flow issues. This ASU will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The purpose of this ASU is to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. This ASU will be effective for annual reporting periods beginning after December 15, 2017. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other. The purpose of this ASU is to simplify how an entity is required to test goodwill for impairment. This ASU will be effective for annual fiscal years beginning after December 15, 2019. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets. The purpose of this ASU is to clarify the scope for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers and add guidance for partial sales of nonfinancing assets. This ASU is effective for the Company beginning with the fiscal year ending June 30, 2019. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs. The purpose of this ASU is to shorten the amortization period of certain callable debt securities held at a premium. This ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation. The purpose of this ASU is to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. This ASU will be effective for annual periods, and interim periods within those annual periods, beginning December 15, 2017. The Company adopted this standard effective July 1, 2017 and it did not have a material impact to the Company’s consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging. The purpose of this ASU is to address complexity of accounting for certain financial instruments with down round features and the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity. This ASU is effective for fiscal years beginning after December 15, 2019. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging. The purpose of this ASU is to improve the hedge accounting model to facilitate financial reporting that more closely reflects an entity’s risk management activities. This ASU will be effective for fiscal years beginning after December 15, 2018. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income. The purpose of this ASU is to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This amendment is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations at March 31, 2018 and for the three and nine months ended March 31, 2018 and 2017 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this report.
All references herein to the “Company”, “we”, “us”, or similar terms refer to Equitable Financial Corp. and its subsidiary.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:
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Statements of our goals, intentions and expectations;
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Statements regarding our business plans, prospects, growth and operating strategies;
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Statements regarding the quality of our loan and investment portfolios; and
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Estimates of our risks and future costs and benefits.
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These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic, regulatory and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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General economic conditions, either nationally or in our market areas, that are worse than expected;
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Competition among depository and other financial institutions;
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Inflation and changes in the interest rate environment that reduce our margins and yields or reduce the fair value of financial instruments;
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Our success in continuing to emphasize agricultural and commercial loans;
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Changes in consumer spending, borrowing and savings habits;
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Our ability to enter new markets successfully and capitalize on growth opportunities;
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Our ability to successfully integrate acquired branches or entities;
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Adverse changes in the securities markets;
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Changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
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Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
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Changes in our organization, compensation and benefit plans;
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Our ability to retain key employees;
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Changes in the level of government support for housing finance;
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Significant increases in our loan losses; and
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Changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
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Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Overview
We are a
Nebraska-based community bank headquartered in Grand Island, Nebraska, with full-service branch offices in Grand Island, Omaha and North Platte, Nebraska. For most of our history as a community bank, which dates back to 1882, we have operated as a traditional thrift institution, focusing on the origination of one- to four-family residential real estate loans. In the past 10 years, however, we have expanded our lending focus and now offer a wide range of loans to commercial businesses, agricultural borrowers and consumers – in addition to our traditional residential loan products. We also invest in securities, primarily U.S. government agency securities, municipal bonds and mortgage-backed securities. In addition, we offer insurance and investment products and services from locations in Grand Island, Omaha and North Platte.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service fees, rental income, gain on sales of loans and other income. Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy, data processing, advertising and promotion, professional and regulatory, federal deposit insurance premiums, net loss on other real estate owned, write-downs, sales and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could significantly affect our financial position or results of operations. Actual results could differ from those estimates.
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.
Discussed below are selected critical accounting policies that are of particular significance to us:
Allowance for Loan Losses.
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a
quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings. An allowance for loan losses is maintained at a level considered necessary to provide for loan losses based upon an evaluation of known and inherent losses in the loan portfolio. In determining the allowance for loan losses, we consider the losses inherent in the loan portfolio and changes in the nature and volume of the loan activities, along with the local economic and real estate market conditions. We utilize a two-tier approach: (1) establishment of specific reserves for impaired loans, and (2) establishment of a general valuation allowance for the remainder of the loan portfolio. We maintain a loan review system which allows for a periodic review of the loan portfolio and the early identification of impaired loans. One- to four-family residential real estate loans and consumer installment loans are considered to be homogeneous and, therefore, are not separately evaluated for impairment unless they are considered troubled debt restructurings. A loan is considered to be a troubled debt restructuring when, to maximize the recovery of the loan, we modify the borrower’s existing loan terms and conditions in response to financial difficulties experienced by the borrower.
In establishing specific reserves for impaired loans, we take into consideration, among other things, payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reason for the delay, the borrower’s prior payment record and the amount of shortfall in relation to what is owed.
A loan is deemed to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts when due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated individually. We do not aggregate such loans for evaluation purposes. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Payments received on impaired loans are generally applied first to principal and then to interest.
The general valuation allowance is based upon a combination of factors including, but not limited to, actual loan loss rates, composition of the loan portfolio, current economic conditions and management’s judgment. Regardless of the extent of the analysis of customer performance, portfolio evaluations, trends or risk management processes established, certain inherent, but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their financial condition, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends, and the sensitivity of assumptions utilized to establish allocated allowances for homogeneous groups of loans among other factors. These other risk factors are continually reviewed and revised by management using relevant information available at the time of the evaluation.
Although we believe that we use the best information available to recognize losses on loans and establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the OCC, as an integral part of its examination process, periodically reviews the adequacy of our allowance for loan losses. That agency may require us to recognize additions to the allowance based on its judgments about information available to it at the time of its examination.
Deferred Income Taxes.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect earnings. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets.
Fair Value Measurements.
We use our best judgment in estimating fair value measurements of the Bank’s financial instruments; however, there are inherent weaknesses in any estimation technique. We utilize various assumptions and valuation techniques to determine fair value, including, but not limited to cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, quoted market prices, and appraisals. The fair value estimates are not necessarily indicative of the actual amounts that could have been realized in a sale transaction on the dates indicated. The estimated fair value amounts have not been re-evaluated or updated subsequent to the respective reporting dates. As such, the estimated fair values subsequent to the respective dates may be different than the amounts reported.
Comparison of Financial Condition at March 31, 2018 and June 30, 2017
Assets.
Total assets at March 31, 2018 were $305.7 million, an increase of $51.9 million, or 20.4%, from $253.8 million at June 30, 2017. This increase is attributable to an increase in cash and due from financial institutions, interest-earning deposits, net loans, customer list intangible and other assets. Cash and due from financial institutions increased
$2.8 million, or 57.1%, to $7.7 million at March 31, 2018 from $4.9 million at June 30, 2017. Interest-earning deposits were $28.3 million at March 31, 2018. There were no interest-earning deposits at June 30, 2017. The increase in interest-earning deposits was a result of deposit growth. Net loans increased $19.4 million, or 8.2%, to $255.9 million at March 31, 2018 from $236.5 million at June 30, 2017. Loan demand in all markets continues to be strong. Customer list intangible increased $1.2 million, or 398.6% to $1.4 million at March 31, 2018 from $289,000 at June 30, 2017. This increase reflects the purchase of a customer list associated with an investment representative’s business in the second quarter. This customer list consists of customer relationships with wealth management clients that have been transferred to the Bank. Other assets increased $359,000, or 20.9%, to $2.1 million at March 31, 2018 from $1.7 million at June 30, 2017.
Nonperforming Assets and Allowance for Loan Losses.
We had non-performing assets of $4.5 million, or 1.5% of total assets as of March 31, 2018 and $2.6 million, or 1.0% of total assets as of June 30, 2017. The allowance for loan losses totaled $4.6 million at March 31, 2018 and $3.6 million at June 30, 2017. This represents a ratio of the allowance for loan losses to gross loans receivable of 1.8% at March 31, 2018 and 1.5% at June 30, 2017. This increase is primarily attributable to deterioration in one loan relationship. The allowance for loan losses to non-performing loans was 101.9% at March 31, 2018 and 149.3% at June 30, 2017.
Deposits.
Total deposits increased $51.6 million, or 24.7%, to $260.7 million at March 31, 2018 from $209.1 million at June 30, 2017. Noninterest-bearing deposits increased $8.0 million, or 27.1%, to $37.5 million at March 31, 2018 from $29.5 million at June 30, 2017. Interest-bearing deposits increased $43.8 million, or 24.4%, to $223.2 million at March 31, 2018 from $179.5 million at June 30, 2017.
Stockholders’ Equity.
Total stockholder’s equity increased $88,000, or 0.2%, to $35.7 million at March 31, 2018 from $35.6 million at June 30, 2017. The increase was a result of net income realized for the nine months ended March 31, 2018. The increase was offset by repurchased stock.
Comparison of Operating Results for the Three Months Ended March 31, 2018 and 2017
General.
Net income for the three months ended March 31, 2018 was $350,000. This represented an increase of $75,000, or 27.3%, from net income of $275,000 for the three months ended March 31, 2017.
Interest Income.
Total interest income for the three months ended March 31, 2018 increased $593,000, or 25.6%, to $2.9 million, from $2.3 million for the three months ended March 31, 2017. The increase in interest income was primarily due to an increase in interest income in loans.
Interest income from loans increased $569,000, or 24.7%, to $2.9 million for the three months ended March 31, 2018 from $2.3 million for the three months ended March 31, 2017. The increase in interest income from loans was due primarily to an increase of $36.5 million in average loan balances. Average loan balances were $253.3 million for the three months ended March 31, 2018 compared to $216.8 million for the three months ended March 31, 2017. The increase in our average loan balance was primarily due to increased loan demand, primarily attributable to improved economic conditions in our market areas and growth in commercial loans originated in all branches. The average yield on loans increased 28 basis points to 4.53% during the three months ended March 31, 2018 from 4.25% for the three months ended March 31, 2017.
Securities and other interest income increased $24,000, or 126.3%, to $43,000 for the three months ended March 31, 2018 from $19,000 for the three months ended March 31, 2017. This increase was primarily due to an increase in the yield realized on other interest-earning balances.
Interest Expense.
Interest expense increased $186,000, or 65.7%, to $469,000 for the three months ended March 31, 2018 from $283,000 for the three months ended March 31, 2017. This increase was due to an increase of $38.5 million in average deposit balances. Average deposit balances were $208.0 million for the three months ended March 31, 2018 compared to $169.5 million for the three months ended March 31, 2017. Cost of deposits increased 20 basis points to 86 basis points for the three months ended March 31, 2018 from 66 basis points for the three months ended March 31, 2017. Also contributing to the increase in interest expense were FHLB advances. For the three months ended March 31, 2018 average balances of FHLB advances were $5.0 million. During the three months ended March 31, 2017 average balances were $100,000.
Net Interest Income.
Net interest income increased $407,000, or 20.0%, to $2.4 million for the three months ended March 31, 2018 from $2.0 million for the three months ended March 31, 2017. Average interest-earning assets were $284.2 million for the three months ended March 31, 2018 and $235.2 million for the three months ended March 31, 2017, while the average yield was 4.36% and 4.20% for the respective periods. Our net interest spread decreased 6 basis points for the three months ended March 31, 2018 to 3.48% from 3.54% for the three months ended March 31, 2017. Our net interest margin decreased 3 basis points to 3.66% for the three months ended March 31, 2018 from 3.69% for the three months ended March 31, 2017. The ratio of average interest-earning assets to average interest-bearing liabilities decreased 430 basis points to 125.5% for the three months ended March 31, 2018 from 129.8% for the three months ended March 31, 2017.
Provision for Loan Losses.
We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors, we recorded provisions for loan losses of $134,000 and $61,000 for the three months ended March 31, 2018 and 2017, respectively. The provision for loan losses for the three months ended March 31, 2018 was a result of loan growth and deterioration in one loan relationship. The provision for loan losses for the three months ended March 31, 2017 was primarily due to loan growth. The allowance for loan losses was $4.6 million, or 1.8% of loans outstanding at March 31, 2018 compared to $3.3 million, or 1.5% of loans outstanding at March 31, 2017. The nonperforming assets to total assets ratio was 1.1% at March 31, 2018 and 2017. The level of the allowance is based on estimates and the ultimate losses may vary from estimates.
Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of March 31, 2018 was maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, such losses were both probable and reasonably estimable.
Non-Interest Income.
Non-interest income was $512,000 for the three months ended March 31, 2018 and 2017. Service charges on deposits accounts increased $14,000, or 9.3%, to $165,000 for the three months ended March 31, 2018 from $151,000 for the three months ended March 31, 2017. Other loan fees increased $15,000, or 25.9%, to $73,000 for the three months ended March 31, 2018 from $58,000 for the three months ended March 31, 2017. Other income increased $22,000, or 56.4%, to $61,000 for the three months ended March 31, 2018 from $39,000 for the three months ended March 31, 2017. Brokerage fee income decreased $19,000, or 11.8%, to $142,000 for the three months ended March 31, 2018 from $161,000 for the three months ended March 31, 2017. Gain on sale of loans decreased $33,000, or 31.7%, to $71,000 for the three months ended March 31, 2018 from $104,000 for the three months ended March 31, 2017.
Non-Interest Expense.
Total non-interest expense increased $242,000, or 11.7%, to $2.3 million for the three months ended March 31, 2018 from $2.1 million for the three months ended March 31, 2017. Increases were realized in salaries and employee benefits, data processing fees, regulatory fees and deposit insurance premiums, advertising and public relations, professional fees, and other expenses. Salaries and employee benefits increased $74,000, or 6.0%, to $1.3 million for the three months ended March 31, 2018 compared to $1.2 million for the three months ended March 31, 2017. Data processing fees increased $18,000, or 12.3%, to $164,000 for the three months ended March 31, 2018 from $146,000 for the three months ended March 31, 2017. Regulatory fees and deposit insurance premiums increased $27,000, or 62.8%, to $70,000 for the three months ended March 31, 2018 from $43,000 for the three months ended March 31, 2017. Advertising and public relations increased $7,000, or 12.1%, to $65,000 for the three months ended March 31, 2018 from $58,000 for the three months ended March 31, 2017. Professional fees increased $46,000, or 86.8%, to $99,000 for the three months ended March 31, 2018 from $53,000 for the three months ended March 31, 2017. Other expenses increased $61,000, or 33.2%, to $245,000 for the three months ended March 31, 2018 from $184,000 for the three months ended March 31, 2017.
Income Tax Expense.
For the three months ended March 31, 2018, income tax expense was $155,000 compared to $139,000 for the three months ended March 31, 2017. The effective tax rate for the three months ended March 31, 2018 was 30.7% compared to 33.6% for the three months ended March 31, 2017.
Comparison of Operating Results for the Nine Months Ended March 31, 2018 and 2017
General.
Net income for the nine months ended March 31, 2018 was $571,000. This represents a decrease of $279,000, or 32.8%, from net income of $850,000 for the nine months ended March 31, 2017.
Interest Income.
Total interest income for the nine months ended March 31, 2018 increased $1.7 million, or 25.0%, to $8.5 million, from $6.8 million for the nine months ended March 31, 2017. The increase in interest income was primarily due to an increase in interest income in loans.
Interest income from loans increased $1.7 million, or 25.4%, to $8.4 million for the nine months ended March 31, 2018 from $6.7 million for the nine months ended March 31, 2017. The increase in interest income from loans was due primarily to an increase of $37.4 million in average loan balances. Average loan balances were $248.2 million for the nine months ended March 31, 2018 compared to $210.8 million for the nine months ended March 31, 2017. The increase in our average loan balance was primarily due to increased loan demand, primarily attributable to improved economic conditions in our market areas and growth in commercial loans originated in all branches. The average yield on loans increased 27 basis points to 4.53% during the nine months ended March 31, 2018 from 4.26% for the nine months ended March 31, 2017.
Securities and other interest income increased $32,000, or 59.3%, to $86,000 for the nine months ended March 31, 2018 from $54,000 for the nine months ended March 31, 2017. This increase was primarily due to an increase in the yield realized on other interest-bearing balances.
Interest Expense.
Interest expense increased $468,000, or 57.4%, to $1.3 million for the nine months ended March 31, 2018 from $816,000 for the nine months ended March 31, 2017. This increase was due to an increase of $30.0 million in average deposit balances. Average deposit balances were $195.6 million for the nine months ended March 31, 2018 compared to $165.6 million for the nine months ended March 31, 2017. Cost of deposits increased 17 basis points to 82 basis points for the nine months ended March 31, 2018 from 65 basis points for the nine months ended March 31, 2017. Also contributing to the increase in interest expense were FHLB advances. For the nine months ended March 31, 2018, average balances of FHLB advances were $6.4 million. During the nine months ended March 31, 2017, average balances of FHLB advances was $256,000.
Net Interest Income.
Net interest income increased $1.2 million, or 20.0%, to $7.2 million for the nine months ended March 31, 2018 from $6.0 million for the nine months ended March 31, 2017. Average interest-earning assets were $270.4 million for the nine months ended March 31, 2018 and $230.9 million for the nine months ended March 31, 2017, while the average yield was 4.45% and 4.18% for the respective periods. Our net interest spread increased 8 basis points for the nine months ended March 31, 2018 to 3.60% from 3.52% for the nine months ended March 31, 2017. Our net interest margin increased 11 basis points to 3.78% for the nine months ended March 31, 2018 from 3.67% for the nine months ended March 31, 2017. The ratio of average interest-earning assets to average interest-bearing liabilities decreased 400 basis points to 126.4% for the nine months ended March 31, 2018 from 130.4% for the nine months ended March 31, 2017.
Provision for Loan Losses.
We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors, we recorded provisions for loan losses of $1.0 million and $383,000 for the nine months ended March 31, 2018 and 2017, respectively. The provision for loan losses for the nine months ended March 31, 2018 was due to loan growth and the deterioration in one loan relationship. The provision for loan losses for the nine months ended March 31, 2017 was primarily due to loan growth. The allowance for loan losses was $4.6 million, or 1.8% of loans outstanding at March 31, 2018 compared to $3.3 million, or 1.5% of loans outstanding at March 31, 2017. The
nonperforming assets to total assets ratio was 1.1% at March 31, 2018 and 2017. The level of the allowance is based on estimates and the ultimate losses may vary from estimates.
Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may request to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of March 31, 2018 was maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, such losses were both probable and reasonably estimable.
Non-Interest Income.
Non-interest income decreased $163,000, or 8.5%, to $1.8 million for the nine months ended March 31, 2018 from $1.9 million for the nine months ended March 31, 2017. Service charges on deposit accounts increased $22,000, or 4.7%, to $491,000 for the nine months ended March 31, 2018 compared to $469,000 for the nine months ended March 31, 2017. Other income increased $156,000, or 145.8%, to $263,000 for the nine months ended March 31, 2018 from $107,000 for the nine months ended March 31, 2017. This increase is related to a one-time entry for credit enhancement fee income from mortgage loans serviced. Brokerage fee income decreased $92,000, or 16.8%, to $454,000 for the nine months ended March 31, 2018 compared to $546,000 for the nine months ended March 31, 2017. Gain on sale of loans decreased $220,000, or 37.0%, to $375,000 for the nine months ended March 31, 2018 compared to $595,000 for the nine months ended March 31, 2017. Other loan fees decreased $29,000, or 13.9%, to $180,000 for the nine months ended March 31, 2018 from $209,000 for the nine months ended March 31, 2017.
Non-Interest Expense.
Total non-interest expense increased $489,000, or 7.9%, to $6.7 million for the nine months ended March 31, 2018 from $6.2 million for the nine months ended March 31, 2017. Salaries and employee benefits increased $309,000, or 8.7%, to $3.8 million for the nine months ended March 31, 2018 compared to $3.5 million for the nine months ended March 31, 2017. Data processing fees increased $38,000, or 8.8%, to $471,000 for the nine months ended March 31, 2018 from $433,000 for the nine months ended March 31, 2017. Regulatory fees and deposit insurance premiums increased $57,000, or 45.2%, to $183,000 for the nine months ended March 31, 2018 from $126,000 for the nine months ended March 31, 2017. Advertising and public relations increased $26,000, or 17.0%, to $179,000 for the nine months ended March 31, 2018 from $153,000 for the nine months ended March 31, 2017. Other expenses increased $25,000, or 4.5%, to $584,000 for the nine months ended March 31, 2018 from $559,000 for the nine months ended March 31, 2017.
Income Tax Expense.
For the nine months ended March 31, 2018, income tax expense was $759,000 compared to $489,000 for the nine months ended March 31, 2017. The effective tax rate for the nine months ended March 31, 2018 was 57.1% compared to 36.5% for the nine months ended March 31, 2017. The increase reflects the revaluation of our net deferred tax asset based on the new federal tax rate of 21%, compared to the previous tax rate of 34%, which became effective under the Act beginning in tax years after December 31, 2017.
.
Analysis of Net Interest Income
The following table sets forth average balance sheets, average yields and costs and certain other information for the periods indicated. No tax equivalent adjustments were made. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
Average
|
|
Interest
|
|
|
|
Average
|
|
Interest
|
|
|
|
|
|
|
Outstanding
|
|
Earned/
|
|
|
|
Outstanding
|
|
Earned/
|
|
|
|
|
|
|
Balance
|
|
Paid
|
|
Yield/Cost
|
|
Balance
|
|
Paid
|
|
Yield/Cost
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits in other financial institutions
|
|
$
|
11,532
|
|
$
|
28
|
|
0.97%
|
|
$
|
1,594
|
|
$
|
5
|
|
1.25%
|
|
|
Securities
|
|
|
2,029
|
|
|
13
|
|
2.56%
|
|
|
2,193
|
|
|
13
|
|
2.37%
|
|
|
Loans receivable
|
|
|
253,347
|
|
|
2,870
|
|
4.53%
|
|
|
216,760
|
|
|
2,301
|
|
4.25%
|
|
|
FHLB common stock
|
|
|
281
|
|
|
2
|
|
2.85%
|
|
|
231
|
|
|
1
|
|
1.73%
|
|
|
Total interest-earning assets
|
|
|
267,189
|
|
|
2,913
|
|
4.36%
|
|
|
220,778
|
|
|
2,320
|
|
4.20%
|
|
|
Total noninterest-earning assets
|
|
|
17,044
|
|
|
|
|
|
|
|
14,376
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
284,233
|
|
|
|
|
|
|
$
|
235,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
17,857
|
|
$
|
12
|
|
0.27%
|
|
$
|
16,197
|
|
$
|
10
|
|
0.25%
|
|
|
NOW accounts
|
|
|
67,980
|
|
|
103
|
|
0.61%
|
|
|
47,147
|
|
|
46
|
|
0.39%
|
|
|
Money market accounts
|
|
|
64,973
|
|
|
134
|
|
0.82%
|
|
|
64,477
|
|
|
124
|
|
0.77%
|
|
|
Certificates of deposit
|
|
|
57,141
|
|
|
200
|
|
1.40%
|
|
|
41,668
|
|
|
101
|
|
0.97%
|
|
|
Total deposits
|
|
|
207,951
|
|
|
449
|
|
0.86%
|
|
|
169,489
|
|
|
281
|
|
0.66%
|
|
|
Federal funds purchased
|
|
|
—
|
|
|
1
|
|
0.00%
|
|
|
510
|
|
|
1
|
|
—
|
|
|
FHLB advances
|
|
|
5,000
|
|
|
19
|
|
1.52%
|
|
|
100
|
|
|
1
|
|
—
|
|
|
Total interest-bearing liabilities
|
|
|
212,951
|
|
|
469
|
|
0.88%
|
|
|
170,099
|
|
|
283
|
|
0.67%
|
|
|
Noninterest-bearing demand deposits - checking accounts
|
|
|
31,949
|
|
|
|
|
|
|
|
27,356
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
3,404
|
|
|
|
|
|
|
|
1,834
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
248,304
|
|
|
|
|
|
|
|
199,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
35,929
|
|
|
|
|
|
|
|
35,865
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
284,233
|
|
|
|
|
|
|
$
|
235,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
2,444
|
|
|
|
|
|
|
$
|
2,037
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
3.48%
|
|
|
|
|
|
|
|
3.54%
|
|
|
Net interest-earning assets
|
|
$
|
54,238
|
|
|
|
|
|
|
$
|
50,679
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
3.66%
|
|
|
|
|
|
|
|
3.69%
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
125.47%
|
|
|
|
|
|
|
|
129.79%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended March 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
Average
|
|
Interest
|
|
|
|
Average
|
|
Interest
|
|
|
|
|
|
|
Outstanding
|
|
Earned/
|
|
|
|
Outstanding
|
|
Earned/
|
|
|
|
|
|
|
Balance
|
|
Paid
|
|
Yield/Cost
|
|
Balance
|
|
Paid
|
|
Yield/Cost
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits in other financial institutions
|
|
$
|
4,878
|
|
$
|
38
|
|
1.04%
|
|
$
|
4,012
|
|
$
|
22
|
|
0.73%
|
|
|
Securities
|
|
|
2,077
|
|
|
40
|
|
2.57%
|
|
|
1,843
|
|
|
30
|
|
2.17%
|
|
|
Loans receivable
|
|
|
248,154
|
|
|
8,436
|
|
4.53%
|
|
|
210,773
|
|
|
6,737
|
|
4.26%
|
|
|
FHLB common stock
|
|
|
339
|
|
|
8
|
|
3.15%
|
|
|
231
|
|
|
2
|
|
1.15%
|
|
|
Total interest-earning assets
|
|
|
255,448
|
|
|
8,522
|
|
4.45%
|
|
|
216,859
|
|
|
6,791
|
|
4.18%
|
|
|
Total noninterest-earning assets
|
|
|
14,953
|
|
|
|
|
|
|
|
14,024
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
270,401
|
|
|
|
|
|
|
$
|
230,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
17,500
|
|
$
|
33
|
|
0.25%
|
|
$
|
15,501
|
|
$
|
28
|
|
0.24%
|
|
|
NOW accounts
|
|
|
57,953
|
|
|
237
|
|
0.55%
|
|
|
44,135
|
|
|
128
|
|
0.39%
|
|
|
Money market accounts
|
|
|
64,984
|
|
|
394
|
|
0.81%
|
|
|
63,983
|
|
|
354
|
|
0.74%
|
|
|
Certificates of deposit
|
|
|
55,173
|
|
|
546
|
|
1.32%
|
|
|
41,953
|
|
|
303
|
|
0.96%
|
|
|
Total deposits
|
|
|
195,610
|
|
|
1,210
|
|
0.82%
|
|
|
165,572
|
|
|
813
|
|
0.65%
|
|
|
Federal funds purchased
|
|
|
63
|
|
|
5
|
|
10.58%
|
|
|
504
|
|
|
1
|
|
0.26%
|
|
|
FHLB advances
|
|
|
6,439
|
|
|
69
|
|
1.43%
|
|
|
256
|
|
|
1
|
|
0.52%
|
|
|
Total interest-bearing liabilities
|
|
|
202,112
|
|
|
1,284
|
|
0.85%
|
|
|
166,332
|
|
|
815
|
|
0.65%
|
|
|
Noninterest-bearing demand deposits - checking accounts
|
|
|
29,722
|
|
|
|
|
|
|
|
26,709
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,587
|
|
|
|
|
|
|
|
1,753
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
234,421
|
|
|
|
|
|
|
|
194,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
35,980
|
|
|
|
|
|
|
|
36,089
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
270,401
|
|
|
|
|
|
|
$
|
230,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
7,238
|
|
|
|
|
|
|
$
|
5,976
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
3.60%
|
|
|
|
|
|
|
|
3.52%
|
|
|
Net interest-earning assets
|
|
$
|
53,336
|
|
|
|
|
|
|
$
|
50,527
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
3.78%
|
|
|
|
|
|
|
|
3.67%
|
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
126.39%
|
|
|
|
|
|
|
|
130.38%
|
|
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
March 31, 2018 vs. 2017
|
|
March 31, 2018 vs. 2017
|
|
|
|
|
Increase (Decrease)
|
|
Total
|
|
Increase (Decrease)
|
|
Total
|
|
|
|
|
Due to
|
|
Increase
|
|
Due to
|
|
Increase
|
|
|
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits in other financial institutions
|
|
$
|
25
|
|
$
|
(2)
|
|
$
|
23
|
|
$
|
5
|
|
$
|
11
|
|
$
|
16
|
|
|
Securities
|
|
|
(1)
|
|
|
1
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
10
|
|
|
FHLB Stock
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
5
|
|
|
6
|
|
|
Loans receivable
|
|
|
409
|
|
|
160
|
|
|
569
|
|
|
1,252
|
|
|
447
|
|
|
1,699
|
|
|
Total interest-earning assets
|
|
|
433
|
|
|
160
|
|
|
593
|
|
|
1,263
|
|
|
468
|
|
|
1,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
3
|
|
|
5
|
|
|
NOW accounts
|
|
|
25
|
|
|
32
|
|
|
57
|
|
|
47
|
|
|
62
|
|
|
109
|
|
|
Money market accounts
|
|
|
1
|
|
|
9
|
|
|
10
|
|
|
6
|
|
|
34
|
|
|
40
|
|
|
Certificates of deposit
|
|
|
45
|
|
|
54
|
|
|
99
|
|
|
111
|
|
|
132
|
|
|
243
|
|
|
Total deposits
|
|
|
72
|
|
|
96
|
|
|
168
|
|
|
166
|
|
|
231
|
|
|
397
|
|
|
Federal funds purchased and securities sold under repurchase agreements
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
FHLB advances
|
|
|
19
|
|
|
(1)
|
|
|
18
|
|
|
63
|
|
|
5
|
|
|
68
|
|
|
Total interest-bearing liabilities
|
|
|
91
|
|
|
95
|
|
|
186
|
|
|
229
|
|
|
240
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
342
|
|
$
|
65
|
|
$
|
407
|
|
$
|
1,034
|
|
$
|
228
|
|
$
|
1,262
|
|
Liquidity and Capital Resources
We maintain liquid assets at levels we consider adequate to meet our liquidity needs. Liquid assets, which include cash and cash equivalents and securities available-for-sale, totaled $37.3 million, or 12.2% of total assets,at March 31, 2018, as compared to $6.3 million, or 2.5% of total assets, at June 30, 2017. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.
Our primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning investments and other assets, which provide liquidity to meet lending requirements. At March 31, 2018, we invested $28.3 million in excess funds in short-term interest-earning investments. At June 30, 2017, we did not have any excess funds to invest.
A significant portion of our liquidity consists of securities classified as available-for-sale and cash and cash equivalents, which are a product of our operating, investing and financing activities. Our primary sources of cash are net
income, principal repayments on loans and mortgage-backed securities, and increases in deposit accounts, along with advances from the FHLB of Topeka.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB which provides an additional source of funds.
Our cash flows are comprised of three classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $3.0 million for the nine months ended March 31, 2018 and $1.8 million for the nine months ended March 31, 2017. Net cash used by investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from sales, calls, and maturities of securities and proceeds from the pay downs on mortgage-backed securities, was $21.0 million and $24.3 million for the nine months ended March 31, 2018 and 2017, respectively. The Company did not purchase any securities during the nine months ended March 31, 2018. For the nine months ended March 31, 2017 the Company purchased one available-for-sale security. For the nine months ended March 31, 2018 and 2017, net cash provided by financing activities was $49.1 million and $15.0 million, respectively.
Off-Balance-Sheet Arrangements.
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and standby letters of credit.
For the nine months ended March 31, 2018, we did not engage in any off-balance sheet transactions, other than loan origination commitments, unused lines of credit and standby letters of credit in the normal course of our lending activities.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements that are applicable to the Company, please see
Note 2 of the notes to the Company’s consolidated financial statements, beginning on page 9.
Effect of Inflation and Changing Prices
The unaudited consolidated financial statements and related data presented herein have been prepared in accordance with GAAP, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on the Company’s performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, because such prices are affected by inflation to a larger extent than interest rates.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
This item is not applicable because we are a smaller reporting company.
Item 4.
Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective. In addition, there have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.