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ROC

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

 

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

For the quarterly period ended June 30, 2023

OR

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

For the transition period from to

Commission File Number: 333-272636

 

Central Plains Bancshares, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

93-2239246

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

221 South Locust Street

Grand Island, NE

68801

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (308) 382-4000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

None

 

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 filing requirements for the past 90 days. (1) Yes No (2) Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

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

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

As of September 27, 2023, the registrant had no shares of common stock, $0.01 par value per share, outstanding.

 

 

 


Table of Contents

 

Table of Contents

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

2

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

34

 

 

 

PART II.

OTHER INFORMATION

35

 

 

 

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

Signatures

37

 

i


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Explanatory Note

 

Central Plains Bancshares, Inc. (the “Company”) was formed to serve as the holding company for Home Federal Savings and Loan Association of Grand Island and Subsidiary (the “Association”). As of June 30, 2023, the reorganization had not been completed and the Company had no assets or liabilities and had not conducted any business activities other than organizational activities. Accordingly, the unaudited financial statements and other financial information contained in these financial statements relate solely to the consolidated financial results of Home Federal Savings and Loan Association of Grand Island and Subsidiary.

 

The unaudited financial statements should be read in conjunction with the audited financial statements, and related notes, of Home Federal Savings and Loan Association of Grand Island and Subsidiary at and for the year ended March 31, 2023 contained in the Association’s prospectus dated August 14, 2023 (the “Prospectus”), as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on August 24, 2023.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF GRAND ISLAND AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands)

 

 

As of
June 30, 2023

 

 

As of
March 31, 2023

 

Assets

 

(unaudited)

 

 

(audited)

 

Cash and due from banks

 

$

8,833

 

 

$

7,915

 

Interest-bearing deposits in other banks

 

 

7,842

 

 

 

8,648

 

Total cash and cash equivalents

 

 

16,675

 

 

 

16,563

 

Investment securities - Available for sale

 

 

58,636

 

 

 

57,842

 

Investment securities - Held to maturity

 

 

381

 

 

 

422

 

Loans - Net of allowance of $5,699 and $5,412, respectively

 

 

359,740

 

 

 

348,337

 

Accrued interest receivable

 

 

1,794

 

 

 

1,727

 

Federal Home Loan Bank stock - At cost

 

 

663

 

 

 

563

 

Premises and equipment - Net

 

 

4,032

 

 

 

4,104

 

Deferred income taxes

 

 

3,392

 

 

 

3,292

 

Mortgage servicing rights

 

 

420

 

 

 

434

 

Other assets

 

 

4,674

 

 

 

4,508

 

Total assets

 

$

450,407

 

 

$

437,792

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Noninterest bearing deposits

 

$

83,759

 

 

$

73,248

 

Interest bearing deposits

 

 

319,470

 

 

 

317,704

 

Total deposits

 

 

403,229

 

 

 

390,952

 

Pension liability

 

 

2,271

 

 

 

2,310

 

Advances from borrowers for taxes and insurance

 

 

1,321

 

 

 

1,719

 

Accrued interest payable

 

 

1,055

 

 

 

668

 

Accounts payable, accrued expenses and other liabilities

 

 

3,827

 

 

 

3,477

 

Total liabilities

 

 

411,703

 

 

 

399,126

 

Accumulated other comprehensive loss

 

 

(5,613

)

 

 

(5,107

)

Retained earnings

 

 

44,317

 

 

 

43,773

 

Total equity

 

 

38,704

 

 

 

38,666

 

Total liabilities and equity

 

$

450,407

 

 

$

437,792

 

 

See accompanying notes to unaudited consolidated financial statements.

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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF GRAND ISLAND AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands)

(unaudited)

 

 

For the Three Months Ended June 30,

 

 

 

2023

 

 

2022

 

Interest and dividend income:

 

 

 

 

 

 

Loans—including fees

 

$

4,320

 

 

$

3,222

 

Investment securities

 

 

388

 

 

 

344

 

Federal Home Loan Bank stock

 

 

7

 

 

 

2

 

Federal funds sold

 

 

51

 

 

 

7

 

Total interest and dividend income

 

 

4,766

 

 

 

3,575

 

Interest expense:

 

 

 

 

 

 

Deposits

 

 

1,362

 

 

 

268

 

Borrowings under FHLB advances

 

 

69

 

 

 

20

 

Total interest expense

 

 

1,431

 

 

 

288

 

Net interest income before provision (credit) for credit losses

 

 

3,335

 

 

 

3,287

 

Provision (credit) for credit losses

 

 

(27

)

 

 

152

 

Net interest income after provision (credit) for credit losses

 

 

3,362

 

 

 

3,135

 

Noninterest income:

 

 

 

 

 

 

Servicing fees on loans

 

 

86

 

 

 

75

 

Service charges on deposit accounts

 

 

187

 

 

 

154

 

Interchange income

 

 

305

 

 

 

288

 

Gain on sale of loans

 

 

41

 

 

 

17

 

Gain from real estate owned and other repossessed assets, net

 

 

1

 

 

 

 

Other

 

 

32

 

 

 

32

 

Total noninterest income

 

 

652

 

 

 

566

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

Salaries and employee benefits

 

 

1,564

 

 

 

1,553

 

Occupancy and equipment

 

 

242

 

 

 

238

 

Data processing

 

 

443

 

 

 

479

 

Federal deposit insurance premiums

 

 

81

 

 

 

40

 

Debit card processing

 

 

60

 

 

 

56

 

Advertising

 

 

68

 

 

 

74

 

Other general and administrative expenses

 

 

378

 

 

 

395

 

Total noninterest expense

 

 

2,836

 

 

 

2,835

 

Income before income tax expense

 

 

1,178

 

 

 

866

 

Income tax expense

 

 

232

 

 

 

191

 

Net income

 

$

946

 

 

$

675

 

 

See accompanying notes to unaudited consolidated financial statements.

HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF GRAND ISLAND AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

 

For the Three Months Ended June 30,

 

 

 

2023

 

 

2022

 

Net income

 

$

946

 

 

$

675

 

Other comprehensive (loss):

 

 

 

 

 

 

Unrealized holding losses arising during the period on available-for-sale securities

 

 

(642

)

 

 

(2,085

)

Minimum pension liability adjustment

 

 

 

 

 

20

 

Other comprehensive loss, before tax

 

 

(642

)

 

 

(2,065

)

Income tax benefit for other comprehensive income

 

 

136

 

 

 

435

 

Total other comprehensive loss - net of tax

 

 

(506

)

 

 

(1,630

)

Comprehensive income (loss)

 

$

440

 

 

$

(955

)

 

See accompanying notes to unaudited consolidated financial statements.

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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF GRAND ISLAND AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(dollars in thousands)

(unaudited)

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Retained
Earnings

 

 

Total
Equity

 

Balance—March 31, 2022

 

$

(3,725

)

 

$

42,127

 

 

$

38,402

 

Net income

 

 

 

 

 

675

 

 

 

675

 

Other comprehensive loss - net of tax

 

 

(1,630

)

 

 

 

 

 

(1,630

)

Balance—June 30, 2022

 

$

(5,355

)

 

$

42,802

 

 

$

37,447

 

 

 

 

 

 

 

 

 

 

 

Balance—March 31, 2023

 

$

(5,107

)

 

$

43,773

 

 

$

38,666

 

Adoption of ASU 326 credit losses

 

 

 

 

 

(402

)

 

 

(402

)

Net income

 

 

 

 

 

946

 

 

 

946

 

Other comprehensive loss—net of tax

 

 

(506

)

 

 

 

 

 

(506

)

Balance—June 30, 2023

 

$

(5,613

)

 

$

44,317

 

 

$

38,704

 

 

See accompanying notes to unaudited consolidated financial statements.

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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF GRAND ISLAND AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

 

For the Three Months Ended June 30,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

946

 

 

$

675

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

127

 

 

 

120

 

Gain on sale of loans

 

 

(41

)

 

 

(17

)

Amortization of premium and accretion of discount on securities

 

 

51

 

 

 

94

 

Deferred income tax (benefit) expense

 

 

7

 

 

 

(434

)

Provision (credit) for credit losses

 

 

(27

)

 

 

152

 

Origination of loans held for sale

 

 

(2,386

)

 

 

(980

)

Proceeds from sales of loans held for sale

 

 

2,428

 

 

 

997

 

Contributions to pension plan

 

 

100

 

 

 

150

 

Change in assets and liabilities:

 

 

 

 

 

 

Accrued interest receivable

 

 

(67

)

 

 

78

 

Mortgage servicing rights

 

 

14

 

 

 

35

 

Other assets

 

 

(177

)

 

 

299

 

Accrued interest payable

 

 

387

 

 

 

(29

)

Accounts payable, accrued expenses and other liabilities

 

 

(201

)

 

 

(753

)

Net cash provided by operating activities

 

 

1,161

 

 

 

387

 

Cash flows from investing activities

 

 

 

 

 

 

Net change in loans

 

 

(11,372

)

 

 

(17,188

)

Purchase of investment securities available for sale

 

 

(3,799

)

 

 

 

Principal paydowns from investment securities available for sale

 

 

2,349

 

 

 

4,160

 

Principal paydowns from investment securities held to maturity

 

 

41

 

 

 

35

 

Purchase of Federal Home Loan Bank stock

 

 

(100

)

 

 

(177

)

Purchase of premises and equipment

 

 

(47

)

 

 

(47

)

Net cash used in investing activities

 

 

(12,928

)

 

 

(13,217

)

Cash flows from financing activities

 

 

 

 

 

 

Net change in deposits

 

 

12,277

 

 

 

(12,806

)

Proceeds from short-term FHLB advances

 

 

 

 

 

15,000

 

Net change in advances from borrowers for taxes and insurance

 

 

(398

)

 

 

(360

)

Net cash provided by financing activities

 

 

11,879

 

 

 

1,834

 

Net increase (decrease) in cash and cash equivalents

 

 

112

 

 

 

(10,996

)

Cash and cash equivalents—beginning of period

 

 

16,563

 

 

 

18,979

 

Cash and cash equivalents—end of period

 

$

16,675

 

 

$

7,983

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for taxes

 

$

 

 

$

75

 

Cash paid for interest

 

$

1,044

 

 

$

215

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF GRAND ISLAND AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

(unaudited)

Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business—Home Federal Savings and Loan Association of Grand Island d.b.a. Home Federal Bank (the “Association”) is a federally chartered mutual savings and loan association whose primary business is providing mortgage, consumer, commercial real estate, and commercial loans in the Grand Island, Nebraska area, with additional lending opportunities through the Association’s participation network of banks in Nebraska and other states, and acquiring consumer and commercial deposits to fund these investments.

Basis of Presentation—The consolidated financial statements include the accounts of the Association and First Service Corporation, a wholly owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (GAAP) as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).

Central Plains Bancshares, Inc., a Maryland corporation (the “Company”), was formed to serve as the stock holding company for the Association as part of the Association's mutual-to-stock conversion. As of June 30, 2023, the conversion had not been completed, and, as of that date, the Company had no assets or liabilities, and had not conducted any business other than that of an organizational nature. After the conversion and offering are completed, we will be organized as a fully public stock holding company, with 100% of the common stock being held by the public. Accordingly, the financial statements and other information included in Part I of this Quarterly Report is for the Association.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year or any other period.

Use of Estimates—In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Significant estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, the determination of the pension liability, as well as the fair value measurements of investment securities. As with any estimate, actual results could differ from those estimates.

Accounting Developments—In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13,Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” also known as Current Expected Credit Losses, or CECL. ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process. 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 multiple existing impairment models, which generally require that a loss be incurred before it is recognized.

The Association adopted ASC 326 and all related subsequent amendments thereto effective April 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment for the adoption of CECL resulted in an increase in the allowance for credit losses on loans of $299, which is presented as a reduction to net loans outstanding, and the establishment of an allowance for credit losses on unfunded loan commitments of $210, which is recorded within accounts payable, accrued expenses and other liabilities on the consolidated statement of financial condition. The Association recorded a net decrease to retained earnings of $402, as of April 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after April 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

 

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In March 2022, FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this update eliminate the accounting guidance and related disclosures for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, ReceivablesTroubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty and requiring an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial InstrumentsCredit LossesMeasured at Amortized Cost. The Association adopted the amendments in this update on April 1, 2023, and is applying the amendments prospectively with the exception of the recognition and measurement of existing TDRs for which the entity has elected to apply a modified retrospective transition method.

Allowance for Credit Losses

The allowance for credit losses (“ACL”) is an estimate of the expected credit losses on the loans held for investment, unfunded loan commitments, held to maturity securities, and available-for-sale debt securities portfolios.

Allowance for Credit Losses on Loans—The ACL is maintained by management at a level believed adequate to absorb estimated credit losses that are expected to occur within the existing loan portfolio through their contractual terms adjusted for expected prepayments. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans. Determination of the ACL is inherently subjective in nature since it requires significant estimates and management judgment, and includes a level of imprecision given the difficulty of identifying and assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Association’s direct control, including, but not limited to, the performance of the loan portfolio, consideration of current economic trends, changes in interest rates and property values, estimated losses on pools of homogeneous loans based on an analysis that uses historical loss experience for prior periods that are determined to have like characteristics with the current period such as pre-recessionary, recessionary, or recovery periods, portfolio growth and concentration risk, management and staffing changes, the interpretation of loan risk classifications by regulatory authorities and other credit market factors.

The ACL methodology consists of measuring loans on a collective (pool) basis when similar risk characteristics exist. The Association has identified seven portfolio segments and measures the ACL using the Scaled CECL Allowance for Losses Estimator (“SCALE”) method. The loan portfolios are real estate – construction, real estate – commercial, real estate – residential, commercial, agriculture, other consumer and land development/sanitary improvement districts (SIDS). The SCALE method uses publicly available data from Schedule RI-C of the Call Report to derive the initial proxy expected lifetime loss rates. These proxy expected lifetime loss rates are then adjusted for Association-specific facts and circumstances to arrive at the final ACL estimate that adequately reflects the Association’s loss history and credit risk within our portfolio.

The qualitative factors applied to each loan portfolio consist of the impact of other internal and external qualitative and credit market factors as assessed by management through a detailed loan review, ACL analysis and credit discussions. These internal and external qualitative and credit market factors used include the following:

The nature and volume of the Association’s financial assets;
The existence, growth, and effect of any concentration of credit;
The volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets;
The value of the underlying collateral for loans that are non-collateral-dependent;
The Association’s lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries;
The quality of the Association’s credit review function;
The experience, ability, and depth of the Association’s lending, investment, collection, and other relevant management and staff;
The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters; and

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Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Association operates that affect the collectability of financial assets.

The impact of the above listed internal and external qualitative and credit market risk factors is assessed within predetermined ranges to adjust the ACL totals calculated.

In addition to the pooled analysis performed for the majority of our loan and commitment balances, we also review those loans that have collateral dependency or nonperforming status which requires a specific review of that loan, per our individually analyzed CECL calculations.

Loans are charged off against the ACL when management believes the uncollectability of a loan balance is confirmed, while recoveries of amounts previously charged-off are credited to the ACL. Approved releases from previously established ACL reserves authorized under our ACL methodology also reduce the ACL. Additions to the ACL are established through the provision for credit losses on loans, which is charged to expense.

The Association’s ACL methodology is intended to reflect all loan portfolio risk, but management recognizes the inability to accurately depict all future credit losses in a current ACL estimate, as the impact of various factors cannot be fully known. Accrued interest receivable on loans is excluded from the amortized cost basis of financing receivables for the purpose of determining the allowance for credit losses.

Allowance for Credit Losses on Unfunded Loan Commitments—The Association estimates expected credit losses over the contractual period in which the Association is exposed to credit risk by a contractual obligation to extend credit, unless that obligation is unconditionally cancelable by the Association. The ACL related to off-balance sheet credit exposures, which is recorded within accounts payable, accrued expenses and other liabilities on the consolidated statement of financial condition, is estimated at each balance sheet date under the CECL model, and is adjusted as determined necessary through the provision for credit losses on the consolidated statement of income. The estimate for ACL on unfunded loan commitments includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

Allowance for Credit Losses on Securities Available-for-Sale—For available-for-sale debt securities in an unrealized loss position, the Association first assesses whether it intends to sell, or it is more likely than not that it will sell, the security before recovery of its amortized cost basis. If either of the aforementioned criteria exists, the Association will record an ACL related to securities available-for-sale with an offsetting entry to the provision for credit losses on securities on the income statement. If either of these criteria does not exist, the Association will evaluate the securities individually to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors, such as market interest rate fluctuations.

In evaluating securities available-for sale for potential impairment, the Association considers many factors, including the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and its ability and intent to hold the security for a period of time sufficient for a recovery in value. The Association also considers the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. The amount of the impairment related to other factors is recognized in other comprehensive income (loss).

Allowance for Credit Losses on Held-to Maturity Securities—The allowance for credit losses on held-to-maturity debt securities is estimated using a CECL methodology. Any expected credit loss is provided through the allowance for credit loss on held-to-maturity securities and is deducted from the amortized cost basis of the security so that the balance sheet reflects the net amount the Association expects to collect. Nearly all the Associations HTM debt securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Accordingly, there is a zero-credit loss expectation on these securities.

Allowance for Loan Losses (Prior to April 1, 2023)—The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio. Additions to the allowance are recorded in the provision for loan losses charged to expense. Charge-offs, net of recoveries, are deducted from the allowance. The allowance estimate is based on prior experience, the nature and volume of the loan portfolio, review of specific problem loans, and an evaluation of the overall portfolio quality under current economic conditions. Specific reserves for impaired loans are measured and recognized to the extent that the recorded investment of an impaired loan exceeds its value based on either the fair value of the loan’s underlying collateral less estimated costs to sell, the calculated present value of projected cash flows discounted at the contractual interest rate, or the loan’s observable fair value.

 

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The Association’s allowance for loan losses consists of various methodologies to determine impairment: (a) loans individually evaluated for impairment are evaluated based upon a specific identified probable loss, and (b) loans collectively evaluated for impairment are evaluated based on historical loan loss experience for similar loans with similar characteristics, adjusted to reflect the impact of current conditions. Factors considered in determining the adjustment for current conditions include the following: (a) changes in asset quality, (b) composition and concentrations of credit risk, and (c) the impact of economic risks on the portfolio.

In determining the allowance for loan losses, management considers factors such as economic and business conditions affecting key lending areas, credit concentrations and credit quality trends. Since the evaluation of the inherent loss with respect to these factors is subject to a higher degree of uncertainty, the measurement of the overall allowance is subject to estimation risk and the amount of actual losses can vary significantly from the estimated amounts. The Association’s measurement methods incorporate comparisons between recent experience and historical rates.

Loans are generally secured by underlying real estate, business assets, personal property and personal guarantees. The amount of collateral obtained is based upon management’s evaluation of the borrower.

The Association periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR.

A loan is considered impaired when it is probable that all principal and interest amounts due will not be collected in accordance with the loan’s contractual terms. Except for TDRs, consumer loans within any class are generally not individually evaluated on a regular basis for impairment. All TDRs, regardless of the outstanding balance amount, are considered to be impaired.

The allowance established for probable losses on specific loans is based on a periodic analysis and evaluation of classified loans. Specific reserves for impaired loans are measured and recognized to the extent that the recorded investment of an impaired loan exceeds its value based on either the fair value of the loan’s underlying collateral less costs to sell, the calculated present value of projected cash flows discounted at the contractual effective interest rate or the loan’s observable fair value.

Cash and Cash Equivalents—Cash and cash equivalents include cash on hand, federal funds sold, demand deposits at other financial institutions, and short-term investments with maturities when purchased, of three months or less.

Investment Securities—Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity are classified as available for sale and recorded at fair value, with unrealized gains and losses on a net-of-tax basis excluded from earnings and reported in other comprehensive income. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted market prices of similar instruments or discounted cash flow models that incorporate market inputs and assumptions including discount rates, prepayment speeds, and loss rates. The Association did not have any securities classified as trading at June 30, 2023 and March 31, 2023.

Purchased premiums and discounts are amortized and accreted to the earlier of call or maturity of the related security using the effective interest method. Realized gains and losses on the sale of securities are recognized on the specific identification method in the statements of income.

For periods prior to April 1, 2023, management monitored securities for other-than-temporary-impairment (OTTI). If the Association intends to sell the security or will more likely than not be required to sell the security before recovery of the entire amortized cost basis, then an OTTI has occurred. However, even if the Association does not intend to sell the security and will not likely be required to sell the security before recovery of its entire amortized cost basis, the Association must evaluate expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, the credit component of the impairment is recorded as a loss in the statement of income and the non-credit component is recognized through other comprehensive income (loss).

Federal Home Loan Bank Stock—As a member of the Federal Home Loan Bank of Topeka (FHLB), the Association is required to maintain an investment in the capital stock of the FHLB. For financial reporting purposes, such stock is carried at cost, which approximates fair value, based on the redemption provisions.

Loans Held for Sale—Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related mortgage loan sold, which is reduced by the cost allocated to the servicing right. The Association generally locks in the sale price to the purchaser of the mortgage loan at the same time an interest rate commitment is made to the borrower.

 

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Loans—Loans that management has the intent and ability to hold for the foreseeable future are stated at the amount of unpaid principal less an allowance for loan losses and any deferred fees or costs on originated loans. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. The accrual of interest on impaired loans is discontinued when management believes that the borrower may be unable to make payments as scheduled, generally when a loan becomes contractually delinquent for three months or more. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent that cash payments are received in excess of principal due. Loan origination fees and commitment fees offset by certain direct loan origination costs are deferred and recognized over the contractual life of the loan as a yield adjustment.

Mortgage Servicing Rights—Mortgage servicing rights are established based on the allocated fair value of servicing rights retained on loans originated by the Association and subsequently sold in the secondary market. Mortgage servicing rights are amortized into servicing fees on loans on the consolidated statements of income in proportion to, and over the period of, the estimated net servicing income and are evaluated for impairment based on their fair value. Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.

Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Association are initially measured at fair value at the date of transfer. The Association has elected to subsequently measure the mortgage servicing rights using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date.

Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with other noninterest expense on the income statement.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

Premises and Equipment—Office properties and equipment are carried at cost less accumulated depreciation. Depreciation is computed based on the straight-line basis over the estimated useful lives of the assets ranging from 3 to 15 years. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Costs incurred for maintenance and repairs are expensed as incurred. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of a particular asset may not be recoverable.

Leases—Lease expense for operating and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Association’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. When the rate implicit in the lease is unknown, the present value of the lease payments is determined using our incremental borrowing rate based on the FHLB amortizing advance rate, adjusted for the lease term and other factors.

Revenue Recognition—Most of the Association’s revenue is not subject to Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, including net interest income, fees related to loans and loan commitments, gain on derivatives, and gain on sales of loans and securities.

 

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Under ASC 606, the Association must identify the contract with a customer, identify the performance obligation(s) within the contract, determine the transaction price, allocate the transaction price to the performance obligation(s) within the contract, and recognize revenue when (or as) the performance obligation(s) are satisfied. The core principle under ASC 606 requires the Association to recognize revenue to depict the transfer of services or products to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those services or products recognized as performance obligations are satisfied. The Association generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Since performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Transfer of Financial Assets—Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Association, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Association does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.

Retirement Plans—Pension expense is the net of service and interest cost, return on plan assets, and amortization of gains and losses not immediately recognized. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.

Interest Rate Risk—The Association is a mutual savings bank engaged principally in originating and investing in first mortgage loans, consumer loans to individuals, agricultural loans and commercial loans to businesses primarily in Grand Island, Nebraska. These loans are funded primarily with short-term liabilities that have interest rates that vary with market rates over time. The earnings of the Association are exposed to interest rate risk largely because of the mismatch between the repricing intervals of its assets and liabilities.

To reduce interest rate risk the Association has employed the strategy of selling a majority of the single family fixed-rate home loans the Association originates into the secondary market. The Association holds any adjustable-rate single family home loans in their portfolio. In addition, the commercial loans the Association originates and maintains in its portfolio are either tied to some variant of Wall Street Journal Prime (WSJP) and adjust as WSJP adjusts or they contain shorter term call dates (typically three or five years) when amortized over longer periods of time. The consumer portfolio has three-to-five-year amortized terms which mitigate long term interest rate exposure in this portfolio.

Income Taxes—The Association and its subsidiary file consolidated income tax returns. Income taxes are accounted for using an asset and liability method. Deferred tax liabilities or assets are recognized for the estimated future tax effects attributable to operating loss and tax credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using the currently enacted tax rates expected to apply in the year in which those temporary differences are expected to be recovered or settled. If needed, a valuation allowance is recorded to reduce deferred tax assets to the amount expected to be realized. The Association recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability for unrecognized tax benefits is recorded for any tax benefits claimed in tax returns that do not meet these recognition and measurement standards. The Association recognizes both interest and penalties (if applicable) as a component of income tax expense.

Comprehensive Income—Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and minimum pension liability adjustments, are reported as a separate component of the equity section of the consolidated statements of financial condition; such items, along with net income, are components of comprehensive income, net of tax.

Financial Instruments and Loan Commitments—Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments, such as standby letters of credit, that are considered financial guarantees are recorded at fair value.

 

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Note 2 - Investment SECURITIES

The following is a summary of investment securities at June 30, 2023 and March 31, 2023:

 

(dollars in thousands)

 

June 30, 2023

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

Available-for-Sale

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

FHLMC bonds

 

$

26,652

 

 

$

5

 

 

$

(2,432

)

 

$

24,225

 

GNMA bonds

 

 

3,964

 

 

 

 

 

 

(143

)

 

 

3,821

 

FNMA bonds

 

 

25,641

 

 

 

10

 

 

 

(2,622

)

 

 

23,029

 

Municipal bonds

 

 

8,993

 

 

 

 

 

 

(1,432

)

 

 

7,561

 

Total

 

$

65,250

 

 

$

15

 

 

$

(6,629

)

 

$

58,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

FHLMC bonds

 

$

111

 

 

$

 

 

$

(2

)

 

$

109

 

GNMA bonds

 

 

71

 

 

 

 

 

 

(3

)

 

 

68

 

FNMA bonds

 

 

199

 

 

 

 

 

 

(3

)

 

 

196

 

Total

 

$

381

 

 

$

 

 

$

(8

)

 

$

373

 

 

(dollars in thousands)

 

March 31, 2023

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

Available-for-Sale

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

FHLMC bonds

 

$

25,446

 

 

$

13

 

 

$

(2,203

)

 

$

23,256

 

GNMA bonds

 

 

2,648

 

 

 

 

 

 

(58

)

 

 

2,590

 

FNMA bonds

 

 

26,726

 

 

 

17

 

 

 

(2,453

)

 

 

24,290

 

Municipal bonds

 

 

8,994

 

 

 

1

 

 

 

(1,289

)

 

 

7,706

 

Total

 

$

63,814

 

 

$

31

 

 

$

(6,003

)

 

$

57,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

FHLMC bonds

 

$

116

 

 

$

 

 

$

(2

)

 

$

114

 

GNMA bonds

 

 

74

 

 

 

 

 

 

(1

)

 

 

73

 

FNMA bonds

 

 

232

 

 

 

1