UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 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. 000-55652

 

 

 

Best Hometown Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

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

 

(618) 345-1121

(Registrant�s telephone number)

 

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

 

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

 

As of August 9, 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 28
     
ITEM 3. QUANTIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36
     
ITEM 4. CONTROLS AND PROCEDURES 36
     
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS 36
     
ITEM 1A. RISK FACTORS 36
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 37
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 37
     
ITEM 4. MINE SAFETY DISCLOSURES 37
     
ITEM 5. OTHER INFORMATION 37
     
ITEM 6. EXHIBITS 37
     
SIGNATURES 38
   
INDEX TO EXHIBITS 39

 

1 

Table of Contents

 

BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

ITEM 1. FINANCIAL STATEMENTS

 

    June 30,     December 31,  
    2017     2016  
    (Unaudited)        
ASSETS                
Cash and due from banks   $ 1,336     $ 1,776  
Interest-earning deposits in banks     3,252       3,683  
Total cash and cash equivalents     4,588       5,459  
Available-for-sale securities     21,082       25,162  
Loans     80,486       75,462  
Allowance for loan losses     (1,232 )     (1,214 )
Net loans     79,254       74,248  
Premises and equipment, net     3,427       3,141  
Bank owned life insurance     3,428       -  
Real estate owned, net     82       -  
Accrued interest receivable                
Investment securities     253       244  
Loans receivable     65       74  
Deferred tax asset     119       138  
Restricted equity securities     405       837  
Other assets     94       87  
Total assets   $ 112,797     $ 109,390  
                 
LIABILITIES                
Deposits                
Noninterest-bearing   $ 4,841     $ 4,781  
Interest-bearing     84,319       83,690  
Total deposits     89,160       88,471  
Federal Home Loan Bank ("FHLB") advances     9,000       6,000  
Accrued defined benefit pension and postretirement plans     1,837       1,911  
Other liabilities     147       209  
Total liabilities     100,144       96,591  
                 
Commitments and contingencies                
Redeemable common stock held by ESOP plan     62       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     6,843       6,839  
Retained earnings - substantially restricted     8,078       8,330  
Unearned Employee Stock Ownership Plan ("ESOP"), 61,192 and 62,844 shares     (612 )     (628 )
Accumulated other comprehensive loss, net of tax:                
Net unrealized losses on available-for-sale securities     (232 )     (269 )
Net unrealized losses on defined benefit pension plan and postretirement medical plans, net     (1,432 )     (1,481 )
Total accumulated other comprehensive loss, net of tax     (1,664 )     (1,750 )
Less maximum cash obligation related to ESOP shares     (62 )     (41 )
Total shareholders' equity     12,591       12,758  
Total liabilities and shareholders' equity   $ 112,797     $ 109,390  

 

See accompanying notes to the condensed consolidated financial statements

 

2 

Table of Contents 

 

BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2017     2016     2017     2016  
Interest income:                                
Loans receivable   $ 859     $ 822     $ 1,694     $ 1,654  
Investment securities, taxable     106       52       207       98  
Other interest-earning assets     7       11       16       20  
Total interest income     972       885       1,917       1,772  
Interest expense:                                
Deposits     266       257       527       495  
Advances from FHLB     51       71       89       142  
Total interest expense     317       328       616       637  
Net interest income     655       557       1,301       1,135  
Provision for loan losses     -       -       -       -  
Net interest income after provision for loan losses     655       557       1,301       1,134  
Noninterest income:                                
Service charges on deposit accounts     22       16       39       33  
Income on bank owned life insurance     26       -       28       -  
Gain (loss) on sales of securities     (19 )     -       (19 )     -  
Gain on sale of real estate owned     1       -       1       -  
Other     4       7       8       12  
Total noninterest income     34       23       57       45  
Noninterest expense:                                
Salaries and employee benefits     425       328       852       741  
Occupancy and equipment     116       87       234       174  
Data processing     50       52       106       103  
Professional and supervisory fees     133       107       225       189  
Office expense     10       12       24       23  
Advertising     17       17       33       26  
FDIC deposit insurance     8       21       15       42  
Provision for real estate owned and related expenses     14       49       15       48  
Other     53       60       106       120  
Total noninterest expense     826       733       1,610       1,466  
Loss before income taxes     (137 )     (153 )     (252 )     (286 )
Income tax expense     -       -       -       -  
Net loss   $ (137 )   $ (153 )   $ (252 )   $ (286 )
                                 
Basic net loss per share   $ (0.18 )     NA     $ (0.33 )     NA  

 

See accompanying notes to the condensed consolidated financial statements

 

3 

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BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

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

(Unaudited)

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2017     2016     2017     2016  
                         
Net loss   $ (137 )   $ (153 )   $ (252 )   $ (286 )
Other comprehensive income:                                
Unrealized gain on available-for-sale securities :                                
Unrealized holding gain arising during the period     18     $ 9       36       98  
Reclassification adjustment for losses included in net income     19       -       19       -  
Tax effect     (12 )     (4 )     (18 )     (34 )
Net of tax     25       5       37       64  
                                 
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     24       29       49       56  
Tax effect     -       -       -       -  
Net of tax     24       29       49       56  
Total other comprehensive income     49       34       86     $ 120  
Comprehensive loss   $ (88 )   $ (119 )   $ (166 )   $ (166 )

 

See accompanying notes to the condensed consolidated financial statements

 

4 

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BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS� EQUITY

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

(Unaudited)

 

                                  Net Unrealized              
                                  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     -       -       (286 )     -       -       -       -       (286 )
Other comprehensive income     -       -       -       -       64       56       -       120  
Proceeds from issuance of 826,208 shares of common stock     8       6,836               (661 )                             6,183  
Balance at June 30, 2016   $ 8     $ 6,836     $ 8,503     $ (661 )   $ (21 )   $ (1,786 )   $ -     $ 12,879  
                                                                 
Balance at December 31, 2016   $ 8       6,839       8,330       (628 )     (269 )     (1,481 )   $ (41 )   $ 12,758  
Net loss     -       -       (252 )     -       -       -       -       (252 )
Other comprehensive income     -       -       -       -       37       49       -       86  
ESOP shares earned     -       4       -       16       -       -       -       20  
Change related to ESOP shares cash obligation     -       -       -       -       -       -       (21 )     (21 )
Balance at June 30, 2017   $ 8     $ 6,843     $ 8,078     $ (612 )   $ (232 )   $ (1,432 )   $ (62 )   $ 12,591  

 

See accompanying notes to the condensed consolidated financial statements

 

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BEST HOMETOWN BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

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

 

    Six Months Ended  
    June 30,  
    2017     2016  
             
Cash flows from operating activities:                
Net loss   $ (252 )   $ (286 )
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:                
Depreciation and amortization, net     368       190  
Provision for loan losses     -       -  
Income on bank owned life insurance     (28 )     -  
Gain (loss) on sale of real estate owned     (1 )     26  
Loss on sales of securities     19       -  
ESOP compensation expense     20       -  
Net change in operating assets and liabilities:                
Accrued interest receivable     -       (8 )
Accrued interest payable     (4 )     (10 )
Other     (67 )     203  
Net cash provided by operating activities     55       115  
                 
Cash flows from investing activities:                
Loan originations and repayments, net     (5,141 )     2,214  
Purchases of available-for-sale securities     (1,816 )     (9,407 )
Proceeeds from maturities, paydowns and calls of available-for-sale securities     2,710       1,947  
Proceeds from sales of available-for-sale securities     2,998       -  
Purchase of bank owned life insurance     (3,400 )     -  
Redemptions of FHLB stock, net     432       -  
Purchases of premises and equipment     (430 )     (157 )
Proceeds from sale of foreclosed real estate     32       311  
Net cash used in investing activities     (4,615 )     (5,092 )
                 
Cash flows from financing activities:                
Net change in deposits     689       5,673  
Borrowings of FHLB advances     3,000       -  
Repayments of FHLB advances     -       (3,000 )
Proceeds from issuance of common stock     -       6,183  
Net cash provided by financing activities     3,689       8,856  
Change in cash and cash equivalents     (871 )     3,879  
Cash and cash equivalents at beginning of period     5,459       9,100  
Cash and cash equivalents at end of period   $ 4,588     $ 12,979  
                 
Supplemental disclosures of cash flow information:                
Cash paid during the period for:                
Interest on deposits   $ 527     $ 494  
Interest on advances from FHLB     92       153  
                 
Real estate acquired in settlement of loans   $ 113     $ 122  

 

See accompanying notes to the condensed consolidated financial statements

 

6 

Table of Contents 

 

BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED 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. (referred to herein as �the Company,� �we,� �us,� or �our�), 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 $1.4 million, 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 up to the applicable limits. 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 is 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 accompanying unaudited consolidated financial statements of Best Hometown Bancorp, Inc.., which include the accounts of its wholly owned subsidiary Best Hometown Bank have been prepared in accordance with U.S. generally accepted accounting principles (�GAAP�) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Intercompany accounts and transactions are eliminated during consolidation.

 

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited condensed consolidated financial statements have been included to present fairly the financial position as of June 30, 2017 and December 31, 2016 and the results of operations and cash flows for the three and six months ended June 30, 2017 and 2016. All interim amounts have not been audited and the results of operations for the three and six months ended June 30, 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 and six months ended June 30, 2016 were reclassified to conform to the current presentation and had no effect on net income or shareholders� equity.

 

Cash and cash equivalents include cash on hand, federal funds sold, overnight interest-bearing deposits and amounts due from other depository institutions.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of foreclosed real estate, fair values of financial instruments, measurement of defined benefit pension and postretirement medical plans and valuation of deferred tax assets.

 

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. There have been no changes to our investment portfolio since the three months ended March 31, 2017. Accordingly, the adoption of this standard will not have an effect on the Company�s consolidated financial statements as the company does not own any callable debt securities.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments � Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. The portion of ASU 2016-01 that is likely to have an effect on our financial statements and disclosures relates a clarification of accounting standards with respect to deferred tax assets arising from unrealized losses on available-for-sale securities. This ASU 2016-01 requires an entity to evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We have not completed our evaluation of the effects on our financial statements of ASU 2016-01 and disclosures at this time.

 

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 continued its preparation for the implementation for this standard during the three months ended June 30, 2017. We have not completed our evaluation of its effects on our financial statements and disclosures at this time.

 

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.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

(3) EARNINGS (LOSS) 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
    Six Months
Ended
 
    June 30,     June 30,  
    2017     2017  
             
Loss per share                
Net loss   $ (137 )   $ (252 )
Weighted average common shares outstanding     826,208       826,208  
Less: average unearned ESOP shares     (61,466 )     (62,017 )
Weighted average common shares outstanding     764,742       764,191  
                 
Basic loss per share   $ (0.18 )   $ (0.33 )

 

Given a net loss for the three and six months ended June 30, 2017, only basic loss per share is applicable.

 

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

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED 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 June 30, 2017 and December 31, 2016 are as follows:

 

          Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
June 30, 2017   Cost     Gains     Losses     Value  
Debt securities:                                
U.S. Government agency SBAP security   $ 925     $ -     $ (25 )   $ 900  
U.S. Government agency mortgage-backed securities - residential     20,508       -       (326 )     20,182  
    $ 21,433     $ -     $ (351 )   $ 21,082  

 

          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 June 30, 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 CONDENSED 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 June 30, 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.

 

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.

 

    Less than 12 Months     12 Months or Longer  
                Number in                 Number in  
    Fair     Unrealized     Unrealized     Fair     Unrealized     Unrealized  
June 30, 2017   Value     Loss     Loss (1)     Value     Loss     Loss (1)  
U.S. Government agency SBAP security   $ 900     $ (25 )     1     $ -     $ -       0  
U.S. Government agency mortgage-backed securities - residential     15,965       (266 )     23       3,753       (60 )     8  
    $ 16,865     $ (291 )     24     $ 3,753     $ (60 )     8  
                                                 
    Total                    
                Number in                    
    Fair     Unrealized     Unrealized                    
June 30, 2017   Value     Loss     Loss (1)                    
U.S. Government agency SBAP security   $ 900     $ (25 )     1                          
U.S. Government agency mortgage-backed securities - residential     19,718       (326 )     31                          
Total   $ 20,618     $ (351 )     32                          

 

    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 CONDENSED 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 June 30, 2017 and December 31, 2016, was $20,618 and $23,817, which was approximately 98% at both June 30, 2017 and December 31, 2016, of the Company�s available-for-sale securities. None of the unrealized losses at June 30, 2017 were recognized into net income for the three and six months ended June 30, 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 and six months ended June 30, 2017.

 

Sales of available-for-sale securities for the three and six months ended June 30, 2017 and 2016 are listed in the tables below:

 

    Three Months Ended     Six Months Ended  
Available-for-sale:   June 30,
2017
    June 30,
2016
    June 30,
2017
    June 30,
2016
 
Proceeds   $ 2,998     $ -     $ 2,998     $ -  
Gross gains     -       -       -       -  
Gross losses     (19 )     -       (19 )     -  

 

(5) LOANS

 

The components of loans at June 30, 2017 and December 31, 2016 were as follows:

 

    June 30,     December 31,  
    2017     2016  
Real estate loans:                
One-to four-family, owner occupied   $ 46,761     $ 47,971  
One-to four-family, non-owner occupied     5,290       5,251  
Commercial and multi-family     22,316       17,785  
Construction and land     3,131       2,676  
Commercial business loans     1,712       921  
Consumer loans     1,297       901  
      80,507       75,505  
Net deferred loan fees     (21 )     (43 )
Total   $ 80,486     $ 75,462  

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED 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 six months ended June 30, 2017 and 2016 by portfolio segment:

 

    Beginning                       Ending  
    Balance     Provision     Charge-offs     Recoveries     Balance  
Three Months Ended June 30, 2017                              
Real estate loans:                                        
One-to-four family, owner occupied   $ 647     $ (60 )   $ (6 )   $ 37     $ 618  
One-to-four family, non-owner occupied     109       (3 )     -       2       108  
Commercial and multi-family     317       72       -       -       389  
Construction and land     44       (8 )     -       7       43  
Commercial business loans     41       (7 )     -       -       34  
Consumer loans     34       6       -       -       40  
Unallocated     -       -       -       -       -  
    $ 1,192     $ -     $ (6 )   $ 46     $ 1,232  

 

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

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

    Beginning                       Ending  
    Balance     Provision     Charge-offs     Recoveries     Balance  
Six Months Ended June 30, 2017                                        
Real estate loans:                                        
One-to-four family, owner occupied   $ 657     $ (48 )   $ (34 )   $ 43     $ 618  
One-to-four family, non-owner occupied     113       (8 )     -       3       108  
Commercial and multi-family     309       80       -       -       389  
Construction and land     42       (5 )     -       6       43  
Commercial business loans     18       16       -       -       34  
Consumer loans     26       14       -       -       40  
Unallocated     49       (49 )     -       -       -  
    $ 1,214     $ -     $ (34 )   $ 52     $ 1,232  

 

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

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED 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 June 30, 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  
June 30, 2017                                                
Real estate loans:                                                
One-to four-family, owner occupied   $ -     $ 618     $ 618     $ 645     $ 46,116     $ 46,761  
One-to four-family, non-owner occupied     -       108       108       79       5,211       5,290  
Commercial and multi-family     -       389       389       -       22,316       22,316  
Construction and land     -       43       43       13       3,118       3,131  
Commercial business loans     -       34       34       -       1,712       1,712  
Consumer loans     -       40       40       -       1,297       1,297  
Unallocated     -       -       -       -       -       -  
    $ -     $ 1,232     $ 1,232     $ 737     $ 79,770     $ 80,507  

 

    Ending Allowance on Loans     Loans  
    Individually     Collectively           Individually     Collectively        
    Evaluated for     Evaluated for           Evaluated     Evaluated        
    Impairment     Impairment     Total     Impairment     Impairment     Total  
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, at times, will maintain an 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 CONDENSED 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 June 30, 2017 and December 31, 2016.

 

    June 30, 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   $ 810     $ 645     $ -     $ 915     $ 661     $ -  
One-to four-family, non-owner occupied     102       79       -       134       110       -  
Commercial and multi-family     -       -       -       69       69       -  
Construction and land     13       13       -       16       16       -  
Commercial business loans     -       -       -       -       -       -  
Consumer loans     -       -       -       -       -       -  
Total   $ 925     $ 737     $ -     $ 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   $ 925     $ 737     $ -     $ 1,173     $ 895     $ 9  
Commercial loans     -       -       -       -       -       -  
Consumer and other loans     -       -       -       -       -       -  
Total   $ 925     $ 737     $ -     $ 1,173     $ 895     $ 9  

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

The tables below present the average recorded investment of loans individually evaluated for impairment and the amount of interest earned on those loans for the three and six months ended June 30, 2017 and 2016:

 

    Three Months Ended     Six Months Ended  
    June 30, 2017     June 30, 2016     June 30, 2017     June 30, 2016  
    Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
    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   $ 647     $ 11     $ 1,745     $ 29     $ 650     $ 21     $ 1,692     $ 56  
One-to four-family, non-owner occupied     79       -       82       -       79       3       82       -  
Commercial and multi-family     -       -       -       -       -       -       -       -  
Construction and land     14       -       -       -       14       -       -       -  
Commercial business loans     -       -       -       -       -       -       -       -  
Consumer loans     -       -       -       -       -       -       -       -  
Total   $ 740     $ 11     $ 1,827     $ 29     $ 743     $ 24     $ 1,774     $ 56  
                                                                 
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   $ 740     $ 11     $ 1,827     $ 29     $ 743     $ 24     $ 1,774     $ 56  
Commercial business loans     -       -       -       -       -       -       -       -  
Consumer and other loans     -       -       -       -       -       -       -       -  
Total   $ 740     $ 11     $ 1,827     $ 29     $ 743     $ 24     $ 1,774     $ 56  

 

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 June 30, 2017 and December 31, 2016.

 

There were no loans modified as troubled debt restructurings during the six months ended June 30, 2017 and 2016 or commitments to lend additional funds to borrowers with loans whose terms have been modified as a troubled debt restructure. 

 

At June 30, 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 CONDENSED 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 at June 30, 2017 and December 31, 2016. 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.

 

    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
 
June 30, 2017                                                        
Real estate loans:                                                        
One-to four-family, owner occupied   $ 248     $ 95     $ -     $ 46,418     $ 46,761     $ -     $ -  
One-to four-family, non-owner occupied     -       -       -       5,290       5,290       -       -  
Commercial and multi-family     437       -       -       21,879       22,316       -       -  
Construction and land     -       -       -       3,131       3,131       13       -  
Commercial business loans     60       -       -       1,652       1,712       -       -  
Consumer loans     -       -       -       1,297       1,297       -       -  
    $ 745     $ 95     $ -     $ 79,667     $ 80,507     $ 13     $ -  

 

    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.

 

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.

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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 theconstruction, 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. Multifamily real estate loans are secured by generally 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 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

 

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BEST HOMETOWN BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

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 and 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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The following tables present total loans by risk grade and portfolio segment at June 30, 2017 and December 31, 2016:

  

                Special                          
    Pass     Watch     Mention     Substandard     Doubtful     Loss     Total  
June 30, 2017                                                        
Real estate loans:                                                        
One-to four-family, owner occupied   $ 44,626     $ 726     $ 149     $ 1,260     $ -     $ -     $ 46,761  
One-to four-family, non-owner occupied     5,211       -       -       79       -       -       5,290  
Commercial and multi-family     22,316       -       -       -       -       -       22,316  
Construction and land     2,944       174       -       13       -       -       3,131  
Commercial business loans     1,493       -       219       -       -       -       1,712  
Consumer loans     1,297       -       -       -       -       -       1,297  
    $ 77,887     $ 900     $ 368     $ 1,352     $ -     $ -     $ 80,507  

 

                Special                          
    Pass     Watch     Mention     Substandard     Doubtful     Loss     Total  
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 June 30, 2017 and December 31, 2016, advances from the Federal Home Loan Bank were as follows:

 

    Interest     June 30,     December 31,  
Maturity Date   Rate     2017     2016  
                   
February 12, 2018     1.27 %   $ 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  

 

Each advance is payable at its maturity date, with a prepayment penalty if paid earlier than its maturity date. The advances were collateralized by $38,198 and $46,544 of first mortgage loans under a blanket lien arrangement at June 30, 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 $38,500 at June 30, 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 recorded. Any dividends on allocated shares increase participant accounts. Participants receive the shares at the end of employment.

 

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No contributions to the ESOP were made during the six months ended June 30, 2017. The expense recognized for the three and six months ended June 30, 2017 was $10 and $20, respectively, and is reported in salaries and wages. No ESOP expense was recognized during the three or six months ended June 30, 2016.

 

ESOP shares at June 30, 2017 and December 31, 2016 are summarized as follows:

 

    June 30,     December 31,  
    2017     2016  
Committed to be released to participants     1,653       -  
Allocated to participants     3,252       3,252  
Unearned     61,191       62,844  
Total ESOP shares     66,096       66,096  
                 
Fair value of unearned shares   $ 771     $ 792  

 

(8) DEFINED BENEFIT AND POST RETIREMENT MEDICAL PLANS

 

Net periodic cost for the defined benefit pension plan and postretirement medical plan for the three and six months ended June 30, 2017 and 2016 included the following components:

 

    Defined Benefit     Postretirement  
    Pension Plan     Medical Plan  
    Three Months Ended     Three Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2017     2016     2017     2016  
                         
Service cost   $ -     $ -     $ -     $ -  
Interest cost     33       35       9       10  
Expected return on plan assets     (36 )     (34 )     -       -  
Amortization:                                
Unrecognized net loss     24       29       2       2  
Unrecognized prior service cost     -       -       (2 )     (2 )
Asset (loss) gain deferred     -       -       -       -  
Net periodic cost   $ 21     $ 30     $ 9     $ 10  

 

    Defined Benefit     Postretirement  
    Pension Plan     Medical Plan  
    Six Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2017     2016     2017     2016  
                         
Service cost   $ -     $ -     $ -     $ -  
Interest cost     66       71       18       20  
Expected return on plan assets     (72 )     (68 )                
Amortization:                                
Unrecognized net loss     49       56       4       4  
Unrecognized prior service cost     -       -       (4 )     (4 )
Asset (loss) gain deferred     -       -       -       -  
Net periodic cost   $ 43     $ 59     $ 18     $ 20  

 

The following table summarizes plan assets for the defined benefit pension plan, measured at fair value on a recurring basis at

 

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June 30, 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  
                         
June 30, 2017                        
Pooled separate accounts   $ -     $ 2,637     $ -     $ 2,637  

 

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

 

During the six months ended June 30, 2017, benefits paid, employer contributions and the actual return on plan assets for the defined benefit pension plan were $137, $69, $147, respectively. During the six months ended June 30, 2016, benefits paid, employer contributions, and the actual return on plan assets were $136, $172, and $104, respectively.

 

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

 

        June 30,     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.

 

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

 

    Defined Benefit     Postretirement  
    Pension Plan     Medical Plan  
    Three Months Ended     Three Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2017     2016     2017     2016  
       
Unrecognized net loss   $ 24     $ 29     $ (2 )   $ (2 )
Unrecognized prior service cost     -       -       2       2  
      24       29       -       -  
Tax effect     -       -       -       -  
Unrecognized gain, net of tax   $ 24     $ 29     $ -     $ -  

 

    Defined Benefit     Postretirement  
    Pension Plan     Medical Plan  
    Six Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
       
Unrecognized net loss   $ 49     $ 56     $ 4     $ 4  
Unrecognized prior service cost     -       -       (4 )     (4 )
      49       56       -       -  
Tax effect     -       -       -       -  
Unrecognized gain, net of tax   $ 49     $ 56     $ -     $ -  

 

(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

 

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per the borrower�s financial statements, or aging reports, adjusted or discounted based on management�s historical knowledge, changes in market conditions from the time of the valuation, and management�s expertise and knowledge of the client and client�s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Real Estate Owned:

 

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

 

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

 

Assets and liabilities measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016 are summarized below:

 

    Level 2  
    June 30,     December 31,  
    2017     2016  
Financial Assets                
Available-for-sale securities   $ 21,082     $ 25,162  
    $ 21,082     $ 25,162  

 

Presented in the table below are assets measured at fair value on a nonrecurring basis using Level 3 inputs at June 30, 2017 and December 31, 2016:

 

    Level 3  
    June 30,     December 31,  
    2017     2016  
Impaired loans (collateral dependent)                
One-to four-family, owner occupied   $ -     $ 39  
One-to four-family, non-owner occupied     -       -  
Total financial assets     -       39  
                 
Nonfinancial assets                
Real estate owned, net:                
One-to four-family, owner occupied     -       -  
Total nonfinancial assets   $ -     $ -  
Total assets measured at fair value on a nonrecurring basis   $ -     $ 39  

 

The Company's impaired loan at December 31, 2016 was measured at fair value based primarily upon the estimated value of real estate collateral less costs to sell. The carrying amounts of this loan was $39. This loan had a specific valuation allowance of $9 at December 31, 2016. At June 30, 2016 impaired loans of $33 were adjusted to fair value through charge offs of $30 to the allowance for loan losses for the three and six months ended June 30, 2016.

 

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Real estate owned is carried at the lower of carrying value or fair value less costs to sell. At June 30, 2016, real estate owned of $130 was adjusted to fair value, recognizing a loss of $16 for the three and six months ended June 30, 2016.

 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at June 30, 2017 and December 31, 2016:

 

    Level 3 Quantitative Information
    June 30,     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   $ -     $ 39     Sales comparison approach   Adjustment for differences between the comparable sales   0% to 30%

 

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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 June 30, 2017 and December 31, 2016 are summarized below:

 

    Carrying     Fair Value  
    Amount     Level 1     Level 2     Level 3     Total  
June 30, 2017                                        
Financial assets                                        
Available-for-sale securities   $ 21,082     $ -     $ 21,082     $ -     $ 21,082  
Restricted equity securities (1)     405       NA       NA       NA       NA  
Loans, net     79,254       -       -       79,853       79,853  
                                         
Financial liabilities                                        
Deposits   $ 89,160     $ 27,387     $ 62,804     $ -     $ 90,191  
FHLB Advances     9,000       -       9,080       -       9,080  
                                         
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.

 

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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.

 

PART 1. FINANCIAL INFORMATION

 

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

 

Management�s discussion and analysis of financial condition and results of operations at June 30, 2017 and for the three and six months ended June 30, 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;

 

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changes in our organization, compensation and benefit plans;

 

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

 

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

 

Additional factors that may affect our results are discussed in Best Hometown Bancorp, Inc.�s 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 Annual Report on Form 10-K for Best Hometown Bancorp, Inc. for the year ended December 31, 2016.

 

Comparison of Financial Condition at June 30, 2017 and December 31, 2016

 

Our total assets increased $3.4 million, or 3.1%, to $112.8 million at June 30, 2017 from $109.4 million at December 31, 2016. The increase in total assets is primarily due to the $5.0 million increase in net loans and the purchase of bank owned life insurance of $3.4 million. The increase in total assets was primarily supported by increases in our total deposits and FHLB advances of $3.6 million, or 3.7%, to $98.1 million at June 30, 2017 from $94.5 million at December 31, 2016. The increase in net loans and bank owned life insurance was offset partially by a $4.1 million, or 16.3%, decrease in available-for-sale securities to $21.1 million at June 30, 2017 from $25.2 million at December 31, 2016, which is largely related to our sale of approximately $3.0 in amortized cost of available-for-sales securities for liquidity needs and principal paydowns on mortgage backed securities. Cash and cash equivalents also decreased by $871,000, or 16.1%, to $4.6 million at June 30, 2017 from $5.4 million at December 31, 2016. The decrease in cash and cash equivalents is reflective of our loan growth since December 31, 2016.

 

Gross loans increased by $5.0 million, or 6.6%, to $80.5 million at June 30, 2017 from $75.5 million at December 31, 2016. All of our loan portfolio segments increased except for our one-to four-family owner occupied loans. Our commercial and multifamily, construction and land, commercial business, and consumer loan segments increased by $4.5 million, $455,000, $791,000, and $396,000, respectively. In total, our one-to four-family, owner occupied and non-owner occupied loans decreased to $52.0 million at June 30, 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 six months of 2017.

 

Securities available for sale decreased by $4.1 million, or 16.3%, to $21.1 million at June 30, 2017 from $25.2 million at December 31, 2016, which is largely related to our sale of approximately $3.0 in amortized cost of available-for-sales securities for liquidity needs and principal paydowns on mortgage-backed securities.

 

Real estate owned, net increased to $82,000 at June 30, 2017, which was the result of one foreclosure on a one-to four-family residential loan during the three months ended June 30, 2017. The real estate owned was recorded at fair value less costs to sell. No charge-off was recognized.

 

Our deposits increased $689,000, or 0.78%, to $89.2 million at June 30, 2017 from $88.5 million at December 31, 2016, with $629,000, or 0.75%, of the increase in interest-bearing deposits and $60,000, or 1.2%, in noninterest 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 June 30, 2017 from $6.0 million at December 31, 2016. The increase in FHLB advances reflects additional funding needs to support our loan growth. We repaid a short-term $3.0 million variable rate advance maturing in September 2017 with the proceeds from the sale of available-for-sale securities and entered into a 9 month advance for $3 million at a fixed rate of 1.27%, maturing in February 2018.

 

Shareholders� equity decreased by $167,000, or 1.31%, to $12.6 million at June 30, 2017 from $12.8 million at December 31, 2016. The decrease in shareholders� equity reflects our net loss of $252,000 for the six months ended June 30, 2017, offset mainly by a decrease of $86,000, or 4.9%, of accumulated other comprehensive loss related to available-for-sale securities and the defined

 

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benefit and postretirement medical plans, and a $21,000 increase in shareholders� equity attributable to the recognition of employee stock ownership plan expenses over the six months ended June 30, 2017.

 

Nonperforming Assets

 

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

 

    June 30,     December 31,  
    2017     2016  
    (Dollars in thousands)  
             
Non-accrual loans:                
Real estate mortgage loans:                
One- to four-family, owner occupied   $ -     $ 39  
One- to four-family, non-owner occupied     -       30  
Commercial and multi-family     -       69  
Construction and land     13       16  
Total non-accrual loans     13       154  
                 
Accruing troubled debt restructured loans:                
Real estate mortgage loans:                
One- to four-family, owner occupied     86       87  
Total accruing troubled debt restructured loans     86       87  
Total non-performing loans     99       241  
                 
Foreclosed real estate held for sale:                
One- to four-family     82       -  
Total foreclosed real estate held for sale     82       -  
                 
Total non-performing assets   $ 181     $ 241  
                 
Total non-performing loans to total gross loans     0.12 %     0.32 %
Total non-performing assets to total assets     0.16 %     0.22 %

 

Interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was less than $1,000 for the three and six months ended June 30, 2017 and no income was recognized on these loans for the three and six months ended June 30, 2017. There were no nonaccrual loans during the three and six month ended June 30, 2016.

 

Interest income that would have been recorded had our trouble debt restructured loans been current in accordance with their original terms was $2,000 and $7,000 for the six months ended June 30, 2017 and 2016. Interest of $1,000 and $7, 000 was recognized on these loans and is included in net income for the six months ended June 30, 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  
    June 30, 2017     June 30, 2016  
    Average
Balance
    Interest
and 
Dividends
    Yield/
Cost
    Average
Balance
    Interest and
Dividends
    Yield/
Cost
 
    (Dollars in Thousands)  
Assets:                                                
Interest-earning assets:                                                
Loans   $ 79,878       859       4.30 %   $ 73,557       822       4.47 %
Investment securities     25,001       106       1.70       15,345       52       1.36  
Interest-bearing deposits     1,744       7       1.61       7,738       11       0.57  
Total interest-earning assets     106,623       972       3.65       96,640       885       3.66  
Noninterest-earning assets     19,490                       5,575                  
Total assets   $ 126,113                     $ 102,215                  
                                                 
Liabilities and equity:                                                
Interest-bearing liabilities:                                                
Checking accounts   $ 446       1       0.90 %     319       -       - %
Savings accounts     7,725       1       0.05       8,280       1       0.05  
Money market accounts     14,367       17       0.47       9,952       8       0.32  
Certificates of deposit     61,786       247       1.60       62,642       248       1.59  
Total interest-bearing deposits     84,324       266       1.27       81,193       257       1.27  
FHLB advances and other     11,074       51       1.85       6,000       71       4.76  
Total interest-bearing liabilities     95,398       317       1.33       87,193       328       1.51  
Noninterest bearing deposits     4,992                       5,426                  
Other noninterest-bearing liabilities     2,213                       2,790                  
Total liabilities     102,603                       95,409                  
Equity     23,509                       6,806                  
Total liabilities and equity   $ 126,113                     $ 102,215                  
                                                 
Net interest income           $ 655                     $ 557          
Interest rate spread                     2.32 %                     2.15 %
Net interest margin                     2.46 %                     2.31 %
Average interest-earning assets to average interest-bearing liabilities     1.12 X                     1.11 X                

 

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    For the Six Months Ended  
    June 30, 2017     June 30, 2016  
    Average
Balance
    Interest
and 
Dividends
    Yield/
Cost
    Average
Balance
    Interest and
Dividends
    Yield/
Cost
 
    (Dollars in Thousands)  
Assets:                                                
Interest-earning assets:                                                
Loans   $ 77,959       1,694       4.35 %   $ 73,989       1,654       4.47 %
Investment securities     25,424       207       1.63       13,353       98       1.47  
Interest-bearing deposits     2,414       16       1.33       6,322       20       0.63  
Total interest-earning assets     105,797       1,917       3.62       93,664       1,772       3.78  
Noninterest-earning assets     7,006                       6,285                  
Total assets   $ 112,803                     $ 99,949                  
                                                 
Liabilities and equity:                                                
Interest-bearing liabilities:                                                
Checking accounts   $ 444       1       0.45 %   $ 305       1       0.66 %
Savings accounts     7,535       2       0.05       8,115       3       0.07  
Money market accounts     13,830       31       0.45       9,440       13       0.28  
Certificates of deposit     62,302       493       1.60       61,611       479       1.57  
Total interest-bearing deposits     84,111       527       1.26       79,471       496       1.26  
FHLB advances and other     8,715       89       2.06       6,097       142       4.71  
Total interest-bearing liabilities     92,826       616       1.34       85,568       638       1.51  
Noninterest bearing deposits     6,244                       4,717                  
Other noninterest-bearing liabilities     2,213                       2,814                  
Total liabilities     101,283                       93,099                  
Equity     11,520                       6,850                  
Total liabilities and equity   $ 112,803                     $ 99,949                  
                                                 
Net interest income           $ 1,301                     $ 1,134          
Interest rate spread                     2.28 %                     2.27 %
Net interest margin                     2.46 %                     2.42 %
Average interest-earning assets to average interest-bearing liabilities     1.14 X                     1.09 X                

 

Comparison of Operating Results for the Three Months Ended June 30, 2017 and 2016

 

General. We recognized a net loss of $137,000 for the three months ended June 30, 2017 compared to a net loss of $153,000 for the three months ended June 30, 2016. The decrease in net loss was primarily attributed to an increase in net interest income of $98,000, or 17.6%, to $655,000 for the three months ended June 30, 2017 from $557,000 for the three months ended June 30, 2016, and increase in total noninterest income of $11,000, or 47.8%, to $34,000 from $23,000 for the same periods, offset partially by an increase in noninterest expense of $93,000, or 12.7%, to $826,000 for the three months ended June 30, 2017 compared to $733,000 for the three months ended June 30, 2016.

 

Interest Income. Interest income increased $87,000, or 9.8%, to $972,000 for the three months ended June 30, 2017 from $885,000 for the three months ended June 30, 2016. The increase in interest income reflects an increase in the average balances of

 

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interest-earning assets, which increased to $106.6 million for the three months ended June 30, 2017 from $96.6 million for the three months ended June 30, 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 June 30, 2016. For the three months ended June 30, 2017 compared to the three months ended June 30, 2016, the average balance of loans increased to $79.9 million from $73.5 million and the average balance of investments increased to $25.0 million from $15.3 million. The average balance of interest-bearing deposits decreased to $1.7 million for the three months ended June 30, 2017 compared to $7.7 million for the three months ended June 30, 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 more than offset the decrease in the average yield on interest-earning assets, which decreased 1 basis point to 3.65% from 3.66% for the three months ended June 30, 2017 and 2016, respectively. Yield on loans decreased 17 basis points to 4.30% from 4.47% for the three months ended June 30, 2017 and 2016, respectively. The decrease in yield on loans reflects the lower interest rate environment in our highly competitive market area, particularly for commercial loans. The increase of 34 basis points in yield on our investment securities reflec