MSBB 10-Q
Mercer Bancorp, Inc. (MSBB)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
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.
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
(Address of Principal Executive Offices) | (Zip Code) |
(
(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 ☐ ☒
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). ☒ 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 ☐ |
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
Mercer Bancorp, Inc.
Form 10-Q
Index
EXPLANATORY NOTE
Mercer Bancorp, Inc. (the “Company,” “we” or “us”) was incorporated on March 7, 2023, to serve as the bank holding company for Mercer Savings Bank (the “Bank”) in connection with the Bank’s conversion from the mutual form of organization to the stock form of organization. As of June 30, 2023, the conversion had not been completed and the Company had no assets or liabilities and had not conducted any business activities other than organizational activities. Accordingly, financial and other information included in this Quarterly Report relates primarily to the Bank.
The unaudited financial statements and other financial information contained in this Quarterly Report should be read in conjunction with the audited financial statements, and related notes, of the Bank as of and for each of the years ended September 30, 2022 and 2021, contained in the Company’s definitive prospectus dated May 15, 2023, as filed with the Securities and Exchange Commission on May 22, 2023.
Part I. – Financial Information
Item 1.Financial Statements
Mercer Savings Bank
Condensed Balance Sheets
June 30, 2023 (Unaudited) and September 30, 2022
| June 30, | September 30, | |||||
| 2023 |
| 2022 |
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Assets |
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Cash and due from banks | $ | | $ | | |||
Interest-bearing deposits in other financial institutions |
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Cash and cash equivalents |
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Interest-bearing time deposits |
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Available-for-sale securities |
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Held-to-maturity securities |
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Loans held for sale |
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Loans receivable |
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Allowance for loan losses |
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Net loans |
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Premises and equipment |
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Federal Home Loan Bank stock |
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Bank owned life insurance |
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Accrued interest receivable |
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Federal Home Loan Bank lender risk account |
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Deferred federal income taxes |
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Other assets |
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Total assets | $ | | $ | | |||
Liabilities and Equity |
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Liabilities |
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Deposits |
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Demand | $ | | $ | | |||
Savings and money market |
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Time |
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Total deposits |
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Advances from the Federal Home Loan Bank |
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Stock subscription proceeds in escrow | | — | |||||
Directors plan liability |
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Accrued interest payable and other liabilities |
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Total liabilities |
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Equity |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total equity |
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Total liabilities and equity | $ | | $ | | |||
See Notes to Condensed Financial Statements
1
Mercer Savings Bank
Condensed Statements of Income
For the Three and Nine Months Ended June 30, 2023 and 2022 (Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 |
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Interest Income |
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Loans | $ | | $ | | $ | | $ | | |||||
Investment securities |
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Interest-bearing deposits and other |
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Total interest income |
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Interest Expense |
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Deposits |
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Federal Home Loan Bank advances |
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Total interest expense |
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Net Interest Income |
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Provision for Loan Losses |
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Net Interest Income After Provision for Loan Losses |
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Noninterest Income |
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Service fees on deposits |
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Late charges and fees on loans |
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Gain on sale of loans |
| — |
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Loan servicing fees |
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Gain (loss) on sale of investments |
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Bank owned life insurance |
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Life insurance death benefits |
| — |
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Other income |
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Total noninterest income |
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Noninterest Expense |
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Salaries and employee benefits |
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Directors fees |
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Occupancy and equipment |
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Data processing fees |
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Franchise taxes |
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FDIC insurance premiums |
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Professional services |
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Deposit account services expense |
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Advertising |
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Loan expenses |
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Other |
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Total noninterest expense |
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Income before income taxes |
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Provision for income taxes |
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Net Income | $ | | $ | | $ | | $ | | |||||
See Notes to Condensed Financial Statements
2
Mercer Savings Bank
Condensed Statements of Comprehensive Income (Loss)
For the Three and Nine Months Ended June 30, 2023 and 2022 (Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 |
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Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive (loss) income: |
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Net unrealized (losses) gains on available-for-sale securities |
| ( |
| ( |
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Reclassification adjustment for realized (gain) loss on sales of securities |
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| — |
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Tax benefit (expense) |
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Other comprehensive (loss) income |
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Comprehensive income (loss) | $ | | $ | ( | $ | | $ | ( | |||||
See Notes to Condensed Financial Statements
3
Mercer Savings Bank
Condensed Statements of Changes in Equity
For the Three and Nine Months Ended June 30, 2023 and 2022 (Unaudited)
Accumulated | |||||||||
Other | |||||||||
Retained | Comprehensive | ||||||||
| Earnings |
| Income (Loss) |
| Total | ||||
For the three months ended June 30, 2023 | |||||||||
Balance at April 1, 2023 | $ | | $ | ( | $ | | |||
Net income | | — | | ||||||
Other comprehensive loss | — | ( | ( | ||||||
Balance at June 30, 2023 | $ | | $ | ( | $ | | |||
For the three months ended June 30, 2022 | |||||||||
Balance at April 1, 2022 | $ | | $ | ( | $ | | |||
Net income | | — | | ||||||
Other comprehensive loss | — | ( | ( | ||||||
Balance at June 30, 2022 | $ | | $ | ( | $ | | |||
For the nine months ended June 30, 2023 | |||||||||
Balance at October 1, 2022 | $ | | $ | ( | $ | | |||
Net income |
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Other comprehensive income |
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Balance at June 30, 2023 | $ | | $ | ( | $ | | |||
For the nine months ended June 30, 2022 | |||||||||
Balance at October 1, 2021 | $ | | $ | | $ | | |||
Net income |
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| — |
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Other comprehensive loss |
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| ( |
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Balance at June 30, 2022 | $ | | $ | ( | $ | | |||
See Notes to Condensed Financial Statements
4
Mercer Savings Bank
Condensed Statements of Cash Flows
For the Nine Months Ended June 30, 2023 and 2022 (Unaudited)
| Nine Months Ended | ||||||
June 30, | |||||||
| 2023 |
| 2022 | ||||
Operating Activities |
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Net income | $ | | $ | | |||
Items not requiring (providing) cash: |
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Depreciation and amortization |
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Amortization of premiums and discounts |
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Amortization of deferred loan fees |
| ( |
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Deferred income taxes |
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Provision for loan losses |
| — |
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Gain on sale of loans |
| ( |
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Proceeds from sales of loans |
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Loans originated for sale |
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Loss on sale of investment securities |
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Life insurance death benefits |
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Increase in cash surrender value of bank-owned life insurance |
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Changes in: |
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Accrued interest receivable |
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Other assets |
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Other liabilities |
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Net cash (used in) provided by operating activities |
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Investing Activities |
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Purchases of available-for-sale securities |
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Proceeds from sales of available-for-sale securities |
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Proceeds from calls, maturities and paydowns of available-for-sale securities |
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Principal repayments on securities held-to-maturity |
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Net change in loans |
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Purchase of premises and equipment |
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Proceeds from redemption of FHLB stock |
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Proceeds from sale of foreclosed real estate |
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Proceeds from death benefit of life insurance policies |
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Net cash provided by (used in) investing activities |
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Financing Activities |
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Net (decrease) increase in deposit accounts |
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Proceeds from FHLB advances | | — | |||||
Repayment of FHLB advances |
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Proceeds from stock subscriptions | | — | |||||
Net cash provided by financing activities |
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(Decrease) Increase in Cash and Cash Equivalents |
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Cash and Cash Equivalents, Beginning of Period |
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Cash and Cash Equivalents, End of Period | $ | | $ | | |||
Supplemental Disclosure of Cash Flow Information |
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Cash paid during the period for: |
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Interest on deposits and borrowings | $ | | $ | | |||
Income taxes |
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Supplemental Disclosure of Noncash Investing Activities |
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Transfers from loans to real estate acquired through foreclosure | $ | | $ | — | |||
See Notes to Condensed 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 June 30, 2023, and for the interim three and nine month periods ended June 30, 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 and nine months ended June 30, 2023 and 2022, are not necessarily indicative of the results to be obtained for a full year.
Nature of Operations
Mercer Savings Bank (“Bank”) is an Ohio chartered mutual 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
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 loan 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 loans and automobile 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 loan 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.
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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.
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 impaired 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. Troubled debt restructured loans 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 Loan Losses
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 collectability of a loan balance is doubtful. Subsequent recoveries, if any, are credited to the allowance.
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, collateral value 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
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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 collectability 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 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.
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.
8
Note 2: Future 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 Bank’s accounting for financial instruments. The Bank 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 is effective for fiscal years beginning after December 15, 2022, or October 1, 2023 as to the Bank, including interim periods within those fiscal years. Management is continuing to evaluate the provisions of the ASU.
Note 3: Debt Securities
The amortized cost and fair values, together with gross unrealized gains and losses of securities are as follows:
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Amortized | Unrealized | Unrealized | Approximate | |||||||||
Cost | Gains | Losses | Fair Value | |||||||||
Available-for-sale Securities: |
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June 30, 2023 |
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U.S. Treasury securities | $ | | $ | — | $ | | $ | | ||||
U.S. Government agencies |
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Mortgage-backed Government Sponsored Enterprises (GSEs) |
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State and political subdivisions |
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$ | | $ | | $ | | $ | | |||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Approximate | |||||||||
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Available-for-sale Securities: |
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September 30, 2022 |
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U.S. Treasury securities | $ | | $ | — | $ | | $ | | ||||
U.S. Government agencies |
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Mortgage-backed Government Sponsored Enterprises (GSEs) |
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State and political subdivisions |
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$ | | $ | | $ | | $ | | |||||
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Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Approximate | |||||||||
| Cost |
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Held-to-maturity Securities: |
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June 30, 2023 |
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Mortgage-backed Government Sponsored Enterprises (GSEs) | $ | | $ | — | $ | | $ | | ||||
September 30, 2022 |
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|
|
|
| ||||
Mortgage-backed Government Sponsored Enterprises (GSEs) | $ | | $ | — | $ | | $ | | ||||
The amortized cost and fair value of available-for-sale securities at June 30, 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 | |||
June 30, 2023 |
|
|
|
| ||
Within one year | $ | | $ | | ||
One to five years |
| |
| | ||
Five to ten years |
| — |
| — | ||
After ten years |
| |
| | ||
| |
| | |||
Mortgage-backed GSEs |
| |
| | ||
Totals | $ | | $ | | ||
September 30, 2022 |
|
|
|
| ||
Within one year | $ | | $ | | ||
One to five years |
| |
| | ||
Five to ten years |
| — |
| — | ||
After ten years |
| |
| | ||
| |
| | |||
Mortgage-backed GSEs |
| |
| | ||
Totals | $ | | $ | | ||
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was approximately $
Proceeds from the sales of available for sale securities totaled $
Proceeds from sales of available for sale securities totaled $
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
10
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.
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
The following tables show the Bank’s investments’ gross unrealized losses and fair value of the Bank’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2023 (unaudited) and September 30, 2022:
June 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 | $ | — | $ | — | $ | | $ | | $ | | $ | | ||||||
U.S. Government agencies |
| — |
| — |
| |
| |
| |
| | ||||||
Mortgage-backed Government Sponsored Enterprises (GSEs) |
| — |
| — |
| |
| |
| |
| | ||||||
State and political subdivisions |
| |
| |
| |
| |
| |
| | ||||||
| |
| |
| |
| |
| |
| | |||||||
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed Government Sponsored Enterprises (GSEs) |
| — | — |
| |
| |
| |
| | |||||||
Total temporarily impaired securities | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
September 30, 2022 | ||||||||||||||||||
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 | $ | — | $ | — | $ | | $ | | $ | | $ | | ||||||
U.S. Government agencies |
| |
| |
| |
| |
| |
| | ||||||
Mortgage-backed Government Sponsored Enterprises (GSEs) |
| |
| |
| |
| |
| |
| | ||||||
State and political subdivisions |
| |
| |
| — |
| — |
| |
| | ||||||
| |
| |
| |
| |
| |
| | |||||||
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed Government Sponsored Enterprises (GSEs) |
| |
| |
| — |
| — |
| |
| | ||||||
Total temporarily impaired securities | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
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
11
not the Bank will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Bank does not consider those investments to be other-than-temporarily impaired at June 30, 2023 (unaudited).
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 does not consider those investments to be other-than-temporarily impaired at June 30, 2023 (unaudited).
Note 4: Loans and Allowance for Loan Losses
Categories of loans were as follows:
| June 30, | September 30, | |||||
| 2023 |
| 2022 |
| |||
(In thousands) | |||||||
Real estate loans: |
|
|
| ||||
Residential | $ | | $ | | |||
Multi-family |
| |
| | |||
Agricultural |
| |
| | |||
Commercial |
| |
| | |||
Construction and land |
| |
| | |||
Home equity line of credit (HELOC) |
| |
| | |||
Commercial and industrial |
| |
| | |||
Consumer |
| |
| | |||
Total loans |
| |
| | |||
Less: |
|
|
|
| |||
Undisbursed loans in process |
| |
| | |||
Net deferred loan fees |
| |
| | |||
Allowance for loan losses |
| |
| | |||
Net loans | $ | | $ | ||||
Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of these loans at June 30, 2023 (unaudited) and September 30, 2022, were approximately $
12
The following tables present the activity in the allowance for loan losses based on portfolio segment for the three and nine months ended June 30, 2023 and the year ended September 30, 2022.
Three Months Ended June 30, 2023 | |||||||||||||||
Provision | |||||||||||||||
Balance | (credit) | Balance | |||||||||||||
| April 1, 2023 |
| for loan losses |
| Charge-offs |
| Recoveries |
| June 30, 2023 | ||||||
(In thousands) | |||||||||||||||
Real estate loans: |
|
|
|
|
| ||||||||||
Residential | $ | | $ | | $ | ( | $ | — | $ | | |||||
Multi-family |
| |
| |
| — |
| — |
| | |||||
Agricultural |
| |
| ( |
| — |
| — |
| | |||||
Commercial |
| |
| ( |
| — |
| — |
| | |||||
Construction and land |
| |
| |
| — |
| — |
| | |||||
Home equity line of credit (HELOC) |
| |
| ( |
| — |
| — |
| | |||||
Commercial and industrial |
| |
| ( |
| — |
| — |
| | |||||
Consumer |
| |
| |
| — |
| — |
| | |||||
Total loans | $ | | $ | — | $ | ( | $ | — | $ | | |||||
Three Months Ended June 30, 2022 | |||||||||||||||
Provision | |||||||||||||||
Balance | (credit) | Balance | |||||||||||||
| April 1, 2022 |
| for loan losses |
| Charge-offs |
| Recoveries |
| June 30, 2022 | ||||||
(In thousands) | |||||||||||||||
Real estate loans: |
|
|
|
|
| ||||||||||
Residential | $ | | $ | ( | $ | — | $ | — | $ | | |||||
Multi-family |
| |
| ( |
| — |
| — |
| | |||||
Agricultural |
| |
| |
| — |
| — |
| | |||||
Commercial |
| |
| — |
| — |
| — |
| | |||||
Construction and land |
| |
| ( |
| — |
| — |
| | |||||
Home equity line of credit (HELOC) |
| |
| |
| — |
| — |
| | |||||
Commercial and industrial |
| |
| ( |
| — |
| — |
| | |||||
Consumer |
| |
| |
| — |
| — |
| | |||||
Total loans | $ | | $ | — | $ | — | $ | — | $ | | |||||
Nine Months Ended June 30, 2023 | |||||||||||||||
Provision | |||||||||||||||
Balance | (credit) | Balance | |||||||||||||
| October 1, 2022 |
| for loan losses |
| Charge-offs |
| Recoveries |
| June 30, 2023 | ||||||
(In thousands) | |||||||||||||||
Real estate loans: |
|
|
|
|
| ||||||||||
Residential | $ | | $ | | $ | ( | $ | — | $ | | |||||
Multi-family |
| |
| |
| — |
| — |
| | |||||
Agricultural |
| |
| ( |
| — |
| — |
| | |||||
Commercial |
| |
| ( |
| — |
| — |
| | |||||
Construction and land |
| |
| |
| — |
| — |
| | |||||
Home equity line of credit (HELOC) |
| |
| ( |
| — |
| — |
| | |||||
Commercial and industrial |
| |
| ( |
| — |
| — |
| | |||||
Consumer |
| |
| |
| — |
| — |
| | |||||
Total loans | $ | | $ | — | $ | ( | $ | — | $ | | |||||
13
Nine Months Ended June 30, 2022 | |||||||||||||||
Provision | |||||||||||||||
Balance | (credit) | Balance | |||||||||||||
| October 1, 2021 |
| for loan losses |
| Charge-offs |
| Recoveries |
| June 30, 2022 | ||||||
(In thousands) | |||||||||||||||
Real estate loans: |
|
|
|
|
| ||||||||||
Residential | $ | | $ | ( | $ | — | $ | — | $ | | |||||
Multi-family |
| |
| ( |
| — |
| — |
| | |||||
Agricultural |
| |
| |
| — |
| — |
| | |||||
Commercial |
| |
| |
| — |
| — |
| | |||||
Construction and land |
| |
| ( |
| — |
| — |
| | |||||
Home equity line of credit (HELOC) |
| |
| |
| — |
| — |
| | |||||
Commercial and industrial |
| |
| — |
| — |
| — |
| | |||||
Consumer |
| |
| |
| — |
| |
| | |||||
Total loans | $ | | $ | | $ | — | $ | | $ | | |||||
The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2023 and September 30, 2022:
Allowance for loan losses | Loans | |||||||||||
Ending balance, evaluated for impairment | Ending balance, evaluated for impairment | |||||||||||
| Individually |
| Collectively |
| Individually |
| Collectively | |||||
(In thousands) | ||||||||||||
June 30, 2023 |
|
|
|
| ||||||||
Real estate loans: |
|
|
|
|
|
|
|
| ||||
Residential | $ | — | $ | | $ | — | $ | | ||||
Multi-family |
| — |
| |
| — |
| | ||||
Agricultural |
| — |
| |
| — |
| | ||||
Commercial |
| — |
| |
| — |
| | ||||
Construction and land |
| — |
| |
| — |
| | ||||
Home equity line of credit (HELOC) |
| — |
| |
| — |
| | ||||
Commercial and industrial |
| — |
| |
| — |
| | ||||
Consumer |
| — |
| |
| — |
| | ||||
Total loans | $ | — | $ | | $ | — | $ | | ||||
Allowance for loan losses | Loans | |||||||||||
Ending balance, evaluated for impairment | Ending balance, evaluated for impairment | |||||||||||
| Individually |
| Collectively |
| Individually |
| Collectively | |||||
(In thousands) | ||||||||||||
September 30, 2022 |
|
|
|
| ||||||||
Real estate loans: |
|
|
|
|
|
|
|
| ||||
Residential | $ | — | $ | | $ | — | $ | | ||||
Multi-family |
| — |
| |
| — |
| | ||||
Agricultural |
| — |
| |
| — |
| | ||||
Commercial |
| — |
| |
| — |
| | ||||
Construction and land |
| — |
| |
| — |
| | ||||
Home equity line of credit (HELOC) |
| — |
| |
| — |
| | ||||
Commercial and industrial |
| — |
| |
| — |
| | ||||
Consumer |
| — |
| |
| — |
| | ||||
Total loans | $ | — | $ | | $ | — | $ | | ||||
14
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.
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.
15
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.
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 June 30, 2023 (unaudited) and September 30, 2022, follows:
Special | |||||||||||||||
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total | ||||||
(In thousands) | |||||||||||||||
June 30, 2023 |
|
|
|
|
| ||||||||||
Real estate loans: |
|
|
|
|
| ||||||||||
Residential | $ | | $ | — | $ | | $ | — | $ | | |||||
Multi-family |
| |
| — |
| — |
| — |
| | |||||
Agricultural |
| |
| — |
| — |
| — |
| | |||||
Commercial |
| |
| — |
| — |
| — |
| | |||||
Construction and land |
| |
| — |
| — |
| — |
| | |||||
Home equity line of credit (HELOC) |
| |
| — |
| — |
| — |
| | |||||
Commercial and industrial |
| |
| — |
| — |
| — |
| | |||||
Consumer |
| |
| — |
| |
| — |
| | |||||
Total loans | $ | | $ | — | $ | | $ | — | $ | | |||||
16
| Special | ||||||||||||||
| Pass |
| Mention |
| Substandard |
| Doubtful |
| Total | ||||||
| (In thousands) | ||||||||||||||
September 30, 2022 |
|
|
|
|
| ||||||||||
Real estate loans: |
|
|
|
|
| ||||||||||
Residential | $ | | $ | — | $ | | $ | — | $ | | |||||
Multi-family |
| |
| — |
| — |
| — |
| | |||||
Agricultural |
| |
| — |
| — |
| — |
| | |||||
Commercial |
| |
| — |
| — |
| — |
| | |||||
Construction and land |
| |
| — |
| — |
| — |
| | |||||
Home equity line of credit (HELOC) |
| |
| — |
| — |
| — |
| | |||||
Commercial and industrial |
| |
| — |
| — |
| — |
| | |||||
Consumer |
| |
| — |
| |
| — |
| | |||||
Total loans | $ | | $ | — | $ | | $ | — | $ | | |||||
The Bank evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the nine months ended June 30, 2023 (unaudited) or the year ended September 30, 2022.
The following tables present the Bank’s loan portfolio aging analysis of the recorded investment in loans as of June 30, 2023 and September 30, 2022:
June 30, 2023 | |||||||||||||||||||||
Greater Than | Total Loans > | ||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days | Total | Total Loans | 90 Days & | ||||||||||||||||
| Past Due |
| Past Due |
| Past Due |
| Past Due |
| Current |
| Receivable |
| Accruing | ||||||||
(In thousands) | |||||||||||||||||||||
Real estate loans: |
|
|
|
|
|
|
| ||||||||||||||
Residential | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | |||||||
Multi-family |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Agricultural |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Commercial |
| |
| — |
| — |
| |
| |
| |
| — | |||||||
Construction and land |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Home equity line of credit (HELOC) |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Commercial and industrial |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Consumer |
| — |
| |
| — |
| |
| |
| |
| — | |||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | |||||||
17
September 30, 2022 | |||||||||||||||||||||
Greater Than | Total Loans > | ||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days | Total | Total Loans | 90 Days & | ||||||||||||||||
| Past Due |
| Past Due |
| Past Due |
| Past Due |
| Current |
| Receivable |
| Accruing | ||||||||
(In thousands) | |||||||||||||||||||||
Real estate loans: |
|
|
|
|
|
|
| ||||||||||||||
Residential | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | |||||||
Multi-family |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Agricultural |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Commercial |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Construction and land |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Home equity line of credit (HELOC) |
| |
| — |
| — |
| |
| |
| |
| — | |||||||
Commercial and industrial |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Consumer |
| — |
| — |
| |
| |
| |
| |
| — | |||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | |||||||
The Bank had
Nonaccrual loans at June 30, 2023 and September 30, 2022, were as follows:
June 30, | September 30, | ||||||
| 2023 |
| 2022 |
| |||
(In thousands) | |||||||
Residential real estate loans | $ | | $ | | |||
Home equity line of credit |
| — |
| — | |||
Consumer |
| — |
| | |||
$ | | $ | | ||||
There were
Note 5: 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 June 30, 2023 (unaudited) and September 30, 2022, that the Bank met all capital adequacy requirements to which it is subject.
18
As of June 30, 2023 (unaudited), 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 June 30, 2023 |
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| ||||
Total Capital | ||||||||||||||||
(to Risk-Weighted Assets) | $ | | | % | $ | | | % | $ | | | % | ||||
Tier 1 Capital | ||||||||||||||||
(to Risk-Weighted Assets) | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Common Equity Tier I Capital |
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(to Risk-Weighted Assets) | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Tier I Capital |
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|
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| ||||
(to Average Total Assets) | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
As of September 30, 2022 |
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| ||||
Total Capital |
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| ||||
(to Risk-Weighted Assets) | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Tier 1 Capital |
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(to Risk-Weighted Assets) | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Common Equity Tier I Capital |
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(to Risk-Weighted Assets) | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Tier I Capital |
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(to Average Total Assets) | $ | |
| | % | $ | |
| | % | $ | |
| | % | |
Note 6: 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.
19
Recurring Measurements
The following table presents the fair value measurements of assets recognized in the accompanying 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 June 30, 2023 (unaudited), and September 30, 2022:
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) | |||||
June 30, 2023 | ||||||||||||
U.S. Treasury securities | $ | | $ | | $ | — | $ | — | ||||
U.S. Government agencies | | — | | — | ||||||||
Mortgage-backed Government Sponsored Enterprises (GSEs) |
| |
| — |
| |
| — | ||||
State and political subdivisions |
| |
| — |
| |
| — | ||||
September 30, 2022 |
|
|
|
|
|
|
|
| ||||
U.S. Treasury securities | $ | | $ | | $ | — | $ | — | ||||
U.S. Government agencies |
| |
| — |
| |
| — | ||||
Mortgage-backed Government Sponsored Enterprises (GSEs) |
| |
| — |
| |
| — | ||||
State and political subdivisions |
| |
| — |
| |
| — | ||||
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
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
Nonrecurring Measurements
The Bank had
20
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 | ||||||
June 30, 2023 |
|
|
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|
|
|
|
|
|
| |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents | $ | | $ | | $ | | $ | — | $ | — | |||||
Interest-bearing time deposits |
| |
| |
| |
| — |
| — | |||||
Loans held for sale | | | | ||||||||||||
Loans, net |
| |
| |
| — |
| — |
| | |||||
FHLB Stock |
| |
| |
| — |
| |
| — | |||||
Bank owned life insurance |
| |
| |
| |
| — |
| — | |||||
Accrued interest receivable |
| |
| |
| |
| — |
| — | |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
| |||||
Deposits |
| |
| |
| |
| — |
| | |||||
FHLB advances |
| |
| |
| — |
| |
| — | |||||
Accrued interest payable |
| |
| |
| |
| — |
| — | |||||
September 30, 2022 |
|
|
|
|
|
|
|
|
|
| |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents | $ | | $ | | $ | | $ | — | $ | — | |||||
Interest-bearing time deposits |
| |
| |
| |
| — |
| — | |||||
Loans, net |
| |
| |
| — |
| — |
| | |||||
FHLB Stock |
| |
| |
| — |
| |
| — | |||||
Bank owned life insurance |
| |
| |
| |
| — |
| — | |||||
Accrued interest receivable |
| |
| |
| |
| — |
| — | |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
| |||||
Deposits |
| |
| |
| |
| — |
| | |||||
FHLB advances |
| |
| |
| — |
| |
| — | |||||
Accrued interest payable |
| |
| |
| |
| — |
| — | |||||
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.
Note 7: 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.
21
Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
Commitments outstanding were as follows:
| June 30, | September 30, | |||||
| 2023 |
| 2022 |
| |||
| (In thousands) | ||||||
Commitments to originate loans | $ | | $ | |
| ||
Undisbursed balance of loans closed |
| | | ||||
Total | $ | | $ | | |||
Note 8: Subsequent Events
Plan of Conversion and Change in Corporate 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, the Federal Reserve Bank of Cleveland and the State of Ohio Division of Financial Institutions and was approved by the affirmative vote of at least -thirds of the total votes eligible to be cast by the voting members of the Bank at a special meeting. Pursuant to the Plan, the Bank converted from the mutual form of organization into a stock bank structure, followed by the issuance of all of the Bank’s outstanding stock to Mercer Bancorp, Inc. Pursuant to the Plan, Mercer Bancorp, Inc. offered its common stock for sale to members of the Bank and general public, with the total offering value and number of shares of common stock determined based upon an independent appraiser’s valuation. The stock was priced at $
The conversion and stock offering were completed effective July 27, 2023, with the issuance of
At the completion of the conversion to stock form, the Bank established a liquidation account in the amount of its total equity as of December 31, 2022. In the event of a liquidation, all claims of creditors, including those of depositors, would be paid first, followed by distributions of the liquidation account to eligible deposit account holders who continue to maintain their deposit accounts as of the date of liquidation, with any assets remining thereafter distributed to Mercer Bancorp, Inc. as the sole owner of the Bank’s capital stock. The liquidation account will be maintained for the benefit of eligible deposit account holders who maintain their accounts in the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits.
The conversion will be 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.
22
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 definitive prospectus dated May 15, 2023, as filed with the Securities and Exchange Commission on May 22, 2023, pursuant to Securities Act Rule 424(b)(3).
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 loan 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; |
24
| ● | 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 |
| ● | public health emergencies, including the COVID-19 pandemic. |
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 and Use of Critical Accounting Estimates
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
25
may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.
Management performs a quarterly evaluation of the allowance for loan losses. 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.
The analysis has two components, specific and general allowances. The specific percentage allowance is for unconfirmed losses related to loans that are determined to be impaired. Impairment is 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 is less than the loan’s carrying value, a charge is recorded for the difference. The general allowance, which is for loans reviewed collectively, is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes historical loss percentages and qualitative factors that are applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that are reviewed collectively. The qualitative component is critical in determining the allowance for loan losses as certain trends may indicate the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Not incorporating a qualitative component could misstate the allowance for loan losses. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.
A new credit loss accounting standard, the Current Expected Credit Loss standard (“CECL”), will become effective for Mercer Savings Bank on October 1, 2023. CECL requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for loan losses that are incurred or probable, which may require us to increase our allowance for credit losses and will require us to greatly increase the types of data we need to collect and review to determine the appropriate level of the allowance for credit losses.
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.
26
Mercer Savings 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, Mercer Savings 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 Mercer Savings Bank can be found in Note 6 of the Financial Statements, “Disclosures About Fair Value of Assets and Liabilities.”
Comparison of Financial Condition at June 30, 2023 and September 30, 2022
Total Assets. Total assets were $155.3 million at June 30, 2023, an increase of $2.4 million, or 1.6%, over $152.9 million at September 30, 2022. The increase was primarily comprised of an increase in loans of $8.7 million, or 7.3%, which was partially offset by a decrease in cash and cash equivalents of $5.2 million.
Cash and Cash Equivalents. Cash and cash equivalents decreased by $5.2 million, or 36.4%, to $9.1 million at June 30, 2023 from September 30, 2022. The decrease resulted primarily from cash used to fund the increase in loans and a decrease in deposits, partially offset by stock subscription proceeds held in escrow by the Bank during the nine months ended June 30, 2023.
Investment Securities. Investment securities decreased $984,000, or 7.7%, to $11.8 million at June 30, 2023, from $12.8 million at September 30, 2022. During the nine-month period ended June 30, 2023, securities purchases of $2.0 million and a $232,000 decrease in the net unrealized losses were offset by sales, calls, maturities and repayments of $3.1 million.
The yield on investment securities was 1.88% for the nine months ended June 30, 2023, compared to 1.02% for the year ended September 30, 2022, reflecting the recent increases in the overall interest rate environment.
Loans Held for Sale. Loans held for sale totaled $6.9 million at June 30, 2023, and consisted solely of auto loans. Our new indirect automobile lending group originated $7.3 million of new loans during the nine months ended June 30, 2023. Mortgage loans originated and sold during the nine months ended June 30, 2023 totaled $281,000. The Bank had no loans held for sale at September 30 2022. The Bank’s indirect automobile lending program was implemented in January 2023.
Net Loans. Net loans held for investment increased by $1.8 million, or 1.5%, to $119.5 million at June 30, 2023 from $117.7 million at September 30, 2022. During the nine months ended June 30, 2023, loan originations totaled $18.0 million which were partially offset by loan repayments received. Agricultural loans increased $4.3 million, or 15.1%, during the nine months ended June 30, 2023, while residential real estate loans decreased $2.8 million, or 3.6%.
The Bank’s overall 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, continuing to focus primarily on owner-occupied one-to-four family residential real estate loans, agricultural real estate loans and automobile loans.
Deposits. Deposits decreased by $6.8 million, or 5.1%, to $127.9 million at June 30, 2023 from $134.8 million at September 30, 2022. Core deposits decreased $10.6 million, or 9.7%, to $98.9 million at June 30, 2023 from $109.5 million at September 30, 2022. Certificates of deposit increased $3.8 million, or 15.0%, to $29.0 million at June 30, 2023 from September 30, 2022. The decrease in core deposits was due to customer migration to higher rate certificates of deposit and alternatives at investment brokerages as a result of the rising interest rate environment, as well as normal seasonal declines in transactional accounts.
During the nine months ended June 30, 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.
27
Management intends to continue its efforts to increase core deposits, with an emphasis on growth in consumer and business demand deposits.
Stock Subscription Proceeds in Escrow. Stock subscription proceeds in escrow totaled $6.1 million at June 30, 2023. This balance represented the proceeds received for stock orders during the subscription period that began during June 2023. These proceeds earned interest at a rate of 0.05% during the period held until July 27, 2023, the date the shares were issued.
Advances from the Federal Home Loan Bank. Advances from the Federal Home Loan Bank increased by $2.0 million, or 66.7%, to $5.0 million at June 30, 2023, from $3.0 million at September 30, 2022, as the Bank borrowed $3.0 million in new advances, offset by the maturity of a $1.0 million advance during the nine-month period ended June 30, 2023.
Total Equity. Total equity increased $1.1 million, or 7.9%, to $15.2 million at June 30, 2023 from $14.1 million at September 30, 2022. The increase resulted from net income of $930,000 during the nine months ended June 30, 2023 and a $183,000 decrease in accumulated other comprehensive loss.
28
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 June 30, |
| ||||||||||||||||
2023 | 2022 |
| |||||||||||||||
Average |
|
|
| Average |
|
|
| ||||||||||
Outstanding | Average | Outstanding | Average |
| |||||||||||||
| Balance | Interest | Yield/Rate | Balance | Interest | Yield/Rate |
| ||||||||||
| |||||||||||||||||
Interest-earning assets: | |||||||||||||||||
Loans (1) | $ | 119,396 | $ | 1,362 |
| 4.56 | % | $ | 113,586 | $ | 1,059 |
| 3.73 | % | |||
Taxable securities |
| 9,533 |
| 37 |
| 1.55 |
| 7,493 |
| 35 |
| 1.87 | |||||
Tax-exempt securities |
| 4,115 |
| 28 |
| 2.72 |
| 2,827 |
| 16 |
| 2.26 | |||||
Interest-earning deposits and other |
| 8,021 |
| 78 |
| 3.89 |
| 22,633 |
| 43 |
| 0.76 | |||||
Total interest-earning assets |
| 141,065 |
| 1,505 |
| 4.27 |
| 146,539 |
| 1,153 |
| 3.15 | |||||
Noninterest-earning assets |
| 10,656 |
|
|
|
|
| 8,909 |
|
|
|
| |||||
Allowance for loan losses |
| (961) |
|
|
|
|
| (983) |
|
|
|
| |||||
Total assets | $ | 150,760 |
|
|
|
| $ | 154,465 |
|
|
|
| |||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest-bearing demand deposits | $ | 41,745 |
| 5 |
| 0.05 | % | $ | 45,301 |
| 6 |
| 0.05 | % | |||
Savings deposits |
| 42,286 |
| 5 |
| 0.05 |
| 45,398 |
| 5 |
| 0.04 | |||||
Certificates of deposit |
| 29,095 |
| 136 |
| 1.87 |
| 27,707 |
| 45 |
| 0.65 | |||||
Total interest-bearing deposits |
| 113,126 |
| 146 |
| 0.52 |
| 118,406 |
| 56 |
| 0.19 | |||||
Federal Home Loan Bank advances |
| 3,500 |
| 22 |
| 2.51 |
| 3,000 |
| 7 |
| 0.93 | |||||
Total interest-bearing liabilities |
| 116,626 |
| 168 |
| 0.58 |
| 121,406 |
| 63 |
| 0.21 | |||||
Noninterest-bearing demand deposits |
| 18,016 |
|
|
|
|
| 18,304 |
|
|
|
| |||||
Other noninterest-bearing liabilities |
| 2,712 |
|
|
|
|
| 955 |
|
|
|
| |||||
Total liabilities |
| 137,354 |
|
|
|
|
| 140,665 |
|
|
|
| |||||
Equity |
| 13,406 |
|
|
|
|
| 13,800 |
|
|
|
| |||||
Total liabilities and equity | $ | 150,760 |
|
|
|
| $ | 154,465 |
|
|
|
| |||||
Net interest income | $ | 1,337 |
|
|
|
| $ | 1,090 |
|
| |||||||
Net interest rate spread (2) |
| 3.69 | % |
|
|
|
|
| 2.94 | % | |||||||
Net interest-earning assets (3) | $ | 24,439 |
|
|
|
| $ | 25,133 |
|
|
|
| |||||
Net interest margin (4) |
|
|
| 3.79 | % |
|
|
|
|
| 2.98 | % | |||||
Average interest-earning assets to interest-bearing liabilities |
| 120.96 | % |
|
|
|
|
| 120.70 | % |
|
|
|
| |||
29
For the Nine Months Ended June 30, |
| ||||||||||||||||
2023 | 2022 |
| |||||||||||||||
Average |
|
|
| Average |
|
|
| ||||||||||
Outstanding | Average | Outstanding | Average |
| |||||||||||||
| Balance | Interest | Yield/Rate | Balance | Interest | Yield/Rate |
| ||||||||||
| |||||||||||||||||
Interest-earning assets: | |||||||||||||||||
Loans (1) | $ | 119,011 | $ | 3,841 |
| 4.30 | % | $ | 113,835 | $ | 3,185 |
| 3.73 | % | |||
Taxable securities |
| 9,999 |
| 113 |
| 1.51 |
| 8,681 |
| 62 |
| 0.95 | |||||
Tax-exempt securities |
| 4,110 |
| 86 |
| 2.79 |
| 2,309 |
| 36 |
| 2.08 | |||||
Interest-earning deposits and other |
| 9,904 |
| 299 |
| 4.03 |
| 21,698 |
| 63 |
| 0.39 | |||||
Total interest-earning assets |
| 143,024 |
| 4,339 |
| 4.05 |
| 146,523 |
| 3,346 |
| 3.04 | |||||
Noninterest-earning assets |
| 8,067 |
| 6,513 | |||||||||||||
Allowance for loan losses |
| (965) |
| (976) | |||||||||||||
Total assets | $ | 150,126 | $ | 152,060 | |||||||||||||
Interest-bearing liabilities: | |||||||||||||||||
Interest-bearing demand deposits | $ | 43,412 |
| 15 |
| 0.05 | % | $ | 45,681 |
| 16 |
| 0.05 | % | |||
Savings deposits |
| 43,903 |
| 16 |
| 0.05 |
| 43,957 |
| 17 |
| 0.05 | |||||
Certificates of deposit |
| 26,983 |
| 274 |
| 1.35 |
| 28,962 |
| 145 |
| 0.67 | |||||
Total interest-bearing deposits |
| 114,298 |
| 305 |
| 0.36 |
| 118,600 |
| 178 |
| 0.20 | |||||
Federal Home Loan Bank advances |
| 3,200 |
| 36 |
| 1.50 |
| 3,600 |
| 25 |
| 0.93 | |||||
Total interest-bearing liabilities |
| 117,498 |
| 341 |
| 0.39 |
| 122,200 |
| 203 |
| 0.22 | |||||
Noninterest-bearing demand deposits |
| 16,943 |
|
|
| 14,869 |
|
| |||||||||
Other noninterest-bearing liabilities |
| 1,915 |
|
|
| 1,041 |
|
| |||||||||
Total liabilities |
| 136,356 |
|
|
| 138,110 |
|
| |||||||||
Equity |
| 13,770 |
|
|
| 13,950 |
|
| |||||||||
Total liabilities and equity | $ | 150,126 |
|
| $ | 152,060 |
|
| |||||||||
Net interest income | $ | 3,998 |
| $ | 3,143 |
| |||||||||||
Net interest rate spread (2) |
| 3.66 | % |
|
|
| 2.82 | % | |||||||||
Net interest-earning assets (3) | $ | 25,526 |
|
| $ | 24,323 |
|
| |||||||||
Net interest margin (4) |
|
| 3.73 | % |
|
|
| 2.86 | % | ||||||||
Average interest-earning assets to interest-bearing liabilities |
| 121.72 | % |
|
|
| 119.90 | % |
|
| |||||||
| (1) | Net deferred fee income included in interest earned on loans totaled $22,000 and $35,000 for the three months ended June 30, 2023 and 2022, respectively, and $40,000 and $66,000 for the nine months ended June 30, 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. |
30
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 | Nine Months Ended | |||||||||||||||||
June 30, 2023 vs. 2022 | June 30, 2023 vs. 2022 | ||||||||||||||||||
Increase (Decrease) | Total | Increase (Decrease) | Total | ||||||||||||||||
Due to | Increase | Due to | Increase | ||||||||||||||||
Volume |
| Rate |
| (Decrease) |
| Volume |
| Rate |
| (Decrease) |
| ||||||||
(In thousands) | (In thousands) | ||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||
Loans | $ | 56 | $ | 247 | $ | 303 | $ | 150 | $ | 506 | $ | 656 | |||||||
Taxable securities |
| 6 |
| (4) |
| 2 |
| 10 |
| 41 |
| 51 | |||||||
Tax exempt-securities |
| 9 |
| 3 |
| 12 |
| 35 |
| 15 |
| 50 | |||||||
Interest-earning deposits and other |
| (7) |
| 42 |
| 35 |
| (14) |
| 250 |
| 236 | |||||||
Total interest-earning assets |
| 64 |
| 288 |
| 352 |
| 181 |
| 812 |
| 993 | |||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest-bearing demand deposits |
| — |
| (1) |
| (1) |
| (1) |
| — |
| (1) | |||||||
Savings deposits |
| — |
| — |
| — |
| — |
| (1) |
| (1) | |||||||
Certificates of deposit |
| 2 |
| 89 |
| 91 |
| (9) |
| 138 |
| 129 | |||||||
Total interest-bearing deposits |
| 2 |
| 88 |
| 90 |
| (10) |
| 137 |
| 127 | |||||||
Federal Home Loan Bank Advances |
| 1 |
| 14 |
| 15 |
| (3) |
| 14 |
| 11 | |||||||
Total interest-bearing liabilities |
| 3 |
| 102 |
| 105 |
| (13) |
| 151 |
| 138 | |||||||
Change in net interest income | $ | 61 | $ | 186 | $ | 247 | $ | 194 | $ | 661 | $ | 855 | |||||||
Comparison of Operating Results for the Three Months Ended June 30, 2023 and 2022
General. The Bank recorded net income for the three months ended June 30, 2023 of $288,000, an increase of $49,000, or 20.7%, compared to the three months ended June 30, 2022. The increase in net income was primarily due to a $247,000 increase in net interest income and a $34,000 increase in noninterest income, which were partially offset by a $214,000 increase in noninterest expenses and a $17,000 increase in income taxes.
Interest Income. Interest income increased $352,000, or 30.5%, to $1.5 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. This increase was attributable to a $303,000, or 28.6%, increase in interest on loans, a $14,000, or 27.8%, increase in interest on investment securities and a $35,000, or 79.9%, increase in interest on interest-bearing deposits and other assets.
The average balance of loans increased by $5.8 million, or 5.1%, during the three months ended June 30, 2023, over the average balance for the three months ended June 30, 2022, while the average yield on loans increased by 83 basis points to 4.56% for the three months ended June 30, 2023, from 3.73% for the three months ended June 30, 2022. The increase in average yield on loans was due primarily to the overall increase in interest rates in the economy, as well as the new automobile loans originated in the current period, which had a weighted-average yield of 7.12%.
The average balance of investment securities increased $3.3 million, or 32.2%, to $13.6 million for the three months ended June 30, 2023 from $10.3 million, for the three months ended June 30, 2022, while the average yield on investment securities decreased by seven basis points to 1.91% for the three months ended June 30, 2023 from 1.98% for the three months ended June 30, 2022.
31
The average balance of other interest-earning deposits, comprised primarily of certificates of deposit in other financial institutions, overnight deposits and stock in the Federal Home Loan Bank, decreased $14.6 million, or 64.6%, for the three months ended June 30, 2023, compared to the same period in 2022, which was partially offset by an increase in the average yield of 313 basis points, to 3.89% for the three months ended June 30, 2023 from 0.76% for the three months ended June 30, 2022. The average yield on short-term deposits reflected the increases in interest rates in the economy. The decrease in the average balance of interest-earning deposits and other resulted primarily from excess cash used to fund the increases in loans and investment securities, as well as deposit withdrawals over the period.
Interest Expense. Total interest expense increased $105,000, or 166.8%, to $168,000 for the three months ended June 30, 2023, from $63,000 for the three months ended June 30, 2022. The increase was primarily due to an increase of 33 basis points in the average cost of interest-bearing deposits to 0.52% for the three months ended June 30, 2023 from 0.19% for the three months ended June 30, 2022, partially offset by a decrease of $5.3 million, or 4.5%, in the average balance of interest-bearing deposits to $113.1 million for the three months ended June 30, 2023 from the three months ended June 30, 2022.
Interest expense on borrowings increased $15,000, or 210.8%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase was due to a $500,000 increase in the average balance outstanding, to $3.5 million for the three months ended June 30, 2023 from $3.0 million for the same period in 2022, and a 158 basis point increase in the weighted-average rate, to 2.51% for the three months ended June 30, 2023.
Net Interest Income. Net interest income increased $247,000, or 22.6%, to $1.3 million for the three months ended June 30, 2023, compared to $1.1 million for the three months ended June 30, 2022. The increase reflected an increase in the interest rate spread to 3.69% for the three months ended June 30, 2023 from 2.94% for the three months ended June 30, 2022. Our net interest margin increased to 3.79% for the three months ended June 30, 2023 from 2.98% for the three months ended June 30, 2022. The interest rate spread and net interest margin were impacted by a series of interest rate increases in the economy between the respective three-month periods.
Provision for Loan Losses. Based on an analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” management concluded that a provision for loan losses was not required for either of the three months ended June 30, 2023 and 2022. The allowance for loan losses was $961,000 and $984,000 at June 30, 2023 and 2022, respectively, and represented 0.74% of total loans at June 30, 2023, and 0.83% of total loans at June 30, 2022. During the three months ended June 30, 2023, the Bank recorded a charge-off on a residential real estate loan totaling $23,000. The determination over the adequacy of the allowance for loan losses was due primarily to the low balances of nonperforming loans, delinquent loans and net charge-offs in both periods.
Total nonperforming loans were $629,000 at June 30, 2023, compared to $472,000 at June 30, 2022. Classified loans totaled $659,000 at June 30, 2023, compared to $451,000 at June 30, 2022, and total loans past due greater than 30 days were $1.1 million and $792,000 at those respective dates. As a percentage of nonperforming loans, the allowance for loan losses was 152.8% at June 30, 2023 compared to 208.5% at June 30, 2022.
The allowance for loan losses reflects the estimate management believes to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at June 30, 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. In addition, bank regulatory agencies periodically review the allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of loan charge-offs, based on judgments different than those of management.
Non-Interest Income. Non-interest income totaled $199,000 for the three months ended June 30, 2023, an increase of $34,000, or 20.9%, from the three months ended June 30, 2022. The increase was primarily due to a $56,000 increase in late charges and fees on loans, which was partially offset by a $13,000 decrease in gain on sale of loans. The increase in late charges and fees on loans was due primarily to fees related to the new indirect automobile loan program.
32
Noninterest Expense. Noninterest expense increased $214,000, or 22.3%, to $1.2 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase was due primarily to a $58,000, or 11.3%, increase in salaries and employee benefits, a $36,000, or 46.6%, increase in occupancy and equipment, a $21,000, or 19.3%, increase in data processing fees and a $36,000, or 138.8%, increase in professional services. The increase in salaries and employee benefits was due primarily to an increase in the profit-sharing allocation as a result of the increase in net income, along with normal merit increases period-to-period. The increase in occupancy and equipment was due primarily to expenses associated with installation of new data processing hardware and software. The increase in data processing was due to an extensive IT network upgrade and the engagement of an independent firm for managed services. The increase in professional services was due primarily to an increase in costs of audit and other services related to our conversion and stock offering.
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 increased by $17,000, or 31.3%, to $73,000 for the three months ended June 30, 2023, compared to $56,000 for the three months ended June 30, 2022. The increase in the income tax provision was due primarily to a $67,000, or 22.7%, increase in pretax income. The effective tax rates were 20.2% and 18.9% for the three months ended June 30, 2023 and 2022, respectively.
Comparison of Operating Results for the Nine Months Ended June 30, 2023 and 2022
General. The Bank recorded net income for the nine months ended June 30, 2023 of $930,000, an increase of $369,000, or 65.9%, compared to net income of $561,000 for the nine months ended June 30, 2022. The increase in net income was primarily due to a $855,000 increase in net interest income and a $25,000 decrease in the provision for loan losses, which were partially offset by an $18,000 decrease in noninterest income, a $402,000 increase in noninterest expenses and a $90,000 increase in income taxes.
Interest Income. Interest income increased $993,000, or 29.7%, to $4.3 million for the nine months ended June 30, 2023, compared to $3.3 million for the nine months ended June 30, 2022. This increase was attributable to a $656,000, or 20.6%, increase in interest on loans, a $101,000, or 103.4%, increase in interest on investment securities and a $236,000, or 370.5%, increase in interest on interest-bearing deposits and other assets.
The average balance of loans increased by $5.2 million, or 4.5%, during the nine months ended June 30, 2023 over the average balance for the nine months ended June 30, 2022, while the average yield on loans increased by 57 basis points to 4.30% for the nine months ended June 30, 2023 from 3.73% for the nine months ended June 30, 2022. The increase in average yield on loans was due to the overall increase in interest rates in the economy, as well as the new automobile loans originated in the current period, which had a weighted-average yield of 7.10%.
The average balance of investment securities increased $3.1 million, or 28.4%, to $14.1 million for the nine months ended June 30, 2023 from $11.0 million for the nine months ended June 30, 2022, while the average yield on investment securities increased by 69 basis points to 1.88% for the nine months ended June 30, 2023 from 1.19% for the nine months ended June 30, 2022. The increase in average yields on securities was due primarily to the increasing interest rate environment.
The average balance of 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 $11.8 million, or 54.4%, for the nine months ended June 30, 2023, compared to the same period in 2022, which was more than offset by an increase in the average yield of 364 basis points, to 4.03% for the nine months ended June 30, 2023 from 0.39% for the nine months ended June 30, 2022. The average yield on short-term deposits reflected the increases in interest rates in the economy. The decrease in the average balance of interest-earning deposits and other resulted primarily from excess cash used to fund the increases in loans and investment securities, as well as deposit withdrawals over the period.
33
Interest Expense. Total interest expense increased $138,000, or 68.1%, to $342,000 for the nine months ended June 30, 2023, from the nine months ended June 30, 2022. The increase was primarily due to an increase of 16 basis points in the average cost of interest-bearing deposits to 0.36% for the nine months ended June 30, 2023 from 0.20% for the nine months ended June 30, 2022, partially offset by a decrease of $4.3 million, or 3.6%, in the average balance of interest-bearing deposits to $114.3 million for the nine months ended June 30, 2023 from $118.6 million for the nine months ended June 30, 2022.
Interest expense on borrowings increased $11,000, or 45.2%, for the nine months ended June 30, 2023, compared to the nine months ended June 30, 2022. The increase was due to a 57 basis point increase in the weighted-average rate, to 1.50% for the nine months ended June 30, 2023 from 0.93% for the same period in 2022, which was partially offset by a $400,000 decrease in the average balance outstanding, to $3.2 million for the nine months ended June 30, 2023 from $3.6 million for the same period in 2022.
Net Interest Income. Net interest income increased $855,000, or 27.2%, to $4.0 million for the nine months ended June 30, 2023, compared to $3.1 million for the nine months ended June 30, 2022. The increase reflected an increase in the interest rate spread to 3.66% for the nine months ended June 30, 2023 from 2.82% for the nine months ended June 30, 2022 and an increase in average net interest earning assets of $1.2 million period to period. Our net interest margin increased to 3.73% for the nine months ended June 30, 2023 from 2.86% for the nine months ended June 30, 2022. The interest rate spread and net interest margin were impacted by a series of interest rate increases in the economy during 2023 and 2022.
Provision for Loan Losses. Based on an analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” management concluded that a provision for loan losses was not required for the nine months ended June 30, 2023, a decrease of $25,000 compared to the nine months ended June 30, 2022. The allowance for loan losses was $961,000 and $983,000 at June 30, 2023 and 2022, respectively, and represented 0.74% of total loans at June 30, 2023, and 0.83% of total loans at June 30, 2022. The determination over the adequacy of the allowance for loan losses was due primarily to the low balances of nonperforming loans, delinquent loans and net charge-offs in both periods.
The allowance for loan losses reflects the estimate management believes to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at June 30, 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. In addition, bank regulatory agencies periodically review the allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of loan charge-offs, based on judgments different than those of management.
Non-Interest Income. Non-interest income totaled $476,000 for the nine months ended June 30, 2023, a decrease of $18,000, or 3.7%, from $494,000 for the nine months ended June 30, 2022. The decrease was primarily due to a $46,000 decrease in gain on sale of loans, a $14,000, or 25.3%, decrease in loan servicing fees and a $7,000 loss on sale of investment securities, which were partially offset by a $47,000, or 52.4%, increase in late charges and fees on loans. The Bank had a decline in the volume of loan sales during the nine months ended June 30, 2023, as the increase in interest rates had the effect of reducing origination of fixed-rate loans that the Bank sells in the secondary market. The increase in late charges and fees on loans was due primarily to fees related to the new indirect automobile loan program.
Noninterest Expense. Noninterest expense increased $402,000, or 13.8%, to $3.3 million for the nine months ended June 30, 2023, compared to $2.9 million for the nine months ended June 30, 2022. The increase was due primarily to a $124,000, or 8.1%, increase in salaries and employee benefits, an $83,000, or 33.0%, increase in occupancy and equipment, a $63,000, or 19.0%, increase in data processing fees and a $52,000, or 45.6%, increase in professional services. The increase in salaries and employee benefits was due primarily to an increase in the profit-sharing allocation as a result of the increase in net income, along with normal merit increases period-to-period. The increase in occupancy and equipment was due primarily to expenses associated with installation of new data processing hardware and software.
34
The increase in data processing was due to an extensive IT network upgrade and the engagement of an independent firm for managed services. The increase in professional services was due primarily to an increase in costs of audit and other services related to our conversion and stock offering.
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 increased by $90,000, or 66.3%, to $227,000 for the nine months ended June 30, 2023, compared to $136,000 for the nine months ended June 30, 2022. The increase in the income tax provision was due primarily to a $460,000, or 66.0%, increase in pretax income. The effective tax rates were 19.6% for each of the nine-month periods ended June 30, 2023 and 2022.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Not applicable, as the Company is a smaller reporting company.
Item 4.Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2023. Based on that evaluation, the Company’s management, including the Company’s principal executive officer and principal financial officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended June 30, 2023, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II – Other Information
Item 1.Legal Proceedings
The Bank 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, Use of Proceeds, and Issuer Purchases of Equity Securities
On March 10, 2023, the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission in connection with the mutual-to-stock conversion of the Bank and the Company’s related stock offering. The Registration Statement (File No. 333-270445) was declared effective by the Securities and Exchange Commission on May 15, 2023. The Company registered 1,471,688 shares of its common stock, par value $0.01 per share, pursuant to the Registration Statement for an aggregate offering price of $14.7 million. The stock offering commenced on May 22, 2022, and was completed on July 26, 2023. Performance Trust Capital Partners, LLC (“Performance Trust”) was engaged to assist in the marketing of the common stock and for records management services. Performance Trust received a fee of $280,000 for its services and was reimbursed approximately $116,000 for its reasonable out-of-pocket expenses, inclusive of its legal fees and expenses.
35
The stock offering resulted in gross proceeds of $9.7 million, through the sale of 972,970 shares of common stock at a price of $10.00 per share. The Company also contributed 50,000 shares of its common stock to the newly formed Mercer Savings Charitable Foundation, Inc. Net proceeds and use of proceeds will be reported supplementally.
Item 3.Defaults Upon Senior Securities
Not applicable.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
Not applicable.
Item 6.Exhibits
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 June 30, 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) |
36
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.
MERCER BANCORP, INC. | |
Date: August 14, 2023 | /s/Alvin B. Parmiter |
Alvin B. Parmiter | |
President and Chief Executive Officer | |
Date: August 14, 2023 | /s/Rick L. Ross |
Rick L. Ross | |
Treasurer |
37