Attached files

file filename
EX-32.2 - EX-32.2 - Equitable Financial Corp.eqfn-20170331ex322a96c54.htm
EX-32.1 - EX-32.1 - Equitable Financial Corp.eqfn-20170331ex321b71c7d.htm
EX-31.2 - EX-31.2 - Equitable Financial Corp.eqfn-20170331ex31247c22c.htm
EX-31.1 - EX-31.1 - Equitable Financial Corp.eqfn-20170331ex3119c77dd.htm
EX-10.7 - EX-10.7 - Equitable Financial Corp.eqfn-20170331ex107ff9509.htm
EX-10.6 - EX-10.6 - Equitable Financial Corp.eqfn-20170331ex106a03ef4.htm
EX-10.5 - EX-10.5 - Equitable Financial Corp.eqfn-20170331ex10506b8c7.htm
EX-10.4 - EX-10.4 - Equitable Financial Corp.eqfn-20170331ex104a7ee52.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2017

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from ____________________ to ____________________

 

Commission File No. 333-202707

 

Equitable Financial Corp.

(Exact name of registrant as specified in its charter)

 

Maryland

    

32-0467709

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

113 North Locust Street

 

 

Grand Island, NE

 

68801

(Address of principal executive offices)

 

(Zip Code)

 

(308) 382-3136

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

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

 

Shares of the Registrant’s common stock, par value $0.01 per share,  3,431,963 issued and outstanding as of May 11, 2017.

 

 

 


 

EQUITABLE FINANCIAL CORP.

FORM 10-Q

 

INDEX

 

 

 

Page

Part I.  Financial Information 

 

 

 

Item 1. 

Financial Statements

3

 

 

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Income

4

 

Consolidated Statements of Comprehensive Income

5

 

Consolidated Statement of Changes in Stockholders’ Equity

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Consolidated Financial Statements

9

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

41

 

 

 

Item 4. 

Controls and Procedures

41

 

 

 

Part II.  Other Information 

 

 

 

Item 1. 

Legal Proceedings

43

 

 

 

Item 1A. 

Risk Factors

43

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 3. 

Defaults upon Senior Securities

43

 

 

 

Item 4. 

Mine Safety Disclosures

43

 

 

 

Item 5. 

Other Information

43

 

 

 

Item 6. 

Exhibits

44

 

 

 

Signatures 

45

 

 

2


 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Equitable Financial Corp. and Subsidiary

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

March 31, 2017

    

June 30, 2016

 

Assets

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

4,830,944

 

$

2,567,296

 

Interest-earning deposits

 

 

2,576,000

 

 

12,380,000

 

 

 

 

7,406,944

 

 

14,947,296

 

Securities available-for-sale

 

 

1,433,716

 

 

664,755

 

Securities held-to-maturity

 

 

744,640

 

 

781,740

 

Federal Home Loan Bank stock, at cost

 

 

231,700

 

 

229,900

 

Loans, net of allowance for loan losses of $3,300,000 and $2,947,000, respectively

 

 

220,944,659

 

 

198,309,920

 

Premises and equipment, net

 

 

5,459,920

 

 

5,274,461

 

Foreclosed assets, net

 

 

223,200

 

 

461,847

 

Accrued interest receivable

 

 

1,233,302

 

 

1,147,467

 

Deferred taxes, net

 

 

1,495,039

 

 

1,416,093

 

Other assets

 

 

2,085,724

 

 

1,853,698

 

 

 

 

 

 

 

 

 

Total assets

 

$

241,258,844

 

$

225,087,177

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

28,414,452

 

$

24,296,166

 

Interest-bearing deposits

 

 

174,473,915

 

 

162,666,186

 

 

 

 

202,888,367

 

 

186,962,352

 

Advance payments from borrowers for taxes and insurance

 

 

445,546

 

 

387,166

 

Accrued interest payable and other liabilities

 

 

1,416,707

 

 

1,198,850

 

Total liabilities

 

 

204,750,620

 

 

188,548,368

 

 

 

 

 

 

 

 

 

Common stock in ESOP subject to contingent repurchase obligation

 

 

681,820

 

 

564,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value, 25,000,000 shares authorized 3,431,963 and 3,477,157 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively

 

 

34,320

 

 

34,771

 

Additional paid-in capital

 

 

26,405,683

 

 

26,844,426

 

Retained earnings

 

 

12,089,781

 

 

11,239,913

 

Unearned ESOP shares

 

 

(1,142,270)

 

 

(1,246,045)

 

Shares reserved for stock compensation

 

 

(861,060)

 

 

(338,332)

 

Accumulated other comprehensive income/(loss) net of tax

 

 

(18,230)

 

 

4,076

 

Reclassification of ESOP shares

 

 

(681,820)

 

 

(564,723)

 

Total stockholders’ equity

 

 

35,826,404

 

 

35,974,086

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

241,258,844

 

$

225,087,177

 

 

See Notes to Consolidated Financial Statements.

3


 

Equitable Financial Corp. and Subsidiary

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

    

March 31, 2017

    

March 31, 2016

    

March 31, 2017

    

March 31, 2016

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

2,301,482

 

$

2,012,359

 

$

6,737,414

 

$

6,125,911

 

Securities

 

 

13,417

 

 

9,797

 

 

32,500

 

 

70,763

 

Other

 

 

5,329

 

 

30,788

 

 

21,704

 

 

49,387

 

Total interest income

 

 

2,320,228

 

 

2,052,944

 

 

6,791,618

 

 

6,246,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

281,285

 

 

271,490

 

 

813,465

 

 

777,262

 

Federal Home Loan Bank borrowings

 

 

1,011

 

 

 —

 

 

1,011

 

 

 —

 

Other

 

 

595

 

 

186

 

 

1,357

 

 

630

 

Total interest expense

 

 

282,891

 

 

271,676

 

 

815,833

 

 

777,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

2,037,337

 

 

1,781,268

 

 

5,975,785

 

 

5,468,169

 

Provision for loan losses

 

 

60,830

 

 

2,023

 

 

382,703

 

 

159,368

 

Net interest income after provision for loan losses

 

 

1,976,507

 

 

1,779,245

 

 

5,593,082

 

 

5,308,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

150,976

 

 

149,571

 

 

468,544

 

 

435,027

 

Brokerage fee income

 

 

160,542

 

 

147,257

 

 

545,779

 

 

460,795

 

Gain on sale of loans

 

 

103,721

 

 

151,618

 

 

595,439

 

 

564,680

 

Other loan fees

 

 

57,644

 

 

66,672

 

 

208,947

 

 

206,240

 

Other income

 

 

38,930

 

 

29,119

 

 

107,231

 

 

102,403

 

Total noninterest income

 

 

511,813

 

 

544,237

 

 

1,925,940

 

 

1,769,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

1,225,488

 

 

1,093,182

 

 

3,538,488

 

 

3,356,930

 

Director and committee fees

 

 

41,557

 

 

39,192

 

 

122,342

 

 

120,242

 

Data processing fees

 

 

146,346

 

 

142,544

 

 

433,039

 

 

399,921

 

Occupancy and equipment

 

 

247,386

 

 

224,508

 

 

729,916

 

 

656,208

 

Regulatory fees and deposit insurance premium

 

 

42,804

 

 

52,926

 

 

126,003

 

 

152,689

 

Advertising and public relations

 

 

58,207

 

 

56,639

 

 

153,379

 

 

172,392

 

Insurance and bond premiums

 

 

23,860

 

 

23,642

 

 

71,604

 

 

75,406

 

Professional fees

 

 

53,198

 

 

71,329

 

 

310,931

 

 

398,963

 

Supplies, telephone and postage

 

 

75,480

 

 

67,173

 

 

207,570

 

 

203,138

 

Other expenses

 

 

160,028

 

 

154,852

 

 

487,081

 

 

452,433

 

Total noninterest expense

 

 

2,074,354

 

 

1,925,987

 

 

6,180,353

 

 

5,988,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

413,966

 

 

397,495

 

 

1,338,669

 

 

1,089,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(138,620)

 

 

(155,001)

 

 

(488,801)

 

 

(350,028)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

275,346

 

$

242,494

 

$

849,868

 

$

739,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.08

 

$

0.07

 

$

0.26

 

$

0.23

 

Diluted earnings per share

 

$

0.08

 

$

0.07

 

$

0.25

 

$

0.23

 

 

See Notes to Consolidated Financial Statements.

4


 

Equitable Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

    

March 31, 2017

    

March 31, 2016

    

March 31, 2017

    

March 31, 2016

 

 

Net income

 

$

275,346

 

$

242,494

 

$

849,868

 

$

739,596

 

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on securities available-for-sale, net of tax

 

 

4,941

 

 

4,086

 

 

(22,306)

 

 

6,031

 

 

Comprehensive income

 

$

280,287

 

$

246,580

 

$

827,562

 

$

745,627

 

 

 

See Notes to Consolidated Financial Statements.

 

 

5


 

Equitable Financial Corp. and Subsidiary

Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended March 31, 2017

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

Accumulated

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserved for

 

Other

 

Reclassified

 

 

 

 

 

Common

 

Additional

 

Retained

 

Unearned

 

Stock

 

Comprehensive

 

on ESOP

 

 

 

 

    

Stock

    

Paid-in Capital

    

Earnings

    

ESOP Shares

    

Compensation

    

Income

    

Shares

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2016

 

$

34,771

 

$

26,844,426

 

$

11,239,913

 

$

(1,246,045)

 

$

(338,332)

 

$

4,076

 

$

(564,723)

 

$

35,974,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

849,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

849,868

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,306)

 

 

 

 

 

(22,306)

 

Release of 11,894 unearned ESOP shares

 

 

 

 

 

7,840

 

 

 

 

 

103,775

 

 

 

 

 

 

 

 

 

 

 

111,615

 

Stock compensation expense

 

 

 

 

 

(47,835)

 

 

 

 

 

 

 

 

105,536

 

 

 

 

 

 

 

 

57,701

 

Equity Incentive Plan stock issued

 

 

635

 

 

627,629

 

 

 

 

 

 

 

 

(628,264)

 

 

 

 

 

 

 

 

 -

 

Stock Buyback

 

 

(1,086)

 

 

(1,026,377)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,027,463)

 

Reclassification due to release and changes in fair value of common stock in ESOP subject to contingent repurchase obligation of ESOP shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(117,097)

 

 

(117,097)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2017

 

$

34,320

 

$

26,405,683

 

$

12,089,781

 

$

(1,142,270)

 

$

(861,060)

 

$

(18,230)

 

$

(681,820)

 

$

35,826,404

 

 

See Notes to Consolidated Financial Statements.

 

 

6


 

Equitable Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

    

March 31, 2017

    

March 31, 2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

849,868

 

$

739,596

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

254,167

 

 

260,212

 

Federal Home Loan Bank stock dividends

 

 

(1,800)

 

 

(2,400)

 

ESOP expense

 

 

111,615

 

 

72,697

 

Stock compensation expense

 

 

57,701

 

 

59,116

 

Amortization of deferred loan origination costs, net

 

 

369,661

 

 

345,516

 

Amortization of premiums and discounts

 

 

8,641

 

 

12,114

 

Gain on sale of loans

 

 

(595,439)

 

 

(564,680)

 

(Gain)/Loss on sale of foreclosed assets

 

 

(4,579)

 

 

11,008

 

Loss on disposal of premises and equipment

 

 

 —

 

 

50,293

 

Provision for loan losses

 

 

382,703

 

 

159,368

 

Deferred taxes

 

 

(67,456)

 

 

244,109

 

Loans originated for sale

 

 

(23,044,937)

 

 

(21,413,781)

 

Proceeds from sale of loans

 

 

23,355,172

 

 

18,410,861

 

Loss on investment in partnership

 

 

34,859

 

 

28,500

 

Changes in:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(85,835)

 

 

(82,064)

 

Other assets

 

 

(50,217)

 

 

(12,260)

 

Accrued interest payable and other liabilities

 

 

202,857

 

 

170,328

 

Net cash provided/(used) by operating activities

 

 

1,776,981

 

 

(1,511,467)

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Net change in loans

 

 

(23,303,567)

 

 

(9,731,377)

 

Proceeds from sale of foreclosed assets, net

 

 

243,226

 

 

115,500

 

Proceeds from maturity of time deposits with financial institutions

 

 

 —

 

 

500,000

 

Securities available-for-sale:

 

 

 

 

 

 

 

Proceeds from calls and principal repayments

 

 

175,728

 

 

153,027

 

Purchases

 

 

(985,400)

 

 

(469,253)

 

Securities held-to-maturity:

 

 

 

 

 

 

 

Proceeds from calls and principal repayments

 

 

35,374

 

 

2,481,550

 

Purchase of premises and equipment

 

 

(439,626)

 

 

(98,393)

 

Net cash used in investing activities

 

 

(24,274,265)

 

 

(7,048,946)

 

 

(Continued)

7


 

Equitable Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

    

March 31, 2017

    

March 31, 2016

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net change in deposits

 

$

15,926,015

 

$

21,804,620

 

Proceeds from Federal Home Loan Bank borrowings

 

 

2,620,000

 

 

 —

 

Repayments of Federal Home Loan Bank borrowings

 

 

(2,620,000)

 

 

 —

 

Net change in advance payments from borrowers for taxes and insurance

 

 

58,380

 

 

50,738

 

Stock Buyback

 

 

(1,027,463)

 

 

 —

 

Purchase of ESOP Shares

 

 

 —

 

 

(951,912)

 

Expenses and return of proceeds in advance of offering

 

 

 —

 

 

(2,555,176)

 

Net cash provided by financing activities

 

 

14,956,932

 

 

18,348,270

 

 

 

 

 

 

 

 

 

Increase/(Decrease) in cash and cash equivalents

 

 

(7,540,352)

 

 

9,787,857

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

Beginning

 

 

14,947,296

 

 

21,512,653

 

 

 

 

 

 

 

 

 

Ending

 

$

7,406,944

 

$

31,300,510

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Interest paid on deposits and borrowings

 

$

816,262

 

$

768,607

 

Income taxes paid

 

$

162,879

 

$

145,156

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

8


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

Note 1.Basis of Presentation

 

The accompanying consolidated financial statements of Equitable Financial Corp. (the “Company”) and its wholly owned subsidiary Equitable Bank (the “Bank”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with SEC rules and regulations. Accordingly, the statements do not include all the information and footnotes required by GAAP for complete financial statements. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto that were included in the Company’s annual report for the year ended June 30, 2016.  The consolidated balance sheet of the Company as of June 30, 2016 has been derived from the audited consolidated balance sheet of the Company as of that date.  All significant intercompany transactions are eliminated in consolidation.  In the opinion of the Company’s management, all adjustments necessary (i) for a fair presentation of the financial statements for the interim periods included herein and (ii) to make such financial statements not misleading have been made and are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year.

 

In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period.  Actual results could differ from those estimates.  For further information with respect to significant accounting policies followed by the Company in preparation of the financial statements, refer to the Company’s annual report for the year ended June 30, 2016.

 

The Bank is a federally chartered stock savings bank and a member of the Federal Home Loan Bank (“FHLB”) system. The Bank maintains insurance on deposit accounts with the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”).  

 

Note 2.Stock Conversion

 

On July 8, 2015, Equitable Financial, MHC, the Company’s former federally chartered mutual holding company, consummated its mutual-to-stock conversion, and the Company consummated its initial stock offering. In the Offering, the Company sold 1,983,160 shares of its common stock, par value $0.01 per share, at $8.00 per share in a subscription offering and community offering, including 118,989 shares, equal to 6.0% of the shares sold in the offering, to the Equitable Bank employee stock ownership plan.

 

In accordance with applicable federal conversion regulations, at the time of the completion of our mutual-to-stock conversion, we established a liquidation account in an amount equal to the Company’s total equity as of the latest balance sheet date in the final prospectus used in the Conversion. Each eligible account holder or supplemental account holder is entitled to a proportionate share of this liquidation account in the event of a complete liquidation of the Bank, and only in such event. This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record as of any June 30 and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after Conversion in the related deposit balance.

 

Following completion of the Conversion, the Bank may not declare, pay a dividend on, or repurchase any of its capital stock of the Bank, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements.

 

Note 3.New Accounting Pronouncements

 

In May 2014, the FASB issued Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers.  ASU 2014-09 is intended to provide robust framework for addressing revenue recognitition guidance related to contractual rights and obligations.  ASU 2014-09 is effective for annual periods beginning after December 15, 2017 and is not expected to have a material impact on the Company’s condoliated financial statements. 

9


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

In On February 25, 2016, the FASB issued ASU 2016-02, intended to improve financial reporting about leasing transactions. The ASU is effective for the Company with the interim period beginning January 1, 2019. We are currently evaluating the effect of this proposal to our financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The purpose of this Update is to simplify the accounting for share-based payment award transactions. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. This ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The purpose of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity. The Update replaces the current incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is expected to have an impact on the Company’s consolidated financial statements. The Company is currently evaluating the effect this will have on its financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows; Classification of Certain Cash Receipts and Cash Payments.  The purpose of this Update is to address existing diversity in practice related to specific cash flow issues.  This Update will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory.  The purpose of this Update is to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other.  The purposes of this Update is to simplify how an entity is required to test goodwill for impairment.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

In February 2017, the FASB issued ASU 2017-05 Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets.  The purpose of this Update is to clarify the scope for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers and add guidance for partial sales of nonfinancing assets.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

In March 2017, the FASB issues ASU 2017-08 Receivables – Nonrefundable Fees and Other Costs.  The purpose of this Update is to shorten the amortization period of certain callable debt securities held at a premium.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

 

Note 4.Securities

 

The fair value of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

March 31, 2017

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. Government-sponsored agencies securities

 

$

986,306

 

$

 —

 

$

(27,274)

 

$

959,032

 

Residential mortgage-backed securities

 

 

475,031

 

 

 —

 

 

(347)

 

 

474,684

 

 

 

$

1,461,337

 

$

 —

 

$

(27,621)

 

$

1,433,716

 

 

10


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

June 30, 2016

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Residential mortgage-backed securities

 

$

658,579

 

$

6,176

 

$

 —

 

$

664,755

 

 

The carrying amount, unrecognized gross gains and losses, and fair value of securities held-to-maturity are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

March 31, 2017

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Residential mortgage-backed securities

 

$

144,501

 

$

11,208

 

$

 —

 

$

155,709

 

Municipal securities

 

 

600,139

 

 

 —

 

 

(155)

 

 

599,984

 

 

 

$

744,640

 

$

11,208

 

$

(155)

 

$

755,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

June 30, 2016

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Residential mortgage-backed securities

 

$

180,035

 

$

15,281

 

$

 —

 

$

195,316

 

Municipal securities

 

 

601,705

 

 

4,093

 

 

 —

 

 

605,798

 

 

 

$

781,740

 

$

19,374

 

$

 —

 

$

801,114

 

 

Securities available-for-sale and held-to-maturity consist of investments in bonds securitized by U.S. Government sponsored agencies, local municipal securities and mortgage-backed securities securitized by the Government National Mortgage Association.

 

The contractual maturities of the residential mortgage-backed securities at March 31, 2017 are not disclosed because the securities are not due at a single maturity date.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Approximately $400,000 in municipal securities will mature in the year ending June 30, 2019 with the remaining balance maturing in the year ending June 30, 2020.  Approximately $985,000 of U.S. Government sponsored agency bonds will mature in the year ending June 30, 2023.

 

There were no sales of securities for the nine months ended March 31, 2017 and 2016.

 

The duration of gross unrealized losses is not disclosed as such amounts are immaterial to the consolidated financial statements. The Company has not recognized other-than-temporary impairment on any securities for the nine months ended March 31, 2017 and 2016.

 

Note 5.Loans

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at their outstanding unpaid principal balances, less an allowance for loan losses, premiums and discounts on loans purchased, and net deferred loan fees/costs. Interest income on loans is recognized over the term of the loan and is calculated using the simple interest method on principal amounts outstanding. Direct loan origination fees and costs are generally being deferred and the net amounts amortized as an adjustment of the related loan's yield. The Company generally amortizes these amounts over the contractual life. Direct loan origination fees and costs related to loans sold to unrelated third parties are recognized as income or expense in the current consolidated statement of income.

 

The Company’s portfolio segments are as follows:

 

·

Commercial

·

Agricultural

·

Residential real estate

11


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

·

Other

 

The Company’s classes of loans are as follows:

 

·

Commercial – operating

·

Commercial – real estate

·

Agricultural – operating

·

Agricultural – real estate

·

Residential real estate – 1-4 family

·

Residential real estate – home equity

·

Other – construction and land

·

Other – consumer

 

Loans are as follows:

 

 

 

 

 

 

 

 

 

 

    

March 31, 2017

    

June 30, 2016

 

Commercial:

 

 

 

 

 

 

 

Operating

 

$

16,904,455

 

$

15,355,676

 

Real estate

 

 

78,315,059

 

 

67,698,929

 

Agricultural:

 

 

 

 

 

 

 

Operating

 

 

22,612,056

 

 

22,942,560

 

Real estate

 

 

30,037,940

 

 

24,965,541

 

Residential real estate:

 

 

 

 

 

 

 

1-4 family

 

 

41,636,099

 

 

40,309,797

 

Home equity

 

 

11,171,511

 

 

12,644,624

 

Other:

 

 

 

 

 

 

 

Construction and land

 

 

19,161,346

 

 

13,210,393

 

Consumer

 

 

3,808,313

 

 

3,566,917

 

Total loans

 

 

223,646,779

 

 

200,694,437

 

 

 

 

 

 

 

 

 

Deferred loan origination costs, net

 

 

597,880

 

 

562,483

 

Allowance for loan losses

 

 

(3,300,000)

 

 

(2,947,000)

 

 

 

 

(2,702,120)

 

 

(2,384,517)

 

 

 

 

 

 

 

 

 

Loans, net

 

$

220,944,659

 

$

198,309,920

 

 

For all portfolio segments, the allowance for loan losses is maintained at the level considered adequate by management of the Company to provide for losses that are probable. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Subsequent recoveries, if any, are credited to the allowance. In determining the adequacy of the allowance balance, the Company makes continuous evaluations of the loan portfolio and related off-balance sheet commitments, considers current economic conditions, historical loan loss experience, review of specific problem loans and other factors.

 

Changes in the allowance for loan losses, by portfolio segment are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Residential

    

 

    

 

 

 

 

Commercial

 

Agricultural

 

Real Estate

 

Other

 

Total

 

 

 

For the three months ended March 31, 2017

 

Balance, beginning

 

$

1,468,000

 

$

848,000

 

$

635,000

 

$

287,000

 

$

3,238,000

 

Provision charged to expense

 

 

53,020

 

 

(9,000)

 

 

(19,838)

 

 

36,648

 

 

60,830

 

Recoveries

 

 

980

 

 

 —

 

 

932

 

 

1,402

 

 

3,314

 

Loans charged off

 

 

 —

 

 

 —

 

 

(94)

 

 

(2,050)

 

 

(2,144)

 

Balance, ending

 

$

1,522,000

 

$

839,000

 

$

616,000

 

$

323,000

 

$

3,300,000

 

 

12


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Residential

    

 

    

 

 

 

 

Commercial

 

Agricultural

 

Real Estate

 

Other

 

Total

 

 

 

For the three months ended March 31, 2016

 

Balance, beginning

 

$

1,225,000

 

$

748,000

 

$

672,000

 

$

172,000

 

$

2,817,000

 

Provision charged to expense

 

 

(14,121)

 

 

12,000

 

 

(7,675)

 

 

11,819

 

 

2,023

 

Recoveries

 

 

1,121

 

 

 —

 

 

675

 

 

1,058

 

 

2,854

 

Loans charged off

 

 

 —

 

 

 —

 

 

 —

 

 

(8,877)

 

 

(8,877)

 

Balance, ending

 

$

1,212,000

 

$

760,000

 

$

665,000

 

$

176,000

 

$

2,813,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Residential

    

 

 

    

 

 

 

 

 

Commercial

 

Agricultural

 

Real Estate

 

Other

 

Total

 

 

 

For the nine months ended March 31, 2017

 

Balance, beginning

 

$

1,337,000

 

$

738,000

 

$

655,000

 

$

217,000

 

$

2,947,000

 

Provision charged to expense

 

 

209,331

 

 

101,000

 

 

(40,812)

 

 

113,184

 

 

382,703

 

Recoveries

 

 

23,536

 

 

 —

 

 

2,000

 

 

2,604

 

 

28,140

 

Loans charged off

 

 

(47,867)

 

 

 —

 

 

(188)

 

 

(9,788)

 

 

(57,843)

 

Balance, ending

 

$

1,522,000

 

 

839,000

 

 

616,000

 

 

323,000

 

$

3,300,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Residential

    

 

 

    

 

 

 

 

 

Commercial

 

Agricultural

 

Real Estate

 

Other

 

Total

 

 

 

For the nine months ended March 31, 2016

 

Balance, beginning

 

$

1,124,000

 

$

697,000

 

$

644,000

 

$

118,000

 

$

2,583,000

 

Provision charged to expense

 

 

13,433

 

 

63,000

 

 

19,641

 

 

63,294

 

 

159,368

 

Recoveries

 

 

75,831

 

 

 —

 

 

1,359

 

 

5,452

 

 

82,642

 

Loans charged off

 

 

(1,264)

 

 

 —

 

 

 —

 

 

(10,746)

 

 

(12,010)

 

Balance, ending

 

$

1,212,000

 

$

760,000

 

$

665,000

 

$

176,000

 

$

2,813,000

 

 

 

For commercial loans, agricultural loans, and construction and land loans the allowance for estimated losses on loans consists of specific and general components.

 

The specific component relates to loans that are classified as impaired, as defined below. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

 

For commercial loans, agricultural loans, and construction and land loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

The general component consists of quantitative and qualitative factors and covers non-impaired loans. The quantitative factors are based on historical charge-off experience. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss data. The Company’s credit quality indicator for all loans excluding commercial loans is past due or performance status.  The Company’s credit quality indicator for commercial loans is internal risk ratings.

 

13


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

For residential real estate loans and consumer and other loans, these large groups of smaller balance homogenous loans are collectively evaluated for impairment. In estimating the allowance for loan losses for these loans, the Company applies quantitative and qualitative factors on a portfolio segment basis. Quantitative factors are based on historical charge-off experience and qualitative factors are based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss data. Accordingly, the Company generally does not separately identify individual residential real estate loans and/or consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

 

Troubled debt restructures are considered impaired loans and are subject to the same allowance methodology as described above for impaired loans by portfolio segment.

 

The allowance for loan losses, by impairment evaluation and portfolio segment is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

    

Commercial

    

Agricultural

    

Real Estate

    

Other

    

Total

 

 

 

March 31, 2017

 

Allowance for loans individually evaluated for impairment

 

$

10,884

 

$

21,191

 

$

26,354

 

$

1,343

 

$

59,772

 

Allowance for loans collectively evaluated for impairment

 

 

1,511,116

 

 

817,809

 

 

589,646

 

 

321,657

 

 

3,240,228

 

 

 

$

1,522,000

 

$

839,000

 

$

616,000

 

$

323,000

 

$

3,300,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

950,007

 

$

904,768

 

$

3,415,882

 

$

23,418

 

$

5,294,075

 

Loans collectively evaluated for impairment

 

 

94,269,507

 

 

51,745,228

 

 

49,391,728

 

 

22,946,241

 

 

218,352,704

 

 

 

$

95,219,514

 

$

52,649,996

 

$

52,807,610

 

$

22,969,659

 

$

223,646,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

    

Commercial

    

Agricultural

    

Real Estate

    

Other

    

Total

 

 

 

June 30, 2016

 

Allowance for loans individually evaluated for impairment

 

$

34,975

 

$

 

$

17,828

 

$

 

$

52,803

 

Allowance for loans collectively evaluated for impairment

 

 

1,302,025

 

 

738,000

 

 

637,172

 

 

217,000

 

 

2,894,197

 

 

 

$

1,337,000

 

$

738,000

 

$

655,000

 

$

217,000

 

$

2,947,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

227,824

 

$

885,757

 

$

3,726,602

 

$

3,194

 

$

4,843,377

 

Loans collectively evaluated for impairment

 

 

82,826,781

 

 

47,022,344

 

 

49,227,819

 

 

16,774,116

 

 

195,851,060

 

 

 

$

83,054,605

 

$

47,908,101

 

$

52,954,421

 

$

16,777,310

 

$

200,694,437

 

 

Generally, for all classes of loans, loans are considered past due when contractual payments are delinquent for 31 days or greater.

 

For all classes of loans, loans will generally be placed on nonaccrual status when the loan has become greater than 90 days past due; or when management believes, after considering collection efforts and other factors, that the borrower’s financial condition is such that collection of interest is doubtful.

 

When a loan is placed on nonaccrual status, payments received will be applied to the principal balance. However, interest may be taken on a cash basis in the event the loan is fully secured and the risk of loss is minimal.  Previously recorded but uncollected interest on a loan placed in nonaccrual status is accounted for as follows:  if the previously accrued but uncollected interest and the principal amount of the loan is protected by sound collateral value based upon a current, independent qualified appraisal, such interest may remain on the Company’s books. If such interest is not so protected, it is considered a loss with the amount thereof recorded in the current year being reversed against current interest income, and the amount recorded in the prior year being charged against the allowance for possible loan losses.

 

14


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

For all classes of loans, nonaccrual loans may be restored to accrual status provided the following criteria are met:

 

·

The loan is current, and all principal and interest amounts contractually due have been made

·

The loan is well secured and in the process of collection

·

Prospects for future principal and interest payments are not in doubt

 

The aging in terms of unpaid principal balance of the loan portfolio, by classes of loans is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

> 90 days

    

 

    

 

 

    

 

 

 

 

31-60 days

 

61-90 days

 

Past Due

 

 

 

Non accrual

 

 

 

Current

 

Past Due

 

Past Due

 

(Nonaccrual)

 

Total

 

Loans

 

 

 

March 31, 2017

 

Classes of loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

$

16,882,591

 

$

 —

 

$

21,864

 

$

 —

 

$

16,904,455

 

$

160,590

 

Real estate

 

 

78,234,228

 

 

 —

 

 

42,607

 

 

38,224

 

 

78,315,059

 

 

692,720

 

Agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

22,605,208

 

 

 —

 

 

 —

 

 

6,848

 

 

22,612,056

 

 

44,260

 

Real estate

 

 

29,211,431

 

 

 —

 

 

 —

 

 

826,509

 

 

30,037,940

 

 

841,509

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family

 

 

41,379,209

 

 

23,046

 

 

 —

 

 

233,844

 

 

41,636,099

 

 

697,559

 

Home equity

 

 

11,153,134

 

 

18,377

 

 

 —

 

 

 —

 

 

11,171,511

 

 

34,699

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land

 

 

19,161,346

 

 

 —

 

 

 —

 

 

 —

 

 

19,161,346

 

 

 —

 

Consumer

 

 

3,803,153

 

 

176

 

 

4,984

 

 

 —

 

 

3,808,313

 

 

23,418

 

 

 

$

222,430,300

 

$

41,599

 

$

69,455

 

$

1,105,425

 

$

223,646,779

 

$

2,494,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

> 90 days

    

 

    

 

 

    

 

 

 

 

31-60 days

 

61-90 days

 

Past Due

 

 

 

 

Non accrual

 

 

 

Current

 

Past Due

 

Past Due

 

(Nonaccrual)

 

Total

 

 

Loans

 

 

 

June 30, 2016

 

Classes of loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

$

15,256,328

 

$

99,348

 

$

 —

 

$

 —

 

$

15,355,676

 

$

97,294

 

Real estate

 

 

67,606,842

 

 

 —

 

 

 —

 

 

92,087

 

 

67,698,929

 

 

92,087

 

Agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

22,318,246

 

 

624,314

 

 

 —

 

 

 —

 

 

22,942,560

 

 

6,848

 

Real estate

 

 

24,965,541

 

 

 —

 

 

 —

 

 

 —

 

 

24,965,541

 

 

877,909

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family

 

 

38,428,793

 

 

1,823,353

 

 

23,736

 

 

33,915

 

 

40,309,797

 

 

688,454

 

Home equity

 

 

12,644,624

 

 

 —

 

 

 —

 

 

 —

 

 

12,644,624

 

 

29,807

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land

 

 

13,210,393

 

 

 —

 

 

 —

 

 

 —

 

 

13,210,393

 

 

 —

 

Consumer

 

 

3,563,221

 

 

1,294

 

 

 —

 

 

2,402

 

 

3,566,917

 

 

7,248

 

 

 

$

197,993,988

 

$

2,548,309

 

$

23,736

 

$

128,404

 

$

200,694,437

 

$

1,799,647

 

 

For commercial, agriculture, and construction and land loans, the Company utilizes the following internal risk rating scale:

 

Highest Quality (rating 1) -- Loans represent a credit extension of the highest quality. Excellent liquidity, management and character in an industry with favorable conditions. High quality financial information, history of strong cash flows and superior collateral including readily marketable assets, prime real estate, U.S. government securities, U.S.

15


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

government agencies, highly rated municipal bonds, insured savings accounts, and insured certificates of deposit drawn on high-quality financial institutions.

 

Good Quality (rating 2) -- Loans which have a sound primary and secondary source of repayment. Strong to good liquidity, management and character in an industry with favorable conditions. Good quality financial information and margins of cash flow coverage is consistently good. Loans may be unsecured, secured by quality (but less readily marketable) assets, high quality real estate or traded stocks, lower grade municipal bonds (which must still be investment grade), and uninsured certificates of deposit on other financial institutions may also be included in this grade.

 

Acceptable Quality (rating 3) -- Loans where the borrower is a reasonable credit risk and demonstrates the ability to repay the debt from normal business operations. Good liquidity, management and character in an industry that is more sensitive to external factors. Alternative sources of refinancing may be less available in periods of uncertain economic conditions. Term debt is moderate but cash flow margins fall within bank policy guidelines. Quality of financial information is adequate but is not as detailed and sophisticated as information found on higher-grade loans. Secured by business assets that conform to usual lending parameters for margin and eligibility or real estate that is deemed to be of satisfactory quality in an area that may not be prime but still within viable economic centers.

 

Fair Quality (rating 4) -- Loans where the borrower is a reasonable credit risk but shows a more erratic earnings history (a loss may have been realized in the past four years). Liquidity is limited and primary repayment is susceptible to unfavorable external factors. Industry characteristics are generally stable. Borrower is more highly leveraged with increased levels of term debt. Cash flow margins remain adequate but may not fall within the policy guidelines. Quality of financial information is adequate and interim reporting may be required. Secured by business assets with an adequate collateral margin or real estate that is of fair quality and location. Property may have limited alternative uses and may be considered a "special use" facility.

 

Special Mention (rating 5) -- Loans in this category have the potential for developing weaknesses that deserve extra attention from the account manager and other management personnel. If the developing weakness is not corrected or mitigated, the ability of the borrower to repay the Company's debt in the future may deteriorate. This grade should not be assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. If a loan's actual, not potential, weakness or problems are clearly evident and significant it should generally be graded in one of the following grade categories.

 

Substandard (rating 6) -- Loans and other credit extensions are considered to be inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. These loans, even if apparently protected by collateral value, have a well-defined weakness or weaknesses that jeopardize the liquidation of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.

 

Doubtful (rating 7) -- Loans and other credit extensions have all the weaknesses inherent in those graded "6" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include: proposed merger, acquisition, or liquidation actions; capital injection; perfecting liens on collateral and refinancing plans. Loans in this classification should be placed in non-accrual status, with collections applied to principal.

 

Loss (rating 8) -- Loans are considered uncollectible and cannot be justified as a viable asset of the Bank. This classification does not mean the loan has absolutely no recovery value. However, it is not prudent to delay writing off this loan even though partial recovery may be obtained in the future.

 

16


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

For commercial, agricultural and construction and land loans or credit relationships with aggregate exposure greater than $250,000, a loan review is required within 12 months of the most recent credit review. The reviews are completed in enough detail to, at a minimum, validate the risk rating. Additionally, the reviews shall determine whether any documentation exceptions exist, appropriate written analysis is included in the loan file, and whether credit policies have been properly adhered to.

 

For each class of loans, the following summarizes the unpaid principal balance by credit quality indicator as of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

    

Other —

    

    

 

 

 

Commercial —

    

Commercial —

    

Agricultural —

    

Agricultural —

    

Construction

    

    

 

 

 

Operating

 

Real Estate

 

Operating

 

Real Estate

 

and Land

 

Total

 

 

 

March 31, 2017

 

Internally assigned risk rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Highest Quality (rating 1)

 

$

 —

 

$

 —

 

$

764,263

 

$

326,045

 

$

 —

 

$

1,090,308

 

Good Quality (rating 2)

 

 

200,639

 

 

6,739,080

 

 

3,816,673

 

 

2,953,291

 

 

2,870,445

 

 

16,580,128

 

Acceptable Quality (rating 3)

 

 

7,400,028

 

 

38,337,562

 

 

7,551,517

 

 

14,801,186

 

 

9,429,231

 

 

77,519,524

 

Fair Quality (rating 4)

 

 

9,101,485

 

 

30,335,575

 

 

9,534,145

 

 

11,115,909

 

 

6,861,670

 

 

66,948,784

 

Special Mention (rating 5)

 

 

 —

 

 

 —

 

 

342,234

 

 

 —

 

 

 —

 

 

342,234

 

Substandard (rating 6)

 

 

202,303

 

 

2,902,842

 

 

603,224

 

 

841,509

 

 

 —

 

 

4,549,878

 

Doubtful (rating 7)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Loss (rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

16,904,455

 

$

78,315,059

 

$

22,612,056

 

$

30,037,940

 

$

19,161,346

 

$

167,030,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

    

Other —

    

    

    

 

 

Commercial —

    

Commercial —

    

Agricultural —

    

Agricultural —

    

Construction

 

 

 

 

 

 

Operating

 

Real Estate

 

Operating

 

Real Estate

 

and Land

 

Total

 

 

 

June 30, 2016

 

Internally assigned risk rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Highest Quality (rating 1)

 

$

 —

 

$

 —

 

$

484,813

 

$

348,011

 

$

 —

 

$

832,824

 

Good Quality (rating 2)

 

 

213,824

 

 

4,923,002

 

 

5,510,208

 

 

6,173,479

 

 

1,993,567

 

 

18,814,080

 

Acceptable Quality (rating 3)

 

 

7,732,341

 

 

33,606,696

 

 

5,992,063

 

 

9,729,301

 

 

6,675,761

 

 

63,736,162

 

Fair Quality (rating 4)

 

 

7,294,630

 

 

28,578,771

 

 

9,604,176

 

 

7,836,841

 

 

4,541,065

 

 

57,855,483

 

Special Mention (rating 5)

 

 

 —

 

 

 —

 

 

829,738

 

 

 —

 

 

 —

 

 

829,738

 

Substandard (rating 6)

 

 

114,881

 

 

590,460

 

 

521,562

 

 

877,909

 

 

 —

 

 

2,104,812

 

Doubtful (rating 7)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Loss (rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

15,355,676

 

$

67,698,929

 

$

22,942,560

 

$

24,965,541

 

$

13,210,393

 

$

144,173,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Residential RE —

    

Residential RE —

    

Other —

    

 

 

 

 

1-4 Family

 

Home Equity

 

Consumer

 

Total

 

 

 

March 31, 2017

 

Delinquency status*:

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

40,915,493

 

$

11,134,736

 

$

3,779,735

 

$

55,829,964

 

Nonperforming

 

 

720,606

 

 

36,775

 

 

28,578

 

 

785,959

 

 

 

$

41,636,099

 

$

11,171,511

 

$

3,808,313

 

$

56,615,923

 

 

 

17


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Residential RE —

    

Residential RE —

    

Other —

    

    

    

 

 

1-4 Family

 

Home Equity

 

Consumer

 

Total

 

 

 

June 30, 2016

 

Delinquency status*:

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

37,832,838

 

$

12,614,817

 

$

3,558,375

 

$

54,006,030

 

Nonperforming

 

 

2,476,959

 

 

29,807

 

 

8,542

 

 

2,515,308

 

 

 

$

40,309,797

 

$

12,644,624

 

$

3,566,917

 

$

56,521,338

 


*Performing loans are those which are accruing and less than 31 days past due. Nonperforming loans are those on nonaccrual and accruing loans that are greater than or equal to 31 days past due.

 

At March 31, 2017 and June 30, 2016, the Company had no loans greater than 90 days past due and still accruing.

 

For commercial, agricultural, and construction and land loans, the Company’s credit quality indicator is internally assigned risk ratings. Each loan is assigned a risk rating upon origination. The risk rating is reviewed every 12 months, at a minimum, and on an as needed basis depending on the specific circumstances of the loan.

 

For residential real estate and consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system.

 

18


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

Loans, by classes of loans, considered to be impaired are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Unpaid

    

 

 

 

Recorded

 

Principal

 

Related

 

 

Investment

 

Balance

 

Allowance

 

 

March 31, 2017

Classes of loans:

 

 

 

 

 

 

 

 

 

Impaired loans with no specific allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

Operating

 

$

195,801

 

$

193,338

 

$

 —

Real estate

 

 

656,969

 

 

654,496

 

 

 —

Agricultural:

 

 

 

 

 

 

 

 

 

Operating

 

 

26,426

 

 

25,848

 

 

 —

Real estate

 

 

409,712

 

 

355,452

 

 

 —

Residential real estate:

 

 

 

 

 

 

 

 

 

1-4 family

 

 

2,767,870

 

 

2,749,483

 

 

 —

Home equity

 

 

8,309

 

 

8,296

 

 

 —

Other:

 

 

 

 

 

 

 

 

 

Consumer

 

 

2,152

 

 

1,546

 

 

 —

 

 

 

4,067,239

 

 

3,988,459

 

 

 —

 

 

 

 

 

 

 

 

 

 

Impaired loans with specific allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

Operating

 

 

64,522

 

 

63,949

 

 

2,596

Real estate

 

 

48,596

 

 

38,224

 

 

8,288

Agricultural:

 

 

 

 

 

 

 

 

 

Operating

 

 

37,804

 

 

37,411

 

 

2,297

Real estate

 

 

518,721

 

 

486,057

 

 

18,894

Residential real estate:

 

 

 

 

 

 

 

 

 

1-4 family

 

 

655,459

 

 

641,801

 

 

25,768

Home equity

 

 

16,440

 

 

16,302

 

 

586

Other:

 

 

 

 

 

 

 

 

 

Consumer

 

 

21,923

 

 

21,872

 

 

1,343

 

 

 

1,363,465

 

 

1,305,616

 

 

59,772

 

 

 

 

 

 

 

 

 

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

Operating

 

 

260,323

 

 

257,287

 

 

2,596

Real estate

 

 

705,565

 

 

692,720

 

 

8,288

Agricultural:

 

 

 

 

 

 

 

 

 

Operating

 

 

64,230

 

 

63,259

 

 

2,297

Real estate

 

 

928,433

 

 

841,509

 

 

18,894

Residential real estate:

 

 

 

 

 

 

 

 

 

1-4 family

 

 

3,423,329

 

 

3,391,284

 

 

25,768

Home equity

 

 

24,749

 

 

24,598

 

 

586

Other:

 

 

 

 

 

 

 

 

 

Consumer

 

 

24,075

 

 

23,418

 

 

1,343

 

 

$

5,430,704

 

$

5,294,075

 

$

59,772

 

 

19


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Unpaid

    

 

 

 

Recorded

 

Principal

 

Related

 

 

Investment

 

Balance

 

Allowance

 

 

June 30, 2016

Classes of loans:

 

 

 

 

 

 

 

 

 

Impaired loans with no specific allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

Operating

 

$

88,902

 

$

87,497

 

$

 —

Agricultural:

 

 

 

 

 

 

 

 

 

Operating

 

 

8,009

 

 

7,848

 

 

 —

Real estate

 

 

925,288

 

 

877,909

 

 

 —

Residential real estate:

 

 

 

 

 

 

 

 

 

1-4 family

 

 

3,330,310

 

 

3,320,028

 

 

 —

Home equity

 

 

59,336

 

 

59,123

 

 

 —

Other:

 

 

 

 

 

 

 

 

 

Consumer

 

 

3,756

 

 

3,194

 

 

 —

 

 

 

4,415,601

 

 

4,355,599

 

 

 —

 

 

 

 

 

 

 

 

 

 

Impaired loans with specific allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

Operating

 

 

48,302

 

 

48,240

 

 

4,824

Real estate

 

 

114,837

 

 

92,087

 

 

30,151

Residential real estate:

 

 

 

 

 

 

 

 

 

1-4 family

 

 

330,997

 

 

329,623

 

 

16,913

Home equity

 

 

17,882

 

 

17,828

 

 

915

 

 

 

512,018

 

 

487,778

 

 

52,803

 

 

 

 

 

 

 

 

 

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

Operating

 

 

137,204

 

 

135,737

 

 

4,824

Real estate

 

 

114,837

 

 

92,087

 

 

30,151

Agricultural:

 

 

 

 

 

 

 

 

 

Operating

 

 

8,009

 

 

7,848

 

 

 —

Real estate

 

 

925,288

 

 

877,909

 

 

 —

Residential real estate:

 

 

 

 

 

 

 

 

 

1-4 family

 

 

3,661,307

 

 

3,649,651

 

 

16,913

Home equity

 

 

77,218

 

 

76,951

 

 

915

Other:

 

 

 

 

 

 

 

 

 

Consumer

 

 

3,756

 

 

3,194

 

 

 —

 

 

$

4,927,619

 

$

4,843,377

 

$

52,803

 

20


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

Impaired loans, for which no allowance has been provided as of March 31, 2017 and June 30, 2016, have adequate collateral, based on management’s current estimates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

March 31, 2017

 

March 31, 2016

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Classes of loans:

    

 

    

    

 

    

    

 

    

    

 

    

 

Impaired loans with no specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

$

192,837

 

$

3,125

 

$

71,908

 

$

585

 

Real estate

 

 

663,799

 

 

4,749

 

 

187,474

 

 

 —

 

Agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

16,903

 

 

125

 

 

7,079

 

 

105

 

Real estate

 

 

411,432

 

 

 —

 

 

970,207

 

 

1,669

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family

 

 

2,811,564

 

 

35,254

 

 

3,624,633

 

 

45,273

 

Home equity

 

 

8,520

 

 

141

 

 

60,648

 

 

1,000

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

2,642

 

 

24

 

 

8,592

 

 

134

 

 

 

 

4,107,697

 

 

43,418

 

 

4,930,541

 

 

48,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

65,973

 

 

906

 

 

60,747

 

 

705

 

Real estate

 

 

48,321

 

 

 —

 

 

237,966

 

 

 —

 

Agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

18,902

 

 

 —

 

 

198,658

 

 

 —

 

Real estate

 

 

515,527

 

 

230

 

 

 —

 

 

 —

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family

 

 

661,611

 

 

9,955

 

 

345,848

 

 

4,634

 

Home equity

 

 

17,202

 

 

447

 

 

19,339

 

 

525

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

22,947

 

 

378

 

 

 —

 

 

 —

 

 

 

 

1,350,483

 

 

11,916

 

 

862,558

 

 

5,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

258,810

 

 

4,031

 

 

132,655

 

 

1,290

 

Real estate

 

 

712,120

 

 

4,749

 

 

425,440

 

 

 —

 

Agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

35,805

 

 

125

 

 

205,737

 

 

105

 

Real estate

 

 

926,959

 

 

230

 

 

970,207

 

 

1,669

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family

 

 

3,473,175

 

 

45,209

 

 

3,970,481

 

 

49,907

 

Home equity

 

 

25,722

 

 

588

 

 

79,987

 

 

1,525

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

25,589

 

 

402

 

 

8,592

 

 

134

 

 

 

$

5,458,180

 

$

55,334

 

$

5,793,099

 

$

54,630

 

 

 

 

21


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

March 31, 2017

 

March 31, 2016

 

 

Average

 

Interest

 

Average

 

Interest

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

Investment

 

Recognized

 

Investment

 

Recognized

Classes of loans:

    

 

    

    

 

    

    

 

    

    

 

    

Impaired loans with no specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

$

164,025

 

$

7,722

 

$

53,766

 

$

2,030

Real estate

 

 

328,484

 

 

7,124

 

 

187,636

 

 

2,331

Agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

17,218

 

 

125

 

 

8,380

 

 

339

Real estate

 

 

425,722

 

 

 —

 

 

856,736

 

 

15,902

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family

 

 

2,733,003

 

 

100,579

 

 

3,628,569

 

 

153,553

Home equity

 

 

8,926

 

 

450

 

 

61,807

 

 

3,093

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

3,780

 

 

144

 

 

9,831

 

 

399

 

 

 

3,681,158

 

 

116,144

 

 

4,806,725

 

 

177,647

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

60,770

 

 

2,028

 

 

62,616

 

 

2,856

Real estate

 

 

47,764

 

 

 —

 

 

234,325

 

 

 —

Agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

37,804

 

 

 —

 

 

203,386

 

 

14,843

Real estate

 

 

508,658

 

 

593

 

 

 —

 

 

 —

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family

 

 

663,628

 

 

18,199

 

 

343,496

 

 

7,739

Home equity

 

 

17,161

 

 

835

 

 

19,221

 

 

1,366

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

23,861

 

 

951

 

 

 —

 

 

 —

 

 

 

1,359,646

 

 

22,606

 

 

863,044

 

 

26,804

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

224,795

 

 

9,750

 

 

116,382

 

 

4,886

Real estate

 

 

376,248

 

 

7,124

 

 

421,961

 

 

2,331

Agricultural:

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

55,022

 

 

125

 

 

211,766

 

 

15,182

Real estate

 

 

934,380

 

 

593

 

 

856,736

 

 

15,902

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family

 

 

3,396,631

 

 

118,778

 

 

3,972,065

 

 

161,292

Home equity

 

 

26,087

 

 

1,285

 

 

81,028

 

 

4,459

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

27,641

 

 

1,095

 

 

9,831

 

 

399

 

 

$

5,040,804

 

$

138,750

 

$

5,669,769

 

$

204,451

 

The Company's troubled debt restructuring as of March 31, 2017 and June 30, 2016 were not material to the consolidated financial statements.

 

 

22


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 6.Borrowings

 

Our borrowings consist primarily of advances from Federal Home Loan Bank of Topeka.  At March 31, 2017, we had access to Federal Home Loan Bank advances up to $39.5 million. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile.

 

The following table sets forth information concerning balances and interest rates on our advances at March 31, 2017.  At and during the period ended March 31, 2016 there were no advances outstanding.

 

 

 

 

 

 

 

 

At or For the

 

 

 

Nine Months Ended

 

 

March 31, 2017

 

 

(Dollars in thousands)

Federal Home Loan Bank Advances:

 

 

 

 

Maximum outstanding at any month end

 

$

300,000

 

Balance at the end of period

 

 

 —

 

Average balance during period

 

 

575,000

 

Weighted average interest rate at the end of period

 

 

0.75

%  

Weighted average interest rate during period

 

 

0.75

%  

 

 

 

   

Note 7.Regulatory Matters

 

The Bank is subject to regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

 

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If only adequately capitalized, regulatory approval is required to accept brokered deposits.  If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.  Management believes, as of March 31, 2017, that the Bank meets all capital adequacy requirements to which it is subject.

 

23


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

Actual capital levels and minimum required levels for the Bank were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

 

 

 

 

 

 

 

 

 

Required to Be

 

 

 

 

 

 

 

 

 

 

 

Well Capitalized

 

 

 

 

 

 

 

Minimum Required for

 

Under Prompt

 

 

 

 

 

 

 

Capital Adequacy

 

Corrective Action

 

 

 

 

 

 

 

Purposes

 

Provisions

 

(Dollars in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

$

30,362

 

13.8

%

$

17,563

 

8.0

%

$

21,954

 

10.0

%

Common equity Tier 1 capital (to risk-weighted assets)

 

 

27,610

 

12.6

%

 

9,879

 

4.5

%

 

14,270

 

6.5

%

Tier 1 (core) capital (to risk-weighted assets)

 

 

27,610

 

12.6

%

 

13,172

 

6.0

%

 

17,563

 

8.0

%

Tier 1 (core) capital (to adjusted total assets)

 

 

27,610

 

11.8

%

 

9,322

 

4.0

%

 

11,653

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

$

28,977

 

14.7

%  

$

15,805

 

8.0

%  

$

19,757

 

10.0

%

Common equity Tier 1 capital (to risk-weighted

 

 

26,500

 

13.4

%  

 

8,891

 

4.5

%  

 

12,842

 

6.5

%

Tier 1 (core) capital (to risk-weighted assets)

 

 

26,500

 

13.4

%  

 

11,854

 

6.0

%  

 

15,805

 

8.0

%

Tier 1 (core) capital (to adjusted total assets)

 

 

26,500

 

11.6

%  

 

9,114

 

4.0

%  

 

11,393

 

5.0

%

 

Federal regulations require the Bank to comply with a Qualified Thrift Lender (“QTL”) test, which requires that 65% of assets be maintained in housing-related finance and other specified assets.  If the QTL test is not met, limits are placed on growth, branching, new investment, FHLB advances, and dividends or the institution must convert to a commercial bank charter.  Management believes the QTL test has been met.

 

In July 2013, the Federal Reserve Board and the Federal Deposit Insurance Corporation issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revised minimum capital requirements and adjusted prompt corrective action thresholds. The final rules revised the regulatory capital elements, added a new common equity Tier 1 capital ratio, increased the minimum Tier 1 capital ratio requirement, and implemented a new capital conservation buffer. The rules also permitted certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Management chose the one-time election to retain the existing treatment. The final rules took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules.

 

Note 8.Employee Benefit Plan

 

The Company has a 401(k) and profit sharing plan (the “Plans”) covering substantially all employees.  Annual contributions to the Plans are made at the discretion of and determined by the Board of Directors.  Participant interests are vested over a period from one to five years of service.  Contributions were made of $88,548 and $71,366 for the nine months ended March 31, 2017 and 2016.

 

On November 8, 2005, the Company adopted an employee stock ownership plan (the “ESOP”) for the benefit of substantially all employees.  The ESOP borrowed $1,292,620 from the Company and used those funds to acquire 129,262 shares of the Company’s stock in connection with the reorganization at a price of $10.00 per share.

 

On July 8, 2015, the ESOP borrowed $951,912 from the Company and used the funds to acquire 118,989 shares of the Company’s stock in connection with the stock offering at a price of $8.00 per share.

 

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and are allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company.  The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on ESOP assets.  Annual principal and interest payments from the

24


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

note dated November 8, 2005 are approximately $145,000 until maturity at December 31, 2019.  Annual principal and interest payments from the note dated July 8, 2015 are approximately $65,000 until maturity at July 8, 2035.

 

As shares are released from collateral, the Company will report compensation expense equal to the current market price of the shares and the shares will become outstanding for earnings-per-share computations.  Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce accrued interest.  Because participants may require the Company to purchase their ESOP shares upon termination of their employment, the fair value of all earned and allocated ESOP shares may become a liability.

 

The ESOP has a plan year-end of December 31.  The Company recorded compensation expense of $111,615 and $72,697 for the nine months ended March 31, 2017 and 2016, respectively.

 

Shares held by the ESOP were as follows:

 

 

 

 

 

 

 

 

 

 

    

March 31, 2017

    

June 30, 2016

 

Allocated shares

 

 

70,230

 

 

71,803

 

Shares allocated to be released

 

 

19,826

 

 

7,932

 

Unearned ESOP shares

 

 

138,806

 

 

150,700

 

 

 

 

 

 

 

 

 

Total ESOP shares

 

 

228,862

 

 

230,435

 

 

 

 

 

 

 

 

 

Fair value of unearned ESOP shares

 

$

1,422,762

 

$

1,252,317

 

 

 

 

 

 

 

 

 

Fair value of allocated shares subject to repurchase obligation

 

$

681,820

 

$

564,723

 

 

The Company approved the Equitable Financial Corp. 2006 Equity Incentive Plan (“2006 Plan”) in November 2006 and the Equitable Financial Corp. 2016 Equity Incentive Plan (“2016 Plan”) in November 2016. Both plans provide for awards of stock options and restricted stock to officers, employees and directors.  The cost of the plan is based on the fair value of the awards at the grant date.  The fair value of stock is based on the closing price of the Company’s stock on the grant date.  The cost of the awards are being recognized over the five-year vesting periods during which participants are required to provide services in exchange for the awards.  As of December 31, 2016 the 2006 plan has terminated.

 

The maximum number of shares authorized under the 2016 Plan is 198,316 stock options and 79,326 shares of restricted stock to employees and directors.  As of March 31, 2017 158,653 stock options and 63,461 stock awards were awarded.

 

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of the grant.  Unvested restricted stock awards may not be disposed of or transferred during the vesting period.  Restricted stock awards carry with them the right to receive dividends.

 

25


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

The table below represents the restricted stock award activity for the period shown:

 

 

 

 

 

 

 

 

    

Service-Based

    

Weighted

 

 

Stock

 

Grant Date

 

 

Awards

 

Fair Value

 

 

 

 

 

 

 

Non-vested at July 1, 2015

 

 

43,094

 

$

4.02

Conversion for stock offering

 

 

3,907

 

 

 —

Granted

 

 

4,900

 

 

8.53

Vested

 

 

(6,297)

 

 

4.93

Non-vested at March 31, 2016

 

 

45,604

 

$

4.02

 

 

 

 

 

 

 

Non-vested at July 1, 2016

 

 

39,281

 

$

4.32

Granted

 

 

63,461

 

 

9.90

Vested

 

 

(7,294)

 

 

5.40

Non-vested at March 31, 2017

 

 

95,448

 

$

6.97

 

 

 

Note 9.Earnings per Share

 

Amounts reported in earnings per share reflect earnings available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the year.  Diluted earnings per share is calculated by dividing earnings available to common stockholders for the period by the sum of the weighted average common shares outstanding and the weighted average dilutive shares.

 

The following table presents a reconciliation of the components used to compute basic earnings per share for the nine months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

 

March 31, 

 

March 31, 

 

 

    

    

2017

    

2016

    

2017

    

2016

 

Weighted average common shares outstanding

 

 

 

3,284,630

 

 

3,285,020

 

 

3,289,170

 

 

3,260,513

 

Net income available to common stockholders

 

 

$

275,346

 

$

242,494

 

$

849,868

 

$

739,596

 

Basic earnings per share

 

 

$

0.08

 

$

0.07

 

$

0.26

 

$

0.23

 

 

The following table presents a reconciliation of the components used to compute diluted earnings per share for the nine months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

 

March 31, 

 

March 31, 

 

 

    

    

2017

    

2016

    

2017

    

2016

    

Weighted average common shares outstanding

 

 

 

3,284,630

 

 

3,285,020

 

 

3,289,170

 

 

3,260,513

 

Weighted average of net additional shares from restricted stock awards

 

 

 

53,546

 

 

25,927

 

 

48,058

 

 

25,834

 

Weighted average number of shares outstanding

 

 

 

3,338,176

 

 

3,310,947

 

 

3,337,228

 

 

3,286,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

 

$

275,346

 

$

242,494

 

$

849,868

 

$

739,596

 

Diluted earnings per share

 

 

$

0.08

 

$

0.07

 

$

0.25

 

$

0.23

 

 

 

26


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 10.Fair Value Measurements

 

The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification defines fair value, establishes a framework for measuring fair value and requires disclosure of fair value measurements.  The fair value hierarchy set forth in the Topic is as follows:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

There were no transfers between levels during the nine months ended March 31, 2017, nor were there any changes in valuation techniques used for assets or liabilities measured at fair value at March 31, 2017.

 

Assets and liabilities recorded at fair value on a recurring basis: A description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below:

 

Securities Available-for-Sale — Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

 

The following tables summarize assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and June 30, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at March 31, 2017 Using

 

 

    

 

    

Quoted Prices in

    

 

    

Significant

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

$

1,433,716

 

$

 —

 

$

1,433,716

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement at June 30, 2016 Using

 

 

    

 

    

Quoted Prices in

    

 

    

Significant

 

 

 

 

 

Active Markets for

 

Significant Other

 

Unobservable

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

$

664,755

 

$

 

$

664,755

 

$

 

 

Assets and liabilities recorded at fair value on a nonrecurring basis:  A description of the valuation methodologies used for assets and liabilities measured at fair value on a nonrecurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

 

Impaired Loans — From time to time, a loan is considered impaired and an allowance for credit losses is established.  The specific reserves for collateral dependent impaired loans are based on the fair value of the collateral

27


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

less estimated costs to sell. The fair value of collateral was determined based on appraisals. In some cases, adjustments were made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral.  When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement.

 

Foreclosed Assets — Foreclosed assets are carried at estimated fair value of the property, less disposal costs.  The fair value of the property is determined based upon appraisals.  As with impaired loans, if significant adjustments are made to the appraised value, based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement.

 

At March 31, 2017 and June 30, 2016 the fair value of impaired loans and foreclosed assets were immaterial.

 

The Financial Instruments Topic of the FASB Accounting Standards Codification requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.  Fair value is determined under the framework discussed above.  The Topic excludes all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.  The following methods and assumptions used in estimating fair value disclosure for financial instruments are described below:

 

Cash and due from financial institutions — For cash and due from financial institutions, the current carrying amount is a reasonable estimate of fair value.

 

Interest-earning deposits — For interest-earning deposits, the current carrying amount is a reasonable estimate of fair value.

 

Securities — The fair value of securities is determined using quoted prices, when available in an active market.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or a discounted cash flows model.

 

Federal Home Loan Bank stock — For restricted equity securities, the carrying value approximates fair value.

 

Loans, net — The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  The fair value of variable rate loans approximates carrying value.

 

Deposits — The carrying value of noninterest-bearing deposits approximates fair value.  The fair value of fixed rate deposits is estimated by discounting the future cash flows using the current rates for the same remaining maturities.

 

Federal funds purchased — For federal funds purchased, the carrying value approximates fair value.  As of March 31, 2017 and June 30, 2016 the Company did not have any federal funds purchased.

 

Federal Home Loan Bank borrowings — The estimated fair value of fixed rate advances from the FHLB is determined by discounting the future cash flows of existing advances using rates currently available on advances from the FHLB having similar characteristics.  Adjustable rate advances’ carrying value approximates fair value.  As of March 31, 2017 and June 30, 2016 the Company did not have any FHLB borrowings.

 

Accrued interest — The carrying amounts of accrued interest approximate fair value.

 

Off-balance sheet items — The fair value of off-balance-sheet items is based on current fees or cost that would be charged to enter into or terminate such arrangements.  There were not considered material and are not presented in the below tables.

 

28


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

The estimated fair value of financial instruments is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair Value

    

Carrying

    

Estimated

 

March 31, 2017

 

Hierarchy Level

 

Amount

 

Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from financial institutions

 

Level 1

 

$

7,406,944

 

$

7,407,000

 

Securities available-for-sale

 

See previous table

 

 

1,433,716

 

 

1,434,000

 

Securities held-to-maturity

 

Level 2

 

 

744,640

 

 

756,000

 

Federal Home Loan Bank stock

 

Level 1

 

 

231,700

 

 

232,000

 

Loans, net

 

Level 2

 

 

220,944,659

 

 

217,926,000

 

Accrued interest receivable

 

Level 1

 

 

1,233,302

 

 

1,233,000

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

Level 2

 

 

28,414,452

 

 

28,414,000

 

Interest-bearing deposits

 

Level 2

 

 

174,473,915

 

 

178,969,000

 

Accrued interest payable and other liabilities

 

Level 1

 

 

1,416,707

 

 

1,417,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair Value

    

Carrying

    

Estimated

 

June 30, 2016

 

Hierarchy Level

 

Amount

 

Fair Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from financial institutions

 

Level 1

 

$

14,947,296

 

$

14,947,000

 

Securities available-for-sale

 

See previous table

 

 

664,755

 

 

665,000

 

Securities held-to-maturity

 

Level 2

 

 

781,740

 

 

801,000

 

Federal Home Loan Bank stock

 

Level 1

 

 

229,900

 

 

230,000

 

Loans, net

 

Level 2

 

 

198,309,920

 

 

198,000,000

 

Accrued interest receivable

 

Level 1

 

 

1,147,467

 

 

1,147,000

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

Level 2

 

 

24,296,166

 

 

24,296,000

 

Interest-bearing deposits

 

Level 2

 

 

162,666,186

 

 

170,276,000

 

Accrued interest payable and other liabilities

 

Level 1

 

 

1,198,850

 

 

1,199,000

 

 

 

Note 11.Accumulated Other Comprehensive Income/(Loss)

 

Accumulated other comprehensive income components were as follows:

 

 

 

 

 

 

 

 

 

 

    

March 31, 2017

    

June 30, 2016

 

Unrealized holding gains/(losses) on securities available-for-sale

 

$

(27,621)

 

$

6,176

 

Tax expense

 

 

9,391

 

 

(2,100)

 

 

 

 

 

 

 

 

 

 

 

$

(18,230)

 

$

4,076

 

 

 

Note 12.Income Taxes

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

    

March 31, 2017

    

March 31, 2016

 

Provision computed at the statutory federal tax rate

 

$

(140,748)

 

$

(135,148)

 

State income taxes, net of federal tax

 

 

(11,264)

 

 

(11,125)

 

Release of unearned EOSP shares and stock awards

 

 

(1,834)

 

 

1,905

 

Nondeductible expenses

 

 

(2,161)

 

 

(1,522)

 

Other

 

 

17,387

 

 

(9,111)

 

 

 

$

(138,620)

 

$

(155,001)

 

 

 

 

 

 

29


 

Table of Contents

Equitable Financial Corp. and Subsidiary

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

March 31, 2017

 

March 31, 2016

 

Provision computed at the statutory federal tax rate

    

$

(455,147)

    

$

(370,472)

 

State income taxes, net of federal tax

 

 

(39,019)

 

 

(35,837)

 

Release of unearned EOSP shares and stock awards

 

 

3,713

 

 

10,388

 

Nondeductible expenses

 

 

(5,875)

 

 

(5,724)

 

Valuation allowance adjustment

 

 

 —

 

 

79,000

 

Other

 

 

7,527

 

 

(27,383)

 

 

 

$

(488,801)

 

$

(350,028)

 

 

 

Note 13.Stock Buyback

 

The Company announced a stock repurchase plan on October 7, 2016 whereby the Company could repurchase up to 173,857 shares of its common stock, or approximately 5% of the then current outstanding shares.  There were 108,655 shares of the Company’s common stock repurchased by the Company during the nine months ended March 31, 2017, and there were 65,202 shares yet to be repurchased under the plan as of March 31, 2017. 

 

The following table provides information regarding the Company’s purchase of its common stock during the nine months ended March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

 

 

 

 

 

 

 

 

Shares Purchased

 

Maximum Number of

 

 

 

 

 

Weighted

 

as Part of Publicly

 

Shares that May Yet Be

 

 

Total Number of

 

Average Price

 

Announced Plans

 

Purchased Under the

Period

 

Shares Purchased

 

Paid Per Share

 

or Programs

 

Plans or Programs

10/1/16 - 10/31/16

 

 —

 

$

 —

 

 —

 

173,857

11/1/16 - 11/30/16

 

60,000

 

 

9.07

 

60,000

 

113,857

12/1/16 - 12/31/16

 

26,455

 

 

9.57

 

86,455

 

87,402

01/1/17 - 01/31/17

 

 —

 

 

 —

 

86,455

 

87,402

02/1/17 - 02/28/17

 

 —

 

 

 —

 

86,455

 

87,402

03/1/17 - 03/31/17

 

22,200

 

 

10.25

 

108,655

 

65,202

Total

 

108,655

 

$

9.43

 

 

 

 

 

 

 

 

 

 

 

 

Note

 

 

 

 

30


 

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

 

Management’s discussion and analysis of financial condition and results of operations at March 31, 2017 and for the three and nine months ended March 31, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Company.  The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this report.  All references herein to the “Company”, “we”, “us”, or similar terms refer to Equitable Financial Corp. and its subsidiary.

 

Forward-Looking Statements

 

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

·

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, regulatory and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·

General economic conditions, either nationally or in our market areas, that are worse than expected;

 

·

Competition among depository and other financial institutions;

 

·

Inflation and changes in the interest rate environment that reduce our margins and yields or reduce the fair value of financial instruments;

 

·

Our success in continuing to emphasize agricultural and commercial loans;

 

·

Changes in consumer spending, borrowing and savings habits;

 

·

Our ability to enter new markets successfully and capitalize on growth opportunities;

 

·

Our ability to successfully integrate acquired branches or entities;

 

·

Adverse changes in the securities markets;

 

·

Changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

·

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 our organization, compensation and benefit plans;

 

·

Our ability to retain key employees;

 

·

Changes in the level of government support for housing finance;

 

31


 

·

Significant increases in our loan losses; and

 

·

Changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Overview

 

We are a Nebraska-based community bank headquartered in Grand Island, Nebraska, with full-service branch offices in Grand Island, Omaha and North Platte, Nebraska.  For most of our history as a community bank, which dates back to 1882, we have operated as a traditional thrift institution, focusing on the origination of one- to four-family residential real estate loans.  In the past 10 years, however, we have expanded our lending focus and now offer a wide range of loans to commercial businesses, agricultural borrowers and consumers – in addition to our traditional residential loan products.  We also invest in securities, primarily U.S. government agency securities, municipal bonds and mortgage-backed securities.  In addition, we offer insurance and investment products and services from locations in Grand Island, Omaha and North Platte.

 

Our results of operations depend primarily on our net interest income.  Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities.  Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense.  Non-interest income currently consists primarily of service fees, rental income, gain on sales of loans and other income.  Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy, data processing, advertising and promotion, professional and regulatory, federal deposit insurance premiums, net loss on other real estate owned, write-downs, sales and other operating expenses.  Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  By their nature, changes in these assumptions and estimates could significantly affect our financial position or results of operations.  Actual results could differ from those estimates.

 

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was signed into law.  The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies.  As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.  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.

 

Discussed below are selected critical accounting policies that are of particular significance to us:

 

Allowance for Loan Losses.  The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.  We evaluate the need to establish allowances against losses on loans on a quarterly basis.  When additional allowances are necessary, a provision for loan losses is charged to earnings.  An allowance for loan losses is maintained at a level considered necessary to provide for loan losses based upon an evaluation of known and inherent losses in the loan portfolio.  In determining the allowance for loan losses, we consider the losses inherent in the loan portfolio and changes in the nature and volume of the loan activities, along with the local economic and real estate market conditions.  We utilize a two-tier approach: (1) establishment of specific reserves for impaired loans, and (2) establishment of a general valuation allowance for the remainder of the loan portfolio.  We maintain a loan review system which allows for a periodic review of the loan portfolio and the early identification of impaired loans.  One- to four-family residential real estate loans and consumer installment loans are considered to be homogeneous and, therefore, are not separately evaluated for impairment unless they are considered troubled debt restructurings.  A loan is considered to be a troubled

32


 

debt restructuring when, to maximize the recovery of the loan we modify the borrower’s existing loan terms and conditions in response to financial difficulties experienced by the borrower.

 

In establishing specific reserves for impaired loans, we take into consideration, among other things, payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.   Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and shortfalls on a case-by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reason for the delay, the borrower’s prior payment record and the amount of shortfall in relation to what is owed.  A loan is deemed to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts when due according to the contractual terms of the loan agreement.  All loans identified as impaired are evaluated individually.  We do not aggregate such loans for evaluation purposes.  Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.  Payments received on impaired loans are generally applied first to principal and then to interest.

 

The general valuation allowance is based upon a combination of factors including, but not limited to, actual loan loss rates, composition of the loan portfolio, current economic conditions and management’s judgment.  Regardless of the extent of the analysis of customer performance, portfolio evaluations, trends or risk management processes established, certain inherent, but undetected losses are probable within the loan portfolio.  This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their financial condition, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends, and the sensitivity of assumptions utilized to establish allocated allowances for homogeneous groups of loans among other factors.  These other risk factors are continually reviewed and revised by management using relevant information available at the time of the evaluation.

 

Although we believe that we use the best information available to recognize losses on loans and establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors.  In addition, the OCC, as an integral part of its examination process, periodically reviews the adequacy of our allowance for loan losses.  That agency may require us to recognize additions to the allowance based on its judgments about information available to it at the time of its examination.

 

Deferred Income Taxes.  We use the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities.  These judgments require us to make projections of future taxable income.  The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a continual basis as regulatory and business factors change.  Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.  A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect earnings.  Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets.

 

Fair Value Measurements.  We use our best judgment in estimating fair value measurements of the Bank’s financial instruments; however, there are inherent weaknesses in any estimation technique.  We utilize various assumptions and valuation techniques to determine fair value, including, but not limited to cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, quoted market prices, and appraisals.  The fair value estimates are not necessarily indicative of the actual amounts that could have been realized in a sale transaction on the dates indicated.  The estimated fair value amounts have not been re-evaluated or updated subsequent to the respective reporting dates.  As such, the estimated fair values subsequent to the respective dates may be different than the amounts reported.

 

33


 

Comparison of Financial Condition at March 31, 2017 and June 30, 2016

 

Assets.  Total assets at March 31, 2017 were  $241.3 million, an increase of $16.2 million, or 7.2%, from $225.1 million at June 30, 2016.  This increase is primarily due to an increase in securities available-for-sale and net loans.  Securities available-for-sale increased $769,000, or 115.6% to $1.4 million at March 31, 2017 from $665,000 at June 30, 2016.  This increase was related to the purchase of one security.  Net loans increased $22.6 million, or 11.4%, to $220.9 million at March 31, 2017 from $198.3 million at June 30, 2016.  These increases were offset by a decrease in cash of $7.5 million, or 50.3%, to $7.4 million at March 31, 2017 from $14.9 million at June 30, 2016.  This decrease was a result of deploying cash to fund securities purchased  and loans advanced.

 

Nonperforming Assets and Allowance for Loan Losses.    We had non-performing assets of $2.7 million, or 1.1% of total assets as of March 31, 2017 and $2.3 million, or 1.0% of total assets as of June 30, 2016.  The allowance for loan losses totaled $3.3 million at March 31, 2017 and $2.9 million at June 30, 2016.  This represents a ratio of the allowance for loan losses to gross loans receivable of 1.5% at March 31, 2017 and June 30, 2016.  The allowance for loan losses to non-performing loans was 132.3% at March 31, 2017 and 163.7% at June 30, 2016.    

 

Deposits. Total deposits increased $15.9 million, or 8.5%, to $202.9 million at March 31, 2017 from $187.0 million at June 30, 2016.  Noninterest-bearing deposits increased $4.1 million, or 16.9% to $28.4 million at March 31, 2017 from $24.3 million at June 30, 2016.  Interest-bearing deposits increased $11.8 million, or 7.3%, to $174.5 million at March 31, 2017 from $162.7 million at June 30, 2016.

 

Stockholders’ Equity. Total stockholder’s equity decreased $148,000, or 0.4% to $35.8 million at March 31, 2017 from $36.0 million at June 30, 2016.  The decrease was a result of the stock buyback.  The decrease was offset in part by the net income earned during the nine months ended March 31,  2017.

 

Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016

 

General. Net income for the three months ended March 31, 2017 was $275,000.  This represented an increase of $33,000, or 13.6%, from net income of $242,000 for the three months ended March 31, 2016.

 

Interest Income. Total interest income for the three months ended March 31, 2017 increased $267,000, or 13.0%, to $2.3 million, from $2.1 million for the three months ended March 31, 2016.  The increase in interest income was due to an increase in interest income in loans, partially offset by a decrease in interest income on other interest income.

 

Interest income from loans increased $289,000, or 14.4%, to $2.3 million for the three months ended March 31, 2017 from $2.0 million for the three months ended March 31, 2016.  The increase in interest income from loans was due primarily to an increase of $29.6 million in average loan balances.  Average loan balances were $216.8 million for the three months ended March 31, 2017 compared to $187.2 million for the three months ended March 31, 2016.  The increase in our average loan balance was primarily due to increased loan demand, primarily attributable to improved economic conditions in our market areas and growth in commercial loans originated in all branches.  The average yield on loans decreased 5 basis points to 4.25% during the three months ended March 31, 2017 from 4.30% for the three months ended March 31, 2016.

 

Other interest income decreased $22,000, or 53.7%, to $19,000 for the three months ended March 31, 2017 from $41,000 for the three months ended March 31, 2016.  This decrease was primarily due to a decrease in average balances of interest-earning deposits and securities. 

 

Interest Expense.   Interest expense increased $11,000, or 4.0%, to $283,000 for the three months ended March 31, 2017 from $272,000 for the three months ended March 31, 2016.  This increase was due to an increase in interest cost on deposit accounts.  Cost of deposits was 66 basis points for the three months ended March 13, 2017 compared to 64 basis points for the three months ended March 31, 2016.    

 

Net Interest Income. Net interest income increased $256,000, or 14.4%, to $2.0 million for the three months ended March 31, 2017 from $1.8 million for the three months ended March 31, 2016.  Average interest-earning assets were $220.8 million for the three months ended March 31, 2017 and $217.2 million for the three months ended March 31, 2016, while the average yield was 4.20% and 3.78% for the respective periods.  Our net interest spread increased 40 basis points for the three months ended March 31, 2017 to 3.54% from 3.14% for the three months ended March 31, 2016. Our

34


 

net interest margin increased 41 basis points to 3.69% for the three months ended March 31, 2017 from 3.28% for the three months ended March 31, 2016.  The ratio of average interest-earning assets to average interest-bearing liabilities increased 210 basis points to 129.8% for the three months ended March 31, 2017 from 127.7% for the three months ended March 31, 2016.

 

Provision for Loan Losses.   We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio.  In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.  Based on our evaluation of these factors, we recorded a provision for loan losses of $61,000 and $2,000 for the three months ended March 31, 2017 and 2016, respectively.  The provision for loan losses for the three months ended March 31, 2017 and 2016 was primarily a result of loan growth.  The allowance for loan losses was $3.3 million, or 1.5% of loans outstanding at March 31, 2017 compared to $2.8 million, or 1.5% of loans outstanding at March 31, 2016.  The non-performing assets to total assets ratio at March 31, 2017 and 2016 was 1.1%.  The level of the allowance is based on estimates and the ultimate losses may vary from estimates.

 

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance.  While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may request to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of March 31, 2017 was maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, such losses were both probable and reasonably estimable.

 

Non-Interest Income. Non-interest income decreased $32,000, or 5.9% to $512,000 for the three months ended March 31, 2017 from $544,000 for the three months ended March 31, 2016.  We realized a decrease in revenue from the gain on sale of loans and other loan fees.   Gain on sale of loans decreased $48,000, or 31.6%, to $104,000 for the three months ended March 31, 2017 from $152,000 for the three months ended March 31, 2016.  Other loan fees decreased $9,000, or 13.4%, to $58,000 for the three months ended March 31, 2017 from $67,000 for the three months ended March 31, 2016.  These decreases were offset by increases in brokerage fee income and other income.  Brokerage fee income increased $14,000, or 9.5%, to $161,000 for the three months ended March 31, 2017 from $147,000 for the three months ended March 31, 2016. Other income increased $10,000, or 34.5%, to $39,000 for the three months ended March 31, 2017 from $29,000 for the three months ended March 31, 2016.

 

Non-Interest Expense. Total non-interest expense increased $148,000, or 7.7%, to $2.1 million for the three months ended March 31, 2017 from $1.9 million for the three months ended March 13, 2016.  Increases were realized in salaries and employee benefits, occupancy and equipment, and supplies, telephone, and postage.  Salaries and employee benefits increased $132,000, or 12.1%, to $1.2 million for the three months ended March 31, 2017 from $1.1 million for the three months ended March 31, 2016.  Occupancy and equipment increased $22,000, or 9.8%, to $247,000 for the three months ended March 31, 2017 from $225,000 for the three months ended March 31, 2016.  Supplies, telephone, and postage increased $8,000, or 11.9%, to $75,000 for the three months ended March 31, 2017 from $67,000 for the three months ended March 31, 2016.  These increases were offset by decreases in regulatory fees and deposit insurance premium and professional fees.  Regulatory fees and deposit insurance premiums decreased $10,000, or 18.9%, to $43,000 for the three months ended March 31, 2017 from $53,000 for the three months ended March 31, 2016.  Professional fees decreased $18,000, or 25.3%, to $53,000 for the three months ended March 31, 2017 from $71,000 for the three months ended March 31, 2016.

 

Income Tax Expense. For the three months ended March 31, 2017, income tax expense was $139,000 compared to $155,000 for the three months ended March 31, 2016.  The effective tax rate for the three months March 31, 2017 was 33.6% compared to 39.0% for the three months ended March 31, 2016.     

 

35


 

Comparison of Operating Results for the Nine Months Ended March 31, 2017 and 2016

 

General. Net income for the nine months ended March 31, 2017 was $850,000.  This represents an increase of $110,000, or 14.9%, from net income of $740,000 for the nine months ended March 31, 2016.

 

Interest Income. Total interest income for the nine months ended March 31, 2017 increased $546,000, or 8.7%, to $6.8 million for the nine months ended March 31, 2017 from $6.2 million for the nine months ended March 31, 2016.   This increase was attributable to an increase in loan interest income offset in part by a decrease in other interest income. 

 

Interest income from loans increased $611,000, or 10.0%, to $6.7 million for the nine months ended March 31, 2017 from $6.1 million for the same period in 2016.  The increase in interest income from loans was due primarily to an increase of $24.8 million in average loan balances.  Average loan balances were $210.8 million for the nine months ended March 31, 2017 compared to $186.0 million for the nine months ended March 31, 2016.  The increase in our average loan balance was primarily due to increased loan demand, primarily attributable to improved economic conditions in our market areas and growth in commercial loans originated in all branches.  The average yield on loans decreased 13 basis points to 4.26% during the nine months ended March 31, 2017 from 4.39% for the nine months ended March 31, 2016.

 

Other interest income decreased $66,000, or 55.0%, to $54,000 for the nine months ended March 31, 2017 from $120,000 for the nine months ended March 31, 2016.  This decrease was primarily due to a decrease in average balances of interest-earning deposits and securities.  The yield realized on securities and interest-earning deposits also decreased.

 

Interest Expense.   Interest expense increased $37,000, or 4.8%, to $815,000 for the nine months ended March 31, 2017 from $778,000 for the nine months ended March 31, 2016.  This increase was due to an increase in interest expense on deposit accounts from increased average balances.  Average balances for the nine months ended March 31, 2017 were $166.3 million compared to $160.8 million for the nine months ended March 31, 2016. 

 

Net Interest Income. Net interest income increased $508,000, or 9.3%, to $6.0 million for the nine months ended March 31, 2017 from $5.5 million for the nine months ended March 31, 2016.  Average interest-earning assets were $216.9 million for the nine months ended March 31, 2017 and $207.2 million for the nine months ended March 31, 2016, while the average yield was 4.18% and 4.02% for the respective periods.  Our net interest spread increased 14 basis points for the nine months ended March 31, 2017 to 3.52% from 3.38% for the nine months ended March 31, 2016. Our net interest margin increased 15 basis point to 3.67% for the nine months ended March 31, 2017 from 3.52% for the nine months ended March 31, 2016.  The ratio of average interest-earning assets to average interest-bearing liabilities increased 160 basis points to 130.4% for the nine months ended March 31, 2017 from 128.8% for the nine months ended March 31, 2016.

 

Provision for Loan Losses.   We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio.  In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change.  Based on our evaluation of these factors, we recorded a provision for loan losses of $383,000 and $159,000 for the nine months ended March 31, 2017 and 2016, respectively.  The provision for loan losses for the nine months ended March 31, 2017 and 2016 was primarily a result of loan growth.  The allowance for loan losses was $3.3 million, or 1.5% of loans outstanding at March 31, 2017 compared to $2.8 million, or 1.5% of loans outstanding at March 31, 2016.  The non-performing assets to total assets ratio at March 31, 2017 and 2016 was 1.1%.  The level of the allowance is based on estimates and the ultimate losses may vary from estimates.

 

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance.  While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may request to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of March 31, 2017 was maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, such losses were both probable and reasonably estimable.

36


 

 

Non-Interest Income. Non-interest income increased $157,000, or 8.9% to $1.9 million for the nine months ended March 31, 2017 from $1.8 million for the nine months March 31, 2016.  Increases were recorded in service charges on deposit accounts of $34,000, brokerage fee income of $85,000  and gain on sale of loans of $30,000.  These increases were related to increased activity.

 

Non-Interest Expense. Total non-interest expense increased $192,000, or 3.2%, to $6.2 million for the nine months ended March 31, 2017 from $6.0 million for the nine months ended March 31, 2016.  Salaries and employee benefits increased $181,000, data processing fees increased $33,000, occupancy and equipment increased $74,000, and other expense increased $35,000.  Offsetting these increases was a decrease in regulatory fees and deposit insurance premiums of $27,000, advertising and public relations of $19,000 and professional fees of $88,000.

 

Income Tax Expense. For the nine months ended March 31, 2017 income tax expense was $489,000 compared to $350,000 for the nine months ended March 31, 2016.  The effective tax rate for the nine months ended March 31, 2016 was 36.5% compared to 32.1% for the nine months ended March 31, 2016.  During the nine months ended March 31, 2016 a reversal of an income tax valuation allowance was recorded for $79,000.  This caused a decrease in the effective tax rate.  There was no such entry during the nine months ended March 31, 2017.

 

37


 

Analysis of Net Interest Income

 

The following table sets forth average balance sheets, average yields and costs and certain other information for the periods indicated.  No tax equivalent adjustments were made.  All average balances are monthly average balances.  Non-accruing loans have been included in the table as loans carrying a zero yield.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 

 

 

 

2017

 

2016

 

 

 

Average

 

Interest

 

 

 

Average

 

Interest

 

 

 

 

 

Outstanding

 

Earned/

 

 

 

Outstanding

 

Earned/

 

 

 

 

    

Balance

    

Paid

    

Yield/Cost

    

Balance

    

Paid

    

Yield/Cost

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning deposits in other financial institutions

 

$

1,594

 

$

 5

 

1.25%

 

$

28,211

 

$

31

 

0.44%

 

Securities

 

 

2,193

 

 

13

 

2.37%

 

 

1,551

 

 

 9

 

2.32%

 

Loans receivable

 

 

216,760

 

 

2,301

 

4.25%

 

 

187,206

 

 

2,012

 

4.30%

 

FHLB common stock

 

 

231

 

 

 1

 

1.73%

 

 

229

 

 

 1

 

1.75%

 

Total interest-earning assets

 

 

220,778

 

 

2,320

 

4.20%

 

 

217,197

 

 

2,053

 

3.78%

 

Total noninterest-earning assets

 

 

14,376

 

 

 

 

 

 

 

13,989

 

 

 

 

 

 

Total assets

 

$

235,154

 

 

 

 

 

 

$

231,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

$

16,197

 

$

10

 

0.25%

 

$

15,299

 

$

 9

 

0.24%

 

NOW accounts

 

 

47,147

 

 

46

 

0.39%

 

 

45,970

 

 

44

 

0.38%

 

Money market accounts

 

 

64,477

 

 

124

 

0.77%

 

 

63,394

 

 

110

 

0.69%

 

Certificates of deposit

 

 

41,668

 

 

101

 

0.97%

 

 

45,455

 

 

109

 

0.96%

 

Total deposits

 

 

169,489

 

 

281

 

0.66%

 

 

170,118

 

 

272

 

0.64%

 

Federal funds purchased

 

 

510

 

 

 1

 

0.00%

 

 

 —

 

 

 —

 

0.00%

 

FHLB advances

 

 

100

 

 

 1

 

0.00%

 

 

 —

 

 

 —

 

0.00%

 

Total interest-bearing liabilities

 

 

170,099

 

 

283

 

0.67%

 

 

170,118

 

 

272

 

0.64%

 

Noninterest-bearing demand deposits - checking accounts

 

 

27,356

 

 

 

 

 

 

 

23,746

 

 

 

 

 

 

Other liabilities

 

 

1,834

 

 

 

 

 

 

 

1,776

 

 

 

 

 

 

Total liabilities

 

 

199,289

 

 

 

 

 

 

 

195,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

35,865

 

 

 

 

 

 

 

35,546

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

235,154

 

 

 

 

 

 

$

231,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

2,037

 

 

 

 

 

 

$

1,781

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

3.54%

 

 

 

 

 

 

 

3.14%

 

Net interest-earning assets

 

$

50,679

 

 

 

 

 

 

$

47,079

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

3.69%

 

 

 

 

 

 

 

3.28%

 

Average interest-earning assets to average interest-bearing liabilities

 

 

 

 

 

 

 

129.79%

 

 

 

 

 

 

 

127.67%

 

 

 

38


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended March 31, 

 

 

 

2017

 

2016

 

 

 

Average

 

Interest

 

 

 

Average

 

Interest

 

 

 

 

 

Outstanding

 

Earned/

 

 

 

Outstanding

 

Earned/

 

 

 

 

 

Balance

 

Paid

 

Yield/Cost

 

Balance

 

Paid

 

Yield/Cost

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

    

 

 

    

 

 

    

 

    

 

 

    

 

 

    

 

 

Interest-earning deposits in other financial institutions

 

$

4,012

 

 

22

 

0.73%

 

$

18,348

 

$

49

 

0.36%

 

Securities

 

 

1,843

 

 

30

 

2.17%

 

 

2,582

 

 

68

 

3.51%

 

Loans receivable

 

 

210,773

 

 

6,737

 

4.26%

 

 

185,994

 

 

6,126

 

4.39%

 

FHLB common stock

 

 

231

 

 

 2

 

1.15%

 

 

228

 

 

 3

 

1.75%

 

Total interest-earning assets

 

 

216,859

 

 

6,791

 

4.18%

 

 

207,152

 

 

6,246

 

4.02%

 

Total noninterest-earning assets

 

 

14,024

 

 

 

 

 

 

 

14,018

 

 

 

 

 

 

Total assets

 

$

230,883

 

 

 

 

 

 

$

221,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

$

15,501

 

$

28

 

0.24%

 

$

14,133

 

$

25

 

0.24%

 

NOW accounts

 

 

44,135

 

 

128

 

0.39%

 

 

43,042

 

 

127

 

0.39%

 

Money market accounts

 

 

63,983

 

 

354

 

0.74%

 

 

57,732

 

 

296

 

0.68%

 

Certificates of deposit

 

 

41,953

 

 

303

 

0.96%

 

 

45,918

 

 

329

 

0.96%

 

Total deposits

 

 

165,572

 

 

813

 

0.65%

 

 

160,825

 

 

777

 

0.64%

 

Federal funds purchased

 

 

504

 

 

 1

 

0.26%

 

 

 —

 

 

 —

 

 —

 

Other Borrowings

 

 

 —

 

 

 —

 

0.00%

 

 

 —

 

 

 1

 

 —

 

FHLB advances

 

 

256

 

 

 1

 

0.52%

 

 

 —

 

 

 —

 

 —

 

Total interest-bearing liabilities

 

 

166,332

 

 

815

 

0.65%

 

 

160,825

 

 

778

 

0.65%

 

Noninterest-bearing demand deposits - checking accounts

 

 

26,709

 

 

 

 

 

 

 

22,670

 

 

 

 

 

 

Other liabilities

 

 

1,753

 

 

 

 

 

 

 

5,359

 

 

 

 

 

 

Total liabilities

 

 

194,794

 

 

 

 

 

 

 

188,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

36,089

 

 

 

 

 

 

 

32,316

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

230,883

 

 

 

 

 

 

$

221,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

5,976

 

 

 

 

 

 

$

5,468

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

3.52%

 

 

 

 

 

 

 

3.38%

 

Net interest-earning assets

 

$

50,527

 

 

 

 

 

 

$

46,327

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

 

 

3.67%

 

 

 

 

 

 

 

3.52%

 

Average interest-earning assets to average interest-bearing liabilities

 

 

 

 

 

 

 

130.38%

 

 

 

 

 

 

 

128.81%

 

39


 

Rate/Volume Analysis

 

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.  It distinguishes between the changes related to outstanding balances and those due to the changes in interest rates.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume).  For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 2017 vs. 2016

 

March 31, 2017 vs. 2016

 

 

 

Increase (Decrease)

 

Total

 

Increase (Decrease)

 

Total

 

 

 

Due to

 

Increase

 

Due to

 

Increase

 

 

    

Volume

    

Rate

    

(Decrease)

    

Volume

    

Rate

    

(Decrease)

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning deposits in other financial institutions

 

$

(49)

 

$

23

 

$

(26)

 

$

(55)

 

$

28

 

$

(27)

 

Securities

 

 

 4

 

 

 —

 

 

 4

 

 

(16)

 

 

(22)

 

 

(38)

 

FHLB Stock

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1)

 

 

(1)

 

Loans receivable

 

 

313

 

 

(24)

 

 

289

 

 

796

 

 

(185)

 

 

611

 

Total interest-earning assets

 

 

268

 

 

(1)

 

 

267

 

 

725

 

 

(180)

 

 

545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

 —

 

 

 1

 

 

 1

 

 

 3

 

 

 —

 

 

 3

 

NOW accounts

 

 

 1

 

 

 1

 

 

 2

 

 

 1

 

 

 —

 

 

 1

 

Money market accounts

 

 

 2

 

 

12

 

 

14

 

 

32

 

 

26

 

 

58

 

Certificates of deposit

 

 

(9)

 

 

 1

 

 

(8)

 

 

(26)

 

 

 —

 

 

(26)

 

Total deposits

 

 

(6)

 

 

15

 

 

 9

 

 

10

 

 

26

 

 

36

 

Federal funds purchased and securities sold under repurchase agreements

 

 

 1

 

 

 —

 

 

 1

 

 

 1

 

 

 —

 

 

 1

 

Other Borrowings

 

 

 —

 

 

 —

 

 

 —

 

 

(1)

 

 

 —

 

 

(1)

 

FHLB advances

 

 

 1

 

 

 —

 

 

 1

 

 

 1

 

 

 —

 

 

 1

 

Total interest-bearing liabilities

 

 

(4)

 

 

15

 

 

11

 

 

11

 

 

26

 

 

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net interest income

 

$

272

 

$

(16)

 

$

256

 

$

714

 

$

(206)

 

$

508

 

 

Liquidity and Capital Resources

 

We maintain liquid assets at levels we consider adequate to meet our liquidity needs.  Liquid assets, which include cash and cash equivalents and securities available-for-sale, totaled $8.8 million, or 3.7% of total assets at March 31, 2017, as compared to $15.6 million, or 6.9% of total assets, at June 30, 2016.   We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings and to fund loan commitments.  We also adjust liquidity as appropriate to meet asset and liability management objectives.

 

Our primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations.  While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.  We set the interest rates on our deposits to maintain a desired level of total deposits.  In addition, we invest excess funds in short-term interest-earning investments and other assets, which provide liquidity to meet lending requirements.  Short-term interest-earning deposits with the FHLB of Topeka and Midwest Independent Bank amounted to $2.7 million at March 31, 2017 and $12.4 million at June 30, 2016.

 

40


 

A significant portion of our liquidity consists of securities classified as available-for-sale and cash and cash equivalents, which are a product of our operating, investing and financing activities.  Our primary sources of cash are net income, principal repayments on loans and mortgage-backed securities, and increases in deposit accounts, along with advances from the FHLB of Topeka.

 

Liquidity management is both a daily and long-term function of business management.  If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB which provides an additional source of funds.

 

Our cash flows are comprised of three classifications: cash flows from operating activities, investing activities, and financing activities.  Net cash provided by operating activities was $1.8 million for the nine months ended March 31, 2017 and net cash used by operating activities was $1.5 million for the nine months ended March 31, 2016.  Net cash used by investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from sales, calls, and maturities of securities and proceeds from the pay downs on mortgage-backed securities, was $24.3 million and $7.0 million for the nine months ended March 31, 2017 and 2016, respectively.  The Company purchased $985,000 and $469,000 of securities classified as available-for-sale during the nine months ended March 31, 2017 and 2016, respectively.  For the nine months ended March 31, 2017 and 2016, net cash provided by financing activities was $15.0 million and $18.3 million, respectively.

 

Off-Balance-Sheet Arrangements.  In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements.  These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and standby letters of credit.

 

For the nine months ended March 31, 2017, we did not engage in any off-balance sheet transactions, other than loan origination commitments, unused lines of credit and standby letters of credit in the normal course of our lending activities.

 

Recent Accounting Pronouncements

 

For information with respect to recent accounting pronouncements that are applicable to the Company, please see Note 3 of the notes to the Company’s consolidated financial statements, beginning on page 9.

 

Effect of Inflation and Changing Prices

 

The unaudited consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation.  Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature.  As a result, interest rates generally have a more significant impact on the Company’s performance than does the effect of inflation.  Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, because such prices are affected by inflation to a larger extent than interest rates.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

This item is not applicable because we are a smaller reporting company.

 

Item 4.Controls and Procedures

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective.  In addition, there have been no changes in the Company’s internal control over financial reporting during

41


 

the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

42


 

PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

At March 31, 2017, there were no material legal proceedings to which the Company is a party or of which any of its property is subject.  From time to time, the Company is a party to various legal proceedings incident to its business.

 

Item 1A.Risk Factors.

 

This item is not applicable because we are a smaller reporting company.

 

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

 

(a)

Not applicable.

(b)

Not applicable.

(c) The following table sets forth information concerning purchases made by the Company of its common stock for each month in the quarter end March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

 

 

 

 

 

 

 

 

Shares Purchased

 

Maximum Number of

 

 

 

 

 

Weighted

 

as Part of Publicly

 

Shares that May Yet Be

 

 

Total Number of

 

Average Price

 

Announced Plans

 

Purchased Under the

Period

 

Shares Purchased

 

Paid Per Share

 

or Programs

 

Plans or Programs

01/1/17 - 01/31/17

 

 —

 

 

 —

 

86,455

 

87,402

02/1/17 - 02/28/17

 

 —

 

 

 —

 

86,455

 

87,402

03/1/17 - 03/31/17

 

22,200

 

 

10.25

 

108,655

 

65,202

Total

 

22,200

 

$

10.25

 

 

 

 

 

The Company announced a stock repurchase plan on October 7, 2016 whereby the Company can repurchase up to 173,857 shares of its common stock, or approximately 5% of the then current outstanding shares.

 

 

Item 3.Defaults Upon Senior Securities.

 

None.

 

Item 4.Mine Safety Disclosures.

 

Not applicable.

 

Item 5.Other Information.

 

None.

 

43


 

Item 6.Exhibits.

 

 

2.1

Plan of Conversion and Reorganization (Incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-1, file no. 333-202707, originally filed on March 12, 2015)

 

 

 

 

3.1

Articles of Incorporation of Equitable Financial Corp. (Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, file no. 001-37489, filed on September 23, 2015)

 

 

 

 

3.2

Bylaws of Equitable Financial Corp. (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, file no. 001-37489, filed on September 23, 2015)

 

 

 

 

4

Form of Common Stock Certificate of Equitable Financial Corp.  (Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-1, file no. 333-202707, originally filed on March 12, 2015, as amended)

 

 

 

 

10.3

Equitable Financial Corp. 2016 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A for the Company’s Annual Meeting of Stockholders, file no. 001-37489, filed on October 7, 2016)

 

 

 

 

10.4

Form of Restricted Stock Award Agreement (Employee)

 

 

 

 

10.5

Form of Restricted Stock Award Agreement (Outside Director)

 

 

 

 

10.6

Form of Stock Option Award Agreement (Employee)

 

 

 

 

10.7

Form of Stock Option Award Agreement (Outside Director)

 

 

 

 

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.1

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.2

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

 

44


 

SIGNATURES

 

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

 

 

EQUITABLE FINANCIAL CORP.

 

 

 

Dated: May 12, 2017

By:

/s/ Thomas E. Gdowski

 

 

Thomas E. Gdowski

 

 

President and CEO

 

 

 

 

 

 

Dated:  May 12, 2017

By:

/s/ Darcy M. Ray

 

 

Darcy M. Ray

 

 

CFO

 

 

45


 

EXHIBIT INDEX

 

Exhibit
Number

 

Description

2.1

 

Plan of Conversion and Reorganization (Incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-1, file no. 333-202707, originally filed on March 12, 2015)

 

 

 

3.1

 

Articles of Incorporation of Equitable Financial Corp. (Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, file no. 001-37489 filed on September 23, 2015)

 

 

 

3.2

 

Bylaws of Equitable Financial Corp. (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, file no. 001-37489 filed on September 23, 2015)

 

 

 

4

 

Form of Common Stock Certificate of Equitable Financial Corp.  (Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-1, file no. 333-202707, originally filed on March 12, 2015, as amended)

 

 

 

10.3

 

Equitable Financial Corp. 2016 Equity Incentive Plan (Incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A for the Company’s Annual Meeting of Stockholders, file no. 001-37489, filed on October 7, 2016)

 

 

 

10.4

 

Form of Restricted Stock Award Agreement (Employee)

 

 

 

10.5

 

Form of Restricted Stock Award Agreement (Outside Director)

 

 

 

10.6

 

Form of Stock Option Award Agreement (Employee)

 

 

 

10.7

 

Form of Stock Option Award Agreement (Outside Director)

 

 

 

31.1

 

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

46