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 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2017

 

OR

 

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                      to                      

 

Commission File No. 000-55183

 

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Home Bancorp Wisconsin, Inc.

(Exact name of registrant as specified in its charter)

 

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Maryland	46-3383278
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

 

3762 East Washington Avenue, Madison, Wisconsin	53704
(Address of Principal Executive Offices)	Zip Code

 

(608) 282-6000

(Registrant’s telephone number)

 

N/A

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

 

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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  ☒    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  ☒    NO  ☐  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐  (Do not check if smaller reporting company)	Smaller reporting company	☒
		Emerging growth company	☒

  

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

 

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

 

There were 899,190 shares of the Registrant’s common stock, par value $0.01 per share issued and outstanding as of May 14, 2017.  

 

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Home Bancorp Wisconsin, Inc.

Form 10-Q

Index

 

		Page
Part I. Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and September 30, 2016	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2017 and 2016 (unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2017 and 2016 (unaudited)	4
	Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended March 31, 2017 and 2016 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2017 and 2016(unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31
Part II. Other Information
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

  

 

PART I FINANCIAL INFORMATION Item 1. Financial Statements

 

Home Bancorp Wisconsin, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

March 31, 2017 and September 30, 2016

(Dollars in Thousands)

		(Unaudited)
		March 31, 2017				September 30, 2016
Assets
Cash and due from banks		$	4,179			$	2,788
Interest-bearing deposits			421				377
Cash and cash equivalents			4,600				3,165
Other interest-bearing deposits			5,517				5,327
Securities available for sale			996				1,119
Securities held to maturity (fair value of $2,101 and $2,411 for March 31, 2017 and September 30, 2016, respectively)			2,081				2,340
Loans held for sale			108				1,721
Loans, net of allowance for loan losses of $1,501 and $1,502 for March 31, 2017 and September 30, 2016, respectively			123,193				116,164
Premises and equipment, net			5,094				5,176
Cash value of life insurance			3,431				3,392
Federal Home Loan Bank stock			407				646
Other assets			829				942
TOTAL ASSETS		$	146,256			$	139,992
Liabilities and Stockholders’ Equity
Liabilities:
Demand deposits		$	37,101			$	34,590
Money market and savings deposits			47,892				45,354
Time deposits			36,267				32,614
Total deposits			121,260				112,558
Advance payments by borrowers for taxes and insurance			336				809
Federal funds purchased			—				1,330
Borrowed funds			12,032				12,223
Other liabilities			858				1,227
Total liabilities			134,486				128,147
Stockholders’ Equity:
Common stock $0.01 par value, 30,000,000 shares authorized; 899,190 shares issued and outstanding at March 31, 2017 and September 30, 2016		$	9			$	9
Additional paid-in capital			7,405				7,403
Retained earnings			4,983				5,070
Unearned Employee Stock Ownership Plan (ESOP) shares			(626	)			(640	)
Accumulated other comprehensive income			(1	)			3
Total stockholders’ equity			11,770				11,845
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	146,256			$	139,992

 

The accompanying notes are an integral part of these financial statements

 

 

Home Bancorp Wisconsin, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

Three and Six Months Ended March 31, 2017 and 2016

(Unaudited)

(Dollars in Thousands, except per share data)

		Three Months Ended March 31,								Six Months Ended March 31,
		2017				2016				2017				2016
Interest and dividend income:
Loans, including fees		$	1,252			$	1,196			$	2,501			$	2,347
Interest-bearing deposits			18				25				36				50
Securities			19				24				37				52
Total interest and dividend income			1,289				1,245				2,574				2,449
Interest expense:
Deposits			99				87				196				172
Borrowed funds			78				75				154				149
Total interest expense			177				162				350				321
Net interest income			1,112				1,083				2,224				2,128
Provision for loan losses			—				5				—				10
Net interest income after provision for loan losses			1,112				1,078				2,224				2,118
Noninterest income:
Service fees			68				65				138				139
Mortgage banking income (loss)			(12	)			48				(7	)			84
Net gain on sale of securities			—				4				—				4
Increase in cash value of life insurance			19				18				39				37
Net gain on sale of premises and equipment			—				16				15				31
Rental income			24				24				48				48
Other			7				43				20				55
Total noninterest income			106				218				253				398
Noninterest expense:
Compensation and employee benefits			659				617				1,275				1,194
Occupancy and equipment			201				200				375				375
Data processing and office expense			249				234				500				458
Foreclosed assets, net			—				—				—				23
Advertising and promotions			38				32				82				58
Professional fees			65				75				151				152
Examinations and assessments			28				27				52				66
Other			58				65				129				111
Total noninterest expense			1,298				1,250				2,564				2,437
Income (loss) before income taxes			(80	)			46				(87	)			79
Provision for income taxes			—				—				—				—
Net income (loss)		$	(80	)		$	46			$	(87	)		$	79
Earnings per share:
Basic			(.10	)			.06				(.10	)			.09
Dilutive			(.10	)			.06				(.10	)			.09

 

The accompanying notes are an integral part of these financial statements

 

 

Home Bancorp Wisconsin, Inc. and Subsidiary

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three and Six Months Ended March 31, 2017 and 2016

(Unaudited)

(Dollars in Thousands)

		Three Months Ended March 31,								Six Months Ended March 31,
		2017				2016				2017				2016
Net income (loss)		$	(80	)		$	46			$	(87	)		$	79
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities during the year			(4	)			14				(4	)			(17	)
Reclassification adjustment for gains realized in net income			—				(4	)			—				(4	)
Income tax effect			—				—				—				—
Net unrealized gain (loss) on securities			(4	)			10				(4	)			(21	)
Other comprehensive income (loss), net of tax			(4	)			10				(4	)			(21	)
Comprehensive income (loss)		$	(84	)		$	56			$	(91	)		$	58

 

The accompanying notes are an integral part of these financial statements

 

 

Home Bancorp Wisconsin, Inc. and Subsidiary

Condensed Consolidated Statements of Stockholders’ Equity

Six Months Ended March 31, 2017 and 2016

(Unaudited)

(Dollars in Thousands)

		Common Stock				Additional Paid In Capital				Retained Earnings				Unearned ESOP Shares				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance at October 1, 2015		$	9			$	7,407			$	4,937			$	(669	)		$	27			$	11,711
Net income			—				—				79				—				—				79
Allocation of 1,439 Shares from ESOP			—				(2	)			—				14				—				12
Other comprehensive income			—				—				—				—				(21	)			(21	)
Balance at March 31, 2016		$	9			$	7,405			$	5,016			$	(655	)		$	6			$	11,781
Balance at October 1, 2016		$	9			$	7,403			$	5,070			$	(640	)		$	3			$	11,845
Net income			—				—				(87	)			—				—				(87	)
Allocation of 1,439 Shares from ESOP			—				2				—				14				—				16
Other comprehensive loss			—				—				—				—				(4	)			(4	)
Balance at March 31, 2017		$	9			$	7,405			$	4,983			$	(626	)		$	(1	)		$	11,770

 

The accompanying notes are an integral part of these financial statements

 

 

Home Bancorp Wisconsin, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

Six Months Ended March 31, 2017 and 2016

(Unaudited)

(Dollars in Thousands)

		Six Months Ended March 31,
		2017				2016
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income (loss)		$	(87	)		$	79
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation			123				117
Net amortization of premiums and discounts			6				10
ESOP compensation expense			16				12
Provision for loan losses			—				10
Net (gain) loss on sale of securities			—				(4	)
Gain on sale of premises and equipment			(15	)			(31	)
Net loss on foreclosed assets			—				23
Increase in cash surrender value			(39	)			(37	)
Changes in operating assets and liabilities:
Loans held for sale			1,613				(517	)
Other assets			112				57
Other liabilities			(353	)			(115	)
Total adjustments			1,463				(475	)
Net cash provided by (used in) operating activities			1,376				(396	)
Cash flows from investing activities:
Net (increase) decrease in other interest-bearing deposits			(190	)			1,807
Proceeds from sales of securities available for sale			—				473
Proceeds from maturities, prepayments, and calls of securities available for sale			115				228
Proceeds from maturities, prepayments, and calls of securities held to maturity			257				254
Proceeds from sales of Federal Home Loan Bank stock			239				—
Net increase in loans			(7,029	)			(2,857	)
Proceeds from sale of foreclosed assets			—				237
Capital expenditures			(41	)			(134	)
Net cash provided by (used in) investing activities			(6,649	)			8
Cash flows from financing activities:
Net increase in deposits			8,702				4,417
Net decrease in advance payments by borrowers for taxes and insurance			(473	)			(482	)
Net decrease in federal funds purchased			(1,330	)			(616	)
Proceeds from borrowings			—				2,000
Repayments of borrowed funds			(191	)			(3,641	)
Net cash provided by financing activities			6,708				1,678
Net increase in cash and cash equivalents			1,435				1,290
Cash and cash equivalents at beginning			3,165				2,533
Cash and cash equivalents at end		$	4,600			$	3,823
Supplemental cash flow information:
Cash paid for interest		$	341			$	316
Noncash operating and investing activities:

 

The accompanying notes are an integral part of these financial statements

 

 

Home Bancorp Wisconsin, Inc. and Subsidiary Form 10-Q Notes to Condensed Consolidated Financial Statements (Unaudited) (Dollars in Thousands, except per share data)

Home Bancorp Wisconsin, Inc. and Subsidiary   Notes to Financial Statements

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Note 1

Basis of Financial Statement Presentation

 

The unaudited financial statements include the accounts of Home Bancorp Wisconsin, Inc. and its wholly-owned subsidiary, Home Savings Bank, the “Bank,” and collectively, (the “Company”).

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and with instructions for Form 10-Q and 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.

 

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from these estimates.

  

In the opinion of management, the preceding unaudited condensed financial statements contain all adjustments necessary for a fair presentation of the financial condition of the Company as of March 31, 2017 and September 30, 2016, and the results of its operations and comprehensive income (loss) for the three and six months ended March 31, 2017 and 2016, and the statements of stockholders’ equity and cash flows for the six months ended March 31, 2017 and 2016. These financial statements should be read in conjunction with the financial statements of the Company for the year ended September 30, 2016 included as part of Home Bancorp Wisconsin, Inc.’s 10-K dated December 23, 2016 as filed with the Securities and Exchange Commission, and considering the out-of-period adjustments described below.

 

Out-of-Period Adjustments

 

The financial statements presented for the three and six months ended March 31, 2016 include adjustments to correct errors that relate to improper recognition of various vendor expenses that were identified and corrected during the current quarter financial closing process and relate to fiscal years ended September 30, 2011, 2012, 2013, 2014, 2015, and 2016 and quarterly periods therein and the quarterly period ended December 31, 2016. Prior period filings have not been restated as the changes were deemed immaterial to the individual periods. These out-of-period adjustments for improper recognition of various vendor expenses are being treated as corrections to our prior period financial results and aggregate to approximately $528,000 as of December 31, 2016. These out-of-period adjustments are reflected as a decrease in net loans of $528,000, a decrease in retained earnings of $528,000, a decrease in service fees of $13,000, an increase in compensation and employee benefits expense of $114,000, and an increase in professional fees of $401,000. The out-of-period adjustments are reflected in the periods in which they apply on the comparative financial statements.

 

The effects on our unaudited condensed consolidated financial statements are as follows:

 

Unaudited Condensed Consolidated Balance Sheet

		September 30, 2016
		As Reported				Adjustment				Revised
Loans, net of allowance for loan losses		$	116,674			$	(510	)		$	116,164
Total assets			140,502				(510	)			139,992
Retained earnings			5,580				(510	)			5,070
Total stockholders’ equity			12,355				(510	)			11,845
Total liabilities and stockholders’ equity			140,502				(510	)			139,992

   

 

Unaudited Condensed Consolidated Statement of Operations

		Three Months Ended March 31, 2016
		As Reported				Adjustment				Revised
Service fees		$	65			$	---			$	65
Total noninterest income			218				---				218
Compensation and employee benefits			614				3				617
Professional fees			61				14				75
Total noninterest expense			1,233				17				1,250
Income before income taxes			63				(17	)			46
Net income			63				(17	)			46
Earnings per share basic			.08				(.02	)			.06
Earnings per share dilutive			.08				(.02	)			.06

 

Unaudited Condensed Consolidated Statement of Operations

		Six Months Ended March 31, 2016
		As Reported				Adjustment				Revised
Service fees		$	138			$	1			$	139
Total noninterest income			397				1				398
Compensation and employee benefits			1,188				6				1,194
Professional fees			121				31				152
Total noninterest expense			2,400				37				2,437
Income before taxes			115				(36	)			79
Net income			115				(36	)			79
Earnings per share basic			.14				(.05	)			.09
Earnings per share dilutive			.14				(.05	)			.09

   

 

The results of operations for the three and six month periods ended March 31, 2017 are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the financial statements and footnotes thereto in the Annual Report on Form 10-K.

 

Note 2

New Accounting Pronouncements

 

In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). ASU 2017-08 is intended to amend the amortization period for certain purchased callable debt securities held at a premium. Under ASU 2017-08, the FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13 “Credit Losses (Topic 326).” ASU 2016-13 requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently assessing the impact of adopting ASU 2016-13 on its consolidated financial statements.

 

 

In March 2016, the FASB issued ASU No. 2016-09 “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company is currently assessing the impact of adopting ASU 2016-09 on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is currently assessing the impact of adopting ASU 2016-02 on its consolidated financial statements.

 

In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard makes a number of changes to the recognition and measurement standards of financial instruments, including the following changes: 1) equity securities with a readily determinable fair value will have to be measured at fair value with changes in fair value recognized in net income; 2) entities that are public business entities will no longer be required to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; and 3) entities that are public business entities will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. This new standard is effective for consolidated financial statements issued for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this new standard is not expected to have a material impact on our financial condition or results of operations, except that the Company will no longer disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost.

 

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendment supersedes and replaces nearly all existing revenue recognition guidance. Under the amended guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. In August 2015, FASB issued ASU No. 2015-14 Revenue from Contracts with Customer (Topic 606), Deferral of the Effective Date. The amendment defers the effective date of ASU No. 2014-09 by one year. Adoption of ASU No. 2014-04 and ASU 2015-14 is not expected to have a material impact on the consolidated financial statements, but significant disclosures to the Notes thereto will be required.

 

Note 3

Earnings Per Share

 

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, including allocated and committed-to-be-released ESOP shares, during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

 

 

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share for the three and six month periods ended March 31, 2017 and 2016:

 

		Three Months Ended March 31, 2017				Three Months Ended March 31, 2016				Six Months Ended March 31, 2017				Six Months Ended March 31, 2016
Net income (loss)		$	(80	)		$	46			$	(87	)		$	79
Basic potential common shares:
Weighted average shares outstanding			899,190				899,190				899,190				899,190
Weighted average unallocated Employee Stock Ownership Plan shares			(62,943	)			(65,821	)			(63,303	)			(66,180	)
Basic weighted average shares outstanding			836,247				833,369				835,887				833,010
Dilutive potential common shares			—				—				—				—
Dilutive weighted average shares outstanding			836,247				833,369				835,887				833,010
Basic earnings per share		$	(.10	)		$	.06			$	(.10	)		$	.09
Diluted earnings per share		$	(.10	)		$	.06			$	(.10	)		$	.09

 

 

 

Note 4

Securities

 

The amortized cost and estimated fair value of securities with gross unrealized gains and losses are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
March 31, 2017
Securities available for sale:
U.S. agency pass-through		$	997			$	2			$	(3	)		$	996
Securities held to maturity:
U.S. agency pass-through		$	2,081			$	20			$	—			$	2,101
September 30, 2016
Securities available for sale:
U.S. agency pass-through		$	1,116			$	5			$	2			$	1,119
Securities held to maturity:
U.S. agency pass-through		$	2,340			$	71			$	—			$	2,411

 

Fair values of securities are estimated based on financial models or prices paid for similar securities. It is possible interest rates could change considerably, resulting in a material change in the estimated fair value. 

 

The following table shows the fair value and gross unrealized losses of securities with unrealized losses at March 31, 2017 and September 30, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

		Less Than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
March 31, 2017:
Securities available for sale:
U.S. agency pass-through		$	273			$	—			$	208			$	3			$	481			$	3
Totals		$	273			$	—			$	208			$	3			$	481			$	3
September 30, 2016:
Securities available for sale:
U.S. agency pass-through		$	234			$	2			$	—			$	—			$	234			$	2
Totals		$	234			$	2			$	—			$	—			$	234			$	2

 

At March 31, 2017, three debt securities have unrealized losses with aggregate depreciation of less than 1% from the Company’s amortized cost basis. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability to hold debt securities for the foreseeable future, no declines are deemed to be other than temporary.

 

 

At September 30, 2016, two debt securities have unrealized losses with aggregate depreciation of less than 1% from the Company’s amortized cost basis. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability to hold debt securities for the foreseeable future, no declines are deemed to be other than temporary.

 

Note 5

Loans

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff, generally are generally reported at their outstanding unpaid principal balances adjusted for charge-offs and the allowance for loan losses. Interest on loans is accrued and credited to income based on the unpaid principal balance. Loan-origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication the borrower may be unable to make payments as they become due. When loans are placed on nonaccrual or charged off, all unpaid accrued interest is reversed against interest income. The interest on these loans is subsequently accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Allowance for Loan Losses

 

The allowance for loan losses is maintained at the level considered adequate by management to provide for losses that are probable. The allowance for loan losses is established through a provision for loan losses charged to expense as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

 

 

Management regularly evaluates the allowance for loan losses using the Company’s past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, current economic conditions, and other relevant factors. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change.

 

A loan is impaired when, based on current information, it is probable that the Bank will not collect all amounts due in accordance with the contractual terms of the loan agreement. Management determines whether a loan is impaired on a case-by-case basis, taking into consideration the payment status, collateral value, length and reason of any payment delays, the borrower’s prior payment record, and any other relevant factors. Large groups of smaller-balance homogeneous loans, such as residential mortgage and consumer loans, are collectively evaluated in the allowance for loan losses analysis and are not subject to impairment analysis unless such loans have been subject to a restructuring agreement. Specific allowances for impaired loans are based on discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require additions to the allowance for loan losses based on their judgments of collectability.

 

The following table presents total loans by portfolio segment and class of loan as of March 31, 2017 and September 30, 2016:

 

		March 31, 2017				September 30, 2016
Commercial:
Commercial business		$	1,482			$	1,138
Commercial real estate			20,908				20,845
Multifamily real estate			33,159				28,196
Construction			1,605				4,789
Residential real estate:
One- to four-family residential			57,753				53,145
Second mortgage			8,366				8,582
Consumer			1,718				1,748
Subtotals			124,991				118,443
Allowance for loan losses			(1,501	)			(1,502	)
Net deferred loan expenses			(108	)			(91	)
Undisbursed loan proceeds			(189	)			(686	)
Loans, net		$	123,193			$	116,164

 

 

Analysis of the allowance for loan losses for the three and six months ended March 31, 2017 and 2016 follows:

 

Three Months Ended		Commercial				Residential				Consumer				Totals
Balance at December 31, 2015		$	858			$	597			$	27			$	1,482
Provision for loan losses			4				2				(1	)			5
Loans charged off			—				—				(1	)			(1	)
Recoveries of loans previously charged off			—				—				1				1
Balance at March 31, 2016		$	862			$	599			$	26			$	1,487
Balance at December 31, 2016		$	920			$	566			$	15			$	1,501
Provision for loan losses			(18	)			19				(1	)			—
Loans charged off			—				—				(1	)			(1	)
Recoveries of loans previously charged off			—				—				1				1
Balance at March 31, 2017		$	902			$	585			$	14			$	1,501

 

 

Six Months Ended		Commercial				Residential				Consumer				Totals
Balance at September 30, 2015		$	930			$	522			$	26			$	1,478
Provision for loan losses			(68	)			77				1				10
Loans charged off			—				—				(4	)			(4	)
Recoveries of loans previously charged off			—				—				3				3
Balance at March 31, 2016		$	862			$	599			$	26			$	1,487
Balance at September 30, 2016		$	937			$	550			$	15			$	1,502
Provision for loan losses			(35	)			35				—				—
Loans charged off			—				—				(5	)			(5	)
Recoveries of loans previously charged off			—				—				4				4
Balance at March 31, 2017		$	902			$	585			$	14			$	1,501

 

		Commercial				Residential				Consumer				Totals
Allowance for loan losses at March 31, 2017:
Individually evaluated for impairment		$	264			$	23			$	—			$	287
Collectively evaluated for impairment			638				562				14				1,214
Totals		$	902			$	585			$	14			$	1,501
Allowance for loan losses at September 30, 2016:
Individually evaluated for impairment		$	342			$	21			$	—			$	363
Collectively evaluated for impairment			595				529				15				1,139
Totals		$	937			$	550			$	15			$	1,502

 

Analysis of loans evaluated for impairment as of March 31, 2017 and September 30, 2016, follows:

 

		Commercial				Residential				Consumer				Totals
Loans at March 31, 2017:
Individually evaluated for impairment		$	1,292			$	783			$	—			$	2,075
Collectively evaluated for impairment			55,862				65,336				1,718				122,916
Totals		$	57,154			$	66,119			$	1,718			$	124,991
Loans at September 30, 2016:
Individually evaluated for impairment		$	1,801			$	653			$	—			$	2,454
Collectively evaluated for impairment			53,167				61,074				1,748				115,989
Totals		$	54,968			$	61,727			$	1,748			$	118,443

 

 

 

Information regarding impaired loans as of March 31, 2017, follows:

 

		Recorded Investment				Principal Balance				Related Allowance				Average Investment				Interest Recognized
Impaired loans with no related allowance for loan losses:
Commercial real estate		$	100			$	100				N/A			$	107			$	7
One-to four-family			615				615				N/A				608				23
Totals			715				715				N/A				715				30
Impaired loans with an allowance for loan losses:
Commercial business			202				202				172				204				3
Commercial real estate			946				946				88				955				29
Construction			44				44				4				59				1
One-to four-family			168				168				23				168				2
Totals			1,360				1,360				287				1,386				35
Grand totals		$	2,075			$	2,075			$	287			$	2,101			$	65

 

Information regarding impaired loans as of September 30, 2016, follows:

 

		Recorded Investment				Principal Balance				Related Allowance				Average Investment				Interest Recognized
Impaired loans with no related allowance for loan losses:
Commercial real estate		$	477			$	4777				N/A			$	504			$	30
One-to four-family			485				4855				N/A				489				21
Totals			962				962				N/A				993				51
Impaired loans with an allowance for loan losses:
Commercial and industrial			285				285				247				287				9
Commercial real estate			964				964				91				980				60
Construction			75				75				4				76				4
One-to four-family			168				168				21				168				5
Totals			1,492				1,492				363				611				78
Grand totals		$	2,454			$	2,454			$	363			$	1,715			$	129

 

No additional funds are committed to be advanced in connection with impaired loans.

 

The Company regularly evaluates various attributes of loans to determine the appropriateness of the allowance for loan losses. The credit quality indicators monitored differ depending on the class of loan.

 

Commercial loans are generally evaluated using the following internally prepared ratings:

 

“Pass” ratings are assigned to loans with adequate collateral and debt service ability such that collectability of the contractual loan payments is highly probable.

 

“Special mention/watch” ratings are assigned to loans where management has some concern that the collateral or debt service ability may not be adequate, though the collectability of the contractual loan payments is still probable.

 

“Substandard” ratings are assigned to loans that do not have adequate collateral and/or debt service ability such that collectability of the contractual loan payments is no longer probable.

  

“Doubtful” ratings are assigned to loans that do not have adequate collateral and/or debt service ability, and collectability of the contractual loan payments is unlikely.

 

 

Residential real estate and consumer loans are generally evaluated based on whether or not the loan is performing according to the contractual terms of the loan.

 

Information regarding the credit quality indicators most closely monitored for commercial loans by class as of March 31, 2017 and September 30, 2016, follows:

 

		Pass				Special Mention/ Watch				Substandard				Doubtful				Totals
March 31, 2017
Commercial business		$	1,272			$	8			$	202			$	—			$	1,482
Commercial real estate			19,862				— ---				1,046				—				20,908
Multifamily real estate			32,942				217				—				—				33,159
Construction			1,561				44				—				—				1,605
Totals		$	55,637			$	269			$	1,248			$	—			$	57,154
September 30, 2016
Commercial business		$	853			$	—			$	285			$	—			$	1,138
Commercial real estate			19,405				— ---				1,440				—				20.845
Multifamily real estate			27,877				219				—				—				28,196
Construction			4,714				75				—				—				4.789
Totals		$	52,949			$	294			$	1,725			$	—			$	54,968

 

Information regarding the credit quality indicators most closely monitored for residential real estate and consumer loans by class as of March 31, 2017 and September 30, 2016, follows:

 

		Performing				Non- performing				Totals
March 31, 2017
One- to four-family		$	57,753			$	---			$	57,753
Second mortgage			8,350				16				8,366
Consumer			1,699				19				1,718
Totals		$	67,802			$	35			$	67,837
September 30, 2016
One- to four-family		$	52,967			$	178			$	53,145
Second mortgage			9,566				16				8,582
Consumer			1,748				---				1,748
Totals		$	63,281			$	194			$	63,475

 

 

 

Loan aging information as of March 31, 2017, follows:

 

		Loans Past Due 30-89 Days				Loans Past Due 90+ Days				Total Past Due Loans
Commercial business		$	—			$	56			$	56
Commercial real estate			61				—				61
Construction			—				—				—
One- to four-family			145				75				220
Second mortgage			—				16				16
Consumer			7				20				27
Totals		$	213			$	167			$	380

 

		Total Past Due Loans				Total Current Loans				Total Loans				Loans 90+ Days Past Due and Accruing Interest				Total Nonaccrual Loans
Commercial business		$	56			$	1,426			$	1,482			$	—			$	56
Commercial real estate			61				20,847				20,908				—				—
Multifamily real estate			—				33,159				33,159				—				—
Construction			—				1,605				1,605				—				—
One- to four-family			220				57,533				57,753				75				—
Second mortgage			16				8,350				8,366				—				16
Consumer			27				1,691				1,718				—				20
Totals		$	380			$	124,611			$	124,991			$	75			$	92

 

Loan aging information as of September 30, 2016, follows:

 

		Loans Past Due 30-89 Days				Loans Past Due 90+ Days				Total Past Due Loans
Commercial and industrial		$	—			$	130			$	130
One- to four-family			546				178				724
Home equity loans and lines of credit			45				16				61
Consumer			7				----				7
Totals		$	598			$	324			$	922

 

		Total Past Due Loans				Total Current Loans				Total Loans				Loans 90+ Days Past Due and Accruing Interest				Total Nonaccrual Loans
Commercial and industrial		$	130			$	1,008			$	1,138			$	—			$	130
Commercial real estate			—				20.845				20,845				—				—
Multifamily real estate			—				28,196				28,196				—				—
Construction			—				4,789				4,789				—				—
One- to four-family			724				52,421				53,145				—				178
Second mortgage			61				8,521				8,582				—				16
Consumer			7				1,741				1,748				—				—
Totals		$	922			$	117,521			$	118,443			$	—			$	324

 

 

When, for economic or legal reasons related to the borrower’s financial difficulties, the Company grants a concession to the borrower that the Company would not otherwise consider, the modified loan is classified as a troubled debt restructuring. Loan modifications may consist of forgiveness of interest and/or principal, a reduction of the interest rate, interest-only payments for a period of time, and/or extending amortization terms. During the six months ended and as of March 31, 2017, there were two new troubled debt restructurings, $265 on two one-to-four family residential real estate loans that had balances totaling $247 pre-modification.

 

No troubled debt restructurings defaulted within 12 months of their modification date during the six months ended March 31, 2017 and no troubled debt restructuring was past due more than 30 days within 12 months of its modification date during the six months ended March 31, 2017.

 

Note 6

Regulatory Capital Ratios

 

The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, 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 capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Federal and state banking agencies have adopted regulations that substantially amend the capital regulations currently applicable to us. The regulations implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

 

Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new capital requirements adopted by the FDIC. These new requirements create a new required ratio for common equity tier 1 capital, increase the leverage and tier 1 capital ratios, change the risk weight of certain assets for purposes of the risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios and change what qualifies as capital for purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The Company is exempt from consolidated capital requirements as those requirements do not apply to certain small savings bank holding companies with assets under $1 billion.

 

Under the new capital regulations, the minimum capital ratios are: (1) common equity tier 1 capital ratio of 4.5% of risk-weighted assets, (2) a tier 1 capital ratio of 6.0% of risk-weighted assets, (3) a total capital ratio of 8.0% of risk-weighted assets, and (4) a tier 1 capital to average assets ratio of 4.0%. Common equity tier 1 capital generally consists of common stock and retained earnings, subject to applicable regulatory adjustments and deductions.

 

The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (increased from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% (increased from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (increased from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk weights (0% to 600%) for equity exposures.

 

In addition to the minimum common equity tier 1, tier 1 and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting of additional common equity tier 1 capital greater than 2.5% to risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.635% of risk-weighted assets and increasing each year until fully implemented in January 2019.

 

The FDIC’s prompt corrective action standards also changed effective January 1, 2015. Under the new standards, in order to be considered well-capitalized, the Bank must have a common equity tier 1 ratio of 6.5% (new), a tier 1 ratio of 8.0% (increased from 6.0%), a total risk-based capital ratio of 10.0% (unchanged) and a leverage ratio of 5.0% (unchanged). The Bank meets all these new requirements, including the full capital conservation buffer.

 

 

At March 31, 2017 and September 30, 2016, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since March 31, 2017 that management believes have changed the Bank’s category.

  

The Bank’s actual capital amounts and ratios as of March 31, 2017 and September 30, 2016 are presented in the following tables. The capital amounts and ratios at September 30, 2016 have been adjusted to correct errors that relate to improper recognition of various vendor expenses that were identified and corrected during the current quarter financial closing process. See “Out-of-Period Adjustments” in Note 1 – Basis of Financial Statement Presentation.”

 

		Actual								For Capital Adequacy Purposes									To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount					Ratio				Amount					Ratio
March 31, 2017
Total capital (to risk-weighted assets)		$	11,982				12.2	%	>	$	7,872		>			8.0	%	>	$	9,840		>			10.0	%
Tier I capital (to risk-weighted assets)			10,747				10.9	%	>		5,904		>			6.0	%	>		7,872		>			8.0	%
Common equity tier 1 capital (to risk-weighted assets)			10,747				10.9	%	>		4,428		>			4.5	%	>		6,396		>			6.5	%
Tier I capital (to average assets)			10,747				7.5	%	>		5,758		>			4.0	%	>		7,197		>			5.0	%
September 30, 2016 (as revised)
Total capital (to risk-weighted assets)		$	12,070				12.4	%	>	$	7,808		>			8.0	%	>	$	9,760		>			10.0	%
Tier I capital (to risk-weighted assets)			10,847				11.1	%	>		5,856		>			6.0	%	>		7,808		>			8.0	%
Common equity tier 1 capital (to risk-weighted assets)			10,847				11.1	%	>		4,392		>			4.5	%	>		6,344		>			6.5	%
Tier I capital (to average assets)			10,847				7.8	%	>		5,548		>			4.0	%	>		6,935		>			5.0	%
September 30, 2016 (as presented)
Total capital (to risk-weighted assets)		$	12,587				12.8	%	>	$	7,849		>			8.0	%	>	$	9,811		>			10.0	%
Tier I capital (to risk-weighted assets)			11,357				11.6	%	>		5,887		>			6.0	%	>		7,849		>			8.0	%
Common equity tier 1 capital (to risk-weighted assets)			11,357				11.6	%	>		4,415		>			4.5	%	>		6,377		>			6.5	%
Tier I capital (to average assets)			11,357				8.2	%	>		5,568		>			4.0	%	>		6,960		>			5.0	%

  

 

As a state-chartered savings bank, the Bank is required to maintain a minimum net worth ratio. The Bank’s actual and required net worth ratios are as follows:

 

		Actual Net Worth								Required Net Worth
		Amount				Ratio				Amount				Ratio
March 31, 2017		$	11,982				8.3	%		$	8,637				6.0	%
September 30, 2016 (as revised)			12,070				8.6	%			8,400				6.0	%
September 30, 2016 (as presented)			12,587				9.0	%			8,430				6.0	%

 

Note 7

Fair Value Measurements

 

Accounting standards describe three levels of inputs that may be used to measure fair value (the fair value hierarchy). The level of an asset or liability within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement of that asset or liability.

 

Following is a brief description of each level of the fair value hierarchy:

 

Level 1 - Fair value measurement is based on quoted prices for identical assets or liabilities in active markets.

 

Level 2 - Fair value measurement is based on: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; or (3) valuation models and methodologies for which all significant assumptions are or can be corroborated by observable market data.

 

Level 3 - Fair value measurement is based on valuation models and methodologies that incorporate at least one significant assumption that cannot be corroborated by observable market data. Level 3 measurements reflect the Company’s estimates about assumptions market participants would use in measuring fair value of the asset or liability.

 

Some assets and liabilities, such as securities available for sale, are measured at fair value on a recurring basis under accounting principles generally accepted in the United States. Other assets and liabilities, such as impaired loans, may be measured at fair value on a nonrecurring basis.

 

Following is a description of the valuation methodology used for each asset measured at fair value on a recurring or nonrecurring basis, as well as the classification of the asset within the fair value hierarchy. 

 

Securities available for sale - Securities available for sale may be classified as Level 1 or Level 2 measurements within the fair value hierarchy. Level 1 securities include equity securities traded on a national exchange. The fair value measurement of a Level 1 security is based on the quoted price of the security. Level 2 securities include U.S. government and agency securities, obligations of states and political subdivisions, corporate debt securities, and mortgage-related securities. The fair value measurement of a Level 2 security is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data. 

 

Loans - Loans are not measured at fair value on a recurring basis. However, loans considered to be impaired may be measured at fair value on a nonrecurring basis. The fair value measurement of an impaired loan that is collateral dependent is based on the fair value of the underlying collateral. All other impaired loan measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate and, thus, are not fair value measurements. Fair value measurements of underlying collateral that utilize observable market data, such as independent appraisals reflecting recent comparable sales, are considered Level 2 measurements. Other fair value measurements that incorporate estimated assumptions market participants would use to measure fair value are considered Level 3 measurements.

 

  

Information regarding the fair value of assets measured at fair value on a recurring basis as of March 31, 2017 and September 30, 2016 follows:

 

						Recurring Fair Value Measurements Using
		Assets Measured at Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
March 31, 2017
Assets - Securities available for sale		$	996			$	—			$	996			$	—
September 30, 2016
Assets - Securities available for sale		$	1,119			$	—			$	1,119			$	—

 

Information regarding the fair value of assets measured at fair value on a nonrecurring basis as of March 31, 2017 and September 30, 2016 follows:

 

						Nonrecurring Fair Value Measurements Using
		Assets Measured at Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
March 31, 2017
Loans		$	1,073			$	—			$	—			$	1,073
Totals		$	1,073			$	—			$	—			$	1,073
September 30, 2016
Loans		$	1,129			$	—			$	—			$	1,129
Totals		$	1,129			$	—			$	—			$	1,129

 

Loans with a carrying amount of $1,360 and $1,492 were considered impaired and were written down to their estimated fair value of $1,073 and 1,129 as of December 31, 2016 and September 30, 2016, respectively. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $287 and $363 during the six months ended March 31, 2017 and the year ended September 30, 2016, respectively. The loans were valued based on the value of the underlying collateral, adjusted for selling costs. The fair value of collateral is determined based on appraisals, broker price opinions, or automated valuation models. In some cases, adjustments were made to these values due to various factors including age of the appraisal, age of the comparable and other known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement.

 

At March 31, 2017 and September 30, 2016 the Company had no foreclosed assets.

 

The Company estimates fair value of all financial instruments regardless of whether such instruments are measured at fair value. The following methods and assumptions were used by the Company to estimate fair value of financial instruments not previously discussed.

 

Cash and cash equivalents - Fair value approximates the carrying value.

 

Other interest-bearing deposits - Fair value is estimated using discounted cash flow analyses based on current rates for similar types of deposits.

 

Securities held to maturity - Fair value is based on quoted market prices where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

 

Loans held for sale - Fair value is based on commitments on hand from investors or prevailing market prices.

 

Loans - Fair value of variable rate loans that reprice frequently is based on carrying values. Fair value of other loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value of impaired and other nonperforming loans is estimated using discounted expected future cash flows or the fair value of underlying collateral, if applicable.

 

 

Federal Home Loan Bank stock - Fair value is the redeemable (carrying) value based on the redemption provisions of the Federal Home Loan Bank.  

 

Accrued interest receivable and payable - Fair value approximates the carrying value.

 

Cash value of life insurance - Fair value is based on reported values of the assets.

 

Deposits and advance payments by borrowers for taxes and insurance - Fair value of deposits with no stated maturity, such as demand deposits, savings, and money market accounts, including advance payments by borrowers for taxes and insurance, by definition, is the amount payable on demand on the reporting date. Fair value of fixed rate time deposits is estimated using discounted cash flows applying interest rates currently being offered on similar time deposits.

 

Federal funds purchased - Fair value approximates carrying value.

 

Borrowed funds - Fair value of fixed rate, fixed term borrowings is estimated by discounting future cash flows using the current rates at which similar borrowings would be made. Fair value of borrowings with variable rates or maturing within 90 days approximates the carrying value of these borrowings.

 

Off-balance-sheet instruments - Fair value is based on quoted market prices of similar financial instruments where available. If a quoted market price is not available, fair value is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the counterparty’s credit standing. Since the estimated fair value of off-balance-sheet instruments is not material, no amounts are presented in the following schedule.

 

The carrying value and estimated fair value of financial instruments at March 31, 2017 and September 30, 2016 follow:

 

		March 31, 2017
						Fair Value
		Carrying Value				Level 1				Level 2				Level 3
Financial assets:
Cash and cash equivalents		$	4,600			$	4,600			$	—			$	—
Other interest-bearing deposits			5,517				—				—				5,446
Securities available for sale			996				—				996				—
Securities held to maturity			2,081				—				2,101				—
Loans held for sale			108				—				108				—
Loans			123,193				—				—				121,194
Accrued interest receivable			436				436				—				—
Cash value of life insurance			3,431				—				—				3,431
Federal Home Loan Bank stock			407				—				—				407
Financial liabilities:
Deposits		$	121,260			$	84,993			$	—			$	36,055
Advance payments by borrowers for taxes and insurance			336				336				—				—
Federal funds purchased			—				—				—				—
Borrowed funds			12,032				—				—				12,223
Accrued interest payable			70				70				—				—

 

 

 

		September 30, 2016
						Fair Value
		Carrying Value				Level 1				Level 2				Level 3
Financial assets:
Cash and cash equivalents		$	3,165			$	3,165			$	—			$	—
Other interest-bearing deposits			5,327				—				—				5,369
Securities available for sale			1,119				—				1,119				—
Securities held to maturity			2,340				—				2,411				—
Loans held for sale			1,721				—				1,721				—
Loans			116,164				—				—				116,619
Accrued interest receivable			421				421				—				—
Cash value of life insurance			3,392				—				—				3,392
Federal Home Loan Bank stock			646				—				—				646
Financial liabilities:
Deposits		$	112,558			$	79,944			$	—			$	32,933
Advance payments by borrowers for taxes and insurance			809				809				—				—
Federal funds purchased			1,330				1,330				—				—
Borrowed funds			12,223				—				—				12,626
Accrued interest payable			59				59				—				—

  

Limitations - The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

 

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business. Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts, nor is it recorded as an intangible asset on the consolidated balance sheets. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

Note 8

Employee Stock Ownership Plan

 

The Company maintains a leveraged employee stock ownership plan (“ESOP”) that covers substantially all employees. The ESOP was established in conjunction with the Company’s stock offering completed in April 2014. The loan to fund the acquisition of stock by the ESOP was made by the Company. The Bank makes annual contributions to the ESOP equal to the ESOP’s debt service. The ESOP shares initially were pledged as collateral for this debt. As the debt is repaid, shares are released from collateral and allocated to active participants, based on the proportion of debt service paid in the year. Because the debt is intercompany, it is eliminated in consolidation for presentation in these financial statements. The shares pledged as collateral are reported as unearned ESOP shares in the balance sheet.

 

 

As shares are committed to be released from collateral and allocated to active participants, the Company reports compensation expense equal to the current market price of the shares and the shares will become outstanding for earnings-per-shares (EPS) computations. During the six months ended March 31, 2017, 1,438 shares, with an average fair value of $10.93 per share, were committed to be released resulting in ESOP compensation expense of $16 for the six months ended March 31, 2017. The ESOP shares as of March 31, 2017 and September 30, 2016 were as follows:

 

		March 31, 2017				September 30, 2016
Allocated shares			5,755				5,755
Shares committed to be released and allocated to participants			4,316				2,158
Total unallocated shares			61,864				64,022
Total ESOP shares			71,935				71,935

 

 

Note 9

Subsequent Events

 

Management has reviewed operations for potential disclosure of information or financial statement impacts related to events occurring after March 31, 2017 but prior to the release of these financial statements.

 

Based on the results of this review, no additional subsequent events disclosures or financial statement impacts to the recently completed quarter are required as of the release date.

 

 

 

Home Bancorp Wisconsin, Inc. and Subsidiary

Form 10-Q

---

 

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

 

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” 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 quality of our loan and investment portfolios; and

 

•

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on current beliefs and expectations of our management 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.

 

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 in this report:  

 

•

our ability to execute on our business strategy to increase our origination of multi-family residential loans, one- to four-family investment property loans, commercial real estate loans and home equity loans and lines of credit;

 

•

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

 

•

competition among depository and other financial institutions;

 

•

inflation and 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;

 

•

our ability to successfully integrate de novo or acquired branches or acquired financial institutions, if any;

 

•

changes in consumer spending, borrowing and savings habits;

 

•

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

 

•

changes in our organization, compensation and benefit plans; and

 

•

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

 

Because of these and other risks and uncertainties, including those discussed in our Annual Report on Form 10-K under the heading “Risk Factors,” our actual future results may be materially different from the results indicated by the forward-looking statements in this report, and you should not place undue reliance on such statements.

 

  

Critical Accounting Policies

 

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:  

 

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.

 

Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

 

The analysis has two components, specific and general allocations. Specific percentage allocations can be made for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a charge is recorded for the difference. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.

 

Securities Valuation and Impairment. We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale. Securities classified as held-to maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. We obtain our fair values from a third party service. This service’s fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we expense the impairment of the investment in the period in which the event or change occurred. We also consider how long a security has been in a loss position in determining if it is other than temporarily impaired. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral. At December 31, 2016 and September 30, 2016, 100%, of our securities were issued by the U.S. government, U.S. government agencies or U.S. government-sponsored enterprises.

 

Foreclosed Assets. Assets acquired through or in lieu of loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less cost to sell and are included in other assets. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. 

 

Income Taxes and Accounting for Valuation Allowance on Deferred Tax Asset. We determine deferred tax assets and liabilities using the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the current enacted tax rates that will be in effect when these differences are expected to reverse. Provision (credit) for deferred taxes is the result of changes in the deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets.

We assessed our operating losses during fiscal 2008 through 2011, 2013, 2014 and 2015, estimated future operating results, tax planning strategies and the timing of reversals of temporary differences. At September 30, 2013, 2014, 2015, and 2016, December 31, 2016, and March 31, 2017 we determined that it is more likely than not that the deferred tax asset may not be realized. Accordingly, a valuation allowance has been established for the entire amount of our deferred tax asset at September 30, 2013, 2014, 2015 and 2016, December 31, 2016, and March 31, 2017. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income of the appropriate character in the period during which deductible temporary differences reverse or within the carryforward periods available under tax law.

 

 

Overview

  

We recorded a net loss of $80,000 for the three months ended March 31, 2017, compared to net income of $46,000 for the three months ended March 31, 2016. Operating results improved in net interest income and provision for loan loss, however, these improvements were more than offset by a decrease in noninterest income and an increase in noninterest expense. Net interest income increased by $29,000 for the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016, primarily due to loan growth. In addition, the provision for loan losses decreased by $5,000 for the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016, as credit quality continued to improve. Noninterest income decreased $112,000 and noninterest expense increased by $48,000 for the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016.

 

Total assets increased $6.3 million, or 4.5% to $146.3 million at March 31, 2017 from $140.0 million at September 30, 2016. Net loans increased by $7.0 million. The Company had no foreclosed assets at March 31, 2017.

 

Total deposits increased $8.7 million, or 7.7%, to $121.3 million at March 31, 2017 from $112.6 million at September 30, 2016. 

 

Based on the above and the growth achieved to date, we anticipate additional growth and net income pursuant to our business plan. There are no assurances, however, that we will successfully execute our business plan and be able to achieve profitable quarterly results.

  

Comparisons to prior periods reflect the effects of the out-of-period adjustments discussed in Note 1 to the Notes to the Financial Statements in Part I, Item 1.  

 

Comparison of Financial Condition at March 31, 2017 and September 30, 2016

 

Total assets increased $6.3 million, or 4.5% to $146.3 million at March 31, 2017 from $140.0 million at September 30, 2016. Net loans, excluding loans held for sale, increased by $7.0 million, cash and cash equivalents increased by $1.4 million, and other interest-bearing deposits increased by $190,000. Loans held for sale decreased by $1.6 million and total investment securities decreased by $382,000.

 

Cash and cash equivalents increased $1.4 million, or 45.3%, to $4.6 million at March 31, 2017.

 

Other interest-bearing deposits increased $190,000, or 3.6%, to $5.5 million at March 31, 2017.

 

Net loans, excluding loans held for sale, increased by $7.0 million, or 6.1%, to $123.2 million at March 31, 2017 from $116.2 million at September 30, 2016. The increase in net loans during the six months ended March 31, 2017 was primarily the result of a $5.0 million increase in multifamily real estate loans, a $4.6 million increase in one- to four-family residential mortgage loans, a $3.2 million decrease in construction loans, and a $344,000 increase in commercial business loans.

  

Loans held for sale decreased $1.6 million, or 93.7%, to $108,000 from $1.7 million at September 30, 2016. The decrease in loans held for sale reflects the timing of loan originations and loan sales.

 

Total investment securities decreased $382,000, or 11.0%, to $3.1 million at March 31, 2017. Securities available for sale decreased $123,000, while securities held to maturity decreased by $259,000.

 

Our investment in bank-owned life insurance increased $39,000 to $3.4 million during the six months ended March 31, 2017. We invest in bank-owned life insurance to provide us with a funding offset for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses.

 

Foreclosed assets remained at $0 at March 31, 2017.

  

Total deposits increased $8.7 million, or 7.7%, to $121.3 million at March 31, 2017 from $112.6 million at September 30, 2016. As part of our strategic plan we continued our efforts to increase core deposits, which we consider to be all deposits except brokered deposits. During the six months ended March 31, 2017, demand deposits increased $2.5 million, or 7.3%, and money market and savings deposits increased $2.5 million, or 5.6%, while time deposits increased $3.7 million, or 11.2%.

 

Advance payments by borrowers for taxes and insurance decreased $473,000, or 58.5%, as many of such balances were used to pay 2016 property taxes.

 

Our borrowings consist predominantly of Federal Home Loan Bank of Chicago advances. Federal Home Loan Bank advances decreased by $191,000, or 1.6%, to $12.0 million at March 31, 2017. At March 31, 2017 and September 30, 2016, we had $0 and $1.3 million of overnight federal funds, respectively.

 

 

Other liabilities decreased $369,000, or 30.1%, to $858,000 on March 31, 2017.

  

Total equity decreased $75,000, or 0.6%, to $11.8 million at March 31, 2017 from $11.8 million at September 30, 2016. The decrease was primarily due to the $87,000 net loss for the six months ended March 31, 2017. Total equity was also impacted by the recognition of earned ESOP of $16,000 and a $4,000 decrease in accumulated other comprehensive income.

 

 

Comparison of Results of Operations for the three months ended March 31, 2017 and 2016

  

General. We recorded a net loss of $80,000 for the three months ended March 31, 2017, compared to net income of $46,000 for the three months ended March 31, 2016. Operating results improved in net interest income and provision for loan loss, however, these improvements were more than offset by a decrease in noninterest income and an increase in noninterest expense. Net interest income increased by $29,000 for the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016. In addition, the provision for loan losses decreased by $5,000 for the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016, as credit quality continued to improve. Noninterest income decreased $112,000 and noninterest expense increased by $48,000 for the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016.

 

Net Interest Income. Net interest income increased $29,000, or 2.7%, to $1.1 million for the three months ended March 31, 2017 from $1.1 million for the three months ended March 31, 2016. The increase in net interest income resulted from an increase of $44,000 in interest and dividend income partially offset by an increase of $15,000 in interest expense.

 

Interest and Dividend Income. Interest and dividend income increased $44,000, or 3.5%, to $1.3 million for the three months ended March 31, 2017 from $1.2 million for the three months ended March 31, 2016. The increase resulted from a $56,000 increase in interest income on loans partially offset by a $7,000 decrease in interest and dividend income on interest-bearing deposits and a $5,000 decrease in interest and dividend income on securities.

  

Interest income on loans increased $56,000, or 4.7%, to $1.3 million for the quarter ended March 31, 2017 from $1.2 million for the quarter ended December 31, 2016. This increase resulted from an $8.2 million increase in the average balance of loans to $123.2 million and a 12 basis point increase in the average yield on loans to 4.24% for the quarter ended March 31, 2017.

 

Interest income on interest-bearing deposits decreased $7,000, or 28.0%, to $18,000 for the three month period ended March 31, 2017 from $25,000 for the three month period ended March 31, 2016.

 

Interest and dividend income on investment securities decreased by $5,000 to $19,000 for the quarter ended March 31, 2017 from $24,000 for the quarter ended March 31, 2016. The decrease was due to a $1.8 million decrease in the average balance of investment securities to $3.2 million for the quarter ended March 31, 2017 and an 84 basis point increase in the average yield on investment securities to 2.63%.

 

Interest Expense. Interest expense, consisting of interest-bearing deposits and borrowings, increased $15,000, or 9.3%, to $177,000 for the quarter ended March 31, 2017 from $162,000 for the quarter ended March 31, 2016. The increase was due to a $12,000, or 13.8%, increase in the cost of interest-bearing deposits and a $3,000, or 4.0%, increase in the cost of borrowings. At March 31, 2017, our borrowings consisted of $12.0 million of Federal Home Loan Bank of Chicago advances.

 

The $12,000 increase in interest expense from interest-bearing deposits was largely the result of a $12,000 increase in interest expense from certificates of deposit. The average balance of certificates of deposit increased $1.6 million for the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016, while the average cost of such deposits increased to 1.04% from 0.92% for the same periods, respectively.

 

The cost of borrowings increased $3,000, or 4.0%, to $78,000 for the quarter ended March 31, 2017 from $75,000 for the quarter ended March 31, 2016. The increase was due to a 0.18% increase in average borrowing rates to 2.21%, partially offset by a $347,000 decrease in average borrowings.

 

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended March 31, 2017, compared to a provision for loan losses of $5,000 for the three months ended March 31, 2016. The decrease in the provision for loan losses was primarily due to the payoff of a loan that previously had a specific reserve. The allowance for loan losses remained unchanged in the three months ended March 31, 2017 as loan charge offs totaled $1,000 and loan recoveries totaled $1,000.

 

  

Noninterest Income. Noninterest income decreased $112,000 to $106,000 for the three months ended March 31, 2017, compared to $218,000 for the three months ended March 31, 2016. The decrease for the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016 was primarily due to a $60,000 decrease in mortgage banking income, a $4,000 decrease in gain on sale of securities, a $16,000 decrease in the gain on sale of premises and equipment, and a $36,000 decrease in other income, partially offset by a $3,000 increase in service fees to $68,000, and a $1,000 increase in the cash value of life insurance.

 

Noninterest Expense. Noninterest expense increased $48,000, or 3.8%, to $1.3 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The largest component increases were compensation which increased $42,000, or 6.8%, to $659,000 from $617,000, data processing and office expense which increased $15,000, advertising and promotions expense which increased $6,000. These increases and others were partially offset by decreases of $10,000 in professional fees and $7,000 in other noninterest expense.

 

Income Tax Expense. We recorded no income tax benefit or expense for the three months ended March 31, 2017 and 2016 and maintain a valuation allowance on our deferred tax asset. 

 

Comparison of Results of Operations for the six months ended March 31, 2017 and 2016

 

General. We recorded a net loss of $87,000 for the six months ended March 31, 2017, compared to net income of $79,000 for the six months ended March 31, 2016. Operating results improved in net interest income and provision for loan loss, however, these improvements were more than offset by a decrease in noninterest income and an increase noninterest expense. Net interest income increased by $96,000 for the six months ended March 31, 2017, compared to the six months ended March 31, 2016. In addition, the provision for loan losses decreased by $10,000 for the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016, as credit quality continued to improve. Noninterest income decreased $145,000 and noninterest expense increased by $127,000 for the six months ended March 31, 2017, compared to the six months ended March 31, 2016.

 

Net Interest Income. Net interest income increased $96,000, or 4.5%, to $2.2 million for the six months ended March 31, 2017 from $2.1 million for the six months ended March 31, 2016. The increase in net interest income resulted from an increase of $125,000 in interest and dividend income partially offset by an increase of $29,000 in interest expense.

 

Interest and Dividend Income. Interest and dividend income increased $125,000, or 5.1%, to $2.6 million for the six months ended March 31, 2017 from $2.4 million for the six months ended March 31, 2016. The increase resulted from a $154,000 increase in interest income on loans partially offset by a $14,000 decrease in interest and dividend income on interest-bearing deposits and a $15,000 decrease in interest and dividend income from securities.  

 

Interest income on loans increased $154,000, or 6.6%, to $2.5 million for the six months ended March 31, 2017 from $2.3 million for the six months ended March 31, 2016. This increase resulted from an $8.3 million increase in the average balance of loans to $121.7 million and a 6 basis point increase in the average yield on loans to 4.18% for the six months ended March 31, 2017.

 

Interest income on interest-bearing deposits decreased $14,000, or 28.0%, to $36,000 for the six months ended March 31, 2017 from $50,000 for the six month period ended March 31, 2016.

  

Interest and dividend income on investment securities decreased by $15,000 to $37,000 for the six months ended March 31, 2017 from $52,000 for the six months ended March 31, 2016. The decrease was due to a $1.90 million decrease in the average balance of investment securities to $3.3 million for the six months ended March 31, 2017 and a 31 basis point increase in the average yield on investment securities to 2.37%.

 

Interest Expense. Interest expense, consisting of interest-bearing deposits and borrowings, increased $29,000, or 9.0%, to $350,000 for the six months ended March 31, 2017 from $321,000 for the six months ended March 31, 2016. The increase was due to a $24,000, or 14.0%, increase in the cost of interest-bearing deposits and a $5,000, or 3.4%, increase in the cost of borrowings. At March 31, 2017, our borrowings consisted of $12.0 million of Federal Home Loan Bank of Chicago advances.

 

The $24,000 increase in interest expense from interest-bearing deposits was largely the result of a $27,000 increase in interest expense from certificates of deposit, which was partially offset by a $3,000 decrease in interest expense from other interest bearing deposits.. The average balance of certificates of deposit increased $990,000 for the six months ended March 31, 2017 compared to the six months ended March 31, 2016, while the average cost of such deposits increased to 1.01% from 0.88% for the same periods, respectively.

 

The cost of borrowings increased $5,000, or 3.4%, to $154,000 for the six months ended March 31, 2017 from $149,000 for the six months ended March 31, 2016. The increase was due to a 0.21% increase in average borrowing rates to 2.28%, partially offset by a $855,000 decrease in average borrowings.

 

 

Provision for Loan Losses. We recorded no provision for loan losses for the six months ended March 31, 2017, compared to a provision for loan losses of $10,000 for the six months ended March 31, 2016. The decrease in the provision for loan losses was primarily due to the payoff of a loan that previously had a specific reserve. The allowance for loan losses decreased $1,000 in the six months ended March 31, 2017 as net loan charge offs totaled $1,000.

 

Noninterest Income. Noninterest income decreased $145,000 to $253,000 for the six months ended March 31, 2017, compared to $397,000 for the six months ended March 31, 2016. The decrease for the six months ended March 31, 2017 compared to the six months ended March 31, 2016 was primarily due to a $91,000 decrease in mortgage banking income, a $35,000 decrease in other income, a $4,000 decrease in gain on sale of securities, $16,000 decrease in the gain on sale of premises and equipment, a $1,000 decrease in service fees, and, partially offset by a $2,000 increase in the cash value of life insurance.

 

Noninterest Expense. Noninterest expense increased $127,000, or 5.2%, to $2.6 million for the six months ended March 31, 2017 compared to the six months ended March 31, 2016. The largest component increases were; compensation which increased $81,000, or 6.8% to $1.3 million from $1.2 million, data processing and office expense which increased $42,000, advertising and promotions expense which increased $24,000, and other noninterest expense which increased $18,000. These increases and others were partially offset by decreases of $23,000 in foreclosed assets expense and $14,000 in examinations and assessments expense.

 

Income Tax Expense. We recorded no income tax benefit or expense for the six months ended March 31, 2017 and 2016 and maintain a valuation allowance on our deferred tax asset.

 

Liquidity and Capital Resources

 

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, scheduled amortization and prepayments of loan principal and mortgage-backed securities, maturities and calls of investment securities and funds provided by our operations. In addition, we have the ability to borrow from the Federal Home Loan Bank of Chicago. At March 31, 2017, we had $12.0 million in borrowings from the Federal Home Loan Bank of Chicago. At that same date, we had the capacity to borrow an additional $25.1 million from the Federal Home Loan Bank of Chicago, subject to our pledging sufficient assets. At March 31, 2017, we had $0 in federal funds purchased. We had the ability to borrow $2.7 million through Bankers Bank’s agent federal funds program. In addition, we have authority to borrow $5.8 million from the Federal Reserve’s “discount window,” but Federal Reserve policy generally requires savings institutions to exhaust all other sources before borrowing from the Federal Reserve.

 

Loan repayments and maturing securities are a relatively predictable source of funds. However, deposit flows, calls of securities and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of these sources of funds.

 

Our primary investing activity is the origination of loans. We have also purchased investment securities in executing our business strategy to invest some of our excess liquidity in investment securities. Our loans, net of allowance for loan losses, increased $7.0 million during the six months ended March 31, 2017.

 

Total deposits increased $8.7 million during the six months ended March 31, 2017. Deposit flows are affected by the level of interest rates, the interest rates and products offered by competitors and other factors. At March 31, 2017, certificates of deposit scheduled to mature within one year totaled $16.6 million. Our ability to retain these deposits will be determined in part by the interest rates we are willing to pay on such deposits. 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 March 31, 2018. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

 

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

 

At March 31, 2017, the Bank’s capital levels exceeded the levels required to be considered “well capitalized” under federal regulations.

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make.

 

 

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

As of March 31, 2017, there were no material changes in interest rate risk from the analysis disclosed in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on December 28, 2016.

 

Item 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal 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 the period covered by this report. Based upon their evaluation, and based on the material weakness in the Company’s internal control over financial reporting discussed below, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective for the purposes of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. 

During the period in which the Company was closing its books for the quarter ended March 31, 2017, the Company became aware of certain internal control deficiencies that the Company considered to be, in the aggregate, a material weakness. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 

In particular, the Company discovered that it had not recorded certain vendor expenses incurred over the last six years. These expenses, which amounted to approximately $22,000 per quarter, were inadvertently omitted from our previously reported financial results during the six year period that they were not recognized. The aggregate amount of the expenses, was approximately $528,000 on both a before and after tax basis as the Company has a full valuation allowance on deferred tax assets. Reclassifications and adjustments to certain financial statement items to correct for the non-recognition of these expenses are set forth in Note 1 to the Condensed Consolidated Financial Statements included under Item 1 of Part I of this Form 10-Q.

 

Upon investigation, the Company concluded that the failure to record the vendor expenses discussed above was caused by the lack of effective formalized procedures for ensuring that accounts used for the payment of certain vendors were reconciled on a consistent basis. To remediate the identified material weakness and to improve the effectiveness of the Company’s disclosure controls, the Company is implementing new procedures designed to ensure that all of the Company’s accounts used for payment of vendors are identified and periodically reconciled, and that additional reviews of such accounts are conducted. The Company’s management will monitor, evaluate and test the operating effectiveness of these controls on an ongoing basis.

 

 

Home Savings Bank 

 

Part II — Other Information

 

Item 1.

Legal Proceedings

 

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

 

Item  1A.

Risk Factors

 

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016 as filed with the Securities and Exchange Commission on December 28, 2016. As of March 31, 2017, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item  3.

Defaults Upon Senior Securities

 

None.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item  5.

Other Information

 

None.  

 

 

 

Item  6.

Exhibits

 

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Balance Sheets as of March 31, 2017 and September 30, 2016, (ii) the Statements of Income for the three and six months ended March 31, 2017 and 2016, (iii) the Statements of Comprehensive Income (Loss) for the three and six months ended March 31, 2017 and 2016, (iv) the Statements of Stockholders’ Equity for the six months ended March 31, 2017 and 2016, (v) the Statements of Cash Flows for the six months ended March 31, 2017 and 2016, and (vi) the Notes to the Financial Statements.

 

 

 

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.

 

		HOME BANCORP WISCONSIN, INC.
Date: May 15, 2017		/s/ James R. Bradley
		James R. Bradley
		President and Chief Executive Officer
Date: May 15, 2017		/s/ Mark A. Fritz
		Mark A. Fritz
		Senior Vice President and Chief Financial Officer

 

 

 

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