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 March 31, 2017

 

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. 333-210109

 

 

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer ¨ Accelerated filer ¨
       
Non-accelerated filer ¨ Smaller reporting company x
       
    Emerging Growth Company x

 

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

 

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 May 15, 2017, 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 OPERATION 26
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
     
ITEM 4. CONTROLS AND PROCEDURES 32
     
PART II. OTHER INFORMATION
 
ITEM . LEGAL PROCEEDINGS 32
     
ITEM 1A. RISK FACTORS 32
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 32
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 32
     
ITEM 4. MINE SAFETY DISCLOSURES 32
     
ITEM 5. OTHER INFORMATION 32
     
ITEM 6. EXHIBITS 32
     
SIGNATURES 33
   
INDEX TO EXHIBITS 34

 

 1 

Table of Contents 

 

BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

ITEM 1. FINANCIAL STATEMENTS

 

   March 31,   December 31, 
   2017   2016 
   (Unaudited)     
ASSETS          
Cash and due from banks  $2,692   $1,776 
Interest-earning deposits in banks   2,254    3,683 
Total cash and cash equivalents   4,946    5,459 
Available-for-sale securities   25,476    25,162 
Loans   76,889    75,462 
Allowance for loan losses   (1,192)   (1,214)
Net loans   75,697    74,248 
Premises and equipment, net   3,458    3,141 
Bank owned life insurance   3,402    - 
Real estate owned, net   29    - 
Accrued interest receivable          
Investment securities   250    244 
Loans receivable   81    74 
Deferred tax asset   133    138 
Restricted equity securities   405    837 
Other assets   112    87 
Total assets  $113,989   $109,390 
           
LIABILITIES          
Deposits          
Noninterest-bearing  $5,588   $4,781 
Interest-bearing   84,534    83,690 
Total deposits   90,122    88,471 
Federal Home Loan Bank ("FHLB") advances   9,000    6,000 
Accrued defined benefit pension and postretirement plans   1,847    1,911 
Other liabilities   289    209 
Total liabilities   101,258    96,591 
           
Commitments and contingencies          
Redeemable common stock held by ESOP plan   55    41 
           
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    8 
Additional paid-in capital   6,841    6,839 
Retained earnings - substantially restricted   8,215    8,330 
Unearned Employee Stock Ownership Plan ("ESOP"), 61,742 and 62,844 shares   (620)   (628)
Accumulated other comprehensive loss, net of tax:          
Net unrealized losses on available-for-sale securities   (257)   (269)
Net unrealized losses on defined benefit pension plan and postretirement medical plans, net   (1,456)   (1,481)
Total accumulated other comprehensive loss, net of tax   (1,713)   (1,750)
Less maximum cash obligation related to ESOP shares   (55)   (41)
Total shareholders' equity   12,676    12,758 
Total liabilities and shareholders' equity  $113,989   $109,390 

 

See accompanying notes to the condensed consolidated financial statements

 

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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 
   March 31, 
   2017   2016 
Interest income:          
Loans receivable  $818   $821 
Investment securities, taxable   101    46 
Other interest-earning assets   9    9 
Total interest income   928    876 
Interest expense:          
Deposits   261    238 
Advances from FHLB   38    71 
Total interest expense   299    309 
Net interest income   629    567 
Provision for loan losses   -    - 
Net interest income after provision for loan losses   629    567 
Noninterest income:          
Service charges on deposit accounts   17    18 
Income on bank owned life insurance   2    - 
Other   21    16 
Total noninterest income   40    34 
Noninterest expense:          
Salaries and employee benefits   428    412 
Occupancy and equipment   117    87 
Data processing   56    51 
Professional and supervisory fees   93    83 
Office expense   14    11 
Advertising   16    9 
FDIC deposit insurance   8    21 
Provision for real estate owned and related expenses   1    9 
Other   51    51 
Total noninterest expense   784    734 
Loss before income taxes   (115)   (133)
Income tax expense   -    - 
Net loss  $(115)  $(133)
           
Basic net loss per share  $(0.15)   NA 

 

See accompanying notes to the condensed consolidated financial statements

 

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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 
   March 31, 
   2017   2016 
         
Net loss  $(115)  $(133)
Other comprehensive income:          
Unrealized gain on available-for-sale securities :          
Unrealized holding gain arising during the period   18   $89 
Reclassification adjustment for gains included in net income   -    - 
Tax effect   (6)   (30)
Net of tax   12    59 
           
Defined benefit pension and post retirement medical plans:          
Net gain (loss) arising during the period on plans   -    - 
Reclassification adjustment for amortization of prior service cost and net gain/loss included in net periodic pension cost   25    27 
Tax effect   -    - 
Net of tax   25    27 
Total other comprehensive income   37    86 
Comprehensive loss  $(78)  $(47)

 

See accompanying notes to the condensed consolidated financial statements

 

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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         
                       Losses         
                   Net Unrealized   On Defined   Maximum     
       Additional       Unearned   Losses   Benefit Pension and   Cash Obligation     
   Common   Paid-In   Retained   ESOP   On Available-for-sale   Postretirement   Related to     
   Stock   Capital   Earnings   Shares   Securities, Net   Medical Plans, Net   ESOP Shares   Total 
                                         
Balance at December 31, 2015  $-   $-   $8,789   $-   $(85)  $(1,842)  $-   $6,862 
Net loss   -    -    (133)   -    -    -    -    (133)
Other comprehensive income   -    -    -    -    59    27    -    86 
Balance at March 31, 2016  $-   $-   $8,656   $-   $(26)  $(1,815)  $-   $6,815 
                                         
Balance at December 31, 2016  $8    6,839    8,330    (628)   (269)   (1,481)  $(41)  $12,758 
Net loss   -    -    (115)   -    -    -    -    (115)
Other comprehensive income   -    -    -    -    12    25    -    37 
ESOP shares earned   -    2    -    8    -    -    -    10 
Change related to ESOP shares cash obligation   -    -    -    -    -    -    (14)   (14)
Balance at March 31, 2017  $8   $6,841   $8,214   $(620)  $(257)  $(1,456)  $(55)  $12,676 

 

See accompanying notes to the condensed consolidated financial statements

 

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BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

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

(Unaudited)

 

   Three Months Ended 
   March 31 
   2017   2016 
         
Cash flows from operating activities:          
Net loss  $(115)  $(133)
Adjustments to reconcile net loss to net cash          
provided by (used for) operating activities:          
Depreciation and amortization, net   186    83 
Provision for loan losses   -    - 
Income on bank owned life insurance   (2)   - 
ESOP compensation expense   10    - 
Net change in operating assets and liabilities:          
Accrued interest receivable   (13)   2 
Accrued interest payable   1    (21)
Other   36    (366)
Net cash provided by (used in) operating activities   103    (435)
           
Cash flows from investing activities:          
Loan originations and repayments, net   (1,488)   1,666 
Purchases of available-for-sale securities   (1,816)   (2,324)
Proceeds from maturities, paydowns and calls of available-for-sale securities   1,404    1,058 
Purchase of bank owned life insurance   (3,400)   - 
Redemptions of FHLB stock, net   432    - 
Purchases of premises and equipment   (399)   (30)
Proceeds from sale of foreclosed real estate   -    44 
Net cash provided by (used in) investing activities   (5,267)   414 
           
Cash flows from financing activities:          
Net change in deposits   1,651    4,406 
Borrowings of FHLB advances   3,000    - 
Repayments of FHLB advances   -    (3,000)
Net cash provided by financing activities   4,651    1,406 
Change in cash and cash equivalents   (513)   1,385 
Cash and cash equivalents at beginning of period   5,459    9,100 
Cash and cash equivalents at end of period  $4,946   $10,485 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Interest on deposits  $261   $237 
Interest on advances from FHLB   37    82 
           
Real estate acquired in settlement of loans  $29   $- 

 

See accompanying notes to the condensed consolidated financial statements

 

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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 (the “Conversion”) from a federally-chartered mutual savings association to the capital stock form of organization, including 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. In connection with the Conversion, the Company sold 826,208 shares of its common stock, including 66,096 shares (8% of shares sold) that were purchased by the Bank’s employee stock ownership plan (“ESOP”), at a price of $10.00 per share, for gross offering proceeds of $8.3 million. The cost of the conversion and issuance of common stock was $1,400, which was deducted from the gross offering proceeds. The Company contributed $5.0 million of the net proceeds from the offering by the Company to the Bank, and $1.2 million was retained by the Company. In addition, $661,000 of the net proceeds were used to fund a loan to the ESOP, with which the ESOP purchased Company shares.

 

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 March 31, 2017 and for the three months ended March 31, 2017, 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 for the three months ended March 31, 2016 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, 2016, which has been derived from audited financial statements, and unaudited condensed consolidated financial statements of the Company as of March 31, 2017 and for the three months ended March 31, 2017 and 2016, 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, 2016 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 March 31, 2017 and the results of operations and cash flows for the three months ended March 31, 2017 and 2016. All interim amounts have not been audited and the results of operations for the three months ended March 31, 2017, herein are not necessarily indicative of the results of operations to be expected for the entire year. Some items in the statement of operations for the three months ended March 31, 2016 were reclassified to conform to the current presentation and had no effect on net income or shareholders’ equity.

 

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.

 

Contingencies

 

The Company is involved in certain legal actions arising from normal business activities. Management believes that the outcome of such proceedings will not have any material adverse effect on the financial statements of the Company.

 

(2) NEW ACCOUNTING STANDARDS

 

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20). The update changes the amortization period of associated premiums with the purchase of callable debt securities from amortization over the life of the security to the earliest call date of the security. The standard takes effect for fiscal years and interim periods within those fiscal years, beginning after Dec. 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company intends to early adopt this standard. Adoption will not have an effect on the Company’s consolidated financial statements as the company does not presently own any callable debt securities.

 

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 preparing for the implementation of this new credit loss standard and evaluating its effects on our financial statements and disclosures. 

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 PER SHARE

 

Basic EPS or loss per common share is determined by dividing net earnings or loss available to common shareholders by the weighted average number of common shares outstanding for the period. ESOP shares are considered outstanding for this calculation unless unearned. The factors used in the earnings per common share computation follow:

 

   Three Months Ended 
   March 31,
2017
 
Loss per share     
Net loss  $(115)
Weighted average common shares outstanding   826,208 
Less: average unearned ESOP shares   (62,293)
Weighted average common shares outstanding   763,915 
Basic loss per share  $(0.15)

 

Given a net loss for the three months ended March 31, 2017, only basic loss per share is applicable. There were no shares outstanding during the three months ended March 31, 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)

 

(4) SECURITIES AVAILABLE FOR SALE

 

Debt and mortgage-backed securities have been classified in the condensed consolidated balance sheets according to management’s intent. U.S. Government agency mortgage-backed securities consist of securities issued by U.S. Government agencies and U.S. Government sponsored enterprises. Investment securities at March 31, 2017 and December 31, 2016 are as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
March 31, 2017  Cost   Gains   Losses   Value 
Debt securities:                    
U.S. Government agency SBAP security  $1,003   $-   $(28)  $975 
U.S. Government agency mortgage-backed securities - residential   24,861    3    (363)   24,501 
   $25,864   $3   $(391)  $25,476 
                     
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
December 31, 2016  Cost   Gains   Losses   Value 
Debt securities:                    
U.S. Government agency bonds  $1,005   $-   $(29)  $976 
U.S. Government agency mortgage-backed securities - residential   24,563    4    (381)   24,186 
Total  $25,568   $4   $(410)  $25,162 

 

As of March 31, 2017 and December 31, 2016, investment securities with a carrying value of $0 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 March 31, 2017 and December 31, 2016. 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 
           Number in           Number in 
   Fair   Unrealized   Unrealized   Fair   Unrealized   Unrealized 
March 31, 2017  Value   Loss   Loss (1)   Value   Loss   Loss (1) 
U.S. Government agency SBAP security  $975   $(28)   1   $-   $-    - 
U.S. Government agency mortgage-backed securities - residential   20,010    (307)   28    3,250    (56)   8 
   $20,985   $(335)   29   $3,250   $(56)   8 
                               
   Total             
           Number in             
   Fair   Unrealized   Unrealized             
March 31, 2017  Value   Loss   Loss (1)             
U.S. Government agency SBAP security  $975   $(28)   1                
U.S. Government agency mortgage-backed securities - residential   23,260    (363)   36                
Total  $24,235   $(391)   37                

 

(1) Represents actual number of securities in an unrealized loss position.

 

   Less than 12 Months   12 Months or Longer 
           Number in           Number in 
   Fair   Unrealized   Unrealized   Market   Unrealized   Unrealized 
December 31, 2016  Value   loss   Loss (1)   Value   loss   Loss (1) 
U.S. Government agency bonds  $976   $(29)   1   $-   $-    0 
U.S. Government agency mortgage-backed securities - residential   19,341    (320)   26    3,500    (61)   8 
Total  $20,317   $(349)   27   $3,500   $61    8 
                               
   Total             
           Number in             
   Fair   Unrealized   Unrealized             
December 31, 2016  Value   Loss   Loss (1)             
U.S. Government agency bonds  $976   $(29)   1                
U.S. Government agency mortgage-backed securities - residential   22,841    (381)   34                
Total  $23,817   $(410)   35                

 

(1) Represents actual number of securities in an unrealized loss position.

 

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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 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.  

 

Total fair value securities with unrealized losses at March 31, 2017 and December 31, 2016, was $24,235 and $23,817, which was approximately 95% at both March 31, 2017 and December 31, 2016, of the Company’s available for sale securities. None of the unrealized losses at March 31, 2017 were recognized into net income for the three months ended March 31, 2017 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, 2016 were recognized as having OTTI during the three months ended March 31, 2017.

 

Because the actual cash flows for the SBAP security and mortgage-backed securities may differ from their contractual maturities, a maturity table is not shown.

 

There were no sales of securities available-for-sale during the three months ended March 31, 2017 and 2016.

 

(5) LOANS

 

The components of loans at March 31, 2017 and December 31, 2016 were as follows:

 

   March 31,   December 31, 
   2017   2016 
Real estate loans:          
One-to four-family, owner occupied  $47,238   $47,971 
One-to four-family, non-owner occupied   5,231    5,251 
Commercial and multi-family   18,320    17,785 
Construction and land   2,952    2,676 
Commercial business loans   2,046    921 
Consumer loans   1,135    901 
    76,922    75,505 
Net deferred loan fees   (33)   (43)
Total  $76,889   $75,462 

 

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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 months ended March 31, 2017 and 2016 by portfolio segment:

 

   Beginning               Ending 
   Balance   Provision   Charge-offs   Recoveries   Balance 
Three Months Ended March 31, 2017                    
Real estate loans:                         
One-to-four family, owner occupied  $657   $12   $(28)  $6  $647 
One-to-four family, non-owner occupied   113    (4)   -    -   109 
Commercial and multi-family   309    8    -    -    317
Construction and land   42    2    -    -    44 
Commercial business loans   18    23    -    -    41 
Consumer loans   26    8    -    -    34 
Unallocated   49    (49)   -    -    - 
   $1,214   $-   $(28)  $6  $1,192 

 

   Beginning               Ending 
   Balance   Provision   Charge-offs   Recoveries   Balance 
Three Months Ended March 31, 2016                    
Real estate loans:                         
One-to-four family, owner occupied  $771   $(20)  $-   $2   $753 
One-to-four family, non-owner occupied   82    (9)   -    1    74 
Commercial and multi-family   260    3    -    -    263 
Construction and land   47    (4)   -    -    43 
Commercial business loans   14    3    -    -    17 
Consumer loans   19    (1)   -    -    18 
Unallocated   56    28    -    -    84 
   $1,249   $-   $-   $3   $1,252 

 

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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 recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at March 31, 2017 and December 31, 2016:

 

   Ending Allowance on Loans   Loans 
   Individually   Collectively       Individually   Collectively     
   Evaluated for   Evaluated for       Evaluated for   Evaluated for     
   Impairment   Impairment   Total   Impairment   Impairment   Total 
At March 31, 2017    
Real estate loans:                              
One-to four-family, owner occupied  $-   $646   $646   $745   $46,493   $47,238 
One-to four-family, non-owner occupied   -    110    110    80    5,151    5,231 
Commercial and multi-family   -    317    317    67    18,253    18,320 
Construction and land   -    44    44    14    2,938    2,952 
Commercial business loans   -    41    41    -    2,046    2,046 
Consumer loans   -    34    34    -    1,135    1,135 
Unallocated   -    -    -    -    -    - 
   $-   $1,192   $1,192   $906   $76,016   $76,922 

 

   Ending Allowance on Loans   Loans 
   Individually   Collectively       Individually   Collectively     
   Evaluated for   Evaluated for       Evaluated   Evaluated     
   Impairment   Impairment   Total   Impairment   Impairment   Total 
At December 31, 2016    
Real estate loans:                              
One-to four-family, owner occupied  $9   $648   $657   $700   $47,271   $47,971 
One-to four-family, non-owner occupied   -    113    113    110    5,141    5,251 
Commercial and multi-family   -    309    309    69    17,716    17,785 
Construction and land   -    42    42    16    2,660    2,676 
Commercial business loans   -    18    18    -    921    921 
Consumer loans   -    26    26    -    901    901 
Unallocated   -    49    49    -    -    - 
   $9   $1,205   $1,214   $895   $74,610   $75,505 

 

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 March 31, 2017 and December 31, 2016, including the average recorded investment balance and interest earned for the three months ended March 31, 2017 and 2016:

 

   March 31, 2017   December 31, 2016 
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
 
With no recorded allowance:                              
Real estate loans:                              
One-to four-family, owner occupied  $946   $745   $-   $915   $661   $- 
One-to four-family, non-owner occupied   103    80    -    134    110    - 
Commercial and multi-family   67    67    -    69    69    - 
Construction and land   14    14    -    16    16    - 
Commercial business loans   -    -    -    -    -    - 
Consumer loans   -    -    -    -    -    - 
Total  $1,130   $906   $-   $1,134   $856   $- 
                               
With recorded allowance:                              
Real estate loans:                              
One-to four-family, owner occupied  $-   $-   $-   $39   $39   $9 
One-to four-family, non-owner occupied   -    -    -    -    -    - 
Commercial and multi-family   -    -    -    -    -    - 
Construction and land   -    -    -    -    -    - 
Commercial business loans   -    -    -    -    -    - 
Consumer loans   -    -    -    -    -    - 
Total  $-   $-   $-   $39   $39   $9 
                               
Totals:                              
Real estate loans  $1,130   $906   $-   $1,173   $895   $9 
Commercial loans   -    -    -    -    -    - 
Consumer and other loans   -    -    -    -    -    - 
Total  $1,130   $906   $-   $1,173   $895   $9 

 

Generally, 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 March 31, 2017 and December 31, 2016.

 

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2017 and 2016.  At March 31, 2017 and December 31, 2016, there were no residential real estate loans in the process of foreclosure.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

   For the Three Months Ended 
   March 31, 2017   March 31, 2016 
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no recorded allowance:                    
Real estate loans:                    
One-to four-family, owner occupied  $703   $13   $1,683   $27 
One-to four-family, non-owner occupied   95    2    82    - 
Commercial and multi-family   68    -    -    - 
Construction and land   15    -    -    - 
Commercial business loans   -    -    -    - 
Consumer loans   -    -    -    - 
Total  $881   $15   $1,765   $27 
                     
With recorded allowance:                    
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  $881   $15   $1,765   $27 
Commercial loans   -    -    -    - 
Consumer and other loans   -    -    -    - 
Total  $881   $15   $1,765   $27 

 

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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 March 31, 2017 and December 31, 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

 
March 31, 2017                            
Real estate loans:                                   
One-to four-family, owner occupied  $508   $40   $19   $46,671   $47,238   $19   $- 
One-to four-family, non-owner occupied   -    25    -    5,206    5,231    -    - 
Commercial and multi-family   203    -    68    18,049    18,320    68    - 
Construction and land   -    -    -    2,952    2,952    14    - 
Commercial business loans   -    -    -    2,046    2,046    -    - 
Consumer loans   -    -    -    1,135    1,135    -    - 
   $711   $65   $87   $76,059   $76,922   $101   $- 

 

  

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

 
December 31, 2016                            
Real estate loans:                                   
One-to four-family, owner occupied  $505   $40   $39   $47,387   $47,971   $39   $- 
One-to four-family, non-owner occupied   12    43    -    5,196    5,251    30    - 
Commercial and multi-family   -    69    -    17,716    17,785    69    - 
Construction and land   -    -    -    2,676    2,676    16    - 
Commercial business loans   -    -    -    921    921    -    - 
Consumer loans   3    -    -    898    901    -    - 
   $520   $152   $39   $74,794   $75,505   $154   $- 

 

Loan Grades:

 

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.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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.

 

Loss: Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

 

Loan Portfolio Segments:

 

The Company groups loans of similar type that share common risk characteristics. We segment our loan portfolio along with assigning individual risk grades to each loan as part of our methodology for determining our allowance for loan losses. Those portfolio segments and significant risk characteristics are as follows:

 

One-to four-family, owner occupied:   One-to four-family, owner occupied loans consist primarily of loans secured by first or second mortgages on primary residences, and are originated as primarily as fixed-rate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. 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.

 

The Company currently originates residential mortgage loans for our portfolio with loan-to-value ratios of up to 80% for traditional owner-occupied homes. For traditional homes, the Company may originate loans with loan-to-value ratios in excess of 80% if the borrower provides additional readily marketable collateral.

 

One-to four-family, non-owner occupied:   One-to four-family, non-owner occupied loans are similar to owner occupied one-to four-family loans in terms of collateral, but they carry greater inherent risks than owner occupied loans, since the repayment ability of the borrower is generally reliant on the success of the income generated from the property. The Company currently originates one-to four-family, non-owner occupied mortgage loans for our portfolio with loan-to-value ratios of up to 80% for traditional owner-occupied homes.

 

Commercial and multi-family:   Commercial real estate loans are secured primarily by office buildings, churches and various income producing properties. Multi-family real estate loans are generally secured by apartment complexes. Commercial and multifamily 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. The Company generally obtains personal guarantees on these loans.

 

The Company currently originates commercial and multi-family loans in amounts of up to 80% of the lesser of the appraised value or the purchase price of the property with an appropriate projected debt service coverage ratio.

 

Construction and Land:   The Company makes construction loans to individuals for the construction of their primary residences and to commercial businesses for their real estate needs. These loans generally have maximum terms of nine months, and upon completion of construction convert to conventional amortizing mortgage loans. Residential construction loans have rates and terms comparable to one-to-four family residential mortgage loans that the Company originates. Commercial construction

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

loans have rates and terms comparable to other commercial real estate loans that we originate. During the construction phase, the borrower generally pays interest only. Generally, the maximum loan-to-value ratio of our owner-occupied construction loans is 80%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. Commercial construction loans are generally underwritten pursuant to the same guidelines used for originating other commercial real estate loans.

 

The Company also makes interim construction loans for nonresidential properties. In addition, the Company occasionally makes loans for the construction of homes “on speculation,” but the Company generally permits a borrower to have only two such loans at a time. These loans generally have a maximum term of nine months, and upon completion of construction, borrowers can convert to conventional amortizing nonresidential real estate loans. These construction loans have rates and terms comparable to permanent loans secured by property of the type being constructed that we originate. Generally, the maximum loan-to-value ratio of these construction loans is 85%.

 

Commercial business loans:   Commercial, non-real estate, loans are offered to businesses and professionals in the Company’s market area. These loans generally have short and medium terms on a collateralized basis. The structure of these loans are largely determined by the loan purpose and collateral. Sources of collateral can include a lien on equipment, inventory, receivables and other assets of the company. A UCC-1 is typically filed to perfect our lien on these assets.

 

Commercial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of its business and generally are collateralized by business assets. As a result, such loans and leases involve additional complexities, variables and risks and require more thorough underwriting and servicing than other types of loans and leases. Repayment of commercial loans largely depends on the successful operation of the business for which an operating loan is utilized.

 

Consumer loans:   The Company offers installment loans for various consumer purposes, including the purchase of automobiles, boats, and for other legitimate personal purposes. The maximum terms of consumer loans is 12 months for unsecured loans and 12 to 60 months for loans secured by a vehicle, depending on the age of the vehicle. The Company generally only extends consumer loans to existing customers or their immediate family members, and these loans generally have relatively low balances. We also originate floating rate home equity lines of credit and home improvement loans secured by second mortgages.

 

Consumer loans may entail greater credit risk than a typical residential mortgage loan, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

 

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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 total loans by risk grade and portfolio segment at March 31, 2017 and December 31, 2016:

 

           Special                 
   Pass   Watch   Mention   Substandard   Doubtful   Loss   Total 
March 31, 2017                            
Real estate loans:                                   
One-to four-family, owner occupied  $44,718   $932   $150   $1,438   $-   $-   $47,238 
One-to four-family, non-owner occupied   5,151    -    -    80    -    -    5,231 
Commercial and multi-family   18,252    -    -    68    -    -    18,320 
Construction and land   2,763    175    -    14    -    -    2,952 
Commercial business loans   1,820    -    226    -    -    -    2,046 
Consumer loans   1,135    -    -    -    -    -    1,135 
   $73,839   $1,107   $376   $1,600   $-   $-   $76,922 

 

           Special                 
   Pass   Watch   Mention   Substandard   Doubtful   Loss   Total 
At December 31, 2016:                            
Real estate loans:                                   
One-to four-family, owner occupied  $45,335   $987   $250   $1,399   $-   $-   $47,971 
One-to four-family, non-owner occupied   5,141    -    -    110    -    -    5,251 
Commercial and multi-family   17,731    54    -    -    -    -    17,785 
Construction and land   2,483    177    -    16    -    -    2,676 
Commercial business loans   852    -    -    69    -    -    921 
Consumer loans   901    -    -    -    -    -    901 
   $72,443   $1,218   $250   $1,594   $-   $-   $75,505 

 

(6) FHLB Advances

 

At March 31, 2017 and December 31, 2016, advances from the Federal Home Loan Bank were as follows:

 

   Interest   March 31,   December 31, 
Maturity Date  Rate   2017   2016 
             
September 21, 2017   **   $3,000   $- 
March 12, 2018   4.92%   1,000    1,000 
July 18, 2018   1.84%   3,000    3,000 
July 18, 2019   2.21%   2,000    2,000 
Total       $9,000   $6,000 

 

 

** Interest is based on 3 month LIBOR -16 basis points. 0.99% at March 31, 2017.

 

Each advance is payable at its maturity date, with a prepayment penalty if paid earlier than its maturity date. The advances were collateralized by $34,874 and $46,544 of first mortgage loans under a blanket lien arrangement at March 31, 2017 and December 31, 2016. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to a total of $37,344 at March 31, 2017.

 

(7) 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 Bank may make discretionary contributions to the ESOP and pays 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

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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 months ended March 31, 2017. The expense recognized for the three months ended March 31, 2017 was $10 and is reported in salaries and wages.

 

ESOP shares at March 31, 2017 and December 31, 2016 are summarized as follows:

 

   March 31,   December 31, 
   2017   2016 
Committed to be released to participants   1,102    - 
Allocated to participants   3,252    3,252 
Unearned   61,742    62,844 
Total ESOP shares   66,096    66,096 
           
Fair value of unearned shares  $778   $792 

 

(8) 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 March 31,   Three Months Ended March 31, 
   2017   2016   2017   2016 
                 
Service cost  $-   $-   $-   $- 
Interest cost   33    36    9    10 
Expected return on plan assets   (36)   (34)   -    - 
Amortization:                    
Unrecognized net loss   25    27    2    2 
Unrecognized prior service cost   -    -    (2)   (2)
Asset (loss) gain deferred   -    -    -    - 
Net periodic cost  $22   $29   $9   $10 

 

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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 March 31, 2017 and December 31, 2016, 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 
                 
March 31, 2017                    
Pooled separate accounts  $-   $2,650   $-   $2,650 

 

               Total 
   Level 1   Level 2   Level 3   Fair Value 
                 
December 31, 2016:                    
Pooled separate accounts  $-   $2,558   $-   $2,558 

 

During the three months ended March 31, 2017, benefits paid, employer contributions and the actual return on plan assets for the defined benefit pension plan were $69, $69, and $92, respectively. During the three months ended March 31, 2016, benefits paid, employer contributions, and the actual return on plan assets were $68, $0, and $25, respectively.

 

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

 

       March 31,   December 31, 
  

Target Allocation

2017

   2017   2016 
Pooled separate accounts               
Equity   30%-40%    36%   37%
Debt   60%-70%    64%   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.

 

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

 

   Defined Benefit   Postretirement 
   Pension Plan   Medical Plan 
   March 31,   March 31, 
   2017   2016   2017   2016 
     
Unrecognized prior service cost  $-   $-   $2   $2 
Unrecognized net loss   25    27    (2)   (2)
    25    27    -    - 
Tax effect   -    -    -    - 
Unrecognized loss, net of taxes  $25   $27   $-   $- 

 

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(9) 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).

 

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.

 

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Assets and liabilities measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016 are summarized below:

 

   Level 2 
   March 31,   December 31, 
   2017   2016 
Financial Assets          
Available-for-sale securities  $25,476   $25,162 
   $25,476   $25,162 

 

Presented in the table below are assets measured at fair value on a nonrecurring basis using Level 3 inputs at March 31, 2017 and December 31, 2016:

 

   Level 3 
   March 31,   December 31, 
   2017   2016 
Impaired loans (collateral dependent)          
One-to four-family, owner occupied  $20   $39 
One-to four-family, non-owner occupied   -    - 
Total financial assets   20    39 
           
Nonfinancial assets          
Real estate owned, net:          
One-to four-family, owner occupied   29    - 
Total nonfinancial assets  $29   $- 
Total assets measured at fair value on a nonrecurring basis  $49   $39 

 

The Company's impaired loans at March 31, 2017 and December 31, 2016 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 $20 and $39, respectively. At March 31, 2017, there were no specific valuation allowances on this loan as the impaired portion of the loan was charged-off against the allowance for loan losses. This loan had a specific valuation allowance of $9 at December 31, 2016.

 

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 at March 31, 2017 consisted of one property recorded into real estate owned at fair value, less estimated costs to sell of $29. The resulting charge-off upon reclassification of the loan to real estate owned was $4. There was no real estate owned at December 31, 2016 and no write-downs of real estate owned during the three months ended March 31, 2016.

 

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The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2017 and December 31, 2016:

 

   Level 3 Quantitative Information 
   March 31,   December 31,           
   2017   2016   Valuation  Unobservable    
   Fair Value   Fair Value   Technique  Inputs  Range 
                   
Impaired real estate loans net, with specific allocations:                     
One-to-four family, owner occupied  $20   $39   Sales comparison approach  Adjustment for differences between the comparable sales   0% to 30% 
Real estate owned net:                     
One-to-four family, owner occupied  $29   $-   Sales comparison approach  Adjustment for differences between the comparable sales   0% to 20% 

 

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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 accrued interest payable balances. The estimated fair values of the Company’s remaining on-balance sheet financial instruments at March 31, 2017 and December 31, 2016 are summarized below:

 

   Carrying   Fair Value 
   Amount   Level 1   Level 2   Level 3   Total 
March 31, 2017                         
Financial assets                         
Available-for-sale securities  $25,476   $-   $25,476   $-   $25,476 
Restricted equity securities (1)   405    NA    NA    NA    NA 
Loans, net   75,697    -    -    76,852    76,852 
                          
Financial liabilities                         
Deposits  $90,122   $27,839   $63,377   $-   $91,216 
FHLB Advances   9,000    -    9,143    -    9,143 
                          
December 31, 2016                         
Financial assets                         
Available-for-sale securities  $25,162   $-   $25,162   $-   $25,162 
Restricted equity securities (1)   837    NA    NA    NA    NA 
Loans, net   74,248    -    -    75,877    75,877 
                          
Financial liabilities                         
Deposits  $88,471   $25,497   $64,082   $-   $89,579 
FHLB Advances   6,000    -    6,158    -    6,158 

 

 

(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.

 

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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PART 1. FINANCIAL INFORMATION

 

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

 

Management’s discussion and analysis of financial condition and results of operations at March 31, 2017 and for the three months ended March 31, 2017 and 2016 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

 

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

 

Additional factors that may affect our results are discussed in Best Hometown Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on March 30, 2017, 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 March 31, 2017 and December 31, 2016

 

Our total assets increased $4.6 million, or 4.2%, to $114.0 million at March 31, 2017 from $109.4 million at December 31, 2016. The increase in total assets is primarily due to the $1.4 million increase in net loans and the purchase of bank owned life insurance of $3.4 million. The increase in total assets was supported by increases in our total deposits and FHLB advances of $4.6 million, or 4.9%, to $99.1 million at March 31, 2017 from $94.5 million at December 31, 2016.

 

Gross loans increased by $1.5 million, or 2.0%, to $76.9 million at March 31, 2017 from $75.5 million at December 31, 2016. All of our loan portfolio segments increased except for our one-to four-family owner and non-owner occupied loans. Our commercial and multifamily, construction and land, commercial business, and consumer loan segments increased by $535,000, $276,000, $1.1 million, and $234,000, respectively. In total, our one-to four-family, owner occupied and non-owner occupied loans decreased to $52.4 million at March 31, 2017 from $53.0 million at December 31, 2016. The decrease in one-to four-family loans and increase in all other loan segments, particularly, commercial and multi-family and commercial business loans, reflects our strategy of focusing our lending efforts more on commercial lending and an increase in demand for these types of loans during the first quarter of 2017.

 

Securities available for sale increased by $314,000, or 1.2%, to $25.5 million at March 31, 2017 from $25.2 million at December 31, 2016. The increase reflects approximately $1.8 million in purchase of additional U.S. government agency mortgage-backed securities, net of approximately $1.4 million in paydowns on these securities. Our strategy is to limit our investing activities and deploy as much of our funds into higher-yielding loans.

 

Real estate owned, net increased to $29,000 at March 31, 2017, which was the result of one foreclosure on a one-to four-family residential loan during the three months ended March 31, 2017, resulting in a charge off of approximately $4,000.

 

Our deposits increased $1.6 million, or 1.8%, to $90.1 million at March 31, 2017 from $88.5 million at December 31, 2016, with $807,000, or 16.8%, of the increase in noninterest-bearing deposits and $844,000, or 1.0%, in interest bearing deposits. The increase reflects a steady demand by our deposit products, particularly our money market savings and checking accounts.

 

FHLB advances increased to $9.0 million at March 31, 2017 from $6.0 million at December 31, 2016. In March of this quarter, we borrowed $3.0 million in a short-term, 6-month, advance at a variable rate of LIBOR -16 basis points to fulfill short-term liquidity needs to match our loan growth.

 

Shareholders’ equity decreased by $82,000, or 0.64%, to $12.7 million at March 31, 2017. The decrease in shareholders’ equity reflects our net loss of $115 thousand for the three months ended March 31, 2017, offset mainly by a decrease of $37,000, or 2.1%, of accumulated other comprehensive loss related to available-for-sale securities and the defined benefit and postretirement medical plans.

 

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Nonperforming Assets

 

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

 

   At March 31,   At December 31, 
   2017   2016 
   (Dollars in thousands) 
         
Non-accrual loans:          
Real estate mortgage loans:          
One- to four-family, owner occupied  $19   $39 
One- to four-family, non-owner occupied   -    30 
Commercial and multi-family   68    69 
Construction and land   14    16 
Total non-accrual loans   101    154 
           
Accruing loans past due 90 days or more:          
Consumer loans   -    - 
           
Accruing troubled debt restructured loans:          
Real estate mortgage loans:          
One- to four-family, owner occupied   87    87 
Total accruing troubled debt restructured loans   87    87 
Total non-performing loans   188    241 
           
Foreclosed real estate held for sale:          
One- to four-family   29    - 
Total foreclosed real estate held for sale   29    - 
           
Total non-performing assets  $217   $241 
           
Total non-performing loans to total gross loans   0.24%   0.32%
Total non-performing assets to total assets   0.19%   0.22%

 

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $4,000 for the three months ended March 31, 2017 and no income was recognized on these loans for the three months ended March 31, 2017. There were no nonaccrual loans at March 31, 2016.

 

Interest income that would have been recorded had our trouble debt restructured loans been current in accordance with their original terms was $1,000 and $4,000 for the three months ended March 31, 2017 and 2016. Interest of $1,000 and $4,000 was recognized on these loans and is included in net income for the three months ended March 31, 2017 and 2016.

 

The decrease in nonperforming assets is a reflection of strong credit quality within our loan portfolio.

 

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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 
   March 31, 2017   March 31, 2016 
       Interest           Interest       
   Average   and   Yield/   Average   and   Yield/   
   Balance   Dividends   Cost   Balance   Dividends   Cost 
   (Dollars in Thousands)
Assets:                              
Interest-earning assets:                              
Loans  $76,040    818    4.30%  $73,170    821    4.49%
Investment securities   25,848    101    1.56    11,361    46    1.62 
Interest-bearing deposits   3,083    9    1.17    5,744    9    0.63 
Total interest-earning assets   104,971    928    3.54    90,275    876    3.88 
Noninterest-earning assets   5,330              7,407           
Total assets  $110,301             $97,682           
Liabilities and equity:                              
Interest-bearing liabilities:                              
Checking accounts  $442    1    0.92%  $290    -    -%
Savings accounts   7,345    1    0.06    7,950    1    0.05 
Money market accounts   13,294    15    0.46    8,927    5    0.23 
Certificates of deposit   62,817    244    1.58    60,580    232    1.56 
Total interest-bearing deposits   83,898    261    1.26    77,747    238    1.24 
FHLB advances and other   6,355    38    2.43    6,194    71    4.66 
Total interest-bearing liabilities   90,253    299    1.34    83,941    309    1.50 
Noninterest bearing deposits   6,286              4,008           
Other noninterest-bearing liabilities   2,895              2,845           
Total liabilities   99,434              90,794           
Equity   10,867              6,888           
Total liabilities and equity  $110,301             $97,682           
                               
Net interest income       $629             $567      
Interest rate spread             2.20%             2.38%
Net interest margin             2.40%             2.51%
Average interest-earning assets to average interest-bearing liabilities   1.16X            1.08X         

 

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Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016

 

General. We recognized a net loss of $115,000 for the three months ended March 31, 2017 as compared to a net loss of $133,000 for the three months ended March 31, 2016. The decrease in net loss was primarily attributed to an increase in net interest income of $62,000, or 11.0%, to $629,000 for the three months ended March 31, 2017 from $567,000 for the three months ended March 31, 2016, offset partially by an increase in noninterest expense of $50,000, or 6.8%, to $784,000 for the three months ended March 31, 2017 compared to $734,000 for the three months ended March 31, 2016.

 

Interest Income. Interest income increased $52,000, or 5.9%, to $928,000 for the three months ended March 31, 2017 from $876,000 for the three months ended March 31, 2016. The increase in interest income reflects an increase in the average balances of interest-earning assets, which increased to $104.9 million for the three months ended March 31, 2017 from $90.3 million for the three months ended March 31, 2016. The increase in the average balances of interest-earning assets reflects our emphasis on investing in interest-earning assets the funds received from our conversion and public offering on June 29, 2016 and funds from increasing deposit levels since March 31, 2016. For the three months ended March 31, 2017 as compared to the three months ended March 31, 2016, the average balance of loans increased to $76.0 million from $73.2 million and the average balance of investments increased to $25.8 million from $11.4 million. The average balance of interest-bearing deposits decreased to $3.1 million for the three months ended March 31, 2017 as compared to $5.7 million for the three months ended March 31, 2016 as more of our excess funds were deployed into higher-yielding loans and investment securities. The increase in the average balance of our interest-earning assets offset the decrease in the average yield on interest-earning assets, which decreased 34 basis points to 3.54% from 3.88% for the three months ended March 31, 2017 and 2016, respectively. The decrease in yield on loans reflects the sustained lower interest rate environment in our highly competitive market area, particularly for commercial loans. The decrease of 6 basis points in yield on our investment securities reflects the impact of higher prepayments on our mortgage-backed securities, which had a negative impact on the investment portfolio’s overall yield.

 

Interest Expense. Interest expense decreased by $10,000, or 3.2%, to $299,000 for the three months ended March 31, 2017 from $309,000 for the three months ended March 31, 2016. The decrease reflects a decrease in the average rate of our interest-bearing liabilities of 16 basis points to 1.34% for the three months ended March 31, 2017 from 1.50% for the three months ended March 31, 2016. The decrease in our average cost of funds reflects the 2.23 basis point decrease in the cost of FHLB advances to 2.43% for the three months ended March 31, 2017 from 4.66% for the three months ended March 31, 2016. The decrease in the average rate on FHLB advances was related to the maturity of $3.0 million of our advances and refinancing these maturing advances with advances with lower rates during the first quarter of 2016. Interest expense on FHLB advances decreased $33,000, or 46.5%, to $38,000 for the three months ended March 31, 2017 from $71,000 for the three months ended March 31, 2016. The decrease in the average cost of FHLB advances was offset partially by an increase in interest expense from our deposits, which increased $23,000, or 9.70%, to $261,000 for the three months ended March 31, 2017 from $238,000 for the three months ended March 31, 2016. The increase was primarily caused by an increase in the average balance of our deposits of $6.2 million, or 8.0%, to $83.9 million for the three months ended March 31, 2017 from $77.7 million for the three months ended March 31, 2016 due to the growth in our deposits. Money market accounts grew in average balance by $4.4 million, or 49.4%, to $13.3 million for the three months ended March 31, 2017 from $8.9 million for the three months ended March 31, 2016. Certificates of deposit grew in average balance by $2.2 million, or 3.6%, to $62.8 million from $60.6 million for the same periods.

 

Net Interest Income. Net interest income increased $62,000, or 10.9%, to $629,000 for the three months ended March 31, 2017 from $567,000 for the three months ended March 31, 2016, which was largely a reflection of the increase in the ratio of average interest-earning assets to average interest-bearing liabilities to 1.16X for the three months ended March 31, 2017 from 1.08X for the three months ended March 31, 2016.

 

Provision for Loan Losses. There was no provision for loan losses for the three months ended March 31, 2017 or 2016, which is a reflection of our continued strong credit quality as evidenced by our continued low and decreasing levels of nonperforming loans.

 

Our total allowance for loans losses was 1.5% of total gross loans at March 31, 2017 as compared to 1.6% at December 31, 2016. 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 increased $6,000, or 17.6%, to $40,000 for the three months ended March 31, 2017 from $34,000 for the three months ended March 31, 2016. The increase reflects both the recognition of $2,000 of income on bank owned life insurance related to the $3.4 million of bank owned life insurance purchased in March of 2017 and the increase of $5,000 in other noninterest income, which was due to higher loan related fees resulting from increased lending during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.

 

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Noninterest Expense. Noninterest expense increased $50,000, or 6.8%, to $784,000 for the three months ended March 31, 2017 from $734,000 for the three months ended March 31, 2016. The increase largely attributed to increases in salaries and employee benefits, occupancy and equipment expenses, and professional and supervisory fees. Salary and employee benefits increased by $16,000, or 3.9%, to $428,000 for the three months ended March 31, 2017 from $412,000 for the three months ended March 31, 2016. The increase reflects normal pay increases for employees, additional expense associated with our ESOP, and the addition of our new chief financial officer and compliance officer. Occupancy and equipment expenses increased by $30,000, or 34.5%, to $117,000 for the three months ended March 31, 2017 from $87,000 for the three months ended March 31, 2016. The increase was primarily related to increased depreciation costs resulting from depreciation of renovation costs incurred for the renovation of our main office. Professional and supervisory fees increased by $10,000, or 12.0%, to $93,000 for the three months ended March 31, 2017 from $83,000 for the three months ended March 31, 2016. The increase in professional and supervisory fees was related to the increased costs associated with our conversion to a public company subsequent to the period ended March 31, 2016. These increases were partially offset by decreases in FDIC deposit insurance premiums and real estate owned expenses. FDIC deposit insurance premiums decreased by $13,000, or 62.0%, to $8,000 for the three months ended March 31, 2017 from $21,000 for the three months ended March 31, 2016, and real estate owned expenses decreased by $8,000, or 89.0%, to $1,000 for the three months ended March 31, 2017 from $9,000 for the three months ended March 31, 2016. FDIC deposit insurance premiums decreased as a result of the reduction of insurance premiums by the FDIC.

 

Income Tax Expense. There was no provision for income taxes for the three months ended March 31, 2017 or March 31, 2016. 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 March 31, 2017.

 

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, we have borrowing agreements with the Federal Home Loan Bank of Chicago (FHLB) that provide an additional source of funds. Our FHLB advances totaled $9.0 million at March 31, 2017. In addition, the Company has an irrevocable standby letter of credit with the FHLB of $2.7 million at March 31, 2017 to secure public deposits. At March 31, 2017, we had the ability to borrow up to an additional $37.3 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 March 31, 2017.

 

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 March 31, 2017 and December 31, 2016, 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

 

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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 March 31, 2017. 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 March 31, 2017, 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

 

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 Annual Report on Form 10-K for the year ended December 31, 2016 (“Form 10-K”) as filed with the Securities and Exchange Commission on March 30, 2017, 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 March 31, 2017, the risk factors for Best Hometown Bancorp, Inc. have not changed materially from those reported in our Form 10-K. However, the risks described in the Form 10-K are not the only risks that we face.

 

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

 

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: May 12, 2017   /s/ Ronnie R. Shambaugh
    Ronnie R. Shambaugh
    President and Chief Executive Officer
     
Date: May 12, 2017   /s/ H. Allen Salter
    H. Allen Salter, CPA
    Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit

number

  Description
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 March 31, 2017, 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  

 

 

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