UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended March 31, 2017

OR

For the transition period from _______________ to _______________

Commission File No. 001-38074

 

Community First Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

(770) 786-7088

(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 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 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.  

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

As of May 8, 2017, 7,538,250 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

 

 

 

 

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Community First Bancshares, Inc.

Form 10-Q

Table of Contents

 

 

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EXPLANATORY NOTE

Community First Bancshares, Inc. (the “Company”) has been formed to serve as the mid-tier holding company for Newton Federal Bank upon the completion of the mutual holding company reorganization of Newton Federal Bank.  As of March 31, 2017, the reorganization had not been completed.  As of March 31, 2017, the Company had no assets or liabilities and had not conducted any business activities other than organizational activities.  Accordingly, the unaudited financial statements and the other financial information contained in this quarterly report on Form 10-Q relate solely to Newton Federal Bank.

The unaudited financial statements and other financial information contained in this quarterly report on Form 10-Q should be read in conjunction with the audited financial statements of Newton Federal Bank as of and for the years ended September 30, 2016 and 2015 contained in the Company’s definitive prospectus dated February 13, 2017 (the “Prospectus”) as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on February 21, 2017.

 

 

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PART I – FINANCIAL INFORMATION

NEWTON FEDERAL BANK

Balance Sheets

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited financial statements.

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NEWTON FEDERAL BANK

Statements of Income

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited financial statements.

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NEWTON FEDERAL BANK

Statements of Comprehensive Income

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited financial statements.

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NEWTON FEDERAL BANK

Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited financial statements.

 

 

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NEWTON FEDERAL BANK

Notes to Unaudited Financial Statements

 

Newton Federal Bank (the “Bank”) is a federally chartered mutual savings and loan that was regulated by the Office of Thrift Supervision (OTS) until July 2011, when the OTS merged with the Office of Comptroller of the Currency (OCC) and the OCC became the primary regulator of the Bank.  The Bank’s main office is in Covington (Newton County), Georgia, conducting banking activities primarily in Newton and surrounding counties. The main emphasis of the Bank is providing mortgage and commercial loans in its primary lending area.  It offers such customary banking services as consumer and commercial checking accounts, savings accounts, certificates of deposit, mortgage, commercial and consumer loans, money transfers and a variety of other banking services.

The accompanying unaudited financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Bank as of March 31, 2017 and the results of its operations and its cash flows for the periods presented. The interim financial information should be read in conjunction with the annual financial statements and the notes thereto included in the Registration Statement on Form S-1 of Community First Bancshares, Inc. (the “Company”), the proposed holding company for the Bank.

The results of operations for the quarter ended March 31, 2017, are not necessarily indicative of the results to be expected for the full year.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.

Summary of Significant Accounting Policies – The accounting and reporting policies of the Bank conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in the Bank’s financial statements for the year ended September 30, 2016 included in the Company’s Form S-1.

Recent Accounting Pronouncements

There have been no pronouncements issued during the quarter that would have a material impact on the Bank's financial statements.

Investment Securities Held-to-Maturity

Investment securities held-to-maturity at March 31, 2017 and September 30, 2016 are as follows: (in thousands)

 

 

There were no held-to-maturity securities in an unrealized loss position as of March 31, 2017 or September 30, 2016.

The U.S. government sponsored enterprise securities as of March 31, 2017 are comprised of one debt financing security issued by a government agency that matures within one year and one debt security issued by a government agency that matures within three years.

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NEWTON FEDERAL BANK

Notes to Unaudited Financial Statements

 

There were no sales of securities held-to-maturity during the three and six months ended March 31, 2017 or 2016.

Securities with a carrying value of approximately $1,500,000 and $2,250,000 were pledged to secure public deposits at March 31, 2017 and September 30, 2016, respectively.

Investment Securities Available-for-Sale

Investment securities available-for-sale at March 31, 2017 and September 30, 2016 are as follows: (in thousands)

 

 

There were four securities in an unrealized loss position as of March 31, 2017 and no securities in an unrealized loss position as of September 30, 2016.

The municipal tax exempt securities as of March 31, 2017 are comprised of eight debt securities issued by city and county municipal governments that mature between five and ten years and one security issued by a city or county municipal government that matures after ten years. The government agency mortgage back securities are issued by FNMA and FHLMC and are comprised of one security that matures in 5 to 10 years and seven securities that mature after ten years.

There were no sales of securities available-for-sale during the three and six months ended March 31, 2017 or 2016.

No available-for-sale securities were pledged to secure public deposits at March 31, 2017 and September 30, 2016.

Major classifications of loans, by collateral code, at March 31, 2017 and September 30, 2016 are summarized as follows: (in thousands)

 

 

The Bank grants loans and extensions of credit to individuals and a variety of firms and corporations located primarily in Newton County and other surrounding Georgia counties. A substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.

Qualifying loans in the amount of approximately $133,180,000 and $131,997,000 were pledged to secure the line of credit from the FHLB at March 31, 2017 and September 30, 2016, respectively.

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NEWTON FEDERAL BANK

Notes to Unaudited Financial Statements

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method for the six months ended March 31, 2017 and 2016: (in thousands)

 

 

The Bank individually evaluates all loans for impairment that are on nonaccrual status or are rated substandard (as described below).  Additionally, all troubled debt restructurings are evaluated for impairment.  A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the contractual terms of the loan will not be collected.  Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.  Interest payments received on impaired loans are applied as a reduction of the outstanding principal balance.

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NEWTON FEDERAL BANK

Notes to Unaudited Financial Statements

 

Impaired loans at March 31, 2017 and September 30, 2016 were as follows: (in thousands)

 

 

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NEWTON FEDERAL BANK

Notes to Unaudited Financial Statements

 

The following table presents the aging of the recorded investment in past due loans, as well as the recorded investment in nonaccrual loans, as of March 31, 2017 and September 30, 2016 by class of loans: (in thousands)

 

 

There were no loans past due over 90 days and still accruing interest as of March 31, 2017 and September 30, 2016.

The table below presents additional information on troubled debt restructurings including the number of loan contracts restructured and the pre- and post-modification recorded investment that have occurred during the six months ended March 31, 2017.  There were none for the six months ended March 31, 2016.  No troubled debt restructurings have subsequently defaulted during the six months ended March 31, 2017 and 2016: (in thousands)

 

 

The Bank has allocated an allowance for loan losses of approximately $4,000 and $5,000 to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2017 and September 30, 2016, respectively.

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Bank analyzes loans individually by classifying the loans as to credit risk.  This analysis is performed on a continuous basis.  The Bank uses the following definitions for its risk ratings:

Special Mention. Loans have potential weaknesses that may, if not corrected, weaken or inadequately protect the Bank's credit position at some future date.  Weaknesses are generally the result of deviation from prudent lending practices, such as over advances on collateral.  Credits in this category should, within a 12 month period, move to Pass if improved or drop to Substandard if poor trends continue.

Substandard. Inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any.  Loans have a well-defined weakness or weaknesses such as primary source of repayment is gone or severely impaired or cash flow is insufficient to reduce debt.  There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans have weaknesses of those classified Substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable.  The likelihood of a loss on an asset or portion of an asset classified Doubtful is high.

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NEWTON FEDERAL BANK

Notes to Unaudited Financial Statements

 

Loss.  Loans considered uncollectible and of such little value that the continuance as a Bank asset is not warranted.  This does not mean that the loan has no recovery or salvage value, but rather the asset should be charged off even though partial recovery may be possible in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.  As of March 31, 2017 and September 30, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (in thousands)

 

 

 

The aggregate amounts of certificates of deposit of $250,000 or more, the standard FDIC deposit insurance coverage limit per depositor, were approximately $10,649,000 at March 31, 2017 and $7,925,000 at September 30, 2016.  The aggregate amounts of certificates of deposit of $100,000 or more were approximately $37,991,000 at March 31, 2017 and $35,016,000 at September 30, 2016.  

The Bank utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  From time to time, the Bank may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets. Additionally, the Bank is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

The Bank groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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NEWTON FEDERAL BANK

Notes to Unaudited Financial Statements

 

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Cash and Cash Equivalents

The carrying value of cash and cash equivalents is a reasonable estimate of fair value.

Investment Securities Available-for-Sale

Available-for-sale securities are recorded at market value.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and state, county and municipal bonds.  Securities classified as Level 3 include asset-backed securities in less liquid markets.

Investment Securities Held-to-Maturity

Held-to-maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums and discounts.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and state, county and municipal bonds.  Securities classified as Level 3 include asset-backed securities in less liquid markets.

FHLB Stock

The carrying value of FHLB Stock approximates fair value.

Loans and Loans Held for Sale

The Bank does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired and a specific reserve is established within the allowance for loan losses.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, management measures impairment in accordance with GAAP.  The fair value of impaired loans is estimated using one of three methods, including collateral value, market value of similar debt, and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  In accordance with GAAP, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price, the Bank records the impaired loan as nonrecurring Level 2.  When an appraised value is used or an appraisal is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the impaired loan as nonrecurring Level 3. For disclosure purposes, the fair value of fixed rate loans which are not considered impaired 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. For unimpaired variable rate loans, the carrying amount is a reasonable estimate of fair value for disclosure purposes.

The estimated fair value of loans held for sale, classified within Level 2, is approximated by the carrying value, given the short-term nature of the loans and similarly to what secondary markets are currently offering for portfolios of loans with similar characteristics.

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NEWTON FEDERAL BANK

Notes to Unaudited Financial Statements

 

Other Real Estate Owned

Other real estate properties are adjusted to fair value upon transfer of the loans to other real estate.  Subsequently, other real estate assets are carried at fair value less estimated selling costs.  Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price, the Bank records the other real estate as nonrecurring Level 2.  When an appraised value is used or an appraisal is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the other real estate asset as nonrecurring Level 3.

Deposits

The fair value of passbook accounts, interest bearing checking accounts, non-interest bearing checking accounts and market rate checking accounts is the amount payable on demand at the reporting date, while the fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using current rates at which comparable certificates would be issued.

Commitments to Extend Credit

Commitments to extend credit are short-term and, therefore, the carrying value and the fair value are considered immaterial for disclosure.

Assets Recorded at Fair Value on a Recurring Basis

The Bank’s only assets recorded at fair value on a recurring basis are available-for-sale securities that had a fair value of $8.8 million at March 31, 2017.  They are classified as Level 2.  There were no assets recorded at fair value as of September 30, 2016.

Assets Recorded at Fair Value on a Nonrecurring Basis

The Bank may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.  Assets measured at fair value on a nonrecurring basis are included in the table below as of March 31, 2017 and September 30, 2016 (in thousands).

 

 

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NEWTON FEDERAL BANK

Notes to Unaudited Financial Statements

 

The carrying amounts and estimated fair values (in thousands) of the Bank’s financial instruments at March 31, 2017 and September 30, 2016 are as follows:

 

 

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

On October 31, 2016, the Board of Directors of the Bank adopted a Plan of Reorganization from a Mutual Savings Association to a Mutual Holding Company and Stock Issuance Plan (the “Plan”).  The Plan was subject to the approval of the Board of Governors of the Federal Reserve System and the affirmative vote of at least a majority of the total votes eligible to be cast by the voting members of the Bank at a special meeting.  Pursuant to the Plan, on April 27, 2017 the Bank converted to a stock savings bank and is now organized in the mutual holding company structure.  The Bank issued all of its outstanding stock to a new holding company, Community First Bancshares, Inc., which sold 3,467,595 shares of common stock to the public at $10.00 per share, representing 46% of its outstanding shares of common stock.  This amount included shares purchased by the Bank’s employee stock ownership plan (“ESOP”), which purchased 3.92% of the common stock of the new holding company outstanding upon the completion of the reorganization and stock issuance.  Community First Bancshares, Inc. is organized as a corporation under the laws of the United States.  Community First Bancshares, MHC has been organized as a mutual holding company under the laws of the United States and owns 54% of the outstanding common stock of Community First Bancshares, Inc.          

The cost of the reorganization and the issuing of the common stock were deferred and deducted from the sales proceeds of the offering.  As of March 31, 2017, reorganization costs of $809,710 had been recognized.  

 

 

 

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General

Management’s discussion and analysis of financial condition and results of operations at March 31, 2017 and September 30, 2016 and for the three and six months ended March 31, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of Newton Federal Bank.  The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning.  These forward-looking statements include, but are not limited to:

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.

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

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Additional factors that may affect our results are discussed in the Prospectus under the heading “Risk Factors.”

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

Summary of Significant Accounting Policies

A summary of our accounting policies is described in Note 1 of the Notes to Financial Statements included in the Prospectus.  The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

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.

The following represent our significant accounting policies:

Allowance for Loan Losses.  The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio. Actual credit losses, net of recoveries, are deducted from the allowance for loan losses. Loans are charged off when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment, is adequate to absorb probable losses in the loan portfolio. Management’s evaluation process used to determine the appropriateness of the allowance for loan losses is subject to the use of estimates, assumptions, and judgment. The evaluation process involves gathering and interpreting many qualitative and quantitative factors which could affect probable credit losses. Because interpretation and analysis involves judgment, current economic or business conditions can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses and therefore the appropriateness of the allowance for loan losses could change significantly.

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The allocation methodology applied by Newton Federal Bank is designed to assess the appropriateness of the allowance for loan losses and includes allocations for specifically identified impaired loans and loss factor allocations for all remaining loans, with a component primarily based on historical loss rates and a component primarily based on other qualitative factors. The methodology includes evaluation and consideration of several factors, such as, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions or circumstances underlying the collectability of loans. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the loan portfolio. Management believes the allowance for loan losses was appropriate at March 31, 2017. The allowance analysis is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies periodically review the allowance for loan losses. As a result of such reviews, we may have to adjust our allowance for loan losses.  However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is the responsibility of Newton Federal Bank and any increase or decrease in the allowance is the responsibility of management.  

Income Taxes.  The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.

Newton Federal Bank files a federal and a state income tax return.  Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Newton Federal Bank may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

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

Total assets increased $76.4 million, or 32.8%, to $309.3 million at March 31, 2017 from $232.8 million at September 30, 2016.  The increase was due primarily to an increase in cash and cash equivalents, as we held $64.4 million of funds at March 31, 2017 that had been submitted for the purchase of common stock in our stock offering.

Cash and cash equivalents increased $59.6 million, or 231.9%, to $85.3 million at March 31, 2017 from $25.7 million at September 30, 2016. The increase resulted primarily from our holding $64.4 million of funds at March 31, 2017 that had been submitted for the purchase of common stock in our stock offering.  Cash and cash equivalents will decrease in the second calendar quarter of 2017 as shares are issued and excess cash is refunded to persons whose orders for stock were not filled, in whole or in part, in the stock offering.  

We had $133,000 of loans held for sale at March 31, 2017 compared to $472,000 at September 30, 2016.

Loans held for investment increased $10.2 million, or 5.3%, to $204.1 million at March 31, 2017 from $193.9 million at September 30, 2016.  Construction and land loans increased $9.1 million, or 68.5%, to $22.5 million at March 31, 2017 from $13.3 million at September 30, 2016, and commercial and industrial loans increased $2.0 million, or 12.39%, to $18.2 million at March 31, 2017 from $16.2 million at September 30, 2016.  We have recently increased our focus on commercial lending, including construction lending, and our construction lending has benefitted from the opening of our loan production office in Bogart, Georgia in January 2016.  Commercial real estate loans decreased $2.9 million, or 10.14%, to $26.2 million at March 31, 2017 from $29.2 million at September 30, 2016.  The decrease resulted from our largest commercial real estate loan being repaid in connection with it being refinanced at another financial institution.

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Securities held-to-maturity decreased $5.0 million, or 66.6%, to $2.5 million at March 31, 2017 from $7.5 million at September 30, 2016 due to the maturity of a security.  Securities available-for-sale increased to $8.8 million at March 31, 2017, from $0 at September 30, 2016.  We purchased securities available-for-sale with a portion of the excess cash we held during the six-month period as well as the cash generated from the maturity of held-to-maturity securities.

Total deposits increased $76.4 million, or 42.0%, to $258.1 million at March 31, 2017 from $181.7 million at September 30, 2016.  The increase was primarily due to an increase in non-interest accounts, as we held $64.4 million of funds at March 31, 2017 that had been submitted for the purchase of common stock in our stock offering.  The increase was also caused by increases in all other categories of deposit accounts except for market rate checking accounts.  Passbook accounts increased $1.9 million, or 9.2% to $23.1 million at March 31, 2017 from $21.2 million at September 30, 2016.  Interest-bearing accounts increased $4.9 million, or 16.0%, to $30.1 million at March 31, 2017.  Non-interest-bearing checking accounts increased $67.9 million, or 312.3%, to $89.6 million at March 31, 2017 from $21.7 million at September 30, 2016.  Certificates of deposit increased $2.6 million, or 3.0%, to $88.1 million at March 31, 2017 from $85.5 million at September 30, 2016.  We experienced an increase in passbook accounts from out-of-state customers who we believe opened deposit accounts in order to obtain subscription rights in the offering, and many of these funds were withdrawn during the quarter ended March 31, 2017.  Certificates of deposits increased due to a CD campaign.  In recent periods, we allowed higher-rate certificates of deposit to run off at maturity to both improve our deposit mix and reduce our cost of funds, but we stopped this practice as of September 30, 2016.  

We had no outstanding borrowings at March 31, 2017 or September 30, 2016.  We have not needed borrowings to fund our operations in recent years due to a strong cash position and continued deposit growth.

Total equity capital increased $801,000, or 1.8%, to $45.9 million at March 31, 2017 from $45.1 million at September 30, 2016. The growth was due primarily to net income of $794,000 for the six months ended March 31, 2017.  Until the quarter ended December 31, 2016, we had classified all of our securities as held to maturity, resulting in no comprehensive income or loss.  We had $7,000, net of taxes, of unrecognized gain on securities available for sale at March 31, 2017.

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Average Balance Sheets

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated.  No tax-equivalent yield adjustments have been made, as the effects would be immaterial.  All average balances are monthly average balances.  Non-accrual loans were included in the computation of average balances.   The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.  Loan balances exclude loans held for sale.

 

 

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  The total column represents the sum of the prior columns.  For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

 

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

General. Net income increased $224,000, or 117.9%, to $414,000 for the three months ended March 31, 2017, compared to $190,000 for the three months ended March 31, 2016.  The increase was due to increases in net interest income and non-interest income, partially offset by an increase in non-interest expenses, as described in more detail below.

Interest Income. Interest income increased $244,000, or 8.7%, to $3.1 million for the three months ended March 31, 2017 from $2.8 million for the three months ended March 31, 2016.  The increase was due primarily to a $223,000, or 8.2%, increase in interest income on loans, which is our primary source of interest income.  Our average balance of loans increased $27.2 million, or 16.2%, to $195.6 million for the three months ended March 31, 2017 from $168.3 million for the three months ended March 31, 2016.  The increase in the average balance of loans resulted from our continued increased focus on commercial lending, including construction lending, and our construction lending has benefitted from the opening of our loan production office in Bogart, Georgia in January 2016.  Our average yield on loans decreased 45 basis points to 6.03% for the three months ended March 31, 2017 from 6.48% for the three months ended March 31, 2016, as higher-yielding loans have been repaid or refinanced and replaced with lower-yielding loans, reflecting the current interest rate environment.

Interest Expense. Interest expense decreased $122,000, or 33.0%, to $248,000 for the three months ended March 31, 2017 compared to $370,000 for the three months ended March 31, 2016, due to a decrease in interest expense on deposits, which is currently our sole source of interest expense.  Specifically, interest expense on certificates of deposit decreased $137,000, or 40.9%, to $198,000 for the three months ended March 31, 2017 from $335,000 for the three months ended March 31, 2016.  This decrease resulted from decreases in both the average balance of certificates of deposit and the average rate we paid on certificates of deposit.  The average balance of certificates of deposit decreased $7.5 million, or 8.1%, to $85.7 million for the three months ended March 31, 2017 from $93.2 million for the three months ended March 31, 2016, and the average rate we paid on certificates of deposit decreased 52 basis points to 0.92% for the three months ended March 31, 2017 from 1.44% for the three months ended March 31, 2016.  In recent periods, we had allowed higher-rate certificates of deposit to run off at maturity to improve our deposit mix and reduce our cost of funds.  In addition, we have been able to fund loan growth from excess cash as well as cash generated from other deposit products.

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Net Interest Income. Net interest income increased $366,000, or 15.0%, to $2.8 million for the three months ended March 31, 2017 from $2.4 million for the three months ended March 31, 2016, as a result of a higher balance of net interest-earning assets combined with a higher net interest rate spread and net interest margin.  Our average net interest-earning assets increased by $15.1 million, or 28.6%, to $67.9 million for the three months ended March 31, 2017 from $52.8 million for the three months ended March 31, 2016, due primarily to our loan growth, described above.  Our net interest rate spread increased by 35 basis points to 4.65% for the three months ended March 31, 2017 from 4.30% for the three months ended March 31, 2016, and our net interest margin increased by 30 basis points to 4.82% for the three months ended March 31, 2017 from 4.52% for the three months ended March 31, 2016, reflecting primarily a decrease in our cost of funds, as well as a 4 basis point increase in the average yield on our interest-earning assets.

Provision for Loan Losses.  Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See “—Summary of Significant Accounting Policies” for additional information.

After an evaluation of these factors, we did not record a provision for loan losses for the three months ended March 31, 2017 or 2016.  Our allowance for loan losses was $4.4 million at March 31, 2017 compared to $4.4 million at December 31, 2016 and $4.3 million at March 31, 2016.  The allowance for loan losses to total loans was 2.15% at March 31, 2017 compared to 2.21% at December 31, 2016 and 2.43% at March 31, 2016.  The allowance for loan losses to non-performing loans was 167.2% at March 31, 2017 compared to 95.2% at December 31, 2016 and 131.6% at March 31, 2016.  We were able to maintain the allowance relatively consistent between March 31, 2017 and December 31, 2016 as we experienced modest loan growth during the quarter ended March 31, 2017, and had net recoveries of $25,000 during the quarter.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at March 31, 2017.  However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.  However, regulatory agencies are not directly involved in the process of establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Non-interest Income. Non-interest income increased $35,000, or 12.1%, to $325,000 for the three months ended March 31, 2017 from $290,000 for the three months ended March 31, 2016.  The increase primarily resulted from an increase in other non-interest income of $28,000, or 23.0%, to $150,000 for the three months ended March 31, 2017 from $122,000 for the three months ended March 31, 2016.  This was due largely to loan related fees due to increased loan volume.

Non-interest Expenses. Non-interest expenses information is as follows.

 

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Salaries and employee benefits increased due to increased staff for growth and infrastructure.  Data processing expense increased due to increased expenses related to our Kasasa (rewards) deposit program, which we introduced in November 2014, which promotes free checking accounts with either attractive interest rates or cash-back rewards.  Write down of other real estate owned was a gain compared to a loss the previous period due to reduction in foreclosed property.  Federal deposit insurance premiums decreased substantially due to a change in the way FDIC calculates the assessment fees.

Income Tax Expense. We incurred income tax expense of $250,000 and $95,000 for the three months ended March 31, 2017 and 2016, respectively, resulting in effective rates of 37.7% and 33.3%, respectively.  The increase in tax expense resulted from a $379,000, or 133.0%, increase in pre-tax income to $664,000 for the three months ended March 31, 2017 from $285,000 for the three months ended March 31, 2016.

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

General. Net income increased $331,000, or 71.5%, to $794,000 for the six months ended March 31, 2017, compared to $463,000 for the six months ended March 31, 2016.  The increase was due to increases in net interest income and non-interest income, partially offset by an increase in non-interest expenses, as described in more detail below.

Interest Income. Interest income increased $392,000, or 7.1%, to $5.9 million for the six months ended March 31, 2017 from $5.5 million for the six months ended March 31, 2016.  The increase was due to a $370,000, or 6.9%, increase in interest income on loans, which is our primary source of interest income.  Our average balance of loans increased $24.1 million, or 14.3%, to $192.6 million for the six months ended March 31, 2017 from $168.5 million for the six months ended March 31, 2016.  The increase in the average balance of loans resulted from our continued increased focus on commercial lending, including construction lending, and our construction lending has benefitted from the opening of our loan production office in Bogart, Georgia in January 2017.  Our average yield on loans decreased 42 basis points to 5.99% for the six months ended March 31, 2017 from 6.41% for the six months ended March 31, 2016, as higher-yielding loans have been repaid or refinanced and replaced with lower-yielding loans, reflecting the current interest rate environment.  

Interest Expense. Interest expense decreased $304,000, or 38.3%, to $489,000 for the six months ended March 31, 2017 compared to $793,000 for the six months ended March 31, 2016, due to a decrease in interest expense on deposits, which is currently our sole source of interest expense.  Specifically, interest expense on certificates of deposit decreased $331,000, or 45.7%, to $393,000 for the six months ended March 31, 2017 from $724,000 for the six months ended March 31, 2016.  This decrease resulted from decreases in both the average balance of certificates of deposit and the average rate we paid on certificates of deposit.  The average rate we paid on certificates of deposit decreased 62 basis points to 0.92% for the six months ended March 31, 2017 from 1.54% for the six months ended March 31, 2016, reflecting lower market interest rates.  The average balance of certificates of deposit decreased $9.1 million, or 9.6%, to $85.1 million for the six months ended March 31, 2017 from $94.1 million for the six months ended March 31, 2016.  In recent periods, we had allowed higher-rate certificates of deposit to run off at maturity to improve our deposit mix and reduce our cost of funds.  In addition, we have been able to fund loan growth from excess cash as well as cash generated from other deposit products.  

Net Interest Income. Net interest income increased $696,000, or 14.6%, to $5.5 million for the six months ended March 31, 2017 from $4.8 million for the six months ended March 31, 2016, as a result of a higher balance of net interest-earning assets combined with a higher net interest rate spread and net interest margin.  Our average net interest-earning assets increased by $10.6 million, or 20.3%, to $62.6 million for the six months ended March 31, 2017 from $52.0 million for the six months ended March 31, 2016, due primarily to our loan growth, described above.  Our net interest rate spread increased by 48 basis points to 4.68% for the six months ended March 31, 2017 from 4.20% for the six months ended March 31, 2016, and our net interest margin increased by 41 basis points to 4.85% for the six months ended March 31, 2017 from 4.44% for the six months ended March 31, 2016, reflecting primarily a decrease in our cost of funds, as well as a 10 basis point increase in the average yield on our interest-earning assets.

Provision for Loan Losses.  We did not record a provision for loan losses for the six months ended March 31, 2017 or 2016.  Our allowance for loan losses was $4.4 million at March 31, 2017 compared to $4.3 million at September 30, 2016 and $4.3million at March 31, 2016.  The allowance for loan losses to total loans was 2.20% at March 31, 2017 compared to 2.22% at September 30, 2016 and 2.43% at March 31, 2016.  The allowance for loan losses to non-performing loans was 167.17% at March 31, 2017 compared to 132.87% at September 30, 2016 and 131.55% at March 31, 2016.  We were able to maintain the allowance relatively consistent between March 31, 2017 and September 30, 2016 despite the loan growth we experienced during the six months ended March 31, 2017, as we had net recoveries of $79,000 during the period while also experiencing improvement in asset quality as impaired loans decreased during the period.

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Non-interest Income. Non-interest income increased $82,000, or 14.8%, to $637,000 for the six months ended March 31, 2017 from $555,000 for the six months ended March 31, 2016.  The increase primarily resulted from an increase in other non-interest income of $67,000, or 32.1%, to $276,000 for the six months ended March 31, 2017 from $209,000 for the six months ended March 31, 2016.  This was due largely to loan related fees due to increased loan volume.

Non-interest Expenses. Non-interest expenses information is as follows.

 

 

Salaries and employee benefits increased due to increased staff for growth and infrastructure.  Data processing expense increased due to increased expenses related to our Kasasa (rewards) deposit program, which we introduced in November 2014, which promotes free checking accounts with either attractive interest rates or cash-back rewards.  Write down of other real estate owned was a gain compared to a loss the previous period due to reduction in foreclosed property.  

Income Tax Expense. We incurred income tax expense of $479,000 and $242,000 for the six months ended March 31, 2017 and 2016, respectively, resulting in effective rates of 37.6% and 34.3%, respectively.  The increase in tax expense resulted from a $568,000, or 80.6%, increase in pre-tax income to $1.3 million for the six months ended March 31, 2017 from $705,000 for the six months ended March 31, 2016.

Management of Market Risk

General.  Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates.  Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates.  Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.  We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates.  We have implemented the following strategies to manage our interest rate risk:

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By following these strategies, we believe that we are better positioned to react to increases in market interest rates.  In addition, beginning in calendar 2017, we intend to introduce adjustable-rate, one- to four-family residential real estate loans (in addition to our existing home equity loans and lines of credit, which are originated with adjustable interest rates), and we have already begun to increase our investment securities portfolio, with an average maturity of less than 15 years.

We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model.  Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings.  We estimate what our net interest income would be for a 12-month period.  We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.  A basis point equals one-hundredth of one percent, and 100 basis points equals one percent.  An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

The table below sets forth, as of March 31, 2017, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

 

 

The table above indicates that at March 31, 2017, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 12.34% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 13.81% decrease in net interest income.  At March 31, 2016, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 1.01% decrease in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 4.90% decrease in net interest income.

Net Economic Value. We also compute amounts by which the net present value of our assets and liabilities (net economic value or “NEV”) would change in the event of a range of assumed changes in market interest rates.  This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value.  The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.

The table below sets forth, as of March 31, 2017, the calculation of the estimated changes in our NEV that would result from the designated immediate changes in the United States Treasury yield curve.

 

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The table above indicates that at March 31, 2017, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 12.43% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 2.73% increase in net economic value.  At March 31, 2016, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would experience a 12.81% decrease in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would experience a 0.62% increase in net economic value.

GAP Analysis. In addition, we analyze our interest rate sensitivity by monitoring our interest rate sensitivity “gap.” Our interest rate sensitivity gap is the difference between the amount of our interest-earning assets maturing or repricing within a specific time period and the amount of our interest-bearing liabilities maturing or repricing within that same time period.  A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a period exceeds the amount of interest rate sensitive liabilities maturing or repricing during the same period, and a gap is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a period exceeds the amount of interest rate sensitive assets maturing or repricing during the same period.

The following table sets forth our interest-earning assets and our interest-bearing liabilities at March 31, 2017, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability.  The table sets forth an approximation of the projected repricing of assets and liabilities at March 31, 2017, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans.  Amounts are based on a preliminary balance sheet as of March 31, 2017, and may not equal amounts included in our unaudited financial statements for the quarter ended March 31, 2017.  However, we believe that there would be no material changes in the results of the gap analysis if the unaudited financial results included in Part 1, Item 1 of this quarterly report had been utilized.

 

 

At March 31, 2016, our asset/liability gap from zero days to one year was ($944,000), resulting in a gap/assets ratio of (0.41%).

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Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income and NEV tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and NEV and will differ from actual results.  Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.  Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table.

Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business.  Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures.  Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities.  We also have the ability to borrow from the Federal Home Loan Bank of Atlanta.  At March 31, 2017, we had a $58.0 million line of credit with the Federal Home Loan Bank of Atlanta, and had no borrowings outstanding as of March 31, 2017.  In addition, we have a $5.0 million unsecured federal funds line of credit and a $7.5 million unsecured federal funds line of credit.  No amount was outstanding on these lines of credit at March 31, 2017.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities.  Net cash (used in)/provided by operating activities was $(639,000) and $518,000 for the six months ended March 31, 2017 and 2016, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans was $(16.1) million and $3.1 million for the six months ended March 31, 2017 and 2016, respectively. Net cash provided by financing activities, consisting of activity in deposit accounts, was $76.4 million and $3.8 million for the six months ended March 31, 2017 and 2016.

We are committed to maintaining a strong liquidity position.  We monitor our liquidity position on a daily basis.  We anticipate that we will have sufficient funds to meet our current funding commitments.  Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

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At March 31, 2017, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at March 31, 2017.  Management is not aware of any conditions or events since the most recent notification that would change our category.  The Bank’s actual capital amounts and ratios for March 31, 2017 and September 30, 2016 are presented in the table below (in thousands).

 

 

The net proceeds from the stock offering significantly increased our liquidity and capital resources. Over time, our level of liquidity may be reduced as the net proceeds from the stock offering are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations are expected to be enhanced and result in increases in net interest-earning assets and net interest income. However, due to the increase in equity from the stock offering proceeds, our return on equity will be lower until we can utilize the proceeds raised in the stock offering.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit.  While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.  Such commitments are subject to the same credit policies and approval process accorded to loans we make.  At March 31, 2017, we had outstanding commitments to originate loans of $15.4 million.  We anticipate that we will have sufficient funds available to meet our current lending commitments.  Time deposits that are scheduled to mature in less than one year from March 31, 2017 totaled $28.7 million.  Management expects that a substantial portion of the maturing time deposits will be renewed.  However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations.  Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

During the year ended September 30, 2016, we entered into an agreement to construct an operations center.  The new building is expected to be completed during the second calendar quarter of 2017, with an estimated construction price of $2.6 million, as well as additional costs to furnish the building.  During the six months ended March 31, 2017, we incurred $1,848,450 of expense for this construction.

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The information required by this item is included in Part 1, Item 2 of this quarterly report under “Management of Market Risk.”

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2017. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2017, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business.  At March 31, 2017, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.

In addition to the other information set forth in this quarterly report, you should carefully consider the factors discussed under the heading “Risk Factors” contained in the Prospectus.  The Company’s evaluation of the risk factors applicable to it has not changed materially from those disclosed in the Prospectus.

None.

None.

Not applicable.

None.

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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.

 

 

 

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