UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended December 31, 2023
OR
☐ | 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. 000-56575
Mercer Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| | |
Maryland |
| 92-3452469 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
| | |
1100 Irmscher Blvd, Celina, Ohio | | 45822 |
(Address of Principal Executive Offices) | | (Zip Code) |
(419) 586-5158
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☒ | 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 Act). YES ☐ NO ☒
As of February 9, 2024. 1,022,970 shares of the registrant’s common stock, par value $0.01 per share, were issued and outstanding.
Mercer Bancorp, Inc.
Form 10-Q/A
Index
| | |
| Page |
| | | | |
| | 1 | ||
| | | | |
| | Balance Sheets as of December 31, 2023 (unaudited) and September 30, 2023 | | 1 |
| | | | |
| | Statements of Income for the Three months Ended December 31, 2023 and 2022 (unaudited) | | 2 |
| | | | |
| | | 3 | |
| | | | |
| | | 4 | |
| | | | |
| | Statements of Cash Flows for the Three months Ended December 31, 2023 and 2022 (unaudited) | | 5 |
| | | | |
| | | 6 | |
| | | | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 28 | |
| | | | |
| | 36 | ||
| | | | |
| | 36 | ||
| | | | |
| | | | |
| | 37 | ||
| | | | |
| | 37 | ||
| | | | |
| | 37 | ||
| | | | |
| | 37 | ||
| | | | |
| | 37 | ||
| | | | |
| | 37 | ||
| | | | |
| | 38 | ||
| | | | |
| | | 39 |
Explanatory Note
Mercer Bancorp, Inc., a Maryland corporation (the “Company”), is filing this Amendment to our Quarterly Report on Form 10-Q for the period ended December 31, 2023 (the “Amended Report”), which was originally filed on February 14, 2024 (the “Original Report” or “Quarterly Report on Form 10-Q”), to reflect a restatement of our consolidated financial statements.
The Company has restated its unaudited consolidated financial statements as of and for the three months ended December 31, 2023, effective with the filing of this Quarterly Report on Form 10-Q. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, to the consolidated financial statements in Item 1, Financial Statements for additional information related to the restatement.
Part I. – Financial Information
Item 1.Financial Statements
Mercer Bancorp, Inc.
Consolidated Balance Sheets
December 31, 2023 (Unaudited) and September 30, 2023
| | | | | | |
|
| (as restated) | | | ||
| | December 31, | | September 30, | ||
|
| 2023 |
| 2023 | ||
Assets | | |
| | |
|
Cash and due from banks | | $ | 2,238,904 | | $ | 1,707,488 |
Interest-bearing deposits in other financial institutions | |
| 5,396,313 | |
| 4,583,848 |
Cash and cash equivalents | |
| 7,635,217 | |
| 6,291,336 |
| | | | | | |
Interest-bearing time deposits | |
| 100,000 | |
| 100,000 |
Available-for-sale securities, net of allowance for credit losses of $0 for December 31, 2023 and September 30, 2023 | |
| 11,648,818 | |
| 11,449,715 |
Held-to-maturity securities, net of allowance for credit losses of $0 for December 31, 2023 and September 30, 2023 | |
| 133,551 | |
| 147,291 |
Loans held for sale | |
| 5,236,643 | |
| 3,094,405 |
Loans receivable | |
| 134,513,249 | |
| 130,901,654 |
Allowance for credit losses | |
| (966,593) | |
| (934,331) |
Net loans | |
| 133,546,656 | |
| 129,967,323 |
| | | | | | |
Premises and equipment | |
| 2,553,121 | |
| 2,601,575 |
Foreclosed real estate | | | 54,000 | | | 54,000 |
Federal Home Loan Bank stock | |
| 1,474,700 | |
| 1,368,900 |
Bank owned life insurance | |
| 1,794,889 | |
| 1,783,880 |
Accrued interest receivable | |
| 528,479 | |
| 456,867 |
Federal Home Loan Bank lender risk account | |
| 488,277 | |
| 490,411 |
Deferred federal income taxes | |
| 303,690 | |
| 407,304 |
Other assets | |
| 871,485 | |
| 833,606 |
| | | | | | |
Total assets | | $ | 166,369,526 | | $ | 159,046,613 |
| | | | | | |
Liabilities and Shareholders' Equity | |
|
| |
|
|
| | | | | | |
Liabilities | |
|
| |
|
|
Deposits | |
|
| |
|
|
Demand | | $ | 50,192,283 | | $ | 50,597,494 |
Savings and money market | |
| 39,239,103 | |
| 39,900,297 |
Time | |
| 41,344,526 | |
| 32,317,957 |
| | | | | | |
Total deposits | |
| 130,775,912 | |
| 122,815,748 |
| | | | | | |
Advances from the Federal Home Loan Bank - short term | |
| 10,000,000 | |
| 11,000,000 |
Advances from the Federal Home Loan Bank - long term | | | 1,000,000 | | | 1,000,000 |
Directors plan liability | |
| 437,362 | |
| 444,770 |
Accrued interest payable and other liabilities | |
| 905,810 | |
| 1,108,404 |
| | | | | | |
Total liabilities | |
| 143,119,084 | |
| 136,368,922 |
| | | | | | |
Shareholders' Equity | |
|
| |
|
|
Preferred stock - authorized 1,000,000 shares of $0.01 par value, none issued | | | — | | | — |
Common stock - authorized 9,000,000 shares of $0.01 par value, issued and outstanding 1,022,970 shares | | | 10,229 | | | 10,229 |
Additional paid-in capital | | | 8,658,653 | | | 8,642,312 |
Shares acquired by ESOP | | | (754,329) | | | (818,380) |
Shares issued to irrevocable trust | | | 96,360 | | | 96,360 |
Shares held in irrevocable trust | | | (96,360) | | | (96,360) |
Retained earnings | |
| 15,852,110 | |
| 15,703,856 |
Accumulated other comprehensive loss | |
| (516,221) | |
| (860,326) |
| | | | | | |
Total shareholders' equity | |
| 23,250,442 | |
| 22,677,691 |
| | | | | | |
Total liabilities and shareholders' equity | | $ | 166,369,526 | | $ | 159,046,613 |
See Notes to Consolidated Financial Statements
1
Mercer Bancorp, Inc.
Consolidated Statements of Income
For the Three months Ended December 31, 2023 and 2022
| | | | | | | |
| | Three Months Ended | | ||||
| | December 31, | | ||||
| | | (as restated) | | | | |
|
| 2023 |
| 2022 |
| ||
Interest Income | | |
|
| |
| |
Loans | | $ | 1,716,117 | | $ | 1,222,045 | |
Investment securities | |
| 66,668 | |
| 66,310 | |
Interest-bearing deposits and other | |
| 94,720 | |
| 105,406 | |
| | | | | | | |
Total interest income | |
| 1,877,505 | |
| 1,393,761 | |
| | | | | | | |
Interest Expense | |
|
| |
|
| |
Deposits | |
| 329,666 | |
| 48,609 | |
Federal Home Loan Bank advances | |
| 166,288 | |
| 7,209 | |
| | | | | | | |
Total interest expense | |
| 495,954 | |
| 55,818 | |
| | | | | | | |
Net Interest Income | |
| 1,381,551 | |
| 1,337,943 | |
| | | | | | | |
Provision for Credit Losses | |
| — | |
| — | |
| | | | | | | |
Net Interest Income After Provision for Credit Losses | |
| 1,381,551 | |
| 1,337,943 | |
| | | | | | | |
Noninterest Income | |
|
| |
|
| |
Service fees on deposits | |
| 83,252 | |
| 75,915 | |
Late charges and fees on loans | |
| 46,855 | |
| 24,941 | |
Loan servicing fees | |
| 11,986 | |
| 10,066 | |
Loss on sale of investments | |
| - | |
| (8,049) | |
Bank owned life insurance | |
| 15,555 | |
| 14,381 | |
Life insurance death benefits | |
| - | |
| 4,515 | |
Other income | |
| 3,954 | |
| 5,552 | |
| | | | | | | |
Total noninterest income | |
| 161,602 | |
| 127,321 | |
| | | | | | | |
Noninterest Expense | |
|
| |
|
| |
Salaries and employee benefits | |
| 615,555 | |
| 535,960 | |
Directors fees | |
| 22,425 | |
| 20,175 | |
Occupancy and equipment | |
| 123,975 | |
| 112,993 | |
Data processing fees | |
| 128,270 | |
| 130,564 | |
Franchise taxes | |
| 19,276 | |
| 19,999 | |
FDIC insurance premiums | |
| 17,059 | |
| 10,264 | |
Professional services | |
| 110,250 | |
| 51,353 | |
Deposit account services expense | |
| 73,514 | |
| 60,997 | |
Advertising | |
| 23,104 | |
| 21,939 | |
Loan expenses | |
| 69,183 | |
| 19,880 | |
Other | |
| 123,001 | |
| 76,161 | |
| | | | | | | |
Total noninterest expense | |
| 1,325,612 | |
| 1,060,285 | |
| | | | | | | |
Income before income taxes | |
| 217,541 | |
| 404,979 | |
| | | | | | | |
Provision for income taxes | |
| 44,007 | |
| 76,400 | |
| | | | | | | |
Net Income | | $ | 173,534 | | $ | 328,579 | |
| | | | | | | |
Earnings per share - basic and diluted | | $ | 0.18 | | | n/a | |
See Notes to Consolidated Financial Statements
2
Mercer Bancorp, Inc.
Consolidated Statements of Comprehensive Income
For the Three months Ended December 31, 2023 and 2022
| | | | | | | |
| | Three Months Ended | | ||||
| | December 31, | | ||||
| | | (as restated) | | | | |
|
| 2023 |
| 2022 |
| ||
Net income | | $ | 173,534 | | $ | 328,579 | |
| | | | | | | |
Other comprehensive income: | |
| | |
| | |
Net unrealized gains on available-for-sale securities | |
| 435,576 | |
| 170,128 | |
| | | | | | | |
Reclassification adjustment for realized loss on sales of securities | |
| — | |
| 8,049 | |
| | | | | | | |
Tax expense | |
| (91,471) | |
| (37,417) | |
| | | | | | | |
Other comprehensive income | |
| 344,105 | |
| 140,760 | |
| | | | | | | |
Comprehensive income | | $ | 517,639 | | $ | 469,339 | |
See Notes to Consolidated Financial Statements
3
Mercer Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the Three months Ended December 31, 2023 (as restated) and 2022
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | | ||
| | | | | Additional | | Shares | | Shares Issued | | Shares Held | | | | | Other | | | | |||||
| | Common | | Paid-in | | Acquired by | | to Irrevocable | | by Irrevocable | | Retained | | Comprehensive | | | | |||||||
|
| Stock |
| Capital |
| ESOP |
| Trust |
| Trust |
| Earnings |
| Income (Loss) |
| Total | ||||||||
Balance at October 1, 2022 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 14,959,892 | | $ | (903,562) | | $ | 14,056,330 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | — | | | — | | | — | | | — | |
| 328,579 | |
| — | |
| 328,579 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income | | | — | | | — | | | — | | | — | | | — | |
| — | |
| 140,760 | |
| 140,760 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2022 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 15,288,471 | | $ | (762,802) | | $ | 14,525,669 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at October 1, 2023 | | $ | 10,229 | | $ | 8,642,312 | | $ | (818,380) | | $ | 96,360 | | $ | (96,360) | | $ | 15,703,856 | | $ | (860,326) | | $ | 22,677,691 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Effect of adoption of ASC 326 | | | — | |
| — | |
| — | |
| — | |
| — | |
| (25,280) | | | — | | | (25,280) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income as originally reported | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 189,855 | |
| — | |
| 189,855 |
Effect of restatement | | | — | | | — | | | — | | | — | | | — | | | (16,321) | | | — | | | (16,321) |
Net income as restated | | | — | | | — | | | — | | | — | | | — | | | 173,534 | | | — | | | 173,534 |
| | | | | | | | | | | | | | | | | | | | | | | | |
ESOP shares allocated to participants | | | — | | | 16,341 | | | 64,051 | | | — | | | — | | | — | | | — | | | 80,392 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 344,105 | |
| 344,105 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2023 | | $ | 10,229 | | $ | 8,658,653 | | $ | (754,329) | | $ | 96,360 | | $ | (96,360) | | $ | 15,852,110 | | $ | (516,221) | | $ | 23,250,442 |
See Notes to Consolidated Financial Statements
4
Mercer Bancorp, Inc.
Consolidated Statements of Cash Flows
For the Three months Ended December 31, 2023 and 2022
| | | | | | | |
|
| Three Months Ended | | ||||
| | December 31, | | ||||
| | | (as restated) | | | | |
|
| 2023 |
| 2022 | | ||
Operating Activities |
| |
|
| |
| |
Net income | | $ | 173,534 | | $ | 328,579 | |
Items not requiring (providing) cash: | |
| | |
| | |
Depreciation and amortization | |
| 92,109 | |
| 74,463 | |
Amortization of premiums and discounts | |
| 7,731 | |
| 15,962 | |
Amortization of deferred loan fees | |
| (15,836) | |
| (17,635) | |
Deferred income taxes | |
| 18,863 | |
| 4,116 | |
Provision for credit losses | |
| — | |
| — | |
ESOP compensation expense | | | 80,392 | | | — | |
Loans originated for sale | |
| (2,142,238) | |
| (281,500) | |
Loss on sale of investment securities | |
| — | |
| 8,049 | |
Life insurance death benefits | |
| — | |
| (4,515) | |
Increase in cash surrender value of bank-owned life insurance | |
| (11,009) | |
| (14,381) | |
Changes in: | |
|
| |
| | |
Accrued interest receivable | |
| (71,612) | |
| 7,927 | |
Other assets | |
| (38,717) | |
| 102,613 | |
Other liabilities | |
| (210,002) | |
| (98,385) | |
| | | | | | | |
Net cash (used in) provided by operating activities | |
| (2,116,785) | |
| 125,293 | |
| | | | | | | |
Investing Activities | |
|
| |
|
| |
Purchases of available-for-sale securities | |
| (890,248) | |
| (1,273,478) | |
Proceeds from sales of available-for-sale securites | |
| — | |
| 519,438 | |
Proceeds from calls, maturities and paydowns of available-for-sale securities | |
| 1,119,365 | |
| 160,050 | |
Principal repayments on securities held-to-maturity | |
| 13,365 | |
| 20,318 | |
Net change in loans | |
| (3,595,497) | |
| (159,935) | |
Purchase of premises and equipment | |
| (40,683) | |
| (65,835) | |
Proceeds from redemption of FHLB stock | |
| (105,800) | | | — | |
Proceeds from sale of foreclosed real estate | |
| — | |
| 18,000 | |
Proceeds from death benefit of life insurance policies | |
| — | |
| 541,987 | |
| | | | | | | |
Net cash used in investing activities | |
| (3,499,498) | |
| (239,455) | |
| | | | | | | |
Financing Activities | |
|
| |
|
| |
Net (decrease) increase in deposit accounts | |
| 7,960,164 | |
| (7,059,795) | |
Proceeds from FHLB advances - short term | | | 15,000,000 | | | — | |
Repayment of FHLB advances - short term | | | (16,000,000) | | | — | |
| | | | | | | |
Net cash provided by (used in) financing activities | |
| 6,960,164 | |
| (7,059,795) | |
| | | | | | | |
Increase (Decrease) in Cash and Cash Equivalents | |
| 1,343,881 | |
| (7,173,957) | |
| | | | | | | |
Cash and Cash Equivalents, Beginning of Period | |
| 6,291,336 | |
| 14,376,718 | |
| | | | | | | |
Cash and Cash Equivalents, End of Period | | $ | 7,635,217 | | $ | 7,202,761 | |
| | | | | | | |
Supplemental Disclosure of Cash Flow Information | |
|
| |
|
| |
Cash paid during the period for: | |
|
| |
|
| |
Interest on deposits and borrowings | | $ | 435,208 | | $ | 55,894 | |
Income taxes | |
| — | |
| — | |
| | | | | | | |
Non Cash Activies: | | | | | | | |
Effect of adoption of ASC 326 | | $ | 32,000 | | $ | 0 | |
See Notes to Consolidated Financial Statements
5
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Inclusion of Unaudited Information
The financial information included herein as of December 31, 2023, and for the interim three months periods ended December 31, 2023 and 2022 is unaudited. However, in management’s opinion, the information reflects all normal, recurring adjustments that are necessary for a fair presentation. The results shown for the three months ended December 31, 2023 are not necessarily indicative of the results to be obtained for a full year.
Nature of Operations
Mercer Bancorp, Inc. (“Mercer Bancorp” or the “Company”) is a Maryland corporation incorporated on March 7, 2023, to serve as the bank holding company for Mercer Savings Bank (“Mercer Savings” or the “Bank”) in connection with the Bank’s conversion from the mutual form of organization to the stock form of organization (the “Conversion”). The Conversion was completed on July 26, 2023. In connection with the Conversion, Mercer Bancorp acquired 100% ownership of Mercer Savings and the Company offered and sold 972,970 shares of its common stock at $10.00 per share, for gross offering proceeds of $9,729,700.
Mercer Savings Bank (“Bank”) is an Ohio chartered stock bank engaged primarily in the business of providing a variety of deposit and lending services to individual customers in western Ohio. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential and commercial mortgage, agricultural, commercial, home equity lines of credit and installment loans, and indirect automobile loans. Its operations are conducted through its four office locations in Celina, Ft. Recovery and Greenville, Ohio. The Bank faces competition from other financial institutions and is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
Principles of Consolidation
The consolidated financial statements as of and for the three months ended December 31, 2023, include the accounts of Mercer Bancorp, Inc. and its wholly-owned subsidiary, the Bank. All intercompany transactions and balances have been eliminated in consolidation.
The financial statements as of and for the three months ended December 31, 2022, represent the Bank only, as the conversion to stock form, including the formation of Mercer Bancorp, Inc., was completed on July 26, 2023. References herein to the “Company” for periods prior to the completion of the stock conversion should be deemed to refer to the “Bank”.
Revision of Prior Period Financial Statements.
The Company has revised the consolidated financial statements as of and for the year ended September 30, 2023. The revisions were considered necessary for two primary reasons, as follows:
(1) as a result of the recent discovery of several unpaid and unaccrued invoices, for legal services provided during the year ended September 30, 2023. The invoices represented services performed in connection with the Company’s initial public offering completed effective July 27, 2023, as well as for services performed subsequent to completion of the stock offering.
(2) the Company has revised the consolidated financial statements to record the effects of irrevocable (Rabbi) trusts that have been established for the benefit of two members of the board of directors.
The effect of the revisions to the September 30, 2023 consolidated financial statements related to the legal invoices were as follows: (a) a reduction to additional paid-in capital totaling $81,340, (b) an increase in legal expense of $32,398, (c) a decrease in income tax expense of $6,804, (d) an increase in accrued liabilities of $106,934 and (d) a decrease in retained earnings of $25,594.
6
The effect of the revisions to the September 30, 2023 consolidated financial statements related to the Rabbi trusts included the addition of two offsetting $96,360 line items within the statement of stockholders’ equity, which had no net effect on the total stockholder’s equity as previously reported. There were no changes to the reported assets, liabilities, income or expense and no effect on net income for this revision.
The Company has concluded that the effect of the revisions to the consolidated financial statements as of and for the year ended September 30, 2023 were not material.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of mortgage servicing rights and deferred tax assets and fair values of financial instruments.
Loans Held for Sale
Mortgage and indirect auto loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances, adjusted for unearned income, charge-offs, the allowance for credit losses and any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan. For all loan portfolio segments except residential and consumer loans, the Bank promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
The Bank charges-off loans, or portions thereof, when the Bank reasonably determines the amount of the loss. The Bank adheres to delinquency thresholds established by applicable regulatory guidance to determine the charge-off timeframe for these loans. Loans at these delinquency thresholds for which the Bank can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.
7
For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Bank requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
When cash payments are received on individually evaluated loans, the Bank records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Loans to borrowers experiencing financial difficulties that have been modified recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months.
Allowance for Credit Losses
The Company adopted ASU No. 2016-13 using the modified retrospective method for financial assets measured at amortized cost and off-balance-sheet credit exposures effective October 1, 2023. Results for the period beginning after October 1, 2023 are presented under ASU No. 2016-13, while prior period amounts are reported in accordance with the previously applicable accounting standards.
Available-for-sale securities
For available for sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.
For securities available-for-sale that do not meet the above criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost and adverse conditions related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of tax. The Company elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major agencies and have a long history of no credit losses. Management concluded that no allowance for credit losses was required on available-for-sale securities at October 1, 2023 and December 31, 2023.
Accrued interest receivable on available-for-sale debt securities totaled $53,536 at December 31, 2023 and is included within accrued interest receivable on the balance sheet. This amount is excluded from the estimate of expected credit losses. Held-to-maturity debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When held-to-maturity debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed.
Held-to-Maturity Securities
The Company measures expected credit losses on held-to-maturity debt securities, which are comprised of U.S. government sponsored enterprise mortgage-back securities and residential mortgage-backed securities. The Company’s residential mortgage-backed security holdings are issued by U.S. government entities and agencies and are either explicitly
8
or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Management concluded that no allowance for credit losses was required on held-to-maturity securities at October 1, 2023 and December 31, 2023.
Accrued interest receivable on held-to-maturity debt securities totaled $538 at December 31, 2023 and is included within accrued interest receivable on the balance sheet. This amount is excluded from the estimate of expected credit losses. Held-to-maturity debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When held-to-maturity debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed.
Loans
The allowance for credit losses (ACL) is a valuation allowance that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loan losses are charged against the allowance when management believes the collectibility of a loan balance is doubtful. Subsequent recoveries, if any, are credited to the allowance. Management’s determination of the adequacy of the ACL is based on the assessment of the expected credit losses on loans over the expected life of the loan. The ACL is increased by provision expense and decreased by charge-offs, net of recoveries of amounts previously charged off and expected to be charged off. The Company made the policy election to exclude accrued interest receivable on loans from the estimate of credit losses.
Management estimates the ACL balance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience of a defined peer group, by affiliate, paired with economic forecasts provide the basis for the quantitatively modeled estimates of expected credit losses. The Company adjusts its quantitative model, as necessary, to reflect conditions not already considered by the quantitative model. These adjustments are commonly known as the qualitative factors.
The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company uses the average historical loss method to measure the quantitative portion of the ACL over the forecast and reversion periods.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
Unfunded Commitments
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on unfunded commitments is adjusted through the provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the related ACL methodology. Management concluded that no allowance for credit losses was required on unfunded commitments at October 1, 2023 and December 31, 2023.
Prior to October 1, 2023, the Company calculated the allowance for loan losses under the probable incurred methodology.
9
For periods prior to October 1, 2023 the allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the collectibility of a loan balance is doubtful. Subsequent recoveries, if any, are credited to the allowance.
For periods prior to October 1, 2023 the allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of 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. The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. 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. The general component covers nonimpaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the prior three years. Management believes the three-year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that the Bank 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 history and the probability of collecting scheduled principal and interest payments when due, based on the loan’s current payment status and the borrower’s financial condition, including available sources of cash flows. 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 generally measured on a loan-by-loan 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. For impaired loans where the Bank utilizes the discounted cash flows to determine the level of impairment, the Bank includes the entire change in the present value of cash flows as a provision for loan losses.
The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Bank acquires an updated appraisal upon identification of impairment and annually thereafter for commercial, commercial real estate and multi-family loans. If the most recent appraisal is over a year old, and a new appraisal is not performed, due to lack of comparable values or other reasons, the existing appraisal is utilized and discounted based on the age of the appraisal, condition of the subject property and overall economic conditions. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses. The potential for outdated appraisal values is considered in our determination of the allowance for loan losses through our analysis of various trends and conditions including the local economy, trends in charge-offs and delinquencies and the related qualitative adjustments assigned by the Bank. Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.
In the course of working with borrowers, the Bank may choose to restructure the contractual terms of certain loans. In this scenario, the Bank attempts to work out an alternative payment schedule with the borrower in order to optimize collectibility of the loan. Any loans that are modified are reviewed by the Bank to identify if a troubled debt restructuring (“TDR”) has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower’s current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms or a combination of the two. If such efforts by the Bank do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at
10
foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.
It is the Bank’s policy that any restructured loans on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, the Bank reviews the loan to determine if it is appropriate to continue the accrual of interest on the restructured loan.
With regard to determination of the amount of the allowance for loan losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously.
Employee Stock Ownership Plan (ESOP)
The cost of shares issued to the Employee Stock Ownership Plan (“ESOP”), but not yet allocated to participants, is shown as a reduction of shareholders’ equity. Compensation expense is based on the average fair value of shares as they are committed to be released to participant accounts.
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Unallocated common shares held by the ESOP are shown as a reduction in shareholders’ equity and are excluded from weighted-average common shares outstanding for both basic and diluted earnings per share calculations until they are committed to be released.
The Company had no dilutive or potentially dilutive securities during the three months ended December 31, 2023.
Earnings per share is not applicable to the three months ended December 31, 2022, as the Company completed the stock offering and conversion to stock form on July 26, 2023.
Revenue Recognition
The Bank accounts for certain revenues in accordance with Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC 606) and all subsequent ASUs that modified ASC 606. ASC 606 provides that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The majority of the Bank’s revenue, including net interest income, fees related to loans and loan commitments, net securities gains (losses), gain on sale of loans and income from bank-owned life insurance are not included within the scope of ASC 606. For the revenue streams in the scope of ASC 606, service charges on deposits and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All of the Bank’s in scope revenue from contracts with customers is recognized within other noninterest income.
Deposit Services. The Bank generates revenues through fees charged to depositors related to deposit account maintenance fees, overdrafts, ATM fees, wire transfers and additional miscellaneous services provided at the request of the depositor.
For deposit-related services, revenue is recognized when performance obligations are satisfied, which is, generally, at a point in time.
11
Note 2: Restatement of Previously Issued Financial Statements.
The Company has restated herein the unaudited consolidated financial statements as of and for the three months ended December 31, 2023. The restatement was considered necessary due to the recent discovery of several unpaid and unaccrued invoices, for legal services provided during the three-month period ended December 31, 2023.
Accordingly, we have restated herein our consolidated financial statements at and for the three months ended December 31, 2023, in accordance with Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections.
The effect of the restatement to the December 31, 2023 consolidated financial statements related to the legal invoices were as follows: (a) an increase to legal expense of $20,659, (b) a decrease to income tax expense of $4,338, (c) an increase to accrued liabilities of $16,321 and (d) a decrease to retained earnings of $16,321. The effect on reported earnings per share was a $0.02 reduction which brought earnings per share to $0.18 for the 3 months ended December 31, 2023.
Note 3: Change in Accounting Principle
The FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The ASU introduced a new credit loss model, the current expected credit loss model (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.
The CECL model utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, will be recognized in an allowance for credit losses and adjusted each period for changes in expected credit risk. This model replaces the existing impairment models, which generally require that a loss be incurred before it is recognized. The CECL model represents a significant change from existing practice and may result in material changes to the Company’s accounting for financial instruments. The Company is evaluating the effect ASU 2016-13 will have on its financial statements and related disclosures. The impact of the ASU will depend upon the state of the economy and the nature of our portfolios at the date of adoption. The new standard was effective for fiscal years beginning after December 15, 2022, or October 1, 2023 as to the Company, including interim periods within those fiscal years.
The Company adopted the new standard effective October 1, 2023, which resulted in a $32,000 increase to the allowance for credit losses and a charge, net of tax, of $25,280 to retained earnings.
Note 4: Debt Securities
The amortized cost and fair values, together with gross unrealized gains and losses of securities are as follows:
| | | | | | | | | | | | |
|
| | |
| Gross |
| Gross |
| | | ||
| | Amortized | | Unrealized | | Unrealized | | | ||||
| | Cost | | Gains | | Losses | | Fair Value | ||||
Available-for-sale Securities: | |
| | |
| | |
| | |
| |
December 31, 2023 | |
| | |
| | |
| | |
| |
U.S. Treasury securities | | $ | 999,740 | | $ | — | | $ | (19,740) | | $ | 980,000 |
U.S. Government agencies | |
| 3,410,444 | |
| — | |
| (117,860) | |
| 3,292,584 |
Mortgage-backed Government Sponsored Enterprises (GSEs) | |
| 4,008,229 | |
| — | |
| (304,911) | |
| 3,703,318 |
State and political subdivisions | |
| 3,883,850 | |
| 41,437 | |
| (252,371) | |
| 3,672,916 |
| | | | | | | | | | | | |
| | $ | 12,302,263 | | $ | 41,437 | | $ | (694,882) | | $ | 11,648,818 |
12
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | | ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
Available-for-sale Securities: |
| |
|
| |
|
| |
|
| |
|
September 30, 2023 |
| |
|
| |
|
| |
|
| |
|
U.S. Treasury securities | | $ | 999,565 | | $ | — | | $ | (32,845) | | $ | 966,720 |
U.S. Government agencies | |
| 4,009,577 | |
| — | |
| (184,807) | |
| 3,824,770 |
Mortgage-backed Government Sponsored Enterprises (GSEs) | |
| 3,647,020 | |
| — | |
| (414,789) | |
| 3,232,231 |
State and political subdivisions | |
| 3,882,574 | |
| — | |
| (456,580) | |
| 3,425,994 |
| | | | | | | | | | | | |
| | $ | 12,538,736 | | $ | — | | $ | (1,089,021) | | $ | 11,449,715 |
| | | | | | | | | | | | |
| | | | | Gross | | Gross | | | | ||
| | Amortized | | Unrealized | | Unrealized | | | ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
Held-to-maturity Securities: |
| |
|
| |
|
| |
|
| |
|
December 31, 2023 |
| |
|
| |
|
| |
|
| |
|
Mortgage-backed Government Sponsored Enterprises (GSEs) | | $ | 133,551 | | $ | — | | $ | (3,183) | | $ | 130,368 |
| | | | | | | | | | | | |
September 30, 2023 | |
|
| |
|
| |
|
| |
|
|
Mortgage-backed Government Sponsored Enterprises (GSEs) | | $ | 147,291 | | $ | — | | $ | (4,149) | | $ | 143,142 |
The Company had no allowance for credit losses on available-for-sale and held-to maturity securities at December 31, 2023.
The amortized cost and fair value of available-for-sale securities at December 31, 2023 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties:
| | | | | | |
| | Amortized | | Fair | ||
|
| Cost |
| Value | ||
December 31, 2023 |
| |
|
| |
|
Within one year | | $ | 999,740 | | $ | 980,000 |
One to five years | |
| 3,460,803 | |
| 3,323,495 |
Five to ten years | |
| 404,999 | |
| 404,453 |
After ten years | |
| 3,428,492 | |
| 3,237,552 |
| |
| 8,294,034 | |
| 7,945,500 |
Mortgage-backed GSEs | |
| 4,008,229 | |
| 3,703,318 |
Totals | | $ | 12,302,263 | | $ | 11,648,818 |
Maturity information for held-to-maturity securities is not presented since expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately $476,000 and $468,000 at December 31, 2023 and September 30, 2023, respectively.
Proceeds from sales of available for sale securities totaled $519,000 during the three months ended December 31, 2022, resulting in gross realized losses of $8,049. There were no sales of securities during the three-month period ended December 31, 2023.
13
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments, comprised of 19 securities at December 31, 2023 and 23 securities at September 30, 2023, was approximately $9,569,000 and $11,450,000 or 83 percent and 100 percent, respectively, of the fair value of the Bank’s total investment portfolio. These declines primarily resulted from changes in market interest rates.
Based on evaluation of available evidence, including recent changes in market interest rates and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.
The following tables show the Bank’s investments’ gross unrealized losses and fair value of the Bank’s investments with unrealized losses, for which an allowance for credit loss has not been recorded, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2023 and September 30, 2023:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | ||||||||||||||||
| | Less than 12 Months | | 12 Months or More | | Total | ||||||||||||
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | ||||||
Description of Securities |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
Available for sale | | |
| | |
| | |
| | |
| | |
| | |
|
U.S. Treasury securities | | $ | — | | $ | — | | $ | 980,000 | | $ | (19,740) | | $ | 980,000 | | $ | (19,740) |
U.S. Government agencies | |
| 404,453 | |
| (545) | |
| 2,888,130 | |
| (117,315) | |
| 3,292,583 | |
| (117,860) |
Mortgage-backed Government Sponsored Enterprises (GSEs) | |
| — | |
| — | |
| 3,217,524 | |
| (304,911) | |
| 3,217,524 | |
| (304,911) |
State and political subdivisions | |
| — | |
| — | |
| 2,078,985 | |
| (252,371) | |
| 2,078,985 | |
| (252,371) |
| | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | | $ | 404,453 | | $ | (545) | | $ | 9,164,639 | | $ | (694,337) | | $ | 9,569,092 | | $ | (694,882) |
| | | | | | | | | | | | | | | | | | |
| | September 30, 2023 | ||||||||||||||||
| | Less than 12 Months | | 12 Months or More | | Total | ||||||||||||
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | ||||||
Description of Securities |
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | ||||||
Available for sale | | |
| | | | | |
| | |
| | |
| | |
|
U.S. Treasury securities | | $ | — | | $ | — | | $ | 966,720 | | $ | (32,845) | | $ | 966,720 | | $ | (32,845) |
U.S. Government agencies | |
| — | |
| — | |
| 3,824,770 | |
| (184,807) | |
| 3,824,770 | |
| (184,807) |
Mortgage-backed Government Sponsored Enterprises (GSEs) | |
| — | |
| — | |
| 3,232,231 | |
| (414,789) | |
| 3,232,231 | |
| (414,789) |
State and political subdivisions | |
| 1,481,544 | |
| (71,136) | |
| 1,944,450 | |
| (385,444) | |
| 3,425,994 | |
| (456,580) |
| |
| 1,481,544 | |
| (71,136) | |
| 9,968,171 | |
| (1,017,885) | |
| 11,449,715 | |
| (1,089,021) |
| | | | | | | | | | | | | | | | | | |
Held to maturity | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Mortgage-backed Government Sponsored Enterprises (GSEs) | |
| — | |
| — | |
| 143,142 | |
| (4,149) | |
| 143,142 | |
| (4,149) |
| | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | | $ | 1,481,544 | | $ | (71,136) | | $ | 10,111,313 | | $ | (1,022,034) | | $ | 11,592,857 | | $ | (1,093,170) |
U.S. Government Treasuries and Agencies and State and Political Subdivisions
Unrealized losses on these securities have not been recognized because the issuers’ bonds are of high credit quality, values have only been impacted by changes in interest rates since the securities were purchased, and the Bank has the intent and ability to hold the securities for the foreseeable future. The fair value is expected to recover as the bonds approach the maturity date. Because the decline in market value was attributable to changes in interest rates, and not credit quality, and because the Bank typically does not intend to sell the investments and it is not more likely than not the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Bank has not established an allowance for credit losses for these securities at December 31, 2023.
14
Mortgage-backed GSEs
The unrealized losses on the Bank’s investment in residential mortgage-backed government sponsored enterprises were caused primarily by changes in interest rates. The Bank expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates, and not credit quality, and because the Bank typically does not intend to sell the investments and it is not more likely than not the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Bank has not established an allowance for credit losses for these securities at December 31, 2023.
Note 5: Loans and Allowance for Credit Losses
Categories of loans were as follows:
| | | | | | | |
|
| December 31, | | September 30, | | ||
|
| 2023 |
| 2023 |
| ||
Real estate loans: |
| |
| | |
| |
Residential | | $ | 73,290,421 | | $ | 74,561,278 | |
Multi-family | |
| 1,297,142 | |
| 1,309,586 | |
Agricultural | |
| 40,949,888 | |
| 36,378,192 | |
Commercial | |
| 2,221,381 | |
| 2,311,882 | |
Construction and land | |
| 4,269,565 | |
| 5,082,863 | |
Home equity line of credit (HELOC) | |
| 4,871,656 | |
| 4,708,023 | |
Commercial and industrial | |
| 1,790,942 | |
| 1,801,569 | |
Consumer | |
| 7,710,352 | |
| 7,652,164 | |
| | | | | | | |
Total loans | |
| 136,401,347 | |
| 133,805,557 | |
| | | | | | | |
Less: | |
|
| |
|
| |
Undisbursed loans in process | |
| 1,563,513 | |
| 2,578,282 | |
Net deferred loan fees | |
| 324,585 | |
| 325,621 | |
Allowance for credit losses | |
| 966,593 | |
| 934,331 | |
| | | | | | | |
Net loans | | $ | 133,546,656 | | $ | 129,967,323 | |
Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of these loans at December 31, 2023 and September 30, 2023, were approximately $19,219,000 and $19,667,000 respectively.
15
The Company adopted ASU 2016-13 effective October 1,2023, which required implementation of the current expected credit loss (CECL) model in estimating the allowance for credit losses (ACL) valuation account. The implementation of the new standard resulted in a $32,000 increase to the overall balance of the Company’s allowance for credit losses (ACL). The following tables present the activity in the allowance for credit losses based on portfolio segment for the three months ended December 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2023 | ||||||||||||||||
| | | | Effect of | | Provision | | | | | | | ||||||
| | Balance | | adoption of | | (credit) | | | | | | Balance | ||||||
|
| October 1, 2023 |
| ASC 326 | | for credit losses |
| Charge-offs |
| Recoveries |
| December 31, 2023 | ||||||
Real estate loans: | | |
| | | | | |
| | |
| | |
| | |
|
Residential | | $ | 738,230 | | $ | 32,000 | | $ | 7,412 | | $ | — | | $ | — | | $ | 777,642 |
Multi-family | |
| 12,840 | |
| — | | | (10,198) | |
| — | |
| — | |
| 2,642 |
Agricultural | |
| 73,608 | |
| — | | | 9,801 | |
| — | |
| — | |
| 83,409 |
Commercial | |
| 4,678 | |
| — | | | (153) | |
| — | |
| — | |
| 4,525 |
Construction and land | |
| 49,835 | |
| — | | | (9,550) | |
| — | |
| — | |
| 40,285 |
Home equity line of credit (HELOC) | |
| 14,289 | |
| — | | | 595 | |
| — | |
| — | |
| 14,884 |
Commercial and industrial | |
| 3,645 | |
| — | | | 3 | |
| — | |
| — | |
| 3,648 |
Consumer | |
| 37,206 | |
| — | | | 2,090 | |
| — | |
| 262 | |
| 39,558 |
| | | | | | | | | | | | | | | | | | |
Total loans | | $ | 934,331 | | $ | 32,000 | | $ | — | | $ | — | | $ | 262 | | $ | 966,593 |
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, 2022 | |||||||||||||
| | | | Provision | | | | | | | |||||
| | Balance | | (credit) | | | | | | Balance | |||||
|
| October 1, 2022 |
| for loan losses |
| Charge-offs |
| Recoveries |
| December 31, 2022 | |||||
Real estate loans: | | |
| | |
| | |
| | |
| | |
|
Residential | | $ | 623,649 | | $ | 58,838 | | $ | (22,809) | | $ | — | | $ | 659,678 |
Multi-family | |
| 11,008 | |
| 1,669 | |
| — | |
| — | |
| 12,677 |
Agricultural | |
| 199,011 | |
| (45,091) | |
| — | |
| — | |
| 153,920 |
Commercial | |
| 10,801 | |
| (1,731) | |
| — | |
| — | |
| 9,070 |
Construction and land | |
| 35,292 | |
| 3,515 | |
| — | |
| — | |
| 38,807 |
Home equity line of credit (HELOC) | |
| 69,234 | |
| (22,170) | |
| — | |
| — | |
| 47,064 |
Commercial and industrial | |
| 12,086 | |
| (3,079) | |
| — | |
| — | |
| 9,007 |
Consumer | |
| 22,573 | |
| 8,049 | |
| — | |
| — | |
| 30,622 |
| | | | | | | | | | | | | | | |
Total loans | | $ | 983,654 | | $ | — | | $ | (22,809) | | $ | — | | $ | 960,845 |
16
The following tables present the balance in the allowance for credit losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2023 and September 30, 2023:
| | | | | | | | | | | | |
| | Allowance for credit losses | | Loans | ||||||||
| | Ending balance, evaluated for expected credit losses | | Ending balance, evaluated for expected credit losses | ||||||||
|
| Individually |
| Collectively |
| Individually |
| Collectively | ||||
| | (In thousands) | ||||||||||
December 31, 2023 | | |
| | |
| | |
| | |
|
Real estate loans: |
| |
|
| |
|
| |
|
| |
|
Residential | | $ | — | | $ | 777,642 | | $ | 593,206 | | $ | 72,697,215 |
Multi-family | |
| — | |
| 2,642 | |
| — | |
| 1,297,142 |
Agricultural | |
| — | |
| 83,409 | |
| — | |
| 40,949,888 |
Commercial | |
| — | |
| 4,525 | |
| — | |
| 2,221,381 |
Construction and land | |
| — | |
| 40,285 | |
| — | |
| 4,269,565 |
Home equity line of credit (HELOC) | |
| — | |
| 14,884 | |
| — | |
| 4,871,656 |
Commercial and industrial | |
| — | |
| 3,648 | |
| — | |
| 1,790,942 |
Consumer | |
| — | |
| 39,558 | |
| 20,831 | |
| 7,710,352 |
| | | | | | | | | | | | |
Total loans | | $ | — | | $ | 966,593 | | $ | 614,037 | | $ | 135,808,141 |
| | | | | | | | | | | | |
| | Allowance for loan losses | | Loans | ||||||||
| | Ending balance, evaluated for impairment | | Ending balance, evaluated for impairment | ||||||||
|
| Individually |
| Collectively |
| Individually |
| Collectively | ||||
September 30, 2023 | | |
| | |
| | |
| | |
|
Real estate loans: |
| |
|
| |
|
| |
|
| |
|
Residential | | $ | — | | $ | 738,230 | | $ | — | | $ | 74,561,278 |
Multi-family | |
| — | |
| 12,840 | |
| — | |
| 1,309,586 |
Agricultural | |
| — | |
| 73,608 | |
| — | |
| 36,378,192 |
Commercial | |
| — | |
| 4,678 | |
| — | |
| 2,311,882 |
Construction and land | |
| — | |
| 49,835 | |
| — | |
| 5,082,863 |
Home equity line of credit (HELOC) | |
| — | |
| 14,289 | |
| — | |
| 4,708,023 |
Commercial and industrial | |
| — | |
| 3,645 | |
| — | |
| 1,801,569 |
Consumer | |
| — | |
| 37,206 | |
| — | |
| 7,652,164 |
| | | | | | | | | | | | |
Total loans | | $ | — | | $ | 934,331 | | $ | — | | $ | 133,805,557 |
The Bank has adopted a standard loan grading system for all loans, as follows:
Pass. Loans of sufficient quality, which generally are protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral.
Special Mention. Loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.
Substandard. Loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Usually, this classification includes all 90 days or more, non-accrual, and past due loans.
17
Doubtful. Loans which have all the weaknesses inherent in those classified substandard 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.
Loss. Loans considered uncollectible and of such little value that continuance as an asset without the establishment of a specific reserve is not warranted.
Risk characteristics of each loan portfolio segment are described as follows:
Residential Real Estate
These loans include first liens and junior liens on 1-4 family residential real estate (both owner and non-owner occupied). The main risks for these loans are changes in the value of the collateral and stability of the local economic environment and its impact on the borrowers’ employment. Management specifically considers unemployment and changes in real estate values in the Bank’s market area.
Multi-family Real Estate
These loans include loans on residential real estate secured by property with five or more units. The main risks are changes in the value of the collateral, ability of borrowers to collect rents, vacancy and changes in the tenants’ employment status. Management specifically considers unemployment and changes in real estate values in the Bank’s market area.
Agriculture Real Estate
These loans are primarily loans on farm ground and include loans secured by residential properties located on farm ground, but agricultural activities may not be the primary occupation of the borrowers. The main risks are changes in the value of the collateral and changes in the economy or borrowers’ business operations. Management specifically considers unemployment and changes in real estate values in the Bank’s market area.
Commercial Real Estate
These loans are generally secured by owner-occupied commercial real estate including warehouses and offices. The main risks are changes in the value of the collateral and ability of borrowers to successfully conduct their business operations. Management specifically considers unemployment and changes in real estate values in the Bank’s market area.
Construction and Land Real Estate
These loans include construction loans for 1-4 family residential and commercial properties (both owner and non-owner occupied) and first liens on land. The main risks for construction loans include uncertainties in estimating costs of construction and in estimating the market value of the completed project. The main risks for land loans are changes in the value of the collateral and stability of the local economic environment. Management specifically considers unemployment and changes in real estate values in the Bank’s market area.
HELOC
These loans are generally secured by owner-occupied 1-4 family residences. The main risks for these loans are changes in the value of the collateral and stability of the local economic environment and its impact on the borrowers’ employment. Management specifically considers unemployment and changes in real estate values in the Bank’s market area.
18
Commercial and Industrial
The commercial and industrial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of the borrower and the economic conditions that impact the cash flow stability from business operations.
Consumer Loans
These loans include vehicle loans, share loans and unsecured loans. The main risks for these loans are the depreciation of the collateral values (vehicles) and the financial condition of the borrowers. Major employment changes are specifically considered by management.
Information regarding the credit quality indicators most closely monitored for other than residential real estate loans by class as of December 31, 2023 and September 30, 2023, follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Term Loans Amortized Costs Basis by Origination Year | | | | |||||||||||||||||||
| | | | | | For The Years Ending September 30, | | | | |||||||||||||||
|
| 12/31/2023 |
| 2023 |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| Prior |
| Total | ||||||||
December 31, 2023 | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | | | | | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | - | | $ | - | | $ | 1,482,676 | | $ | 500,008 | | $ | - | | $ | - | | $ | 238,697 | | $ | 2,221,381 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Doubtful | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total | | $ | - | | $ | - | | $ | 1,482,676 | | $ | 500,008 | | $ | - | | $ | - | | $ | 238,697 | | $ | 2,221,381 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | | | | | | | | | | | | | | | | | | | | | | | |
Current period gross charge-offs | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | | | | | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 44,800 | | $ | 3,991,745 | | $ | 71,092 | | $ | 71,266 | | $ | 51,998 | | $ | 12,996 | | $ | 25,667 | | $ | 4,269,565 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Doubtful | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total | | $ | 44,800 | | $ | 3,991,745 | | $ | 71,092 | | $ | 71,266 | | $ | 51,998 | | $ | 12,996 | | $ | 25,667 | | $ | 4,269,565 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | | | | | | | | | | | | | | | | | | | | | | |
Current period gross charge-offs | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 54,439 | | $ | 190,422 | | $ | 273,947 | | $ | 228,281 | | $ | 622,114 | | $ | 62,519 | | $ | 359,221 | | $ | 1,790,942 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Doubtful | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total | | $ | 54,439 | | $ | 190,422 | | $ | 273,947 | | $ | 228,281 | | $ | 622,114 | | $ | 62,519 | | $ | 359,221 | | $ | 1,790,942 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | | | | | |
Current period gross charge-offs | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
Multi Family | | | | | | | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | - | | $ | - | | $ | 973,664 | | $ | - | | $ | - | | $ | 175,906 | | $ | 147,573 | | $ | 1,297,142 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Doubtful | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total | | $ | - | | $ | - | | $ | 973,664 | | $ | - | | $ | - | | $ | 175,906 | | $ | 147,573 | | $ | 1,297,142 |
19
| | | | | | | | | | | | | | | | | | | | | | | | |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Term Loans Amortized Costs Basis by Origination Year | | | | |||||||||||||||||||
| | | | | | For The Years Ending September 30, | | | | |||||||||||||||
|
| 12/31/2023 |
| 2023 |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| Prior |
| Total | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Multi Family | | | | | | | | | | | | | | | | | | | | | | | | |
Current period gross charge-offs | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | | | | | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 4,775,232 | | $ | 12,938,459 | | $ | 9,300,846 | | $ | 6,057,543 | | $ | 4,262,134 | | $ | 562,180 | | $ | 3,053,495 | | $ | 40,949,888 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Doubtful | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total | | $ | 4,775,232 | | $ | 12,938,459 | | $ | 9,300,846 | | $ | 6,057,543 | | $ | 4,262,134 | | $ | 562,180 | | $ | 3,053,495 | | $ | 40,949,888 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | | | | | | | | | | | | | | | | | | | | | | |
Current period gross charge-offs | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | | | | | | | | | | |
Risk Rating | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 4,874,470 | | $ | 17,120,626 | | $ | 12,102,225 | | $ | 6,857,098 | | $ | 4,936,246 | | $ | 813,601 | | $ | 3,824,652 | | $ | 50,528,918 |
Special Mention | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Substandard | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Doubtful | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total | | $ | 4,874,470 | | $ | 17,120,626 | | $ | 12,102,225 | | $ | 6,857,098 | | $ | 4,936,246 | | $ | 813,601 | | $ | 3,824,652 | | $ | 50,528,918 |
| | | | | | | | | | | | | | | |
|
| | | | Special | | | | | | | | | | |
|
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total | |||||
September 30, 2023 | | |
| | |
| | |
| | |
| | |
|
Real estate loans: | | |
| | |
| | |
| | |
| | |
|
Residential | | $ | 74,083,965 | | $ | — | | $ | 477,313 | | $ | — | | $ | 74,561,278 |
Multi-family | |
| 1,309,586 | |
| — | |
| — | |
| — | |
| 1,309,586 |
Agricultural | |
| 36,378,192 | |
| — | |
| — | |
| — | |
| 36,378,192 |
Commercial | |
| 2,311,882 | |
| — | |
| — | |
| — | |
| 2,311,882 |
Construction and land | |
| 5,082,863 | |
| — | |
| — | |
| — | |
| 5,082,863 |
Home equity line of credit (HELOC) | |
| 4,708,023 | |
| — | |
| — | |
| — | |
| 4,708,023 |
Commercial and industrial | |
| 1,801,569 | |
| — | |
| — | |
| — | |
| 1,801,569 |
Consumer | |
| 7,652,164 | |
| — | |
| — | |
| — | |
| 7,652,164 |
| | | | | | | | | | | | | | | |
Total loans | | $ | 133,328,244 | | $ | — | | $ | 477,313 | | $ | — | | $ | 133,805,557 |
20
The Bank monitors the credit risk profile by payment activity for residential and consumer loan classes. Loans past due 90 days or more and loans on nonaccrual status are considered nonperforming. Nonperforming loans are reviewed monthly. The following table presents the amortized cost in residential and consumer loans based on payment activity:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Costs Basis by Origination Year | | | | |||||||||||||||||||
| | | | | | For The Years Ending September 30, | | | | |||||||||||||||
|
| 12/31/2023 |
| 2023 |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| Prior |
| Total | ||||||||
December 31, 2023 | | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Performance | | | | | | | | | | | | | | | | | | | | | | | | |
Performing | | $ | 1,005,224 | | $ | 4,910,086 | | $ | 16,268,568 | | $ | 20,198,257 | | $ | 7,005,759 | | $ | 2,868,168 | | $ | 20,441,155 | | $ | 72,697,215 |
Nonperforming | | | - | | | - | | | - | | | 304,134 | | | - | | | - | | | 289,072 | | | 593,206 |
Total | | $ | 1,005,224 | | $ | 4,910,086 | | $ | 16,268,568 | | $ | 20,502,391 | | $ | 7,005,759 | | $ | 2,868,168 | | $ | 20,730,227 | | $ | 73,290,421 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | | | | | | | | | | | | | | | | | | | | | | | |
Current period gross charge-offs | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
Home equity | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Performance | | | | | | | | | | | | | | | | | | | | | | | | |
Performing | | $ | 241,084 | | $ | 975,922 | | $ | 1,436,397 | | $ | 781,686 | | $ | 514,490 | | $ | 298,614 | | $ | 623,463 | | $ | 4,871,656 |
Nonperforming | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - |
Total | | $ | 241,084 | | $ | 975,922 | | $ | 1,436,397 | | $ | 781,686 | | $ | 514,490 | | $ | 298,614 | | $ | 623,463 | | $ | 4,871,656 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Home equity | | | | | | | | | | | | | | | | | | | | | | | | |
Current period gross charge-offs | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Performance | | | | | | | | | | | | | | | | | | | | | | | | |
Performing | | $ | 2,803 | | $ | 7,216,482 | | $ | 249,309 | | $ | 82,971 | | $ | 84,847 | | $ | 35,500 | | $ | 17,610 | | $ | 7,689,521 |
Nonperforming | | | - | | | 20,831 | | | - | | | - | | | - | | | - | | | - | | | 20,831 |
Total | | $ | 2,803 | | $ | 7,237,313 | | $ | 249,309 | | $ | 82,971 | | $ | 84,847 | | $ | 35,500 | | $ | 17,610 | | $ | 7,710,352 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | |
Current period gross charge-offs | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Performance | | | | | | | | | | | | | | | | | | | | | | | | |
Performing | | $ | 1,249,111 | | $ | 13,102,489 | | $ | 17,954,273 | | $ | 21,062,914 | | $ | 7,605,096 | | $ | 3,202,282 | | $ | 21,082,227 | | $ | 85,258,392 |
Nonperforming | | | - | | | 20,831 | | | - | | | 304,134 | | | - | | | - | | | 289,072 | | | 614,037 |
Total | | $ | 1,249,111 | | $ | 13,123,320 | | $ | 17,954,273 | | $ | 21,367,048 | | $ | 7,605,096 | | $ | 3,202,282 | | $ | 21,371,299 | | $ | 85,872,429 |
The Bank evaluates the loan risk grading system definitions on an ongoing basis. No significant changes were made during the three months ended December 31, 2023 or the year ended September 30, 2023.
21
The following tables present the Bank’s loan portfolio aging analysis of the recorded investment in loans as of December 31, 2023 and September 30, 2023:
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | |||||||||||||||||
| | | | | | Greater Than | | | | | | | | ||||||
| | 30-59 Days | | 60-89 Days | | 90 Days | | Total | | | | Total Loans | | ||||||
|
| Past Due |
| Past Due |
| Past Due |
| Past Due |
| Current |
| Receivable |
| ||||||
Real estate loans: | | |
| | |
| | |
| | |
| | |
| | |
| |
Residential | | $ | 484,091 | | $ | 296,092 | | $ | 593,206 | | $ | 1,373,389 | | $ | 71,917,032 | | $ | 73,290,421 | |
Multi-family | |
| — | |
| — | |
| — | |
| — | |
| 1,297,142 | |
| 1,297,142 | |
Agricultural | |
| — | |
| — | |
| — | |
| — | |
| 40,949,888 | |
| 40,949,888 | |
Commercial | |
| — | |
| — | |
| — | |
| — | |
| 2,221,381 | |
| 2,221,381 | |
Construction and land | |
| — | |
| — | |
| — | |
| — | |
| 4,269,565 | |
| 4,269,565 | |
Home equity line of credit (HELOC) | |
| — | |
| — | |
| — | |
| — | |
| 4,871,656 | |
| 4,871,656 | |
Commercial and industrial | |
| — | |
| — | |
| — | |
| — | |
| 1,790,942 | |
| 1,790,942 | |
Consumer | |
| 121,834 | |
| 4,919 | |
| 20,831 | |
| 147,584 | |
| 7,562,768 | |
| 7,710,352 | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 605,925 | | $ | 301,011 | | $ | 614,037 | | $ | 1,520,973 | | $ | 134,880,374 | | $ | 136,401,347 | |
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 | |||||||||||||||||
| | | | | | Greater Than | | | | | | | | ||||||
| | 30-59 Days | | 60-89 Days | | 90 Days | | Total | | | | Total Loans | | ||||||
|
| Past Due |
| Past Due |
| Past Due |
| Past Due |
| Current |
| Receivable |
| ||||||
Real estate loans: | | |
| | |
| | |
| | |
| | |
| | |
| |
Residential | | $ | 482,844 | | $ | 332,929 | | $ | 477,313 | | $ | 1,293,086 | | $ | 73,268,192 | | $ | 74,561,278 | |
Multi-family | |
| — | |
| — | |
| — | |
| — | |
| 1,309,586 | |
| 1,309,586 | |
Agricultural | |
| — | |
| — | |
| — | |
| — | |
| 36,378,192 | |
| 36,378,192 | |
Commercial | |
| — | |
| — | |
| — | |
| — | |
| 2,311,882 | |
| 2,311,882 | |
Construction and land | |
| — | |
| — | |
| — | |
| — | |
| 5,082,863 | |
| 5,082,863 | |
Home equity line of credit (HELOC) | |
| — | |
| — | |
| — | |
| — | |
| 4,708,023 | |
| 4,708,023 | |
Commercial and industrial | |
| — | |
| — | |
| — | |
| — | |
| 1,801,569 | |
| 1,801,569 | |
Consumer | |
| 5,653 | |
| 20,831 | |
| — | |
| 26,484 | |
| 7,625,680 | |
| 7,652,164 | |
| | | | | | | | | | | | | | | | | | | |
Total | | $ | 488,497 | | $ | 353,760 | | $ | 477,313 | | $ | 1,319,570 | | $ | 132,485,987 | | $ | 133,805,557 | |
The Bank had no loans identified as collateral dependent as of December 31, 2023 and no loans identified as individually evaluated during the year ended September 30, 2023.
Nonaccrual loans with no allowance for credit losses at December 31, 2023 and September 30, 2023, were as follows:
| | | | | | | |
| | December 31, | | September 30, | | ||
|
| 2023 |
| 2023 |
| ||
Residential real estate loans | | $ | 593,206 | | $ | 477,313 | |
Consumer | |
| 20,831 | |
| — | |
| | | | | | | |
| | $ | 614,037 | | $ | 477,313 | |
There were no loans modified for borrowers experiencing financial difficulty during the three months ended December 31, 2023 and 2022 and during the year ended September 30, 2023. There were no loans modified for borrowers experiencing financial difficulty in the past 12 months that subsequently defaulted during the three months ended December 31, 2023 and 2022 and during the year ended September 30, 2023.
22
Note 6: Regulatory Matters
The Bank is subject to various 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 Bank’s 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 U.S. GAAP reporting requirements and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.
Quantitative measures established by regulatory reporting standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier I capital (as defined) to total risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2023, that the Bank met all capital adequacy requirements to which it is subject.
As of December 31, 2023 the most recent notification from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based capital, Tier I risk-based capital, common equity Tier I risk-based capital and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank’s actual and required capital amounts and ratios are as follows (table amounts in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | To Be Well Capitalized |
| |||
| | | | | | | | | | | | Under | | |||
| | | | | | | | | | | | Prompt Corrective | | |||
| | | | For Capital Adequacy | | Action |
| |||||||||
| | Actual |
| Purposes | | Provisions |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
| | (Dollars in thousands) |
| |||||||||||||
As of December 31, 2023 (as restated) |
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Total Capital | | | | | | | | | | | | | | | | |
(to Risk-Weighted Assets) | | $ | 21,198 | | 18.0 | % | $ | 9,400 | | 8.0 | % | $ | 11,750 | | 10.0 | % |
| | | | | | | | | | | | | | | | |
Tier 1 Capital | | | | | | | | | | | | | | | | |
(to Risk-Weighted Assets) | | $ | 20,231 |
| 17.2 | % | $ | 7,050 |
| 6.0 | % | $ | 9,400 |
| 8.0 | % |
| | | | | | | | | | | | | | | | |
Common Equity Tier I Capital | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
(to Risk-Weighted Assets) | | $ | 20,231 |
| 17.2 | % | $ | 5,287 |
| 4.5 | % | $ | 7,637 |
| 6.5 | % |
| | | | | | | | | | | | | | | | |
Tier I Capital | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
(to Average Total Assets) | | $ | 20,231 |
| 12.3 | % | $ | 6,553 |
| 4.0 | % | $ | 8,192 |
| 5.0 | % |
| | | | | | | | | | | | | | | | |
As of September 30, 2023 | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
Total Capital | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
(to Risk-Weighted Assets) | | $ | 21,079 | | 19.0 | % | $ | 8,897 |
| 8.0 | % | $ | 11,121 |
| 10.0 | % |
| | | | | | | | | | | | | | | | |
Tier 1 Capital | |
| | | | |
| |
|
| |
| |
|
| |
(to Risk-Weighted Assets) | | $ | 20,145 |
| 18.1 | % | $ | 6,672 |
| 6.0 | % | $ | 8,897 |
| 8.0 | % |
| | | | | | | | | | | | | | | | |
Common Equity Tier I Capital | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
(to Risk-Weighted Assets) | | $ | 20,145 |
| 18.1 | % | $ | 5,004 |
| 4.5 | % | $ | 7,228 |
| 6.5 | % |
| | | | | | | | | | | | | | | | |
Tier I Capital | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
(to Average Total Assets) | | $ | 20,145 |
| 13.1 | % | $ | 6,158 |
| 4.0 | % | $ | 7,697 |
| 5.0 | % |
23
Note 7: Disclosures about Fair Value of Assets and Liabilities
Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2Significant 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 3Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Recurring Measurements
The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2023 and September 30, 2023:
| | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | |||||||
| | | | Quoted Prices in | | Significant | | | ||||
| | | | Active Markets | | Other | | Significant | ||||
| | | | for | | Observable | | Unobservable | ||||
| | Fair | | Identical Assets | | Inputs | | Inputs | ||||
|
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
December 31, 2023 | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 980,000 | | $ | 980,000 | | $ | — | | $ | — |
U.S. Government agencies | | | 3,292,584 | | | — | | | 3,292,584 | | | — |
Mortgage-backed Government Sponsored Enterprises (GSEs) |
| | 3,703,318 |
| | — |
| | 3,703,318 |
| | — |
State and political subdivisions |
| | 3,672,916 |
| | — |
| | 3,672,916 |
| | — |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
September 30, 2023 |
| |
|
| |
|
| |
|
| |
|
U.S. Treasury securities | | $ | 966,720 | | $ | 966,720 | | $ | — | | $ | — |
U.S. Government agencies | |
| 3,824,770 | |
| — | |
| 3,824,770 | |
| — |
Mortgage-backed Government Sponsored Enterprises (GSEs) | |
| 3,232,231 | |
| — | |
| 3,232,231 | |
| — |
State and political subdivisions | |
| 3,425,994 | |
| — | |
| 3,425,994 | |
| — |
Following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There are no liabilities measured at fair value on a recurring basis. There have been no significant changes in the valuation techniques during the three months ended December 31, 2023 and the year ended September 30, 2023.
24
Available-for-sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 are not available, securities are classified within Level 3 of the hierarchy. The Bank had no Level 3 securities.
Nonrecurring Measurements
The Bank had no assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2023 and September 30, 2023.
The estimated fair values of the Bank’s financial instruments not carried at fair value on the balance sheets are as follows:
| | | | | | | | | | | | | | | |
| | Carrying | | Fair | | Fair Value Measurements Using | |||||||||
|
| Value |
| Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
December 31, 2023 |
| |
|
| |
|
| |
|
| |
|
| |
|
Financial assets: |
| |
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 7,635,217 | | $ | 7,635,217 | | $ | 7,635,217 | | $ | — | | $ | — |
Interest-bearing time deposits | |
| 100,000 | |
| 100,000 | |
| 100,000 | |
| — | |
| — |
Loans held for sale | | | 5,236,643 | | | 5,236,643 | | | — | | | — | | | 5,236,643 |
Loans, net | |
| 133,546,656 | |
| 122,830,501 | |
| — | |
| — | |
| 122,830,501 |
FHLB Stock | |
| 1,474,700 | |
| 1,474,700 | |
| — | |
| 1,474,700 | |
| — |
Bank owned life insurance | |
| 1,794,889 | |
| 1,794,889 | |
| 1,794,889 | |
| — | |
| — |
Accrued interest receivable | |
| 528,479 | |
| 528,479 | |
| 528,479 | |
| — | |
| — |
| | | | | | | | | | | | | | | |
Financial liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
|
Deposits | |
| 130,775,912 | |
| 132,266,386 | |
| 89,431,386 | |
| — | |
| 42,835,000 |
FHLB advances | |
| 11,000,000 | |
| 11,000,000 | |
| — | |
| 11,000,000 | |
| — |
Accrued interest payable | |
| 130,180 | |
| 130,180 | |
| 130,180 | |
| — | |
| — |
| | | | | | | | | | | | | | | |
September 30, 2023 | |
|
| |
|
| |
|
| |
|
| |
|
|
Financial assets: | |
|
| |
|
| |
|
| |
|
| |
|
|
Cash and cash equivalents | | $ | 6,291,336 | | $ | 6,291,336 | | $ | 6,291,336 | | $ | — | | $ | — |
Interest-bearing time deposits | |
| 100,000 | |
| 100,000 | |
| 100,000 | |
| — | |
| — |
Loans held for sale | | | 3,094,405 | | | 3,096,000 | | | | | | | | | 3,096,000 |
Loans, net | |
| 129,967,323 | |
| 115,340,546 | |
| — | |
| — | |
| 115,340,546 |
FHLB Stock | |
| 1,368,900 | |
| 1,368,900 | |
| — | |
| 1,368,900 | |
| — |
Bank owned life insurance | |
| 1,783,880 | |
| 1,783,880 | |
| 1,783,880 | |
| — | |
| — |
Accrued interest receivable | |
| 456,867 | |
| 456,867 | |
| 456,867 | |
| — | |
| — |
| | | | | | | | | | | | | | | |
Financial liabilities: | |
|
| |
|
| |
|
| |
| | |
|
|
Deposits | |
| 122,815,748 | |
| 123,426,791 | |
| 90,497,791 | |
| — | |
| 32,929,000 |
FHLB advances | |
| 12,000,000 | |
| 12,001,000 | |
| — | |
| 12,001,000 | |
| — |
Accrued interest payable | |
| 69,434 | |
| 69,434 | |
| 69,434 | |
| — | |
| — |
Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Fair value estimates may not be realizable in an immediate settlement of the instrument. In some instances, there are no quoted market prices for the Bank’s various financial instruments, in which case fair values may be based on estimates using present value or other valuation techniques, or based on judgments regarding future expected loss experience, current economic conditions, risk characteristic of the financial instruments, or other factors. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Subsequent changes in assumptions could significantly affect the estimates.
25
Note 8: Commitments and Credit Risks
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
Commitments outstanding were as follows:
| | | | | | | |
|
| December 31, | | September 30, | | ||
|
| 2023 |
| 2023 |
| ||
Commitments to originate loans | | $ | 2,622,992 | | $ | 2,717,974 |
|
Undisbursed balance of loans closed | |
| 8,469,628 | | | 9,172,548 | |
| | | | | | | |
Total | | $ | 11,092,620 | | $ | 11,890,522 | |
Note 9: Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Unallocated common shares held by the Employee Stock Ownership Plan (“ESOP”) are not included in the weighted-average number of common shares outstanding for purposes of calculating basic net income per common share until they are committed to be released.
The following table sets forth the computation of basic and diluted earnings per share:
| | | |
| | Three Months Ended | |
| | December 31, | |
| | 2023 | |
| | | |
Net income (as restated) | | $ | 173,534 |
| | | |
Weighted-average shares issued | |
| 1,022,970 |
Less weighted-average unearned ESOP shares | | | (81,779) |
| | | |
Weighted-average shares outstanding | |
| 941,191 |
| | | |
Earnings per share (as restated) - basic and diluted | | $ | 0.18 |
Note 10: Conversion to Stock Form
On March 3, 2023, the Board of Directors of the Bank adopted a plan of conversion (Plan). The Plan was subject to the approval of the Federal Deposit Insurance Corporation and the State of Ohio Division of Financial Institutions and was approved by the affirmative vote of a majority of the total votes eligible to be cast by the voting
26
members of the Bank at a special meeting. The Plan set forth that the Bank proposed to convert into a stock bank structure with the establishment of a stock holding company (Mercer Bancorp, Inc.), as parent of the Bank. The Bank converted to the stock form of ownership, followed by the issuance of all of the Bank’s outstanding stock to Mercer Bancorp, Inc. Pursuant to the Plan, the Bank determined the total offering value and number of shares of common stock based upon an independent appraiser’s valuation. The stock was priced at $10.00 per share. In addition, the Bank’s Board of Directors adopted an employee stock ownership plan (ESOP) which subscribed for 8% of the common stock sold in the offering.
Mercer Bancorp, Inc. is organized as a corporation under the laws of the State of Maryland and owns all of the outstanding common stock of the Bank upon completion of the conversion.
The costs of issuing the common stock was deducted from the sales proceeds of the offering.
At the completion of the conversion to stock form, the Bank established a liquidation account in the amount of retained earnings contained in the final prospectus. The liquidation account will be maintained for the benefit of eligible savings account holders who maintain deposit accounts in the Bank after conversion.
The conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result. Mercer Bancorp, Inc.is an emerging growth company, and, for as long as it continues to be an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies.” Mercer Bancorp, Inc. intends to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, its financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
27
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis is intended to enhance your understanding of our financial condition and results of operations. The financial information in this section is derived from the accompanying financial statements. You should read the financial information in this section in conjunction with the business and financial information contained in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2023 as filed with the SEC on December 29, 2023.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” 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 asset quality of our loan and investment portfolios; and |
● | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.
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 area, which are worse than expected, including the effects of inflation and monetary policy; |
● | changes in the interest rate environment that reduce our margins and yields, the fair value of our financial instruments, or our level of loan originations, or increase the level of defaults, losses and prepayments within our loan portfolio; |
● | adverse changes in the securities markets; |
● | changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses; |
● | our ability to manage market risk, credit risk and operational risk; |
● | our ability to access cost-effective funding; |
● | changes in liquidity, including the amount and composition of our deposits, including the percentage of uninsured deposits in our portfolio; |
28
● | fluctuations in real estate values and in the conditions of the residential real estate, commercial real estate, and agricultural real estate markets; |
● | demand for loans and deposits in our market area; |
● | our ability to implement and change our business strategies; |
● | competition among depository and other financial institutions; |
● | changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums; |
● | changes in the quality or composition of our loan or investment portfolios; |
● | technological changes that may be more difficult or expensive than expected; |
● | the inability of third-party providers to perform as expected; |
● | a failure or breach of our operational or information security systems or infrastructure, including cyberattacks; |
● | our ability to enter new markets successfully and capitalize on growth opportunities; |
● | changes in consumer spending, borrowing and savings habits; |
● | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board; |
● | our ability to retain key employees; |
● | changes in the financial condition, results of operations or future prospects of issuers of securities that we own; and |
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended
29
transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our critical accounting policies:
Allowance for Credit Losses. The allowance for credit losses is the estimated amount considered necessary to cover inherent credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for credit losses which is charged against income. In determining the allowance for credit losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.
The Company adopted Accounting Standards Update No. 2016-13 Current Expected Credit Losses (CECL), effective October 1, 2023, as required. The adoption of CECL resulted in a $32,000 increase in the level of the allowance for credit losses.
Management performs a quarterly evaluation of the allowance for credit losses (ACL). Management’s determination of the adequacy of the ACL is based on the assessment of the expected credit losses on loans over the expected life of the loan. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.
In accordance with the provisions of the accounting standards under CECL, management estimates the ACL balance using relevant available information from both internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience of a defined peer group, by affiliate, paired with economic forecasts, provide the basis for the quantitatively modeled estimates of expected credit losses. The Company adjusts its quantitative model, as necessary, to reflect conditions not already considered by the quantitative model. These adjustments are commonly known as the qualitative factors.
The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company uses the average historical loss method to measure the quantitative portion of the ACL over the forecast and reversion periods.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Prior to October 1, 2023, the Company calculated the allowance for loan losses under the probable incurred methodology. Using this methodology, the analysis had two components, specific and general allowances. The specific percentage allowance was for unconfirmed losses related to loans that were determined to be impaired. Impairment was measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the fair value of the loan was less than the loan’s carrying value, a charge was recorded for the difference.
The general allowance, which was for loans reviewed collectively, was determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyzed historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis established historical loss percentages and qualitative factors that were applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that were reviewed collectively. The qualitative component was critical in determining the allowance for loan losses as certain trends may have indicated the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Not incorporating a qualitative component could have misstated the allowance for loan losses.
30
Actual loan losses may be significantly more than the allowances we have established at December 31, 2023 and September 30, 2023, which could result in a material negative effect on our financial results.
Deferred Tax Assets. 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. 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. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Determining the proper valuation allowance for deferred taxes is critical in properly valuing the deferred tax asset and the related recognition of income tax expense or benefit. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.
Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Bank estimates the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Bank estimates fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of gain or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology utilized by the Bank can be found in Note 6 of the Financial Statements — “Disclosures About Fair Value of Assets and Liabilities.”
Comparison of Financial Condition at December 31, 2023 and September 30, 2023
Total Assets. Total assets were $166.4 million at December 31, 2023, an increase of $7.3 million, or 4.6%, from September 30, 2023. The increase was primarily comprised of an increase in loans and loans held for sale of $5.7 million, and an increase in cash and cash equivalents of $1.3 million.
Cash and Cash Equivalents. Cash and cash equivalents increased by $1.3 million, or 21.4%, to $7.6 million at December 31, 2023 from $6.3 million at September 30, 2023. The increase was due primarily to an increase in deposits during the three months ended December 31, 2023.
Investment Securities. Investment securities available for sale and held to maturity increased $185,000, or 1.7%, to $11.8 million at December 31, 2023, from $11.6 million at September 30, 2023. During the three months ended December 31, 2023, securities purchases of $890,000 were more than offset by calls, maturities and repayments of $1.1 million, while the fair value of available for sale securities increased by $436,000.
The yield on investment securities was 2.13% for the three months ended December 31, 2023, compared to 1.83% for the three months ended December 31, 2022, reflecting the higher market interest rate environment.
Loans Held for Sale. Loans held for sale increased by $2.1 million, or 69.2% to $5.2 million at December 31, 2023 compared to $3.1 million at September 30, 2023. During fiscal 2023, management established an indirect automobile lending program and began to originate auto loans both for sale and for investment. No sales of auto loans occurred during the three months ended December 31, 2023.
Net Loans. Net loans increased by $3.6 million, or 2.8%, to $133.5 million at December 31, 2023 from $130.0 million at September 30, 2023. During the three months ended December 31, 2023, agricultural real estate loans increased $4.6 million, or 12.6%, to $40.9 million at December 31, 2023, while residential real estate loans decreased
31
$1.3 million, or 1.7%, to $73.3 million at December 31, 2023, from $74.6 million at September 30, 2023 and construction and land loans decreased $813,000, or 16.0%, to $4.3 million at December 31, 2023.
The Bank’s loan growth has been achieved amid strong competition for one- to four-family residential mortgage loans and agricultural mortgage loans in our market area.
The Bank’s strategy includes growing the loan portfolio, through as continued emphasis primarily on owner-occupied one-to-four family residential real estate loans, agricultural real estate loans and automobile loans.
Deposits. Deposits increased by $8.0 million, or 6.5%, to $130.8 million at December 31, 2023 from $122.8 million at September 30, 2023. Core deposits decreased $1.1 million, or 1.2%, to $89.4 million at December 31, 2023 from $90.5 million at September 30, 2023. Certificates of deposit increased $9.0 million, or 27.9%, to $41.3 million at December 31, 2023 from $32.3 million at September 30, 2023. The increase in certificates of deposit was a result of depositors’ transfer of funds from lower-yielding accounts as well as a $5.0 million increase in brokered deposits during the quarter. The decrease in core deposits was due primarily to these transfers to certificates of deposit.
During the three months ended December 31, 2023, management continued its strategy of pursuing growth in demand accounts and other lower cost core deposits, in part by enhancing products and services offered and increased marketing. Management intends to continue its efforts to increase core deposits, with an emphasis on growth in consumer and business demand deposits.
Advances from the Federal Home Loan Bank. Advances from the Federal Home Loan Bank totaled $11.0 million at December 31, 2023, a decrease of $1.0 million, or 8.3%, from the $12.0 million balance at September 30, 2023. Advances totaling $10.0 million are scheduled to mature within one year from December 31, 2023.
Shareholders’ Equity. Shareholders’ equity increased $573,000, or 2.5%, to $23.3 million at December 31, 2023, from $22.7 million at September 30, 2023. The increase resulted primarily from net income of $174,000 and a $344,000 increase to equity through the accumulated other comprehensive loss resulting from lower market interest rates during the quarter.
32
Average Balance Sheets
The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. Average yields include the effect of net deferred fee income, discounts and premiums that are amortized or accreted to interest income or interest expense. Average balances are calculated using monthly average balances. Non-accrual loans are included in the computation of average balances only. Average loan balances include loans held for sale.
| | | | | | | | | | | | | | | | | |
| | For the Three Months Ended December 31, |
| ||||||||||||||
| | 2023 | | 2022 |
| ||||||||||||
| | Average |
| | |
| |
| Average |
| | |
| |
| ||
| | Outstanding | | | | | Average | | Outstanding | | | | | Average |
| ||
|
| Balance | | Interest | | Yield/Rate | | Balance | | Interest | | Yield/Rate |
| ||||
| | | | | | | | (Dollars in thousands) | | | | | | | |||
Interest-earning assets: | | | | | | | | | | | | | | | | | |
Loans (1) | | $ | 127,025 | | $ | 1,716 |
| 5.40 | % | $ | 118,826 | | $ | 1,222 |
| 4.11 | % |
Taxable securities | |
| 8,705 | |
| 37 |
| 1.70 | |
| 10,366 | |
| 41 |
| 1.58 | |
Tax-exempt securities | |
| 3,883 | |
| 30 |
| 3.09 | |
| 4,047 | |
| 25 |
| 2.47 | |
Interest-earning deposits and other | |
| 8,106 | |
| 95 |
| 4.69 | |
| 10,834 | |
| 106 |
| 3.91 | |
Total interest-earning assets | |
| 147,719 | |
| 1,878 |
| 5.09 | |
| 144,073 | |
| 1,394 |
| 3.87 | |
Noninterest-earning assets | |
| 19,141 | |
|
|
|
| |
| 6,193 | |
|
|
|
| |
Allowance for loan losses | |
| (958) | |
|
|
|
| |
| (972) | |
|
|
|
| |
Total assets | | $ | 165,902 | |
|
|
|
| | $ | 149,294 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Interest-bearing demand deposits | | $ | 34,164 | |
| 6 |
| 0.07 | % | $ | 44,897 | |
| 3 |
| 0.03 | % |
Savings deposits | |
| 39,401 | |
| 5 |
| 0.05 | |
| 45,272 | |
| 8 |
| 0.07 | |
Certificates of deposit | |
| 37,912 | |
| 319 |
| 3.37 | |
| 24,208 | |
| 38 |
| 0.63 | |
Total interest-bearing deposits | |
| 111,477 | |
| 330 |
| 1.18 | |
| 114,377 | |
| 49 |
| 0.17 | |
Federal Home Loan Bank advances | |
| 13,000 | |
| 166 |
| 5.11 | |
| 3,000 | |
| 7 |
| 0.93 | |
Total interest-bearing liabilities | |
| 124,477 | |
| 496 |
| 1.59 | |
| 117,377 | |
| 56 |
| 0.19 | |
Noninterest-bearing demand deposits | |
| 16,142 | |
|
|
|
| |
| 16,655 | |
|
|
|
| |
Other noninterest-bearing liabilities | |
| 3,212 | |
|
|
|
| |
| 1,094 | |
|
|
|
| |
Total liabilities | |
| 143,831 | |
|
|
|
| |
| 135,126 | |
|
|
|
| |
Equity | |
| 22,071 | |
|
|
|
| |
| 14,168 | |
|
|
|
| |
Total liabilities and equity | | $ | 165,902 | |
|
|
|
| | $ | 149,294 | |
|
|
|
| |
Net interest income | | | | | $ | 1,382 |
|
| |
|
| | $ | 1,338 |
|
| |
Net interest rate spread (2) | | | | | | |
| 3.50 | % |
|
| |
|
|
| 3.68 | % |
Net interest-earning assets (3) | | $ | 23,242 | |
|
|
|
| | $ | 26,696 | |
|
|
|
| |
Net interest margin (4) | | | | |
|
|
| 3.74 | % |
|
| |
|
|
| 3.71 | % |
Average interest-earning assets to interest-bearing liabilities | |
| 118.67 | % |
|
|
|
| |
| 122.74 | % |
|
|
|
| |
(1) | Net deferred fee income included in interest earned on loans totaled $16,000 and $18,000 for the three months ended December 31, 2023 and 2022, respectively. |
(2) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. |
(3) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(4) | Net interest margin represents net interest income divided by average total interest-earning assets. |
33
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
| | | | | | | | | | |
| | Three Months Ended | | |||||||
| | December 31, 2023 vs. 2022 | | |||||||
| | Increase (Decrease) | | Total | | |||||
| | Due to | | Increase | | |||||
|
| Volume |
| Rate |
| (Decrease) |
| |||
| | (In thousands) | | |||||||
Interest-earning assets: | | | | | | | | | | |
Loans | | $ | 89 | | $ | 405 | | $ | 494 | |
Taxable securities | |
| (7) | |
| 3 | |
| (4) | |
Tax-exempt securities | |
| (1) | |
| 6 | |
| 5 | |
Other interest-earning assets | |
| (30) | |
| 19 | |
| (11) | |
Total interest-earning assets | |
| 51 | |
| 433 | |
| 484 | |
| | | | | | | | | | |
Interest-bearing liabilities: | |
|
| |
|
| |
|
| |
Interest-bearing demand | |
| (1) | |
| 4 | |
| 3 | |
Savings accounts | |
| (1) | |
| (2) | |
| (3) | |
Certificates of deposit | |
| 33 | |
| 248 | |
| 281 | |
Total deposits | |
| 31 | |
| 250 | |
| 281 | |
Federal Home Loan Bank advances | |
| 68 | |
| 91 | |
| 159 | |
Total interest-bearing liabilities | |
| 99 | |
| 341 | |
| 440 | |
| | | | | | | | | | |
Change in net interest income | | $ | (48) | | $ | 92 | | $ | 44 | |
Comparison of Operating Results for the Three Months Ended December 31, 2023 and 2022
General. Net income for the three months ended December 31, 2023 was $174,000, a decrease of $155,000, or 47.2%, compared to $329,000 for the three months ended December 31, 2022. The decrease in net income was primarily due to a $265,000 increase in noninterest expenses, which was partially offset by a $44,000 increase in net interest income, a $34,000 increase in noninterest income and a $32,000 decrease in income taxes.
Interest Income. Interest income increased $484,000, or 34.7%, to $1.9 million for the three months ended December 31, 2023 from $1.4 million for the three months ended December 31, 2022. This increase was attributable to a $494,000, or 40.4%, increase in interest on loans receivable, partially offset by an $11,000, or 10.1%, decrease in interest on interest-bearing deposits and other assets.
The average balance of loans during the three months ended December 31, 2023 increased by $8.2 million, or 6.9%, from the balance for the three months ended December 31, 2022, while the average yield on loans increased by 129 basis points to 5.40% for the three months ended December 31, 2023 from 4.11% for the three months ended December 31, 2022, reflecting the higher interest rate environment period to period.
The average balance of investment securities decreased $1.8 million to $12.6 million for the three months ended December 31, 2023 from $14.4 million for the three months ended December 31, 2022, while the average yield on investment securities increased by 30 basis points to 2.13% for the three months ended December 31, 2023 from 1.83% for the three months ended December 31, 2022.
34
Interest income on other interest-bearing deposits, comprised primarily of certificates of deposit in other financial institutions, overnight deposits and stock in the Federal Home Loan Bank, decreased $11,000, or 10.1%, for the three months ended December 31, 2023, due to a decrease in the average balance of $2.7 million, partially offset by an increase in the average yield of 78 basis points, to 4.69% for the three months ended December 31, 2023 from 3.91% for the three months ended December 31, 2022. The increase in average yield was due to the increase in interest rates in the overall economy during the periods.
Interest Expense. Total interest expense increased $440,000, or 788.5%, to $496,000 for the three months ended December 31, 2023 from $56,000 for the three months ended December 31, 2022. Interest expense on deposits increased $281,000, or 578.2%, due primarily to an increase of 101 basis points in the average cost of deposits to 1.18% for the three months ended December 31, 2023 from 0.17% for the three months ended December 31, 2022, which was partially offset by a decrease of $2.9 million, or 2.5%, in the average balance of interest-bearing deposits to $111.5 million for the three months ended December 31, 2023 from $114.4 million for the three months ended December 31, 2022.
Interest expense on borrowings increased $159,000, or 2,206%, for the three months ended December 31, 2023, compared to the three months ended December 31, 2022. The increase was due to a 418 basis point increase in the weighted-average rate, to 5.11% for the three months ended December 31, 2023 and a $10.0 million increase in the average balance outstanding, to $13.0 million for the three months ended December 31, 2023 from $3.0 million for the three months ended December 31, 2022.
Net Interest Income. Net interest income increased $44,000, or 3.3%, to $1.4 million for the three months ended December 31, 2023 compared to $1.3 million for the three months ended December 31, 2022. The increase reflected an increase in the net interest margin to 3.74% for the three months ended December 31, 2023 from 3.71% for the three months ended December 31, 2022, while the average net interest earning assets decreased $3.5 million year to year. The net interest margin was impacted by a series of interest rate increases in the economy during 2023 and 2022.
Provision for Credit Losses. Based on an analysis of the factors described in “Critical Accounting Policies—Allowance for Credit Losses,” management determined that a provision for credit losses was not required for either of the three month periods ended December 31, 2023 and 2022. The allowance for credit losses was $967,000 at December 31, 2023 and $934,000 at September 30, 2023 and represented 0.70% of total loans at both December 31, 2023 and September 30, 2023. The increase in the allowance for credit losses during the three months ended December 31, 2023, was due to the adoption of ASU 2016-13 effective October 1, 2023, which resulted in an increase of $32,000 to the allowance. The determination over the adequacy of the allowance for credit losses was due primarily to the low balances of nonperforming loans, delinquent loans and no net charge-offs in both periods.
Total nonperforming loans were $477,000 at December 31, 2023, compared to $350,000 at September 30, 2023. Classified loans totaled $477,000 at December 31, 2023, compared to $350,000 at September 30, 2023, and total loans past due greater than 30 days were $1.3 million and $830,000 at those respective dates. As a percentage of nonperforming loans, the allowance for credit losses was 195.7% at December 31, 2023 compared to 281.2% at September 30, 2023.
The allowance for credit losses reflects the estimate management believes to be appropriate to cover inherent credit losses in the loan portfolio at December 31, 2023 and 2022. While management believes the estimates and assumptions used in the determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact the Bank’s financial condition and results of operations.
Non-Interest Income. Non-interest income totaled $162,000 for the three months ended December 31, 2023, an increase of $34,000, or 26.9%, from the three months ended December 31, 2022. The increase was due primarily to a $22,000, or 87.9%, increase in late charges and fees on loans, an $8,000 nonrecurring loss on sale of investments in the 2022 quarter and a $7,000, or 9.7%, increase in service fees on deposits.
35
Noninterest Expense. Noninterest expense increased $265,000, or 25.0%, to $1.3 million for the three months ended December 31, 2023, compared to $1.1 million for the three months ended December 31, 2022. The increase was due primarily to an $80,000, or 14.9%, increase in salaries and employee benefits, a $59,000, or 114.7%, increase in professional services, a $49,000, or 248.0%, increase in loan expenses and a $47,000, or 61.5%, increase in other expense.
The increase in salaries and employee benefits was due primarily to the expense associated with the new employee stock ownership plan (ESOP) which totaled $45,000 during the three months ended December 31, 2023, and normal merit increases year-to-year. The increase in professional services was due primarily to additional audit, legal and related expenses required in connection with the reporting requirements of a public stock company. The increase in other expense was due primarily to management’s decision to outsource maintenance and security of the Company’s information technology functions, which had previously been handled internally, along with an increase in expenses associated with foreclosed real estate and losses related to returned checks and debit cards.
Noninterest expense can be expected to increase because of costs associated with operating as a public company and increased compensation costs related to possible implementation of one or more stock-based benefit plans, if approved by our stockholders.
Income Taxes. Income taxes decreased by $32,000, or 42.4%, to $44,000 for the three months ended December 31, 2023, compared to the three months ended December 31, 2022. The decrease in the income tax provision was due primarily to a $187,000, or 46.3% decrease in pretax income. The effective tax rates were 20.2% and 18.9% for the three months ended December 31, 2023 and 2022, respectively.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Not applicable, as the Company is a smaller reporting company.
Item 4.Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our financial reporting disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2023. The term “disclosure controls and procedures,” under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s maintains internal control over financial reporting which is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
36
management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Subsequent to December 31, 2023, management identified inadvertent errors in the reporting of financial items related to unpaid and unaccrued invoices for legal services. These items combined were determined to be a material weakness in internal controls over financial reporting and therefore our disclosure controls and procedures were not effective as of December 31, 2023.
Subsequent to December 31, 2023, Management has implemented controls that it believes will remediate this weakness and strengthen its internal control over financial reporting including implementing procedures to ensure the monthly collection, payment and accruals of all professional expenses.
Management is committed to continuous improvement of the Company’s internal control processes and will continue to diligently review the Company’s financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, the Company may determine to take additional measures to address control deficiencies or determine to modify certain of the remediation measures described above.
Part II – Other Information
Item 1.Legal Proceedings
The Company is periodically involved in legal proceedings arising in the ordinary course of business. In the opinion of management, the resolution of these legal proceedings is not expected to have a material effect on the Bank’s or the Company’s financial condition or results of operations.
Item 1A.Risk Factors
Not applicable, as the Company is a smaller reporting company.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
None.
37
Item 6.Exhibits
| |
3.1 | |
3.2 | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 | |
101 | The following materials for the quarter ended December 31, 2023, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Comprehensive Income (Loss), (iv) Statements of Changes in Equity, (v) Statements of Cash Flows, and (vi) Notes to Financial Statements |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| MERCER BANCORP, INC. |
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Date: May 20, 2024 | /s/Alvin B. Parmiter |
| Alvin B. Parmiter |
| President and Chief Executive Officer |
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Date: May 20, 2024 | /s/Rick L. Ross |
| Rick L. Ross |
| Principal Financial Officer |
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