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 September 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. 000-55562

 

 

 

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)

 

Not Applicable
(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 November 14, 2016, there were 826,208 shares of the Registrant’s common stock issued and outstanding.

 

 

 

 

 

 

BEST HOMETOWN BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

  PART I. FINANCIAL INFORMATION    
       
ITEM 1. FINANCIAL STATEMENTS   2
       
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   28
       
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   36
       
ITEM 4. CONTROLS AND PROCEDURES   36
       
  PART II. OTHER INFORMATION    
       
ITEM 1.

LEGAL PROCEEDINGS

  36
       
ITEM 1A. RISK FACTORS   36
       
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   37
       
ITEM 3. DEFAULTS UPON SENIOR SECURITIES   37
       
ITEM 4. MINE SAFETY DISCLOSURES   37
       
ITEM 5. OTHER INFORMATION   37
       
ITEM 6. EXHIBITS   37
       
SIGNATURES   38
     
INDEX TO EXHIBITS   39

 

 1 

Table of Contents 

 

PART I. FINANCIAL INFORMATION

 

BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

(Unaudited)

 

ITEM 1. FINANCIAL STATEMENTS

 

   September 30,   December 31, 
   2016   2015 
   (Unaudited)     
ASSETS          
Cash and due from banks  $2,589   $2,632 
Interest-earning deposits in banks   2,703    6,468 
Total cash and cash equivalents   5,292    9,100 
Available-for-sale securities   25,114    11,224 
Loans   74,903    75,551 
Allowance for loan losses   (1,223)   (1,249)
Net loans   73,680    74,302 
Premises and equipment, net   2,678    1,881 
Real estate owned, net   24    667 
Accrued interest receivable          
Investment securities   70    37 
Loans receivable   242    259 
Deferred tax asset   37    44 
Restricted equity securities   837    837 
Other assets   122    305 
Total assets  $108,096   $98,656 
           
LIABILITIES          
Deposits          
Noninterest-bearing  $4,039   $4,237 
Interest-bearing   82,670    75,776 
Total deposits   86,709    80,013 
Federal Home Loan Bank (“FHLB”) advances   6,000    9,000 
Accrued defined benefit pension plan   1,317    1,464 
Accrued postretirement medical plan   989    985 
Other liabilities   321    332 
Total liabilities   95,336    91,794 
           
SHAREHOLDERS' 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   6,837    - 
Retained earnings - substantially restricted   8,381    8,789 
Unearned Employee Stock Ownership Plan ("ESOP") shares   (652)   - 
Accumulated other comprehensive loss, net of tax:          
Net unrealized losses on available-for-sale securities   (55)   (85)
Net unrealized losses on defined benefit pension plan, net of tax   (1,714)   (1,797)
Net unrealized losses on postretirement medical plan, net of tax   (45)   (45)
Total accumulated other comprehensive loss, net of tax   (1,814)   (1,927)
Total shareholders' equity   12,760    6,862 
Total liabilities and shareholders' equity  $108,096   $98,656 

 

See accompanying notes to the condensed consolidated financial statements

 

 2 

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BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Interest income:                    
Loans receivable  $814   $828   $2,445   $2,358 
Investment securities   59    42    157    137 
Other interest-earning assets   10    3    30    12 
Total interest income   883    873    2,632    2,507 
Interest expense:                    
Deposits   267    198    762    553 
Advances from FHLBC   44    102    186    302 
Total interest expense   311    300    948    855 
Net interest income   572    573    1,684    1,652 
Provision for loan losses   -    -    -    18 
Net interest income after provision for loan losses   572    573    1,684    1,634 
Noninterest income:                    
Service charges on deposit accounts   7    19    22    24 
Gain on sales of securities   7    2    7    2 
Gain on sale of real estate owned   20    8    10    120 
Other   26    3    66    44 
Total noninterest income   60    32    105    190 
Noninterest expense:                    
Salaries and employee benefits   370    465    1,110    1,225 
Occupancy and equipment   92    82    266    263 
Data processing   53    55    155    155 
Professional and supervisory fees   133    64    322    242 
Office expense   18    16    41    50 
Advertising   18    14    43    39 
FDIC deposit insurance   21    (28)   63    58 
Provision for real estate owned and related expenses   3    -    52    47 
Other   47    44    145    134 
Total noninterest expense   755    712    2,197    2,213 
Loss before income taxes   (123)   (107)   (408)   (389)
Income tax expense   -    -    -    - 
Net loss  $(123)  $(107)  $(408)  $(389)

 

See accompanying notes to the condensed consolidated financial statements

 

 3 

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BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands, except share and per share data)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
                     
Net loss  $(123)  $(107)  $(408)  $(389)
Other comprehensive loss:                    
Unrealized gain (loss) on available-for-sale securities:                    
Unrealized holding gain (loss) arising during the period   (45)  $(18)   53    (83)
Reclassification adjustment for gains included in net income   (7)   (2)   (7)   (2)
Tax effect   18    7    (16)   29 
Net of tax   (34)   (13)   30    (56)
                     
Defined benefit pension and post retirement medical plans:                    
Net gain (loss) arising during the period  -   -   -   - 
Reclassification adjustment for amortization or prior service cost and net gain/loss included in net periodic pension cost   27    24    83    104 
Tax effect   -    -    -    - 
Net of tax   27    24    83    104 
Total other comprehensive income (loss)   (7)   11    113   $48 
Comprehensive loss  $(130)  $(96)  $(295)  $(341)

 

See accompanying notes to the condensed consolidated financial statements

 

 4 

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BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands, except share and per share data)

(Unaudited)

 

                       Net Unrealized   Net Unrealized     
                   Net Unrealized   Losses   Losses On     
       Additional       Unearned   Losses On   On Defined   Postretirement     
   Common   Paid-In   Retained   ESOP   Available-for-Sale   Benefit Pension   Medical Plan,     
   Stock   Capital   Earnings   Shares   Securities, Net   Plan, Net   Net   Total 
                                 
Balance at December 31, 2014  $-   $-   $9,491   $-   $(38)  $(1,756)  $(73)  $7,624 
Net loss   -    -    (389)   -    -    -    -    (389)
Other comprehensive income   -    -    -    -    (56)   71    33    48 
Balance at September 30, 2015  $-   $-   $9,102   $-   $(94)  $(1,685)  $(40)  $7,283 
                                         
Balance at December 31, 2015  $-   $-   $8,789   $-   $(85)  $(1,797)  $(45)  $6,862 
Net loss   -    -    (408)   -    -    -    -    (408)
Other comprehensive income   -    -    -    -    30    83    -    113 
Proceeds from issuance of 826,208 shares of common stock   8    6,836    -    (661)   -    -    -    6,183 
ESOP shares earned   -    1    -    9    -    -    -    10 
Balance at September 30, 2016  $8   $6,837   $8,381   $(652)  $(55)  $(1,714)  $(45)  $12,760 

 

See accompanying notes to the condensed consolidated financial statements

 

 5 

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BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Amounts in thousands, except share and per share data)

(Unaudited)

 

   Nine Months Ended 
   September 30, 
   2016   2015 
         
Cash flows from operating activities:          
Net loss  $(408)  $(389)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:          
Depreciation and amortization, net   300    260 
Provision for loan losses   -    18 
Gain on sale of real estate owned   (10)   (120)
Gain on sale of securities   (7)   (2)
ESOP compensation expense   10    - 
Net change in operating assets and liabilities:          
Accrued interest receivable   (16)   (2)
Accrued interest payable   (20)   61 
Other   139    (51)
Net cash used in operating activities   (12)   (225)
           
Cash flows from investing activities:          
Loan originations and repayments, net   629    (7,274)
Purchases of available-for-sale securities   (20,212)   (4,223)
Proceeeds from maturities, paydowns and calls of available-for-sale securities   3,233    2,744 
Proceeds from sales of available-for-sale securities   2,911    1,134 
Purchases of premises and equipment   (897)   (67)
Proceeds from sale of foreclosed real estate   661    422 
 Net cash used in investing activities   (13,675)   (7,264)
           
Cash flows from financing activities:          
Net change in deposits   6,696    5,389 
Federal funds purchased   -    2,000 
Borrowings (repayments) of FHLB advances   (3,000)   5,000 
Proceeds from issuance of common stock   6,183    - 
Net cash provided by financing activities   9,879    12,389 
Change in cash and cash equivalents   (3,808)   4,900 
Cash and cash equivalents at beginning of period   9,100    9,794 
Cash and cash equivalents at end of period  $5,292   $14,694 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Interest on deposits  $759   $492 
Interest on advances from FHLBC   209    302 
           
Real estate acquired in settlement of loans  $24   $559 
Loans made to finance sales of foreclosed assets   348    - 

 

See accompanying notes to the condensed consolidated financial statements

 

 6 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(1) BASIS OF PRESENTATION

 

General

 

On June 29, 2016, Best Hometown Bank (the “Bank”) (formerly known as Home Federal Savings and Loan Association of Collinsville) completed its conversion from a federally-chartered mutual savings association to a capital stock form of organization with the establishment of a stock holding company, Best Hometown Bancorp, Inc. (“the 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, at a price of $10.00 per share, for gross offering proceeds of $8,300 that was used to buy its Company shares. The cost of the conversion and issuance of common stock was $1,400, which was deducted from the gross offering proceeds. The Company contributed $5,000 of the net proceeds from the offering to the Bank, and $1,200 was retained by the Company. In addition, $661 of the net proceeds were used to fund the loan to the employee stock ownership plan.

 

Voting rights are held and exercised exclusively by the shareholders 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 are 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 falls below the amounts on the date of record 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.

 

The condensed consolidated financial statements as of September 30, 2016 and for the three and nine months ended September 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 nine months ended September 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.

 

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 September 30, 2016 and for the three and nine months ended September 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 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 September 30, 2016 and the results of operations and cash flows for the three and nine months ended September 30, 2016 and 2015. All interim amounts have not been audited and the results of operations for the three and nine months ended September 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

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

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.

 

(2) NEW ACCOUNTING STANDARDS

 

The Company is an emerging growth Company and may elect to adopt new or revised accounting standards using the effective dates applicable to nonpublic companies (if the standard is applicable to nonpublic companies). This could impact the implementation dates of the standards noted below.

 

On January 5, 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe that this new guidance will have a material effect on the consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved amendments deferring the effective date by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In March and April 2016, the FASB issued final amendments (ASU 2016-08 and ASU 2016-10) to clarify the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for licenses of intellectual property. In May 2016, the FASB issued final amendments (ASU-11) to clarify guidance related to collectability, noncash considerations, presentation of sales tax, and transition. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Early application is permitted but not before the original public entity effective date, i.e., annual periods beginning after December 15, 2016. The Company continues to assess the impact of ASU 2014-09 on its accounting and disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments. The provisions of ASU 2016-13 were 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 incurred loss 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.

 

ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-13 on its accounting and disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The update provides guidance on the classification of certain cash receipts and cash payments for presentation in the statement of cash flows. The amendment is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The amendments will be applied using a retrospective transition method to each period presented unless

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

impracticable. The Company does not believe that this new guidance will have a material effect on the consolidated financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

(3) EARNINGS (LOSS) PER SHARE

 

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 nine months ended September 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.

 

(4) AVAILABLE-FOR-SALE SECURITIES

 

Debt and mortgage-backed securities have been classified as available-for-sale securities in the condensed consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities-residential consist of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at September 30, 2016 and December 31, 2015 are as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
September 30, 2016  Cost   Gains   Losses   Value 
Debt securities:                    
U.S. Government agency mortgage-backed securities-residential  $25,197   $23   $(106)  $25,114 
                     
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
December 31, 2015  Cost   Gains   Losses   Value 
Debt securities:                    
U.S. Government agency bonds  $1,000   $1   $(6)  $995 
U.S. Government agency mortgage-backed securities-residential   10,353    -    (124)   10,229 
Total  $11,353   $1   $(130)  $11,224 

 

As of September 30, 2016 and December 31, 2015, investment securities with a carrying value of $0 and $995 were pledged for public deposits.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

The following tables show the fair value and unrealized loss of securities that have been in unrealized loss positions for less than twelve months and for more than twelve months at September 30, 2016 and December 31, 2015. The tables also show the number of securities in an unrealized loss position for each category of investment security as of the respective dates.

 

   Less than 12 Months   12 Months or Longer   Total 
           Number in           Number in           Number in 
   Fair   Unrealized   Unrealized   Fair   Unrealized   Unrealized   Fair   Unrealized   Unrealized 
September 30, 2016  Value   Loss   Loss (1)   Value   Loss (1)   Loss (1)   Value   Loss   Loss (1) 
U.S. Government agency mortgage-backed securities  $8,882   $83    18   $4,121   $23    9   $13,003   $106    27 

 

   Less than 12 Months   12 Months or Longer   Total 
           Number in           Number in           Number in 
   Fair   Unrealized   Unrealized   Market   Unrealized   Unrealized   Fair   Unrealized   Unrealized 
December 31, 2015  Value   loss   Loss   Value   loss   Loss   Value   Loss   Loss 
U.S. Government agency bonds  $494   $6    1   $-   $-    -   $494   $6    1 
U.S. Government agency mortgage-backed securities   6,974    69    13    3,255    55    8    10,229    124    21 
   $7,468   $75    14   $3,255   $55    8   $10,723   $130    22 

 

 

(1)       Actual amounts.

 

The Company evaluates securities for other-than-temporary impairments (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company considers the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer. Additionally, the Company considers its intent to sell or whether it will be more likely than not it will be required to sell the security prior to the security's anticipated recovery in fair value. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by federal Government agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition.

 

None of the unrealized losses at September 30, 2016 were recognized into net income for the three or nine months ended September 30, 2016 because the issuers’ bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value of these securities is expected to recover as they approach their maturity date or reset date. None of the unrealized losses at December 31, 2015 were recognized as having OTTI during the three or nine months ended September 30, 2016.

 

Because the actual cash flows for mortgage-backed securities may differ from their contractual maturities, a maturity table is not shown. At December 31, 2015, the amortized cost and fair value of U.S. agency bonds with contractual maturities due from one to five years was $500 and $501, respectively and the amortized cost and fair value of U.S. agency bonds with contractual maturities due after ten years was $500 and $494, respectively.

 

The following table presents the gross proceeds from sales of securities available-for-sale and gains or losses recognized for the three and nine months ended September 30, 2016 and 2015:

 

   Three Months Ended   Nine Months Ended 
Available-for-sale:  September 30,
2016
   September 30,
2015
   September 30,
2016
   September 30,
2015
 
Proceeds  $2,911   $-   $2,911   $1,134 
Gross gains   17    -    17    4 
Gross losses   10    -    10    2 

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

(5) LOANS

 

The components of loans at September 30, 2016 and December 31, 2015 were as follows:

 

   September 30,   December 31, 
   2016   2015 
Real estate loans:          
One-to-four family, owner occupied  $48,224   $51,876 
One-to-four family, non-owner occupied   5,287    4,780 
Commercial and multi-family   16,909    14,604 
Construction and land   2,506    3,034 
Commercial business loans   785    713 
Consumer loans   1,240    623 
    74,951    75,630 
Deferred loan fees, net   (48)   (79)
Total  $74,903   $75,551 

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

The following tables present the activity in the allowance for loan losses for the three and nine months ended September 30, 2016 and 2015 by portfolio segment:

 

   Beginning               Ending 
   Balance   Provision   Charge-offs   Recoveries   Balance 
Three Months Ended September 30, 2016                         
Real estate loans:                         
One-to-four family, owner occupied  $743   $(50)  $(29)  $25   $689 
One-to-four family, non-owner occupied   73    11    -    3    87 
Commercial and multi-family   276    18    -    -    294 
Construction and land   38    -    -    -    38 
Commercial business loans   18    (2)   -    -    16 
Consumer loans   21    19    -    -    40 
Unallocated   55    4    -    -    59 
   $1,224   $-   $(29)  $28   $1,223 

 

   Beginning               Ending 
   Balance   Provision   Charge-offs   Recoveries   Balance 
Three Months Ended September 30, 2015                         
Real estate loans:                         
One-to-four family, owner occupied  $795   $(146)  $(1)  $2   $650 
One-to-four family, non-owner occupied   93    3    (51)   13    58 
Commercial and multi-family   153    (7)   -    -    146 
Construction and land   33    (26)   -    -    7 
Commercial business loans   13    (9)   -    -    4 
Consumer loans   6    (2)   -    -    4 
Unallocated   -    187    -    -    187 
   $1,093   $-   $(52)  $15   $1,056 

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

   Beginning               Ending 
   Balance   Provision   Charge-offs   Recoveries   Balance 
Nine Months Ended September 30, 2016                         
Real estate loans:                         
One-to-four family, owner occupied  $771   $(51)  $(59)  $28   $689 
One-to-four family, non-owner occupied   82    -    -    5    87 
Commercial and multi-family   260    34    -    -    294 
Construction and land   47    (9)   -    -    38 
Commercial business loans   14    2    -    -    16 
Consumer loans   19    21    -    -    40 
Unallocated   56    3    -    -    59 
   $1,249   $-   $(59)  $33   $1,223 

 

   Beginning               Ending 
   Balance   Provision   Charge-offs   Recoveries   Balance 
Nine Months Ended September 30, 2015                         
Real estate loans:                         
One-to-four family, owner occupied  $791   $(142)  $(2)  $3   $650 
One-to-four family, non-owner occupied   110    (9)   (58)   15    58 
Commercial and multi-family   87    59    -    -    146 
Construction and land   35    (28)   -    -    7 
Commercial business loans   9    (5)   -    -    4 
Consumer loans   9    (6)   -    1    4 
Unallocated   38    149    -    -    187 
   $1,079   $18   $(60)  $19   $1,056 

 

The following tables present the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at September 30, 2016 and December 31, 2015:

 

   Ending Allowance on Loans   Loans 
   Individually   Collectively       Individually   Collectively     
   Evaluated for   Evaluated for       Evaluated   Evaluated     
   Impairment   Impairment   Total   Impairment   Impairment   Total 
At September 30, 2016                              
Real estate loans:                              
One-to-four family, owner occupied  $-   $689   $689   $749   $47,475   $48,224 
One-to-four family, non-owner occupied   -    87    87    148    5,139    5,287 
Commercial and multi-family   -    294    294    -    16,909    16,909 
Construction and land   -    38    38    17    2,489    2,506 
Commercial business loans   -    16    16    -    785    785 
Consumer loans   -    40    40    -    1,240    1,240 
Unallocated   -    59    59    -    -    - 
   $-   $1,223   $1,223   $914   $74,037   $74,951 

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

   Ending Allowance on Loans   Loans 
   Individually   Collectively       Individually   Collectively     
   Evaluated for   Evaluated for       Evaluated   Evaluated     
   Impairment   Impairment   Total   Impairment   Impairment   Total 
At December 31, 2015:                              
Real estate loans:                              
One-to-four family, owner occupied  $-   $771   $771   $1,901   $49,975   $51,876 
One-to-four family, non-owner occupied   -    82    82    83    4,697    4,780 
Commercial and multi-family   -    260    260    -    14,604    14,604 
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   $73,646   $75,630 

 

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

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

The tables below present loans that were individually evaluated for impairment by portfolio segment at September 30, 2016 and December 31, 2015, including the average recorded investment balance and interest earned for the nine months ended September 30, 2016 and year ended December 31, 2015:

 

   September 30, 2016 
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
With no recorded allowance:                         
Real estate loans: Real estate loans:                         
One-to-four family, owner occupied  $960   $749   $-   $770   $52 
One-to-four family, non-owner occupied   171    148    -    150    8 
Commercial and multi-family   -    -    -    -    - 
Construction and land   17    17    -    17    1 
Commercial business loans   -    -    -    -    - 
Consumer loans   -    -    -    -    - 
Total  $1,148   $914   $-   $937   $61 
                          
With recorded allowance:                         
Real estate loans: Real estate loans:                         
One-to-four family, owner occupied  $-   $-   $-   $-   $- 
One-to-four family, non-owner occupied   -    -    -    -    - 
Commercial and multi-family   -    -    -    -    - 
Construction and land   -    -    -    -    - 
Commercial business loans   -    -    -    -    - 
Consumer loans   -    -    -    -    - 
Total   -   $-   $-   $-   $- 
                          
Totals:                         
Real estate loans  $1,148   $914   $-   $937   $61 
Consumer and other loans   -    -    -    -    - 
Total  $1,148   $914   $-   $937   $61 

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

   December 31, 2015 
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no recorded allowance:                         
Real estate loans: Real estate loans:                         
One-to-four family, owner occupied  $2,180   $1,901   $-   $1,925   $89 
One-to-four family, non-owner occupied   106    83    -    84    4 
Commercial and multi-family   -    -    -    -    - 
Construction and land   -    -    -    -    - 
Commercial business loans   -    -    -    -    - 
Consumer loans   -    -    -    -    - 
Total  $2,286   $1,984   $-   $2,009   $93 
                          
With recorded allowance:                         
Real estate loans: Real estate loans:                         
One-to-four family, owner occupied  $-   $-   $-   $-   $- 
One-to-four family, non-owner occupied   -    -    -    -    - 
Commercial and multi-family   -    -    -    -    - 
Construction and land   -    -    -    -    - 
Commercial business loans   -    -    -    -    - 
Consumer loans   -    -    -    -    - 
Total   -   $-   $-   $-   $- 
                          
Totals:                         
Real estate loans  $2,286   $1,984   $-   $2,009   $93 
Consumer and other loans   -    -    -    -    - 
Total  $2,286   $1,984   $-   $2,009   $93 

 

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

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

The following tables present the aging of past due loans as well as nonaccrual loans. Nonaccrual loans and accruing loans past due 90 days or more include both smaller balance homogenous loans and larger balance loans that are evaluated either collectively or individually for impairment.

 

Total past due loans and nonaccrual loans at September 30, 2016:

 

   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days or
More Past Due
   Current   Total   Nonaccrual
Loans
   Accruing Loans
Past Due 90
Days or More
 
September 30, 2016                                   
Real estate loans:                                   
One-to-four family, owner occupied  $166   $203   $-   $47,855   $48,224   $10   $- 
One-to-four family, non-owner occupied   -    25    -    5,262    5,287    67    - 
Commercial and multi-family   -    -    -    16,909    16,909    -    - 
Construction and land   -    -    -    2,506    2,506    17    - 
Commercial business loans   -    -    -    785    785    -    - 
Consumer loans   2    -    -    1,238    1,240    -    - 
   $168   $228   $-   $74,555   $74,951   $94   $- 

 

   30-59 Days
Past Due
   60-89 Days
Past Due
   90 Days or
More Past Due
   Current   Total   Nonaccrual
Loans
   Accruing Loans
Past Due 90
Days or More
 
At December 31, 2015:                                   
Real estate loans:                                   
One-to-four family, owner occupied  $390   $104   $-   $51,382   $51,876    -   $- 
One-to-four family, non-owner occupied   26    -    -    4,754    4,780    -    - 
Commercial and multi-family   -    -    -    14,604    14,604    -    - 
Construction and land   15    -    -    3,019    3,034    -    - 
Commercial business loans   -    -    -    713    713    -    - 
Consumer loans   2    -    1    620    623    -    1 
   $433   $104   $1   $75,092   $75,630    -   $1 

 

Troubled Debt Restructurings:

 

The following table presents loans that have been modified as troubled debt restructurings at September 30, 2016 and December 31, 2015:

 

   Number of   Recorded 
   Contracts   Investment 
At June 30, 2016:  (Dollars in thousands) 
One-to-four family, owner occupied   1   $89 
           
At December 31, 2015:          
One-to-four family, owner occupied   4   $488 

 

No additional allowance has been specifically reserved for these loans. Additionally, there were no commitments to lend any additional amounts under either loan or any payment default on any loan after the modification. There were no troubled debt restructurings during the three or nine months ended September 30, 2016. There were no troubled restructurings that were restructured in the last 12 months that defaulted during the nine months ended September 30, 2016.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

Loan Grades:

 

The Company utilizes a grading system whereby all loans are assigned a grade based on the risk profile of each loan. Loan grades are determined based on an evaluation of 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. All loans, regardless of size, are analyzed and are given a grade based upon the management’s assessment of the ability of borrowers to service their debts.

 

Pass: Loan assets of this grade conform to a preponderance of our underwriting criteria and are acceptable as a credit risk, based upon the current net worth and paying capacity of the obligor. Loans in this category also include loans secured by liquid assets and secured loans to borrowers with unblemished credit histories.

 

Pass-Watch: Loan assets of this grade represent our minimum level of acceptable credit risk. This grade may also represent obligations previously rated “Pass”, but with significantly deteriorating trends or previously rated.

 

Special Mention: Loan assets of this grade have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard: Loan assets of this grade are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Portfolio Segments:

 

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 secured by generally 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.

 

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.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

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.

 

The following tables present total loans by risk grade and portfolio segment at September 30, 2016 and December 31, 2015:

 

   Special                     
   Mention   Substandard   Doubtful   Loss   Pass   Total 
At September 30, 2016                              
Real estate loans:                              
One-to-four family, owner occupied  $416   $1,665   $-   $-   $46,143   $48,224 
One-to-four family, non-owner occupied   -    150    -    -    5,137    5,287 
Commercial and multi-family   -    -    -    -    16,909    16,909 
Construction and land   -    17    -    -    2,489    2,506 
Commercial business loans   -    -    -    -    785    785 
Consumer loans   -    6    -    -    1,234    1,240 
   $416   $1,838   $-   $-   $72,697   $74,951 
                               

 

   Special                     
   Mention   Substandard   Doubtful   Loss   Pass   Total 
At December 31, 2015:                              
Real estate loans:                              
One-to-four family, owner occupied  $533   $1,793   $-   $-   $49,550   $51,876 
One-to-four family, non-owner occupied   93    83    -    -    4,604    4,780 
Commercial and multi-family   -    -    -    -    14,604    14,604 
Construction and land   3    -    -    -    3,031    3,034 
Commercial business loans   -    -    -    -    713    713 
Consumer loans   7    -    -    -    616    623 
   $636   $1,876   $-   $-   $73,118   $75,630 

 

(6) EMPLOYEE STOCK OWNERSHIP PLAN

 

Employees participate in an Employee Stock Ownership Plan (“ESOP”). The ESOP borrowed from the Company to purchase 66,096 shares of the Company’s common stock at $10 per share on June 29, 2016. The Company may make discretionary contributions to the ESOP and pay dividends on unallocated shares to the ESOP, the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Any dividends on allocated shares increase participant accounts. Participants receive the shares at the end of employment.

 

No contributions to the ESOP were made during the three or nine months ended September 30, 2016. The expense recognized for the three and nine months ended September 30, 2016 was $10 and is reported in salaries and wages.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

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

 

   Nine Months
Ended
 
   September 30,
2016
 
Committed to be released to participants   3,305 
Allocated to participants   - 
Unearned   62,791 
Total ESOP shares   66,096 
      
Fair value of unearned shares  $690,701 

 

(7) DEFINED BENEFIT AND POST RETIREMENT MEDICAL PLANS

 

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
   Three Months
Ended
   Three Months
Ended
   Three Months
Ended
 
   September 30,
2016
   September 30,
2015
   September 30,
2016
   September 30,
2015
 
                 
Service cost  $-   $-   $-   $- 
Interest cost   35    37    10    10 
Expected return on plan assets   (34)   (37)   -    - 
Amortization:                    
Unrecognized net loss   27    65    2    3 
Unrecognized prior service cost   -    -    (2)   (2)
Net periodic cost  $28   $65   $10   $11 

 

   Defined Benefit   Postretirement 
   Pension Plan   Medical Plan 
   Nine Months
Ended
   Nine Months
Ended
   Nine Months
Ended
   Nine Months
Ended
 
   September 30,
2016
   September 30,
2015
   September 30,
2016
   September 30,
2015
 
     
Service cost  $-   $-   $-   $- 
Interest cost   106    111    30    30 
Expected return on plan assets   (102)   (111)   -    - 
Amortization:                    
Unrecognized net loss   83    101    6    9 
Unrecognized prior service cost   -    -    (6)   (6)
Net periodic cost  $87   $101   $30   $33 

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

The following table summarizes plan assets for the defined benefit pension plan, measured at fair value on a recurring basis at September 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 
   Level 1   Level 2   Level 3   Fair Value 
                 
September 30, 2016                    
Pooled separate accounts  $-   $2,450   $-   $2,450 

 

               Total 
   Level 1   Level 2   Level 3   Fair Value 
                 
December 31, 2015:                    
Pooled separate accounts  $-   $2,307   $-   $2,307 

 

During the nine months ended September 30, 2016, benefits paid, employer contributions and the actual return on plan assets for the defined benefit pension plan were $204, $172 and $176, respectively.

 

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

 

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

 

The Company’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 THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

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

 

   Defined Benefit   Postretirement 
   Pension Plan   Medical Plan 
   Three Months
Ended
   Three Months
Ended
   Three Months
Ended
   Three Months
Ended
 
   September 30,
2016
   September 30,
2015
   September 30,
2016
   September 30,
2015
 
     
Unrecognized prior service cost  $-   $-   $2   $3 
Unrecognized net loss   29    65    (2)   (2)
    29    65    -    1 
Tax effect   -    -    -    - 
Unrecognized loss, net of taxes  $29   $65   $-   $1 

 

   Defined Benefit   Postretirement 
   Pension Plan   Medical Plan 
   Nine Months
Ended
   Nine Months
Ended
   Nine Months
Ended
   Nine Months
Ended
 
   September 30,
2016
   September 30,
2015
   September 30,
2016
   September 30,
2015
 
     
Unrecognized prior service cost  $-   $-   $6   $9 
Unrecognized net loss   83    101    (6)   (6)
    83    101    -    3 
Tax effect   -    -    -    - 
Unrecognized loss, net of taxes  $83   $101   $-   $3 

 

(8) FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

Investment Securities:

 

The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

Impaired Loans:

 

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Real Estate Owned:

 

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015 are summarized below:

 

   Level 2 
   September 30,
2016
   December 31,
2015
 
Financial Assets          
Available-for-sale securities  $25,114   $11,224 

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

Presented in the table below are assets measured at fair value on a nonrecurring basis using Level 3 inputs at September 30, 2016 and December 31, 2015:

 

   Level 3 
   September 30,
2016
   December 31,
2015
 
Impaired loans          
One-to-four family, owner occupied  $10   $221 
One-to-four family, non-owner occupied       60 
Total financial assets   10    281 
           
Nonfinancial assets          
Real estate owned, net:          
One-to-four family, owner occupied   24    667 
Total nonfinancial assets  $24   $667 
Total assets measured at fair value on a nonrecurring basis  $34   $948 

 

The Company's impaired loans at September 30, 2016 and December 31, 2015 were measured at fair value based primarily upon the estimated value of real estate collateral less costs to sell. The carrying amounts of these loans were $10 and $281, respectively. Impairments are generally charged off against the allowance for loan loss; therefore, there are no specific valuation allowances carried on these loans at September 30, 2016 and December 31, 2015. The amount charged off related to these impaired loans for the nine months ended September 30, 2016 and year ended December 31, 2015 was $29 and $117, respectively.

 

Real estate owned is carried at the lower of carrying value or fair value less costs to sell. The carrying value of real estate owned September 30, 2016 and December 31, 2015 were $24 and $667. The resulting write-downs for measuring real estate owned at the lower of carrying or fair value less costs to sell for the three and nine months ended September 30, 2016 were $16. There were no write downs of real estate owned during the three and nine months ended September 30, 2015.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2016 and December 31, 2015:

 

   Level 3 Quantitative Information 
   September 30,   December 31,           
   2016   2015   Valuation  Unobservable    
   Fair Value   Fair Value   Technique  Inputs  Range 
                   
Impaired real estate loans net, with specific allocations:                     
One-to-four family, owner occupied  $10   $221   Sales comparison approach  Adjustment for differences between the comparable sales   0% to 30% 
                      
One-to-four family, non-owner occupied   -    60   Sales comparison approach  Discount rate, estimated timing of cash flows   2% to 28% 
                      
Real estate owned net:                     
One-to-four family, owner occupied  $24   $667   Sales comparison approach  Adjustment for differences between the comparable sales   0% to 20% 

 

 

 

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

Fair Value of Financial Instruments

 

Many of the Company’s assets and liabilities are short-term financial instruments whose carrying amounts reported in the consolidated balance sheet approximate fair value and are considered Level 1 assets and liabilities. These items include cash and cash equivalents, accrued interest receivable and payable balances, variable rate loan and deposits that re-price frequently and fully. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at September 30, 2016 and December 31, 2015 are summarized below:

 

   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3   Total 
September 30, 2016                         
Financial assets                         
Available-for-sale securities  $25,114   $-   $25,114   $-   $25,114 
Restricted equity securities (1)   837     NA     NA     NA     NA 
Loans, net   73,680    -    -    75,681    75,681 
                          
Financial liabilities                         
Deposits  $86,709   $14,198   $64,096   $-   $78,294 
FHLB Advances   6,000    -    6,177    -    6,177 
                          
December 31, 2015:                         
Financial assets                         
Securities available-for-sale  $11,224   $-   $11,224   $-   $11,224 
Restricted equity securities (1)   837     NA     NA     NA     NA 
Loans, net   74,302    -    -    76,945    76,945 
                          
Financial liabilities                         
Deposits  $80,013   $20,785   $59,411   $-   $80,196 
FHLB Advances   9,000    -    9,201    -    9,201 

 

 

(1) It is not practicable to determine fair value of restricted equity securities due to restrictions placed on transferability.

 

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

 

Loans:

 

The fair value of loans is computed for each loan category using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

 

Deposits:

 

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. The fair values of certificate accounts are computed using interest rates currently being offered to deposit customers.

 

FHLB advances:

 

FHLB advances are valued at current market interest rates of FHLB advances.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

Off-balance sheet commitments:

 

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to either enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

 

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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 September 30, 2016 and for the three and Nine months ended September 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;

 

·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.

 

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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.

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in the Registrant’s Form S-1 as filed with the Securities and Exchange Commission.

 

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

 

Our total assets increased $9.4 million, or 9.5%, to $108.1 million at September 30, 2016 from $98.7 million at December 31, 2015. The increase in total assets is reflective of the net proceeds of $6.2 million from our common stock offering in connection with our conversion from a mutual savings bank to a stock bank and an increase in our total deposits of $6.7 million during the nine months ended September 30, 2016. A portion of the additional funds were used to increase our portfolio of commercial and multi-family loans. However, repayments of one-to-four family, owner occupied loans during the nine months ended September 30, 2016 offset the increase of commercial and multi-family loans. Additionally, the increase in funds from our stock offering proceeds and increased deposits were invested in high-quality U.S. government agency mortgage-backed securities during the period.

 

Gross loans decreased $648,000, or 0.86%, to $74.9 million at September 30, 2016 from $75.5 million at December 31, 2015. Our commercial and multi-family loans increased by $2.3 million, or 15.8%, to $16.9 million at September 30, 2016 from $14.6 million at December 31, 2015. The decrease in gross loans reflected the decrease in our one-to-four family, owner occupied loans. One-to-four family, owner occupied loans decreased $3.6 million, or 7.0%, to $48.2 million at September 30, 2016 as compared to $51.9 million at December 31, 2015. 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 and decrease our emphasis on lending for long-term one-to-four family loans.

 

Available-for-sale securities increased $13.9 million, or 124.1%, to $25.1 million at September 30, 2016 from $11.2 million at December 31, 2015. The increase reflected our investment of excess funds in U.S. government agency mortgage-backed securities. Management believes that mortgage-backed securities will provide the best yield on available funds and a return of invested cash from principal pay-down until we are able to deploy such additional funds into commercial and multi-family real estate loans.

 

Real estate owned, net decreased $643,000, or 96.4%, to $24,000 at September 30, 2016 from December 31, 2015. The decrease was due to the successful sale of properties

 

Our deposits increased $6.7 million, or 8.4%, to $86.7 million at September 30, 2016 from $80.0 million at December 31, 2015. The increase reflected the Company’s strategy in attracting primarily 4 and 5-year certificates of deposit to improve our long-term interest rate risk position. Certificates of deposit increased to $63.4 million at September 30, 2016 from $59.2 million at December 31, 2015. Core deposits, which include noninterest-bearing checking, interest-bearing checking, savings and money market accounts, increased to $24.4 million at September 30, 2016 from $20.8 million at December 31, 2015. The increase reflected our 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.

 

FHLB advances decreased to $6.0 million at September 30, 2016 from $9.0 million at December 31, 2015. In January 2016, we repaid a matured $3.0 million advance with a cost of 3.90%, using funds from cash and cash equivalents. During July 2016, we refinanced a maturing $5.0 million advance, with an interest rate of 4.62% with $5.0 million of FHLB advances with an average rate of approximately 1.99%.

 

Shareholders’ equity increased to $12.8 million at September 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 the sale of common stock of $6.2 million and decrease in accumulated other comprehensive losses, partially offset by a net loss of $408,000 for the nine months ended September 30, 2016.

 

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Nonperforming Assets

 

The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated.

 

   September 30,   December 31, 
   2016   2015 
   (Dollars in thousands) 
Nonaccrual loans:          
Real estate loans:          
One-to-four family, owner occupied  $10   $- 
One-to-four family, non-owner occupied   67    - 
Commercial and multi-family   -    - 
Construction and land   17    - 
Commercial business loans   -    - 
Consumer loans   -   $- 
Total nonaccrual loans  $94   $- 
Accruing loans past due 90 days or more: (1)  $-   $- 
Total of nonaccrual and 90 days or more past due loans  $94   $- 
           
Real estate owned, net:          
One-to-four family   24    667 
Total real estate owned, net   24    667 
Total nonperforming assets  $118   $667 
Troubled debt restructurings   89    488 
Troubled debt restructurings and total nonperforming assets  $207   $1,155 
           
Total nonperforming loans to total loans   0.13%   -%
Total nonperforming assets to total assets   0.09%   -%
Total nonperforming assets to loans and real estate owned   0.28%   1.52%

 

 

(1) There were no loans past due 90 days or more and still accruing at September 30, 2016 and June 30, 2015.

 

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms and the actual amount collected for the nine months ended September 30, 2016 was $11,000 and $6,000, respectively.

 

Interest income that would have been recorded had our trouble debt restructured loans been current in accordance with their original terms was $12,000 and $20,000 for the nine months ended September 30, 2016 and 2015. Interest of $9,000 and $19,000 respectively, was recognized on these loans and is included in net income for the nine months ended September 30, 2016 and 2015.

 

The decrease in nonperforming assets is a reflection of our successful sales of real estate owned during the nine months ended September 30, 2015.

 

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Analysis of Net Interest Margin

 

The following table sets forth average balance sheets, average annualized yields and rates, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of net deferred costs, discounts and premiums that are amortized or accreted to income.

 

   For the Three Months Ended September 30, 
   September 30, 2016   September 30, 2015 
                   Interest     
   Average   Interest and   Yield/   Average   and   Yield/ 
   Balance   Dividends   Cost   Balance   Dividends   Cost 
   (Dollars in Thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $74,472   $814    4.37%  $72,719   $828    4.55%
Investment securities   20,627    59    1.14    13,480    42    1.25 
Interest-bearing deposits   9,785    10    0.41    5,998    3    0.20 
Total interest-earning assets   104,884    883    3.37    92,197    873    3.79 
Noninterest-earning assets   2,776              2,448           
Total assets  $107,660             $94,645           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
Checking accounts  $5,330   $11    0.83%  $133   $-    -%
Savings accounts   7,811    1    0.05    7,611    2    0.11 
Money market accounts   5,837    1    0.07    7,426    2    0.11 
Certificates of deposit   63,020    254    1.62    55,228    194    1.41 
Total interest-bearing deposits   81,998    267    1.31    70,398    198    1.13 
FHLB advances   6,000    44    2.93    9,968    102    4.09 
Total interest-bearing liabilities   87,998    311    1.42    80,366    300    1.50 
Noninterest bearing deposits   4,884              4,268           
Other noninterest-bearing liabilities   2,110              2,595           
Total liabilities   94,992              87,229           
Equity   12,668              7,416           
Total liabilities and equity  $107,660             $94,645           
                               
Net interest income       $572             $573      
Interest rate spread             1.95%             2.29%
Net interest margin             2.18%             2.49%
Average interest-earning assets to average interest-bearing liabilities   1.19X            1.19X         

 

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   For the Nine Months Ended September 30, 
   September 30, 2016   September 30, 2015 
           Interest     
   Average   Interest and   Yield/   Average   and   Yield/ 
   Balance   Dividends   Cost   Balance   Dividends   Cost 
   (Dollars in Thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $74,150   $2,445    4.40%  $69,010   $2,358    4.56%
Investment securities   15,818    157    1.32    12,936    137    1.41 
Interest-bearing deposits   9,481    30    0.42    8,899    12    0.18 
Total interest-earning assets   99,449    2,632    3.53    90,845    2,507    3.68 
Noninterest-earning assets   3,070              2,765           
Total assets  $102,519             $93,610           
                               
Liabilities and equity:                              
Interest-bearing liabilities:                              
Checking accounts  $3,731   $21    0.75%  $79   $1    1.70%
Savings accounts   7,992    3    0.05    8,147    3    0.05 
Money market accounts   6,487    5    0.10    7,234    5    0.09 
Certificates of deposit   62,081    733    1.58    54,173    544    1.35 
Total interest-bearing deposits   80,291    762    1.27    69,633    553    1.06 
FHLB advances   6,065    186    4.09    9,271    302    4.36 
Total interest-bearing liabilities   86,356    948    1.47    78,904    855    1.45 
Noninterest bearing deposits   4,884              4,451           
Other noninterest-bearing liabilities   2,821              2,744           
Total liabilities   94,061              86,099           
Equity   8,458              7,511           
Total liabilities and equity  $102,519             $93,610           
                               
Net interest income       $1,684             $1,652      
Interest rate spread             2.06%             2.23%
Net interest margin             2.26%             2.42%
Average interest-earning assets to average interest-bearing liabilities   1.15X            1.15X         

 

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

 

General. We reported a net loss of $123,000 for the three months ended September 30, 2016 as compared to a net loss of $107,000 for the three months ended September 30, 2015. The increase in net loss was primarily attributed to an increase in professional and supervisory fees and FDIC deposit insurance. Professional and supervisory fees increased by $69,000, or 107.8%, to $133,000 for the three months ended September 30, 2016 from $64,000 for the three months ended September 30, 2015. The increase in professional and supervisory fees is related to the increased costs associated with our conversion to a public company. FDIC deposit insurance increased by $49,000, or 175.0%, to $21,000 for the three months ended September 30, 2016. FDIC premium expense decreased substantially during the three months ended September 30, 2015 as a result of a lower assessment rate due to our improved risk category.

 

Interest Income. Interest income increased $10,000, or 1.1%, to $883,000 for the three months ended September 30, 2016 from $873,000 for the three months ended September 30, 2015. The increase in interest income is reflective of an increase in the average balances of interest-earning assets, which increased to $104.9 million for the three months ended September 30, 2016 from $92.2 million for the three months ended September 30, 2015. The increase in the average balances of interest-earning assets is reflective of the increase in cash of $6.2 million in net proceeds from of our stock offering in connection with our mutual-to-stock conversion and increasing deposit levels during 2016. For the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, the average balance of loans increased to $74.5 million from $72.7 million, the average balance of investments increased to $20.6 million from $13.5 million, and the average balance of interest-bearing deposits in other banks increased to $9.8 million from $6.0 million. These increases in average balances offset the decrease in the overall yield for each interest-earning asset. The average yields on interest-earning assets decreased 42 basis points to 3.37% for the three months ended September 30, 2016 from 3.79% for the three months ended September 30, 2015. Over these same periods, our loan yield decreased 18 basis points to 4.37% from 4.55%, and our investment yield decreased 11 basis points to 1.14% from 1.25%. The decrease in yields on both loans and investments is reflective of the sustained historically low interest rate environment and very competitive lending environment in our market area.

 

Interest Expense. Interest expense increased $11,000, or 3.7%, to $311,000 for the three months ended September 30, 2016 from $300,000 for the three months ended September 30, 2015. The increase in interest expense was caused by both an increase in the average balances of deposits of $11.6 million, or 16.5%, to $82.0 million for the three months ended September 30, 2016 from $70.4 million for the same period ended September 30, 2015 and an increase in the average rate paid on deposits to 1.31% for the three months ended September 30, 2016 from 1.13% for the three months ended September 30, 2015. This 18 basis point increase is reflective of our marketing strategy to attract new depositors within our market area and retain existing customers post conversion. The increase in interest expense from deposits was offset, partially, by a decrease in interest expense from FHLB advances, which is related to the maturity of $3.0 million of our advances during the first quarter of 2016 and refinancing existing advances with lower rates. Interest expense on FHLB advances decreased $58,000, or 56.9%, to $44,000 for the three months ended December 31, 2016 from $102,000 for the three months ended September 30, 2015.

 

Net Interest Income. Net interest income decreased $1,000, or 0.17%, to $572,000 for the three months ended September 30, 2016. The decrease is reflective of the decrease in our net interest margin of 30 basis points to 2.18% for the nine months ended September 30, 2016 from 2.49% for the nine months ended September 30, 2015, partially offset by an increase in average interest-earning assets to average interest-bearing liabilities.

 

Provision for Loan Losses. There was no provision for loan losses for the three months ended September 30, 2016 or 2015. Even though we have seen a nominal increase in nonperforming loans, our level of impaired loans has declined from $1.9 million at December 31, 2015 to $914,000 at September 30, 2016, and our total loans restructured have decreased from four loans in the amount of $488,000 to 1 loan for $89,000. Additionally, we have seen a decline in our gross charge-offs as gross charge offs declined to $29,000 for the three months ended September 30, 2016 from $52,000 for the three months ended September 30, 2015.

 

Our total allowance for loans losses was 1.6% of total gross loans at September 30, 2016 as compared to 1.7% at December 31, 2015. We do not have an allowance for specifically identified impaired loans as we generally charge off identified impairments on impaired loans to the allowance for loan losses to a net realizable value on those loans. We do maintain an unallocated portion in our general allowance that we believe represents those probable incurred losses within our loan portfolio not specifically identified with any particular portfolio segment. We believe that with our increased emphasis on commercial lending as opposed to mortgage lending there are inherent credit risks that we have not yet quantified through historical experience.

 

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Noninterest Income. Noninterest income increased $28,000, or 87.5%, to $60,000 for the three months ended September 30, 2016 from $32,000 for the three months ended September 30, 2015. The increase is attributable to net gains realized on the sale of real estate owned properties of $20,000 for the three months ended September 30, 2016 as compared to net gains realized of $8,000 for the three months ended September 30, 2015 and an increase in other noninterest income to $26,000 from $3,000 for the same periods ended. The increase in other noninterest income is primarily attributable to an increase in miscellaneous loan administrative fees.

 

Noninterest Expense. Noninterest expense increased $43,000, or 6.0%, to $755,000 for the three months ended September 30, 2016 from $712,000 for the three months ended September 30, 2015. The increase is reflective of increases in professional and supervisory fees and FDIC deposit insurance. Professional and supervisory fees increased by $69,000, or 107.8%, to $133,000 for the three months ended September 30, 2016 from $64,000 for the three months ended September 30, 2015. The increase in professional and supervisory fees is related to the increased costs associated with our conversion to a public company. FDIC deposit insurance increased by $49,000, or 175.0%, to $21,000 for the three months ended September 30, 2016. FDIC premium expense decreased substantially during the three months ended September 30, 2015 as a result of a lower assessment rate due to our improved risk category. These increases in noninterest expenses more than offset a decrease of $95,000, or 20.4%, in salaries and employee benefits to $370,000 from $465,000 for the same periods ended. The decrease in salaries and employee benefits reflects several higher salaried employees that were employed by the Company during the three months ended September 30, 2015 that were no longer employed during the same period in 2016.

 

Income Tax Expense. There was no provision for income taxes for the three months ended September 30, 2016 or September 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.

 

Comparison of Operating Results for the Nine Months Ended September 30, 2016 and 2015

 

General. We reported a net loss of $408,000 for the nine months ended September 30, 2016 as compared to a net loss of $389,000 for the nine months ended September 30, 2015. The increase in net loss was primarily attributed to a decrease in noninterest income of $85,000, or 44.7%, to $105,000 for the nine months ended September 30, 2016 from $190,000 for the nine months ended September 30, 2015, which more than offset the increase in net interest income before the provision for loan losses of $32,000 and the decrease in noninterest expense of $16,000 for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015.

 

Interest Income. Interest income increased $125,000 or 5.0%, to $2.6 million for the nine months ended September 30, 2016 from $2.5 million for the nine months ended September 30, 2015. The increase in interest income is reflective of an increase in the average balances of interest-earning assets, which increased to $99.4 million for the nine months ended September 30, 2016 from $90.8 million for the nine months ended September 30, 2015. The increase in the average balances of interest-earning assets is reflective of the increase in cash from the $6.2 million in net proceeds from of our stock offering in connection with our mutual-to-stock conversion and an increase in total deposits of $6.9 million during the nine months ended September 30, 2015, which was deployed into interest-earning assets. For the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015, the average balance of loans increased to $74.1 million from $69.0 million, the average balance of investments increased to $15.8 million from $12.9 million, and the average balance of interest-bearing deposits in other banks increased to $9.5 million from $8.9 million. These increases in average balances offset the decrease in the overall yield for each interest-earning asset. The average yields on interest-earning assets decreased 15 basis points to 3.53% for the nine months ended September 30, 2016 from 3.68% for the nine months ended September 30, 2015. Over these same periods, our loan yield decreased 16 basis points to 4.40% from 4.56%, and our investment yield decreased 9 basis points to 1.32% from 1.41%. The decrease in yields on both loans and investments is reflective of the sustained historically low interest rate environment and very competitive lending environment in our market area.

 

Interest Expense. Interest expense increased $93,000, or 10.9%, to $948,000 for the nine months ended September 30, 2016 from $855,000 for the nine months ended September 30, 2015. The increase in interest expense was caused by both an increase in the average balances of deposits of $10.6 million, or 15.3%, to $80.3 million for the nine months ended September 30, 2016 from $69.6 million for the nine months ended September 30, 2015 and an increase in the average rate paid on deposits to 1.27% for the nine months ended September 30, 2016 from 1.06% for the nine months ended September 30, 2015. This 21 basis point increase in the average rate paid is reflective of our marketing strategy to attract new depositors within our market area and retain existing customers post conversion. The increase in interest expense from deposits was offset, partially, by a decrease in interest expense from FHLB advances, which is related to the maturity of $3.0 million of our advances during the first quarter of 2016 and refinancing existing FHLB advances with lower rates. Interest expense on FHLB advances decreased $116,000, or 38.4%, to $186,000 for the nine months ended December 31, 2016 from $302,000 for the nine months ended September 30, 2015.

 

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Net Interest Income. Net interest income increased, $32,000, or 1.9%, to $1.7 million for the nine months ended September 30, 2016. The nominal increase is reflective of a consistent average interest-earning assets to average interest-earning liabilities for the nine months ended September 30, 2016 compared to September 30, 2015.

 

Provision for Loan Losses. We recorded no provision for loan losses for the nine months ended September 30, 2016 and $18,000 for the nine months ended September 30, 2015. Even though we have seen a nominal increase in nonperforming loans, our level of impaired loans has declined from $1.9 million at December 31, 2015 to $914,000 at September 30, 2016, and our total loans restructured have decreased from four loans in the amount of $488,000 to 1 loan for $89,000.

 

Our total allowance for loans losses was 1.6% of total gross loans at September 30, 2016 as compared to 1.7% at December 31, 2015. We do not have an allowance for specifically identified impaired loans as we generally charge off identified impairments on impaired loans to the allowance for loan losses to a net realizable value on those loans. We do maintain an unallocated portion in our general allowance that we believe represents those probable incurred losses within our loan portfolio not specifically identified with any particular portfolio segment. We believe that with our increased emphasis on commercial lending as opposed to mortgage lending there are inherent credit risks that we have not yet quantified through historical experience.

 

Noninterest Income. Noninterest income decreased $85,000, or 44.7%, to $105,000 for the nine months ended September 30, 2016 from $190,000 for the nine months ended September 30, 2015. The decrease is due primarily to a larger gain on sale of real estate owned during the nine months ended September 2015 of $120,000 as compared to $10,000 for the nine months ended September 2016. We have successfully sold all but one real estate owned property in the amount of $24,000 at September 30, 2016.

 

Noninterest Expense. Noninterest expense decreased modestly by $16,000, or 0.72%, to $2.2 million for the nine months ended September 30, 2016. The decrease reflected the decrease in salaries and employee benefits of $115,000, or 9.4%, to $1.1 million for the nine months ended September 30, 2016 from $1.2 million for the nine months ended September 30, 2015. The decrease in salaries and employee benefits reflects several higher salaried employees that were employed by the Company during the nine months ended September 30, 2015 that were no longer employed during the same period in 2016. The decrease in salaries and employee beneifts was offset partially by an increase in professional and supervisory fees of $80,000, or 33.1%, to $322,000 for the nine months ended September 30, 2016 as compared to $242,000 for the nine months ended September 30, 2015. The increaese in professional and supervisory fees reflects the increased cost with being a public company.

 

Income Tax Expense. There was no provision for income taxes for the nine months ended September 30, 2016 or September 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.

 

Liquidity and Capital Resources

 

Our primary sources of funds consist of deposit inflows, loan repayments, FHLB advances, and repayments, maturities and calls of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2016.

 

We regularly monitor and adjust our investments in liquid assets based upon our assessment of: (i) expected loan demand; (ii) expected deposit flows; (iii) yields available on interest-earning deposits and securities; and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning and non interest-earning deposits and short- and medium-term securities.

 

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB, which provides an additional source of funds. Our FHLB advances totaled $6.0 million at September 30, 2016. In addition, the Company had entered into an irrevocable standby letter of credit with the FHLB of $3.2 million at September 30, 2016 to secure public deposits. At September 30, 2016, we had the ability to borrow up to an additional $33.2 million from the FHLB, subject to pledging additional collateral. We also have an unused open line of credit at The Independent BankersBank that would allow us to borrow up to $2.5 million at September 30, 2016.

 

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The Company is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2016 and December 31, 2015, the Company exceeded all regulatory capital requirements. The Company is considered “well capitalized” under regulatory guidelines.

 

The net proceeds from the stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of new loans. Our results of operations will be enhanced by the net proceeds from the stock offering, resulting in increased net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, our return on equity will be adversely affected.

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable, as the Registrant is a smaller reporting company.

 

ITEM 4. Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Bank’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2016. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

 

During the quarter ended September 30, 2016, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

ITEM 1A. RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Best Hometown Bancorp, Inc.’s Prospectus dated May 13, 2016 ("Prospectus") 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, which could materially affect our business, financial condition or future results. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. At September 30, 2016, the risk factors for Best Hometown Bancorp, Inc. have not changed materially from those reported in our Prospectus. However, the risks described in the Prospectus are not the only risks that we face.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)Not applicable.

 

(b)Not applicable.

 

(c)Not applicable.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed in the “Index to Exhibits” immediately following the Signatures.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BEST HOMETOWN BANCORP, INC.  
       
Date: November 14, 2016   /s/ Ronnie R. Shambaugh  
    Ronnie R. Shambaugh  
    President and Chief Executive Officer  
       
Date: November 14, 2016     /s/ H. Allen Salter, CPA  
    H. Allen Salter, CPA  
    Chief Financial Officer  

 

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INDEX TO EXHIBITS

 

Exhibit
number
  Description
3.2   Bylaws of Best Hometown Bancorp, Inc.*
4   Form of Common Stock Certificate of Best Hometown Bancorp, Inc.*
10.1   Employment Agreement of Ronnie R. Shambaugh*
10.2   Employment Agreement of David W. Gansner*
10.3   Employment Agreement of Cynthia T. Knebel*
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0   The following materials from Best Hometown Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii)   the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated    Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements  

 

* Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-210109), initially filed on March 11, 2016.

 

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