February 24, 2011
Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549
Re: NASB Financial, Inc.
Form 10-K for fiscal year ended September 30, 2009
File Number: 000-24033
Dear Sir or Madam:
The following are in response to the items noted in your
letter dated January 24, 2011:
1. Please refer to our previous comment 1 in our letter
dated November 18, 2010. Please address the following:
a. Please tell us how you considered the guidance in
ASC 820-10-35-51 when determining that a simple
average was appropriate for determining the fair
value of Central Platte. Tell us how you
reconciled the fact that they produced materially
different results, both from each other and between
reporting periods. Please provide us your analysis
supporting how you determined that this value was
the most representative of the fair value of your
investment and why you gave equal weight to methods
2 and 3, specifically addressing how you considered
the large difference between September 30 and
December 31 and between the values produced by
those methodologies and the appraisal obtained in
March 2010, as adjusted.
b. Please disclose whether the appraisal obtained in
March 2010 provided as is values, as completed
values or both.
c. We note your disclosure beginning on page 36 of
exhibit 13 of your 2010 Form 10-K. Please revise
to disclose specifically that you take a simple
average of the fair value determined under each
methodology used and disclose the fair value
results of each methodology in enough detail for a
reader to understand the potential variability in
your fair value estimate.
d. Please tell us whether you have the right to compel
Central Platte to sell undeveloped land. Please
clarify whether there are other contractual, legal
or other restrictions that may hinder the sale of
partially developed or undeveloped plots.
e. Please clarify why you used a different approach to
value NBH give the similarity of the activities
between the two entities. Please tell us whether
you have already received or plan to obtain an
updated appraisal for this investment. Please
clarify why you did not utilize the updated raw
land from the Central Platte appraisal considering
the similarity and close proximity of the
properties. We note that you recorded a $1.1
million impairment charge during the fourth quarter
of 2010. Please revise to disclose whether this
was the result of an updated appraisal. If not,
please revise to disclose what assumptions changed
in your valuation during that period that caused
the large impairment.
Responses:
a. The guidance within ASC 820-10-35-51-24 states that,
"If multiple valuation techniques are used to measure
fair value, the results (respective indications of fair
value) shall be evaluated and weighted, as appropriate,
considering the reasonableness of the range indicated
by those results. A fair value measurement is the
point within that range that is most representative of
fair value in the circumstances."
As noted in our letter dated January 3, 2011, we
measured impairment of our investment in Central Platte
Holdings, LLC ("Central Platte" or "CPH") using four
different valuation methods that incorporate third-
party appraisals and a discounting of estimated future
cash flows. Method 1 presumes that the value for our
interest in the entire property is derived from its
total appraised value. Method 2 uses the net present
value of estimated future cash flows from: a) the sale
of the fully-developed lots, b) the development and
sale of partially-developed lots, c) the operation of
the Home Owners Association ("HOA") and maintenance of
amenities, and d) the value of remaining raw ground as
derived from a real estate appraisal. This method
presumes that our investment is first recovered from
the future cash flows from lot sales and maintenance of
amenities, then from the appraised value of the
remaining raw ground. Since the amenities have already
been built in the subdivision, their valuation presumes
a discounted cash flow for that which a wholesale buyer
of the property would not otherwise be required to
expend for such amenities, at a later date. Method 3
employs the same components, quantitative measures, and
qualitative inputs as Method 2, but differs in the
presumed timing of which portion of the property will
provide cash flows first. Specifically, it presumes
that our investment will first be recovered from the
portion of the property that is raw ground, and then
from the net present value of estimated future cash
flows from sales of the fully-developed and partially-
developed lots, along with the operation of the HOA and
maintenance of amenities over that time. As with
Method 2, the value of existing amenities is derived by
discounting the estimated future cash flows that a
buyer would not have to otherwise spend to add the
amenities at a later date. Method 4 uses a net present
value of estimated future cash flows resulting from the
sale of fully and partially developed lots, the
operation of the HOA and related maintenance expense,
plus estimated costs and income from the future land
development and sale of lots from the portion that is
currently raw land.
Management continues to perform all four methods of
valuation each quarter; however, because the estimated
timeframe to "build-out" the entire subdivision in
Method 4 exceeds 18 years, we believe the cash flow
estimates for years 5 and beyond are too far into the
future for their estimated values to be reliable.
Therefore, Method 4 has been given zero weight in the
final impairment calculation. We have given valuation
Methods 1, 2, and 3 equal weighting because we believe
that one is not more plausible than the other. It is
our opinion that none of Methods 1, 2, or 3 are
preferable, or more likely to occur, than the others.
Although the results from all methods differ
significantly, 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). In addition, given the fact
that it is the intent of the members to continue to
develop the partially developed and raw land owned by
Central Platte, it is our opinion that a discounted
cash flow method provides a more realistic estimate of
value than merely an as-is appraised value. However,
given the high degree of uncertainty as to the timing
of such cash flows, we believe that it is appropriate
(and conservative) to weight the valuation method that
utilizes only appraised value equal to the discounted
cash flow methods. The results from all four methods
and our final analysis of value are provided below:
As of September 30, 2009 (in thousands):
----------------------------------------
Estimate of Est. Fair Value
Fair Value Weight x Weight
----------- -------- ---------------
Method 1 $ 15,455 33.33% $ 5,151
Method 2 17,838 33.33% 5,945
Method 3 19,791 33.33% 6,596
Method 4 19,278 --% --
-------
Calculated fair value $ 17,692
Carrying value 18,556
-------
Measured impairment $ (864)
=======
After tax effect $ (531)
=======
As of December 31, 2009 (in thousands):
----------------------------------------
Estimate of Est. Fair Value
Fair Value Weight x Weight
----------- -------- ---------------
Method 1 $ 14,942 33.33% $ 4,981
Method 2 16,254 33.33% 5,418
Method 3 18,347 33.33% 6,116
Method 4 18,945 --% --
-------
Calculated fair value $ 16,515
Carrying value, before impairment
charge 18,524
-------
Measured impairment $ (2,009)
=======
After tax effect $ (1,236)
=======
It should be noted that the change in our final
estimate of fair value from September 30, 2009, to
December 31, 2009, was only a $1.17 million decrease,
or 6.6%. This decrease was primarily the result of a
$900 per acre decrease in raw land values, which was
supported by retroactively applying the "timing" factor
utilized to adjust comparable sales in the third-party
appraisal obtained in March 2010. As with most
appraisals, comparable land sale prices were adjusted
either upward or downward, depending on various factors
(i.e., timing, conditions of property, size, etc.) As
the appraisal was as of March 31, 2010, we evaluated
the "timing" factor utilized to determine what the raw
land value would be as of September 30, 2009.
Retrospectively applying the monthly discount, used in
the March 31, 2010, appraisal, back to September 30,
2009, time period, resulted in an upward adjustment of
approximately $900 per acre. In addition, we increased
the discount rate in Methods 2, 3, and 4 from 15% at
September 30, 2009 to 18% at December 31, 2009. This
was commensurate with discount rates utilized by
appraisers in our market during those time frames, and
consistent with the discount rate utilized internally
in evaluation of similar projects.
b. The values presented in the appraisal obtained in March
2010 for the Central Platte property were "as-is."
c. The Investment in LLCs footnote in the Form 10-Q for
the period ended December 31, 2010, was revised, to
provide additional detail regarding our impairment
analysis of Central Platte, as follows:
The Company's investment in Central Platte consists of
a 50% ownership interest in an entity that develops
land for residential real estate sales. Sales of lots
had not met previous expectations and, as a result, the
Company evaluated its investment for impairment, in
accordance with ASC 323-10-35-32, which provides
guidance related to a loss in value of an equity method
investment. The Company utilizes a multi-faceted
approach to measure the potential impairment. The
internal model utilizes the following valuation
methods; 1) liquidation or appraised values determined
by an independent third party appraisal: 2) an on-going
business, or discounted cash flows method wherein the
cash flows are derived from the sale of fully-developed
lots, the development and sale of partially-developed
lots, the operation of the homeowner's association, and
the value of raw land obtained from an independent
third party appraiser; and 3) another on-going business
method, which utilizes the same inputs as method 2, but
presumes that cash flows will first be generated from
the sale of raw ground and then from the sale of fully-
developed and partially-developed lots and the
operation of the homeowner's association. The internal
model also includes an on-going business method wherein
the cash flows are derived from the sale of fully-
developed lots, the development and sale of partially-
developed lots, the operation of the homeowner's
association, and the development and sale of lots from
the property that is currently raw land. However,
management does not feel the results from this method
provide a reliable indication of value because the time
to "build-out" the development exceeds 18 years.
Because of this unreliability, the results from this
method are given a zero weighting in the final
impairment analysis. The significant inputs include
raw land values, absorption rates of lot sales, and a
market discount rate. Management believes this multi-
faceted approach is reasonable given the highly
subjective nature of the assumptions and the
differences in valuation techniques that are utilized
within each approach (e.g., order of distribution of
assets upon potential liquidation). It is management's
opinion that no one valuation method within the model
is preferable to the other and that no one method is
more likely to occur than the other. Therefore, the
final estimate of value is determined by assigning an
equal weight to the values derived from each of the
first three methods described above.
As a result of this analysis, the Company determined
that its investment in Central Platte was materially
impaired and recorded an impairment charge of $2.0
million ($1.2 million, net of tax) during the year
ended September 30, 2010.
The following table displays the results derived from
the Company's internal valuation model and the carrying
value of its investment in Central Platte at December
31, 2010. Dollar amounts are expressed in thousands.
Method 1 $ 17,064
Method 2 16,493
Method 3 18,621
Average of Methods 1, 2, and 3 $ 17,393
=========
Carrying value of investment in
Central Platte Holdings, LLC $ 16,405
=========
(It should be noted that we acknowledge the SEC's
request to revise the Company's Form 10-K for the year
ended September 30, 2010. We received the comment
letter on January 24, 2011, and our Form 10-Q for the
period ended December 31, 2010, was filed on February
9, 2011. Based upon this timing, we made the decision
to include this revision in the Form 10-Q in an effort
to provide this information to investors in a more
timely manner.)
d. NASB does not have the right to compel Central Platte's
managing partner to sell undeveloped land. However, we
do have the ability to exert significant influence
given our 50% membership interest in the entity and
that fact that NASB has funded all development costs to
date. There are no contractual, legal, or other
restrictions that would hinder the sale of partially
developed or undeveloped land owned by Central Platte.
e. Although the NBH, LLC ("NBH") property is located
within close proximity of the Central Platte property,
the characteristics of the two properties and the
activities of the entities are very dissimilar. The
approximately 1,200 acres owned by Central Platte is
zoned for residential development, and CPH has been
actively developing the first four phases of the multi-
phase development since 2004. The NBH property
consists of 86 acres of raw ground zoned agricultural
which fronts a major highway. The highest and best use
of this property will ultimately be for commercial use.
This property is being held for future bulk-sale and is
not generating an ongoing stream of cash flows.
Therefore, an estimate of appraised value is the only
valuation method used to measure impairment of this
property. The $1.1 million impairment charge recorded
during the fourth quarter of fiscal 2010 was the result
of independent third party appraisal performed as of
that date.
The following disclosure regarding the company's
investment in NBH was provided in the Form 10-Q for the
period ended December 31, 2010:
The Company's investment in NBH consists of a 50%
ownership interest in an entity that holds raw land,
which is currently zoned as agricultural. The general
managers intend to rezone this property for commercial
and/or residential development. The raw land was
purchased in 2002. The Company accounts for its
investment in NBH under the equity method. Due to the
overall economic conditions surrounding real estate,
the Company evaluated its investment for impairment in
accordance with ASC 323-10-35-32, which provides
guidance related to a loss in value of an equity method
investment. Potential impairment was measured based on
liquidation or appraised values determined by an
independent third party appraisal. As a result of this
analysis, the Company determined that its investment in
NBH was materially impaired and recorded an impairment
charge of $1.1 million ($693,000, net of tax) during
the year ended September 30, 2010. No events have
occurred during the three months ended December 31,
2010, that would indicate any additional impairment of
the Company's investment in NBH. The carrying value of
the Company's investment in NBH was $1.4 million at
December 31, 2010.
If you have additional questions or comments, you may
contact me via telephone at 816-765-2200 or e-mail at
rnyhus@nasb.com.
Sincerely,
/s/ Rhonda Nyhus
Rhonda Nyhus
Vice President and Treasurer