Central Plains Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2024
Filed with the SEC on Nov 12, 2024 and accepted by EDGAR at Nov 12, 2024, 16:30 ET.
Management's discussion and analysis
As filed, 44,033 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 September 30, 2024 and March 31, 2024 and for the three and six months ended September 30, 2024 and 2023 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;
- 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
Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended March 31, 2024.
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.
Comparison of Financial Condition at September 30, 2024 and March 31, 2024
(Dollars in thousands)
| Selected Consolidated Financial Condition Data: | At September 30, 2024 | At March 31, 2024 |
|---|---|---|
| Cash and cash equivalents | $9,879 | $11,454 |
| Investment securities - available for sale | 59,673 | 60,356 |
| Investment securities - held to maturity | 274 | 307 |
| FHLB stock | 613 | 584 |
| Loans, net | 393,234 | 374,389 |
| Total assets | 482,027 | 463,278 |
| Total deposits | 391,809 | 375,145 |
| Total stockholders' equity | 81,627 | 78,277 |
Total Assets. Total assets increased $18.7 million, or 4.0%, to $482.0 million at September 30, 2024 from $463.3 million at March 31, 2024. The increase was primarily due to an $18.8 million, or 5.0%, increase in net loans.
Cash and cash equivalents. Cash and cash equivalents decreased $1.6 million, or 13.8%, to $9.9 million at September 30, 2024 from $11.5 million at March 31, 2024. This decrease was primarily due to an increase in loan funding, partially offset by an increase in total deposits. We continue to monitor our liquidity position based on alternative uses of available funds and prevailing market conditions.
Investment Securities Available for Sale. Securities available-for-sale decreased $683,000, or 1.1%, to $59.7 million at September 30, 2024 from $60.4 million at March 31, 2024. During the six-month period, we purchased $1.9 million in securities, received $4.4 million in principal payments, and recorded net premium amortization and discount accretion of $47,000. Additionally, net unrealized losses on the securities portfolio decreased by $1.4 million.
Loans. Loans increased $18.8 million, or 5.0%, to $399.1 million at September 30, 2024 from $380.2 million at March 31, 2024. This growth was driven by increases across all loan categories, except for commercial non-real estate loans and other consumer loans. The largest increase occurred in agriculture loans, which increased $16.7 million, or 84.8%, to $36.4 million at September 30, 2024, from $19.7 million at March 31, 2024, which was primarily due to additional agriculture lenders hired by the Association.
Premises and Equipment, Net. Premises and equipment increased $2.4 million, or 40.7%, to $8.3 million at September 30, 2024 from $5.9 million at March 31, 2024. The increase is primarily due to the construction of two new branch offices in Lincoln and Hastings, Nebraska. These new branches are expected to enhance our service coverage in these areas and support growth in customer engagement. The projects are on track for completion in the second quarter 2025.
Total Deposits. Total deposits increased $16.7 million, or 4.4%, to $391.8 million at September 30, 2024 from $375.1 million at March 31, 2024. The increase was primarily driven by higher balances in time deposits and money market accounts, as the Association offered a competitive certificate of deposit special during the six-month period ended September 30, 2024. Management continues to actively monitor deposit balances and interest rates to maintain adequate liquidity.
Noninterest-bearing deposits increased $2.3 million, or 3.5%, to $69.2 million at September 30, 2024 from $66.9 million at March 31, 2024. Time certificates of deposit increased $3.6 million, or 3.1%, to $117.0 million from $113.4 million, as long-term customers sought higher-yield deposit options in response to prior increases in market interest rates. Additionally, the Association held $7.3 million in brokered time deposits at September 30, 2024, whereas no brokered time deposits were held at March 31, 2024.
Borrowings. The Company had no outstanding borrowings at September 30, 2024, and March 31, 2024. While borrowings have been limited in recent periods, the Association has generally utilized the increase in deposits to fund operations. However, management remains prepared to access FHLB advances if necessary to support additional loan funding.
Stockholders' Equity. Stockholders' equity increased $3.3 million, or 4.0% to $81.6 million at September 30, 2024 from $78.3 million at March 31, 2024. This increase was primarily driven by net income of $1.9 million, ESOP shares committed to be released of $71,000 and a decrease in the unrealized loss position on securities valuations. The decrease in the unrealized loss position of $1.4 million, net of the related tax effect, is due to changes in market interest rates during the six-month period ended September 30, 2024.
Average Balance Sheets and Related Yields and Rates
The following table sets 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 September 30, 2024 Average Outstanding Balance | Interest | Average Yield/Rate | 2023 Average Outstanding Balance | Interest | Average Yield/Rate |
|---|---|---|---|---|---|---|
| Loans | $388,854 | $5,596 | 5.76% | $357,868 | $4,589 | 5.13% |
| Mortgage-backed securities | 52,978 | 490 | 3.70% | 50,161 | 354 | 2.82% |
| Investment securities (1) | 7,228 | 42 | 2.32% | 7,506 | 45 | 2.40% |
| Interest-bearing deposits and other | 5,707 | 21 | 1.47% | 3,488 | 45 | 5.16% |
| Total interest-earning assets | 454,767 | 6,149 | 5.41% | 419,023 | 5,033 | 4.80% |
| Non-interest-earning assets | 16,562 | 18,028 | ||||
| Total assets | $471,329 | $437,051 | ||||
| Interest-bearing liabilities: | ||||||
| Savings accounts | $42,330 | $39 | 0.37% | $46,309 | $27 | 0.23% |
| Money market accounts | 27,650 | 148 | 2.14% | 23,176 | 91 | 1.57% |
| NOW accounts | 120,453 | 499 | 1.66% | 147,037 | 530 | 1.44% |
| Certificates of deposit | 105,508 | 1,178 | 4.47% | 81,542 | 788 | 3.87% |
| Individual retirement accounts | 16,618 | 153 | 3.68% | 15,580 | 82 | 2.11% |
| Total interest-bearing deposits | 312,559 | 2,017 | 2.58% | 313,644 | 1,518 | 1.94% |
| Borrowings | 5,208 | 74 | 5.68% | 2,353 | 33 | 5.61% |
| Total interest-bearing liabilities | 317,767 | 2,091 | 2.63% | 315,997 | 1,551 | 1.96% |
| Other non-interest-bearing liabilities | 92,827 | 82,060 | ||||
| Total liabilities | 410,594 | 398,057 | ||||
| Total equity | 60,735 | 38,994 | ||||
| Total liabilities and total equity | $471,329 | $437,051 | ||||
| Net interest income | $4,058 | $3,482 | ||||
| Net interest rate spread (2) | 2.78% | 2.84% | ||||
| Net interest-earning assets (3) | $137,000 | $103,026 | ||||
| Net interest margin (4) | 3.57% | 3.32% | ||||
| Average interest-earning assets to interest-bearing liabilities | 143.11% | 132.60% |
(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: | For the Six Months Ended September 30, 2024 Average Outstanding Balance | Interest | Average Yield/Rate | 2023 Average Outstanding Balance | Interest | Average Yield/Rate |
|---|---|---|---|---|---|---|
| Loans | $383,624 | $10,904 | 5.68% | $355,286 | $8,909 | 5.02% |
| Mortgage-backed securities | 53,421 | 981 | 3.67% | 51,249 | 694 | 2.71% |
| Investment securities (1) | 7,168 | 84 | 2.34% | 7,506 | 93 | 2.48% |
| Interest-bearing deposits and other | 7,607 | 91 | 2.39% | 3,999 | 103 | 5.15% |
| Total interest-earning assets | 451,820 | 12,060 | 5.34% | 418,040 | 9,799 | 4.69% |
| Non-interest-earning assets | 15,847 | 17,808 | ||||
| Total assets | $467,667 | $435,848 | ||||
| Interest-bearing liabilities: | ||||||
| Savings accounts | $42,510 | $78 | 0.37% | $46,323 | $54 | 0.23% |
| Money market accounts | 26,380 | 277 | 2.10% | 22,961 | 180 | 1.57% |
| NOW accounts | 123,193 | 1,017 | 1.65% | 141,716 | 1,060 | 1.50% |
| Certificates of deposit | 101,820 | 2,258 | 4.44% | 77,701 | 1,426 | 3.67% |
| Individual retirement accounts | 16,880 | 307 | 3.64% | 15,449 | 160 | 2.07% |
| Total interest-bearing deposits | 310,783 | 3,937 | 2.53% | 304,150 | 2,880 | 1.89% |
| Borrowings | 3,463 | 99 | 5.72% | 3,798 | 102 | 5.37% |
| Total interest-bearing liabilities | 314,246 | 4,036 | 2.57% | 307,948 | 2,982 | 1.94% |
| Other non-interest-bearing liabilities | 93,923 | 89,022 | ||||
| Total liabilities | 408,169 | 396,970 | ||||
| Total equity | 59,498 | 38,878 | ||||
| Total liabilities and total equity | $467,667 | $435,848 | ||||
| Net interest income | $8,024 | $6,817 | ||||
| Net interest rate spread (2) | 2.77% | 2.75% | ||||
| Net interest-earning assets (3) | $137,574 | $110,092 | ||||
| Net interest margin (4) | 3.55% | 3.26% | ||||
| Average interest-earning assets to interest-bearing liabilities | 143.78% | 135.75% |
(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 and Six Months Ended September 30, 2024 and 2023
General. For the three months ended September 30, 2024, we had net income of $952,000, compared to net income of $973,000 for the three months ended September 30, 2023. For the six months ended September 30, 2024 and September 30, 2023, net income remained consistent at $1.9 million.
Interest and Dividend Income. Interest and dividend income increased $1.1 million, or 22.2%, to $6.1 million for the three months ended September 30, 2024 from $5.0 million for the three months ended September 30, 2023. 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 and loan growth.
Interest income on loans increased $1.0 million, or 21.9%, to $5.6 million for the three months ended September 30, 2024 from $4.6 million for the three months ended September 30, 2023. The average balance of loans increased $31.0 million, or 8.7%, to $388.9 million for the three months ended September 30, 2024 from $357.9 million for the three months ended September 30, 2023. The increase was primarily due to our continued focus on growing our loan portfolio consistent with maintaining asset quality. Our yield on loans increased 63 basis points to 5.76% for the three months ended September 30, 2024 from 5.13% for the three months ended September 30, 2023. The increase in yield was due to increases in market interest rates over the period.
Interest income on securities increased $133,000, or 33.3%, to $532,000 for the three months ended September 30, 2024 from $399,000 for the three months ended September 30, 2023, due to a 77 basis point increase in the average yield from 2.77% for the three months ended September 30, 2023 to 3.54% for the three months ended September 30, 2024. The average balance of securities increased $2.5 million, or 4.4%, to $60.2 million for the three months ended September 30, 2024 from $57.7 million for the three months ended September 30, 2023.
Interest and dividend income increased $2.3 million, or 23.1%, to $12.1 million for the six months ended September 30, 2024 from $9.8 million for the six months ended September 30, 2023. 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 and loan growth.
Interest income on loans increased $2.0 million, or 22.4%, to $10.9 million for the six months ended September 30, 2024 from $8.9 million for the six months ended September 30, 2023. The average balance of loans increased $28.3 million, or 8.0%, to $383.6 million for the six months ended September 30, 2024 from $355.3 million for the six months ended September 30, 2023. This increase was primarily due to our continued focus on growing our loan portfolio consistent with maintaining asset quality. Our yield on loans increased 66 basis points to 5.68% for the six months ended September 30, 2024 from 5.02% for the six months ended September 30, 2023. The increase in yield was due to increases in market interest rates.
Interest income on securities increased $278,000, or 35.3%, to $1.1 million for the six months ended September 30, 2024 from $787,000 for the six months ended September 30, 2023, due to an 84 basis point increase in the average yield from 2.68% for the six months ended September 30, 2023 to 3.52% for the six months ended September 30, 2024. The average balance of securities increased $1.8 million, or 3.1%, to $60.6 million for the six months ended September 30, 2024 from $58.8 million for the six months ended September 30, 2023.
Interest Expense. Interest expense increased $540,000, or 34.8%, to $2.1 million for the three months ended September 30, 2024 compared to $1.6 million for the three months ended September 30, 2023, due to higher costs of interest-bearing liabilities.
Interest expense on deposits increased $499,000, or 32.9%, to $2.0 million for the three months ended September 30, 2024 compared to $1.5 million for the three months ended September 30, 2023. The increase was due to a 64 basis point increase in the average cost of deposits to 2.58% for the three months ended September 30, 2024 from 1.94% for the three months ended September 30, 2023. 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 $24.0 million to $105.5 million for the three months ended September 30, 2024 from $81.5 million for the three months ended September 30, 2023.
Interest expense increased $1.0 million, or 35.3%, to $4.0 million for the six months ended September 30, 2024 compared to $3.0 million for the six months ended September 30, 2023, due to higher costs of interest-bearing liabilities.
Interest expense on deposits increased $1.0 million, or 36.7%, to $3.9 million for the six months ended September 30, 2024 compared to $2.9 million for the six months ended September 30, 2023. The increase was due to a 64 basis point increase in the average cost of deposits to 2.53% for the six months ended September 30, 2024 from 1.89% for the six months ended September 30, 2023. 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 $24.1 million to $101.8 million for the six months ended September 30, 2024 from $77.7 million for the six months ended September 30, 2023.
Net Interest Income. Net interest income before provision for credit losses increased $576,000, or 16.5%, to $4.1 million for the three months ended September 30, 2024 compared to $3.5 million for the three months ended September 30, 2023.
Our interest rate spread decreased six basis points to 2.78% for the three months ended September 30, 2024, compared to 2.84% for the three months ended September 30, 2023, and our net interest margin increased 25 basis points to 3.57% for the three months ended September 30, 2024 compared to 3.32% for the three months ended September 30, 2023.
Net interest income before provision for credit losses increased $1.2 million, or 17.7%, to $8.0 million for the six months ended September 30, 2024 compared to $6.8 million for the six months ended September 30, 2023.
Our interest rate spread increased two basis points to 2.77% for the six months ended September 30, 2024, compared to 2.75% for the six months ended September 30, 2023, and our net interest margin increased 29 basis points to 3.55% for the six months ended September 30, 2024 compared to 3.26% for the six months ended September 30, 2023.
Provision for Credit Losses. During the three months ended September 30, 2024, we recorded a provision for credit losses of $4,000. During the three months ended September 30, 2023, we recorded a reversal of provision for credit losses of $60,000.
During the six months ended September 30, 2024, we recorded a reversal of provision for credit losses of $1,000. During the six months ended September 30, 2023, we recorded a reversal of provision for credit losses of $92,000. We will continue to assess and evaluate the estimated future credit loss impact of current market conditions in subsequent reporting periods, which will be highly dependent on credit quality, macroeconomic forecasts and conditions, as well as the composition of our loan and available-for-sale securities portfolios.
Non-Interest Income. The following table shows the components of non-interest income for periods presented.
(Dollars in thousands)
(Dollars in thousands)
| Non-interest income: | Three months ended September 30, 2024 | 2023 | Six months ended September 30, 2024 | 2023 |
|---|---|---|---|---|
| Servicing fees on loans | $36 | $76 | $68 | $162 |
| Service charges on deposit accounts | 199 | 198 | 391 | 385 |
| Interchange income | 326 | 294 | 648 | 599 |
| Gain on sale of loans | 43 | 72 | 91 | 113 |
| Gain from real estate owned and other repossessed assets, net | 1 | 3 | 1 | 4 |
| Other non-interest income | 19 | 38 | 37 | 65 |
| Total non-interest income | $624 | $681 | $1,236 | $1,328 |
Noninterest income decreased $57,000, or 8.4%, to $624,000 for the three months ended September 30, 2024 from $681,000 for the three months ended September 30, 2023. Servicing fees on loans decreased $40,000, or 52.6%, to $36,000 for the three months ended September 30, 2024 compared to $76,000 for the three months ended September 30, 2023.
Noninterest income decreased $92,000, or 6.9%, to $1.2 million for the six months ended September 30, 2024 from $1.3 million for the six months ended September 30, 2023. Servicing fees on loans decreased $94,000, or 58.0%, to $68,000 for the six months ended September 30, 2024 compared to $162,000 for the six months ended September 30, 2023.
Non-Interest Expense. The following table shows the components of non-interest expense for the periods presented.
(Dollars in thousands)
(Dollars in thousands)
| Non-interest expense: | Three months ended September 30, 2024 | 2023 | Six months ended September 30, 2024 | 2023 |
|---|---|---|---|---|
| Salaries and employee benefits | $1,938 | $1,624 | $3,781 | $3,188 |
| Occupancy and equipment | 270 | 259 | 522 | 501 |
| Data processing | 522 | 464 | 984 | 907 |
| Federal deposit insurance premiums | 49 | 67 | 93 | 148 |
| Debit card processing | 70 | 64 | 134 | 124 |
| Advertising | 71 | 90 | 146 | 158 |
| Other general and administrative expenses | 601 | 423 | 1,334 | 801 |
| Total non-interest expense | $3,521 | $2,991 | $6,994 | $5,827 |
27
Noninterest expense increased $530,000, or 17.7% to $3.5 million for the three months ended September 30, 2024 from $3.0 million for the three months ended September 30, 2023. Salaries and employee benefits expense increased $314,000, or 19.3%, to $1.9 million for the three months ended September 30, 2024 from $1.6 million for the three months ended September 30, 2023, due to additional lenders hired by the Association. Additionally, the Association entered into an Employee Stock Ownership Plan at the closing of the conversion, which resulted in additional ESOP related expenses of $38,000 during the three months ended September 30, 2024. Other general and administrative expenses increased $178,000, or 42.1%, to $601,000 for the three months ended September 30, 2024 from $423,000 for the three months ended September 30, 2023, due to a combination of increases in insurance, auditing and consulting fees. These additional fees relate to public filing requirements and further regulatory compliance consulting.
Noninterest expense increased $1.2 million, or 20.0% to $7.0 million for the six months ended September 30, 2024 from $5.8 million for the six months ended September 30, 2023. Salaries and employee benefits expense increased $593,000, or 18.6%, to $3.8 million for the six months ended September 30, 2024 from $3.2 million for the six months ended September 30, 2023, due to additional lenders hired by the Association. Additionally, the Association entered into an Employee Stock Ownership Plan at the closing of the conversion, which resulted in additional ESOP related expenses of $71,000 during the six months ended September 30, 2024. Other general and administrative expenses increased $533,000, or 66.5%, to $1.3 million for the six months ended September 30, 2024 from $801,000 for the six months ended September 30, 2023, due to a combination of increases in insurance, auditing and consulting fees. These additional fees relate to public filing requirements and further regulatory compliance consulting.
Income Tax Expense. We recognized income tax expense of $205,000 for the three months ended September 30, 2024 and income tax expense of $259,000 for the three months ended September 30, 2023, respectively, resulting in effective rates of 17.7% for the three months ended September 30, 2024 and 21.0% for the three months ended September 30, 2023.
We recognized income tax expense of $412,000 for the six months ended September 30, 2024 and income tax expense of $491,000 for the six months ended September 30, 2023, respectively, resulting in effective rates of 18.2% for the six months ended September 30, 2024 and 20.4% for the six months ended September 30, 2023. The most significant difference between our effective tax rate and statutory rates results from investment partnership tax credits and tax-exempt municipal bond interest.
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 September 30, 2024, 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 | $18,180 | (1.56)% |
| 300 | 18,270 | (1.08) |
| 200 | 18,350 | (0.64) |
| 100 | 18,427 | (0.23) |
| Base | 18,469 | — |
| (100) | 18,477 | 0.04 |
| (200) | 18,496 | 0.15 |
| (300) | 18,508 | 0.21 |
| (400) | 18,498 | 0.16 |
(1) Assumes a gradual change in interest rates at all maturities over a one-year period.
The table above indicates that at September 30, 2024, we would have experienced a 0.64% decrease in NII in the event of a gradual, one-year 200 basis point increase in market interest rates, and a 0.15% 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 September 30, 2024, 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 | $96,158 | $962 | 1.01% | 23.58% | 275 |
| 300 | 96,753 | 1,557 | 1.64 | 23.08 | 225 |
| 200 | 96,273 | 1,077 | 1.13 | 22.34 | 151 |
| 100 | 94,702 | (494) | (0.52) | 21.37 | 54 |
| Base | 95,196 | — | — | 20.83 | — |
| (100) | 86,280 | (8,916) | (9.37) | 18.37 | (246) |
| (200) | 75,668 | (19,528) | (20.51) | 15.75 | (508) |
| (300) | 61,831 | (33,365) | (35.05) | 12.59 | (824) |
| (400) | 64,650 | (30,546) | (32.09) | 12.90 | (793) |
(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 September 30, 2024, we would have experienced a 1.13% increase in MVE in the event of an instantaneous parallel 200 basis point increase in the market interest rates and a 20.51% 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 $40.6 million at September 30, 2024. The FHLB has sole discretion to deny additional advances. 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. Additionally, the Association had the capacity to borrow $5.0 million from a private bankers’ bank at September 30, 2024.
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 six months ended September 30, 2024, cash flows from operating, investing, and financing activities resulted in a net decrease in cash and cash equivalents of $1.6 million. Net cash provided by operating activities amounted to $1.7 million, primarily due to net income of $1.9 million, depreciation of $259,000, changes in accrued interest payable of $262,000 and changes of other assets of $249,000, partially offset by changes in accrued expenses and other liabilities of $930,000. Net cash used in investing activities amounted to $19.0 million, primarily due to a net increase in loans of $18.8 million and the purchase of available-for-sale investment securities of $1.9 million, partially offset by proceeds from paydowns of available-for-sale investment securities of $4.4 million. Net cash provided by financing activities amounted to $15.8 million, primarily due to an increase in deposits of $16.7 million.
For the six months ended September 30, 2023, cash flows from operations, investing, and financing activities resulted in a net increase in cash and cash equivalents of $4.8 million. Net cash provided by operating activities amounted to $1.6 million, primarily due to net income of $1.9 million. Net cash used in investing activities amounted to $12.2 million, primarily due to a net increase in loans of $13.0 million and the purchase of available-for-sale investment securities of $3.8 million, partially offset by proceeds from paydowns of available-for-sale investment securities of $4.7 million. Net cash provided by financing activities amounted to $15.4 million, primarily due to a net increase in deposits of $16.1 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. A 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 2024-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Interest expense | 3 months2024-07-01 to 2024-09-30 | $2.1m | us-gaap:InterestExpense |
| Interest expense | 6 months2024-04-01 to 2024-09-30 | $4.0m | us-gaap:InterestExpense |
| Income tax | 3 months2024-07-01 to 2024-09-30 | $205.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months2024-04-01 to 2024-09-30 | $412.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-07-01 to 2024-09-30 | $952.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months2024-04-01 to 2024-09-30 | $1.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2024-07-01 to 2024-09-30 | $0.25 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months2024-04-01 to 2024-09-30 | $0.49 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2024-07-01 to 2024-09-30 | $0.25 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months2024-04-01 to 2024-09-30 | $0.49 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2024-07-01 to 2024-09-30 | 3,821,330 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months2024-04-01 to 2024-09-30 | 3,819,680 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months2024-04-01 to 2024-09-30 | $1.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months2024-04-01 to 2024-09-30 | $2.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2024-09-30 | $9.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | At period end2024-09-30 | $482.0m | us-gaap:Assets |
| Total liabilities | At period end2024-09-30 | $400.4m | us-gaap:Liabilities |
| Shareholders' equity | At period end2024-09-30 | $81.6m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950170-24-125525. Last ingested by Listed: Oct 24, 2026, 15:16 ET. Listed shows no prices and gives no investment advice.