Central Plains Bancshares, Inc.: Form 10-Q for the period ended Dec 31, 2023
Filed with the SEC on Feb 13, 2024 and accepted by EDGAR at Feb 13, 2024, 16:16 ET.
Management's discussion and analysis
As filed, 47,052 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
General
Management’s discussion and analysis of financial condition and results of operations at December 31, 2023 and March 31, 2023 and for the three and nine months ended December 31, 2023 and 2022 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 financial statements and the notes thereto appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report 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:
- statements of our goals, intentions and expectations;
- statements regarding our business plans, prospects, growth and operating strategies;
- statements regarding the quality of our loan and investment portfolios; and
- estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic 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:
- general economic conditions, including any recessionary conditions and/or increases in unemployment, either nationally or in our market areas, that are worse than expected;
- changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
- our ability to access cost-effective funding and to maintain adequate liquidity, primarily through deposits;
- fluctuations in real estate values and in the conditions of the residential real estate, commercial real estate, and agricultural real estate markets;
- demand for loans, deposits and non-banking services in our market area;
- our ability to implement and change our business strategies;
- competition among depository and other financial institutions, including with respect to our ability to charge overdraft fees;
- inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and will make;
- adverse changes in the securities markets;
- changes in laws or government regulations or policies affecting financial institutions and/or their holding companies, including changes in regulatory fees, capital requirements and insurance premiums;
- monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
- changes in the quality or composition of our loan or investment portfolios;
- technological changes that may be more difficult or expensive than expected;
- the inability of third-party providers to perform as expected;
- a failure or breach of our operational or information security systems or infrastructure, including cyberattacks;
- our ability to manage market risk, credit risk and operational risk;
- our ability to enter new markets successfully and capitalize on growth opportunities;
- our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
- changes in consumer spending, borrowing and savings habits;
- 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;
- changes in accounting and/or tax estimates;
- the effects of any national or global conflict, war or act of terrorism;
- the ability of the U.S. Government to remain open, function properly and manage federal debt limits;
- our compensation expense associated with equity allocated or awarded to our directors and/or employees;
- the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers;
- our ability to attract and retain key employees; and
- changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Critical Accounting Policies
Our most significant accounting policies are described in Note 1 to the consolidated financial statements. Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities. We consider these policies to be our critical accounting estimates.
The estimates and assumptions that we use are based on historical experience, future forecasts and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
The Jumpstart Our Business Startups ("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. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
See Note 1, "Basis of Presentation" for additional information on the adoption of ASC 326, which changes the methodology under which management calculates the reserve for loans and investment securities, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses to be a critical accounting policy. Other than the adoption of ASC 326, there have been no significant changes to the Association's critical accounting policies since March 31, 2023.
Comparison of Financial Condition at December 31, 2023 and March 31, 2023
Total Assets. Total assets increased $16.5 million, or 3.8%, to $454.3 million at December 31, 2023 from $437.8 million at March 31, 2023. The increase was primarily due to a $22.3 million, or 6.3%, increase in gross loans.
Cash and Cash Equivalents. Cash and cash equivalents decreased $4.9 million, or 29.4%, to $11.7 million at December 31, 2023 from $16.6 million at March 31, 2023. This decrease was primarily due to an increase in loan funding and a decrease in interest bearing deposits in other banks, partially offset by cash received in connection with the initial public offering of the Company's common stock. We regularly review our liquidity position based on alternative uses of available funds as well as market conditions.
Investment Securities Available for Sale. Securities available-for-sale decreased $526,000, or 0.9%, to $57.3 million at December 31, 2023 from $57.8 million at March 31, 2023. We purchased $6.0 million in securities, received principal payments of $7.0 million, had net premium amortization and discount accretion of $131,000 and had an increase in the unrealized gain on the securities portfolio of $617,000 during the nine-month period ended December 31, 2023.
Gross Loans. Gross loans held for investment increased $22.3 million, or 6.3%, to $376.1 million at December 31, 2023 from $353.7 million at March 31, 2023. We experienced increases in all loan categories except for construction real estate loans. The largest increase was in commercial real estate loans, which increased $21.4 million, or 20.8%, to $123.8 million from $102.4 at March 31, 2023.
Total Deposits. Total deposits decreased $23.6 million, or 6.0%, to $367.4 million at December 31, 2023 from $391.0 million at March 31, 2023. This decrease was the result of customers using cash to purchase shares in our conversion.
Noninterest-bearing deposits increased $9.1 million, or 12.5%, to $82.4 million at December 31, 2023 from $73.2 million at March 31, 2023. Time certificates of deposit increased $22.1 million, or 28.8%, to $107.7 million at December 31, 2023 from $85.6 million at March 31, 2023, as we believe that long-term customers have sought higher-yield deposits as a result of recent increases in market interest rates. We also had brokered deposits of $8.1 million at March 31, 2023 that are included in the $85.6 million total.
Borrowings. We had no borrowings at December 31, 2023 or March 31, 2023. We have had limited borrowings in recent periods, as we have generally been able to utilize cash provided by our increase in deposits to fund our operations, although we will utilize FHLB advances as needed to support increased loan funding.
Stockholders' Equity. Stockholders' equity increased $39.1 million, or 101.2% to $77.8 million at December 31, 2023 from $38.7 million at March 31, 2023. This increase is the result of the net proceeds of the stock offering, less unallocated shares of the ESOP. Net income of $2.9 million and other comprehensive income of $489,000 for the nine months ended December 31, 2023, was offset by a reduction in equity of $402,000 resulting from increasing our allowance for credit losses in connection with our adopting the CECL accounting methodology effective April 1, 2023.
Average Balance Sheets and Related Yields and Rates
The following tables set forth average annualized balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Loan fees are included in interest income on loans and are not material.
(Dollars in thousands)
| Interest-earning assets: | For the Three Months Ended December 31, 2023 Average Outstanding Balance | Interest | Average Yield/Rate | 2022 Average Outstanding Balance | Interest | Average Yield/Rate |
|---|---|---|---|---|---|---|
| Loans | $367,941 | $4,892 | 5.32% | $341,703 | $3,876 | 4.54% |
| Mortgage-backed securities | 48,970 | 397 | 3.24% | 53,075 | 297 | 2.24% |
| Investment securities (1) | 7,213 | 45 | 2.50% | 8,036 | 45 | 2.24% |
| Interest-bearing deposits and other | 7,409 | 108 | 5.83% | 1,068 | 19 | 7.12% |
| Total interest-earning assets | 431,533 | 5,442 | 5.04% | 403,882 | 4,237 | 4.20% |
| Non-interest-earning assets | 18,898 | 14,574 | ||||
| Total assets | $450,431 | $418,456 | ||||
| Interest-bearing liabilities: | ||||||
| Savings accounts | $42,485 | $53 | 0.50% | $51,132 | $17 | 0.13% |
| Money market accounts | 21,594 | 140 | 2.59% | 25,782 | 73 | 1.13% |
| NOW accounts | 134,427 | 401 | 1.19% | 158,411 | 281 | 0.71% |
| Certificates of deposit | 88,134 | 907 | 4.12% | 42,717 | 243 | 2.28% |
| Individual retirement accounts | 16,084 | 191 | 4.75% | 15,544 | 95 | 2.44% |
| Total interest-bearing deposits | 302,724 | 1,692 | 2.24% | 293,586 | 709 | 0.97% |
| Borrowings | 158 | 2 | 5.06% | 15,946 | 152 | 3.81% |
| Total interest-bearing liabilities | 302,882 | 1,694 | 2.24% | 309,532 | 861 | 1.11% |
| Other non-interest-bearing liabilities | 102,603 | 73,016 | ||||
| Total liabilities | 405,485 | 382,548 | ||||
| Total equity | 44,946 | 35,908 | ||||
| Total liabilities and total equity | $450,431 | $418,456 | ||||
| Net interest income | $3,748 | $3,376 | ||||
| Net interest rate spread (2) | 2.81% | 3.08% | ||||
| Net interest-earning assets (3) | $128,651 | $94,350 | ||||
| Net interest margin (4) | 3.47% | 3.34% | ||||
| Average interest-earning assets to interest-bearing liabilities | 142.48% | 130.48% |
(1) Represents investments in municipal bonds.
(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
(Dollars in thousands)
| Interest-earning assets: | Nine Months Ended December 31, 2023 Average Outstanding Balance | Interest | Average Yield/Rate | 2022 Average Outstanding Balance | Interest | Average Yield/Rate |
|---|---|---|---|---|---|---|
| Loans | $359,515 | $13,801 | 5.12% | $331,219 | $10,698 | 4.31% |
| Mortgage-backed securities | 49,958 | 1,091 | 2.91% | 58,311 | 923 | 2.11% |
| Investment securities (1) | 7,937 | 138 | 2.32% | 8,136 | 135 | 2.21% |
| Interest-bearing deposits and other | 5,137 | 211 | 5.48% | 5,009 | 96 | 2.55% |
| Total interest-earning assets | 422,547 | 15,241 | 4.81% | 402,675 | 11,852 | 3.92% |
| Non-interest-earning assets | 18,170 | 14,257 | ||||
| Total assets | $440,717 | $416,932 | ||||
| Interest-bearing liabilities: | ||||||
| Savings accounts | $45,040 | $107 | 0.32% | $53,106 | $35 | 0.09% |
| Money market accounts | 21,742 | 320 | 1.96% | 25,975 | 189 | 0.97% |
| NOW accounts | 125,685 | 1,461 | 1.55% | 164,572 | 547 | 0.44% |
| Certificates of deposit | 81,017 | 2,333 | 3.84% | 34,187 | 431 | 1.68% |
| Individual retirement accounts | 15,832 | 351 | 2.96% | 15,653 | 198 | 1.69% |
| Total interest-bearing deposits | 289,316 | 4,572 | 2.11% | 293,493 | 1,400 | 0.64% |
| Borrowings | 2,580 | 104 | 5.37% | 13,079 | 269 | 2.74% |
| Total interest-bearing liabilities | 291,896 | 4,676 | 2.14% | 306,572 | 1,669 | 0.73% |
| Other non-interest-bearing liabilities | 107,893 | 73,257 | ||||
| Total liabilities | 399,789 | 379,829 | ||||
| Total equity | 40,928 | 37,103 | ||||
| Total liabilities and total equity | $440,717 | $416,932 | ||||
| Net interest income | $10,565 | $10,183 | ||||
| Net interest rate spread (2) | 2.67% | 3.20% | ||||
| Net interest-earning assets (3) | $130,651 | $96,103 | ||||
| Net interest margin (4) | 3.33% | 3.37% | ||||
| Average interest-earning assets to interest-bearing liabilities | 144.76% | 131.35% |
(1) Represents investments in municipal bonds.
(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
Comparison of Operating Results for the Three Months Ended December 31, 2023 and December 31, 2022
General. Net income increased $2.0 million, or 188.7%, to $937,000 for the three months ended December 31, 2023, compared to a net loss of $1.1 million for the three months ended December 31, 2022. This increase was due primarily to an increase of $2.3 million in provision for credit losses for the three months ended December 31, 2022. The Association recorded a significant provision for credit losses as we recognized a charge-off of $2.4 million on a commercial and industrial loan during 2022.
Interest and Dividend Income. Interest and dividend income increased $1.2 million, or 28.4%, to $5.4 million for the three months ended December 31, 2023 from $4.2 million for the three months ended December 31, 2022. The increase was due primarily to an increase in interest income on loans, which is our primary source of interest income, due to increases in market interest rates.
Interest income on loans increased $1.0 million, or 26.2%, to $4.9 million for the three months ended December 31, 2023 from $3.9 million for the three months ended December 31, 2022. The average balance of loans increased $26.2 million, or 7.7%, to $367.9 million for the three months ended December 31, 2023 from $341.7 million for the three months ended December 31, 2022. The increase was primarily due to our continued focus on growing our loan portfolio consistent with maintaining asset quality. Our yield on loans increased 78 basis points to 5.32% for the three months ended December 31, 2023 from 4.54% for the three months ended December 31, 2022. The increase in yield was due to increases in market interest rates.
Interest income on securities increased $100,000, or 29.2%, to $442,000 for the three months ended December 31, 2023 from $342,000 for the three months ended December 31, 2022, due to a 91 basis point increase in the average yield from 2.24% for the three months ended December 31, 2022 to 3.15% for the three months ended December 31, 2023. The increase was offset by a $4.9 million decrease in the average balance of securities to $56.2 million for the three months ended December 31, 2023 from $61.1 million for the three months ended December 31, 2022. This decrease in the average balance of securities is attributed to paydowns received over the period.
Interest Expense. Interest expense increased $833,000, or 96.7%, to $1.7 million for the three months ended December 31, 2023 compared to $861,000 for the three months ended December 31, 2022, due to increases in the average balance of and higher costs of interest-bearing liabilities.
Interest expense on deposits increased $983,000, or 138.6%, to $1.7 million for the three months ended December 31, 2023 compared to $709,000 for the three months ended December 31, 2022. The increase was due to a 127 basis point increase in the average cost of deposits to 2.24% for the three months ended December 31, 2023 from 0.97% for the three months ended December 31, 2022. The increase in the average cost of deposits was due to the higher interest rate environment and an increase in the average balances of certificates of deposit of $45.4 million to $88.1 million for the three months ended December 31, 2023 from $42.7 million for the three months ended December 31, 2022.
Interest expense on FHLB borrowings decreased $150,000, or 98.7%, to $2,000 for the three months ended December 31, 2023 compared to $152,000 for the three months ended December 31, 2022. The decrease was due to a decrease in the average balance of borrowings of $15.7 million, or 99.0%, to $158,000 for the three months ended December 31, 2023 compared to $15.9 million for the three months ended December 31, 2022, as we have generally been able to utilize cash provided by our increase in deposits to fund our operations.
Net Interest Income. Net interest income less provision for credit losses increased $2.7 million, or 316.5%, to $3.6 million for the three months ended December 31, 2023 compared to $854,000 for the three months ended December 31, 2022.
Our interest rate spread decreased 28 basis points to 2.81% for the three months ended December 31, 2023, compared to 3.08% for the three months ended December 31, 2022, and our net interest margin increased 13 basis points to 3.47% for the three months ended December 31, 2023 compared to 3.34% for the three months ended December 31, 2022.
Provision for Credit Losses. Effective April 1, 2023, we adopted the CECL accounting methodology. As a result, we now determine periodic estimates of lifetime expected credit losses on loans and unfunded commitments and recognize the expected credit losses as allowances for credit losses. Previously, provisions for loan losses were charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that were both probable and reasonably estimable at the date of the consolidated financial statements.
We recorded a provision for credit losses of $191,000 for the three months ended December 31, 2023 compared to a provision for loan losses of $2.5 million for the three months ended December 31, 2022. We had recoveries of $19,000 during the three months ended December 31, 2023, and recoveries of $20,000 during the three months ended December 31, 2022. We had no loans charged off during the three months ended December 31, 2023, and had loans charged off of $2.4 million during the three months ended December 31, 2022.
Non-Interest Income. Noninterest income increased $326,000, or 57.8%, to $890,000 for the three months ended December 31, 2023 from $564,000 for the three months ended December 31, 2022. Other income increased $227,000, or 398.2%, to $284,000 for the three months ended December 31, 2023 compared to $57,000 for the three months ended December 31, 2022, due to a recovery of a previously written off receivable. Service charges on deposit accounts increased $30,000, or 18.3%, to $194,000 for the three months ended December 31, 2023 compared to $164,000 for the three months ended December 31, 2023, primarily due to an increase in overdraft income and debit card usage.
Non-Interest Expense. Noninterest expense increased $558,000, or 20.4% to $3.3 million for the three months ended December 31, 2023 from $2.7 million for the three months ended December 31, 2022. Salaries and employee benefits expense increased $522,000, or 37.8%, to $1.9 million for the three months ended December 31, 2023 from $1.4 million for the three months ended December 31, 2022, due to the reversal of the executive bonus accrual in November 2022. Executive bonus accruals are calculated monthly based on a forecast of year-end earnings. However, due to a significant provision for credit losses the Association recognized during 2022, it was determined that no executive bonus payouts would be made for the year ended March 31, 2023. Additionally, the Association entered into an Employee Stock Ownership Plan at the closing of the conversion, which resulted in additional ESOP related expenses of $126,000 during the three months ended December 31, 2023.
Federal deposit insurance premiums increased $20,000, or 46.5%, to $63,000 for the three months ended December 31, 2023 from $43,000 for the three months ended December 31, 2022, due to a combination of an increase in deposits and an increase in federal deposit insurance premium rates.
Income Tax Expense. We recognized income tax expense of $218,000 for the three months ended December 31, 2023 and an income tax benefit of $260,000 for the three months ended December 31, 2022, respectively, resulting in effective rates of 18.9% for the three months ended December 31, 2023 and 19.9% for the three months ended December 31, 2022. The most significant difference between our effective tax rate and statutory rates results from investment partnership tax credits.
Comparison of Operating Results for the Nine Months Ended December 31, 2023 and December 31, 2022
General. Net income increased $2.2 million, or 313.3%, to $2.9 million for the nine months ended December 31, 2023, compared to $691,000 for the nine months ended December 31, 2022. This increase was due primarily to an increase of $2.7 million in provision for credit losses for the nine months ended December 31, 2022. The Association recorded a significant provision for credit losses as we recognized a charge-off of $2.4 million on a commercial and industrial loan during 2022.
Interest and Dividend Income. Interest and dividend income increased $3.3 million, or 28.6%, to $15.2 million for the nine months ended December 31, 2023 from $11.9 million for the nine months ended December 31, 2022. The increase was due primarily to an increase in interest income on loans, which is our primary source of interest income, due to increases in market interest rates.
Interest income on loans increased $3.1 million, or 29.0%, to $13.8 million for the nine months ended December 31, 2023 from $10.7 million for the nine months ended December 31, 2022. The average balance of loans increased $28.3 million, or 8.5%, to $359.5 million for the nine months ended December 31, 2023 from $331.2 million for the nine months ended December 31, 2022. The increase is due to our continued focus on growing our loan portfolio consistent with maintaining asset quality. Our yield on loans increased 81 basis points to 5.12% for the nine months ended December 31, 2023 from 4.31% for the nine months ended December 31, 2022. The increase in yield was due to increases in market interest rates.
Interest income on securities increased $171,000, or 16.2%, to $1.2 million for the nine months ended December 31, 2023 from $1.1 million for the nine months ended December 31, 2022, due to a 71 basis point increase in the average yield from 2.12% for the nine months ended December 31, 2022 to 2.83% for the nine months ended December 31, 2023. The increase was offset by a $8.5 million decrease in the average balance of securities to $57.9 million for the nine months ended December 31, 2023 from $66.4 million for the nine months ended December 31, 2022. This decrease in the average balance of securities is attributed to paydowns received over the period.
Interest Expense. Interest expense increased $3.0 million, or 180.2%, to $4.7 million for the nine months ended December 31, 2023 compared to $1.7 million for the nine months ended December 31, 2022, due to increases in the average balance of and higher costs of interest-bearing liabilities.
Interest expense on deposits increased $3.2 million, or 226.6%, to $4.6 million for the nine months ended December 31, 2023 compared to $1.4 million for the nine months ended December 31, 2022. The increase was due to a 147 basis point increase in the average cost of deposits to 2.11% for the nine months ended December 31, 2023 from 0.64% for the nine months ended December 31, 2022. The increase in the average cost of deposits was due to the higher interest rate environment and an increase in the average balances of certificates of deposit of $46.8 million to $81.0 million for the nine months ended December 31, 2023 from $34.2 million for the nine months ended December 31, 2022.
Interest expense on FHLB borrowings decreased $165,000, or 61.3%, to $104,000 for the nine months ended December 31, 2023 compared to $269,000 for the nine months ended December 31, 2022. The decrease was due to a decrease in the average balance of borrowings of $10.5 million, or 80.3%, to $2.6 million for the nine months ended December 31, 2023 compared to $13.1 million for nine months ended December 31, 2022.
Net Interest Income. Net interest income less provision for credit losses increased $3.1 million, or 42.6%, to $10.5 million for the nine months ended December 31, 2023 compared to $7.3 million for the nine months ended December 31, 2022.
Our interest rate spread decreased 53 basis points to 2.67% for the nine months ended December 31, 2023, compared to 3.20% for the nine months ended December 31, 2022, and our net interest margin decreased four basis points to 3.33% for the nine months ended December 31, 2023 compared to 3.37% for the nine months ended December 31, 2022.
Provision for Credit Losses. Effective April 1, 2023, we adopted the CECL accounting methodology. As a result, we now determine periodic estimates of lifetime expected credit losses on loans and unfunded commitments and recognize the expected credit losses as allowances for credit losses. Previously, provisions for loan losses were charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements.
We recorded a provision for loan losses of $99,000 for the nine months ended December 31, 2023 compared to a provision for loan losses of $2.8 million for the nine months ended December 31, 2022. In addition, we recognized a reduction in beginning retained earnings of $402,000 related to an increase in our allowance for credit losses in connection with our adoption of CECL. Our allowance for credit losses was $5.9 million at December 31, 2023 compared to an allowance for loan losses of $5.4 million at March 31, 2023 and $5.4 million at December 31, 2022. The ratio of our allowance for credit/loan losses to total loans was 1.56% at December 31, 2023 compared to 1.53% at March 31, 2023 and 1.54% at December 31, 2022.
We had charge-offs of less than $1,000 and recoveries of $58,000 during the nine months ended December 31, 2023, compared to charge-offs of $2.4 million and recoveries of $55,000 during the nine months ended December 31, 2022.
To the best of our knowledge, we have recorded all lifetime expected credit losses on loans and unfunded commitments at December 31, 2023. However, future changes could result in material increases in our provision for credit losses. In addition, the OCC, as an integral part of its examination process, will periodically review our allowance for credit losses, and as a result of such reviews, we may have to adjust our allowance for credit losses.
Non-Interest Income. Noninterest income increased $379,000, or 20.6%, to $2.2 million for the nine months ended December 31, 2023 compared to $1.8 million for the nine months ended December 31, 2022. Service charges on deposit accounts increased $89,000, or 18.2%, to $579,000 for the nine months ended December 31, 2023 compared to $490,000 for the nine months ended December 31, 2022, primarily due to increases in overdraft income and debit card usage. Other income increased $125,000, or 55.8%, to $349,000 for the nine months ended December 31, 2023 compared to $224,000 for the nine months ended December 31, 2022. Gain on sale of loans increased $83,000, or 92.2%, to $173,000 for the nine months ended December 31, 2023 from $90,000 for the nine months ended December 31, 2022.
Non-Interest Expense. Noninterest expense increased $767,000, or 9.2%, to $9.1 million for the nine months ended December 31, 2023 from $8.4 million for the nine months ended December 31, 2022. Salaries and employee benefits increased $613,000, or 13.7%, to $5.1 million for the nine months ended December 31, 2023 from $4.5 million for the nine months ended December 31, 2022, due to the reversal of the executive bonus accrual in November 2022. Executive bonus accruals are calculated monthly based on a forecast of year-end earnings. However, due to a significant provision for credit losses the Association recognized during 2022, it was determined that no executive bonus payouts would be made for the year ended March 31, 2023. Additionally, the Association entered into an Employee Stock Ownership Plan at the closing of the conversion, which resulted in additional ESOP related expenses of $126,000 during the nine months ended December 31, 2023.
Federal deposit insurance premiums increased $92,000, or 77.3%, to $211,000 for the nine months ended December 31, 2023 from $119,000 for the nine months ended December 31, 2022, due to a combination of an increase in deposits and an increase in federal deposit insurance premium rates.
Income Tax Expense. Income tax expense increased $572,000, or 417.5%, to $709,000 for the nine months ended December 31, 2023 from $137,000 for the nine months ended December 31, 2022. The effective tax rate for the nine months ended December 31, 2023 and 2022 were 19.9% and 16.6%, respectively. The most significant difference between our effective tax rate and statutory rates results from investment partnership tax credits.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. All directors participate in discussions during the regular board meetings evaluating the interest rate risk inherent in our assets and liabilities, and the level of risk that is appropriate. These discussions take into consideration our business strategy, operating environment, capital, liquidity and performance objectives consistent with the policy and guidelines approved by them.
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we are using to manage interest rate risk are:
- maintaining capital levels that exceed the thresholds for well-capitalized status under federal regulations;
- maintaining adequate levels of liquidity;
- selling longer-term, fixed-rate loans, subject to market conditions; and
- continuing to diversify our loan portfolio by adding more commercial-related loans, which typically have shorter maturities and/or adjustable rates.
By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.
We have not engaged in hedging activities, such as engaging in futures or options. We do not anticipate entering into similar transactions in the future.
Net Interest Income Analysis. We analyze our sensitivity to changes in interest rates through a third-party net interest income ("NII") model. NII is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our NII would be for a one-year period and then calculate what the NII would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases gradually by up to 400 basis points. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in the interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the "Change in Interest Rates" column below.
The following table sets forth, at December 31, 2023, the calculation of the estimated changes in our NII that would result from the designated changes in the United States Treasury yield curve over a one-year period.
| Changes in Interest Rates (basis points)(1) | NII Year 1 Forecast (Dollars in thousands) | Change in Net Interest Income Year One (% change from year one base) |
|---|---|---|
| 400 | $15,327 | (2.71)% |
| 300 | 15,429 | (2.06) |
| 200 | 15,536 | (1.38) |
| 100 | 15,641 | (0.72) |
| Base | 15,754 | — |
| (100) | 15,845 | 0.58 |
| (200) | 15,952 | 1.26 |
| (300) | 16,148 | 2.50 |
| (400) | 16,338 | 3.71 |
(1) Assumes a gradual change in interest rates at all maturities over a one-year period.
The table above indicates that at December 31, 2023, we would have experienced a 1.38% decrease in NII in the event of a gradual, one-year 200 basis point increase in market interest rates, and a 1.26% increase in NII in the event of a gradual, one-year 200 basis point decrease in market interest rates.
Market Value of Equity
We also use a third-party model to compute amounts by which the net present value of our assets and liabilities (market value of equity or "MVE") would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by up to 400 basis points.
The following table sets forth, at December 31, 2023, the calculation of the estimated changes in our MVE that would result from the designated immediate changes in the United States Treasury yield curve.
(Dollars in thousands)
| Changes in Interest Rates (basis points)(1) | Estimated MVE(2) | Estimated Increase (Decrease) in MVE Dollar Change | Percent Change | MVE as a Percentage of Present Value of Assets(3) MVE Ratio(4) | Increase (Decrease) (basis points) |
|---|---|---|---|---|---|
| 400 | $73,687 | $(7,377) | (9.10)% | 20.40% | 78 |
| 300 | 76,285 | (4,779) | (5.90) | 20.45 | 83 |
| 200 | 77,823 | (3,241) | (4.00) | 20.19 | 57 |
| 100 | 78,062 | (3,002) | (3.70) | 19.60 | (2) |
| Base | 81,064 | — | — | 19.62 | — |
| (100) | 75,095 | (5,969) | (7.36) | 17.54 | (208) |
| (200) | 66,993 | (14,071) | (17.36) | 15.21 | (441) |
| (300) | 56,621 | (24,443) | (30.15) | 12.48 | (714) |
| (400) | 58,407 | (22,657) | (27.95) | 12.53 | (709) |
(1) Assumes an immediate uniform change in interest rate at all maturities.
(2) MVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) MVE Ratio represents MVE divided by the present value of assets.
The table above indicates that at December 31, 2023, we would have experienced a 4.00% decrease in MVE in the event of an instantaneous parallel 200 basis point increase in the market interest rates and a 17.36% decrease in MVE in the event of an instantaneous 200 basis point decrease in market interest rates.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurement. Modeling changes in NII and MVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. For instance, the NII and MVE tables presented above assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. However, the shape of the yield curve changes constantly and the value and pricing of our assets and liabilities, including our deposits, may not closely correlate with changes in market interest rates. Accordingly, although the NII and MVE tables may provide an indication of our interest rate risk exposure at a particular point in time and in the context of a particular yield curve, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on NII and MVE and will differ from actual results.
NII and MVE calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
Liquidity and Capital Resources
Liquidity. Liquidity describes our ability to meet financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB. The Association had remaining availability for FHLB borrowings of approximately $40.9 million at December 31, 2023. The FHLB has sole discretion to deny additional advances. Additionally, the Association had the capacity to borrow $5.0 from a private bankers’ bank at December 31, 2023. We could significantly increase our borrowing capacity from the FHLB Topeka if we pledged additional assets as security. We also have the ability to participate in the Federal Reserve Board's Bank Term Funding Program if needed.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments. The levels of these assets are dependent on our operating, financing, lending and investing activities during any period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
For the nine months ended December 31, 2023, cash flows from operating, investing, and financing activities resulted in a net decrease in cash and cash equivalents of $4.9 million. Net cash provided by operating activities amounted to $4.2 million, primarily due to net income of $2.9 million. Net cash used in investing activities amounted to $21.4 million, primarily due to a net increase in loans of $22.0 million and the purchase of available-for-sale investment securities of $6.0 million, partially offset by proceeds from paydowns of available-for-sale investment securities of $7.0 million. Net cash provided by financing activities amounted to $12.3 million, primarily due to the proceeds from the issuance of common stock.
For the nine months ended December 31, 2022, cash flows from operating, investing, and financing activities resulted in a net decrease in cash and cash equivalents of $11.4 million. Net cash provided by operating activities amounted to $3.3 million. Net cash used in investing activities amount to $30.8 million, primarily due to a net increase in loans of $40.1 million, partially offset by proceeds from paydowns of available-for-sale investment securities of $9.7 million. Net cash provided by financing activities amounted to $16.1 million, primarily due to a net increase in proceeds from short-term FHLB advances of $14.5 million. For further information, see the statements of cash flows contained in the consolidated financial statements in Part 1, Item 1 of this Quarterly Report.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this Quarterly Report have been prepared according to GAAP which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Concentration - Commercial Real Estate
Our market areas have experienced strong population and job growth, contributing to favorable economic conditions for generating new commercial loans. We target new commercial real estate loan originations to experienced, growing small- and mid-size owners and investors in our market area. Our commercial real estate loans are secured by owner-occupied and non-owner-occupied properties, including medical practices, insurance offices, warehouses, single- and multi-tenant retail and hotels. Our commercial residential real estate loans are secured by properties located within our primary market area, or we generally participate with a Nebraska-based bank for loans outside of our primary market area. Generally, our commercial real estate loans have terms and amortization periods up to 20 years with options for balloon payments and interest rate adjustments to occur every five years. The interest rate is fixed for the initial term (five years or less) and then adjusts again at the end of the next period matching the initial term or as negotiated at the end of the first term. Commercial real estate loans generally have terms and amortization periods up to 20 years. We generally limit the loan-to-value ratios of our commercial real estate loans to 75% of the purchase price or appraised value, whichever is lower.
We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property, and the debt service coverage ratio (the ratio of net operating income to debt service). Generally, the debt service coverage ratio on these loans is at least 1.20x. The significant majority of our commercial real estate loans are appraised by outside independent appraisers approved by the board of directors. Personal guarantees are generally obtained from the principals of commercial real estate borrowers.
Market risk
As filed, 209 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Information with respect to qualitative disclosures about market risk can be found in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operation - Management of Market Risk."
Controls and procedures
As filed, 1,088 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by the quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2023-12-31. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Interest expense | 3 months2023-10-01 to 2023-12-31 | $1.7m | us-gaap:InterestExpense |
| Interest expense | 9 months2023-04-01 to 2023-12-31 | $4.7m | us-gaap:InterestExpense |
| Income tax | 3 months2023-10-01 to 2023-12-31 | $218.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2023-04-01 to 2023-12-31 | $709.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2023-10-01 to 2023-12-31 | $937.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months2023-04-01 to 2023-12-31 | $2.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2023-10-01 to 2023-12-31 | $0.31 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2023-10-01 to 2023-12-31 | $0.31 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2023-10-01 to 2023-12-31 | 3,057,992 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2023-04-01 to 2023-12-31 | $4.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2023-04-01 to 2023-12-31 | $533.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2023-12-31 | $11.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | At period end2023-12-31 | $454.3m | us-gaap:Assets |
| Total liabilities | At period end2023-12-31 | $376.5m | us-gaap:Liabilities |
| Shareholders' equity | At period end2023-12-31 | $77.8m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950170-24-014584. Last ingested by Listed: Oct 24, 2026, 15:16 ET. Listed shows no prices and gives no investment advice.