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 September 30, 2015

 

OR

¨

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

 

For the transition period from _________ to __________

 

 

Commission File Number: 0-55170

 

SUGAR CREEK FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Maryland		38-3920636
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

 

28 West Broadway, Trenton, Illinois		62293
(Address of principal executive offices)		(Zip Code)

 

(618) 224-9228

(Registrant’s telephone number)

 

______________________N/A______________________
(Former name, former address and former fiscal year, 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 filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer  ¨	Smaller Reporting Company x
(Do not check if a smaller reporting company)

 

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

 

As of October 30, 2015, the issuer had 949,245 shares of common stock outstanding.

 

 

Form 10-Q

Index

 

PART I.  FINANCIAL INFORMATION	1
Item 1.  Financial Statements	1
Consolidated Balance Sheets (Unaudited)	1
Consolidated Statements of Operations (Unaudited)	2
Consolidated Statements of Stockholders’ Equity (Unaudited)	3
Consolidated Statements of Cash Flows (Unaudited)	4
Notes To Consolidated Financial Statements (Unaudited)	5
Item 2. Management’s Discussion and Analysis Of Financial Condition and Results Of Operations	20
Item 3. Quantitative and Qualitative Disclosures about Market Risk	31
Item 4. Controls and Procedures	31
PART II – OTHER INFORMATION	32
Item 1. Legal Proceedings	32
Item 1A. Risk Factors	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3. Defaults Upon Senior Securities	32
Item 4. Mine Safety Disclosures	32
Item 5. Other Information	32
Item 6. Exhibits	32
SIGNATURES	33
Exhibit 31.0	34
Exhibit 32.0	35

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Balance Sheets (Unaudited)

 

		September 30,				March 31,
Assets		2015				2015
Cash and due from banks		$	2,640,243			$	3,596,926
Federal funds sold			13,820,000				11,580,000
FHLB daily investment account			1,986,669				1,543,082
Cash and cash equivalents			18,446,912				16,720,008
Stock in Federal Home Loan Bank of Chicago ("FHLBC")			1,165,513				1,165,513
Loans receivable, net of allowance for losses of $203,403
and $242,103			75,469,942				75,463,746
Premises and equipment, net			1,192,097				1,198,459
Foreclosed real estate			443,475				434,367
Accrued interest receivable on loans			246,221				257,576
Other assets			313,871				331,950
Total assets		$	97,278,031			$	95,571,619
Liabilities and Stockholders' Equity
Deposits		$	78,279,865			$	76,290,961
Accrued interest payable on deposits			67,016				50,070
Advances from FHLBC			5,000,000				5,000,000
Advances from borrowers for taxes and insurance			154,777				428,485
Other liabilities			309,832				297,680
Deferred tax liability			220,108				220,108
Total liabilities			84,031,598				82,287,304
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized;  none issued or outstanding			-				-
Common stock, $.01 par value, 14,000,000 shares authorized
and 949,245 shares issued and outstanding at
September 30, 2015 and March 31, 2015			9,492				9,492
Additional paid-in capital			6,130,705				6,124,848
Common stock acquired by Employee Stock Ownership Plan ("ESOP")			(409,976	)			(432,527	)
Retained earnings - substantially restricted			7,516,212				7,582,502
Total stockholders' equity			13,246,433				13,284,315
Total liabilities and stockholders' equity		$	97,278,031			$	95,571,619

 

See accompanying notes to consolidated financial statements.        

 

 

Consolidated Statements of Operations (Unaudited)

 

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Interest income:
Loans receivable		$	809,535				825,973				1,626,050				1,657,547
Stock in FHLBC			1,453				1,453				2,890				2,890
Other interest-earning assets			8,155				5,461				17,052				11,855
Total interest income			819,143				832,887				1,645,992				1,672,292
Interest expense:
Deposits			165,776				111,746				310,469				221,393
Advances from FHLBC			60,183				60,183				119,713				119,713
Total interest expense			225,959				171,929				430,182				341,106
Net Interest Income			593,184				660,958				1,215,810				1,331,186
Provision for (credit to) loan losses			-				6,000				(11,700	)			(17,000	)
Net interest income after provision for
(credit to) loan losses			593,184				654,958				1,227,510				1,348,186
Noninterest income:
Loan service charges			4,025				7,467				8,897				10,674
Service charges on deposit accounts			22,674				24,701				45,430				50,539
Other			3,498				3,172				9,276				6,426
Total noninterest income			30,197				35,340				63,603				67,639
Noninterest expense:
Compensation and benefits			341,320				334,212				647,810				665,454
Occupancy expense			35,227				34,169				63,380				65,635
Advertising			8,595				19,152				17,810				28,935
Equipment and data processing			97,235				92,324				202,488				179,878
FDIC premium expense			15,760				5,118				31,665				17,988
Professional and regulatory fees			45,518				39,964				88,645				66,225
Operations of foreclosed real estate			4,482				16,428				19,155				45,715
Other expenses			86,017				88,938				156,489				159,061
Total noninterest expense			634,154				630,305				1,227,442				1,228,891
Earnings (loss) before income tax expense			(10,773	)			59,993				63,671				186,934
Income tax expense			(7,156	)			23,859				22,448				74,235
Net earnings (loss)		$	(3,617	)			36,134				41,223				112,699
Basic and diluted earnings per share		$	(0.00	)			0.04				0.05				0.13
Dividends per share		$	0.12				0.00				0.12				0.00

 

See accompanying notes to consolidated financial statements.            

 

 

Consolidated Statements of Stockholders’ Equity (Unaudited)

 

														Common
						Additional								Stock								Total
For the Six Months Ended		Common				Paid-in				Treasury				Acquired				Retained				Stockholders'
September 30, 2015		Stock				Capital				Stock				by ESOP				Earnings				Equity
Balance at March 31, 2015		$	9,492			$	6,124,848			$	-			$	(432,527	)		$	7,582,502			$	13,284,315
Unaudited:
Net earnings			-				-				-				-				41,223				41,223
Dividends, $.12 per share																			(107,513	)			(107,513	)
Amortization of ESOP awards			-				5,857				-				22,551				-				28,408
Balance at September 30, 2015		$	9,492			$	6,130,705			$	-			$	(409,976	)		$	7,516,212			$	13,246,433
														Common
						Additional								Stock								Total
For the Six Months Ended		Common				Paid-in				Treasury				Acquired				Retained				Stockholders'
September 30, 2014		Stock				Capital				Stock				by ESOP				Earnings				Equity
Balance at March 31, 2014			9,069				3,288,508				(85,638	)			(183,670	)			7,372,223				10,400,492
Unaudited:
Net earnings			-				-				-				-				112,699				112,699
Treasury stock retired
pursuant to reorganization			-				(85,638	)			85,638				-				-				-
Amortization of ESOP awards			-				3,966				-				24,970				-				28,936
Cancellation of
Old Sugar Creek Financial Corp. shares			(9,069	)			9,069				-				-				-				-
Net proceeds from stock offering			9,492				2,904,453				-				(299,670	)			-				2,614,275
Balance at September 30, 2014			9,492				6,120,358				-				(458,370	)			7,484,922				13,156,402

 

See accompanying notes to consolidated financial statements.           

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

		Six Months Ended
		September 30,
		2015				2014
Cash flows from operating activities:
Net earnings		$	41,223			$	112,699
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation			45,546				44,969
Provision for (credit to) loan losses			(11,700	)			(17,000	)
Provision for losses on foreclosed real estste			38,715				29,270
ESOP expense			28,408				28,936
Amortization of deferred loan fees, net			(12,276	)			(7,707	)
(Increase) decrease in accrued interest receivable			11,355				(13,775	)
Decrease (increase) in other assets			18,079				562,505
Increase (decrease) in:
Accrued interest payable on deposits			16,946				2,550
Other liabilities			12,152				9,805
Income taxes payable			-				-
Net cash provided by operating activities			188,448				752,252
Cash flows from investing activities:
Net increase (decrease) in loans receivable			(7,517	)			(1,597,800	)
Purchase of premises and equipment			(39,184	)			(121,702	)
Proceeds from sale of (additions to) foreclosed real estate			(22,526	)			133,896
Net cash provided by (used for) investing activities			(69,227	)			(1,585,606	)
Cash flows from financing activities:
Net (decrease) increase in deposits			1,988,904				(5,214,975	)
Increase (decrease) in advances from borrowers for taxes and insurance			(273,708	)			(253,731	)
Dividend, $.12 per share			(107,513	)			-
Proceeds from sale of common stock			-				2,614,275
Net cash provided by (used for) financing activities			1,607,683				(2,854,431	)
Net increase (decrease) in cash and cash equivalents			1,726,904				(3,687,785	)
Cash and cash equivalents at beginning of period			16,720,008				16,647,828
Cash and cash equivalents at end of period		$	18,446,912			$	12,960,043
Supplemental disclosures - cash paid:
Interest on deposits and advances from FHLBC		$	413,888			$	339,209
Federal and state income taxes			35,000				9,000
Noncash transactions:
Real estate acquired in settlement of loans			179,298				-
Financing of foreclosed real estate			154,000				-
Retirement of treasury stock		$	-			$	85,638

 

See accompanying notes to consolidated financial statements.        

 

 

Note 1. Summary of Significant Accounting Policies

 

General

 

On April 8, 2014, Sugar Creek Financial Corp., a Maryland corporation (the “Company”), became the holding company for Tempo Bank (the “Bank”) upon completion of the “second-step” conversion of the Bank from a mutual holding company structure to a stock holding company structure (the Conversion”). The Conversion involved the sale by the Company of 535,127 shares of common stock in a subscription and community offering, including shares purchased by the Bank’s employee stock ownership plan, the exchange of 414,118 shares of common stock after consideration of fractional shares of the Company for shares of common stock of the former Sugar Creek Financial Corp. (“old Sugar Creek”) held by persons other than Sugar Creek MHC (the “MHC”), and the elimination of old Sugar Creek and the MHC. Net proceeds received from the reorganization and stock offering totaled $2,614,275, net of costs of $929,802, common stock acquired by the ESOP of $299,670 and the contribution of cash from the MHC of $98,382.

 

The Bank is a community oriented financial institution that provides traditional financial services within the areas it serves. The Bank is engaged primarily in the business of attracting deposits from the general public and using these funds to originate one- to four-family residential mortgage loans located in the Clinton, St. Clair, and Madison County, Illinois area. Further, operations of the Bank are managed and financial performance is evaluated on an institution-wide basis. As a result, all of the Bank’s operations are considered by management to be aggregated in one reportable operating segment. The Bank has no subsidiaries.

 

Accounting Standards Codification

 

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) is the officially recognized source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All other accounting literature is considered non-authoritative. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

 

Interim Financial Statements

 

The consolidated financial statements of the Company at September 30, 2015 and for the three and six months ended September 30, 2015 and 2014 have been prepared in conformity with U.S. GAAP for interim financial information and predominant practices followed by the financial services industry and are unaudited. However, in management’s opinion, the interim data at September 30, 2015 and for the three and six months ended September 30, 2015 and 2014 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

 

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Tempo Bank. The Company’s principal business is the business of the Bank. All significant intercompany accounts and transactions have been eliminated.

 

Use of Estimates

 

The consolidated financial statements have been prepared in conformity with U.S. GAAP. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet dates and income and expenses for the periods covered. Actual results could differ significantly from these estimates and assumptions. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.

 

Note 2. Earnings (loss) per Share

 

Earnings (loss) per share are based upon the weighted-average shares outstanding. ESOP shares, which have been committed to be released, are considered outstanding. Unvested restricted stock awards that contain non-forfeitable rights to dividends are participating securities and are included in the EPS computation using the two-class method. Prior period EPS data is adjusted retrospectively.

 

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2015				2014				2015				2015
Net earnings (loss)		$	(3,617	)			36,134			$	41,223				112,699
Weighted-average shares - Basic EPS			894,565				889,218				893,899				888,552
Effect of dilutive stock awards			-				-				-				-
Weighted-average shares - Diluted EPS			894,565				889,218				893,899				888,552
Basic earnings per common share		$	(0.00	)			0.04			$	0.05				0.13
Diluted earnings per common share		$	(0.00	)			0.04			$	0.05				0.13
Anti-dilutive shares			-				-				-				-

 

 

Note 3. Loans Receivable, Net

 

Loans receivable, net, are summarized as follows:

 

		September 30,				March 31,
		2015				2015
Real estate loans:
Single-family, owner occupied		$	61,567,196			$	61,255,147
Single-family, non-owner occupied			7,896,218				8,162,534
Multi-family, 5 or more units			561,650				721,130
Commercial			2,798,658				2,878,651
Land			1,057,567				1,212,874
Consumer loans			1,875,479				1,562,398
			75,756,768				75,792,734
Allowance for losses			(203,403	)			(242,103	)
Deferred loan fees, net			(83,423	)			(86,885	)
Total loans		$	75,469,942			$	75,463,746

 

The weighted-average rate on loans was 4.28% and 4.36% at September 30, 2015 and March 31, 2015, respectively.

 

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

 

Single-family, owner occupied

 

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

 

Single-family, non-owner occupied

 

Single-family, non-owner occupied loans carry greater inherent risks than single-family, owner occupied loans, since the repayment ability of the borrower is reliant on the adequacy of the income generated from the property.

 

Multi-family, 5 or more units

 

Multi-family real estate loans are typically secured by apartment complexes. These loans typically have larger loan balances and involve a greater degree of risk than single-family residential mortgage loans. Payments on loans secured by income producing properties often depend on successful operation and management of the properties.

 

 

Commercial real estate

 

Commercial real estate loans are secured primarily by office buildings and various income-producing properties. Commercial 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 significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. Repayment of loans secured by income-producing properties generally depends on the successful operation of the real estate project and may be subject to a greater extent to adverse market conditions and the general economy.

 

Land

 

Land loans are secured by unimproved land with terms of fifteen years or less and loan amounts that do not exceed 85% of the lesser of the appraised value or the purchase price. Loans secured by unimproved land generally involve greater risks than residential mortgage lending because land loans are more difficult to evaluate and the marketability of the underlying property may also be adversely affected in a high interest rate environment or adverse conditions in the real estate market or economy.

 

Consumer

 

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

 

The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended September 30, 2015 and 2014:

 

		Allowance for Loan Losses
		Beginning				Provision for												Ending
		Balance				Losses				Charge-offs				Recoveries				Balance
Three months ended September 30, 2015:
Real estate loans:
Single-family, owner occupied		$	132,465			$	(22,714	)		$	-			$	-			$	109,751
Single-family, non-owner occupied			28,257				(1,201	)			-				-				27,056
Multi-family, 5 or more units			38,685				(10,722	)			(27,000	)			-				963
Commercial			4,358				442				-				-				4,800
Land			1,691				123				-				-				1,814
Consumer loans			2,191				94				-				-				2,285
Unallocated			22,756				33,978				-				-				56,734
		$	230,403			$	-			$	(27,000	)		$	-			$	203,403

 

 

		Allowance for Loan Losses
		Beginning				Provision for												Ending
		Balance				Losses				Charge-offs				Recoveries				Balance
Three months ended September 30, 2014:
Real estate loans:
Single-family, owner occupied		$	210,963			$	10,762			$	-			$	-			$	221,725
Single-family, non-owner occupied			50,490				(8,333	)			-				-				42,157
Multi-family, 5 or more units			2,312				(46	)			-				-				2,266
Commercial			8,214				274				-				-				8,488
Land			4,454				(364	)			-				-				4,090
Consumer loans			4,365				5				-				-				4,370
Unallocated			305				3,702				-				-				4,007
		$	281,103			$	6,000			$	-			$	-			$	287,103

 

The following presents by portfolio segment, the activity in the allowance for loan losses for the six months ended September 30, 2015 and 2014:

 

		Allowance for Loan Losses
		Beginning				Provision for												Ending
		Balance				Losses				Charge-offs				Recoveries				Balance
Six months ended September 30, 2015:
Real estate loans:
Single-family, owner occupied		$	162,403			$	(52,652	)		$				$	-			$	109,751
Single-family, non-owner occupied			33,206				(6,150	)			-				-				27,056
Multi-family, 5 or more units			1,500				26,463				(27,000	)			-				963
Commercial			5,986				(1,186	)			-				-				4,800
Land			2,521				(707	)			-				-				1,814
Consumer loans			2,954				(669	)							-				2,285
Unallocated			33,533				23,201				-				-				56,734
		$	242,103			$	(11,700	)		$	(27,000	)		$	-			$	203,403

 

		Allowance for Loan Losses
		Beginning				Provision for												Ending
		Balance				Losses				Charge-offs				Recoveries				Balance
Six months ended September 30, 2014:
Real estate loans:
Single-family, owner occupied		$	209,010			$	12,715			$	-			$	-			$	221,725
Single-family, non-owner occupied			52,576				(10,419	)			-				-				42,157
Multi-family, 5 or more units			2,356				(90	)			-				-				2,266
Commercial			8,971				(483	)			-				-				8,488
Land			4,677				(587	)			-				-				4,090
Consumer loans			4,420				(50	)			-				-				4,370
Unallocated			22,093				(18,086	)			-				-				4,007
		$	304,103			$	(17,000	)		$	-			$	-			$	287,103

 

 

The following presents by portfolio segment, the recorded investment in loans and impairment method at September 30, 2015 and March 31, 2015:

 

		Allowance for Loan Losses												Loans
		Individually				Collectively								Individually				Collectively
		Evaluated				Evaluated								Evaluated				Evaluated
		for Impairment				for Impairment				Total				for Impairment				for Impairment				Total
At September 30, 2015:
Real estate loans:
Single-family, owner occupied		$	5,000			$	104,751			$	109,751			$	790,585			$	60,776,611			$	61,567,196
Single-family, non-owner occupied			13,866				13,190				27,056				205,232				7,690,986				7,896,218
Multi-family, 5 or more units			-				963				963				-				561,650				561,650
Commercial			-				4,800				4,800				-				2,798,658				2,798,658
Land			-				1,814				1,814				-				1,057,567				1,057,567
Consumer loans			-				2,285				2,285				-				1,875,479				1,875,479
Unallocated			-				56,734				56,734				-				-				-
		$	18,866			$	184,537			$	203,403			$	995,817			$	74,760,951			$	75,756,768

 

		Allowance for Loan Losses												Loans
		Individually				Collectively								Individually				Collectively
		Evaluated				Evaluated								Evaluated				Evaluated
		for Impairment				for Impairment				Total				for Impairment				for Impairment				Total
At March 31, 2015:
Real estate loans:
Single-family, owner occupied		$	37,000			$	125,403			$	162,403			$	1,209,527			$	60,045,620			$	61,255,147
Single-family, non-owner occupied			16,665				16,541				33,206				239,842				7,922,692				8,162,534
Multi-family, 5 or more units			-				1,500				1,500				127,623				593,507				721,130
Commercial			-				5,986				5,986				-				2,878,651				2,878,651
Land			-				2,521				2,521				-				1,212,874				1,212,874
Consumer loans			-				2,954				2,954				-				1,562,398				1,562,398
Unallocated			-				33,533				33,533				-				-				-
		$	53,665			$	188,438			$	242,103			$	1,576,992			$	74,215,742			$	75,792,734

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.

 

 

The following presents impaired loans and allocated valuation allowances based upon class levels and average recorded investment:

 

		Impaired Loans
		With				With no								Unpaid				Allowance
		Allowance				Allowance								Principal				for
		for Losses				for Losses				Total				Balance				Losses
At September 30, 2015
Real estate loans:
Single-family, owner occupied		$	487,981			$	302,604			$	790,585			$	790,585			$	5,000
Single-family, non-owner occupied			205,232				-				205,232				205,232				13,866
Multi-family, 5 or more units			-				-				-				-				-
Commercial			-				-				-				-				-
Land			-				-				-				-				-
Consumer loans			-				-				-				-				-
		$	693,213			$	302,604			$	995,817			$	995,817			$	18,866

 

The average recorded investment on impaired loans for the six months ended September 30, 2015 was single-family, owner occupied dwellings of $624,220 and single-family, non-owner occupied dwellings of $206,434.

 

The average recorded investment on impaired loans for the six months ended September 30, 2014 was single-family, owner occupied dwellings of $1,159,285, single-family, non-owner occupied dwellings of $221,796, land of $40,835 and consumer of $7,315.

 

		Impaired Loans
		With				With no								Unpaid				Allowance
		Allowance				Allowance								Principal				for
		for Losses				for Losses				Total				Balance				Losses
At March 31, 2015:
Real estate loans:
Single-family, owner occupied		$	946,720			$	262,807			$	1,209,527			$	1,209,527			$	37,000
Single-family, non-owner occupied			207,636				32,206				239,842				239,842				16,665
Multi-family, 5 or more units			-				127,623				127,623				127,623				-
Commercial			-				-				-				-				-
Land			-				-				-				-				-
Consumer loans			-				-				-				-				-
		$	1,154,356			$	422,636			$	1,576,992			$	1,576,992			$	53,665

 

 

The following presents nonperforming loans based upon class level:

 

		Nonperforming Loans
						Past Due 90				Accruing
						Days or More				Troubled Debt
		Nonaccrual				and Still Accruing				Restructurings				Total
At September 30, 2015:
Real estate loans:
Single-family, owner occupied		$	302,604			$	-			$	487,981			$	790,585
Single-family, non-owner occupied			-				-				205,232				205,232
Multi-family, 5 or more units			-				-				-				-
Commercial			-				-				-				-
Land			-				-				-				-
Consumer loans			-				-				-				-
		$	302,604			$	-			$	693,213			$	995,817

 

		Nonperforming Loans
						Past Due 90				Accruing
						Days or More				Troubled Debt
		Nonaccrual				and Still Accruing				Restructurings				Total
At March 31, 2015:
Real estate loans:
Single-family, owner occupied		$	262,807			$	-			$	946,720			$	1,209,527
Single-family, non-owner occupied			32,206				-				207,636				239,842
Multi-family, 5 or more units			127,623				-				-				127,623
Commercial			-				-				-				-
Land			-				-				-				-
Consumer loans			-				-				-				-
		$	422,636			$	-			$	1,154,356			$	1,576,992

 

For the six months ended September 30, 2015, gross interest income that would have been recorded had the non-accruing loans been current in accordance with their original terms was $7,190. There was $854 in interest income recognized on such loans for the six months ended September 30, 2015.

 

There were no new additions for loans modified as troubled debt restructurings (“TDRs”) during the six months ended September 30, 2015 and 2014. For the six months ended September 30, 2015 one accruing single-family, owner occupied TDR was repaid in full.

 

 

The following presents a summary of accruing TDRs at September 30, 2015 and March 31, 2015:

 

		September 30,						March 31,
		2015						2015
		Number of		Recorded				Number of		Recorded
		Contracts		Investment				Contracts		Investment
Real estate loans:
Single-family, owner occupied		1		$	487,981			2		$	946,720
Single-family, non-owner occupied		2			205,232			2			207,636
		3		$	693,213			4		$	1,154,356

 

At September 30, 2015, the recorded investment in single-family, real estate loans that are in the process of foreclosure according to the local jurisdiction requirement was $201,546.

 

The following presents the Bank's loan portfolio aging analysis:

 

		Days Past Due
		30-59				60-89				90 or more				Current				Total
At September 30, 2015:
Real estate loans:
Single-family, owner occupied		$	604,883			$	456,616			$	302,604			$	60,203,093			$	61,567,196
Single-family, non-owner occupied			292,189				38,525				-				7,565,504				7,896,218
Multi-family, 5 or more units			-				-				-				561,650				561,650
Commercial			-				-				-				2,798,658				2,798,658
Land			-				-				-				1,057,567				1,057,567
Consumer loans			8,655				-				-				1,866,824				1,875,479
		$	905,727			$	495,141			$	302,604			$	74,053,296			$	75,756,768

 

		Days Past Due
		30-59				60-89				90 or more				Current				Total
At March 31, 2015:
Real estate loans:
Single-family, owner occupied		$	1,032,922			$	41,745			$	262,807			$	59,917,673			$	61,255,147
Single-family, non-owner occupied			-				186,457				32,206				7,943,871				8,162,534
Multi-family, 5 or more units			-				-				127,623				593,507				721,130
Commercial			-				-				-				2,878,651				2,878,651
Land			-				-				-				1,212,874				1,212,874
Consumer loans			26,221				3,944				-				1,532,233				1,562,398
		$	1,059,143			$	232,146			$	422,636			$	74,078,809			$	75,792,734

 

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

 

 

The Bank uses the following definitions for risk ratings:

 

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

 

The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation. 

 

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

 

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

 

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

 

The following presents the credit risk profile for the Bank's loan portfolio based upon rating category:

 

		Credit Quality Indicator-Credit Risk Profile by Grade or Classification
		Special
		Mention				Substandard				Doubtful				Loss				Pass				Total
At September 30, 2015:
Real estate loans:
Single-family, owner occupied		$	-			$	790,585			$	-			$	-			$	60,776,611			$	61,567,196
Single-family, non-owner occupied			-				205,232				-				-				7,690,986				7,896,218
Multi-family, 5 or more units			-				-				-				-				561,650				561,650
Commercial			-				-				-				-				2,798,658				2,798,658
Land			-				-				-				-				1,057,567				1,057,567
Consumer loans			-				-				-				-				1,875,479				1,875,479
		$	-			$	995,817			$	-			$	-			$	74,760,951			$	75,756,768

 

 

		Credit Quality Indicator-Credit Risk Profile by Grade or Classification
		Special
		Mention				Substandard				Doubtful				Loss				Pass				Total
At March 31, 2015:
Real estate loans:
Single-family, owner occupied		$	-			$	1,209,527			$	-			$	-			$	60,045,620			$	61,255,147
Single-family, non-owner occupied			-				239,842				-				-				7,922,692				8,162,534
Multi-family, 5 or more units			-				127,623				-				-				593,507				721,130
Commercial			-				-				-				-				2,878,651				2,878,651
Land			-				-				-				-				1,212,874				1,212,874
Consumer loans			-				-				-				-				1,562,398				1,562,398
		$	-			$	1,576,992			$	-			$	-			$	74,215,742			$	75,792,734

 

Note 4. Income Taxes

 

The effective tax rate was (66.4)% for the three months ended September 30, 2015, compared to 39.8% for the three months ended September 30, 2014. The effective tax rate was 35.3% for the six months ended September 30, 2015, compared to 39.7% for the six months ended September 30, 2014.

 

Note 5. Regulatory Capital Requirements

 

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to quantitative judgments by the regulators about components, risk-weightings and other factors. At September 30, 2015 and March 31, 2015, the Bank met all capital adequacy requirements.

 

The Bank is also subject to the regulatory framework for prompt corrective action. At September 30, 2015 and March 31, 2015, the most recent notification from the regulatory agencies categorized the Bank as well capitalized. To be categorized as well capitalized, the Bank must maintain minimum capital standards for total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the aforementioned notifications that management believes have changed the Bank’s category.

 

 

The Bank’s actual and required capital amounts and ratios are summarized as follows:

 

										Minimum Required
										for Capital								to be "Well
		Actual								Adequacy								Capitalized"
At September 30, 2015:		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in Thousands)
Total capital to risk-weighted assets		$	11,720				24.8	%		$	3,779				8.0	%		$	4,724				10.0	%
Tier 1 capital to risk-weighted assets		$	11,517				24.4	%		$	2,834				6.0	%		$	3,779				8.0	%
Common equity tier 1 capital to risk-
weighted assets		$	11,517				24.4	%		$	2,126				4.5	%		$	3,071				6.5	%
Tier 1 capital to total assets		$	11,517				11.8	%		$	3,918				4.0	%		$	4,897				5.0	%

 

										Minimum Required
										for Capital								to be "Well
		Actual								Adequacy								Capitalized"
At March 31, 2015:		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in Thousands)
Total capital to risk-weighted assets		$	11,672				24.9	%		$	3,757				8.0	%		$	4,696				10.0	%
Tier 1 capital to risk-weighted assets		$	11,430				24.3	%		$	2,818				6.0	%		$	3,757				8.0	%
Common equity tier 1 capital to risk-
weighted assets		$	11,430				24.3	%		$	2,113				4.5	%		$	3,052				6.5	%
Tier 1 capital to total assets		$	11,430				12.2	%		$	3,756				4.0	%		$	4,695				5.0	%

 

Note 6. Financial Instruments with Off-Balance Sheet Risk

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments typically include commitments to originate mortgage loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

 

The Company’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount and related accrued interest receivable of those instruments.

 

 

The Company minimizes this risk by evaluating each borrower’s creditworthiness on a case-by-case basis. Generally, collateral held by the Company consists of a first or second mortgage on the borrower’s property. At September 30, 2015, there were eight commitments outstanding of $1.5 million to finance single-family, owner occupied residences, one commitment of $378,000 to finance a single-family, non-owner residence, one commitment of $12,000 to finance the purchase of land and one commitment of $250,000 to finance commercial real estate property.

 

Note 7. Concentration of Credit Risk

 

The Bank originates loans to the general public, which includes military personnel and civilian employees of Scott Air Force Base, located in Belleville, Illinois. This concentration of credit risk could unfavorably impact the level of credit risk of the Bank should events occur, such as employment curtailments, temporary layoffs or other events. Management believes that the secured nature of the majority of these loans mitigates this risk based upon current economic conditions.

 

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

 

Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the assumptions that market participants would use in pricing the assets or liabilities (the “inputs”) into three broad levels.

 

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

 

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

 

Valuation Techniques

 

Available for sale securities are carried at fair value utilizing Level 1 and Level 2 inputs. For debt securities, the Bank obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, live trading levels, trade execution data, cash flows, market consensus prepayment speeds, market spreads, credit information and the U.S. Treasury yield curve. At September 30, 2015 and March 31, 2015, the Company did not have any available for sale securities.

 

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

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

Assets measured at fair value on a nonrecurring basis at September 30, 2015 and March 31, 2015 include impaired loans of $995,817 and $1,576,992, respectively, utilizing Level 3 inputs. The impaired loans are collateral dependent.

 

Following is a summary of the activity in the allowance for losses on impaired loans, including TDRs:

 

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Balance, beginning of period		$	90,120			$	62,821			$	53,665			$	65,525
Loan charge-offs			(27,000	)			-				(27,000	)			-
Loan recoveries			-				-				-				-
Provision for (credit to) loan losses			(44,254	)			(1,510	)			(7,799	)			(4,214	)
Balance, end of period		$	18,866			$	61,311			$	18,866			$	61,311

 

Nonfinancial assets measured at fair value on a nonrecurring basis include foreclosed real estate which amounted to $443,475 at September 30, 2015 and $434,367 at March 31, 2015. Foreclosed real estate is initially recorded at fair value utilizing Level 2 units based on observable market data less costs to sell, establishing a new cost basis.

 

Fair Value of Financial Instruments

 

The carrying amount, fair value and the financial hierarchy of the Company’s financial instruments are summarized in the following table. Fair values of financial instruments have been estimated by the Company based upon available market information with the assistance of an independent consultant.

 

		September 30,
		2015
		Carrying				Fair				Fair Value Measurements Using
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
Non-trading instruments
and nonderivatives:
Cash and cash equivalents		$	18,446,912			$	18,446,912			$	18,446,912			$	-			$	-
Stock in FHLB of Chicago			1,165,513				1,165,513				-				1,165,513				-
Loans receivable, net			75,469,942				76,567,772				-				75,571,955				995,817
Accrued interest receivable on loans			246,221				246,221				-				246,221				-
Deposits			78,279,865				73,945,533				-				73,945,533				-
Accrued interest on deposits			67,016				67,016				-				67,016				-
Advances from FHLB of Chicago			5,000,000				5,269,611				-				5,269,611				-

 

 

		March 31,
		2015
		Carrying				Fair				Fair Value Measurements Using
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
Non-trading instruments
and nonderivatives:
Cash and cash equivalents		$	16,720,008			$	16,720,008			$	16,720,008			$	-			$	-
Stock in FHLB of Chicago			1,165,513				1,165,513				-				1,165,513				-
Loans receivable, net			75,463,746				79,924,031				-				78,347,039				1,576,992
Accrued interest receivable on loans			257,576				257,576				-				257,576				-
Deposits			76,290,961				72,906,558				-				72,906,558				-
Accrued interest on deposits			50,070				50,070				-				50,070				-
Advances from FHLB of Chicago			5,000,000				5,353,750				-				5,353,750				-

 

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

 

·

Cash and cash equivalents are valued at their carrying amounts due to the relatively short period to maturity of instruments.

·

Stock in FHLB of Chicago is valued at cost, which represents historical redemption value and approximates fair value.

·

Fair values for the loan portfolio, certificates of deposit and advances from the FHLBC are computed using an analysis which considers the amount and timing of all future cash flows of the underlying instruments discounted at current market rates.

·

Fair values of non-maturing deposits, such as checking, NOW, savings and money market deposit accounts are computed using an analysis which uses decay rates to estimate the amount and timing of all future cash flows of the underlying instruments, which are discounted at current market rates.

·

The carrying amounts of accrued interest receivable and payable approximate fair value.

 

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

 

There were no transfers between Level 1 and Level 2 categorizations and into or out of Level 3 categorization during the periods presented.

  

 

Item 2. Management’s Discussion and Analysis Of Financial Condition and Results Of Operations

 

Management’s discussion and analysis of the financial condition and results of operations at September 30, 2015 and for the three and six months ended September 30, 2015 and 2014 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements (Unaudited) and the notes thereto, appearing in Part I, Item 1 of this report and the Consolidated Financial Statements (Audited) and the notes thereto, appearing in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

 

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 may be required under applicable 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 Federal Deposit Insurance Corporation, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board;

 

·

changes in our organization, compensation and benefit plans;

 

·

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

 

·

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

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

Overview-General

 

Our principal business is to acquire deposits from individuals and businesses in the communities surrounding our offices and to use these deposits to fund loans. We focus on providing our products and services to two segments of customers: individuals and small businesses. At September 30, 2015, we had total assets of $97.3 million, net loans of $75.5 million, total deposits of $78.3 million and stockholders’ equity of $13.2 million.

 

Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income.

 

A secondary source of income is noninterest income, which is revenue that we receive from providing products and services. The majority of our noninterest income generally comes from loan service charges and service charges on deposit accounts.

 

Expenses. The noninterest expenses we incur in operating our business consist of compensation and benefits expenses, occupancy expenses, equipment and data processing expenses, FDIC premiums, costs from operation of foreclosed real estate, professional and regulatory fees and other miscellaneous expenses, legal and accounting fees and expenses of stockholder communications and meetings.

 

Our largest noninterest expense is compensation and benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, expenses for health insurance, retirement plans and other employee benefits, including employee stock ownership plan allocations.

 

Critical Accounting Policy

 

In the preparation of our financial statements, we have adopted various accounting policies that govern the application of U.S. GAAP. Our significant accounting policies are described in note 1 of the notes to the consolidated financial statements.

 

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

 

 

Allowance for Loan Losses. We consider the allowance for loan losses to be our critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover probable losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to operations. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of qualitative loss factors to be applied to the various segments of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least monthly. The allowance consists of allocated and general components. The allocated component relates to loans that are individually classified as impaired, for which the carrying value of the loan exceeds the fair value of the collateral or the present value of expected future cash flows, or loans otherwise adversely classified. The general component covers non-impaired loans and is based on the historical loan loss experience for generally the last three years, including adjustments to historical loss experience, maintained to cover uncertainties that affect the Company’s estimate of probable losses for each loan type. The adjustments to historical loss experience are based on evaluation of several factors, including primarily changes in lending policies and procedures; changes in collection, charge-off and recovery practices; changes in the nature and volume of the loan portfolio; changes in the volume and severity of nonperforming loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and changes in current, national and local economic and business conditions. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the OCC, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

 

Comparison of Financial Condition at September 30, 2015 and March 31, 2015

 

Cash and Cash Equivalents. Cash and cash equivalents increased $1.7 million to $18.4 million at September 30, 2015 from $16.7 million at March 31, 2015 primarily as a result of increased deposits.

 

Loans. The largest segment of our loan portfolio is single-family owner occupied residential real estate loans. At September 30, 2015, single-family, owner occupied residential real estate loans totaled $61.6 million, or 81.3% of total loans, compared to $61.3 million, or 80.8% of total loans at March 31, 2015. The increase in single-family owner occupied residential real estate loans is the result of market forces and competition for this type of mortgage lending.

 

Single-family non-owner occupied residential real estate loans, the second largest segment of our loan portfolio, totaled $7.9 million, or 10.4% of total loans, at September 30, 2015 compared to $8.2 million, or 10.7% of total loans, at March 31, 2015. Single-family non-owner occupied residential real estate loan balances decreased due to payments and prepayments, net of new originations.

 

 

Multi-family and commercial real estate loans totaled $3.3 million, or 4.4% of total loans, at September 30, 2015 compared to $3.6 million, or 4.7% of total loans, at March 31, 2015. Reductions in these loan segments were a result of repayments by borrowers largely as a result of the competitive environment for financing these types of mortgage loans.

 

Consumer loan balances totaled $1.9 million, or 2.5% of total loans, at September 30, 2015 compared to $1.6 million, or 2.0% of total loans, at March 31, 2015.

 

At September 30, 2015, fixed-rate loans, balloon loans and adjustable-rate loans totaled $39.6 million, $36.1 million and $17,000, respectively.

 

Loan originations for the three months ended September 30, 2015 decreased $200,000 to $3.6 million, from $3.8 million for the three months ended September 30, 2014. Loan originations for the six months ended September 30, 2015 increased $1.8 million to $8.7 million from $6.9 million at September 30, 2014. Despite the decrease in the three month period, we believe unusually cold weather during the first quarter followed by a second quarter that was cold and wet depressed loan demand in 2014. Since then, there has been a year of continued economic stabilization and improved weather condition which we believe has boosted the real estate market.

 

Investments. At September 30, 2015, our investment portfolio totaled $1.2 million and consisted solely of our investment in the FHLBC stock. Our investment in FHLBC stock was unchanged from March 31, 2015. At September 30, 2015, $570,000 of our investment in FHLBC stock consisted of excess or voluntary stock.

 

Other Assets. Other assets totaled $314,000 at September 30, 2015, a decrease of $18,000 from March 31, 2015. The decrease over the period was due primarily to a reduction in prepaid benefit expense and the timing of other prepaid items.

 

Deposits. Our deposit base is comprised of noninterest-bearing NOW accounts, NOW accounts, savings accounts, money market accounts and certificates of deposit. We consider our deposit accounts other than certificates of deposit to be core deposits. Deposits increased $2.0 million, or 2.6%, for the three months ended September 30, 2015, as a result of competitive regional deposit pricing. At September 30, 2015 and March 31, 2015, the Bank had no brokered deposits.

 

Borrowings. We utilize FHLBC advances to supplement our supply of funds for loans. During the three months ended September 30, 2015 there were no new advances or repayments made.

 

Results of Operations for the Three Months Ended September 30, 2015 and 2014.

 

General. A net loss of $3,600 was recorded for the three months ended September 30, 2015 compared with net earnings $36,100 at September 30, 2014, a decrease of $39,700 from the three months ended September 30, 2014. The decrease in net earnings for the quarter was primarily due to higher FDIC expense and compensation and benefits offset by lower advertising and operations of foreclosed real estate expenses.

 

Total Interest Income. Total interest income decreased $14,000 to $819,000 for the three months ended September 30, 2015. The decrease was due primarily to a reduction in interest income on loans receivable caused by lower average loan portfolio yields as a result of the continuing protracted low interest environment.

 

 

Total Interest Expense. Total interest expense increased $54,000 to $226,000 for the three months ended September 30, 2015 from $172,000 for the three months ended September 30, 2014. The increase resulted primarily from higher certificates balances and deposit rates.

 

The Bank has a $5 million fixed rate advance that carries an interest rate of 4.77% and matures February 13, 2017. The advance was obtained in a substantially higher interest rate environment. The Bank has not prepaid the advance because it would involve a substantial penalty.

 

Net Interest Income. Net interest income decreased $68,000 to $593,000 for the three months ended September 30, 2015 from $661,000 for the three months ended September 30, 2014. The decrease is due primarily to a lower interest rate spread.

  

Provision for Loan Losses. We establish provisions for loan losses which are charged to operations at a level we believe to be appropriate to our risk profile. These provisions represent management’s best estimate of probable loan losses in the portfolio. In evaluating the allowance for loan losses, management considers historical loss experience, the composition of the loan portfolio, adverse situations that might impact a borrower’s ability to repay the loan, the value of the underlying collateral, and other information, including level of nonaccrual loans. During the quarter ended September 30, 2015, the Company did not record a loss provision. During the quarter ended September 30, 2014, the Company recorded a loss provision of $6,000. The effects of the economic downturn and unemployment appear to have begun to moderate in our market area, and while delinquencies are still an issue to be monitored, employment in the local area is improving and home sales are improving collateral values.

 

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances are now being calculated using daily balances for the three months ended September 30, 2015, and nonaccrual loans are included in average balances only. For the three months ended September 30, 2014, average balances were calculated using month end balances. Management does not believe that the transition from month-end balances to daily balances has caused any material differences in the information presented. Loan fees are included in interest income on loans and are insignificant. None of the income reflected in the following table is tax-exempt income.

 

 

		Three Months Ended
		September 30,
		2015												2014
						Interest												Interest
		Average				and				Yield/				Average				and				Yield/
(Dollars in thousands)		Balance				Dividends				Cost				Balance				Dividends				Cost
Assets:
Interest-earning assets:
Loans		$	75,067			$	810				4.32	%		$	74,183			$	826				4.45	%
FHLBC Stock			1,165				1				0.34				1,165				1				0.34
Other interest-earning assets			16,260				8				0.20				10,927				6				0.22
Total interest-earning assets			92,492				819				3.54				86,275				833				3.86
Noninterest-earning assets			5,585												5,852
Total assets			98,077												92,127
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
NOW accounts		$	6,442			$	3				0.19	%		$	5,816			$	2				0.14	%
Savings accounts			14,405				9				0.25				13,503				9				0.27
Money market accounts			13,999				16				0.46				17,675				21				0.48
Certificates of deposit			40,306				138				1.37				32,686				80				0.98
Total interest-bearing deposits			75,152				166				0.88				69,680				112				0.64
FHLBC advances			5,000				60				4.80				5,000				60				4.80
Other borrowings			-				-				-				-				-				-
Total interest-bearing liabilities		$	80,152			$	226				1.13			$	74,680			$	172				0.92
Noninterest-bearing NOW accounts			3,673												3,170
Other noninterest-bearing liabilities			1,659												1,145
Total liabilities			85,484												78,995
Stockholders’ equity			13,415												13,132
Total liabilities and stockholders’ equity		$	98,077											$	92,127
Net interest income						$	593											$	661
Interest rate spread											2.41	%											2.94	%
Net interest margin							2.56	%											3.06	%
Average interest-earning assets to			115.40	%											115.53	%
average interest-bearing liabilities

 

Noninterest Income. Noninterest income includes service charges on deposit accounts, loan service charges, and other income. Total noninterest income decreased $5,000 to $30,000 for the three month period ended September 30, 2015 from $35,000 for the three months ended September 30, 2014.

 

Noninterest Expense. Noninterest expense primarily consists of salaries and employee benefits, equipment and data processing, occupancy, FDIC premium expense and other expenses. Total noninterest expense increased by $4,000 to $634,000 for the three months ended September 30, 2015 from $630,000 for the three months ended September 30, 2014. Higher FDIC expense and compensation and benefits were offset by lower advertising and operations of foreclosed real estate.

 

 

Compensation and benefit expense increased $7,000 to $341,000 for the three months ended September 30, 2015 from $334,000 for the comparable period in 2014. The increase was due in large part to an increase in defined benefit expense and employee medical expense.

 

Operations of foreclosed real estate decreased $12,000 to $4,000 for the three months ended September 30, 2015 from $16,000 for the three months ended September 30, 2014. This decrease was due to a lower level of losses on foreclosed real estate net of lease income on real estate owned.

 

Other noninterest expense decreased $3,000 to $86,000 at September 30, 2015 from $89,000 for the comparable period of 2014.

 

Income Taxes. Income tax for the three months ended September 30, 2015 was consisted of a $7,000 benefit compared to a $24,000 expense for the three months ended September 30, 2014. The decrease in tax expense is primarily attributable to lower pre-tax earnings.

 

Results of Operations for the Six Months Ended September 30, 2015 and 2014

 

General.  Net earnings for the six months ended September 30, 2015 and 2014 were $41,000 and $113,000, respectively. The decrease was due primarily to lower yields on loans and higher rates paid on certificates on deposits.

 

Total Interest Income. Total interest income decreased $26,000 to $1.6 million for the six months ended September 30, 2015 when compared to $1.7 million for the six months ended September 30, 2014. The decrease was due primarily to reductions in the yield of the loan portfolio to 4.34% for the six months ended September 30, 2015 from 4.49% for the same period in 2014. The loan yield decreased due to the continuing low interest rate environment.

 

Total Interest Expense. Total interest expense increased $89,000 to $430,000 for the six months ended September 30, 2015 from $341,000 for the six months ended September 30, 2014. The decrease resulted primarily of higher average deposit balances and local competitive market forces for acquiring deposits.

 

The Bank has a $5 million fixed rate advance that carries an interest rate of 4.77% and matures February 13, 2017. The advance was obtained in a substantially higher interest rate environment. The Bank has not prepaid the advance because it would involve a substantial penalty.

 

The average rate on interest-bearing liabilities increased to 1.10% for the six months ended September 30, 2015 from 0.91% for the same period in 2014.

 

Net Interest Income. Net interest income decreased $115,000 to $1.2 million for the six months ended September 30, 2015 from $1.3 million for the six months ended September 30, 2014. The decrease was due primarily to lower yields on the loan portfolio and higher average deposit rates and balances.

 

Our interest rate spread decreased 45 basis points to 2.49% for the six months ended September 30, 2015 from 2.94% for the comparable period in 2014.

 

 

The following table summarizes average balances and average yields and costs for the six months ended September 30, 2015 and 2014. Yields are annualized.

 

		Six Months Ended
		September 30,
		2015												2014
						Interest												Interest
		Average				And				Yield/				Average				And				Yield/
(Dollars in thousands)		Balance				Dividends				Cost				Balance				Dividends				Cost
Assets:
Interest-earning assets:
Loans		$	75,052			$	1,626				4.33	%		$	73,886			$	1,657				4.49	%
FHLBC Stock			1,165				3				0.52				1,165				3				0.52
Other interest-earning assets			15,378				17				0.22				11,870				12				0.20
Total interest-earning assets			91,595				1,646				3.59				86,921				1,672				3.85
Noninterest-earning assets			5,770												5,934
Total assets			97,365												92,855
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
NOW accounts		$	6,564			$	5				0.15	%		$	6,049			$	5				0.17	%
Savings accounts			14,409				18				0.25				13,676				17				0.25
Money market accounts			14,119				35				0.50				18,034				43				0.48
Certificates of deposit			38,267				252				1.32				32,400				156				0.96
Total interest-bearing deposits			73,359				310				0.85				70,159				221				0.63
FHLBC advances			5,000				120				4.80				5,000				120				4.80
Other borrowings			-				-				-				-				-				-
Total interest-bearing liabilities		$	78,359			$	430				1.10			$	75,159			$	341				0.91
Noninterest-bearing NOW accounts			3,681												4,367
Other noninterest-bearing liabilities			1,963												1,098
Total liabilities			84,003												80,624
Stockholders’ equity			13,361												12,231
Total liabilities and stockholders’ equity		$	97,365											$	92,855
Net interest income						$	1,216											$	1,331
Interest rate spread											2.49	%											2.94	%
Net interest margin							2.66	%											3.06	%
Average interest-earning assets to
average interest-bearing liabilities			116.89	%											115.65	%

 

Provision for Loan Losses. For the six months ended September 30, 2015, the Company recorded a net credit to the provision for loan losses of $11,700. During the six months ended September 30, 2014, the Company recorded a credit to the provision for loan losses of $17,000. The effects of the economic downturn and unemployment appear to have begun to moderate in our market area, and while delinquencies are still an issue to be monitored, employment in the local area is improving and home sales are improving collateral values.

 

Noninterest Income. Noninterest income includes service charges on deposit accounts, loan service charges, and other income. Total noninterest income decreased $4,000 for the six month period ended September 30, 2015 to $63,000 from $67,000 for the six months ended September 30, 2014 due primarily to lower service charges on deposit accounts.

 

 

Noninterest Expense. Noninterest expense primarily consists of compensation and employee benefits, equipment and data processing, occupancy, FDIC premium expense and other expenses. Total noninterest expense decreased $1,000 for the six months ended September 30, 2015.

 

Compensation and benefit expense decreased $18,000 to $648,000 for the six months ended September 30, 2015 from $666,000 for the comparable period in 2014. The decrease was due to a decrease in defined benefit expense.

 

Operations of foreclosed real estate decreased $27,000 to $19,000 for the six months ended September 30, 2015 from $46,000 for the six months ended September 30, 2014. This decrease was due to a decrease in loss on sale of real estate owned, lower real estate owned expense and lease income derived from the properties held as real estate owned.

 

Advertising expense decreased $11,000 for the six months ended September 30, 2015 from $29,000 for the comparable period in 2014. The decrease is related primarily to the recognition of the Bank’s 125^th anniversary celebration that occurred in 2014.

 

Other noninterest expense decreased $3,000 to $156,000 for the six months ended September 30, 2015 from $159,000 for the six months ended September 30, 2014 due primarily to expenses related to operating a public company.

 

Income Taxes. Income tax expense for the six months ended September 30, 2015 was $22,000 compared to $74,000 for the six months ended September 30, 2014. The decrease in tax expense is primarily attributable to lower pre-tax income.

 

Analysis of Nonperforming and Classified Assets.

 

We consider foreclosed real estate, repossessed assets, nonaccrual loans and accruing troubled debt restructurings to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan. There were no changes in our nonaccrual loan policy during the six months ended September 30, 2015 and 2014.

 

Troubled debt restructurings are loans where concessions have been granted to borrowers experiencing financial difficulties.

 

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at fair market value at the date of foreclosure less estimated selling costs. Holding costs and declines in fair value after acquisition of the property result in charges against income.

 

 

Nonperforming Assets

 

Nonaccrual loans at September 30, 2015 consisted of three single-family, owner-occupied dwellings in the aggregate amount of $303,000. The largest lending relationship in the nonperforming loan category amounted to $195,000, which was secured by one single-family non-owner occupied dwelling. While improving, the level of nonaccrual loans continues to reflect a slow local and regional economy, job layoffs, divorce and health issues that impact borrowers.

 

Accruing troubled debt restructurings were $693,000 at September 30, 2015 and $1.1 million at March 31, 2015.

 

At September 30, 2015, there were no other loans known to management which caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure as nonaccrual, 90 days past due or impaired.

 

See Note 3 to our unaudited consolidated financial statements for a description by loan category of our classified assets as of September 30, 2015 and March 31, 2015.

 

Liquidity and Capital Management

 

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities of and payments on investment securities and borrowings from the FHLBC. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

 

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2015, cash and cash equivalents totaled $18.4 million. At September 30, 2015, the Bank had $5.0 million in FHLBC advances outstanding.

 

A significant use of our liquidity is the funding of loan originations. At September 30, 2015, the Bank had loan commitments outstanding to finance the purchase of eight single-family, owner occupied residences, one single-family, non-owner occupied residence, one commercial real estate property and one land loan. Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of September 30, 2015 totaled $15.0 million, or 36.9% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2016. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

 

The Federal Reserve’s Federal Open Market Committee has been hesitant to increase rates for Fed funds and Discount Window borrowings. The Committee has signaled a bias to increase rates but has not done so because of lingering domestic and foreign economic issues. We have been able to attract new money deposits with targeted pricing and the local deposit market remains extremely competitive with both regional and national banking institutions advertising for deposits. This has resulted in a very rate sensitive time deposit base. We have the ability to attract and retain these deposits by adjusting the interest rates offered, if deemed appropriate.

 

The Company is a separate legal entity from the Bank and must provide for its own liquidity. The Company’s ability to pay cash dividends may depend, in part, upon its receipt of dividends from Tempo Bank because Sugar Creek Financial has no source of income other than earnings from the $1.1 million held in overnight Fed Funds and Fed excess balances accounts. Payment of cash dividends on capital stock by a savings and loan holding company is limited by Federal Reserve Board regulations. The holding company declared a $.12 per share dividend to stockholders of record as of August 11, 2015 and paid as of August 26, 2015. At September 30, 2015, the Company (on an unconsolidated basis) had liquid assets of $1.1 million.

 

We did not repurchase any of our common stock during the quarter ended September 30, 2015 and had no publicly announced repurchase plans or programs as of September 30, 2015.

 

Our primary investing activity is the origination of loans. Our primary financing activities consist of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the rates paid and products offered by us and our local competitors and several other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

 

Capital Management. The Bank is subject to various regulatory capital requirements administered by the OCC, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2015, the Bank exceeded all of its regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines. See note 5 of notes to the consolidated financial statements.

 

The Bank may not declare or pay a cash dividend, if the effect of such dividends would be to cause the capital of the Bank to be reduced below the aggregate amount required by federal or state law. The Company may pay a dividend, if and when declared by its Board of Directors. Any repurchases of the Company’s common stock will be conducted in accordance with applicable laws and regulations.

 

Off-Balance Sheet Arrangements

 

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

 

 

For the three months ended September 30, 2015 and 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Impact of Recent Accounting Pronouncements

 

In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditor (Subtopic 310-40).” The provisions of ASU 2014-04 require reclassification of a residential real estate loan to foreclosed real estate upon obtaining legal title to the property, which could occur either through foreclosure or deed in lieu of foreclosure. The existence of the borrower’s right of redemption will not prevent the lender from reclassifying a loan to foreclosed real estate once the lender obtains legal title to the property.

 

Entities are required to disclose the amount of foreclosed residential real estate and such loans in the process of foreclosure on an interim and annual basis. The provisions of ASU 2014-04 may be applied using either a modified retrospective transition method or a prospective transition method, beginning after December 15, 2014.

 

Effect of Inflation and Changing Prices

 

The financial statements and related financial data presented in this quarterly report have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures 

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2015. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended September 30, 2015, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, we are not a party to any pending legal proceeding, except as disclosed in Note 12 of Notes to Consolidated Financial Statements contained in the 2015 Annual Report on Form 10-K, that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

Not applicable.

 

(b)

Not applicable.

 

(c)

There were no issuer repurchases of securities during the period covered by this report.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

3.1

Articles of Amendment and Restatement to Articles of Incorporation of Sugar Creek Financial Corp. (1)

 

3.2

Bylaws of Sugar Creek Financial Corp. (2)

 

4.0

Form of Common Stock Certificate of Sugar Creek Financial Corp. (2)

 

31.0

Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.0

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.0

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Stockholder’s Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

 

(1)

Incorporated by reference into this document from the exhibits filed with the Quarterly Report on Form 10-Q for the period ended December 31, 2013.

 

(2)

Incorporated by reference into this document from the exhibits filed with the Registration Statement on Form S-1 (SEC File No. 333-192700) and amendments thereto.

 

 

SIGNATURES

 

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

 

	SUGAR CREEK FINANCIAL CORP.
Date: November 6, 2015	/s/ Robert J. Stroh, Jr.
	Robert J. Stroh, Jr.
	Chief Executive Officer and Chief Financial Officer