Equitable Financial Corp. - FORM 10-Q

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EX-32.2 - EX-32.2 - Equitable Financial Corp.	eqfn-20180331ex3229ecb89.htm
EX-32.1 - EX-32.1 - Equitable Financial Corp.	eqfn-20180331ex3215f4f3a.htm
EX-31.2 - EX-31.2 - Equitable Financial Corp.	eqfn-20180331ex312013f80.htm
EX-31.1 - EX-31.1 - Equitable Financial Corp.	eqfn-20180331ex3114ea83a.htm

Table of Contents

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, 2018

☐	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	☒

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 ☒

Shares of the Registrant’s common stock, par value $0.01 per share, 3,317,670 issued and outstanding as of May 14, 2018.

Table of Contents

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	32

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	42

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		46

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

Equitable Financial Corp. and Subsidiary

Consolidated Balance Sheets


	(Unaudited)
	March 31, 2018		June 30, 2017
Assets
Cash and due from financial institutions	$	7,669,608	$	4,881,007
Interest-earning deposits		28,317,000		—
		35,986,608		4,881,007
Securities available-for-sale		1,306,454		1,410,955
Securities held-to-maturity		710,943		735,978
Federal Home Loan Bank stock, at cost		282,300		453,400
Loans, net of allowance for loan losses of $4,598,000 and $3,555,000, respectively		255,946,923		236,545,125
Premises and equipment, net		5,369,485		5,424,855
Foreclosed assets, net		223,200		223,200
Accrued interest receivable		1,512,532		1,297,908
Deferred taxes, net		810,004		862,009
Customer list intangible		1,441,264		289,058
Other assets		2,077,815		1,718,993

Total assets	$	305,667,528	$	253,842,488

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing deposits	$	37,452,083	$	29,546,051
Interest-bearing deposits		223,257,251		179,512,265
		260,709,334		209,058,316
Federal funds purchased		—		399,000
Federal Home Loan Bank Borrowings		5,000,000		6,745,400
Advance payments from borrowers for taxes and insurance		562,082		432,960
Accrued interest payable and other liabilities		2,743,811		820,229
Total liabilities		269,015,227		217,455,905

Common stock in ESOP subject to contingent repurchase obligation		992,922		815,280


Stockholders’ equity:
Common stock, $0.01 par value, 25,000,000 shares authorized 3,317,670 and 3,372,532 shares issued and outstanding at March 31, 2018 and June 30, 2017, respectively		33,177		33,725
Additional paid-in capital		25,213,501		25,794,124
Retained earnings		13,046,057		12,474,958
Unearned ESOP shares		(1,003,894)		(1,107,692)
Shares reserved for stock compensation		(608,620)		(797,950)
Accumulated other comprehensive loss net of tax		(27,920)		(10,582)
Reclassification of ESOP shares		(992,922)		(815,280)
Total stockholders’ equity		35,659,379		35,571,303

Total liabilities and stockholders’ equity	$	305,667,528	$	253,842,488

See Notes to Consolidated Financial Statements.

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Equitable Financial Corp. and Subsidiary

Consolidated Statements of Income

(Unaudited)


	For the three months ended				For the nine months ended
	March 31, 2018		March 31, 2017		March 31, 2018		March 31, 2017
Interest income:
Loans	$	2,870,207	$	2,301,482	$	8,436,343	$	6,737,414
Securities		15,113		13,417		47,940		32,500
Other		27,652		5,329		37,858		21,704
Total interest income		2,912,972		2,320,228		8,522,141		6,791,618

Interest expense:
Deposits		448,530		281,285		1,209,968		813,465
Federal Home Loan Bank borrowings		19,400		1,011		69,060		1,011
Other		1,237		595		4,895		1,357
Total interest expense		469,167		282,891		1,283,923		815,833

Net interest income		2,443,805		2,037,337		7,238,218		5,975,785
Provision for loan losses		134,497		60,830		1,001,836		382,703
Net interest income after provision for loan losses		2,309,308		1,976,507		6,236,382		5,593,082

Noninterest income:
Service charges on deposit accounts		164,781		150,976		491,359		468,544
Brokerage fee income		142,094		160,542		453,602		545,779
Gain on sale of loans		71,205		103,721		374,520		595,439
Other loan fees		73,286		57,644		180,477		208,947
Other income		60,869		38,930		263,189		107,231
Total noninterest income		512,235		511,813		1,763,147		1,925,940

Noninterest expense:
Salaries and employee benefits		1,299,035		1,225,488		3,847,371		3,538,488
Director and committee fees		39,042		41,557		123,242		122,342
Data processing fees		164,304		146,346		471,017		433,039
Occupancy and equipment		266,986		247,386		767,093		729,916
Regulatory fees and deposit insurance premium		70,144		42,804		183,401		126,003
Advertising and public relations		64,796		58,207		179,041		153,379
Professional fees		99,400		53,198		306,976		310,931
Supplies, telephone and postage		67,865		75,480		206,823		207,570
Other expenses		244,701		183,888		584,313		558,685
Total noninterest expense		2,316,273		2,074,354		6,669,277		6,180,353

Income before income taxes		505,270		413,966		1,330,252		1,338,669

Income tax expense		(155,170)		(138,620)		(759,153)		(488,801)

Net income	$	350,100	$	275,346	$	571,099	$	849,868

Basic earnings per share	$	0.11	$	0.08	$	0.18	$	0.26
Diluted earnings per share	$	0.11	$	0.08	$	0.18	$	0.25

See Notes to Consolidated Financial Statements.

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Equitable Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the three months ended				For the nine months ended
	March 31, 2018		March 31, 2017		March 31, 2018		March 31, 2017
Net income	$	350,100	$	275,346	$	571,099	$	849,868
Other comprehensive gain/(loss):
Unrealized gain/(loss) on securities available-for-sale, net of tax		(14,211)		4,941		(17,338)		(22,306)
Comprehensive income	$	335,889	$	280,287	$	553,761	$	827,562

See Notes to Consolidated Financial Statements.

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Equitable Financial Corp. and Subsidiary

Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended March 31, 2018

(Unaudited)


									Shares		Accumulated		Amount
									Reserved for		Other		Reclassified
	Common		Additional		Retained		Unearned		Stock		Comprehensive		on ESOP
	Stock		Paid-in Capital		Earnings		ESOP Shares		Compensation		Loss		Shares		Total

Balance, June 30, 2017	$	33,725	$	25,794,124	$	12,474,958	$	(1,107,692)	$	(797,950)	$	(10,582)	$	(815,280)	$	35,571,303

Net Income						571,099										571,099
Other comprehensive loss												(17,338)				(17,338)
Release of 11,897 unearned ESOP shares				20,723				103,798								124,521
Stock compensation expense				(19,702)						189,330						169,628
Stock Buyback		(548)		(581,644)												(582,192)
Reclassification due to release and changes in fair value of common stock in ESOP subject to contingent repurchase obligation of ESOP shares														(177,642)		(177,642)

Balance, March 31, 2018	$	33,177	$	25,213,501	$	13,046,057	$	(1,003,894)	$	(608,620)	$	(27,920)	$	(992,922)	$	35,659,379

See Notes to Consolidated Financial Statements.

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Equitable Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)


	For the nine months ended
	March 31, 2018		March 31, 2017
Cash Flows from Operating Activities:
Net income	$	571,099	$	849,868
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		264,255		254,167
Federal Home Loan Bank stock dividends		(7,900)		(1,800)
ESOP expense		124,521		111,615
Stock compensation expense		169,628		57,701
Amortization of deferred loan origination costs, net		381,298		369,661
Amortization of intangibles		36,677		16,676
Amortization of premiums and discounts		903		8,641
Gain on sale of loans		(374,520)		(595,439)
(Gain)/Loss on sale of foreclosed assets		30,298		(4,579)
Loss on disposal of premises and equipment		5,078		—
Provision for loan losses		1,001,836		382,703
Deferred taxes		57,442		(67,456)
Loans originated for sale		(14,105,906)		(23,044,937)
Proceeds from sale of loans		14,350,012		23,355,172
Loss on investment in partnership		—		34,859
Changes in:
Accrued interest receivable		(214,624)		(85,835)
Other assets		(213,409)		(66,893)
Accrued interest payable and other liabilities		963,582		202,857
Net cash provided by operating activities		3,040,270		1,776,981

Cash Flows from Investing Activities:
Net change in loans		(21,310,398)		(23,303,567)
Proceeds from sale of foreclosed assets, net		491,288		243,226
Securities available-for-sale:
Proceeds from calls and principal repayments		80,909		175,728
Purchases		—		(985,400)
Securities held-to-maturity:
Proceeds from calls and principal repayments		24,948		35,374
Redemption of Federal Home Loan Bank stock		400,500		—
Purchases of Federal Home Loan Bank stock		(221,500)		—
Purchase of customer list intangible		(240,000)		—
Purchase of premises and equipment		(213,964)		(439,626)
Net cash used in investing activities		(20,988,217)		(24,274,265)

(Continued)

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Equitable Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Continued)

(Unaudited)


	For the nine months ended
	March 31, 2018		March 31, 2017
Cash Flows from Financing Activities:
Net change in deposits	$	51,651,018	$	15,926,015
Net change in federal funds purchased		(399,000)		—
Proceeds from Federal Home Loan Bank borrowings		23,000,000		2,620,000
Repayments of Federal Home Loan Bank borrowings		(24,745,400)		( 2,620,000 )
Net change in advance payments from borrowers for taxes and insurance		129,122		58,380
Stock Buyback		(582,192)		(1,027,463)
Net cash provided by financing activities		49,053,548		14,956,932

Increase/(Decrease) in cash and cash equivalents		31,105,601		(7,540,352)

Cash and Cash Equivalents:
Beginning		4,881,007		14,947,296

Ending	$	35,986,608	$	7,406,944

Supplemental Cash Flow Information:
Interest paid on deposits and borrowings	$	1,243,072	$	816,262
Income taxes paid	$	633,401	$	162,879

Supplemental Noncash Disclosure:
Transfer of loans to foreclosed assets	$	521,586	$	—
Deferred payments on purchase of customer list intangible	$	960,000	$	—

See Notes to Consolidated Financial Statements.

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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, 2017. The consolidated balance sheet of the Company as of June 30, 2017 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, 2017.

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.New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“the FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. This ASU is effective for the Company beginning with the fiscal year ending June 30, 2019, including interim periods within these fiscal years. The FASB issued this ASU to clarify the principles for recognizing revenue and to develop a common revenue standard. The Company believes this will have a minimal impact on its financial statements.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), intended to improve financial reporting about leasing transactions. This ASU is effective for the Company with the interim period beginning July 1, 2019. We are currently evaluating the effect of this proposal on our financial statements.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The purpose of this ASU 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. This ASU 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 will be effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. 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 ASU is to address existing diversity in practice related to specific cash

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

flow issues. This ASU will be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The purpose of this ASU is to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. This ASU will be effective for annual reporting periods beginning after December 15, 2017. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other. The purpose of this ASU is to simplify how an entity is required to test goodwill for impairment. This ASU will be effective for annual fiscal years beginning after December 15, 2019. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets. The purpose of this ASU is to clarify the scope for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers and add guidance for partial sales of nonfinancing assets. This ASU is effective for the Company beginning with the fiscal year ending June 30, 2019. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs. The purpose of this ASU is to shorten the amortization period of certain callable debt securities held at a premium. This ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation. The purpose of this ASU is to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. This ASU will be effective for annual periods, and interim periods within those annual periods, beginning December 15, 2017. The Company adopted this standard effective July 1, 2017 and it did not have a material impact to the Company’s consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging. The purpose of this ASU is to address complexity of accounting for certain financial instruments with down round features and the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity. This ASU is effective for fiscal years beginning after December 15, 2019. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging. The purpose of this ASU is to improve the hedge accounting model to facilitate financial reporting that more closely reflects an entity’s risk management activities. This ASU will be effective for fiscal years beginning after December 15, 2018. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income. The purpose of this ASU is to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This amendment is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 3.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, 2018	Cost		Gains		Losses		Fair Value
U.S. Government-sponsored agencies securities	$	988,759	$	—	$	(32,856)	$	955,903
Residential mortgage-backed securities		356,505		—		(5,954)		350,551
	$	1,345,264	$	—	$	(38,810)	$	1,306,454


			Gross		Gross
	Amortized		Unrealized		Unrealized
June 30, 2017	Cost		Gains		Losses		Fair Value
U.S. Government-sponsored agencies securities	$	986,919	$	—	$	(17,974)	$	968,945
Residential mortgage-backed securities		440,070		1,973		(33)		442,010
	$	1,426,989	$	1,973	$	(18,007)	$	1,410,955

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, 2018	Cost		Gains		Losses		Fair Value
Residential mortgage-backed securities	$	110,943	$	5,575	$	—	$	116,518
Municipal securities		600,000		—		(4,596)		595,404
	$	710,943	$	5,575	$	(4,596)	$	711,922


			Gross		Gross
	Amortized		Unrealized		Unrealized
June 30, 2017	Cost		Gains		Losses		Fair Value
Residential mortgage-backed securities	$	135,978	$	10,279	$	—	$	146,257
Municipal securities		600,000		—		(384)		599,616
	$	735,978	$	10,279	$	(384)	$	745,873

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, 2018 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 $956,000 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, 2018 and 2017.

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, 2018 and 2017.

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 4.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

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, 2018		June 30, 2017
Commercial:
Operating	$	22,079,599	$	20,139,045
Real estate		95,303,209		86,809,938
Agricultural:
Operating		26,228,511		26,739,407
Real estate		30,710,975		31,105,790
Residential real estate:
1-4 family		47,376,890		43,060,013
Home equity		12,950,830		11,748,363
Other:
Construction and land		21,447,244		16,175,698
Consumer		3,777,872		3,674,674
Total loans		259,875,130		239,452,928

Deferred loan origination costs, net		669,793		647,197
Allowance for loan losses		(4,598,000)		(3,555,000)
		(3,928,207)		(2,907,803)

Loans, net	$	255,946,923	$	236,545,125

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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, 2018
Balance, beginning	$	2,446,000	$	980,000	$	716,000	$	320,000	$	4,462,000
Provision charged to expense		(238,975)		(58,000)		196,687		234,785		134,497
Recoveries		975		—		313		1,911		3,199
Loans charged off		—		—		—		(1,696)		(1,696)
Balance, ending	$	2,208,000	$	922,000	$	913,000	$	555,000	$	4,598,000


					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


					Residential
	Commercial		Agricultural		Real Estate		Other		Total
	For the nine months ended March 31, 2018
Balance, beginning	$	1,703,000	$	918,000	$	656,000	$	278,000	$	3,555,000
Provision charged to expense		463,167		4,000		254,855		279,814		1,001,836
Recoveries		41,833		—		2,145		3,789		47,767
Loans charged off		—		—		—		(6,603)		(6,603)
Balance, ending	$	2,208,000		922,000		913,000		555,000	$	4,598,000


					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

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.

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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.

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, 2018
Allowance for loans individually evaluated for impairment	$	413,434	$	30,200	$	226,405	$	209,890	$	879,929
Allowance for loans collectively evaluated for impairment		1,794,566		891,800		686,595		345,110		3,718,071
	$	2,208,000	$	922,000	$	913,000	$	555,000	$	4,598,000

Loans individually evaluated for impairment	$	3,191,959	$	486,057	$	2,885,746	$	557,789	$	7,121,551
Loans collectively evaluated for impairment		114,190,849		56,453,429		57,441,974		24,667,327		252,753,579
	$	117,382,808	$	56,939,486	$	60,327,720	$	25,225,116	$	259,875,130

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


					Residential
	Commercial		Agricultural		Real Estate		Other		Total
	June 30, 2017
Allowance for loans individually evaluated for impairment	$	6,487	$	17,973	$	29,271	$	1,949	$	55,680
Allowance for loans collectively evaluated for impairment		1,696,513		900,027		626,729		276,051		3,499,320
	$	1,703,000	$	918,000	$	656,000	$	278,000	$	3,555,000

Loans individually evaluated for impairment	$	870,377	$	864,357	$	3,142,020	$	20,408	$	4,897,162
Loans collectively evaluated for impairment		106,078,606		56,980,840		51,666,356		19,829,964		234,555,766
	$	106,948,983	$	57,845,197	$	54,808,376	$	19,850,372	$	239,452,928

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.

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, 2018
Classes of loans:
Commercial:
Operating	$	21,943,773	$	12,007	$	72,993	$	50,826	$	22,079,599	$	1,292,084
Real estate		95,163,242		139,967		—		—		95,303,209		598,416
Agricultural:
Operating		26,228,511		—		—		—		26,228,511		—
Real estate		29,904,824		335,094		—		471,057		30,710,975		486,057
Residential real estate:
1-4 family		47,129,554		20,105		—		227,231		47,376,890		1,170,774
Home equity		12,950,830		—		—		—		12,950,830		186,749
Other:
Construction and land		21,447,244		—		—		—		21,447,244		539,558
Consumer		3,776,196		—		500		1,176		3,777,872		16,975
	$	258,544,174	$	507,173	$	73,493	$	750,290	$	259,875,130	$	4,290,613

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


							> 90 days
			31-60 days		61-90 days		Past Due					Non accrual
	Current		Past Due		Past Due		(Nonaccrual)		Total			Loans
	June 30, 2017
Classes of loans:
Commercial:
Operating	$	20,072,350	$	33,060	$	13,240	$	20,395	$	20,139,045	$	154,671
Real estate		86,809,938		—		—		—		86,809,938		640,881
Agricultural:
Operating		26,699,805		32,754		—		6,848		26,739,407		6,848
Real estate		30,263,281		47,900		—		794,609		31,105,790		857,509
Residential real estate:
1-4 family		42,722,767		164,549		—		172,697		43,060,013		675,197
Home equity		11,748,363		—		—		—		11,748,363		22,649
Other:
Construction and land		16,175,698		—		—		—		16,175,698		—
Consumer		3,670,927		—		3,747		—		3,674,674		24,124
	$	238,163,129	$	278,263	$	16,987	$	994,549	$	239,452,928	$	2,381,879

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. 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

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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.

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, 2018
Internally assigned risk rating:
Highest Quality (rating 1)	$	—	$	—	$	36,744	$	302,991	$	—	$	339,735
Good Quality (rating 2)		187,660		7,804,718		3,053,749		3,412,482		563,359		15,021,968
Acceptable Quality (rating 3)		8,558,803		50,018,940		7,555,451		7,198,994		12,334,923		85,667,111
Fair Quality (rating 4)		12,045,470		31,143,251		14,466,885		17,961,102		8,009,404		83,626,112
Special Mention (rating 5)		—		147,010		886,950		280,791		539,558		1,854,309
Substandard (rating 6)		1,287,666		6,189,290		228,732		1,554,615		—		9,260,303
Doubtful (rating 7)		—		—		—		—		—		—
Loss (rating 8)		—		—		—		—		—		—
	$	22,079,599	$	95,303,209	$	26,228,511	$	30,710,975	$	21,447,244	$	195,769,538

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


									Other —
	Commercial —		Commercial —		Agricultural —		Agricultural —		Construction
	Operating		Real Estate		Operating		Real Estate		and Land		Total
	June 30, 2017
Internally assigned risk rating:
Highest Quality (rating 1)	$	—	$	—	$	324,038	$	326,045	$	—	$	650,083
Good Quality (rating 2)		177,795		6,638,998		5,185,147		3,541,630		2,868,632		18,412,202
Acceptable Quality (rating 3)		8,470,283		44,240,531		9,271,425		12,354,765		10,426,245		84,763,249
Fair Quality (rating 4)		11,313,276		31,603,455		11,489,750		13,116,352		2,880,821		70,403,654
Special Mention (rating 5)		—		1,948,017		403,234		—		—		2,351,251
Substandard (rating 6)		177,691		2,378,937		65,813		1,766,998		—		4,389,439
Doubtful (rating 7)		—		—		—		—		—		—
Loss (rating 8)		—		—		—		—		—		—
	$	20,139,045	$	86,809,938	$	26,739,407	$	31,105,790	$	16,175,698	$	180,969,878


	Residential RE —		Residential RE —		Other —
	1-4 Family		Home Equity		Consumer		Total
	March 31, 2018
Delinquency status*:
Performing	$	46,199,376	$	12,764,081	$	3,760,397	$	62,723,854
Nonperforming		1,177,514		186,749		17,475		1,381,738
	$	47,376,890	$	12,950,830	$	3,777,872	$	64,105,592


	Residential RE —		Residential RE —		Other —
	1-4 Family		Home Equity		Consumer		Total
	June 30, 2017
Delinquency status*:
Performing	$	42,220,268	$	11,725,714	$	3,650,519	$	57,596,501
Nonperforming		839,745		22,649		24,155		886,549
	$	43,060,013	$	11,748,363	$	3,674,674	$	58,483,050

*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, 2018 and June 30, 2017, 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.

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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, 2018
Classes of loans:
Impaired loans with no specific allowance recorded:
Commercial:
Operating	$	68,661	$	68,546	$	—
Real estate		1,924,094		1,913,975		—
Residential real estate:
1-4 family		1,580,224		1,577,742		—
Home equity		5,982		5,970		—
		3,578,961		3,566,233		—

Impaired loans with specific allowance recorded:
Commercial:
Operating		1,223,942		1,209,438		413,434
Agricultural:
Real estate		544,599		486,057		30,200
Residential real estate:
1-4 family		1,145,971		1,119,839		214,225
Home equity		182,296		182,195		12,180
Other:
Construction and land		532,013		539,558		205,699
Consumer		18,328		18,231		4,191
		3,647,149		3,555,318		879,929

Total impaired loans:
Commercial:
Operating		1,292,603		1,277,984		413,434
Real estate		1,924,094		1,913,975		—
Agricultural:
Real estate		544,599		486,057		30,200
Residential real estate:
1-4 family		2,726,195		2,697,581		214,225
Home equity		188,278		188,165		12,180
Other:
Construction and land		532,013		539,558		205,699
Consumer		18,328		18,231		4,191
	$	7,226,110	$	7,121,551	$	879,929

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
	June 30, 2017
Classes of loans:
Impaired loans with no specific allowance recorded:
Commercial:
Operating	$	164,823	$	164,128	$	—
Real estate		643,226		640,881		—
Agricultural:
Operating		7,503		6,848		—
Real estate		432,468		371,452		—
Residential real estate:
1-4 family		2,448,574		2,439,137		—
Home equity		7,880		7,868		—
		3,704,474		3,630,314		—

Impaired loans with specific allowance recorded:
Commercial:
Operating		65,701		65,369		6,487
Agricultural:
Real estate		525,068		486,056		17,973
Residential real estate:
1-4 family		695,327		679,474		28,857
Home equity		15,553		15,541		414
Other:
Consumer		20,433		20,408		1,949
		1,322,082		1,266,848		55,680

Total impaired loans:
Commercial:
Operating		230,524		229,497		6,487
Real estate		643,226		640,881		—
Agricultural:
Operating		7,503		6,848		—
Real estate		957,536		857,508		17,973
Residential real estate:
1-4 family		3,143,901		3,118,611		28,857
Home equity		23,433		23,409		414
Other:
Consumer		20,433		20,408		1,949
	$	5,026,556	$	4,897,162	$	55,680

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Impaired loans, for which no allowance has been provided as of March 31, 2018 and June 30, 2017, have adequate collateral, based on management’s current estimates.


	For the three months ended
	March 31, 2018				March 31, 2017
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Classes of loans:
Impaired loans with no specific allowance recorded:
Commercial:
Operating	$	71,557	$	945	$	192,837	$	3,125
Real estate		1,931,470		27,789		663,799		4,749
Agricultural:
Operating		—		—		16,903		125
Real estate		—		—		411,432		—
Residential real estate:
1-4 family		1,595,115		18,240		2,811,564		35,254
Home equity		6,053		90		8,520		141
Other:
Consumer		—		—		2,642		24
		3,604,195		47,064		4,107,697		43,418

Impaired loans with specific allowance recorded:
Commercial:
Operating		1,264,773		8,079		65,973		906
Real estate		—		—		48,321		—
Agricultural:
Operating		—		—		18,902		—
Real estate		541,395		272		515,527		230
Residential real estate:
1-4 family		1,153,656		9,193		661,611		9,955
Home equity		182,913		2,394		17,202		447
Other:
Construction and land		546,147		14,579		—		—
Consumer		19,309		348		22,947		378
		3,708,193		34,865		1,350,483		11,916

Total impaired loans:
Commercial:
Operating		1,336,330		9,024		258,810		4,031
Real estate		1,931,470		27,789		712,120		4,749
Agricultural:
Operating		—		—		35,805		125
Real estate		541,395		272		926,959		230
Residential real estate:
1-4 family		2,748,771		27,433		3,473,175		45,209
Home equity		188,966		2,484		25,722		588
Other:
Construction and land		546,147		14,579		—		—
Consumer		19,309		348		25,589		402
	$	7,312,388	$	81,929	$	5,458,180	$	55,334

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


	For the nine months ended
	March 31, 2018				March 31, 2017
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Classes of loans:
Impaired loans with no specific allowance recorded:
Commercial:
Operating	$	79,059	$	3,133	$	164,025	$	7,722
Real estate		1,283,660		41,561		328,484		7,124
Agricultural:
Operating		—		—		17,218		125
Real estate		—		—		425,722		—
Residential real estate:
1-4 family		1,624,132		61,463		2,733,003		100,579
Home equity		6,190		278		8,926		450
Other:
Consumer		—		—		3,780		144
		2,993,041		106,435		3,681,158		116,144

Impaired loans with specific allowance recorded:
Commercial:
Operating		1,099,997		40,287		60,770		2,028
Real estate		—		—		47,764		—
Agricultural:
Operating		—		—		37,804		—
Real estate		534,833		782		508,658		593
Residential real estate:
1-4 family		920,649		30,693		663,628		18,199
Home equity		98,924		2,926		17,161		835
Other:
Construction and land		525,074		25,035		—		—
Consumer		19,381		877		23,861		951
		3,198,858		100,600		1,359,646		22,606

Total impaired loans:
Commercial:
Operating		1,179,056		43,420		224,795		9,750
Real estate		1,283,660		41,561		376,248		7,124
Agricultural:
Operating		—		—		55,022		125
Real estate		534,833		782		934,380		593
Residential real estate:
1-4 family		2,544,781		92,156		3,396,631		118,778
Home equity		105,114		3,204		26,087		1,285
Other:
Construction and land		525,074		25,035		—		—
Consumer		19,381		877		27,641		1,095
	$	6,191,899	$	207,035	$	5,040,804	$	138,750

The Company's troubled debt restructuring as of March 31, 2018 and June 30, 2017 were not material to the consolidated financial statements.

Table of Contents

Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 5.Borrowings

Our borrowings consist primarily of advances from FHLB of Topeka. At March 31, 2018, we had access to FHLB advances up to $40.6 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 and during the nine months ending March 31, 2018 and 2017.


	At or For the
		Nine Months Ended
		March 31, 2018			March 31, 2017
Federal Home Loan Bank Advances:
Maximum outstanding at any month end	$	10,075,000		$	300,000
Balance at the end of period		5,000,000			—
Average balance during period		6,454,980			575,000
Weighted average interest rate at the end of period		1.55	%		0.75	%
Weighted average interest rate during period		1.44	%		0.75	%

Note 6.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, 2018, that the Bank meets all capital adequacy requirements to which it is subject.

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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, 2018
Total capital (to risk-weighted assets)	$	30,827	12.2	%	$	20,248	8.0	%	$	25,310	10.0	%
Common equity Tier 1 capital (to risk-weighted assets)		27,645	10.9	%		11,389	4.5	%		16,451	6.5	%
Tier 1 (core) capital (to risk-weighted assets)		27,645	10.9	%		15,186	6.0	%		20,248	8.0	%
Tier 1 (core) capital (to adjusted total assets)		27,645	10.0	%		11,070	4.0	%		13,838	5.0	%

June 30, 2017
Total capital (to risk-weighted assets)	$	30,893	13.2	%	$	18,740	8.0	%	$	23,425	10.0	%
Common equity Tier 1 capital (to risk-weighted		27,956	11.9	%		10,541	4.5	%		15,226	6.5	%
Tier 1 (core) capital (to risk-weighted assets)		27,956	11.9	%		14,055	6.0	%		18,740	8.0	%
Tier 1 (core) capital (to adjusted total assets)		27,956	11.4	%		9,806	4.0	%		12,257	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 FDIC 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. The new minimum capital level requirements applicable to Equitable Bank are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of 6% (increased from 4%); (iii) a total capital to risk-weighted assets ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios resulting in the following ratios: (i) a common equity Tier 1 capital ratio of 7%; (ii) a Tier 1 capital to risk-weighted assets ratio of 8.5%; (iii) a total capital to risk-weighted assets ratio of 10.5%; and a Tier 1 leverage ratio unchanged at 4%. The phase-in period for the capital conservation buffer requirement started January 1, 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution is subject to further limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses of its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such actions. The minimum requirements do not include the capital conservation buffer.

Note 7.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. The Company made contributions of $97,936 and $88,548 during the nine months ended March 31, 2018 and 2017, respectively.

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Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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 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 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 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 $124,521 and $111,615 for the nine months ended March 31, 2018 and 2017, respectively.

Shares held by the ESOP were as follows:


	March 31, 2018		June 30, 2017
Allocated shares		99,206		86,104
Shares allocated to be released		3,966		7,929
Unearned ESOP shares		122,946		134,843

Total ESOP shares		226,118		228,876

Fair value of unearned ESOP shares	$	1,290,933	$	1,348,430

Fair value of allocated shares subject to repurchase obligation	$	992,922	$	815,280

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, 2018, 158,653 stock options and 63,461 stock awards were awarded. These options and awards were all granted in February 2017 at an exercise price of $9.90 per share.

Table of Contents

Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

The table below represents the stock option activity for the period shown:


			Weighted		Remaining
			Average		Contractual
	Awards		Exercise Price		Life (Years)

Options outstanding at July 1, 2017		158,653	$	9.90		9.20
Granted		—		—		—
Options outstanding at March 31, 2018		158,653	$	9.90		8.90

The cost of the stock options will be amortized in monthly installments over the noted five-year vesting period, with the first vesting date on February 21, 2018. Stock option expense was $31,652 and $3,517 for the nine months ended March 31, 2018 and 2017, respectively.

Effective July 1, 2017, the Company adopted ASU 2016-09. This ASU did not have a material impact on the Company’s financial statements.

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.

As of March 31, 2018, there was $535,222 of total unrecognized compensation costs related to non-vested restricted stock awards. The cost is expected to be recognized over a weighted-average period of 3.7 years. Compensation expense attributable to the restricted stock awards totaled $137,976 and $54,182 for the nine months ended March 31, 2018 and 2017, respectively.

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, 2017		89,125	$	8.52
Vested		19,987		8.27
Non-vested at March 31, 2018		69,138	$	8.59

adsfs

Note 8.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 three and nine months ended March 31, 2018 and 2017:


	For the three months ended				For the nine months ended
	March 31,				March 31,
	2018		2017		2018		2017
Weighted average common shares outstanding		3,119,978		3,284,630		3,129,294		3,289,170
Net income available to common stockholders	$	350,100	$	275,346	$	571,099	$	849,868
Basic earnings per share	$	0.11	$	0.08	$	0.18	$	0.26

Table of Contents

Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

The following table presents a reconciliation of the components used to compute diluted earnings per share for the three and nine months ended March 31, 2018 and 2017:


	For the three months ended				For the nine months ended
	March 31,				March 31,
	2018		2017		2018		2017
Weighted average common shares outstanding		3,119,978		3,284,630		3,129,294		3,289,170
Weighted average of net additional shares from restricted stock awards		24,760		53,546		18,802		48,058
Weighted average number of shares outstanding		3,144,738		3,338,176		3,148,096		3,337,228

Net income available to common stockholders	$	350,100	$	275,346	$	571,099	$	849,868
Diluted earnings per share	$	0.11	$	0.08	$	0.18	$	0.25

As of March 31, 2018, 20,999 of the outstanding stock options were not included in the computation of diluted earnings per share because the exercise price of the stock options was greater than the average market price of the common shares.

Note 9.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, 2018, nor were there any changes in valuation techniques used for assets or liabilities measured at fair value at March 31, 2018.

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.

Table of Contents

Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

The following tables summarize assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and June 30, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Fair Value Measurement at March 31, 2018 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

1,306,454

—

1,306,454

—

Fair Value Measurement at June 30, 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

1,410,955

—

1,410,955

—

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 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, 2018 and June 30, 2017 the fair value of impaired loans and foreclosed assets was 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.

Table of Contents

Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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.

Mortgage servicing rights and credit enhancement receivable — The fair value is based on a discounted cash flow analysis calculated using a proprietary valuation model from a third party.

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.

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.

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 costs that would be charged to enter into or terminate such arrangements. Such items were not considered material and are not presented in the below tables.

The estimated fair value of financial instruments is as follows:


	Fair Value	Carrying		Estimated
March 31, 2018	Hierarchy Level	Amount		Fair Value
Financial assets:
Cash and due from financial institutions	Level 1	$	7,669,608	$	7,670,000
Interest-earning deposits	Level 1		28,317,000		28,317,000
Securities available-for-sale	See previous table		1,306,454		1,306,000
Securities held-to-maturity	Level 2		710,943		712,000
Federal Home Loan Bank stock	Level 1		282,300		282,000
Loans, net	Level 2		255,946,923		251,425,000
Mortgage servicing rights	Level 2		858,035		1,199,000
Credit enhancement receivable	Level 2		97,001		97,000
Accrued interest receivable	Level 1		1,512,532		1,513,000
Financial liabilities:
Noninterest-bearing deposits	Level 2		37,452,083		37,452,000
Interest-bearing deposits	Level 2		223,257,251		224,212,000
Federal Home Loan Bank Borrowings	Level 2		5,000,000		5,000,000
Accrued interest payable and other liabilities	Level 1		2,743,811		2,744,000

Table of Contents

Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


	Fair Value	Carrying		Estimated
June 30, 2017	Hierarchy Level	Amount		Fair Value
Financial assets:
Cash and due from financial institutions	Level 1	$	4,881,007	$	4,881,000
Securities available-for-sale	See previous table		1,410,955		1,411,000
Securities held-to-maturity	Level 2		735,978		746,000
Federal Home Loan Bank stock	Level 1		453,400		453,000
Loans, net	Level 2		236,545,125		232,931,000
Mortgage servicing rights	Level 2		852,715		1,089,000
Accrued interest receivable	Level 1		1,297,908		1,298,000
Financial liabilities:
Noninterest-bearing deposits	Level 2		29,546,051		29,546,000
Interest-bearing deposits	Level 2		179,512,265		185,040,000
Federal funds purchased	Level 2		399,000		399,000
Federal Home Loan Bank borrowings	Level 2		6,745,400		6,745,000
Accrued interest payable and other liabilities	Level 1		820,229		820,000

Note 10.Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss components were as follows:


	March 31, 2018		June 30, 2017
Unrealized holding losses on securities available-for-sale	$	(38,810)	$	(16,034)
Tax expense		10,890		5,452

	$	(27,920)	$	(10,582)

Note 11.Income Taxes

The Company’s deferred tax position was impacted as a result of the newly enacted Tax Cuts and Jobs Act (the “Act”) which was signed into law on December 22, 2017. The effect reflects the revaluation of our net deferred tax asset based on the new federal tax rate of 21% compared to the previous rate of 34%. We have substantially completed our accounting for the newly enacted tax rates and we have made a reasonable estimate of the effects on our deferred tax balances and believe the actual results will not vary materially from those estimates. The federal tax rate is computed using a blended rate of approximately 28% as a result of part of the fiscal year being calculated at 34% and the other at 21%.


	Three months ended
	March 31, 2018		March 31, 2017
Provision computed at the statutory federal tax rate	$	(141,779)	$	(140,748)
State income taxes, net of federal tax		(15,039)		(11,264)
Release of unearned ESOP shares and stock awards		(2,239)		(1,834)
Nondeductible expenses		(1,431)		(2,161)
Other		5,318		17,387
	$	(155,170)	$	(138,620)

Table of Contents

Equitable Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


	Nine months ended
	March 31, 2018		March 31, 2017
Provision computed at the statutory federal tax rate	$	(373,269)	$	(455,147)
State income taxes, net of federal tax		(42,029)		(39,019)
Release of unearned ESOP shares and stock awards		4,225		3,713
Nondeductible expenses		(5,441)		(5,875)
Effect of Tax Cuts & Jobs Act		(347,957)		—
Other		5,318		7,527
	$	(759,153)	$	(488,801)

Note 12.Stock Buyback

The Company has authorized two stock repurchase programs for an aggregate of 342,303 shares of the Company’s issued common stock. Under the first stock repurchase program, which was approved on October 7, 2016, the Company was authorized to repurchase up to 173,857 shares of the Company’s issued common stock. The first stock repurchase program expired on October 7, 2017.

On November 21, 2017, a second repurchase program was approved, which authorized the repurchase up to 168,446 shares of the Company’s issued common stock.

Under each repurchase program, repurchases were or will be conducted through open market purchases, which may include purchase under a trading plan adopted pursuant to SEC Rule 10b5-1, or through privately negotiated transactions. Repurchases will be made from time to time, depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company.

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the nine months ended March 31, 2018.


				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
07/01/17 - 07/31/17	1,600	$	10.20	169,686	4,171
08/01/17 - 08/31/17	2,000		10.15	171,686	2,171
09/01/17 - 09/30/17	—		—	171,686	2,171
10/01/17 - 10/31/17	—		—	171,686	2,171
11/01/17 - 11/30/17	436		10.40	172,122	168,010
12/01/17 - 12/31/17	6,500		10.35	179,058	161,510
01/01/18 - 01/31/18	2,000		10.50	181,058	159,510
02/01/18 - 02/28/18	15,000		10.65	196,058	144,510
03/01/18 - 03/31/18	27,000		10.62	223,058	117,510
Total	54,536	$	10.56

Note

Table of Contents

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

Management’s discussion and analysis of financial condition and results of operations at March 31, 2018 and for the three and nine months ended March 31, 2018 and 2017 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this report. All references herein to the “Company”, “we”, “us”, or similar terms refer to Equitable Financial Corp. and its subsidiary.

Forward-Looking Statements

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

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;

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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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could significantly affect our financial position or results of operations. Actual results could differ from those estimates.

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

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

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

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

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

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

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

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

Comparison of Financial Condition at March 31, 2018 and June 30, 2017

Assets. Total assets at March 31, 2018 were $305.7 million, an increase of $51.9 million, or 20.4%, from $253.8 million at June 30, 2017. This increase is attributable to an increase in cash and due from financial institutions, interest-earning deposits, net loans, customer list intangible and other assets. Cash and due from financial institutions increased

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$2.8 million, or 57.1%, to $7.7 million at March 31, 2018 from $4.9 million at June 30, 2017. Interest-earning deposits were $28.3 million at March 31, 2018. There were no interest-earning deposits at June 30, 2017. The increase in interest-earning deposits was a result of deposit growth. Net loans increased $19.4 million, or 8.2%, to $255.9 million at March 31, 2018 from $236.5 million at June 30, 2017. Loan demand in all markets continues to be strong. Customer list intangible increased $1.2 million, or 398.6% to $1.4 million at March 31, 2018 from $289,000 at June 30, 2017. This increase reflects the purchase of a customer list associated with an investment representative’s business in the second quarter. This customer list consists of customer relationships with wealth management clients that have been transferred to the Bank. Other assets increased $359,000, or 20.9%, to $2.1 million at March 31, 2018 from $1.7 million at June 30, 2017.

Nonperforming Assets and Allowance for Loan Losses. We had non-performing assets of $4.5 million, or 1.5% of total assets as of March 31, 2018 and $2.6 million, or 1.0% of total assets as of June 30, 2017. The allowance for loan losses totaled $4.6 million at March 31, 2018 and $3.6 million at June 30, 2017. This represents a ratio of the allowance for loan losses to gross loans receivable of 1.8% at March 31, 2018 and 1.5% at June 30, 2017. This increase is primarily attributable to deterioration in one loan relationship. The allowance for loan losses to non-performing loans was 101.9% at March 31, 2018 and 149.3% at June 30, 2017.

Deposits. Total deposits increased $51.6 million, or 24.7%, to $260.7 million at March 31, 2018 from $209.1 million at June 30, 2017. Noninterest-bearing deposits increased $8.0 million, or 27.1%, to $37.5 million at March 31, 2018 from $29.5 million at June 30, 2017. Interest-bearing deposits increased $43.8 million, or 24.4%, to $223.2 million at March 31, 2018 from $179.5 million at June 30, 2017.

Stockholders’ Equity. Total stockholder’s equity increased $88,000, or 0.2%, to $35.7 million at March 31, 2018 from $35.6 million at June 30, 2017. The increase was a result of net income realized for the nine months ended March 31, 2018. The increase was offset by repurchased stock.

Comparison of Operating Results for the Three Months Ended March 31, 2018 and 2017

General. Net income for the three months ended March 31, 2018 was $350,000. This represented an increase of $75,000, or 27.3%, from net income of $275,000 for the three months ended March 31, 2017.

Interest Income. Total interest income for the three months ended March 31, 2018 increased $593,000, or 25.6%, to $2.9 million, from $2.3 million for the three months ended March 31, 2017. The increase in interest income was primarily due to an increase in interest income in loans.

Interest income from loans increased $569,000, or 24.7%, to $2.9 million for the three months ended March 31, 2018 from $2.3 million for the three months ended March 31, 2017. The increase in interest income from loans was due primarily to an increase of $36.5 million in average loan balances. Average loan balances were $253.3 million for the three months ended March 31, 2018 compared to $216.8 million for the three months ended March 31, 2017. The increase in our average loan balance was primarily due to increased loan demand, primarily attributable to improved economic conditions in our market areas and growth in commercial loans originated in all branches. The average yield on loans increased 28 basis points to 4.53% during the three months ended March 31, 2018 from 4.25% for the three months ended March 31, 2017.

Securities and other interest income increased $24,000, or 126.3%, to $43,000 for the three months ended March 31, 2018 from $19,000 for the three months ended March 31, 2017. This increase was primarily due to an increase in the yield realized on other interest-earning balances.

Interest Expense. Interest expense increased $186,000, or 65.7%, to $469,000 for the three months ended March 31, 2018 from $283,000 for the three months ended March 31, 2017. This increase was due to an increase of $38.5 million in average deposit balances. Average deposit balances were $208.0 million for the three months ended March 31, 2018 compared to $169.5 million for the three months ended March 31, 2017. Cost of deposits increased 20 basis points to 86 basis points for the three months ended March 31, 2018 from 66 basis points for the three months ended March 31, 2017. Also contributing to the increase in interest expense were FHLB advances. For the three months ended March 31, 2018 average balances of FHLB advances were $5.0 million. During the three months ended March 31, 2017 average balances were $100,000.

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Net Interest Income. Net interest income increased $407,000, or 20.0%, to $2.4 million for the three months ended March 31, 2018 from $2.0 million for the three months ended March 31, 2017. Average interest-earning assets were $284.2 million for the three months ended March 31, 2018 and $235.2 million for the three months ended March 31, 2017, while the average yield was 4.36% and 4.20% for the respective periods. Our net interest spread decreased 6 basis points for the three months ended March 31, 2018 to 3.48% from 3.54% for the three months ended March 31, 2017. Our net interest margin decreased 3 basis points to 3.66% for the three months ended March 31, 2018 from 3.69% for the three months ended March 31, 2017. The ratio of average interest-earning assets to average interest-bearing liabilities decreased 430 basis points to 125.5% for the three months ended March 31, 2018 from 129.8% for the three months ended March 31, 2017.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors, we recorded provisions for loan losses of $134,000 and $61,000 for the three months ended March 31, 2018 and 2017, respectively. The provision for loan losses for the three months ended March 31, 2018 was a result of loan growth and deterioration in one loan relationship. The provision for loan losses for the three months ended March 31, 2017 was primarily due to loan growth. The allowance for loan losses was $4.6 million, or 1.8% of loans outstanding at March 31, 2018 compared to $3.3 million, or 1.5% of loans outstanding at March 31, 2017. The nonperforming assets to total assets ratio was 1.1% at March 31, 2018 and 2017. The level of the allowance is based on estimates and the ultimate losses may vary from estimates.

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of March 31, 2018 was maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, such losses were both probable and reasonably estimable.

Non-Interest Income. Non-interest income was $512,000 for the three months ended March 31, 2018 and 2017. Service charges on deposits accounts increased $14,000, or 9.3%, to $165,000 for the three months ended March 31, 2018 from $151,000 for the three months ended March 31, 2017. Other loan fees increased $15,000, or 25.9%, to $73,000 for the three months ended March 31, 2018 from $58,000 for the three months ended March 31, 2017. Other income increased $22,000, or 56.4%, to $61,000 for the three months ended March 31, 2018 from $39,000 for the three months ended March 31, 2017. Brokerage fee income decreased $19,000, or 11.8%, to $142,000 for the three months ended March 31, 2018 from $161,000 for the three months ended March 31, 2017. Gain on sale of loans decreased $33,000, or 31.7%, to $71,000 for the three months ended March 31, 2018 from $104,000 for the three months ended March 31, 2017.

Non-Interest Expense. Total non-interest expense increased $242,000, or 11.7%, to $2.3 million for the three months ended March 31, 2018 from $2.1 million for the three months ended March 31, 2017. Increases were realized in salaries and employee benefits, data processing fees, regulatory fees and deposit insurance premiums, advertising and public relations, professional fees, and other expenses. Salaries and employee benefits increased $74,000, or 6.0%, to $1.3 million for the three months ended March 31, 2018 compared to $1.2 million for the three months ended March 31, 2017. Data processing fees increased $18,000, or 12.3%, to $164,000 for the three months ended March 31, 2018 from $146,000 for the three months ended March 31, 2017. Regulatory fees and deposit insurance premiums increased $27,000, or 62.8%, to $70,000 for the three months ended March 31, 2018 from $43,000 for the three months ended March 31, 2017. Advertising and public relations increased $7,000, or 12.1%, to $65,000 for the three months ended March 31, 2018 from $58,000 for the three months ended March 31, 2017. Professional fees increased $46,000, or 86.8%, to $99,000 for the three months ended March 31, 2018 from $53,000 for the three months ended March 31, 2017. Other expenses increased $61,000, or 33.2%, to $245,000 for the three months ended March 31, 2018 from $184,000 for the three months ended March 31, 2017.

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Income Tax Expense. For the three months ended March 31, 2018, income tax expense was $155,000 compared to $139,000 for the three months ended March 31, 2017. The effective tax rate for the three months ended March 31, 2018 was 30.7% compared to 33.6% for the three months ended March 31, 2017.

Comparison of Operating Results for the Nine Months Ended March 31, 2018 and 2017

General. Net income for the nine months ended March 31, 2018 was $571,000. This represents a decrease of $279,000, or 32.8%, from net income of $850,000 for the nine months ended March 31, 2017.

Interest Income. Total interest income for the nine months ended March 31, 2018 increased $1.7 million, or 25.0%, to $8.5 million, from $6.8 million for the nine months ended March 31, 2017. The increase in interest income was primarily due to an increase in interest income in loans.

Interest income from loans increased $1.7 million, or 25.4%, to $8.4 million for the nine months ended March 31, 2018 from $6.7 million for the nine months ended March 31, 2017. The increase in interest income from loans was due primarily to an increase of $37.4 million in average loan balances. Average loan balances were $248.2 million for the nine months ended March 31, 2018 compared to $210.8 million for the nine months ended March 31, 2017. The increase in our average loan balance was primarily due to increased loan demand, primarily attributable to improved economic conditions in our market areas and growth in commercial loans originated in all branches. The average yield on loans increased 27 basis points to 4.53% during the nine months ended March 31, 2018 from 4.26% for the nine months ended March 31, 2017.

Securities and other interest income increased $32,000, or 59.3%, to $86,000 for the nine months ended March 31, 2018 from $54,000 for the nine months ended March 31, 2017. This increase was primarily due to an increase in the yield realized on other interest-bearing balances.

Interest Expense. Interest expense increased $468,000, or 57.4%, to $1.3 million for the nine months ended March 31, 2018 from $816,000 for the nine months ended March 31, 2017. This increase was due to an increase of $30.0 million in average deposit balances. Average deposit balances were $195.6 million for the nine months ended March 31, 2018 compared to $165.6 million for the nine months ended March 31, 2017. Cost of deposits increased 17 basis points to 82 basis points for the nine months ended March 31, 2018 from 65 basis points for the nine months ended March 31, 2017. Also contributing to the increase in interest expense were FHLB advances. For the nine months ended March 31, 2018, average balances of FHLB advances were $6.4 million. During the nine months ended March 31, 2017, average balances of FHLB advances was $256,000.

Net Interest Income. Net interest income increased $1.2 million, or 20.0%, to $7.2 million for the nine months ended March 31, 2018 from $6.0 million for the nine months ended March 31, 2017. Average interest-earning assets were $270.4 million for the nine months ended March 31, 2018 and $230.9 million for the nine months ended March 31, 2017, while the average yield was 4.45% and 4.18% for the respective periods. Our net interest spread increased 8 basis points for the nine months ended March 31, 2018 to 3.60% from 3.52% for the nine months ended March 31, 2017. Our net interest margin increased 11 basis points to 3.78% for the nine months ended March 31, 2018 from 3.67% for the nine months ended March 31, 2017. The ratio of average interest-earning assets to average interest-bearing liabilities decreased 400 basis points to 126.4% for the nine months ended March 31, 2018 from 130.4% for the nine months ended March 31, 2017.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors, we recorded provisions for loan losses of $1.0 million and $383,000 for the nine months ended March 31, 2018 and 2017, respectively. The provision for loan losses for the nine months ended March 31, 2018 was due to loan growth and the deterioration in one loan relationship. The provision for loan losses for the nine months ended March 31, 2017 was primarily due to loan growth. The allowance for loan losses was $4.6 million, or 1.8% of loans outstanding at March 31, 2018 compared to $3.3 million, or 1.5% of loans outstanding at March 31, 2017. The

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nonperforming assets to total assets ratio was 1.1% at March 31, 2018 and 2017. The level of the allowance is based on estimates and the ultimate losses may vary from estimates.

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may request to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of March 31, 2018 was maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, such losses were both probable and reasonably estimable.

Non-Interest Income. Non-interest income decreased $163,000, or 8.5%, to $1.8 million for the nine months ended March 31, 2018 from $1.9 million for the nine months ended March 31, 2017. Service charges on deposit accounts increased $22,000, or 4.7%, to $491,000 for the nine months ended March 31, 2018 compared to $469,000 for the nine months ended March 31, 2017. Other income increased $156,000, or 145.8%, to $263,000 for the nine months ended March 31, 2018 from $107,000 for the nine months ended March 31, 2017. This increase is related to a one-time entry for credit enhancement fee income from mortgage loans serviced. Brokerage fee income decreased $92,000, or 16.8%, to $454,000 for the nine months ended March 31, 2018 compared to $546,000 for the nine months ended March 31, 2017. Gain on sale of loans decreased $220,000, or 37.0%, to $375,000 for the nine months ended March 31, 2018 compared to $595,000 for the nine months ended March 31, 2017. Other loan fees decreased $29,000, or 13.9%, to $180,000 for the nine months ended March 31, 2018 from $209,000 for the nine months ended March 31, 2017.

Non-Interest Expense. Total non-interest expense increased $489,000, or 7.9%, to $6.7 million for the nine months ended March 31, 2018 from $6.2 million for the nine months ended March 31, 2017. Salaries and employee benefits increased $309,000, or 8.7%, to $3.8 million for the nine months ended March 31, 2018 compared to $3.5 million for the nine months ended March 31, 2017. Data processing fees increased $38,000, or 8.8%, to $471,000 for the nine months ended March 31, 2018 from $433,000 for the nine months ended March 31, 2017. Regulatory fees and deposit insurance premiums increased $57,000, or 45.2%, to $183,000 for the nine months ended March 31, 2018 from $126,000 for the nine months ended March 31, 2017. Advertising and public relations increased $26,000, or 17.0%, to $179,000 for the nine months ended March 31, 2018 from $153,000 for the nine months ended March 31, 2017. Other expenses increased $25,000, or 4.5%, to $584,000 for the nine months ended March 31, 2018 from $559,000 for the nine months ended March 31, 2017.

Income Tax Expense. For the nine months ended March 31, 2018, income tax expense was $759,000 compared to $489,000 for the nine months ended March 31, 2017. The effective tax rate for the nine months ended March 31, 2018 was 57.1% compared to 36.5% for the nine months ended March 31, 2017. The increase reflects the revaluation of our net deferred tax asset based on the new federal tax rate of 21%, compared to the previous tax rate of 34%, which became effective under the Act beginning in tax years after December 31, 2017.

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Analysis of Net Interest Income

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


	For the Three Months Ended March 31,
	2018					2017
	Average		Interest			Average		Interest
	Outstanding		Earned/			Outstanding		Earned/
	Balance		Paid		Yield/Cost	Balance		Paid		Yield/Cost
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other financial institutions	$	11,532	$	28	0.97%	$	1,594	$	5	1.25%
Securities		2,029		13	2.56%		2,193		13	2.37%
Loans receivable		253,347		2,870	4.53%		216,760		2,301	4.25%
FHLB common stock		281		2	2.85%		231		1	1.73%
Total interest-earning assets		267,189		2,913	4.36%		220,778		2,320	4.20%
Total noninterest-earning assets		17,044					14,376
Total assets	$	284,233				$	235,154

Interest-bearing liabilities:
Savings accounts	$	17,857	$	12	0.27%	$	16,197	$	10	0.25%
NOW accounts		67,980		103	0.61%		47,147		46	0.39%
Money market accounts		64,973		134	0.82%		64,477		124	0.77%
Certificates of deposit		57,141		200	1.40%		41,668		101	0.97%
Total deposits		207,951		449	0.86%		169,489		281	0.66%
Federal funds purchased		—		1	0.00%		510		1	—
FHLB advances		5,000		19	1.52%		100		1	—
Total interest-bearing liabilities		212,951		469	0.88%		170,099		283	0.67%
Noninterest-bearing demand deposits - checking accounts		31,949					27,356
Other liabilities		3,404					1,834
Total liabilities		248,304					199,289

Stockholders' equity		35,929					35,865
Total liabilities and stockholders' equity	$	284,233				$	235,154

Net interest income			$	2,444				$	2,037
Net interest rate spread					3.48%					3.54%
Net interest-earning assets	$	54,238				$	50,679
Net interest margin					3.66%					3.69%
Average interest-earning assets to average interest-bearing liabilities					125.47%					129.79%

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	For the Nine Months Ended March 31,
	2018					2017
	Average		Interest			Average		Interest
	Outstanding		Earned/			Outstanding		Earned/
	Balance		Paid		Yield/Cost	Balance		Paid		Yield/Cost
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other financial institutions	$	4,878	$	38	1.04%	$	4,012	$	22	0.73%
Securities		2,077		40	2.57%		1,843		30	2.17%
Loans receivable		248,154		8,436	4.53%		210,773		6,737	4.26%
FHLB common stock		339		8	3.15%		231		2	1.15%
Total interest-earning assets		255,448		8,522	4.45%		216,859		6,791	4.18%
Total noninterest-earning assets		14,953					14,024
Total assets	$	270,401				$	230,883

Interest-bearing liabilities:
Savings accounts	$	17,500	$	33	0.25%	$	15,501	$	28	0.24%
NOW accounts		57,953		237	0.55%		44,135		128	0.39%
Money market accounts		64,984		394	0.81%		63,983		354	0.74%
Certificates of deposit		55,173		546	1.32%		41,953		303	0.96%
Total deposits		195,610		1,210	0.82%		165,572		813	0.65%
Federal funds purchased		63		5	10.58%		504		1	0.26%
FHLB advances		6,439		69	1.43%		256		1	0.52%
Total interest-bearing liabilities		202,112		1,284	0.85%		166,332		815	0.65%
Noninterest-bearing demand deposits - checking accounts		29,722					26,709
Other liabilities		2,587					1,753
Total liabilities		234,421					194,794

Stockholders' equity		35,980					36,089
Total liabilities and stockholders' equity	$	270,401				$	230,883

Net interest income			$	7,238				$	5,976
Net interest rate spread					3.60%					3.52%
Net interest-earning assets	$	53,336				$	50,527
Net interest margin					3.78%					3.67%
Average interest-earning assets to average interest-bearing liabilities					126.39%					130.38%

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Rate/Volume Analysis

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


	Three Months Ended						Nine Months Ended
	March 31, 2018 vs. 2017						March 31, 2018 vs. 2017
	Increase (Decrease)				Total		Increase (Decrease)				Total
	Due to				Increase		Due to				Increase
	Volume		Rate		(Decrease)		Volume		Rate		(Decrease)
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits in other financial institutions	$	25	$	(2)	$	23	$	5	$	11	$	16
Securities		(1)		1		—		5		5		10
FHLB Stock		—		1		1		1		5		6
Loans receivable		409		160		569		1,252		447		1,699
Total interest-earning assets		433		160		593		1,263		468		1,731

Interest-bearing liabilities:
Savings accounts		1		1		2		2		3		5
NOW accounts		25		32		57		47		62		109
Money market accounts		1		9		10		6		34		40
Certificates of deposit		45		54		99		111		132		243
Total deposits		72		96		168		166		231		397
Federal funds purchased and securities sold under repurchase agreements		—		—		—		—		4		4
FHLB advances		19		(1)		18		63		5		68
Total interest-bearing liabilities		91		95		186		229		240		469

Change in net interest income	$	342	$	65	$	407	$	1,034	$	228	$	1,262

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet our liquidity needs. Liquid assets, which include cash and cash equivalents and securities available-for-sale, totaled $37.3 million, or 12.2% of total assets,at March 31, 2018, as compared to $6.3 million, or 2.5% of total assets, at June 30, 2017. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.

Our primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning investments and other assets, which provide liquidity to meet lending requirements. At March 31, 2018, we invested $28.3 million in excess funds in short-term interest-earning investments. At June 30, 2017, we did not have any excess funds to invest.

A significant portion of our liquidity consists of securities classified as available-for-sale and cash and cash equivalents, which are a product of our operating, investing and financing activities. Our primary sources of cash are net

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income, principal repayments on loans and mortgage-backed securities, and increases in deposit accounts, along with advances from the FHLB of Topeka.

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

Our cash flows are comprised of three classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $3.0 million for the nine months ended March 31, 2018 and $1.8 million for the nine months ended March 31, 2017. Net cash used by investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from sales, calls, and maturities of securities and proceeds from the pay downs on mortgage-backed securities, was $21.0 million and $24.3 million for the nine months ended March 31, 2018 and 2017, respectively. The Company did not purchase any securities during the nine months ended March 31, 2018. For the nine months ended March 31, 2017 the Company purchased one available-for-sale security. For the nine months ended March 31, 2018 and 2017, net cash provided by financing activities was $49.1 million and $15.0 million, respectively.

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

For the nine months ended March 31, 2018, we did not engage in any off-balance sheet transactions, other than loan origination commitments, unused lines of credit and standby letters of credit in the normal course of our lending activities.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements that are applicable to the Company, please see Note 2 of the notes to the Company’s consolidated financial statements, beginning on page 9.

Effect of Inflation and Changing Prices

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4.Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective. In addition, there have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.Legal Proceedings.

At March 31, 2018, 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 Company has authorized two stock repurchase programs for an aggregate of 342,303 shares of the Company’s issued common stock. Under the first stock repurchase program, which was approved on October 7, 2016, the Company was authorized to repurchase up to 173,857 shares of the Company’s issued common stock. The first stock repurchase program expired on October 7, 2017.

On November 21, 2017, a second repurchase program was approved, which authorized the repurchase up to 168,446 shares of the Company’s issued common stock.

The following table sets forth information concerning purchases made by the Company of its common stock for each month in the quarter ended March 31, 2018:


				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
01/01/18 - 01/31/18	2,000	$	10.50	181,058	159,510
02/01/18 - 02/28/18	15,000		10.65	196,058	144,510
03/01/18 - 03/31/18	27,000		10.62	223,058	117,510
Total	44,000	$	10.62

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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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)

	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, 2018, 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.

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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)

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, 2018, 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.

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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.

	EQUITABLE FINANCIAL CORP.

Dated: May 14, 2018	By:	/s/ Thomas E. Gdowski
		Thomas E. Gdowski
		President and CEO


Dated: May 14, 2018	By:	/s/ Darcy M. Ray
		Darcy M. Ray
		CFO

Equitable Financial Corp. - FORM 10-Q - May 14, 2018

Attached files

Equitable Financial Corp. Reports