237,587		3,623		1,314		239,896

(5) SECURITIES HELD TO MATURITY

The following table presents a summary of securities held to maturity at June 30, 2014. Dollar amounts are expressed in thousands. The Bank did not have any securities classified as held to maturity at September 30, 2013.


			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
Corporate debt securities	$	36,013		348		45		36,316

Total	$	36,013		348		45		36,316

There were no sales of securities held to maturity during the nine month period ended June 30, 2014 and 2013.

The following table presents a summary of the fair value and gross unrealized losses of those securities held to maturity which had unrealized losses at June 30, 2014. Dollar amounts are expressed in thousands.


	Less than 12 months				12 months or longer
	Estimated		Gross		Estimated		Gross
	fair		unrealized		fair		Unrealized
	value		losses		value		Losses
Corporate debt securities	$	9,647		45	$	—		—

Total	$	9,647		45	$	—		—

The scheduled maturities of securities held to maturity at June 30, 2014 are presented in the following table. Dollar amounts are expressed in thousands.


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Due from one to five years	$	4,995		15		—		5,010
Due from five to ten years		31,018		333		45		31,306

Total	$	36,013		348		45		36,316

(6) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

The following table presents a summary of mortgage-backed securities available for sale at June 30, 2014. Dollar amounts are expressed in thousands.


			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
Pass-through certificates guaranteed by GNMA – fixed rate	$	61		2		—		63
Pass-through certificates guaranteed by FNMA – adjustable rate		105		6		—		111
FHLMC participation certificates:
Fixed rate		71		3		—		74
Adjustable rate		89		5		—		94

Total	$	326		16		—		342

The following table presents a summary of mortgage-backed securities available for sale at September 30, 2013. Dollar amounts are expressed in thousands.


			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
Pass-through certificates guaranteed by GNMA – fixed rate	$	68		2		—		70
Pass-through certificates guaranteed by FNMA – adjustable rate		119		7		—		126
FHLMC participation certificates:
Fixed rate		122		5		—		127
Adjustable rate		105		5		—		110

Total	$	414		19		—		433

During the quarter ended December 31, 2013, the Bank transferred one collateralized mortgage obligation security with an amortized cost of $4.4 million and an unrealized gain of $79,000 from held to maturity to available for sale. The security was transferred after it was determined that it was not an allowable investment under provisions of the Volcker Rule. Management determined that it did not have the ability to hold the security to maturity, as the Volcker Rule requires banks to bring their activities into compliance on or before July 21, 2015. This security was sold during the quarter ended March 31, 2014, and the Company recognized a gain of $72,000. There were no other sales of securities available for sale during the nine month period ended June 30, 2014 and 2013.

The scheduled maturities of mortgage-backed securities available for sale at June 30, 2014 are presented in the following table. Dollar amounts are expressed in thousands.


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Due from one to five years	$	71		3		—		74
Due after ten years		255		13		—		268

Total	$	326		16		—		342

Actual maturities and pay-downs of mortgage-backed securities available for sale will differ from scheduled maturities depending on the repayment characteristics and experience of the underlying financial instruments, on which borrowers have the right to prepay certain obligations.

(7) MORTGAGE-BACKED SECURITIES HELD TO MATURITY

The following table presents a summary of mortgage-backed securities held to maturity at June 30, 2014. Dollar amounts are expressed in thousands.


			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
FHLMC participation certificates:
Fixed rate	$	24		—		—		24
FNMA pass-through certificates:
Balloon maturity and adjustable rate		1		—		—		1
Collateralized mortgage obligations		37,286		704		8		37,982

Total	$	37,311		704		8		38,007

The following table presents a summary of mortgage-backed securities held to maturity at September 30, 2013. Dollar amounts are expressed in thousands.


			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair
	cost		gains		losses		value
FHLMC participation certificates:
Fixed rate	$	30		2		—		32
FNMA pass-through certificates:
Fixed rate		1		—		—		1
Balloon maturity and adjustable rate		14		—		—		14
Collateralized mortgage obligations		43,029		94		27		43,096

Total	$	43,074		96		27		43,143

During the nine month period ended June 30, 2014, the Bank recognized a loss of $10,000 on the sale of one mortgage backed security which was classified as held to maturity. This security had an amortized cost of $518,000 at the time of sale. During the nine month period ended June 30, 2013, the Bank recognized a gain of $295,000 and a loss of $38,000 on the sale of two mortgage backed securities which were classified as held to maturity. The securities had a combined amortized cost of $10.5 million at the time of sale. The decision was made to sell these securities after it was determined that there was a significant deterioration in the issuer’s creditworthiness.

The following table presents a summary of the fair value and gross unrealized losses of those mortgage-backed securities held to maturity which had unrealized losses at June 30, 2014. 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	$	—		—	$	2,058		8

Total	$	—		—	$	2,058		8

The scheduled maturities of mortgage-backed securities held to maturity at June 30, 2014, are presented in the following table. Dollar amounts are expressed in thousands.


	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Due from one to five years	$	25		—		—		25
Due after ten years		37,286		704		8		37,982

Total	$	37,311		704		8		38,007

Actual maturities and pay-downs of mortgage-backed securities held to maturity will differ from scheduled maturities depending on the repayment characteristics and experience of the underlying financial instruments, on which borrowers have the right to prepay certain obligations.

(8) LOANS RECEIVABLE

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

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


	6/30/14			9/30/13
HELD FOR INVESTMENT
Mortgage loans:
Permanent loans on:
Residential properties	$	377,520			365,248
Business properties		256,293			268,641
Partially guaranteed by VA or insured by FHA		15,932			7,694
Construction and development		143,696			91,451

Total mortgage loans		793,441			733,034
Commercial loans		11,961			12,226
Installment loans and lease financing to individuals		5,629			5,599

Total loans receivable held for investment		811,031			750,859
Less:
Undisbursed loan funds		(58,889	)		(30,749	)
Unearned discounts and fees on loans, net of deferred costs		(4,004	)		(4,397	)

Net loans receivable held for investment	$	748,138			715,713

HELD FOR SALE
Mortgage loans:
Permanent loans on:
Residential properties	$	78,204			69,079

Included in the loans receivable balances at June 30, 2014, are participating interests in mortgage loans and wholly-owned mortgage loans serviced by other institutions in the amount of $711,000. Loans and participations serviced for others amounted to approximately $26.4 million at June 30, 2014. Loans serviced for others are not included in the accompanying condensed consolidated balance sheets.

Lending Practices and Underwriting Standards

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

The Bank’s residential real estate loan underwriters are grouped into three different levels, based upon each underwriter’s experience and proficiency. Underwriters within each level are authorized to approve loans up to prescribed dollar amounts. Any loan over $1 million must also be approved by either the Board Chairman, CEO or EVP/Residential Lending. Conventional residential real estate loans are underwritten using FNMA’s Desktop Underwriter or FHLMC’s Loan Prospector automated underwriting systems, which analyze credit history, employment and income information, qualifying ratios, asset reserves, and loan-to-value ratios. If a loan does not meet the automated underwriting standards, it is underwritten manually. Full documentation to support each applicant’s credit history, income, and sufficient funds for

closing is required on all loans. An appraisal report, performed in conformity with the Uniform Standards of Professional Appraisers Practice by an approved outside licensed appraiser, is required for substantially all loans. Typically, the Bank requires borrowers to purchase private mortgage insurance when the loan-to-value ratio exceeds 80%.

NASB originates Adjustable Rate Mortgages (“ARMs”), which fully amortize and typically have initial rates that are fixed for one to seven years before becoming adjustable. Such loans are underwritten based on the initial interest rate and the borrower’s ability to repay based on the maximum first adjustment rate. Each underwriting decision takes into account the type of loan and the borrower’s ability to pay at higher rates. While lifetime rate caps are taken into consideration, qualifying ratios may not be calculated at this level due to an extended number of years required to reach the fully-indexed rate.

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

Construction and development loans - Construction and land development loans are made primarily to builders/developers, who construct properties for resale. The Bank’s requirements for a construction loan are similar to those of a mortgage on an existing residence. In addition, the borrower must submit accurate plans, specifications, and cost projections of the property to be constructed. All construction and development loans are manually underwritten using NASB’s internal underwriting standards. All construction and development loans require two approvals, from either the Board Chairman, CEO, or SVP/Construction Lending. Prior approval is required from the Bank’s Board of Directors for newly originated construction and development loans with a proposed balance of $2.5 million or greater. The bank has adopted internal loan-to-value limits consistent with regulations, which are 65% for raw land, 75% for land development, and 85% for residential and non-residential construction. An appraisal report performed in conformity with the Uniform Standards of Professional Appraisers Practice by an approved outside licensed appraiser is required on all loans in excess of $250,000. Generally, the Bank will commit to an initial term of 12 to 18 months on construction loans, and an initial term of 24 to 48 months on land acquisition and development loans, with six month renewals thereafter. Interest rates on construction loans typically adjust daily and are tied to a predetermined index. NASB’s staff regularly performs inspections of each property during its construction phase to help ensure adequate progress is achieved before making scheduled loan disbursements.

When construction and development loans mature, the Bank typically considers extensions for short, six-month term periods. This allows the Bank to more frequently evaluate the loan, including creditworthiness and current market conditions and, if management believes it is in the best interest of the Company, to modify the terms accordingly. This portfolio consists primarily of assets with rates tied to the prime rate and, in most cases, the conditions for loan renewal include an interest rate “floor” in accordance with the market conditions that exist at the time of renewal. Such extensions are accounted for as Troubled Debt Restructurings (“TDRs”) if the restructuring was related to the borrower’s financial difficulty, and if the Bank made concessions that it would not otherwise consider. In order to determine whether or not a renewal should be accounted for as a TDR, management reviewed the borrower’s current financial information, including an analysis of income and liquidity in relation to debt service requirements. During the nine month period ended June 30, 2014, the Bank renewed fifty-three loans within its construction and development loan portfolio, ten of which were considered TDRs.

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

The Bank’s commercial real estate loans are secured primarily by multi-family and nonresidential properties. Such loans are manually underwritten using NASB’s internal underwriting standards, which evaluate the sources of repayment, including the ability of income producing property to generate sufficient cash flow to service the debt, the capacity of the borrower or guarantors to cover any shortfalls in operating income, and, as a last resort, the ability to liquidate the collateral in such a manner as to completely protect the Bank’s investment. All commercial real estate loans require two approvals, from either the Board Chairman, CEO, or EVP/Chief Lending Officer. Prior approval is required from the Bank’s Board of

Directors for newly originated commercial loans with a proposed balance of $2.5 million or greater. Typically, loan-to-value ratios do not exceed 80%; however, exceptions may be made when it is determined that the safety of the loan is not compromised, and the rationale for exceeding this limit is clearly documented. An appraisal report performed in conformity with the Uniform Standards of Professional Appraisers Practice by an approved outside licensed appraiser is required on all loans in excess of $250,000. Interest rates on commercial loans may be either fixed or tied to a predetermined index and adjusted daily.

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

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

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

Allowance for Loan Losses

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

The ALLL is determined based upon two components. The first is made up of specific reserves for loans which have been deemed impaired in accordance with GAAP. The second component is made up of general reserves for loans that are not impaired. A loan becomes impaired when management believes it will be unable to collect all principal and interest due according to the contractual terms of the loan. Once a loan has been deemed impaired, the impairment must be measured by comparing the recorded investment in the loan to the present value of the estimated future cash flows discounted at the loan’s effective rate, or to the fair value of the loan based on the loan’s observable market price, or to the fair value of the collateral if the loan is collateral dependent. Any measured impairments that are deemed “confirmed losses” are charged-off and netted from their respective loan balances. For impaired loans that are collateral dependent, a “confirmed loss” is generally the amount by which the loan’s recorded investment exceeds the fair value of its collateral. If a loan is considered uncollectible, the entire balance is deemed a “confirmed loss” and is fully charged-off.

Loans that are not impaired are evaluated based upon the Bank’s historical loss experience, as well as various subjective factors, to estimate potential unidentified losses within the various loan portfolios. These loans are categorized into pools based upon certain characteristics such as loan type, collateral type and repayment source. In addition to analyzing historical losses, the Bank also evaluates the following subjective factors for each loan pool to estimate future losses: changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio, changes in management and other relevant staff, changes in the volume and severity of past due loans,

changes in the quality of the Bank’s loan review system, changes in the value of the underlying collateral for collateral dependent loans, changes in the level of lending concentrations, and changes in other external factors such as competition and legal and regulatory requirements. Historical loss ratios are adjusted accordingly, based upon the effect that the subjective factors have in estimated future losses. These adjusted ratios are applied to the balances of the loan pools to determine the adequacy of the ALLL each quarter

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

The following table presents the balance in the allowance for loan losses for the three and nine month periods ended June 30, 2014 and 2013. Dollar amounts are expressed in thousands.


				Residential		Commercial
				Held For		Real			Construction &
	Residential			Sale		Estate			Development			Commercial			Installment			Total
Allowance for loan losses:
Balance at April 1, 2014	$	6,407			—		3,193			3,883			10			178			13,671
Provision for loan losses		(72	)		—		426			(313	)		(4	)		(37	)		—
Losses charged off		(86	)		—		(538	)		—			—			—			(624	)
Recoveries		304			—		52			725			—			62			1,143

Balance at June 30, 2014	$	6,553			—		3,133			4,295			6			203			14,190

Balance at April 1, 2013	$	7,380			—		7,253			5,627			60			406			20,726
Provision for loan losses		886			—		(315	)		(476	)		—			(95	)		—
Losses charged off		(203	)		—		(420	)		—			—			—			(623	)
Recoveries		307			—		174			21			—			45			547

Balance at June 30, 2013	$	8,370			—		6,692			5,172			60			356			20,650

Balance at October 1, 2013	$	8,642			—		6,561			4,841			58			281			20,383
Provision for loan losses		(387	)		—		(3,706	)		(639	)		(52	)		(216	)		(5,000	)
Losses charged off		(2,228	)		—		(902	)		(651	)		—			—			(3,781	)
Recoveries		526			—		1,180			744			—			138			2,588

Balance at June 30, 2014	$	6,553			—		3,133			4,295			6			203			14,190

Balance at October 1, 2012	$	6,941			—		7,086			16,590			513			699			31,829
Provision for loan losses		2,232			—		177			(11,129	)		(453	)		(427	)		(9,600	)
Losses charged off		(1,359	)		—		(994	)		(669	)		—			(87	)		(3,109	)
Recoveries		556			—		423			380			—			171			1,530

Balance at June 30, 2013	$	8,370			—		6,692			5,172			60			356			20,650

The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method at June 30, 2014. Dollar amounts are expressed in thousands.


			Residential		Commercial
			Held For		Real		Construction &
	Residential		Sale		Estate		Development		Commercial		Installment		Total
Allowance for loan losses:
Ending balance of allowance for loan losses related to loans at June 30, 2014:
Individually evaluated for impairment	$	213		—		—		1		1		15		230

Collectively evaluated for impairment	$	6,340		—		3,133		4,294		5		188		13,960

Acquired with deteriorated credit quality *	$	32		—		—		—		—		—		32

Loans:
Balance at June 30, 2014	$	391,317		78,204		254,982		84,261		11,961		5,617		826,342

Ending balance:
Loans individually evaluated for impairment	$	14,028		—		10,684		12,715		11,250		37		48,714

Loans collectively evaluated for impairment	$	377,289		78,204		244,298		71,546		711		5,580		777,628

Loans acquired with deteriorated credit quality **	$	4,095		—		—		—		—		—		4,095

The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method at September 30, 2013. Dollar amounts are expressed in thousands.


			Residential		Commercial
			Held For		Real		Construction &
	Residential		Sale		Estate		Development		Commercial		Installment		Total
Allowance for loan losses:
Ending balance of allowance for loan losses related to loans at September 30, 2013:
Individually evaluated for impairment	$	333		—		35		4		25		—		397

Collectively evaluated for Impairment	$	8,309		—		6,526		4,837		33		281		19,986

Acquired with deteriorated credit quality *	$	31		—		—		—		—		—		31

Loans:
Balance at September 30, 2013	$	370,296		69,079		266,895		60,697		12,226		5,599		784,792

Ending balance:
Loans individually evaluated for impairment	$	18,864		—		10,235		23,917		11,250		3		64,269

Loans collectively evaluated for impairment	$	351,432		69,079		256,660		36,780		976		5,596		720,523

Loans acquired with deteriorated credit quality **	$	4,196		—		—		—		—		—		4,196

*	Included in ending balance of allowance for loan losses related to loans individually evaluated for impairment.

**	Included in ending balance of loans individually evaluated for impairment.

Classified Assets, Delinquencies, and Non-accrual Loans

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

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

Each quarter, management reviews the problem loans in its portfolio to determine whether changes to the asset classifications or allowances are needed. The following table presents the credit risk profile of the Company’s loan portfolio based on risk rating category as of June 30, 2014. Dollar amounts are expressed in thousands.


			Residential		Commercial
			Held For		Real		Construction &
	Residential		Sale		Estate		Development		Commercial		Installment		Total
Rating:
Pass	$	353,290		78,204		195,445		58,359		—		5,595		690,893
Pass – Watch		19,993		—		45,105		19,939		11,961		—		96,998
Special Mention		—		—		—		—		—		—		—
Substandard		18,034		—		14,432		5,963		—		22		38,451
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—

Total	$	391,317		78,204		254,982		84,261		11,961		5,617		826,342

The following table presents the credit risk profile of the Company’s loan portfolio based on risk rating category as of September 30, 2013. Dollar amounts are expressed in thousands.


			Residential		Commercial
			Held For		Real		Construction &
	Residential		Sale		Estate		Development		Commercial		Installment		Total
Rating:
Pass	$	320,090		69,079		194,070		20,789		—		5,595		609,623
Pass – Watch		24,449		—		56,640		20,698		976		—		102,763
Special Mention		227		—		583		—		—		—		810
Substandard		25,397		—		15,567		19,210		11,250		4		71,428
Doubtful		133		—		35		—		—		—		168
Loss		—		—		—		—		—		—		—

Total	$	370,296		69,079		266,895		60,697		12,226		5,599		784,792

The following table presents the Company’s loan portfolio aging analysis as of June 30, 2014. Dollar amounts are expressed in thousands.


	30-59 Days Past Due		60-90 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
Residential	$	1,021		966		4,669		6,656		384,661		391,317		—
Residential held for sale		—		—		1		1		78,203		78,204		—
Commercial real estate		—		252		1,328		1,580		253,402		254,982		272
Construction & development		—		—		714		714		83,547		84,261		—
Commercial		—		—		—		—		11,961		11,961		—
Installment		—		16		—		16		5,601		5,617		—

Total	$	1,021		1,234		6,712		8,967		817,375		826,342		272

The following table presents the Company’s loan portfolio aging analysis as of September 30, 2013. Dollar amounts are expressed in thousands.


	30-59 Days Past Due		60-90 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
Residential	$	1,044		1,308		7,079		9,431		360,865		370,296		—
Residential held for sale		—		—		—		—		69,079		69,079		—
Commercial real estate		4,195		334		328		4,857		262,038		266,895		—
Construction & development		—		—		774		774		59,923		60,697		—
Commercial		—		—		—		—		12,226		12,226		—
Installment		—		—		1		1		5,598		5,599		—

Total	$	5,239		1,642		8,182		15,063		769,729		784,792		—

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

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


	6/30/14		9/30/13
Residential	$	10,756		18,073
Residential held for sale		—		—
Commercial real estate		6,132		8,354
Construction & development		2,349		5,195
Commercial		—		—
Installment		—		—

Total	$	19,237		31,622

As of June 30, 2014, $12.2 million (63.3%) of the loans classified as nonaccrual were current and paying as agreed.

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

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


	6/30/14		9/30/13
Troubled debt restructurings:
Residential	$	6,240		9,381
Residential held for sale		—		—
Commercial real estate		5,881		6,079
Construction & development		12,002		23,144
Commercial		11,250		11,250
Installment		37		3

Total	$	35,410		49,857

Performing troubled debt restructurings:
Residential	$	1,461		1,626
Residential held for sale		—		—
Commercial real estate		3,618		1,036
Construction & development		10,367		18,722
Commercial		11,250		11,250
Installment		37		3

Total	$	26,733		32,637

At June 30, 2014, the Bank had outstanding commitments of $1,000 to be advanced in connection with TDRs.

The following table presents the number of loans and the Company’s recorded investment in TDRs modified during the nine month period ended June 30, 2014. Dollar amounts are expressed in thousands.


			Recorded		Recorded
			Investment		Investment		Increase in
	Number		Prior to		After		ALLL or
	of Loans		Modification		Modification		Charge-offs
Residential		6	$	1,138	$	1,138	$	—
Residential held for sale		—		—		—		—
Commercial real estate		1		990		990		—
Construction & development		10		6,163		6,163		—
Commercial		—		—		—		—
Installment		2		39		39		15

Total		19	$	8,330	$	8,330	$	15

The following table presents the number of loans and the Company’s recorded investment in TDRs modified during the nine month period ended June 30, 2013. Dollar amounts are expressed in thousands.


			Recorded		Recorded
			Investment		Investment		Increase in
	Number		Prior to		After		ALLL or
	of Loans		Modification		Modification		Charge-offs
Residential		18	$	7,526	$	7,468	$	19
Residential held for sale		—		—		—		—
Commercial real estate		3		1,471		1,338		133
Construction & development		21		23,484		23,484		—
Commercial		1		16,251		13,751		25
Installment		2		5		5		—

Total		45	$	48,737	$	46,046	$	177

The following table presents TDRs restructured during the nine month period ended June 30, 2014 by type of modification. Dollar amounts are expressed in thousands.


							Total
							Recorded
	Extension				Combination		Investment
	of		Interest Only		of Terms		Prior to
	Maturity		Period		Modified		Modification
Residential	$	769		—		369		1,138
Residential held for sale		—		—		—		—
Commercial real estate		—		—		990		990
Construction & development		2,920		—		3,243		6,163
Commercial		—		—		—		—
Installment		15		—		24		39

Total	$	3,704		—		4,626		8,330

The following table presents TDRs restructured during the nine month period ended June 30, 2013 by type of modification. Dollar amounts are expressed in thousands.


							Total
							Recorded
	Extension				Combination		Investment
	of		Interest Only		of Terms		Prior to
	Maturity		Period		Modified		Modification
Residential	$	6,529		—		997		7,526
Residential held for sale		—		—		—		—
Commercial real estate		—		—		1,471		1,471
Construction & development		23,484		—		—		23,484
Commercial		—		—		16,251		16,251
Installment		—		—		5		5

Total	$	30,013		—		18,724		48,737

The following table presents the Company’s recorded investment and number of loans considered TDRs at June 30, 2014 and 2013, that defaulted during the nine month period. Dollar amounts are expressed in thousands.


	June 30, 2014				June 30, 2013
	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Residential		14	$	3,907		22	$	5,023
Residential held for sale		—		—		—		—
Commercial real estate		1		—		3		322
Construction & development		—		—		2		1,485
Commercial		—		—		—		—
Installment		3		37		2		4

Total		18	$	3,944		29	$	6,834

The following table presents impaired loans, including troubled debt restructurings, as of June 30, 2014. Dollar amounts are expressed in thousands.


			Unpaid
	Recorded		Principal		Specific
	Balance		Balance		Allowance
Loans without a specific valuation allowance:
Residential	$	12,851		17,095		—
Residential held for sale		—		—		—
Commercial real estate		10,684		17,674		—
Construction & development		10,936		13,492		—
Commercial		—		—		—
Installment		22		398		—
Loans with a specific valuation allowance:
Residential	$	1,177		1,203		213
Residential held for sale		—		—		—
Commercial real estate		—		—		—
Construction & development		1,779		1,779		1
Commercial		11,250		11,250		1
Installment		15		15		15
Total:
Residential	$	14,028		18,298		213
Residential held for sale		—		—		—
Commercial real estate		10,684		17,674		—
Construction & development		12,715		15,271		1
Commercial		11,250		11,250		1
Installment		37		413		15

The following table presents impaired loans, including troubled debt restructurings, as of September 30, 2013. Dollar amounts are expressed in thousands.


			Unpaid
	Recorded		Principal		Specific
	Balance		Balance		Allowance
Loans without a specific valuation allowance:
Residential	$	17,063		20,053		—
Residential held for sale		—		—		—
Commercial real estate		9,199		16,925		—
Construction & development		22,138		25,377		—
Commercial		—		—		—
Installment		3		457		—
Loans with a specific valuation allowance:
Residential	$	1,801		1,828		333
Residential held for sale		—		—		—
Commercial real estate		1,036		1,036		35
Construction & development		1,779		1,779		4
Commercial		11,250		11,250		25
Installment		—		—		—
Total:
Residential	$	18,864		21,881		333
Residential held for sale		—		—		—
Commercial real estate		10,235		17,961		35
Construction & development		23,917		27,156		4
Commercial		11,250		11,250		25
Installment		3		457		—

The following table presents the average recorded investment and interest income recognized on impaired loans for the three and nine month periods ended June 30, 2014. Dollar amounts are expressed in thousands.


	Three Months Ended 6/30/14				Nine Months Ended 6/30/14
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Loans without a specific valuation allowance:
Residential	$	12,880		171		13,827		488
Residential held for sale		—		—		—		—
Commercial real estate		11,090		259		11,481		870
Construction & development		11,414		179		12,360		598
Commercial		—		—		—		—
Installment		23		5		24		18
Loans with a specific valuation allowance:
Residential	$	1,179		15		1,189		57
Residential held for sale		—		—		—		—
Commercial real estate		—		—		—		—
Construction & development		1,779		30		1,779		91
Commercial		11,250		192		11,250		576
Installment		15		—		15		1
Total:
Residential	$	13,659		186		15,016		545
Residential held for sale		—		—		—		—
Commercial real estate		11,090		259		11,481		870
Construction & development		13,193		209		14,139		689
Commercial		11,250		192		11,250		576
Installment		38		5		39		19

The following table presents the average recorded investment and interest income recognized on impaired loans for the three and nine month periods ended June 30, 2013. Dollar amounts are expressed in thousands.


	Three Months Ended 6/30/13				Nine Months Ended 6/30/13
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Loans without a specific valuation allowance:
Residential	$	16,703		203		17,014		606
Residential held for sale		—		—		—		—
Commercial real estate		10,172		248		10,627		810
Construction & development		28,685		441		31,231		1,483
Commercial		—		—		—		—
Installment		5		6		41		36
Loans with a specific valuation allowance:
Residential	$	4,922		68		5,526		255
Residential held for sale		—		—		—		—
Commercial real estate		137		—		138		6
Construction & development		1,779		30		1,779		91
Commercial		11,250		192		13,195		702
Installment		—		—		—		—
Total:
Residential	$	21,625		271		22,540		861
Residential held for sale		—		—		—		—
Commercial real estate		10,309		248		10,765		816
Construction & development		30,464		471		33,010		1,574
Commercial		11,250		192		13,195		702
Installment		5		6		41		36

(9) FORECLOSED ASSETS HELD FOR SALE

The carrying value of real estate owned and other repossessed property was $10.3 million and $11.3 million at June 30, 2014, and September 30, 2013, respectively

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.

(10) SUBORDINATED DEBENTURES

On December 13, 2006, the Company, through its wholly-owned statutory trust, NASB Preferred Trust I (the “Trust”), issued $25 million of pooled Trust Preferred Securities. The Trust used the proceeds from the offering to purchase a like amount of the Company’s subordinated debentures. The debentures, which have a variable rate of 1.65% over the 3-month LIBOR and a 30-year term, are the sole assets of the Trust. In exchange for the capital contributions made to the Trust by the Company upon formation, the Company owns all the common securities of the Trust.

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

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

In accordance with the Company’s written agreement with the Federal Reserve Bank of Kansas City (“FRB”), dated November 29, 2012, the Company is prohibited from making any distributions of principal or interest on its Trust Preferred Securities without the prior written non-objection of the FRB. On July 11, 2012, the Company notified security holders that it was exercising its right to defer the payment of interest on its Trust Preferred Securities for a period of up to five years. On December 18, 2013, the Company received written non-objection from the FRB to pay all accrued interest on Trust Preferred Securities, and on December 23, 2013, the Company notified security holders that it intended to end the elective deferral period and pay all accrued interest at the next regularly scheduled payment date in January 2014. On January 30, 2014, the Company paid $893,000 of accrued interest on Trust Preferred Securities, which brought all payments current. The Board intends to continue making quarterly interest payments on Trust Preferred Securities; however, while the Company is operating under the regulatory written agreement, each interest payment must first receive prior written non-objection from its regulators. On April 24, 2014, Company received regulatory written non-objection to pay accrued interest on its outstanding Trust Preferred Securities on the April 30, 2014, payment date, which amounted to $122,000. On June 27, 2014, Company received regulatory written non-objection to pay accrued interest on its outstanding Trust Preferred Securities on the July 30, 2014, payment date, which amounted to $122,000.

(11) INCOME TAXES

The Company’s federal and state income tax returns for fiscal years 2011 through 2013 remain subject to examination by the Internal Revenue Service and various state jurisdictions, based on the statute of limitations.

(12) SEGMENT INFORMATION

The Company has identified two principal operating segments for purposes of financial reporting: Banking and Mortgage Banking. These segments were determined based on the Company’s internal financial accounting and reporting processes and are consistent with the information that is used to make operating decisions and to assess the Company’s performance by the Company’s key decision makers.

The Mortgage Banking segment originates mortgage loans for sale to investors and for the portfolio of the Banking segment. The Banking segment provides a full range of banking services through the Bank’s branch network, exclusive of mortgage loan originations. A portion of the income presented in the Mortgage Banking segment is derived from sales of loans to the Banking segment based on a transfer pricing methodology that is designed to approximate economic reality. The Other and Eliminations segment includes financial information from the parent company plus inter-segment eliminations.

The following table presents financial information from the Company’s operating segments for the periods indicated. Dollar amounts are expressed in thousands.


				Mortgage		Other and
Three months ended June 30, 2014	Banking			Banking		Eliminations			Consolidated
Net interest income	$	11,229			—		(119	)		11,110
Provision for loan losses		—			—		—			—
Other income		1,107			10,626		(854	)		10,879
General and administrative expenses		6,593			8,648		(311	)		14,930
Income tax expense		2,010			692		(231	)		2,471

Net income	$	3,733			1,286		(431	)		4,588


				Mortgage		Other and
Three months ended June 30, 2013	Banking			Banking		Eliminations			Consolidated
Net interest income	$	10,398			—		(125	)		10,273
Provision for loan losses		—			—		—			—
Other income		830			11,408		(1,241	)		10,997
General and administrative expenses		7,448			11,268		(332	)		18,384
Income tax expense (benefit)		1,455			54		(398	)		1,111

Net income (loss)	$	2,325			86		(636	)		1,775


				Mortgage		Other and
Nine months ended June 30, 2014	Banking			Banking		Eliminations			Consolidated
Net interest income	$	33,050			—		(362	)		32,688
Provision for loan losses		(5,000	)		—		—			(5,000	)
Other income		3,387			25,918		(2,360	)		26,945
General and administrative expenses		20,647			24,918		(570	)		44,995
Income tax expense		7,277			350		(757	)		6,870

Net income	$	13,513			650		(1,395	)		12,768


				Mortgage		Other and
Nine months ended June 30, 2013	Banking			Banking		Eliminations			Consolidated
Net interest income	$	32,722			—		(377	)		32,345
Provision for loan losses		(9,600	)		—		—			(9,600	)
Other income		1,615			47,210		(2,366	)		46,459
General and administrative expenses		20,666			34,100		(687	)		54,079
Income tax expense		8,959			5,047		(791	)		13,215

Net income	$	14,312			8,063		(1,265	)		21,110

(13) DERIVATIVE INSTRUMENTS

The Company enters into derivative contracts to manage interest rate and pricing risk associated with its mortgage banking activities. In accordance with GAAP, derivative instruments are recorded in the Company’s balance sheet at fair value. As the Company enters into commitments to originate loans, it also enters into commitments to sell certain loans in the secondary market. These derivative commitments to sell loans, which may include best efforts commitments, mandatory commitments, and forward sales of mortgage-backed securities, are used to hedge the risks resulting from interest rate movements on the Company’s outstanding commitments to originate loans held for sale and its portfolio of loans held for sale.

The Company has commitments outstanding to extend credit that have not closed prior to the end of the period. Commitments to originate loans held for sale are also considered derivative instruments in accordance with GAAP. As a result of marking to market commitments to originate loans held for sale, the Company recorded an increase in other assets of $227,000, a decrease in other liabilities of $715,000, and an increase in other income of $942,000 for the quarter ended June 30, 2014. The Company recorded a decrease in other assets of $940,000, an increase in other liabilities of $1,000, and a decrease in other income of $941,000 for the nine month period ended June 30, 2014. As a result of marking to market commitments to originate loans held for sale, the Company recorded a decrease in other assets of $909,000, an increase in other liabilities of $4.4 million, and a decrease in other income of $5.3 million for the quarter ended June 30, 2013. The Company recorded a decrease in other assets of $2.5 million, an increase in other liabilities of $4.4 million, and a decrease in other income of $6.9 million for the nine month period ended June 30, 2013.

The Company also has best-efforts 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 such loans held for sale, the Company recorded a decrease in other assets of $746,000, an increase in other liabilities of $269,000, and a decrease in other income of $1.0 million during the quarter ended June 30, 2014. The Company recorded an increase in other assets of $17,000, a decrease in other liabilities of $75,000, and an increase in other income of $92,000 during the nine month period ended June 30, 2014. Due to the mark to market adjustment on commitments to sell loans held for sale on a best-efforts basis, the Company recorded an increase in other assets of $3.8 million, a decrease in other liabilities of $37,000, and an increase in other income of $3.9 million during the quarter ended June 30, 2013. The Company recorded an increase in other assets of $3.5 million, a decrease in other liabilities of $133,000, and an increase in other income of $3.6 million during the nine month period ended June 30, 2013.

In addition, the Company has forward sales commitments of mortgage-backed securities that have not settled prior to the end of the period. Due to the mark to market adjustment on forward sales of mortgage-backed securities, the Company recorded an increase in other assets of $4,000, an increase in other liabilities of $126,000, and a decrease in other income of $122,000 during the quarter ended June 30, 2014. The Company did not have any such commitments prior to the quarter ended June 30, 2014.

The balance of derivative instruments related to commitments to originate and sell loans at June 30, 2014, and September 30, 2013, is disclosed in Footnote 14, Fair Value Measurements.

(14) FAIR VALUE MEASUREMENTS

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

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

•

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

•

Level 2 – Inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.

•

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs reflect the Company’s own assumptions about what market participants would use to price the asset or liability. These inputs may include internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

The Company measures certain financial assets and liabilities at fair value in accordance with GAAP. These measurements involve various valuation techniques and assume that the transactions would occur between market participants in the most advantageous market for the Company.

The following is a summary of valuation techniques utilized by the Company for its significant financial assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy:

Available for sale securities

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

Mortgage-backed securities available for sale, which consist of collateralized mortgage obligations and agency pass-through and participation certificates issued by GNMA, FNMA, and FHLMC, were valued by using industry standard models which utilize various inputs and assumptions such as historical prices of benchmark securities, prepayment estimates, loan type, and year of origination. Substantially all of these assumptions are observable in the marketplace or can be derived from observable data. These measurements are classified as Level 2 within the hierarchy.

Loans held for sale

Loans held for sale are valued using quoted market prices for loans with similar characteristics. This measurement is classified as Level 2 within the hierarchy.

Commitments to Originate Loans and Forward Sales Commitments

Commitments to originate loans and forward loan sales commitments are valued using a valuation model which considers differences between current market interest rates and committed rates. The model also includes assumptions, which estimate fall-out percentages, for commitments to originate loans, and average lives. Fall-out percentages, which range from ten to forty percent, are estimated based upon the difference between current market rates and committed rates. Average lives are based upon estimates for similar types of loans. These measurements use significant unobservable inputs and are classified as Level 3 within the hierarchy. Forward commitments to sell mortgage-backed securities are valued based upon the gain or loss that would occur if the Bank were to pair-off the transaction. This value is obtained by using industry standard models which utilize various inputs and assumptions such as historical prices of benchmark securities, prepayment estimates, loan type, and year of origination. Substantially all of these assumptions are observable in the marketplace or can be derived from observable data. This measurement is classified as Level 2 within the hierarchy.

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall at June 30, 2014 (in thousands):


			Quoted Prices in		Significant		Significant
			Active Markets for		Other		Unobservable
	Fair		Identical Assets		Observable		Inputs
	Value		(Level 1)		Inputs (Level 2)		(Level 3)
Assets:
Securities, available for sale
U.S. government sponsored agency securities	$	160,520		—		160,520		—
Corporate debt securities		78,954		—		78,954		—
Municipal securities		422		—		422		—
Mortgage-backed securities, available for sale
Pass through certificates guaranteed by GNMA – fixed rate		63		—		63		—
Pass through certificates guaranteed by FNMA – adjustable rate		111		—		111		—
FHLMC participation certificates:
Fixed rate		74		—		74		—
Adjustable rate		94		—		94		—
Loans held for sale		78,204		—		78,204		—
Commitments to originate loans		447		—		—		447
Forward loan sales commitments		234		—		—		234
Forward sales commitments of mortgage- backed securities		4		—		4		—

Total assets	$	319,127		—		318,446		681

Liabilities:
Commitments to originate loans	$	214		—		—		214
Forward loan sales commitments		288		—		—		288
Forward sales commitments of mortgage- backed securities		126		—		126		—

Total liabilities	$	628		—		126		502


			Quoted Prices in		Significant		Significant
			Active Markets for		Other		Unobservable
	Fair		Identical Assets		Observable		Inputs
	Value		(Level 1)		Inputs (Level 2)		(Level 3)
Assets:
Securities, available for sale
U.S. government sponsored agency securities	$	183,164		110,982		72,182		—
Corporate debt securities		69,110		—		69,110		—
Municipal securities		422		—		422		—
Mortgage-backed securities, available for sale
Pass through certificates guaranteed by GNMA – fixed rate		70		—		70		—
Pass through certificates guaranteed by FNMA – adjustable rate		126		—		126		—
FHLMC participation certificates:
Fixed rate		127		—		127		—
Adjustable rate		110		—		110		—
Loans held for sale		69,079		—		69,079		—
Commitments to originate loans		1,387		—		—		1,387
Forward sales commitments		217		—		—		217

Total assets	$	323,812		110,982		211,226		1,604

Liabilities:
Commitments to originate loans	$	213		—		—		213
Forward sales commitments		362		—		—		362

Total liabilities	$	575		—		—		575

The following tables present a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs for the nine month periods ended June 30, 2014 and 2013 (in thousands):


	Commitments
	to Originate			Forward Sales
	Loans			Commitments
Balance at October 1, 2013	$	1,174			(145	)
Total realized and unrealized gain (losses):
Included in net income		(941	)		91

Balance at June 30, 2014	$	233			(54	)


	Commitments
	to Originate			Forward Sales
	Loans			Commitments
Balance at October 1, 2012	$	2,047			2,061
Total realized and unrealized gain (losses):
Included in net income		(6,912	)		3,613

Balance at June 30, 2013	$	(4,865	)		5,674

Realized and unrealized gains and losses noted in the table above and included in net income for the nine month period ended June 30, 2014, are reported in the condensed consolidated statements of income as follows (in thousands):


	Other Income
Total losses	$	(850	)

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

Realized and unrealized gains and losses noted in the table above and included in net income for the nine month period ended June 30, 2013, are reported in the consolidated statements of income as follows (in thousands):


	Other Income
Total losses	$	(3,299	)

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

The following is a summary of valuation techniques utilized by the Company for its significant financial assets and liabilities measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy:

Impaired loans

Loans for which it is probable that the Company will not collect principal and interest due according to contractual terms are measured for impairment. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and other internal assessments of value. Appraisals are obtained when an impaired loan is deemed to be collateral dependent and at least annually thereafter. Fair value is generally the appraised value less estimated selling costs and may be discounted further if management believes any other factors or events have affected the fair value. Impaired loans are classified within Level 3 of the fair value hierarchy.

The carrying value of impaired loans that were re-measured during the nine month period ended June 30, 2014, was $8.7 million. The carrying value of impaired loans that were re-measured during the nine month period ended June 30, 2013, was $26.1 million.

Foreclosed Assets Held For Sale

The carrying value of foreclosed assets held for sale was $10.3 million at June 30, 2014. Charge-offs related to foreclosed assets held for sale that were re-measured during the nine month period ended June 30, 2014, totaled $165,000. Charge-offs and increases in specific reserves related to foreclosed assets held for sale that were re-measured during the nine month period ended June 30, 2013, totaled $478,000.

Investment in LLCs

Investments in LLCs are accounted for using the equity method of accounting. On a quarterly basis, these investments are analyzed for impairment in accordance with ASC 323-10-35-32, which states that an other than temporary decline in value of an equity method investment should be recognized. The Company utilizes a multi-faceted approach to measure the potential impairment. The internal model utilizes the following valuation methods: 1) liquidation or appraised values determined by an independent third party appraisal; 2) an on-going business, or discounted cash flows method wherein the cash flows are derived from the sale of fully-developed lots, the development and sale of partially-developed lots, the operation of the homeowner’s association, and the value of raw land obtained from an independent third party appraiser; and 3) an on-going business method, which utilizes the same inputs as method 2, but presumes that cash flows will first be generated from the sale of raw ground and then from the sale of fully-developed and partially-developed lots and the operation of the homeowner’s association. The significant inputs include raw land values, absorption rates of lot sales, and a market discount rate. Management believes this multi-faceted approach is reasonable given the highly subjective nature of the assumptions and the differences in valuation techniques that are utilized within each approach (e.g., order of distribution of assets upon potential liquidation). As a result of this analysis, the Company determined that its investment in Central Platte was materially impaired and recorded an impairment charge of $2.0 million ($1.2 million, net of tax) during the year ended September 30, 2010. During the quarter ended March 31, 2012, list prices of fully-developed lots in Central Platte’s residential development were reduced. The Company incorporated these lower prices into its internal valuation model, which resulted in an additional impairment charge of $200,000 ($123,000, net of tax) during the quarter ended March 31, 2012. No other events have occurred that would indicate any additional impairment of the Company’s investment in Central Platte. Investment in LLCs is classified within Level 3 of the fair value hierarchy.

The carrying value of the Company’s investment in LLCs was $16.6 million at June 30, 2014, and $16.5 million at September 30, 2013.

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 condensed consolidated balance sheets is a reasonable estimate of fair value.

Securities and mortgage-backed securities held to maturity

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

Stock in Federal Home Loan Bank (“FHLB”)

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

Loans receivable held for investment

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

Customer and brokered deposit accounts

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

Advances from FHLB

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

Subordinated debentures

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

Commitments to originate, purchase and sell loans

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

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2014 (in thousands):


			Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:						`
Cash and cash equivalents	$	8,627		8,627		—		—
Stock in Federal Home Loan Bank		9,994		—		9,994		—
Corporate debt securities held to maturity		36,013		—		36,316		—
Mortgage-backed securities held to maturity		37,311		—		38,007		—
Loans receivable held for investment		733,948		—		—		757,605
Financial Liabilities:
Customer deposit accounts		744,406		—		—		745,602
Advances from FHLB		215,000		—		—		216,532
Subordinated debentures		25,774		—		—		17,526


			Fair Value Measurements Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:						`
Cash and cash equivalents	$	6,347		6,347		—		—
Stock in Federal Home Loan Bank		7,679		—		7,679		—
Mortgage-backed securities held to maturity		43,074		—		43,143		—
Loans receivable held for investment		695,330		—		—		726,408
Financial Liabilities:
Customer deposit accounts		748,193		—		—		749,561
Advances from FHLB		155,000		—		—		156,885
Subordinated debentures		25,774		—		—		10,310

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


	June 30, 2014					September 30, 2013
	Contract or notional amount		Estimated unrealized gain (loss)			Contract or notional amount		Estimated unrealized gain (loss)
Unrecognized financial instruments:
Lending commitments – fixed rate, net	$	41,022		(33	)	$	17,421		(73	)
Lending commitments – floating rate		11,422		(17	)		5,813		34
Commitments to sell loans		—		—			—		—

The fair value estimates presented are based on pertinent information available to management as of June 30, 2014, and September 30, 2013. 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 condensed consolidated financial statements since that date. Therefore, current estimates of fair value may differ significantly from the amounts presented above.

(15) INVESTMENT IN LLCs

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

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

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

The following table displays the results derived from the Company’s internal valuation model at June 30, 2014, and the carrying value of its investment in Central Platte at June 30, 2014. Dollar amounts are expressed in thousands.


Method 1	$	15,639
Method 2		17,013
Method 3		18,457
Average of methods 1, 2, and 3	$	17,036

Carrying value of investment in Central Platte Holdings, LLC	$	15,155

The Company’s investment in NBH consists of a 50% ownership interest in an entity that holds raw land, which is currently zoned as agricultural. The general managers intend to rezone this property for commercial and/or residential development. The raw land was purchased in 2002. The Company accounts for its investment in NBH under the equity method. Due to the overall economic conditions surrounding real estate, the Company evaluated its investment for impairment in accordance with ASC 323-10-35-32, which provides guidance related to a loss in value of an equity method investment. Potential impairment was measured based on liquidation or appraised values determined by an independent third party appraisal. As a result of this analysis, the Company determined that its investment in NBH was materially impaired and recorded an impairment charge of $1.1 million ($693,000, net of tax) during the year ended September 30, 2010. The results of this analysis as of September 30, 2013, did not indicate any additional impairment of the Company’s investment in NBH. No events have occurred during the nine month period ended June 30, 2014, that would indicate any additional impairment of the Company’s investment. The carrying value of the Company’s investment in NBH was $1.4 million at June 30, 2014.

(16) REGULATORY AGREEMENTS

On April 30, 2010, the Board of Directors of North American Savings Bank, F.S.B. (the “Bank”), a wholly-owned subsidiary of the Company, entered into a Supervisory Agreement with the Office of Thrift Supervision (“OTS”), the Bank’s primary regulator at that time. The agreement required, among other things, that the Bank revise its policies regarding internal asset review, obtain an independent assessment of its allowance for loan and lease losses methodology and conduct an independent third-party review of a portion of its commercial and construction loan portfolios. The agreement also directed the Bank to provide a plan to reduce its classified assets and its reliance on brokered deposits, and restricted the payment of dividends or other capital distributions by the Bank during the period of the agreement. The agreement did not direct the Bank to raise capital, make management or board changes, revise any loan policies or restrict lending growth.

On May 22, 2012, the Board of Directors of the Bank agreed to a Consent Order with the Office of the Comptroller of the Currency (“OCC”), which replaced and terminated a previous Supervisory Agreement. The Consent Order required that the Bank establish various plans and programs to improve its asset quality, including board approval for loans over certain limits, and to ensure the adequacy of allowances for loan and lease losses. It required the Bank to obtain an independent third-party review of its non-homogenous loan portfolios and to enhance its credit administration systems. Among other items, it also required a written capital maintenance plan to ensure that the Bank’s Tier 1 leverage capital and total risk-based capital ratios remain equal to or greater than 10% and 13%, respectively. The Consent Order did not direct the Bank to raise capital, make management or board changes, or restrict lending. On February 25, 2014, the Board of Directors of the Bank was notified by the OCC that they were terminating their Consent Order with the Bank, dated May 22, 2012, effective immediately. In achieving compliance with the Consent Order, the Bank established, among other things, various processes and programs that improved the asset quality of the Bank and ensured the adequacy of allowances for loan and lease losses.

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

On November 29, 2012, the Company’s Board of Directors entered into a formal written agreement with the Federal Reserve Bank of Kansas City (“FRB”), which replaced and terminated a previous written agreement. The agreement with FRB prohibits the Company from making distributions of capital, including the payment of shareholder dividends or other capital distributions or the purchase or redemption of Company stock, unless the Company receives prior written non-objection from the FRB. The agreement also restricts the Company’s ability to incur, increase, or guarantee any debt and restricts the Company and its wholly-owned statutory trust, NASB Preferred Trust I, from making distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior written non-objection from the FRB.

Upon receipt of written non-objection from the FRB, the Company’s Board of Directors declared a special cash dividend of $0.60 per share on December 20, 2013, payable on January 17, 2014, to shareholders of record as of January 3, 2014. The special dividend, which amounted to $4.7 million, was accrued within the December quarter. In addition, the Company received regulatory written non-objection to pay all accrued interest on its outstanding Trust Preferred Securities at the January 30, 2014, payment date, which amounted to $893,000.

Upon receipt of written non-objection from the FRB, the Company’s Board of Directors declared a cash dividend of $0.10 per share on April 25, 2014, payable on May 20, 2014, to shareholders of record as of May 9, 2014. In addition, the Company received regulatory written non-objection to pay accrued interest on its outstanding Trust Preferred Securities on the April 30, 2014, payment date, which amounted to $122,000.

(17) CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME

Amounts reclassified from Accumulated Other Comprehensive Income (“AOCI”) and the affected line items in the statement of operations during the three month periods ending June 30, 2014 and 2013, were as follows (in thousands):


	Amounts reclassified from AOCI				Affected line item in the
	6/30/14		6/30/13		Statement of Operations
Unrealized gains (losses) on available for sale securities:
					Gain (loss) on sale of securities
	$	—		—	available for sale
		—		—	Impairment loss on securities

		—		—	Total reclassified before tax
		—		—	Income tax expense (benefit)

	$	—		—	Net reclassified amount

Amounts reclassified from Accumulated Other Comprehensive Income (“AOCI”) and the affected line items in the statement of operations during the nine month periods ending June 30, 2014 and 2013, were as follows (in thousands):


	Amounts reclassified from AOCI				Affected line item in the
	6/30/14		6/30/13		Statement of Operations
Unrealized gains (losses) on available for sale Securities:
					Gain (loss) on sale of securities
	$	616		—	available for sale
		—		—	Impairment loss on securities

		616		—	Total reclassified before tax
		216		—	Income tax expense (benefit)

	$	400		—	Net reclassified amount

(18) SUBSEQUENT EVENTS

On July 22, 2014, the Federal Reserve Bank of Kansas City, NASB Financial Inc.’s primary regulator, announced that their written agreement with the Company dated November 29, 2012, was terminated.

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

FORWARD-LOOKING STATEMENTS

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

These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” and similar expressions are intended to identify forward-looking statements. The following factors, as well as those discussed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2013, filed with the Securities and Exchange Commission, among others, could cause our financial performance to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:

•

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

•

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

•

the effects of, and changes in, foreign and governmental policy; inflation, interest rate, market and monetary fluctuations;

•

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

•

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

•

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

•

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

•

technological changes;

•

acquisitions and dispositions;

•

changes in consumer spending and saving habits;

•

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

•

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

This list of important factors is not all-inclusive. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. For further discussion of these factors, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2013, filed with the Securities and Exchange Commission, and in our Quarterly Reports, if applicable.

GENERAL

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

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

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

FINANCIAL CONDITION

Assets

The Company’s total assets as of June 30, 2014 were $1,206.9 million, an increase of $62.8 million from September 30, 2013, the prior fiscal year end.

Loans receivable held for investment were $748.1 million as of June 30, 2014, an increase of $32.4 million during the nine month period. This increase was primarily due to the origination of new loans in the Bank’s construction and land development and residential loan portfolios. The weighted average rate on total loans receivable held for investment as of June 30, 2014, was 5.09%, a decrease from 5.42% as of June 30, 2013.

Loans receivable held for sale as of June 30, 2014, were $78.2 million, an increase of $9.1 million from September 30, 2013. This portfolio consists of residential mortgage loans originated by the Bank’s mortgage banking division that will be sold on the secondary market. The Company has elected to carry loans held for sale at fair value, as permitted under GAAP.

As the Bank originates mortgage loans each month, management evaluates the existing market conditions to determine which loans will be held in the Bank’s portfolio and which loans will be sold in the secondary market. Loans sold in the secondary market can be sold with servicing released or sold with the loan servicing retained by the Bank. At the time of each loan commitment, a decision is made to either hold the loan for investment, hold it for sale with servicing retained, or hold it for sale with servicing released. Management monitors market conditions to decide whether loans should be held in portfolio or sold and if sold, which method of sale is appropriate. During the nine months ended June 30, 2014, the Bank originated and purchased $827.8 million in mortgage loans held for sale, $175.6 million in mortgage loans held for investment, and $1.2 million in other loans. This total of $1,004.6 million in loans compares to $1,605.3 million in loans originated and purchased during the nine months ended June 30, 2013.

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

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


	6/30/14			9/30/13			6/30/13
Asset Classification:
Substandard	$	48,726			82,760			90,475
Doubtful		34			168			655
Loss		—			—			—

		48,760			82,928			91,130
Allowance for loan losses		(14,190	)		(20,383	)		(20,650	)

	$	34,570			62,545			70,480

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


	6/30/14			9/30/13			6/30/13
Total Assets	$	1,206,935			1,144,155			1,142,405

Non-accrual loans		19,237			31,622			36,728
Performing troubled debt restructurings		26,733			32,637			33,313
Net real estate and other assets acquired through foreclosure		10,276			11,252			13,007

Total	$	56,246			75,511			83,048

Percent of total assets		4.66	%		6.60	%		7.27	%

Management records a provision for loan losses in amounts sufficient to cover current net charge-offs and an estimate of probable losses based on an analysis of risks that management believes to be inherent in the loan portfolio. The Allowance for Loan and Lease Losses recognizes the inherent risks associated with lending activities for individually identified problem assets as well as the entire homogenous and non-homogenous loan portfolios. Management believes that the specific loss allowances and ALLL are adequate. While management uses available information to determine these allowances, future provisions may be necessary because of changes in economic conditions or changes in the information available to management. Also, regulatory agencies review the Bank’s allowance for losses as part of their examinations, and they may require the Bank to recognize additional loss provisions based on the information available at the time of their examinations.

With the exception of certain residential loans, which are not deemed impaired until they reach 180 days past due, loans in non-accrual status are considered impaired. (At June 30, 2014, loans of $387,000 in non-accrual status were not deemed impaired.) Once a loan has been deemed impaired, the impairment must be measured by comparing the recorded investment in the loan to the present value of the estimated future cash flows discounted at the loan’s effective rate, or to the fair value of the loan based on the loan’s observable market price, or to the fair value of the collateral if the loan is collateral dependent. Any measured impairment that is deemed a “confirmed loss” is charged off and netted from the respective loan balance. For collateral dependent loans, which make up the majority of the Bank’s impaired loans, a “confirmed loss” is generally the amount by which the loan’s recorded investment exceeds the fair value of its collateral. Therefore, risks associated with non-accrual loans have been addressed within Bank’s quarterly analysis of the adequacy of its ALLL, as essentially all were individually analyzed for impairment.

If loans classified as substandard are also impaired, they are individually analyzed for impairment, as noted above. At June 30, 2014, $29.2 million of loans classified as substandard have also been deemed impaired. In addition, the Bank utilizes a qualitative adjustment related to changes and trends in past due, non-accrual, and adversely classified loans. This adjustment is applied to the various pools of unimpaired loans when determining adequacy of the Bank’s ALLL.

Investment securities were $275.9 million as of June 30, 2014, an increase of $23.2 million from September 30, 2013. During the nine month period, the Bank purchased $97.5 million and sold $52.6 million of investment securities. The average yield on the investment securities portfolio was 2.32% at June 30, 2014, an increase from 1.77% at June 30, 2013.

Mortgage-backed securities were $37.7 million as of June 30, 2014, a decrease of $5.9 million from the prior year end. The Bank made no purchases, but sold $4.9 million of mortgage-backed securities during the nine month period ended June 30, 2014. The average yield on the mortgage-backed securities portfolio was 3.68% at June 30, 2014, which is unchanged from the average yield at June 30, 2013.

The Company’s investment in LLCs, which is accounted for using the equity method, was $16.6 million at June 30, 2014, an increase of $72,000 from September 30, 2013. There have been no events subsequent to September 30, 2013, that would indicate an additional impairment in value of the Company’s investment in LLCs at June 30, 2014.

Liabilities and Equity

Customer deposit accounts decreased $3.8 million during the nine months ended June 30, 2014. The weighted average rate on customer deposits as of June 30, 2014, was 0.50%, a decrease from 0.56% as of June 30, 2013.

Advances from the FHLB were $215.0 million as of June 30, 2014, an increase of $60.0 million from September 30, 2013. During the nine month period, the Bank borrowed $316.0 million of new advances and repaid $256.0 million. Management regularly uses FHLB advances as an alternate funding source to provide operating liquidity and to fund the origination and purchase of mortgage loans.

Subordinated debentures were $25.8 million as of June 30, 2014. Such debentures resulted from the issuance of Trust Preferred Securities through the Company’s wholly-owned statutory trust, NASB Preferred Trust I. The Trust used the proceeds from the offering to purchase a like amount of the Company’s subordinated debentures. The debentures, which have a variable rate of 1.65% over the 3-month LIBOR and a 30-year term, are the sole assets of the Trust.

Escrows were $7.4 million as of June 30, 2014, a decrease of $1.1 million from September 30, 2013. This decrease is due to amounts paid for borrowers’ taxes during the fourth calendar quarter of 2013.

Total stockholders’ equity as of June 30, 2014, was $205.5 million (17.0% of total assets). This compares to $195.5 million (17.1% of total assets) at September 30, 2013. On a per share basis, stockholders’ equity was $26.12 on June 30, 2014, compared to $24.85 on September 30, 2013.

In accordance with the regulatory written agreement, which is described more fully in Footnote 15, Regulatory Agreements, the Company was restricted from paying dividends or making other capital distributions without the prior written non-objection from its primary regulator. Upon receipt of written non-objection from the FRB, the Company’s Board of Directors declared a special cash dividend of $0.60 per share on December 20, 2013, which was paid on January 17, 2014, to shareholders of record as of January 3, 2014. The special dividend, which amounted to $4.7 million, was accrued within the December 2013 quarter. In addition, the Company received regulatory written non-objection to pay all accrued interest on its outstanding Trust Preferred Securities on the January 30, 2014, payment date, which amounted to $893,000.

The Board intends to continue making quarterly interest payments on the Company’s Trust Preferred Securities and to consider some level of quarterly cash dividend to the Company’s shareholders; however, while the Company was operating under the regulatory written agreement, each interest payment on Trust Preferred Securities and dividend distribution to shareholders was subject to prior written non-objection from regulators. Upon receipt of written non-objection from the FRB, the Company’s Board of Directors declared a cash dividend of $0.10 per share on April 25, 2014, which was paid on May 20, 2014, to shareholders of record as of May 9, 2014. In addition, the Company received regulatory written non-objection to pay accrued interest on its outstanding Trust Preferred Securities on the April 30, 2014, payment date, which amounted to $122,000.

Upon receipt of written non-objection from the FRB, the Company’s Board of Directors declared a cash dividend of $0.10 per share on July 1, 2014, payable on July 25, 2014, to shareholders of record as of July 11, 2014. In addition, the Company received regulatory written non-objection to pay accrued interest on its outstanding Trust Preferred Securities on the July 30, 2014, payment date, which amounted to $122,000. On July 22, 2014, the Federal Reserve Bank of Kansas City, the Company’s primary regulator, announced that their written agreement with the Company dated November 29, 2012, was terminated. Therefore, future dividends or other capital distributions are no longer subject to the prior written non-objection from the Company’s primary regulator.

Total stockholders’ equity as of June 30, 2014, includes an unrealized gain, net of deferred income taxes, on available for sale securities of $1.5 million. This amount is reflected in the line item “Accumulated other comprehensive income.”

Ratios

The following table illustrates the Company’s return on assets (annualized net income divided by average total assets); return on equity (annualized net income divided by average total equity); equity-to-assets ratio (ending total equity divided by ending total assets); and dividend payout ratio (dividends paid divided by net income).


	Nine months ended
	6/30/14			6/30/13
Return on assets		1.45	%		2.36	%
Return on equity		8.49	%		15.55	%
Equity-to-assets ratio		17.03	%		16.68	%
Dividend payout ratio		43.14	%		—	%

RESULTS OF OPERATIONS - Comparison of three and nine months ended June 30, 2014 and 2013.

For the three months ended June 30, 2014, the Company had net income of $4.6 million or $0.58 per share. This compares to a net income of $1.8 million or $0.23 per share for the three month period ended June 30, 2013.

For the nine months ended June 30, 2014, the Company had net income of $12.8 million or $1.62 per share. This compares to a net income of $21.1 million or $2.68 per share for the nine month period ended June 30, 2013.

Net Interest Margin

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

The following table presents the total dollar amounts of interest income and expense on the indicated amounts of average interest-earning assets or interest-costing liabilities for the nine months ended June 30, 2014 and 2013. Average yields reflect reductions due to non-accrual loans. Once a loan becomes 90 days delinquent, or when full payment of interest and principal is not expected, any interest that has accrued up to that time is reversed and no further interest income is recognized unless the loan is paid current. Average balances and weighted average yields for the periods include all accrual and non-accrual loans. The table also presents the interest-earning assets and yields for each respective period. Dollar amounts are expressed in thousands.


	Nine months ended 6/30/14							As of			Nine months ended 6/30/13							As of
	Nine months ended 6/30/14							6/30/14			Nine months ended 6/30/13							6/30/13
	Average				Yield/			Yield/			Average				Yield/			Yield/
	Balance		Interest		Rate			Rate			Balance		Interest		Rate			Rate
Interest-earning assets
Loans	$	777,079		31,515		5.41	%		4.98	%	$	826,849		34,954		5.64	%		5.16	%
Mortgage-backed securities		43,073		1,179		3.65	%		3.68	%		21,452		484		3.01	%		3.68	%
Securities		275,976		4,632		2.24	%		2.32	%		252,700		3,155		1.66	%		1.77	%
Bank deposits		3,562		9		0.34	%		0.11	%		18,371		4		0.03	%		0.22	%

Total earning assets		1,099,690		37,335		4.53	%		4.25	%		1,119,372		38,597		4.60	%		4.26	%

Non-earning assets		63,182										74,741

Total	$	1,162,872									$	1,194,113

Interest-costing liabilities
Customer checking and savings deposit accounts	$	371,260		990		0.36	%		0.32	%	$	325,875		1,088		0.45	%		0.40	%
Customer and brokered certificates of deposit		371,960		1,855		0.66	%		0.68	%		511,226		3,200		0.83	%		0.71	%
FHLB Advances		184,606		1,424		1.03	%		0.91	%		132,305		1,573		1.59	%		1.69	%
Subordinated debentures		25,000		362		1.93	%		1.87	%		25,000		378		2.02	%		1.93	%
Other borrowings		421		16		5.07	%		5.00	%		337		13		5.14	%		5.00	%

Total costing liabilities		953,247		4,647		0.65	%		0.62	%		994,743		6,252		0.84	%		0.73	%

Non-costing liabilities		11,018										15,642
Stockholders’ equity		198,607										183,728

Total	$	1,162,872									$	1,194,113

Net earning balance		146,443										124,629

Earning yield less costing rate						3.88	%		3.63	%						3.76	%		3.53	%

Average interest-earning assets, net interest, and net yield spread on average interest –earning assets	$	1,099,690		32,688		3.96	%				$	1,119,372		32,345		3.85	%

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


	Nine months ended June 30, 2014, compared to nine months ended June 30, 2013
	Yield			Volume			Yield/ Volume			Total
Components of interest income:
Loans	$	(1,426	)		(2,105	)		92			(3,439	)
Mortgage-backed securities		103			488			104			695
Securities		1,099			290			88			1,477
Bank deposits		43			(3	)		(35	)		5

Net change in interest income		(181	)		(1,330	)		249			(1,262	)

Components of interest expense:
Customer and brokered deposit accounts		(1,067	)		(479	)		103			(1,443	)
FHLB Advances		(556	)		624			(217	)		(149	)
Subordinated debentures		(17	)		—			1			(16	)
Other borrowings		—			3			—			3

Net change in interest expense		(1,640	)		148			(113	)		(1,605	)

Increase (decrease) in net interest margin	$	1,459			(1,478	)		362			343

Net interest margin before loan loss provision for the nine months ended June 30, 2014, increased $343,000 from the same period in the prior year. Specifically, interest income decreased $1.3 million, which was offset by a $1.6 million decrease in interest expense for the period. Interest on loans decreased $3.4 million as the result of a $49.8 million decrease in the average balance of loans receivable outstanding during the period and a 23 basis point decrease in the average rate earned on such loans during the period. Interest on mortgage-backed securities increased $695,000 due to a $21.6 million increase in the average balance and a 64 basis point increase in the average rate earned on such securities during the period. Interest earned on investment securities increased $1.5 million resulting from a 58 basis point increase in the average rate and a $23.3 million increase in the average balance of such securities during the period. Interest expense on customer and brokered deposit accounts decreased $1.4 million due to a 17 basis point decrease in the average rate paid on such liabilities and a $93.9 million decrease in the average balance of customer and brokered deposits during the period. Interest expense on FHLB advances decreased $149,000 as the result a 56 basis point decrease in the average rate paid on such liabilities, the effect of which was largely offset by a $52.3 million increase in the average balance of advances outstanding during the period.

Provision for Loan Losses

During the nine months ended June 30, 2014, the Company recorded a negative provision for loan losses of $5.0 million, consistent with the changes in both qualitative and quantitative factors of the Bank’s Allowance for Loan and Lease Losses (“ALLL”) methodology, including the following:

•

The level of criticized loans (those classified as special mention, substandard, or doubtful) decreased $34.0 million during the period, of which $26.3 million related to loans within the Bank’s commercial real estate, construction and land development, and commercial portfolios, which had higher historical credit losses than the Bank’s other portfolios.

•

The level of nonperforming loans decreased $12.4 million during the period, to $19.2 million at June 30, 2014.

•

The total of past due loans decreased $6.1 million during the period, to $9.0 million at June 30, 2014.

•

The Bank’s historical loss experience has continued to improve, as periods with higher losses are largely outside of the 36 month look-back period used within the Bank’s ALLL methodology. Management does not feel that it is appropriate to increase the look-back period, as loans within the current portfolio have less risk due to stabilized collateral values and enhanced loan underwriting and administration processes and programs.

•

During the nine months ended June 30, 2014, the OCC terminated the Bank’s Consent Order with the Bank, which validated the improved credit quality of the Bank’s portfolios and the effectiveness of its loan administration processes and programs.

Management believes these factors reflect the Bank’s improved risk profile. Based upon management’s analysis, the June 30, 2014, ALLL balance of $14.2 million (1.90% of loans held to maturity) is adequate.

The Company recorded a negative provision for loan losses of $9.6 million during the nine month period ended June 30, 2013. The negative provision for loan loss was based upon the Bank’s ALLL methodology, which contains both qualitative and quantitative factors. Specifically, activity during the nine month period ended June 30, 2013, reflected in quantitative factors included the following:

•

The Bank’s portfolio of loans held to maturity decreased $71.0 million during the nine month period, to $695.6 million. This decrease consisted almost entirely of declines within the Bank’s commercial real estate and construction and land development portfolios, which historically have experienced higher credit losses than the Bank’s other portfolios.

•

The level of criticized loans (those classified as special mention, substandard, or doubtful) decreased $66.1 million during the nine month period. Of this decline, $51.2 million related to loans within the Bank’s commercial real estate and construction and land development portfolios.

•

The Bank’s loss experience during the period was much better than the previous 36 months. During the nine month period ended June 30, 2013, the Bank recorded net charge-offs of $1.6 million.

•

The level of nonperforming loans decreased $38.0 million during the nine month period. Similar to the decrease in gross loan balances, this decline consisted almost entirely of loans within the Bank’s commercial real estate and construction and land development portfolios.

In addition to the quantitative factors noted above, management observed the following qualitative factors when determining the appropriate level of the Bank’s ALLL at June 30, 2013:

•

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

•

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

On a consolidated basis, the allowance for losses on loans and real estate owned was 29.1% of total classified assets at June 30, 2014, 24.6% at September 30, 2013, and 22.7% at June 30, 2013.

Management believes that the allowance for losses on loans and real estate owned is adequate. The provision can fluctuate based on changes in economic conditions, changes in the level of classified assets, changes in the amount of loan charge-offs and recoveries, or changes in other information available to management. Also, regulatory agencies review the Company’s allowances for losses as a part of their examination process, and they may require changes in loss provision based on information available at the time of their examination.

Other Income

Other income for the three months ended June 30, 2014, decreased $118,000 from the same period in the prior year. Specifically, gain on sale of loans held for sale decreased $1.3 million from the same period in the prior year due to decreased mortgage banking volume and spreads. Customer service fees decreased $528,000 due primarily to a decrease in miscellaneous loan fees. These decreases were offset by a $128,000 decrease in the provision for loss on real estate owned due to fewer declines in the fair value of properties within the Bank’s portfolio of foreclosed assets held for sale during the period. In addition, other income increased $1.6 million due primarily to the effect of recording the net fair value of certain loan-related commitments in accordance with GAAP and an increase in gains on the sale of foreclosed assets held for sale during the period.

Other income for the nine months ended June 30, 2014, decreased $19.5 million from the same period in the prior year. Specifically, gain on sale of loans held for sale decreased $22.5 million from the same period in the prior year due to decreased mortgage banking volume and spreads. Customer service fees decreased $1.7 million due primarily to a decrease in miscellaneous loan fees. Gain on sale of securities held to maturity decreased $267,000 due primarily to the sale of two mortgage-backed securities held to maturity in the prior year, after it was determined that there was a significant deterioration in the issuer’s creditworthiness. These decreases were partially offset by a $790,000 decrease in the provision for loss on real estate owned due to fewer declines in the fair value of properties within the Bank’s portfolio of foreclosed assets held for sale during the period. Gain on sale of securities available for sale increased $616,000 from the prior year, resulting from the sale of four U. S. government sponsored agency securities, one corporate debt security, and one CMO security during the nine months ended June 30, 2014. In addition, other income increased $3.6 million due primarily to the effect of recording the net fair value of certain loan-related commitments in accordance with GAAP and an increase in gains on the sale of foreclosed assets held for sale during the period.

General and Administrative Expenses

Total general and administrative expenses for the three months ended June 30, 2014, decreased $3.5 million from the same period in the prior year. Specifically, compensation and fringe benefits decreased $822,000 due primarily to fewer personnel in the Company’s mortgage banking division and its information technology department. Commission-based mortgage banking compensation decreased $1.3 million due to a decrease in residential mortgage loan origination volume from the same period in the prior year. Federal deposit insurance premiums decreased $461,000, due primarily to a reduction in premium rates from the same period in the prior year, based upon the Bank’s improved risk rating. Advertising and business promotion expense decreased $184,000 due primarily to reduced billboard, television, and radio advertising during the current year. Other expense decreased $661,000 due to decreases in credit and appraisal expense, processing fees, and other expenses primarily related to the decrease in residential mortgage origination volume.

Total general and administrative expenses for the nine months ended June 30, 2014, decreased $9.1 million from the same period in the prior year. Specifically, compensation and fringe benefits decreased $1.1 million due primarily to fewer personnel in the Company’s mortgage banking division. Commission-based mortgage banking compensation decreased $6.8 million due to a decrease in residential mortgage loan origination volume from the same period in the prior year. Federal deposit insurance premiums decreased $1.1 million, due primarily to a reduction in premium rates from the same period in the prior year, based upon the Bank’s improved risk rating. Other expense decreased $1.6 million due primarily to decreases in credit and appraisal expense, legal fees, processing fees, and temporary employment fees, related to the decreased in residential mortgage origination volume. In addition telecom expense decreased during the period due primarily to the settlement of billing disputes. These decreases were partially offset by a $1.1 million increase in advertising and business promotion expense, due primarily to increased advertising costs related to the Company’s mortgage banking division. In addition, premises and equipment expense increased $353,000 due to the lease of additional office space for certain information technology and mortgage banking employees and due to increased amortization of software costs.

REGULATION

Regulation of the Company

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

Regulation of the Bank

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

Capital Requirements

Regulations require that thrifts meet three minimum capital ratios.

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

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

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

At June 30, 2014, the Bank exceeds all capital requirements prescribed by the OCC. To calculate these requirements, a thrift must deduct any investments in and loans to subsidiaries that are engaged in activities not permissible for a national bank. As of June 30, 2014, the Bank did not have any investments in or loans to subsidiaries engaged in activities not permissible for national banks.

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


At June 30, 2014	Amount
GAAP capital (Bank only)	$	209,497
Adjustment for regulatory capital:
Intangible assets		(2,196	)
Reverse the effect of SFAS No. 115		(1,511	)

Tangible capital		205,790
Qualifying intangible assets		—

Tier 1 capital (core capital)		205,790
Qualifying general valuation allowance		11,247

Risk-based capital	$	217,037


	As of June 30, 2014
	Actual					Minimum Required for Capital Adequacy					Minimum Required to be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital to risk-weighted assets $		217,037		24.2	%		71,743		>8	%		89,679		>10	%
Tier 1 capital to adjusted tangible assets		205,790		17.4	%		47,312		>4	%		59,140		>5	%
Tangible capital to tangible assets		205,790		17.4	%		17,742		>1.5	%		—		—
Tier 1 capital to risk-weighted assets		205,790		23.0	%		—		—			53,807		>6	%

Recent Legislation

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

In July 2013, the federal banking agencies announced new risk-based capital and leverage ratios to conform to the Basel III framework and address provisions of the Dodd-Frank Act. With respect to the Company and the Bank, these requirements will become effective on January 1, 2015. See “Recent Amendments to Regulatory Capital Requirements” below for a discussion of these new Basel III requirements.

On December 10, 2013, the federal banking agencies adopted the final version of the Volcker Rule which implements certain provisions of the Dodd-Frank Act. The rule prohibits an insured depository institution and its affiliates from engaging in “proprietary trading;” acquiring or retaining an equity, partnership, or other ownership interest in a hedge fund or private equity fund; or sponsoring a hedge fund or private equity fund. The final rule will become effective on April 1, 2014. However, the conformance period was extended, and banks have until July 21, 2015, to bring their activities into compliance with the rule.

Recent Amendments to Regulatory Capital Requirements

In July 2013, the federal banking agencies approved amendments to their regulatory capital rules to conform them to the international regulatory standards agreed to by the Basel Committee on Banking Supervision in the accord often referred to as “Basel III”. The revisions establish new higher capital ratio requirements, tighten the definitions of capital, impose new operating restrictions on banking organizations with insufficient capital buffers and increase the risk weighting of certain assets. The new capital requirements will apply to all banks and savings associations, bank holding companies with more than $500 million in assets and all savings and loan holding companies (other than certain savings and loan holding companies engaged in insurance underwriting and grandfathered diversified holding companies) regardless of asset size. The rules will become effective for the institutions with assets over $250 billion and internationally active institutions starting in January 2014 and will become effective for all other institutions beginning in January 2015. The following discussion summarizes the changes which are believed most likely to affect the Company and the Bank.

New and Higher Capital Requirements. The regulations establish a new capital measure called “Common Equity Tier 1 Capital” which will consist of common stock instruments and related surplus (net of treasury stock), retained earnings, accumulated other comprehensive income and, subject to certain adjustments, minority common equity interests in subsidiaries. Unlike the current rules which exclude unrealized gains and losses on available-for-sale debt securities from regulatory capital, the amended rules would require accumulated other comprehensive income to flow through to regulatory capital unless a one-time, irrevocable opt-out election is made in the first regulatory reporting period under the new rule. Depository institutions and their holding companies will be required to maintain Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets by 2015.

The regulations increase the required ratio of Tier 1 Capital to risk-weighted assets from the current 4% to 6% by 2015. Tier 1 Capital will consist of Common Equity Tier 1 Capital plus Additional Tier 1 Capital elements which would include non-cumulative perpetual preferred stock. Cumulative preferred stock (other than cumulative preferred stock issued to the U.S. Treasury under the TARP Capital Purchase Program or the Small Business Lending Fund) will no longer qualify as Additional Tier 1 Capital. Trust preferred securities and other non-qualifying capital instruments issued prior to May 19, 2010 by bank and savings and loan holding companies with less than $15 billion in assets as of December 31, 2009 or by mutual holding companies may continue to be included in Tier 1 Capital but will be phased out over 10 years beginning in 2016 for all other banking organizations. These non-qualifying capital instruments, however, may be included in Tier 2 Capital which could also include qualifying subordinated debt. The amended regulations also require a minimum Tier 1 leverage ratio of 4% for all institutions, eliminating the 3% option for institutions with the highest supervisory ratings. The minimum required ratio of total capital to risk-weighted assets will remain at 8%.

Capital Conservation Buffer Requirement. In addition to higher capital requirements, depository institutions and their holding companies will be required to maintain a common equity Tier 1 capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital conservation buffer requirement will be phased in over four years beginning in 2016. The capital conservation buffer requirement effectively raises the minimum required risk-based capital ratios to 7% Common Equity Tier 1 Capital, 8.5% Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.

Changes to Prompt Corrective Action Capital Categories. The Prompt Corrective Action rules will be amended effective January 1, 2015 to incorporate a Common Equity Tier 1 Capital requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization will be required to have at least an 8% Total Risk-Based Capital Ratio, a 6% Tier 1 Risk-Based Capital Ratio, a 4.5% Common Equity Tier 1 Risk Based Capital Ratio and a 4% Tier 1 Leverage Ratio. To be well capitalized, a banking organization will be required to have at least a 10% Total Risk-Based Capital Ratio, an 8% Tier 1 Risk-Based Capital Ratio, a 6.5% Common Equity Tier 1 Risk Based Capital Ratio and a 5% Tier 1 Leverage Ratio. Federal savings associations will be required to calculate their prompt corrective action capital ratios in the same manner as national banks. Accordingly, tangible equity ratios will be based on average total assets rather than period-end total assets.

Additional Deductions from Capital. Banking organizations will be required to deduct goodwill and other intangible assets (other than certain mortgage servicing assets), net of associated deferred tax liabilities, from Common Equity Tier 1 Capital. Deferred tax assets arising from temporary timing differences that cannot be realized through net operating loss carrybacks will continue to be deducted. Deferred tax assets that can be realized through NOL carrybacks will not be deducted but will be subject to 100% risk weighting. Defined benefit pension fund assets, net of any associated deferred tax liability, will be deducted from Common Equity Tier 1 Capital unless the banking organization has unrestricted and unfettered access to such assets. Reciprocal cross-holdings of capital instruments in any other financial institutions will now be deducted from capital, not just holdings in other depository institutions. For this purpose, financial institutions are broadly defined to include securities and commodities firms, hedge and private equity funds and non-depository lenders. Banking organizations will also be required to deduct non-significant investments (less than 10% of outstanding stock) in the capital of other financial institutions (including investments in trust preferred securities) to the extent these exceed 10% of Common Equity Tier 1 Capital subject to a 15% of Common Equity Tier 1 Capital cap. Greater than 10% investments must be deducted if they exceed 10% of Common Equity Tier 1 Capital. If the aggregate amount of certain items excluded from capital deduction due to a 10% threshold exceeds 17.65% of Common Equity Tier 1 Capital, the excess must be deducted. Savings associations will continue to be required to deduct investments in subsidiaries engaged in activities not permitted for national banks.

Changes in Risk-Weightings. The federal banking agencies did not adopt a proposed rule that would have significantly changed the risk-weighting for residential mortgages. Instead, the amended regulations will continue to follow the current capital rules which assign a 50% risk-weighting to “qualifying mortgage loans” which generally consist of residential first mortgages with an 80% loan-to-value ratio (or which carry mortgage insurance that reduces the bank’s exposure to 80%) that are not more than 90 days past due. All other mortgage loans will have a 100% risk weight. The revised regulations apply a 250% risk-weighting to mortgage servicing rights, deferred tax assets that cannot be realized through NOL carrybacks and investments in the capital instruments of other financial institutions that are not deducted from capital. The revised regulations also create a new 150% risk-weighting category for “high volatility commercial real estate loans” which are credit facilities for the acquisition, construction or development of real property other than for certain community development projects, agricultural land and one- to four-family residential properties or commercial real projects where: (i) the loan-to-value ratio is not in excess of interagency real estate lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real estate’s “as completed” value before the loan is made.

LIQUIDITY AND CAPITAL RESOURCES

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

Management continues to use FHLB advances as a primary source of short-term funding. FHLB advances are secured by a blanket pledge agreement covering portions of the loan and securities portfolio as collateral, supported by quarterly reporting of eligible collateral to FHLB. FHLB borrowings are limited based upon a percentage of the Bank’s assets and eligible collateral, as adjusted by collateral eligibility and maintenance levels. Management continually monitors the balance of eligible collateral relative to the amount of advances outstanding to determine the availability of additional FHLB advances. At June 30, 2014, the Bank had a total borrowing capacity at FHLB of $407.6 million, and outstanding advances of $215.0 million. As an additional source of liquidity, the Bank has $60.2 million of highly liquid short term U.S. Government sponsored agency securities in its portfolio at June 30, 2014.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 positions, equity securities, or foreign currency positions, other than its mortgage banking activities, 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 an annual basis. The IRR policy also identifies the duties of the Bank’s Asset/Liability Committee (“ALCO”). Among other things, the ALCO is responsible for assessing and mitigating the Bank’s liquidity risk, monitoring anticipated weekly cash flows, 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 guidelines are reviewed and approved.

The following table is an interest rate sensitivity analysis, which summarizes information calculated by the Bank’s internal model that estimates the changes in NPV 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 Bank’s model compiled this information using data as of June 30, 2014. 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 market	Net Portfolio Value											Minimum per
interest rates	$ Amount		$ Change			% Change			Actual			policy guidelines
+3%		182,292		(51,297	)		-22	%		17	%		10	%
+2%		199,038		(34,551	)		-15	%		18	%		10	%
+1%		216,020		(17,569	)		-8	%		18	%		12	%
no change		233,589		—			—			19	%		12	%
-1%		250,915		17,326			+7	%		20	%		12	%
-2%		—		—			—			—			12	%
-3%		—		—			—			—			12	%

The change in NPV of the Bank’s portfolio of assets, liabilities, and off-balance sheet items has increased, given an upward change in interest rates, from September 30, 2013, the prior fiscal year end. The primary reasons for this increase in IRR is the Bank’s recent strategy of acquiring longer-term fixed rate assets and funding them with overnight FHLB advances. This strategy has proven to be profitable due to a sustained period of and low and stable interest rates; however, there is increased risk to earnings and capital in a rapidly-rising interest rate scenario. ALCO continues to monitor IRR and believes the current strategy is appropriate, given the Bank’s strong capital position, current interest rate environment, and improvement in the Bank’s overall risk profile during the nine month period.

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.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the end of the period covered by this quarterly report. There were no changes in the Company’s internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There were no material changes during the period from the risk factors previously discussed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2013.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit 31.1		– Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)

Exhibit 31.2		– Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)

Exhibit 32.1		– Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2		– Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101.INS		– XBRL Instance Document

Exhibit 101.SCH		– XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL		– XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.DEF		– XBRL Taxonomy Extension Definition Linkbase Document

Exhibit 101.LAB		– XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE		– XBRL Taxonomy Extension Presentation Linkbase Document

S I G N A T U R E S

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


		NASB Financial, Inc.
		(Registrant)

August 11, 2014	By:	/s/ Paul L. Thomas
		Paul L. Thomas
		Chief Executive Officer

August 11, 2014	By:	/s/ Rhonda Nyhus
		Rhonda Nyhus
		Vice President and Treasurer