UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

xQuarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the quarterly period ended June 30, 2016

 

 

OR

 

¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the transition period from _______________ to ______________________

 

 

Commission File No. 000-55652

 

 

 

Best Hometown Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

           Maryland                81-1959486  
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)
     
100 East Clay Street, Collinsville, Illinois   62234
(Address of Principal Executive Offices)   Zip Code

 

(618) 345-1121

(Registrant’s telephone number)

 

                               N/A                               

(Former name or former address, if changed since last report)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES x  NO ¨.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x  NO ¨.

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
       
Non-accelerated filer ¨ Smaller reporting company x

 

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

 

As of August 12, 2016, there were 826,208 shares of the Registrant’s common stock issued and outstanding.

 

 

 

 

 

 

Best Hometown Bancorp, Inc.

FORM 10-Q

 

Index

 

    Page
     
Part I. Financial Information
     
Item 1. Condensed Consolidated Financial Statements  
     
  Condensed Consolidated Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015 2
     
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited) 3
     
  Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited) 4
     
  Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2016 and 2015 (Unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited) 6
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 57
Item 4. Controls and Procedures 58
     
Part II. Other Information
     
Item 1. Legal Proceedings 58
Item 1A. Risk Factors 58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 58
Item 3. Defaults upon Senior Securities 59
Item 4. Mine Safety Disclosures 59
Item 5. Other Information 59
Item 6. Exhibits 59
  Signatures 60

 

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Best Hometown Bancorp, Inc.

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

 

Condensed Consolidated Balance Sheets

June 30, 2016 (Unaudited) and December 31, 2015

 

   June 30,   December 31, 
   2016   2015 
   (In thousands) 
Assets          
Cash and due from banks  $1,275   $2,632 
Interest-bearing deposits in other banks:          
Federal Home Loan Bank of Chicago ("FHLBC") demand account   6,899    1,215 
TIB-The Independent BankersBank money market account   4,558    5,007 
Other banks   247    246 
Cash and cash equivalents   12,979    9,100 
Investment securities available for sale, at market value
(amortized cost of $18,687 and $11,353, respectively)
   18,656    11,224 
Stock in FHLBC   837    837 
Loans receivable, net of allowance for loan losses of $1,224 and $1,249, respectively   72,210    74,302 
Premises and equipment, net   1,974    1,881 
Foreclosed real estate held for sale, net   208    667 
Accrued interest receivable:          
Investment securities   54    37 
Loans receivable   250    259 
Deferred tax asset   10    44 
Other assets   122    305 
Total assets  $107,300   $98,656 
           
Liabilities and Stockholders' Equity          
Liabilities          
Deposits:          
Noninterest-bearing  $3,830   $4,237 
Interest-bearing   81,856    75,776 
Total deposits   85,686    80,013 
Advances from FHLBC   6,000    9,000 
Accrued defined benefit pension plan   1,296    1,464 
Accrued postretirement medical plan   985    985 
Other liabilities   454    332 
Total liabilities   94,421    91,794 
Commitments and contingencies          
Stockholders' Equity          
Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued and outstanding   -    - 
Common stock, $0.01 par value, 30,000,000 shares authorized, 826,208 shares issued and outstanding   8    - 
Additional paid-in capital   6,836    - 
Retained earnings - substantially restricted   8,503    8,789 
Unearned Employee Stock Ownership Plan ("ESOP") shares   (661)   - 
Accumulated other comprehensive (loss), net of tax:          
Net unrealized (losses) on investment securities, net of tax   (21)   (85)
Net unrealized (losses) on defined benefit pension plan, net of tax   (1,741)   (1,797)
Net unrealized (losses) on postretirement medical plan, net of tax   (45)   (45)
Total accumulated other comprehensive (loss), net of tax   (1,807)   (1,927)
Total stockholders' equity   12,879    6,862 
Total liabilities and stockholders' equity  $107,300   $98,656 

 

See accompanying notes to condensed consolidated financial statements.

 

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Best Hometown Bancorp, Inc.

 

Condensed Consolidated Statements of Operations

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
   (In thousands) 
Interest income:                    
Loans receivable  $806   $764   $1,623   $1,523 
Investment securities   52    50    98    96 
Other interest-earning assets   11    5    20    9 
Total interest income   869    819    1,741    1,628 
Interest expense:                    
Deposits   257    171    495    355 
Advances from FHLBC   71    101    142    200 
Total interest expense   328    272    637    555 
Net interest income   541    547    1,104    1,073 
Provision for loan losses   -    -    -    18 
Net interest income after provision for loan losses   541    547    1,104    1,055 
Noninterest income:                    
Loan service charges   4    3    8    7 
Other   22    21    45    37 
Total noninterest income   26    24    53    44 
Noninterest expense:                    
Compensation and benefits   333    386    747    751 
Occupancy expense   56    57    116    116 
Equipment expense   37    38    72    86 
Data processing   52    50    103    100 
FDIC premium expense   21    47    42    86 
Professional services   94    77    164    140 
Insurance costs   8    12    18    25 
Advertising   17    16    26    25 
Supplies   10    12    19    24 
Operations from foreclosed real estate   49    (65)   58    (65)
Other   43    52    78    90 
Total noninterest expense   720    682    1,443    1,378 
Loss before income taxes   (153)   (111)   (286)   (279)
Income taxes:                    
Current   -    -    -    - 
Deferred   -    -    -    - 
Total income taxes   -    -    -    - 
Net loss  $(153)  $(111)  $(286)  $(279)

 

See accompanying notes to condensed consolidated financial statements.

 

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Best Hometown Bancorp, Inc.

 

Condensed Consolidated Statements of Comprehensive Loss

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
   (In thousands) 
                 
Net loss  $(153)  $(111)  $(286)  $(279)
Accumulated other comprehensive earnings (loss), net of tax:                    
Unrealized (losses) gains on investment securities during the period   9    (130)   98    (65)
Net unrealized gains on defined benefit pension plan   29    23    56    46 
Net unrealized gains on postretirement medical plan   -    1    -    2 
Accumulated other comprehensive gains (loss) before taxes   38    (106)   154    (17)
Income tax benefit (expense)   (4)   46    (34)   23 
Accumulated other comprehensive earnings (loss), net of tax   34    (60)   120    6 
Comprehensive loss  $(119)  $(171)  $(166)  $(273)

 

See accompanying notes to condensed consolidated financial statements.

 

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Best Hometown Bancorp, Inc.

 

Condensed Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2016 and 2015 (Unaudited)

 

                       Net Unrealized   Net Unrealized         
                   Net Unrealized   (Losses)   (Losses) On   Accumulated     
       Additional   Unearned       (Losses) Gains   On Defined   Postretirement   Other   Total 
   Common   Paid-In   ESOP   Retained   On Investment   Benefit Pension   Medical Plan,   Comprehensive   Stockholders' 
   Stock   Capital   Shares   Earnings   Securities, Net   Plan, Net   Net   (Loss), Net   Equity 
   (In thousands) 
                                     
Balance at December 31, 2014  $-   $-   $-   $9,491   $(38)  $(1,756)  $(73)  $(1,867)  $7,624 
                                              
Net loss   -    -    -    (279)   -    -    -    -    (279)
                                              
Net unrealized (losses) gains, net of taxes   -    -    -    -    (42)   46    2    6    6 
                                              
Balance at  June 30, 2015  $-   $-   $-   $9,212   $(80)  $(1,710)  $(71)  $(1,861)  $7,351 
                                              
Balance at December 31, 2015  $-   $-   $-   $8,789   $(85)  $(1,797)  $(45)  $(1,927)  $6,862 
                                              
Net loss   -    -    -    (286)   -    -    -    -    (286)
                                              
Proceeds from issuance of 826,208 shares of common stock   8    6,836    (661)   -    -    -    -    -    6,183 
                                              
Net unrealized (losses) gains, net of taxes   -    -    -    -    64    56    -    120    120 
                                              
Balance at  June 30, 2016  $8   $6,836   $(661)  $8,503   $(21)  $(1,741)  $(45)  $(1,807)  $12,879 

 

See accompanying notes to condensed consolidated financial statements.

 

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Best Hometown Bancorp, Inc.

 

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2016 and 2015 (Unaudited)

 

   Six Months Ended 
   June 30, 
   2016   2015 
   (In thousands) 
Cash flows from operating activities:          
Net loss  $(286)  $(279)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:          
Depreciation expense   64    64 
Amortization of premiums, net   126    124 
Provision for loan losses   -    18 
Loss (gain) on foreclosed real estate   26    (112)
(Increase) decrease in:          
Accrued interest receivable   (8)   (7)
Other assets   183    7 
Increase (decrease) in other liabilities   10    (29)
Net cash provided by (used for) operating activities   115    (214)
Cash flows from investing activities:          
Net decrease (increase) in loans receivable   2,214    (5,261)
Mortgage-backed securities ("MBSs") available for sale - collections   1,447    1,455 
MBSs available for sale - purchased   (9,407)   (3,722)
Securities available for sale - purchased   -    (501)
Securities available for sale - proceeds from call   500    500 
Purchases of premises and equipment   (157)   (53)
Proceeds from foreclosed real estate   311    373 
Net cash used for investing activities   (5,092)   (7,209)

 

(Continued)

 

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Best Hometown Bancorp, Inc.

 

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2016 and 2015 (Unaudited)

 

(Continued)        
   Six Months Ended 
   June 30, 
   2016   2015 
   (In thousands) 
Cash flows from financing activities:          
Net increase in deposits  $5,673   $4,679 
(Repayment of) proceeds from advances from FHLBC   (3,000)   5,000 
Proceeds from issuance of common stock   6,183    - 
Net cash provided by financing activities   8,856    9,679 
Net increase in cash and cash equivalents   3,879    2,256 
Cash and cash equivalents at beginning of period   9,100    9,794 
Cash and cash equivalents at end of period  $12,979   $12,050 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Interest on deposits  $494   $355 
Interest on advances from FHLBC   153    201 
Real estate acquired in settlement of loans  $-   $25 
Loans made to finance sales of foreclosed assets   122    24 

 

See accompanying notes to condensed consolidated financial statements.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Note 1. Summary of Significant Accounting Policies

 

General

 

On June 29, 2016, Best Hometown Bank (“Bank”) (formerly known as Home Federal Savings and Loan Association of Collinsville) completed its conversion from a federally-chartered mutual savings association to a federally-chartered stock savings association and the establishment of a stock holding company, Best Hometown Bancorp, Inc. (“Company”), as parent of the Bank. The stock holding company is organized under the laws of the State of Maryland and owns all of the outstanding common stock of the Bank. The Company sold 826,208 shares of its common stock, including 8% or 66,096 shares purchased by the Bank’s employee stock ownership plan (“ESOP”), at a price of $10.00 per share, for gross offering proceeds of $8.3 million. The cost of the conversion and issuance of common stock was $1.4 million which was deducted from the gross offering proceeds. The Company contributed $5.0 million of the net proceeds from the offering to the Bank and $1.2 million was retained by the Company. In addition, $661,000 of the net proceeds were used to fund the loan to the ESOP. The loan was used by the ESOP to purchase Company shares in the offering.

 

Voting rights are held and exercised exclusively by the stockholders of the holding company. Deposit account holders continue to be insured by the FDIC. A liquidation account was established in an amount equal to the Bank’s total equity as of the latest balance sheet date in the final offering circular used in the conversion. Each eligible account holder or supplemental account holder is entitled to a proportionate share of this account in the event of a complete liquidation of the Bank, and only in such event. This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance at fiscal year end falls below the amounts on the respective eligiblity record date and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after conversion in the related deposit balance.

 

The Bank may not pay a dividend on its capital stock, if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements. In addition, the stock holding company will be subject to certain regulations related to the repurchase of its capital stock.

 

The Conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

 

Basis of Presentation and Consolidation

 

The condensed consolidated financial statements as of June 30, 2016 and for the three and six months ended June 30, 2016, include Best Hometown Bancorp, Inc. and its wholly-owned subsidiary of the Bank. Intercompany transactions and balances have been eliminated in consolidation. The financial statements as of December 31, 2015 and for the three and six months ended June 30, 2015 represent the Bank only, as the conversion to stock form, including the formation of Best Hometown Bancorp, Inc. was completed on June 29, 2016. References herein to the Company for periods prior to the completion of the stock conversion should be deemed to refer to the Bank.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

The accompanying condensed balance sheet of the Bank as of December 31, 2015, which has been derived from audited financial statements, and unaudited condensed consolidated financial statements of the Company as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015, were prepared in accordance with instructions for Form 10-Q and Article 8 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto of the Bank for the year ended December 31, 2015 included in the Registrant’s Registration Statement on Form S-1. Reference is made to the accounting policies of the Bank described in the Notes to Financial Statements contained in the Form S-1.

 

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included to present fairly the financial position as of June 30, 2016 and the results of operations and cash flows for the three and six months ended June 30, 2016 and 2015. All interim amounts have not been audited and the results of operations for the three and six months ended June 30, 2016, herein are not necessarily indicative of the results of operations to be expected for the entire year.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 condensed consolidated financial statements and the reported amounts of income 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 foreclosed real estate, fair values of financial instruments, measurement of defined benefit pension and postretirement medical plans and valuation of deferred tax assets.

 

Loans Receivable, Net

 

Loans receivable, net are carried at unpaid principal balances, less allowance for loan losses, net deferred loan fees, deferred income and loans in process. Loan origination fees and certain direct loan origination costs are deferred and amortized to interest income over the contractual life of the loan using the interest method.

 

Allowance for Loan Losses

 

Allowance for loan losses are established for impaired loans for the difference between the loan amount and the present value of expected future cash flows discounted at the original contractual interest rate, or as a practical expedient if the loan is deemed collateral dependent, the fair value of collateral less estimated selling costs. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. The

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

types of loans for which impairment is measured under FASB ASC 310-10-35, “Receivables,” include nonaccrual commercial and multi-family real estate loans, large nonaccrual one-to-four family, owner occupied and non-owner occupied loans and troubled debt restructurings (“TDRs”), where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Impairment losses are recognized through an increase in the allowance for loan losses. Such loans are placed on nonaccrual status at the point deemed uncollectible. The Bank generally ceases accruing interest on the loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on non-accrual loans generally is applied against principal using the cost recovery method or to interest income recognized on the cash basis. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. A loan is considered delinquent when a payment has not been made by the contractual due date.

 

Allowances for loan losses are available to absorb losses incurred on loans receivable and represents additions charged to expense, less net charge-offs. Loans are charged-off in the period deemed uncollectible. Recoveries of loans previously charged-off are recorded when received. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired, for which the carrying value of the loan exceeds the fair value of the collateral or the present value of expected future cash flows, or loans otherwise adversely classified. The general component covers non-impaired loans and is based on the historical loan loss experience for the last two years, including adjustments to historical loss experience maintained to cover uncertainties that affect the Association’s estimate of probable losses for each loan type. The adjustments to historical loss experience are based on evaluation of several factors, including primarily changes in lending policies and procedures; changes in collection, charge-off and recovery practices; changes in the nature and volume of the loan portfolio; changes in the volume and severity of nonperforming loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and changes in current, national and local economic and business conditions.

 

Management believes that all known and inherent losses in the loan portfolio that are probable and reasonable to estimate have been recorded as of each condensed consolidated balance sheet date.

 

Employee Stock Ownership Plan (“ESOP”)

 

In conjunction with the stock offering, the Company established an ESOP for the benefit of employees who meet eligibility requirements as defined in the ESOP. Eligible employees in the ESOP are those employees which complete at least 1000 hours of service and attain age 21. Participant benefits become fully vested upon completion of 6 years of service (including those years of service prior to adoption of the plan); participants will be vested 0% prior to two years of

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

service, 20% after two years of service and an additional 20% for each year of service thereafter. The Bank makes annual contributions equal to the ESOP's debt service, less dividends on unallocated and allocated (if any) shares used to repay the loan. Dividends on allocated ESOP shares are charged to retained earnings. The ESOP shares are pledged as collateral on the loan. As the loan is repaid, shares are released from collateral and allocated to participating employees, based on the proportion of loan principal and interest repaid and compensation of the participants.

 

The Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released. To the extent the fair value of the ESOP shares released differs from the cost of the shares, such amount is charged to or credited to equity as additional paid-in capital.

 

Earnings (Loss) Per Share

 

Earnings (loss) per share are based upon the weighted-average shares outstanding. ESOP shares, which have been committed to be released, are considered outstanding.

 

Based on the accounting method used for the recording of the common stock transaction, including the funding of Best Hometown Bancorp, Inc., on June 29, 2016, together with the methods and computations for calculating the weighted-average number of related outstanding shares and loss per share for the three and six months ended June 30, 2016, the computation of loss per share would not provide meaningful information to readers of the accompanying condensed consolidated financial statements. Therefore, such presentation is not included for such periods.

 

Comprehensive Loss

 

Comprehensive loss consists of net loss, unrealized gains (losses) on available-for-sale securities, unrealized gains (losses) on defined benefit pension plan and unrealized gains (losses) on postretirement medical plan. Changes recognized in accumulated other comprehensive (loss), net of tax are as follows:

 

   Three Months Ended   Six Months Ended    
   June 30,   June 30,    
Components of Accumulated Other Comprehensive (Loss), Net of Tax  2016   2015   2016   2015   Description
   (In thousands)    
            
Unrealized gains and losses on investment securities available for sale:                       
                        
Unrealized gains (losses) on investment securities  $9   $(130)  $98   $(65)  Included in accumulated other comprehensive loss
    (4)   46    (34)   23   Tax effect
   $5   $(84)  $64   $(42)  Net of tax
                        
Amortization of defined benfit pension plan:  $29   $23   $56   $46   Included in net periodic cost (note 5)
Net loss   -    -    -    -   Tax effect
   $29   $23   $56   $46   Net of tax
                        
Amortization of postretirement medical plan:                       
Net loss  $2   $3   $4   $6   Included in net periodic cost (note 5)
Prior service cost   (2)   (2)   (4)   (4)  Included in net periodic cost (note 5)
    -    -    -    -   Tax effect
   $-   $1   $-   $2   Net of tax
                        
Total reclassifications out of accumulated other comprehensive (loss), net of tax  $34    (60)   120   $6    

 

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Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Recent Accounting Pronouncements

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718)-Improvements to Employee Share-Based Payment Accounting.” The provisions of ASU 2016-09 simplify several aspects for share-based payment transactions, including income tax consequences, forfeitures, statutory tax withholding requirements and classifications of the income tax effects of certain share-based payment transactions in the statement of cash flows. ASU 2016-09 eliminates equity treatment for tax benefits or deficiencies that result from differences between compensation costs recognized for GAAP purposes and the related tax deduction and require such differences be recognized as income tax expense. Since excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method will exclude the amount of excess tax benefits when calculating earnings per share. Under ASU 2016-09, forfeitures can be estimated and considered in the accrual of compensation expense, as in current practice, or accounted for as they occur. Excess tax benefits are now classified as operating activities and cash paid by an employer when directly withholding shares for tax-withholding purposes is classified as a financing activity. Since the Company qualifies as an emerging growth company, ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Bank is currently evaluating the impact of ASU 2016-09 on its condensed financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326).” The provisions of ASU 2016-13 was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 eliminate the probable initial recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the financial assets.

 

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.

 

Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.

 

Since the Company qualifies as an emerging growth company, ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Bank is currently evaluating the impact of ASU 2016-13 on its financial statements.

 

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Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Note 2. Investment Securities Available for Sale

 

Investment securities available for sale are summarized as follows:

 

   June 30, 2016 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Market 
   Cost   Gains   Losses   Value 
   (In thousands) 
Debt securities:                    
Agencies due in 2020   500    8    -    508 
MBS: Government-sponsored enterprise ("GSE") residential   18,187    17    (56)   18,148 
Total  $18,687   $25   $(56)  $18,656 

 

   December 31, 2015 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Market 
   Cost   Gains   Losses   Value 
   (In thousands) 
Debt securities:                    
Agencies due in 2019  $500   $1   $-   $501 
Agencies due in 2020   500    -    (6)   494 
MBS: GSE residential   10,353    -    (124)   10,229 
Total  $11,353   $1   $(130)  $11,224 

 

As of June 30, 2016 and December 31, 2015, investment securities with a carrying value of $508 and $995 were pledged for public deposits.

 

There were no investment securities sold during the three or six months ended June 30, 2016 or 2015.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Investment securities having a continuous unrealized loss position for less than twelve months and twelve months or longer at June 30, 2016 and December 31, 2015 are summarized as follows:

 

   Number   Less than 12 Months   12 Months or Longer   Total 
June 30,  of   Market   Unrealized   Market   Unrealized   Market   Unrealized 
2016  Positions   Value   loss   Value   loss   Value   loss 
   (Dollars in thousands) 
                             
Agencies   -   $-   $-   $-   $-   $-   $- 
MBS   21    8,882    30    4,789    26    13,671    56 
    21   $8,882   $30   $4,789   $26   $13,671   $56 

 

   Number   Less than 12 Months   12 Months or Longer   Total 
December 31,  of   Market   Unrealized   Market   Unrealized   Market   Unrealized 
2015  Positions   Value   loss   Value   loss   Value   loss 
   (Dollars in thousands) 
                             
Agencies   1   $494   $6   $-   $-   $494   $6 
MBS   21    6,974    69    3,255    55    10,229    124 
    22   $7,468   $75   $3,255   $55   $10,723   $130 

 

The unrealized losses on the investment securities were due to changes in market interest rates and not the credit quality of the issuer. The Company did not consider the unrealized losses on those securities to be other-than-temporarily impaired credit related losses at the above dates. Total fair value of these investment securities at June 30, 2016 and December 31, 2015, was $13,671 and $10,723, respectively, which is approximately 73% and 96%, respectively, of the Bank’s available for sale investments securities portfolio.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Note 3. Loans Receivable, Net

 

Loans receivable, net are summarized as follows:

 

   June 30,   December 31, 
   2016   2015 
   (In thousands) 
Real estate loans:          
One-to-four family, owner occupied  $50,177   $52,163 
One-to-four family, non-owner occupied   4,137    4,780 
Commercial and multi-family   15,846    14,876 
Construction and land   2,435    3,034 
Commercial business loans   881    713 
Consumer loans   688    623 
    74,164    76,189 
Allowance for losses   (1,224)   (1,249)
Loans in process   (669)   (559)
Deferred loan fees, net   (61)   (79)
Total  $72,210   $74,302 

 

The risk characteristics of each loan portfolio segment are as follows:

 

One-to-four family, owner occupied, including construction and land

 

One-to-four family, owner occupied loans and construction and land loans are underwritten based on the applicant’s employment and credit history and the appraised value of the property. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Land loans are secured primarily by unimproved land for future residential use. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

One-to-four family, non-owner occupied

 

One-to-four family, non-owner occupied loans carry greater inherent risks than one-to-four family, owner occupied loans, since the repayment ability of the borrower is generally reliant on the success of the income generated from the property.

 

Commercial and multi-family real estate

 

Commercial real estate loans are secured primarily by office buildings, churches and various income-producing properties. Multi-family real estate loans are generally secured by apartment complexes. Commercial and multi-family real estate loans are underwritten based on the economic viability of the property and creditworthiness of the borrower, with emphasis given to projected cash flow as a percentage of debt service requirements. These loans carry increased risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. Repayment of loans secured by income-producing properties depends on the successful operation of the real estate and the economy.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Commercial business

 

Commercial business loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial business loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis.

 

Commercial business loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation of the business for which an operating loan is utilized.

 

Consumer

 

Consumer loans include automobile, personal and other consumer loans. Potential credit risks include rapidly depreciable assets, such as automobiles, which could adversely affect the value of the collateral.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

The following presents by portfolio segment, the activity in the allowance for loan losses:

 

   Allowance for Loan Losses 
   Beginning   Provision for           Ending 
   Balance   Losses   Charge-offs   Recoveries   Balance 
Three Months Ended June 30, 2016:                         
Real estate loans:                         
One-to-four family, owner occupied  $753   $19   $(30)  $1   $743 
One-to-four family, non-owner occupied   74    (2)   -    1    73 
Commercial and multi-family   263    13    -    -    276 
Construction and land   43    (5)   -    -    38 
Commercial business loans   17    1    -    -    18 
Consumer loans   18    3    -    -    21 
Unallocated   84    (29)   -    -    55 
   $1,252   $-   $(30)  $2   $1,224 

 

   Allowance for Loan Losses 
   Beginning   Provision for           Ending 
   Balance   Losses   Charge-offs   Recoveries   Balance 
Three Months Ended June 30, 2015:                         
Real estate loans:                         
One-to-four family, owner occupied  $810   $(14)  $(1)  $-   $795 
One-to-four family, non-owner occupied   96    4    (7)   -    93 
Commercial and multi-family   98    55    -    -    153 
Construction and land   47    (14)   -    -    33 
Commercial business loans   12    1    -    -    13 
Consumer loans   17    (12)   -    1    6 
Unallocated   20    (20)   -    -    - 
   $1,100   $-   $(8)  $1   $1,093 

 

   Allowance for Loan Losses 
   Beginning   Provision for           Ending 
   Balance   Losses   Charge-offs   Recoveries   Balance 
Six Months Ended June 30, 2016:                         
Real estate loans:                         
One-to-four family, owner occupied  $771   $(1)  $(30)  $3   $743 
One-to-four family, non-owner occupied   82    (11)   -    2    73 
Commercial and multi-family   260    16    -    -    276 
Construction and land   47    (9)   -    -    38 
Commercial business loans   14    4    -    -    18 
Consumer loans   19    2    -    -    21 
Unallocated   56    (1)   -    -    55 
   $1,249   $-   $(30)  $5   $1,224 

 

   Allowance for Loan Losses 
   Beginning   Provision for           Ending 
   Balance   Losses   Charge-offs   Recoveries   Balance 
Six Months Ended June 30, 2015:                         
Real estate loans:                         
One-to-four family, owner occupied  $791   $4   $(1)  $1   $795 
One-to-four family, non-owner occupied   110    (12)   (7)   2    93 
Commercial and multi-family   87    66    -    -    153 
Construction and land   35    (2)   -    -    33 
Commercial business loans   9    4    -    -    13 
Consumer loans   9    (4)   -    1    6 
Unallocated   38    (38)   -    -    - 
   $1,079   $18   $(8)  $4   $1,093 

 

The Bank establishes the unallocated allowance for loan losses due to uncertainties that could affect management’s estimate of probable losses. The unallocated component of the

 

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Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

allowance for loan losses is maintained to cover probable and incurred credit losses inherent in the loan portfolio but not captured in the general component, such as historical loss experience data that may not precisely correspond to individual loan portfolio segments and to uncertainties in economic conditions.

 

The following presents by portfolio segment, the recorded investment in loans and impairment method:

 

   Allowance for Loan Losses   Loans 
   Individually   Collectively       Individually   Collectively     
   Evaluated   Evaluated       Evaluated   Evaluated     
   for Impairment   for Impairment   Total   for Impairment   for Impairment   Total 
   (In thousands) 
At June 30, 2016:                              
Real estate loans:                              
One-to-four family, owner occupied  $-   $743   $743   $1,697   $48,480   $50,177 
One-to-four family, non-owner occupied   -    73    73    82    4,055    4,137 
Commercial and multi-family   -    276    276    -    15,846    15,846 
Construction and land   -    38    38    -    2,435    2,435 
Commercial business loans   -    18    18    -    881    881 
Consumer loans   -    21    21    -    688    688 
Unallocated   -    55    55    -    -    - 
   $-   $1,224   $1,224   $1,779   $72,385   $74,164 

 

   Allowance for Loan Losses   Loans 
   Individually   Collectively       Individually   Collectively     
   Evaluated   Evaluated       Evaluated   Evaluated     
   for Impairment   for Impairment   Total   for Impairment   for Impairment   Total 
   (In thousands) 
At December 31, 2015:                              
Real estate loans:                              
One-to-four family, owner occupied  $-   $771   $771   $1,901   $50,262   $52,163 
One-to-four family, non-owner occupied   -    82    82    83    4,697    4,780 
Commercial and multi-family   -    260    260    -    14,876    14,876 
Construction and land   -    47    47    -    3,034    3,034 
Commercial business loans   -    14    14    -    713    713 
Consumer loans   -    19    19    -    623    623 
Unallocated   -    56    56    -    -    - 
   $-   $1,249   $1,249   $1,984   $74,205   $76,189 

 

The following tables present impaired loans and allowance for loan losses and nonperforming loans based on class level:

 

   Impaired Loans 
   With   With no             
   Allowance   Allowance       Unpaid   Allowance 
   for Loan   for Loan       Principal   for Loan 
   Losses   Losses   Total   Balance   Losses 
   (In thousands) 
At June 30, 2016:                         
Real estate loans:                         
One-to-four family, owner occupied  $-   $1,697   $1,697   $2,006   $- 
One-to-four family, non-owner occupied   -    82    82    105    - 
Commercial and multi-family   -    -    -    -    - 
Construction and land   -    -    -    -    - 
Commercial business loans   -    -    -    -    - 
Consumer loans   -    -    -    -    - 
   $-   $1,779   $1,779   $2,111   $- 

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

   Nonperforming Loans 
       Past Due 90   Accruing     
       Days and More   Troubled Debt     
   Nonaccrual   Still Accruing   Restructurings   Total 
   (In thousands) 
At June 30, 2016:                    
Real estate loans:                    
One-to-four family, owner occupied  $-   $-   $270   $270 
One-to-four family, non-owner occupied   -    -    -    - 
Commercial and multi-family   -    -    -    - 
Construction and land   -    -    -    - 
Commercial business loans   -    -    -    - 
Consumer loans   -    -    -    - 
   $-   $-   $270   $270 

 

   Impaired Loans 
   With   With no             
   Allowance   Allowance       Unpaid   Allowance 
   for Loan   for Loan       Principal   for Loan 
   Losses   Losses   Total   Balance   Losses 
   In Thousands) 
At December 31, 2015:                         
Real estate loans:                         
One-to-four family, owner occupied  $-   $1,901   $1,901   $2,180   $- 
One-to-four family, non-owner occupied   -    83    83    106    - 
Commercial and multi-family   -    -    -    -    - 
Construction and land   -    -    -    -    - 
Commercial business loans   -    -    -    -    - 
Consumer loans   -    -    -    -    - 
   $-   $1,984   $1,984   $2,286   $- 

 

   Nonperforming Loans 
       Past Due 90   Accruing     
       Days and More   Troubled Debt     
   Nonaccrual   Still Accruing   Restructurings   Total 
   (In thousands) 
At December 31, 2015:                    
Real estate loans:                    
One-to-four family, owner occupied  $-   $-   $488   $488 
One-to-four family, non-owner occupied   -    -    -    - 
Commercial and multi-family   -    -    -    - 
Construction and land   -    -    -    - 
Commercial business loans   -    -    -    - 
Consumer loans   -    1    -    1 
   $-   $1   $488   $489 

 

Impaired loans with identified losses have been reduced by partial charge-offs and are carried at their estimated net realizable value. The Bank believes no further allowance for loan losses were necessary at June 30, 2016 or December 31, 2015.

 

There were no nonaccrual loans at June 30, 2016 or December 31, 2015.

 

The average recorded investment in impaired loans for the three and six months ended June 30, 2016 and 2015 is as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
Real estate loans:                    
One-to-four family, owner occupied  $1,745    2,112   $1,692   $2,074 
One-to-four family, non-owner occupied   82    260    82    278 
Commercial and multi-family   -    -    -    - 
Construction and land   -    -    -    - 
Commercial business loans   -    -    -    - 
Consumer loans   -    -    -    - 
   $1,827   $2,372   $1,774   $2,352 

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

For the three and six months ended June 30, 2016 and 2015, gross interest income that would have been recorded had the impaired loans been current in accordance with their original terms was $29, $56, $36 and $73, respectively. Interest income recognized on such loans for the three and six months ended June 30, 2016 and 2015 was $29, $56, $32 and $62, respectively.

 

The Bank does not have any commitments to lend additional funds to borrowers with loans whose terms have been modified in TDRs or whose loans are on nonaccrual.

 

There were no loans modified as troubled debt restructurings during the three or six months ended June 30, 2016 or 2015.

 

Following is a summary of troubled debt restructurings at June 30, 2016 and December 31, 2015:

 

   Number of   Recorded 
   Contracts   Investment 
   (Dollars in thousands) 
At June 30, 2016:          
One-to-four family, owner occupied   3   $270 
           
At December 31, 2015:          
One-to-four family, owner occupied   4   $488 

 

At June 30, 2016, there were no residential real estate loans in the process of foreclosure.

 

The following table presents the Bank’s loan portfolio aging analysis:

 

   Days Past Due 
   30-59   60-89   90 or more   Current   Total 
   (In thousands) 
At June 30, 2016:                         
Real estate loans:                         
One-to-four family, owner occupied  $486   $41   $-   $49,650   $50,177 
One-to-four family, non-owner occupied   25    -    -    4,112    4,137 
Commercial and multi-family   -    -    -    15,846    15,846 
Construction and land   -    -    -    2,435    2,435 
Commercial business loans   -    -    -    881    881 
Consumer loans   2    -    -    686    688 
   $513   $41   $-   $73,610   $74,164 

 

   Days Past Due 
   30-59   60-89   90 or more   Current   Total 
   (In thousands) 
At December 31, 2015:                         
Real estate loans:                         
One-to-four family, owner occupied  $390   $104   $-   $51,669   $52,163 
One-to-four family, non-owner occupied   26    -    -    4,754    4,780 
Commercial and multi-family   -    -    -    14,876    14,876 
Construction and land   15    -    -    3,019    3,034 
Commercial business loans   -    -    -    713    713 
Consumer loans   2    -    1    620    623 
   $433   $104   $1   $75,651   $76,189 

 

The Bank classifies loans by risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, smaller dollar consumer loans are excluded from this grading process and are reflected in the Pass category. The delinquency trends of these consumer loans are monitored on a homogeneous basis.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

The Bank uses the following definitions for risk ratings:

 

The Pass asset quality rating encompasses assets that have generally performed as expected. With the exception of some smaller consumer and residential loans, these assets generally do not have delinquency. Loans assigned this rating include loans to borrowers possessing solid credit quality with acceptable risk.

 

The Special Mention asset quality rating encompasses assets that 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 loan. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation.

 

The Substandard asset quality rating encompasses assets that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a well-defined weakness based upon objective evidence; assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected; or the possibility that liquidation will not be timely. Loans categorized in this grade possess a well-defined credit weakness and the likelihood of repayment from the primary source is uncertain.  Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss.  Collateral coverage may be marginal.

 

Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as substandard.  In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

The Loss asset quality rating encompasses assets that are considered uncollectible and of such little value that their continuance as assets is not warranted. A loss classification does not mean that an asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be realized in the future.

 

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Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity:

 

   Credit Quality Indicator-Credit Risk Profile by Grade or Classification 
   Special                     
   Mention   Substandard   Doubtful   Loss   Pass   Total 
   (In thousands) 
At June 30, 2016:                              
Real estate loans:                              
One-to-four family, owner occupied  $416   $1,665   $-   $-   $48,096   $50,177 
One-to-four family, non-owner occupied   -    150    -    -    3,987    4,137 
Commercial and multi-family   -    -    -    -    15,846    15,846 
Construction and land   -    17    -    -    2,418    2,435 
Commercial business loans   -    -    -    -    881    881 
Consumer loans   -    6    -    -    682    688 
   $416   $1,838   $-   $-   $71,910   $74,164 

 

   Credit Quality Indicator-Credit Risk Profile by Grade or Classification 
   Special                     
   Mention   Substandard   Doubtful   Loss   Pass   Total 
   (In thousands) 
At December 31, 2015:                              
Real estate loans:                              
One-to-four family, owner occupied  $533   $1,793   $-   $-   $49,837   $52,163 
One-to-four family, non-owner occupied   93    83    -    -    4,604    4,780 
Commercial and multi-family   -    -    -    -    14,876    14,876 
Construction and land   3    -    -    -    3,031    3,034 
Commercial business loans   -    -    -    -    713    713 
Consumer loans   7    -    -    -    616    623 
   $636   $1,876   $-   $-   $73,677   $76,189 

 

Note 4.  Foreclosed Real Estate

 

   June 30,   December 31, 
   2016   2015 
   (In thousands) 
Foreclosed real estate-residential  $208   $667 

 

At June 30, 2016 and December 31, 2015, foreclosed real estate includes three and eight single-family dwellings, respectively.

 

Activity in foreclosed real estate is summarized as follows:

 

   Six Months Ended June 30, 
   2016   2015 
   (In thousands) 
Balance, beginning of period  $667   $365 
Foreclosures   -    25 
Write-down   (16)   - 
Proceeds from sale   (311)   (373)
Loans to facilitate sales   (122)   (24)
(Loss) gain on sale   (10)   112 
Balance, end of period  $208   $105 

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Following is a summary of operations from foreclosed real estate:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
   (In thousands) 
Loss (gain) on foreclosed real estate  $26   $(73)  $26   $(112)
Foreclosed real estate expenses, net   23    8    32    47 
   $49   $(65)  $58   $(65)

 

Note 5. Employee Benefits

 

Net periodic cost for the defined benefit pension plan and postretirement medical plan included the following components:

 

   Defined Benefit   Postretirement 
   Pension Plan   Medical Plan 
   Three Months Ended June 30,   Three Months Ended June 30, 
   2016   2015   2016   2015 
   (In thousands) 
Service cost  $-   $-   $-   $- 
Interest cost   35    37    10    10 
Expected return on plan assets   (34)   (37)   -    - 
Amortization:                    
Unrecognized net loss   29    23    2    3 
Unrecognized prior service cost   -    -    (2)   (2)
Net periodic cost  $30   $23   $10   $11 

 

   Defined Benefit   Postretirement 
   Pension Plan   Medical Plan 
   Six Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
   (In thousands) 
Service cost  $-   $-   $-   $- 
Interest cost   71    74    20    20 
Expected return on plan assets   (68)   (74)   -    - 
Amortization:                    
Unrecognized net loss   56    46    4    6 
Unrecognized prior service cost   -    -    (4)   (4)
Net periodic cost  $59   $46   $20   $22 

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

The following table summarizes plan assets for the defined benefit pension plan, measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015, segregated by the level of the inputs (as defined in Note 8) within the hierarchy used to measure fair value:

 

               Total 
Assets  Level 1   Level 2   Level 3   Fair Value 
   (In thousands) 
June 30, 2016:                    
Pooled separate accounts  $-   $2,447   $-   $2,447 

 

               Total 
Assets  Level 1   Level 2   Level 3   Fair Value 
   (In thousands) 
December 31, 2015:                    
Pooled separate accounts  $-   $2,307   $-   $2,307 

 

During the six months ended June 30, 2016, benefits paid, employer contributions and the actual return on plan assets for the defined benefit pension plan were $136, $172 $104, respectively.

 

The Bank’s defined benefit pension plan target allocations and weighted-average allocations by asset category are as follows:

 

   Target         
   Allocation   June 30,   December 31, 
   2016   2016   2015 
Pooled separate accounts:               
Equity   30%-40%    38%   37%
Debt   60%-70%    62%   63%

  

The Bank’s investment strategy is to maintain a diversified investment portfolio. Rebalancing occurs on a periodic basis to maintain the target allocations, but normal market activity may result in deviations. As a result of the percentage of equities held, actual return of plan assets for any period may fluctuate significantly due to changes in the stock market.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Accumulated other comprehensive loss, net for the benefit plans are summarized as follows:

 

   Defined Benefit   Postretirement 
   Pension Plan   Medical Plan 
   Three Months Ended June 30,   Three Months Ended June 30, 
   2016   2015   2016   2015 
   (In thousands) 
Unrecognized prior service cost  $-   $-   $2   $3 
Unrecognized net loss   29    23    (2)   (2)
    29    23    -    1 
Tax effect   -    -    -    - 
Unrecognized loss, net of taxes  $29   $23   $-   $1 

 

   Defined Benefit   Postretirement 
   Pension Plan   Medical Plan 
   Six Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
   (In thousands) 
Unrecognized prior service cost  $-   $-   $4   $6 
Unrecognized net loss   56    46    (4)   (4)
    56    46    -    2 
Tax effect   -    -    -    - 
Unrecognized loss, net of taxes  $56   $46   $-   $2 

 

As part of the Company’s stock offering, shares were purchased by the ESOP with a loan from the Company. The ESOP purchased 66,096 shares of the Company’s common stock in the offering completed on June 29, 2016. Equal annual payments of principal and interest over a term of twenty years at an interest rate of 3.50% will be made. The loan is secured by the shares of common stock.

 

ESOP shares at June 30, 2016 are summarized as follows:

 

Allocated   - 
Committed-to-be-allocated   36 
Unallocated   66,060 
Total ESOP shares   66,096 

 

The aggregate fair value of the 66,060 unallocated shares was $727,000 based on the closing price of common stock of $11.00 per share on June 30, 2016.

 

In the event the ESOP is unable to satisfy the obligations to repurchase the shares held by each beneficiary upon the beneficiary’s termination or retirement, the Company is obligated to repurchase the shares.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Note 6. Equity and Regulatory Capital

 

The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can result in 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, the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

 

The Bank's capital amounts and classifications are also subject to judgments by the regulators about components, risk-weightings and other factors. At June 30, 2016 and December 31, 2015, the Bank met all capital adequacy requirements. The Bank is also subject to the regulatory framework for prompt corrective action. At June 30, 2016 and December 31, 2015, the most recent notification from the regulatory agencies categorized the Bank as well-capitalized. There are no conditions or events since the dates of the aforementioned notifications which management believes have changed the Bank’s category.

 

Provisions of the Dodd-Frank Act increased the capital requirements of financial institutions. The rules include minimum risk-based capital and leverage ratios, which became effective January 1, 2015, and refine the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements applicable to the Bank are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of 6%; (iii) a total capital to risk-weighted assets ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios, and resulting in the following ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital to risk-weighted assets ratio of 8.5% and (iii) a total capital to risk-weighted assets ratio of 10.5%. The Tier 1 leverage ratio remains unchanged at 4%. The new capital conservation buffer requirement was added in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to further limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

The Bank's actual and required capital amounts and ratios at June 30, 2016 are as follows:

 

           Minimum Required 
           for Capital   to be "Well 
   Actual   Adequacy   Capitalized" 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in Thousands) 
Stockholders' equity  $11,035                          
Unrealized loss on securities AFS, net   21                          
Unrecognized loss, net - benefit plans   1,786                          
Tangible capital   12,842                          
General valuation allowance - limited   662                          
                               
Total capital to risk-weighted assets  $13,504    25.7%  $4,197    8.0%  $5,246    10.0%
                               
Tier 1 capital to risk-weighted assets  $12,842    24.5%  $3,148    6.0%  $4,197    8.0%
                               
Common equity Tier 1 capital to risk-weighted assets  $12,842    24.5%  $2,361    4.5%  $3,410    6.5%
                               
Tier 1 capital to total assets  $12,842    12.8%  $4,003    4.0%  $5,004    5.0%

 

The Bank's actual and required capital amounts and ratios at December 31, 2015 are as follows:

 

           Minimum Required 
           for Capital   to be "Well 
   Actual   Adequacy   Capitalized" 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in Thousands) 
Equity  $6,862                          
Unrealized loss on securities AFS, net   85                          
Unrecognized loss, net - benefit plans   1,842                          
Tangible capital   8,789                          
General valuation allowance - limited   668                          
                               
Total capital to risk-weighted assets  $9,457    17.9%  $4,231    8.0%  $5,289    10.0%
                               
Tier 1 capital to risk-weighted assets  $8,789    16.6%  $3,173    6.0%  $4,231    8.0%
                               
Common equity Tier 1 capital to risk-weighted assets  $8,789    16.6%  $2,380    4.5%  $3,438    6.5%
                               
Tier 1 capital to total assets  $8,789    9.0%  $3,913    4.0%  $4,891    5.0%

 

The general valuation allowance is limited to 1.25% of risk-weighted assets.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Note 7. Financial Instruments with Off-Balance Sheet Risk

 

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount and related accrued interest receivable of those instruments.

 

The Bank minimizes this risk by evaluating each borrower's creditworthiness on a case-by-case basis. Collateral held by the Bank consists of a first or second mortgage on the borrower's property. The amount of collateral obtained is based upon an appraisal of the property.

 

Commitments to originate mortgage loans are legally binding agreements to lend to the Bank's customers. Commitments at June 30, 2016 and December 31, 2015 to originate balloon and fixed-rate loans (including related loans in process) were $6,433 and $1,417, expiring in 180 days or less. Interest rates for commitments to fund balloon and fixed-rate loans ranged from 1.99% to 5.75% and 1.99% to 6.00% at June 30, 2016 and December 31, 2015, respectively.

 

During July 2015, the Bank entered into an advance transaction with the Federal Home Loan Bank of Chicago (“FHLBC”) to borrow $5,000 on July 18, 2016. One advance of $3,000 will carry an interest rate of 1.84% and mature on July 18, 2018. The other advance of $2,000 will carry an interest rate of 2.21% and mature on July 18, 2019.

 

In addition, the Bank has an unused open line of credit with TIB-The Independent BankersBank of $2.5 million.

 

Note 8. Fair Value Measurements and Fair Value of Financial Instruments

 

Fair Value Measurements

 

The fair value hierarchy prioritizes the assumptions that market participants would use in pricing the assets or liabilities (the “inputs”) into three broad levels.

 

The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets and liabilities and the lowest priority (Level 3) to unobservable inputs in which little, if any, market activity exists, requiring entities to develop their own assumptions and data.

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in market areas that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Valuation Techniques

 

Available for sale securities are carried at fair value utilizing Level 1 and Level 2 inputs. For debt securities, the Association obtains fair value measurements from an independent pricing service. Debt securities include Federal agency obligations and MBSs. The fair value measurements consider observable data that may include dealer quotes, live trading levels, trade execution data, cash flows, market consensus prepayment speeds, market spreads, credit information and the U.S. Treasury yield curve.

 

Impaired loans are carried at fair value utilizing Level 3 inputs, consisting of appraisals of underlying collateral (collateral method) adjusted for selling costs (unobservable input), which generally approximate 6% of the sales prices and discounted cash flow analysis. See note 3.

 

Assets Measured at Fair Value on a Recurring Basis

 

The following table summarizes financial assets measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015, segregated by the level of the inputs within the hierarchy used to measure fair value:

 

               Total 
Assets  Level 1   Level 2   Level 3   Fair Value 
   (In thousands) 
June 30, 2016:                    
Agencies  $-   $508   $-   $508 
MBS: GSE residential   -    18,148    -    18,148 
   $-   $18,656   $-   $18,656 
                     
December 31, 2015:                    
Agencies  $-   $995   $-   $995 
MBS: GSE residential   -    10,229    -    10,229 
   $-   $11,224   $-   $11,224 

 

There were no transfers between Level 1 and Level 2 categorizations for the years presented.

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

Assets measured at fair value on a non-recurring basis include impaired loans. At June 30, 2016 and December 31, 2015, impaired loans of $33 and $281, respectively, were adjusted to fair value utilizing Level 3 inputs. The impaired loans are collateral dependent. Fair value adjustments, consisting of charge-offs, on impaired loans during the three and six months ended June 30, 2016 and year ended December 31, 2015 amounted to $30, $30 and $117, respectively.

 

Nonfinancial assets measured at fair value on a nonrecurring basis include foreclosed real estate. Foreclosed real estate is initially recorded at fair value utilizing Level 3 units based on observable market data less costs to sell when acquired, establishing a new costs basis. If it is determined that fair value declines subsequent to foreclosure, an allowance for losses is recorded through noninterest expense. At June 30, 2016 and December 31, 2015, foreclosed real estate of $130 and $0, respecitvely, were adjusted to fair value utilizing Level 3 inputs. Fair value adjustments on foreclosed real estate during the three and six months ended June 30, 2016 and year ended December 31, 2015 amounted to $16, $16 and $0, respectively. See Note 4.

 

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Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

Fair Value of Financial Instruments

 

Fair values of financial instruments have been estimated by the Company based on available market information with the assistance of an independent consultant:

 

   Carrying   Fair   Fair Value Measurements Using 
   Amount   Value   Level 1   Level 2   Level 3 
   (In thousands) 
June 30, 2016:                         
Cash and cash equivalents  $12,979   $12,979   $12,979   $-   $- 
Securities available for sale   18,656    18,656    -    18,656    - 
Stock in FHLBC   837    837    -    837    - 
Loans receivable, net   72,210    74,172    -    -    74,172 
Accrued interest receivable   304    304    -    304    - 
Deposits   85,686    86,222    22,888    63,334    - 
Advances from FHLBC   6,000    6,098    -    6,098    - 
Accrued interest payable  $36   $36   $-   $36   $- 
                          
December 31, 2015:                         
Cash and cash equivalents  $9,100   $9,100   $9,100   $-   $- 
Securities available for sale   11,224    11,224    -    11,224    - 
Stock in FHLBC   837    837    -    837    - 
Loans receivable, net   74,302    76,945    -    -    76,945 
Accrued interest receivable   296    296    -    296    - 
Deposits   80,013    80,196    20,785    59,411    - 
Advances from FHLBC   9,000    9,201    -    9,201    - 
Accrued interest payable  $36   $36   $-   $34   $- 

 

The following methods and assumptions were used in estimating the fair values shown above:

 

·Cash and cash equivalents are valued at their carrying amounts due to the relatively short period to maturity of the instruments.
·Stock in FHLBC is valued at cost, which represents redemption value and approximates fair value.
·Fair values are computed for each loan category using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
·The carrying amounts of accrued interest receivable and accrued interest payable approximate fair value.
·Deposits with no defined maturities, such as checking accounts, savings accounts and money market deposit accounts are, by definition, equal to the amount payable on demand at the balance sheet date.
·Advances from the FHLBC, are valued at current market interest rates of FHLBC advances.
·The fair values of certificate accounts are computed using interest rates currently being offered to deposit customers.

 

Off-balance sheet assets include the commitments to extend credit for which fair values were estimated based on interest rates and fees currently charged for similar transactions. Due to the short-term nature of the outstanding commitments, the fair values of fees on those commitments approximates the amount collected and the Company has not assigned a value to such instruments for purposes of this disclosure.

 

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Best Hometown Bancorp, Inc.

 

Notes to Condensed Consolidated Financial Statements

June 30, 2016 (Unaudited) and December 31, 2015

Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)

(Dollars in Thousands)

 

The methods and assumptions used in estimating fair values for investment securities indicated above under the caption, “Valuation Techniques.”

 

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Part 1. Financial Information

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s discussion and analysis of financial condition and results of operations at June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” 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 Form 10-Q, except as required by law.

 

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

 

·general economic conditions, either nationally or in our market areas, that are worse than expected;

 

·competition among depository and other financial institutions;

 

·changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

·adverse changes in the securities markets;

 

·changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

·our ability to enter new markets successfully and capitalize on growth opportunities;

 

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·changes in consumer spending, borrowing and savings habits;

 

·changes in accounting policies and practices, as may be adopted by the Securities and Exchange Commission, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board;

 

·changes in our organization, compensation and benefit plans;

 

·changes in our financial condition or results of operations that reduce capital; and

 

·changes in the financial condition or future prospects of issuers of securities that we own.

 

Additional factors that may affect our results are discussed in Best Hometown Bancorp, Inc.’s Prospectus dated May 13, 2016 as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 24, 2016, including under the section titled “Risk Factors”. These factors and the other factors listed above should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.

 

Overview

 

In conjunction with the completion of the conversion from a mutual to stock institution, the Bank changed its name to Best Hometown Bank on June 29, 2016. We conduct our operations from our main office in Collinsville, Illinois and our full-service branch office in Maryville, Illinois. Our primary deposit market includes the areas surrounding our banking offices in Collinsville and Maryville, Illinois. Our primary lending market is Madison and St. Clair Counties, Illinois and, to a lesser extent, St. Louis County, Missouri.

 

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in loans. Our primary lending activity includes one- to four-family residential real estate loans, including non-owner occupied one- to four-family real estate loans, commercial and multi-family real estate loans and construction and land loans. To a lesser extent, we also make commercial business loans and consumer loans, including home equity loans and lines of credit. At June 30, 2016, $50.2 million, or 67.7% of our total loan portfolio was comprised of owner occupied one- to four-family real estate loans, and $15.8 million, or 21.4% of our total loan portfolio, was comprised of commercial and multi-family real estate loans. Our commercial and multi-family real estate loan portfolio has grown $12.1 million from $3.7 million at December 31, 2013 to $15.8 million at June 30, 2016.

 

We also invest in securities, which at June 30, 2016, consisted of securities issued by U.S. government agencies and U.S. government-sponsored enterprises.

 

We offer a variety of deposit accounts, including interest-bearing and non-interest bearing checking accounts, savings and money market accounts and certificates of deposit. We have recently expanded the products we offer our customers, including online banking, remote deposit capture and ATM cards and debit cards. We are also in the process of adding mobile banking.

 

We utilize advances from the FHLB – Chicago to provide an additional source of funds.

 

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In 2015, we began offering brokerage services to our customers through a networking arrangement with a registered broker-dealer.

 

Critical Accounting Policies

 

We consider the accounting policies discussed below to be our 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.

 

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our consolidated financial statements may not be comparable to companies that comply with such new or revised accounting standards.

 

The following represents our critical accounting policies:

 

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover probable credit losses in the loan portfolio at the consolidated balance sheet dates. The allowance is established through the provision for losses on loans which is charged against operations. 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. The specific component is for 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 present value of expected future cash flows or fair value of the collateral is less than the loan’s carrying value, a charge to operations is recorded for the difference. The general component, which is for loans reviewed collectively, is determined by segregating the remaining loans by type of loan. We also analyze historical loss experience for the past two years 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. These qualitative factors include the existence and effect of any concentrations of credit and changes in the level of such concentrations, changes in national, regional and local economic conditions that affect the collectability of the loan portfolio, changes in levels or trends in charge-offs and recoveries, changes in the volume and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or loss, changes in the size and composition of the loan portfolio and terms of loans, changes in lending policies and procedures, risk selection and underwriting standards, changes in the experience, ability and depth of lending management and other relevant staff, quality of loan review and

 

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board of directors oversight, changes in the value of underlying collateral for collateral-dependent loans, and the effect of other external factors, trends or uncertainties that could affect management’s estimate of probable losses, such as competition and legal and regulatory requirements. 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.

 

Foreclosed Real Estate. Real estate acquired through foreclosure or by deed in lieu of foreclosure is recorded at fair value less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new appraisal, which is obtained as soon as practicable, typically after the foreclosure process is completed. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

 

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Bank estimates the fair value of a financial instrument and any related asset impairment using several valuation methods. Where financial instruments are actively traded, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Bank estimates fair value. These estimates are subjective in nature and imprecision can impact the resulting fair value. For further information related to the fair values measured at each level of the fair value hierarchy and the methodology utilized by the Bank, see Note 8 of Notes to Financial Statements, “Fair Value Measurements and Fair Value of Financial Instruments.”

 

Defined Benefit Pension and Postretirement Medical Plans. Our defined benefit pension and postretirement medical plan net obligations are measured using several assumptions such as the discount rate, expected rate of return on plan assets, mortality rates and healthcare cost trend rate. We evaluate these assumptions with our actuarial consultants and select assumptions that we believe reflect the economics underlying our pension and post-retirement net obligations. Any changes in the assumptions could have a material impact on our reported results of operations.

 

Income Tax Expense. Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations. A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carryback and carryforward periods, including consideration of available tax planning strategies. Tax related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the views of legal counsel and other advisors, experience of the Bank or other enterprises in similar matters, if any, and management’s intended response to any assessment.

 

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Comparison of Financial Condition at June 30, 2016 and December 31, 2015

 

Summary of Selected Balance Sheet Data.

 

   June 30,   December 31,   Increase     
   2016   2015   (Decrease)   % Change 
   (Dollars in thousands) 
Total assets  $107,300   $98,656   $8,644    8.8%
Cash and cash equivalents   12,979    9,100    3,879    42.6 
Investment securities   18,656    11,224    7,432    66.2 
Stock in Federal Home Loan Bank of Chicago ("FHLB - Chicago")   837    837    -    0.0 
Loans receivable, net   72,210    74,302    (2,092)   (2.8)
Premises and equipment, net   1,974    1,881    93    4.9 
Foreclosed real estate held for sale, net   208    667    (459)   (68.8)
Other assets (1)   436    645    (209)   (32.4)
Deposits   85,686    80,013    5,673    7.1 
Advances from FHLB – Chicago   6,000    9,000    (3,000)   (33.3)
Accrued defined benefit pension plan   1,296    1,464    (168)   (11.5)
Accrued postretirement medical plan   985    985    -    0.0 
Other liabilities   454    332    122    36.7 
Stockholders' equity   12,879    6,862    6,017    87.7 

 

 

(1) Includes accrued interest receivable, deferred tax asset and other assets.

 

Comparison of Financial Condition at June 30, 2016 and December 31, 2015

 

Total Assets. Total assets increased $8.6 million, or 8.8%, to $107.3 million at June 30, 2016 from $98.7 million at December 31, 2015. The increase in total assets was due primarily to the net proceeds from sale of common stock which were temporarily invested in cash and cash equivalents and purchases of investment securities, partially offset by a decrease in loans and foreclosed real estate. As part of our business strategy, we intend to increase our emphasis on short-term commercial and multi-family real estate loans and, to a lesser extent, increase our commercial business loans and consumer loans.

 

Loans Receivable, Net. Net loans decreased $2.1 million, or 2.8%, to $72.2 million at June 30, 2016 from $74.3 million at December 31, 2015. The decrease in loans was due primarily to repayments exceeding originations for one-to-four family, owner -occupied loans of $2.0 million. There were modest changes in the other loan segments.

 

Investment Securities Available for Sale. At June 30, 2016 and December 31, 2015, all investment securities were classified as available for sale and included primarily mortgage-backed securities. Investment securities increased $7.4 million, or 66.2%, to $18.7 million at June 30, 2016 due to purchase of mortgage-backed securities, partially offset by principal collections on mortgage-backed securities and calls of investment securities. The purchases of mortgage-backed securities were made to increase the yield on total interest-earning assets.

 

Cash and Cash Equivalents. Cash and cash equivalents increased $3.9 million, or 42.6%, to $13.0 million at June 30, 2016 from $9.1 million at December 31, 2015.

 

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Foreclosed Real Estate Held for Sale, Net. Foreclosed real estate held for sale decreased $459,000, or 68.8%, to $208,000 at June 30, 2016 from $667,000 at December 31, 2015. The decrease was due primarily to the sale of several properties.

 

Deposits. Deposits increased $5.7 million, or 7.1%, to $85.7 million at June 30, 2016 from $80.0 million at December 31, 2015. The majority of the increase in deposits was due to the Bank attracting primarily 4 and 5-year certificates of deposit to improve its interest rate risk position. Certificates of deposit increased $3.6 million to $62.8 million at June 30, 2016 from $59.2 million at December 31, 2015. Core deposits, which include non-interest-bearing checking, interest-bearing checking, savings and money market accounts, increased $2.1 million, or 10.1%, to $22.9 million at June 30 2016 from $20.8 million at December 31, 2015. The increase was due primarily to new interest-bearing checking and money market accounts. We intend to increase our core deposits, in particular, checking and money market accounts, through our existing and new commercial loan customers and aggressive marketing efforts.

 

Advances from FHLB – Chicago. At December 31, 2015, we had $9.0 million of FHLB – Chicago advances with an average cost of 4.47%. We intend, subject to market conditions, to replace our higher-cost FHLB – Chicago advances as they mature with lower-cost FHLB – Chicago advances and core deposits. In January 2016, we repaid a matured $3.0 million FHLB – Chicago advance with a cost of 3.90%, using funds from cash and cash equivalents. Advances from FHLB – Chicago amounted to $6.0 million at June 30, 2016. During July 2016, we refinanced a maturing $5.0 million FHLB – Chicago advance, with an interest rate of 4.62% with a $5.0 million of FHLB – Chicago advances costing approximately 1.99%.

 

Stockholders’ Equity. Stockholders’ equity increased to $12.9 million at June 30, 2016 from $6.9 million at December 31, 2015, primarily as a result of the completion of the mutual-to-stock conversion and resulting proceeds from sale of common stock of $6.2 million and decrease in accumulated other comprehensive losses, partially offset by a net loss of $286,000 for the six months ended June 30, 2016.

 

Comparison of Operating Results for the Three Months Ended June 30, 2016 and 2015

 

Net Loss. We had a net loss of $153,000 for the three months ended June 30, 2016, compared to a net loss of $111,000 for the three months ended June 30, 2015. Our net loss for the 2016 period was higher due primarily to higher noninterest expense.

 

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Net Interest Income.

 

   Three Months Ended June 30,   Increase     
   2016   2015   (Decrease)   % Change 
   (Dollars in thousands)     
Interest income:                    
Loans receivable  $806   $764   $42    5.5%
Investment securities   52    50    2    4.0 
Other interest - earning assets   11    5    6    120.0 
Total interest income   869    819    50    6.1 
                     
Interest expense:                    
Checking accounts   7    -    7    NM 
Savings accounts   2    1    1    100.0 
Money market account   1    2    (1)   (50.0)
Certificates of deposit   247    168    79    47.0 
Total deposits   257    171    86    50.3 
Borrowings   71    101    (30)   (29.7)
Total interest expense   328    272    56    20.6 
                     
Net interest income  $541   $547   $(6)   (1.1)%

 

 

NM Not meaningful.

 

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Summary of Average Yields, Average Rates and Average Balances.

 

Average Yields and Rates

 

   Three Months Ended June 30,   Increase 
   2016   2015   (Decrease) 
             
Loans receivable   4.42%   4.59%   (0.17)%
Investment securities   1.66    1.42    0.24 
Other interest - earning assets   0.66    0.31    0.35 
                
Total interest-earning assets   3.77    3.76    0.01 
                
Checking accounts   1.07    -    1.07 
Savings accounts   0.05    0.05    - 
Money market deposit accounts   0.12    0.11    0.01 
Certificates of deposit   1.61    1.24    0.37 
Total deposits   1.30    0.98    0.32 
Borrowings   4.64    4.43    0.21 
                
Total interest-bearing liabilities   1.54    1.37    0.17 
                
Net interest rate spread   2.23    2.39    (0.16)
Net interest margin   2.35%   2.51%   (0.16)%

 

Average Balances

 

   Three Months Ended June 30,   Increase     
   2016   2015   (Decrease)   % Change 
   (Dollars in thousands)     
Loans receivable  $72,879   $66,622   $6,257    9.4%
Investment securities   12,550    14,074    (1,524)   (10.8)
Other interest - earning assets   6,664    6,521    143    2.2 
                     
Total interest-earning assets   92,093    87,217    4,876    5.6 
                     
Checking accounts   2,624    12    2,612    21,766.7 
Savings accounts   8,071    8,559    (488)   (5.7)
Money market accounts   6,906    7,192    (286)   (4.0)
Certificates of deposit   61,328    54,293    7,035    13.0 
Total interest-bearing deposits   78,929    70,056    8,873    12.7 
Borrowings   6,122    9,111    (2,989)   (32.8)
                     
Total interest-bearing liabilities   85,051    79,167    5,884    7.4 
                     
Net interest-earning assets  $7,042   $8,050   $(1,008)   (12.5)%

 

Interest Income. Interest income increased $50,000, or 6.1%, to $869,000 for the three months ended June 30, 2016 from $819,000 for the three months ended June 30, 2015. The increase in interest income is due principally to a higher average balance of loans, partially offset by a lower average yield on loans.

 

Interest Expense. Interest expense increased $56,000, or 20.6%, to $328,000 for the three months ended June 30, 2016 from $272,000 for the three months ended June 30, 2015 as a result of the Bank’s marketing efforts to attract new deposit customers. The average balance of interest-bearing liabilities increased to $85.1 million for the 2016 quarter from $79.2 million for the 2015 quarter.

 

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Net Interest Income. Net interest income decreased $6,000, or 1.1%, to $541,000 for the three months ended June 30, 2016 from $547,000 for the three months ended June 30, 2015. The decrease in net interest income was mostly attributable to a lower net interest rate spread.

 

The average balance of loans increased $6.3 million, or 9.4%, to $72.9 million for the quarter ended June 30, 2016 from $66.6 million for the quarter ended June 30, 2015. The average yield on loans decreased 17 basis points to 4.42% for the 2016 period from 4.59% for the 2015 period. The decrease in average yield was due to lower market interest rates.

 

The average balance of investment securities decreased $1.5 million, or 10.8%, to $12.6 million for the quarter ended June 30, 2016 from $14.1 million for the quarter ended June 30, 2015. The average yield on investment securities increased 24 basis points to 1.66% for the 2016 quarter from 1.42% for the 2015 quarter.

 

The average balance of deposits increased $8.9 million, or 12.7%, to $78.9 million for the three months ended June 30, 2016 from $70.0 million for the three months ended June 30, 2015. In addition, the average cost of deposits increased 32 basis points to 1.30% for the 2016 quarter from 0.98% for the 2015 quarter. The increase in the average balance and average rate was primarily attributable to an increase in certificates of deposit accounts.

 

The average balance of borrowings decreased $3.0 million, or 32.8%, to $6.1 million for the three months ended June 30, 2016 from $9.1 million for the three months ended June 30, 2015. The decrease was due to the maturity of a $3.0 million advance from the FHLB in January 2016.

 

Net interest-earning assets decreased to $7.0 million for the three months ended June 30, 2016 from $8.1 million for the three months ended June 30, 2015. This decrease is due primarily to the introduction of interest-bearing checking accounts.

 

The net interest rate spread decreased 16 points to 2.23% for the three months ended June 30, 2016 from 2.39% for the second quarter of 2015. Our average yield on interest-earning assets increased 1 basis point while the average cost of interest-bearing liabilities increased 17 basis points.

 

Provision for Loan Losses. There was no provision for loan losses for the three months ended June 30, 2016 or 2015. The Bank maintains an allowance for loan losses at a level necessary to absorb management’s best estimate of probable losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. Management also reviews individual loans for which full collectivity may not be reasonably assured and considers, among other matters, the estimated fair value of underlying collateral. This evaluation is ongoing and results in variations in the provision for loan losses.

 

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Summary of Noninterest Income.

 

   Three Months Ended June 30,   Increase     
   2016   2015   (Decrease)   % Change 
   (Dollars in thousands)     
Noninterest income:                    
Loan service charges  $4   $3   $1    33.3%
  Other   22    21    1    4.8 
Total noninterest income  $26   $24   $2    8.3%

 

Noninterest Income. Noninterest income increased $2,000, or 8.3%, to $26,000 for the three months ended June 30, 2016 from $24,000 for the three months ended June 30, 2015. The increase is due primarily to higher loan service charges and service charge income on deposit accounts.

 

Summary of Noninterest Expense.

 

   Three Months Ended June 30,   Increase     
   2016   2015   (Decrease)   % Change 
   (Dollars in thousands)     
Noninterest expense:                    
Compensation and benefits  $333   $386   $(53)   (13.7)%
Occupancy expense   56    57    (1)   (1.8)
Equipment expense   37    38    (1)   (2.6)
Data processing   52    50    2    4.0 
FDIC premium expense   21    47    (26)   (55.3)
Professional services   94    77    17    22.1 
Insurance costs   8    12    (4)   (33.3)
Advertising   17    16    1    6.3 
Supplies   10    12    (2)   (16.7)
Operations from foreclosed real estate   49    (65)   114    (175.4)
Other   43    52    (9)   (17.3)
Total noninterest expense  $720   $682   $38    5.6%

 

Noninterest Expense. Noninterest expense increased $38,000, or 5.6%, to $720,000 for the three months ended June 30, 2016 from $682,000 for the three months ended June 30, 2015. The increase was due primarily to the absence of gains from sale of foreclosed real estate recognized in the 2015 quarter, partially offset by decreases in compensation and FDIC premium expense.

 

During the three months ended June 30, 2015, we recognized $73,000 in net gains on sale of foreclosed real estate versus $26,000 in net losses on sale of foreclosed real estate in the 2016 quarter. In addition, net expenses on foreclosed real estate were $23,000 for the 2016 quarter versus $8,000 in the 2015 quarter.

 

FDIC premium expense decreased substantially as a result of a lower assessment rate due to our improved risk category. Such expenses were $21,000 for the quarter ended June 30, 2016 versus $47,000 for the 2015 quarter.

 

Compensation and benefits decreased $53,000, or 13.7%, to $333,000 for the three months ended June 30, 2016 from $386,000 for the three months ended June 30, 2015 due primarily to lower salary expenses, partially offset by a higher defined benefit pension plan expense.

 

We expect our noninterest expenses to increase because of costs associated with operating as a public company and increased compensation costs related to the Bank’s ESOP and possible

 

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implementation of one or more stock-based compensation benefit plans, if approved by our stockholders.

 

Income Tax Expense. There was no provision for income taxes for the quarter ended June 30, 2016, or for the quarter ended June 30, 2015. A valuation allowance has been recorded against all components of the net deferred tax asset, except for the unrealized loss on available for sale securities, based upon our cumulative operating losses in recent years.

 

The deferred tax asset will only be recognized in future periods upon the Company’s ability to realize and maintain profitable results of operations.

 

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Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as we had no tax-exempt interest-earning assets during the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income.

 

   For The Three Months Ended June 30, 
   2016   2015 
   Average           Average         
   Outstanding       Yield/   Outstanding       Yield/ 
   Balance   Interest   Rate (1)   Balance   Interest   Rate (1) 
                         
Interest-earning assets:                              
Loans  $72,879   $806    4.42%  $66,622   $764    4.59%
Investment securities   12,550    52    1.66    14,074    50    1.42 
Other interest-earning assets   6,664    11    0.66    6,521    5    0.31 
Total interest-earning assets   92,093    869    3.77    87,217    819    3.76 
Non-interest-earning assets   6,913              6,846           
Total assets  $99,006   $         $94,063   $      
                               
Interest-bearing liabilities:                              
Checking accounts  $2,624   $7    1.07   $12   $-    - 
Savings accounts   8,071    1    0.05    8,559    1    0.05 
Money market accounts   6,906    2    0.12    7,192    2    0.11 
Certificates of deposit   61,328    247    1.61    54,293    168    1.24 
Total interest-bearing deposits   78,929    257    1.30    70,056    171    0.98 
Borrowings (2)   6,122    71    4.64    9,111    101    4.43 
Total interest-bearing liabilities   85,051    328    1.54    79,167    272    1.37 
Non-interest-bearing checking accounts   4,283              4,618           
Other non-interest-bearing liabilities   2,819              2,753           
Stockholders' equity   6,853              7,525           
Total liabilities and stockholders' equity  $99,006   $        $94,063   $      
                               
Net interest income       $541             $547      
Net interest rate spread (3)             2.23%             2.39%
Net interest-earning assets (4)  $7,042             $8,050           
Net interest margin (5)             2.35%             2.51%
Average interest-earning assets to average interest-bearing liabilities             108.28%             110.17%

 

 

(1) Computed on an annualized basis.

(2) Consists entirely of advances from the FHLB-Chicago.

(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the rate of average interest-bearing liabilities.

(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5) Net interest margin represents net interest income divided by average total interest-earning assets.

 

Comparison of Operating Results for the Six Months Ended June 30, 2016 and 2015

 

Net Loss. We had a net loss of $286,000 for the six months ended June 30, 2016, compared to a net loss of $279,000 for the six months ended June 30, 2015. Our net loss for the 2016 period was higher due primarily to higher noninterest expense, partially offset by higher net interest income, no provision for loan losses for the six months ended June 30, 2016, compared to $18,000 for the six months ended June 30, 2015, and modestly higher noninterest income.

 

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Net Interest Income.

 

   Six Months Ended June 30,   Increase     
   2016   2015   (Decrease)   % Change 
   (Dollars in thousands)     
Interest income:                    
Loans receivable  $1,623   $1,523   $100    6.6%
Investment securities   98    96    2    2.1 
Other interest - earning assets   20    9    11    122.2 
Total interest income   1,741    1,628    113    6.9 
                     
Interest expense:                    
Checking accounts   10    -    10    NM 
Savings accounts   3    2    1    50.0 
Money market account   3    4    (1)   (25.0)
Certificates of deposit   479    349    130    37.2 
Total deposits   495    355    140    39.4 
Borrowings   142    200    (58)   (29.0)
Total interest expense   637    555    82    14.8 
                     
Net interest income  $1,104   $1,073   $31    2.9%

 

NM Not meaningful

 

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Summary of Average Yields, Average Rates and Average Balances.

 

Average Yields and Rates

 

   Six Months Ended June 30,   Increase 
   2016   2015   (Decrease) 
             
Loans receivable   4.46%   4.64%   (0.18)%
Investment securities   1.47    1.35    0.12 
Other interest - earning assets   0.56    0.26    0.30 
                
Total interest-earning assets   3.73    3.75    (0.02)
                
Checking accounts   0.68    -    0.68 
Savings accounts   0.07    0.05    0.02 
Money market deposit accounts   0.09    0.11    (0.02)
Certificates of deposit   1.55    1.29    0.26 
Total deposits   1.25    1.01    0.24 
Borrowings   4.65    4.44    0.21 
                
Total interest-bearing liabilities   1.49    1.40    0.09 
                
Net interest rate spread   2.24    2.35    (0.11)
Net interest margin   2.37%   2.47%   (0.10)%

 

Average Balances

 

   Six Months Ended June 30,   Increase     
   2016   2015   (Decrease)   % Change 
   (Dollars in thousands)     
Loans receivable  $72,739   $65,667   $7,072    10.8%
Investment securities   13,355    14,210    (855)   (6.0)
Other interest - earning assets   7,166    6,973    193    2.8 
                     
Total interest-earning assets   93,260    86,850    6,410    7.4 
                     
Checking accounts   2,930    -    2,930    NM 
Savings accounts   8,116    8,571    (455)   (5.3)
Money market accounts   6,813    7,262    (449)   (6.2)
Certificates of deposit   61,614    54,201    7,413    13.7 
Total interest-bearing deposits   79,473    70,034    9,439    13.5 
Borrowings   6,103    9,000    (2,897)   (32.2)
                     
Total interest-bearing liabilities   85,576    79,034    6,542    8.3 
                     
Net interest-earning assets  $7,684   $7,816   $(132)   (1.7)%
                     
NM Not meaningful.                    

 

Interest Income. Interest income increased $113,000, or 6.9%, to $1.7 million for the six months ended June 30, 2016 from $1.6 million for the six months ended June 30, 2015. The increase in interest income is due principally to a higher average balance of loans, partially offset by a lower average yield on loans.

 

Interest Expense. Interest expense increased $82,000, or 14.8%, to $637,000 for the six months ended June 30, 2016 from $555,000 for the six months ended June 30, 2015 as a result of the Bank’s marketing efforts to attract new deposit customers. The average balance on interest-bearing liabilities increased to $85.6 million for the six months ended June 30, 2016 from $79.0 million for the comparable 2015 period.

 

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Net Interest Income. Net interest income increased $31,000, or 2.9%, to $1.1 million for the six months ended June 30, 2016 from $1.1 million for the six months ended June 30, 2015. The increase in net interest income was most attributable to a growth in loans.

 

The average balance of loans increased $7.1 million, or 10.8%, to $72.7 million for the six months ended June 30, 2016 from $65.6 million for the six months ended June 30, 2015. The average yield on loans decreased 18 basis points to 4.46% for the 2016 period from 4.64% for the 2015 period. The decrease in average yield was due to lower market interest rates.

 

The average balance of investment securities decreased $855,000, or 6.0%, to $13.4 million for the six months ended June 30, 2016 from $14.2 million for the six months ended June 30, 2015. The average yield on investment securities increased 12 basis points to 1.47% for the six months ended June 30, 2016 from 1.35% for the six months ended June 30, 2015.

 

The average balance of deposits increased $9.4 million, or 13.5%, to $79.4 million for the six months ended June 30, 2016 from $70.0 million for the six months ended June 30, 2015. In addition, the average cost of deposits increased 24 basis points to 1.25% for the six months ended June 30, 2016 from 1.01% for the six months ended June 30, 2015. The increase in the average balance and average rate was primarily attributable to an increase in certificates of deposit accounts.

 

The average balance of borrowings decreased $2.9 million, or 32.2%, to $6.1 million for the six months ended June 30, 2016 from $9.0 million for the six months ended June 30, 2015 due primarily to the maturity of a $3.0 million advance from the FHLB in January 2016.

 

Net interest-earning assets decreased to $7.7 million for the six months ended June 30, 2016 from $7.8 million for the six months ended June 30, 2015. This decrease is due to the introduction of interest-bearing checking accounts.

 

The net interest rate spread decreased 11 points to 2.24% for the six months ended June 30, 2016 from 2.35% for the six months ended June 30, 2015. Our average yield on interest-earning assets decreased 2 basis points while the average cost of interest-bearing liabilities increased 9 basis points.

 

Provision for Loan Losses. There was no provision for loan losses for the six months ended June 30, 2016, compared to $18,000 for the six months ended June 30, 2015. The Bank maintains an allowance for loan losses at a level necessary to absorb management’s best estimate of probable losses in the portfolio. Management considers, among other factors, historical loss experience, type and amount of loans, borrower concentrations and current conditions of the economy. Management also reviews individual loans for which full collectivity may not be reasonably assured and considers, among other matters, the estimated fair value of underlying collateral. This evaluation is ongoing and results in variations in the provision for loan losses.

 

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Summary of Noninterest Income.

 

   Six Months Ended June 30,   Increase     
   2016   2015   (Decrease)   % Change 
   (Dollars in thousands)     
Noninterest income:                    
Loan service charges  $8   $7   $1    14.3%
  Other   45    37    8    21.6 
Total noninterest income  $53   $44   $9    20.5%

 

Noninterest Income. Noninterest income increased $9,000, or 20.5%, to $53,000 for the six months ended June 30, 2016 from $44,000 for the six months ended June 30, 2015. The increase is due primarily to higher service charge income on deposit accounts.

 

Summary of Noninterest Expense.

 

   Six Months Ended June 30,   Increase     
   2016   2015   (Decrease)   % Change 
   (Dollars in thousands)     
Noninterest expense:                    
Compensation and benefits  $747   $751   $(4)   (0.5)%
Occupancy expense   116    116    -    0.0 
Equipment expense   72    86    (14)   (16.3)
Data processing   103    100    3    3.0 
FDIC premium expense   42    86    (44)   (51.2)
Professional services   164    140    24    17.1 
Insurance costs   18    25    (7)   (28.0)
Advertising   26    25    1    4.0 
Supplies   19    24    (5)   (20.8)
Operations from foreclosed real estate   58    (65)   123    (189.2)
Other   78    90    (12)   (13.3)
Total noninterest expense  $1,443   $1,378   $65    4.7%

 

Noninterest Expense. Noninterest expense increased $65,000, or 4.7%, to $1.4 million for the six months ended June 30, 2016. The increase was due primarily to the absence of gains in 2016 from sale of foreclosed real estate that were recognized in the six months ended June 30, 2015 and higher professional fees, partially offset by decreases in FDIC premium expense, equipment expense and other noninterest expense.

 

During the six months ended June 30, 2015, we recognized $112,000 in net gains on sale of foreclosed real estate versus $26,000 in net losses on sale of foreclosed real estate in the six months ended June 30, 2016. In addition, net expenses on foreclosed real estate were $32,000 for the 2016 period versus $47,000 in the 2015 period.

 

Professional services increased due primarily to the outsourcing of information technology related services. During the 2015 period such services were provided by one of the Bank’s employees and the related costs were included in compensation and benefits.

 

FDIC premium expense decreased substantially as a result of a lower assessment rate due to our improved risk category. Such expenses were $42,000 for the six months ended June 30, 2016 versus $86,000 for the six months ended June 30, 2015. Equipment expense was $72,000 for the six months ended June 30, 2016, compared to $86,000 for the six months ended June 30, 2015.

 

We expect our noninterest expenses to increase because of costs associated with operating as a public company and increased compensation costs related to the Bank’s ESOP and possible

 

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implementation of one or more stock-based compensation benefit plans, if approved by our stockholders.

 

Income Tax Expense. There was no provision for income taxes for the six months ended June 30, 2016, or for the six months ended June 30, 2015. A valuation allowance has been recorded against all components of the net deferred tax asset, except for the unrealized loss on available-for-sale securities, based upon our cumulative operating losses in recent years.

 

The deferred tax asset will only be recognized in future periods upon the Bank’s ability to realize and maintain profitable results of operations.

 

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Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as we had no tax-exempt interest-earning assets during the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income.

 

   For The Six Months  Ended June 30, 
   2016   2015 
   Average           Average         
   Outstanding       Yield/   Outstanding       Yield/ 
   Balance   Interest   Rate  (1)   Balance   Interest   Rate (1) 
                         
Interest-earning assets:                              
Loans  $72,739   $1,623    4.46%  $65,667   $1,523    4.64%
Investment securities   13,355    98    1.47    14,210    96    1.35 
Other interest-earning assets   7,166    20    0.56    6,973    9    0.26 
Total interest-earning assets   93,260    1,741    3.73    86,850    1,628    3.75 
Non-interest-earning assets   6,686              7,197           
Total assets  $99,946   $        $94,047   $      
                               
Interest-bearing liabilities:                              
Checking accounts  $2,930   $10    0.68   $-   $-    - 
Savings accounts   8,116    3    0.07    8,571    2    0.05 
Money market accounts   6,813    3    0.09    7,262    4    0.11 
Certificates of deposit   61,614    479    1.55    54,201    349    1.29 
Total interest-bearing deposits   79,473    495    1.25    70,034    355    1.01 
Borrowings (2) </