Attached files
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EX-32.0 - EXHIBIT 32.0 - Sugar Creek Financial Corp./MD/ | v430321_ex32.htm |
EX-31.0 - EXHIBIT 31.0 - Sugar Creek Financial Corp./MD/ | v430321_ex31.htm |
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________
Commission File Number: 0-55170
SUGAR CREEK FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Maryland | 38-3920636 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
28 West Broadway, Trenton, Illinois | 62293 | |
(Address of principal executive offices) | (Zip Code) |
(618) 224-9228
(Registrant’s telephone number)
N/A |
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer ¨ | Accelerated Filer ¨ |
Non-Accelerated Filer ¨ | Smaller Reporting Company x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
As of January 29, 2016, the issuer had 908,245 shares of common stock outstanding.
Form 10-Q
Index
i |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Consolidated Balance Sheets (Unaudited)
December 31, | March 31, | |||||||
2015 | 2015 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 3,457,724 | $ | 3,596,926 | ||||
Federal funds sold | 10,970,000 | 11,580,000 | ||||||
FHLB daily investment account | 1,572,280 | 1,543,082 | ||||||
Cash and cash equivalents | 16,000,004 | 16,720,008 | ||||||
Stock in Federal Home Loan Bank of Chicago ("FHLBC") | 1,165,513 | 1,165,513 | ||||||
Loans receivable, net of allowance for losses of $203,403 and $242,103 | 77,430,532 | 75,463,746 | ||||||
Premises and equipment, net | 1,174,311 | 1,198,459 | ||||||
Foreclosed real estate | 397,396 | 434,367 | ||||||
Accrued interest receivable on loans | 241,807 | 257,576 | ||||||
Other assets | 365,419 | 331,950 | ||||||
Total assets | $ | 96,774,982 | $ | 95,571,619 | ||||
Liabilities and Stockholders' Equity | ||||||||
Deposits | $ | 78,027,577 | $ | 76,290,961 | ||||
Accrued interest payable on deposits | 69,717 | 50,070 | ||||||
Advances from FHLBC | 5,000,000 | 5,000,000 | ||||||
Advances from borrowers for taxes and insurance | 292,729 | 428,485 | ||||||
Other liabilities | 254,538 | 297,680 | ||||||
Deferred tax liability | 220,108 | 220,108 | ||||||
Total liabilities | 83,864,669 | 82,287,304 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued or outstanding | - | - | ||||||
Common stock, $.01 par value, 14,000,000 shares authorized and 919,245 and 949,245 shares issued and outstanding at December 31, 2015 and March 31, 2015, respectively | 9,192 | 9,492 | ||||||
Additional paid-in capital | 5,924,960 | 6,124,848 | ||||||
Common stock acquired by Employee Stock Ownership Plan ("ESOP") | (399,056 | ) | (432,527 | ) | ||||
Retained earnings - substantially restricted | 7,375,217 | 7,582,502 | ||||||
Total stockholders' equity | 12,910,313 | 13,284,315 | ||||||
Total liabilities and stockholders' equity | $ | 96,774,982 | $ | 95,571,619 |
See accompanying notes to consolidated financial statements.
1 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Earnings (Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Interest income: | ||||||||||||||||
Loans receivable | $ | 819,093 | 827,517 | 2,445,142 | $ | 2,485,064 | ||||||||||
Stock in FHLBC | 1,469 | 1,469 | 4,359 | 4,359 | ||||||||||||
Other interest-earning assets | 9,160 | 5,647 | 26,213 | 17,502 | ||||||||||||
Total interest income | 829,722 | 834,633 | 2,475,714 | 2,506,925 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 171,910 | 114,895 | 482,379 | 336,288 | ||||||||||||
Advances from FHLBC | 60,183 | 60,183 | 179,896 | 179,896 | ||||||||||||
Total interest expense | 232,093 | 175,078 | 662,275 | 516,184 | ||||||||||||
Net interest income | 597,629 | 659,555 | 1,813,439 | 1,990,741 | ||||||||||||
Provision for (credit to) loan losses | - | (45,000 | ) | (11,700 | ) | (62,000 | ) | |||||||||
Net interest income after provision for (credit to) loan losses | 597,629 | 704,555 | 1,825,139 | 2,052,741 | ||||||||||||
Noninterest income: | ||||||||||||||||
Loan service charges | 7,665 | 10,711 | 16,561 | 21,385 | ||||||||||||
Service charges on deposit accounts | 26,330 | 22,793 | 71,761 | 73,332 | ||||||||||||
Other | 3,746 | 3,314 | 13,022 | 9,740 | ||||||||||||
Total noninterest income | 37,741 | 36,818 | 101,344 | 104,457 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Compensation and benefits | 347,136 | 314,757 | 994,946 | 980,211 | ||||||||||||
Occupancy expense | 33,390 | 34,388 | 96,770 | 100,022 | ||||||||||||
Equipment and data processing | 97,707 | 109,254 | 300,195 | 289,132 | ||||||||||||
FDIC premium expense | 16,638 | 14,834 | 48,304 | 32,822 | ||||||||||||
Advertising | 8,849 | 13,839 | 26,659 | 42,774 | ||||||||||||
Operations of foreclosed real estate, net | 5,878 | 42,090 | 25,032 | 87,806 | ||||||||||||
Professional and regulatory fees | 55,050 | 36,977 | 143,695 | 103,203 | ||||||||||||
Other | 65,429 | 58,650 | 221,917 | 217,710 | ||||||||||||
Total noninterest expense | 630,077 | 624,789 | 1,857,518 | 1,853,680 | ||||||||||||
Earnings before income tax expense | 5,293 | 116,584 | 68,965 | 303,518 | ||||||||||||
Income tax expense | 3,689 | 45,683 | 26,137 | 119,918 | ||||||||||||
Net earnings | $ | 1,604 | 70,901 | 42,828 | $ | 183,600 | ||||||||||
Basic and diluted earnings per share | $ | 0.00 | 0.08 | 0.05 | $ | 0.21 | ||||||||||
Dividends per share | $ | 0.00 | 0.00 | 0.12 | $ | 0.00 |
See accompanying notes to consolidated financial statements.
2 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity (Unaudited)
Common | ||||||||||||||||||||||||
Additional | Stock | Total | ||||||||||||||||||||||
For the Nine Months Ended | Common | Paid-in | Treasury | Acquired | Retained | Stockholders' | ||||||||||||||||||
December 31, 2015 | Stock | Capital | Stock | by ESOP | Earnings | Equity | ||||||||||||||||||
Balance at March 31, 2015 | $ | 9,492 | $ | 6,124,848 | $ | - | $ | (432,527 | ) | $ | 7,582,502 | $ | 13,284,315 | |||||||||||
Net earnings | - | - | - | - | 42,828 | 42,828 | ||||||||||||||||||
Dividends, $.12 per share | (107,513 | ) | (107,513 | ) | ||||||||||||||||||||
Repurchase of common stock | (300 | ) | (209,700 | ) | - | - | (142,600 | ) | (352,600 | ) | ||||||||||||||
Amortization of ESOP awards | - | 9,812 | - | 33,471 | - | 43,283 | ||||||||||||||||||
Balance at December 31, 2015 | $ | 9,192 | $ | 5,924,960 | $ | - | $ | (399,056 | ) | $ | 7,375,217 | $ | 12,910,313 |
Common | ||||||||||||||||||||||||
Additional | Stock | Total | ||||||||||||||||||||||
For the Nine Months Ended | Common | Paid-in | Treasury | Acquired | Retained | Stockholders' | ||||||||||||||||||
December 31, 2014 | Stock | Capital | Stock | by ESOP | Earnings | Equity | ||||||||||||||||||
Balance at March 31, 2014 | 9,069 | 3,288,508 | (85,638 | ) | (183,670 | ) | 7,372,223 | 10,400,492 | ||||||||||||||||
Net earnings | - | - | - | - | 183,600 | 183,600 | ||||||||||||||||||
Treasury stock retired pursuant to reorganization | - | (85,638 | ) | 85,638 | - | - | - | |||||||||||||||||
Amortization of ESOP awards | - | 6,315 | - | 37,753 | - | 44,068 | ||||||||||||||||||
Cancellation of Old Sugar Creek Financial Corp. shares | (9,069 | ) | 9,069 | - | - | - | - | |||||||||||||||||
Net proceeds from stock offering | 9,492 | 2,904,453 | - | (299,670 | ) | - | 2,614,275 | |||||||||||||||||
Balance at December 31, 2014 | 9,492 | 6,122,707 | - | (445,587 | ) | 7,555,823 | 13,242,435 |
See accompanying notes to consolidated financial statements.
3 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended | ||||||||
December 31, | ||||||||
2015 | 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings | $ | 42,828 | $ | 183,600 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation | 69,456 | 69,882 | ||||||
Provision for (credit to) loan losses | (11,700 | ) | (62,000 | ) | ||||
Provision for losses on foreclosed real estste | 13,878 | 68,712 | ||||||
ESOP expense | 43,283 | 44,068 | ||||||
Amortization of deferred loan fees, net | (18,538 | ) | (12,429 | ) | ||||
(Increase) decrease in accrued interest receivable | 15,769 | 688 | ||||||
Decrease (increase) in other assets | (33,469 | ) | 477,285 | |||||
Increase (decrease) in: | ||||||||
Accrued interest payable on deposits | 19,647 | 3,583 | ||||||
Other liabilities | (43,142 | ) | 30,903 | |||||
Income taxes payable | - | - | ||||||
Net cash provided by operating activities | 98,012 | 804,292 | ||||||
Cash flows from investing activities: | ||||||||
Net increase (decrease) in loans receivable | (1,961,845 | ) | (1,989,135 | ) | ||||
Purchase of premises and equipment | (45,308 | ) | (145,007 | ) | ||||
Proceeds from sale of (additions to) foreclosed real estate | 48,390 | 201,625 | ||||||
Net cash provided by (used for) investing activities | (1,958,763 | ) | (1,932,517 | ) | ||||
Cash flows from financing activities: | ||||||||
Net (decrease) increase in deposits | 1,736,616 | (5,166,099 | ) | |||||
Increase (decrease) in advances from borrowers for taxes and insurance | (135,756 | ) | (82,307 | ) | ||||
Dividend, $.12 per share | (107,513 | ) | - | |||||
Repurchase of common stock | (352,600 | ) | - | |||||
Proceeds from sale of common stock | - | 2,614,275 | ||||||
Net cash provided by (used for) financing activities | 1,140,747 | (2,634,131 | ) | |||||
Net increase (decrease) in cash and cash equivalents | (720,004 | ) | (3,762,356 | ) | ||||
Cash and cash equivalents at beginning of period | 16,720,008 | 16,647,828 | ||||||
Cash and cash equivalents at end of period | $ | 16,000,004 | $ | 12,885,472 | ||||
Supplemental disclosures - cash paid: | ||||||||
Interest on deposits and advances from FHLBC | $ | 662,274 | $ | 512,600 | ||||
Federal and state income taxes | 35,000 | 37,000 | ||||||
Noncash transactions: | ||||||||
Real estate acquired in settlement of loans | 179,298 | - | ||||||
Financing of foreclosed real estate | 154,000 | - | ||||||
Retirement of repurchased common stock | 352,600 | - | ||||||
Retirement of treasury stock | $ | - | $ | 85,638 |
See accompanying notes to consolidated financial statements.
4 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
General
On April 8, 2014, Sugar Creek Financial Corp., a Maryland corporation (the “Company”), became the holding company for Tempo Bank (the “Bank”) upon completion of the “second-step” conversion of the Bank from a mutual holding company structure to a stock holding company structure (the Conversion”). The Conversion involved the sale by the Company of 535,127 shares of common stock in a subscription and community offering, including shares purchased by the Bank’s employee stock ownership plan, the exchange of 414,118 shares of common stock after consideration of fractional shares of the Company for shares of common stock of the former Sugar Creek Financial Corp. (“old Sugar Creek”) held by persons other than Sugar Creek MHC (the “MHC”), and the elimination of old Sugar Creek and the MHC. Net proceeds received from the reorganization and stock offering totaled $2,614,275, net of costs of $929,802, common stock acquired by the ESOP of $299,670 and the contribution of cash from the MHC of $98,382.
The Bank is a community oriented financial institution that provides traditional financial services within the areas it serves. The Bank is engaged primarily in the business of attracting deposits from the general public and using these funds to originate one- to four-family residential mortgage loans located in the Clinton, St. Clair, and Madison County, Illinois area. Further, operations of the Bank are managed and financial performance is evaluated on an institution-wide basis. As a result, all of the Bank’s operations are considered by management to be aggregated in one reportable operating segment. The Bank has no subsidiaries.
Accounting Standards Codification
The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) is the officially recognized source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All other accounting literature is considered non-authoritative. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
Interim Financial Statements
The consolidated financial statements of the Company at December 31, 2015 and for the three and nine months ended December 31, 2015 and 2014 have been prepared in conformity with U.S. GAAP for interim financial information and predominant practices followed by the financial services industry and are unaudited. However, in management’s opinion, the interim data at December 31, 2015 and for the three and nine months ended December 31, 2015 and 2014 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
5 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Tempo Bank. The Company’s principal business is the business of the Bank. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The consolidated financial statements have been prepared in conformity with U.S. GAAP. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet dates and income and expenses for the periods covered. Actual results could differ significantly from these estimates and assumptions. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.
Note 2. Earnings per Share
Earnings per share are based upon the weighted-average shares outstanding. ESOP shares, which have been committed to be released, are considered outstanding. Unvested restricted stock awards that contain non-forfeitable rights to dividends are participating securities and are included in the EPS computation using the two-class method. Prior period EPS data is adjusted retrospectively.
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net earnings | $ | 1,604 | $ | 70,901 | $ | 42,828 | $ | 183,600 | ||||||||
Weighted-average basic and diluted shares | 886,232 | 890,551 | 892,663 | 889,218 | ||||||||||||
Basic and diluted earnings per share | $ | 0.00 | $ | 0.08 | $ | 0.05 | $ | 0.21 |
6 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
Note 3. Loans Receivable, Net
Loans receivable, net, are summarized as follows:
December 31, | March 31, | |||||||
2015 | 2015 | |||||||
Real estate loans: | ||||||||
Single-family, owner occupied | $ | 62,365,176 | $ | 61,255,147 | ||||
Single-family, non-owner occupied | 8,574,042 | 8,162,534 | ||||||
Multi-family, 5 or more units | 715,733 | 721,130 | ||||||
Commercial | 2,737,800 | 2,878,651 | ||||||
Land | 1,380,660 | 1,212,874 | ||||||
Consumer loans | 1,942,631 | 1,562,398 | ||||||
77,716,042 | 75,792,734 | |||||||
Allowance for losses | (203,403 | ) | (242,103 | ) | ||||
Deferred loan fees, net | (82,107 | ) | (86,885 | ) | ||||
Total loans | $ | 77,430,532 | $ | 75,463,746 |
The weighted-average rate on loans was 4.22% and 4.36% at December 31, 2015 and March 31, 2015, respectively.
The risk characteristics of each loan portfolio segment are as follows:
Single-family, owner occupied
Single-family, owner occupied loans are underwritten based on the applicant’s employment and credit history and the appraised value of the property. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Single-family, non-owner occupied
Single-family, non-owner occupied loans carry greater inherent risks than single-family, owner occupied loans, since the repayment ability of the borrower is reliant on the adequacy of the income generated from the property.
7 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
Multi-family, 5 or more units
Multi-family real estate loans are typically secured by apartment complexes. These loans typically have larger loan balances and involve a greater degree of risk than single-family residential mortgage loans. Payments on loans secured by income producing properties often depend on successful operation and management of the properties.
Commercial real estate
Commercial real estate loans are secured primarily by office buildings and various income-producing properties. Commercial real estate loans are underwritten based on the economic viability of the property and creditworthiness of the borrower, with emphasis given to projected cash flow as a percentage of debt service requirements. These loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. Repayment of loans secured by income-producing properties generally depends on the successful operation of the real estate project and may be subject to a greater extent to adverse market conditions and the general economy.
Land
Land loans are secured by unimproved land with terms of fifteen years or less and loan amounts that do not exceed 85% of the lesser of the appraised value or the purchase price. Loans secured by unimproved land generally involve greater risks than residential mortgage lending because land loans are more difficult to evaluate and the marketability of the underlying property may also be adversely affected in a high interest rate environment or adverse conditions in the real estate market or economy.
Consumer
Consumer loans include automobile, signature and other consumer loans. Potential credit risks include rapidly depreciable assets, such as automobiles, which could adversely affect the value of the collateral.
The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended December 31, 2015 and 2014:
Allowance for Loan Losses | ||||||||||||||||||||
Beginning | Provision for | Ending | ||||||||||||||||||
Balance | Losses | Charge-offs | Recoveries | Balance | ||||||||||||||||
Three months ended December 31, 2015: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Single-family, owner occupied | $ | 109,751 | $ | 11,655 | $ | - | $ | - | $ | 121,406 | ||||||||||
Single-family, non-owner occupied | 27,056 | (907 | ) | - | - | 26,149 | ||||||||||||||
Multi-family, 5 or more units | 963 | 272 | - | - | 1,235 | |||||||||||||||
Commercial | 4,800 | (77 | ) | - | - | 4,723 | ||||||||||||||
Land | 1,814 | 568 | - | - | 2,382 | |||||||||||||||
Consumer loans | 2,285 | 216 | - | - | 2,501 | |||||||||||||||
Unallocated | 56,734 | (11,727 | ) | - | - | 45,007 | ||||||||||||||
$ | 203,403 | $ | - | $ | - | $ | - | $ | 203,403 |
8 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
Allowance for Loan Losses | ||||||||||||||||||||
Beginning | Provision for | Ending | ||||||||||||||||||
Balance | Losses | Charge-offs | Recoveries | Balance | ||||||||||||||||
Three months ended December 31, 2014: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Single-family, owner occupied | $ | 221,725 | $ | (59,583 | ) | $ | - | $ | - | $ | 162,142 | |||||||||
Single-family, non-owner occupied | 42,157 | (7,624 | ) | - | - | 34,533 | ||||||||||||||
Multi-family, 5 or more units | 2,266 | (732 | ) | - | - | 1,534 | ||||||||||||||
Commercial | 8,488 | (2,958 | ) | - | - | 5,530 | ||||||||||||||
Land | 4,090 | (1,491 | ) | - | - | 2,599 | ||||||||||||||
Consumer loans | 4,370 | (1,557 | ) | - | - | 2,813 | ||||||||||||||
Unallocated | 4,007 | 28,945 | - | - | 32,952 | |||||||||||||||
$ | 287,103 | $ | (45,000 | ) | $ | - | $ | - | $ | 242,103 |
The following presents by portfolio segment, the activity in the allowance for loan losses for the nine months ended December 31, 2015 and 2014:
Allowance for Loan Losses | ||||||||||||||||||||
Beginning | Provision for | Ending | ||||||||||||||||||
Balance | Losses | Charge-offs | Recoveries | Balance | ||||||||||||||||
Nine months ended December 31, 2015: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Single-family, owner occupied | $ | 162,403 | $ | (40,997 | ) | $ | - | $ | - | $ | 121,406 | |||||||||
Single-family, non-owner occupied | 33,206 | (7,057 | ) | - | - | 26,149 | ||||||||||||||
Multi-family, 5 or more units | 1,500 | 26,735 | (27,000 | ) | - | 1,235 | ||||||||||||||
Commercial | 5,986 | (1,263 | ) | - | - | 4,723 | ||||||||||||||
Land | 2,521 | (139 | ) | - | - | 2,382 | ||||||||||||||
Consumer loans | 2,954 | (453 | ) | - | - | 2,501 | ||||||||||||||
Unallocated | 33,533 | 11,474 | - | - | 45,007 | |||||||||||||||
$ | 242,103 | $ | (11,700 | ) | $ | (27,000 | ) | $ | - | $ | 203,403 |
Allowance for Loan Losses | ||||||||||||||||||||
Beginning | Provision for | Ending | ||||||||||||||||||
Balance | Losses | Charge-offs | Recoveries | Balance | ||||||||||||||||
Nine months ended December 31, 2014: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Single-family, owner occupied | $ | 209,010 | $ | (46,868 | ) | $ | - | $ | - | $ | 162,142 | |||||||||
Single-family, non-owner occupied | 52,576 | (18,043 | ) | - | - | 34,533 | ||||||||||||||
Multi-family, 5 or more units | 2,356 | (822 | ) | - | - | 1,534 | ||||||||||||||
Commercial | 8,971 | (3,441 | ) | - | - | 5,530 | ||||||||||||||
Land | 4,677 | (2,078 | ) | - | - | 2,599 | ||||||||||||||
Consumer loans | 4,420 | (1,607 | ) | - | - | 2,813 | ||||||||||||||
Unallocated | 22,093 | 10,859 | - | - | 32,952 | |||||||||||||||
$ | 304,103 | $ | (62,000 | ) | $ | - | $ | - | $ | 242,103 |
9 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
The following presents by portfolio segment, the recorded investment in loans and impairment method at December 31, 2015 and March 31, 2015:
Allowance for Loan Losses | Loans | |||||||||||||||||||||||
Individually | Collectively | Individually | Collectively | |||||||||||||||||||||
Evaluated | Evaluated | Evaluated | Evaluated | |||||||||||||||||||||
for Impairment | for Impairment | Total | for Impairment | for Impairment | Total | |||||||||||||||||||
At December 31, 2015: | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Single-family, owner occupied | $ | 15,000 | $ | 106,406 | $ | 121,406 | $ | 720,724 | $ | 61,644,452 | $ | 62,365,176 | ||||||||||||
Single-family, non-owner occupied | 11,711 | 14,438 | 26,149 | 204,194 | 8,369,848 | 8,574,042 | ||||||||||||||||||
Multi-family, 5 or more units | - | 1,235 | 1,235 | - | 715,733 | 715,733 | ||||||||||||||||||
Commercial | - | 4,723 | 4,723 | - | 2,737,800 | 2,737,800 | ||||||||||||||||||
Land | - | 2,382 | 2,382 | - | 1,380,660 | 1,380,660 | ||||||||||||||||||
Consumer loans | - | 2,501 | 2,501 | - | 1,942,631 | 1,942,631 | ||||||||||||||||||
Unallocated | - | 45,007 | 45,007 | - | - | - | ||||||||||||||||||
$ | 26,711 | $ | 176,692 | $ | 203,403 | $ | 924,918 | $ | 76,791,124 | $ | 77,716,042 |
Allowance for Loan Losses | Loans | |||||||||||||||||||||||
Individually | Collectively | Individually | Collectively | |||||||||||||||||||||
Evaluated | Evaluated | Evaluated | Evaluated | |||||||||||||||||||||
for Impairment | for Impairment | Total | for Impairment | for Impairment | Total | |||||||||||||||||||
At March 31, 2015: | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Single-family, owner occupied | $ | 37,000 | $ | 125,403 | $ | 162,403 | $ | 1,209,527 | $ | 60,045,620 | $ | 61,255,147 | ||||||||||||
Single-family, non-owner occupied | 16,665 | 16,541 | 33,206 | 239,842 | 7,922,692 | 8,162,534 | ||||||||||||||||||
Multi-family, 5 or more units | - | 1,500 | 1,500 | 127,623 | 593,507 | 721,130 | ||||||||||||||||||
Commercial | - | 5,986 | 5,986 | - | 2,878,651 | 2,878,651 | ||||||||||||||||||
Land | - | 2,521 | 2,521 | - | 1,212,874 | 1,212,874 | ||||||||||||||||||
Consumer loans | - | 2,954 | 2,954 | - | 1,562,398 | 1,562,398 | ||||||||||||||||||
Unallocated | - | 33,533 | 33,533 | - | - | - | ||||||||||||||||||
$ | 53,665 | $ | 188,438 | $ | 242,103 | $ | 1,576,992 | $ | 74,215,742 | $ | 75,792,734 |
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.
10 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
The following presents impaired loans and allocated valuation allowances based upon class levels and average recorded investment:
Impaired Loans | ||||||||||||||||||||||||
With | With no | Unpaid | Allowance | Average | ||||||||||||||||||||
Allowance | Allowance | Principal | for | Recorded | ||||||||||||||||||||
for Losses | for Losses | Total | Balance | Losses | Investment | |||||||||||||||||||
At December 31, 2015 | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Single-family, owner occupied | $ | 680,410 | $ | 40,314 | $ | 720,724 | $ | 720,724 | $ | 15,000 | $ | 721,156 | ||||||||||||
Single-family, non-owner occupied | 204,194 | - | 204,194 | 204,194 | 11,711 | 205,915 | ||||||||||||||||||
Multi-family, 5 or more units | - | - | - | - | - | - | ||||||||||||||||||
Commercial | - | - | - | - | - | - | ||||||||||||||||||
Land | - | - | - | - | - | - | ||||||||||||||||||
Consumer loans | - | - | - | - | - | - | ||||||||||||||||||
$ | 884,604 | $ | 40,314 | $ | 924,918 | $ | 924,918 | $ | 26,711 | $ | 927,071 |
The average recorded investment on impaired loans for the nine months ended December 31, 2015 was single-family, owner occupied dwellings of $721,156 and single-family, non-owner occupied dwellings of $205,915.
The average recorded investment on impaired loans for the nine months ended December 31, 2014 was single-family, owner occupied dwellings of $1,131,044, single-family, non-owner occupied dwellings of $416,900 and multi-family, five or more units of $57,094.
Impaired Loans | ||||||||||||||||||||||||
With | With no | Unpaid | Allowance | Average | ||||||||||||||||||||
Allowance | Allowance | Principal | for | Recorded | ||||||||||||||||||||
for Losses | for Losses | Total | Balance | Losses | Investment | |||||||||||||||||||
At March 31, 2015: | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Single-family, owner occupied | $ | 946,720 | $ | 262,807 | $ | 1,209,527 | $ | 1,209,527 | $ | 37,000 | $ | 1,219,813 | ||||||||||||
Single-family, non-owner occupied | 207,636 | 32,206 | 239,842 | 239,842 | 16,665 | 227,375 | ||||||||||||||||||
Multi-family, 5 or more units | - | 127,623 | 127,623 | 127,623 | - | 53,176 | ||||||||||||||||||
Commercial | - | - | - | - | - | - | ||||||||||||||||||
Land | - | - | - | - | - | - | ||||||||||||||||||
Consumer loans | - | - | - | - | - | - | ||||||||||||||||||
$ | 1,154,356 | $ | 422,636 | $ | 1,576,992 | $ | 1,576,992 | $ | 53,665 | $ | 1,500,364 |
11 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
The following presents nonperforming loans based upon class level:
Nonperforming Loans | ||||||||||||||||
Past Due 90 | Accruing | |||||||||||||||
Days or More | Troubled Debt | |||||||||||||||
Nonaccrual | and Still Accruing | Restructurings | Total | |||||||||||||
At December 31, 2015: | ||||||||||||||||
Real estate loans: | ||||||||||||||||
Single-family, owner occupied | $ | 235,370 | $ | - | $ | 485,354 | $ | 720,724 | ||||||||
Single-family, non-owner occupied | - | - | 204,194 | 204,194 | ||||||||||||
Multi-family, 5 or more units | - | - | - | - | ||||||||||||
Commercial | - | - | - | - | ||||||||||||
Land | - | - | - | - | ||||||||||||
Consumer loans | - | - | - | - | ||||||||||||
$ | 235,370 | $ | - | $ | 689,548 | $ | 924,918 |
Nonperforming Loans | ||||||||||||||||
Past Due 90 | Accruing | |||||||||||||||
Days or More | Troubled Debt | |||||||||||||||
Nonaccrual | and Still Accruing | Restructurings | Total | |||||||||||||
At March 31, 2015: | ||||||||||||||||
Real estate loans: | ||||||||||||||||
Single-family, owner occupied | $ | 262,807 | $ | - | $ | 946,720 | $ | 1,209,527 | ||||||||
Single-family, non-owner occupied | 32,206 | - | 207,636 | 239,842 | ||||||||||||
Multi-family, 5 or more units | 127,623 | - | - | 127,623 | ||||||||||||
Commercial | - | - | - | - | ||||||||||||
Land | - | - | - | - | ||||||||||||
Consumer loans | - | - | - | - | ||||||||||||
$ | 422,636 | $ | - | $ | 1,154,356 | $ | 1,576,992 |
For the nine months ended December 31, 2015, gross interest income that would have been recorded had the non-accruing loans been current in accordance with their original terms was $8,722. There was $1,643 in interest income recognized on such loans for the nine months ended December 31, 2015.
There were no new additions for loans modified as troubled debt restructurings (“TDRs”) during the nine months ended December 31, 2015 and 2014. For the nine months ended December 31, 2015, one accruing single-family, owner occupied TDR was repaid in full.
12 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
The following presents a summary of accruing TDRs at December 31, 2015 and March 31, 2015:
December 31, | March 31, | |||||||||||||||
2015 | 2015 | |||||||||||||||
Number of | Recorded | Number of | Recorded | |||||||||||||
Contracts | Investment | Contracts | Investment | |||||||||||||
Real estate loans: | ||||||||||||||||
Single-family, owner occupied | 1 | $ | 485,354 | 2 | $ | 946,720 | ||||||||||
Single-family, non-owner occupied | 2 | 204,194 | 2 | 207,636 | ||||||||||||
3 | $ | 689,548 | 4 | $ | 1,154,356 |
At December 31, 2015, the recorded investment in single-family, real estate loans that are in the process of foreclosure according to the local jurisdiction requirement was $195,056.
The following presents the Bank's loan portfolio aging analysis:
Days Past Due | ||||||||||||||||||||
30-59 | 60-89 | 90 or more | Current | Total | ||||||||||||||||
At December 31, 2015: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Single-family, owner occupied | $ | 416,731 | 816,811 | 235,370 | $ | 60,896,264 | $ | 62,365,176 | ||||||||||||
Single-family, non-owner occupied | 274,098 | 20,496 | - | 8,279,448 | 8,574,042 | |||||||||||||||
Multi-family, 5 or more units | - | - | - | 715,733 | 715,733 | |||||||||||||||
Commercial | - | - | - | 2,737,800 | 2,737,800 | |||||||||||||||
Land | - | - | - | 1,380,660 | 1,380,660 | |||||||||||||||
Consumer loans | 11,890 | 2,761 | - | 1,927,980 | 1,942,631 | |||||||||||||||
$ | 702,719 | $ | 840,068 | $ | 235,370 | $ | 75,937,885 | $ | 77,716,042 |
Days Past Due | ||||||||||||||||||||
30-59 | 60-89 | 90 or more | Current | Total | ||||||||||||||||
At March 31, 2015: | ||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||
Single-family, owner occupied | $ | 1,032,922 | $ | 41,745 | $ | 262,807 | $ | 59,917,673 | $ | 61,255,147 | ||||||||||
Single-family, non-owner occupied | - | 186,457 | 32,206 | 7,943,871 | 8,162,534 | |||||||||||||||
Multi-family, 5 or more units | - | - | 127,623 | 593,507 | 721,130 | |||||||||||||||
Commercial | - | - | - | 2,878,651 | 2,878,651 | |||||||||||||||
Land | - | - | - | 1,212,874 | 1,212,874 | |||||||||||||||
Consumer loans | 26,221 | 3,944 | - | 1,532,233 | 1,562,398 | |||||||||||||||
$ | 1,059,143 | $ | 232,146 | $ | 422,636 | $ | 74,078,809 | $ | 75,792,734 |
The Bank categorizes all classes of loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, smaller dollar consumer loans are excluded from this grading process and are reflected in the Pass category. The delinquency trends of these consumer loans are monitored on a homogeneous basis.
13 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
The Bank uses the following definitions for risk ratings:
The Pass asset quality rating encompasses assets that have performed as expected. With the exception of some smaller consumer and residential loans, these assets do not have delinquency. Loans assigned this rating include loans to borrowers possessing solid credit quality with acceptable risk.
The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation.
The Substandard asset quality rating encompasses assets that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a well-defined weakness based upon objective evidence; assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected; or the possibility that liquidation will not be timely. Loans categorized in this grade possess a well-defined credit weakness and the likelihood of repayment from the primary source is uncertain. Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss. Collateral coverage may be marginal.
Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as substandard. In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
The Loss asset quality rating encompasses assets that are considered uncollectible and of such little value that their continuance as assets is not warranted. A loss classification does not mean that an asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be realized in the future.
The following presents the credit risk profile for the Bank's loan portfolio based upon rating category:
Credit Quality Indicator-Credit Risk Profile by Grade or Classification | ||||||||||||||||||||||||
Special | ||||||||||||||||||||||||
Mention | Substandard | Doubtful | Loss | Pass | Total | |||||||||||||||||||
At December 31, 2015: | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Single-family, owner occupied | $ | - | $ | 720,724 | $ | - | $ | - | $ | 61,644,452 | $ | 62,365,176 | ||||||||||||
Single-family, non-owner occupied | - | 204,194 | - | - | 8,369,848 | 8,574,042 | ||||||||||||||||||
Multi-family, 5 or more units | - | - | - | - | 715,733 | 715,733 | ||||||||||||||||||
Commercial | - | - | - | - | 2,737,800 | 2,737,800 | ||||||||||||||||||
Land | - | - | - | - | 1,380,660 | 1,380,660 | ||||||||||||||||||
Consumer loans | - | - | - | - | 1,942,631 | 1,942,631 | ||||||||||||||||||
$ | - | $ | 924,918 | $ | - | $ | - | $ | 76,791,124 | $ | 77,716,042 |
14 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
Credit Quality Indicator-Credit Risk Profile by Grade or Classification | ||||||||||||||||||||||||
Special | ||||||||||||||||||||||||
Mention | Substandard | Doubtful | Loss | Pass | Total | |||||||||||||||||||
At March 31, 2015: | ||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
Single-family, owner occupied | $ | - | $ | 1,209,527 | $ | - | $ | - | $ | 60,045,620 | $ | 61,255,147 | ||||||||||||
Single-family, non-owner occupied | - | 239,842 | - | - | 7,922,692 | 8,162,534 | ||||||||||||||||||
Multi-family, 5 or more units | - | 127,623 | - | - | 593,507 | 721,130 | ||||||||||||||||||
Commercial | - | - | - | - | 2,878,651 | 2,878,651 | ||||||||||||||||||
Land | - | - | - | - | 1,212,874 | 1,212,874 | ||||||||||||||||||
Consumer loans | - | - | - | - | 1,562,398 | 1,562,398 | ||||||||||||||||||
$ | - | $ | 1,576,992 | $ | - | $ | - | $ | 74,215,742 | $ | 75,792,734 |
Note 4. Income Taxes
The effective tax rate was 69.7% for the three months ended December 31, 2015, compared to 39.2% for the three months ended December 31, 2014. The effective tax rate was 37.9% for the nine months ended December 31, 2015, compared to 39.5% for the nine months ended December 31, 2014.
Note 5. Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to quantitative judgments by the regulators about components, risk-weightings and other factors. At December 31, 2015 and March 31, 2015, the Bank met all capital adequacy requirements.
The Bank is also subject to the regulatory framework for prompt corrective action. At December 31, 2015 and March 31, 2015, the most recent notification from the regulatory agencies categorized the Bank as well capitalized. To be categorized as well capitalized, the Bank must maintain minimum capital standards for total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the aforementioned notifications that management believes have changed the Bank’s category.
15 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
The Bank’s actual and required capital amounts and ratios are summarized as follows:
Minimum Required | ||||||||||||||||||||||||
for Capital | to be "Well | |||||||||||||||||||||||
Actual | Adequacy | Capitalized" | ||||||||||||||||||||||
At December 31, 2015: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Total capital to risk-weighted assets | $ | 11,139 | 23.7 | % | $ | 3,759 | 8.0 | % | $ | 4,699 | 10.0 | % | ||||||||||||
Tier 1 capital to risk-weighted assets | $ | 10,936 | 23.3 | % | $ | 2,819 | 6.0 | % | $ | 3,759 | 8.0 | % | ||||||||||||
Common equity tier 1 capital to risk- weighted assets | $ | 10,936 | 23.3 | % | $ | 2,114 | 4.5 | % | $ | 3,054 | 6.5 | % | ||||||||||||
Tier 1 capital to total assets | $ | 10,936 | 11.3 | % | $ | 3,868 | 4.0 | % | $ | 4,835 | 5.0 | % |
Minimum Required | ||||||||||||||||||||||||
for Capital | to be "Well | |||||||||||||||||||||||
Actual | Adequacy | Capitalized" | ||||||||||||||||||||||
At March 31, 2015: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Total capital to risk-weighted assets | $ | 11,672 | 24.9 | % | $ | 3,757 | 8.0 | % | $ | 4,696 | 10.0 | % | ||||||||||||
Tier 1 capital to risk-weighted assets | $ | 11,430 | 24.3 | % | $ | 2,818 | 6.0 | % | $ | 3,757 | 8.0 | % | ||||||||||||
Common equity tier 1 capital to risk- weighted assets | $ | 11,430 | 24.3 | % | $ | 2,113 | 4.5 | % | $ | 3,052 | 6.5 | % | ||||||||||||
Tier 1 capital to total assets | $ | 11,430 | 12.2 | % | $ | 3,756 | 4.0 | % | $ | 4,695 | 5.0 | % |
During the three months ended December 31, 2015, the Bank paid a $600,000 cash dividend to the Company. The Company is using these funds and funds from the Company to repurchase outstanding common shares as part of a repurchase plan announced November 12, 2015.
16 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
Note 6. Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments typically include commitments to originate mortgage loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The Company’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount and related accrued interest receivable of those instruments.
The Company mitigates this risk by evaluating each borrower’s creditworthiness on a case-by-case basis. Generally, collateral held by the Company consists of a first or second mortgage on the borrower’s property. At December 31, 2015, there was one commitment outstanding of $97,900.
Note 7. Concentration of Credit Risk
The Bank originates loans to the general public, which includes military personnel and civilian employees of Scott Air Force Base, located in Belleville, Illinois. This concentration of credit risk could unfavorably impact the level of credit risk of the Bank should events occur, such as employment curtailments, temporary layoffs or other events. Management believes that the secured nature of the majority of these loans mitigates this risk based upon current economic conditions.
Note 8. Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the assumptions that market participants would use in pricing the assets or liabilities (the “inputs”) into three broad levels.
The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets and liabilities and the lowest priority (Level 3) to unobservable inputs in which little, if any, market activity exists, requiring entities to develop their own assumptions and data.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in market areas that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Valuation Techniques
Available for sale securities are carried at fair value utilizing Level 1 and Level 2 inputs. For debt securities, the Bank obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, live trading levels, trade execution data, cash flows, market consensus prepayment speeds, market spreads, credit information and the U.S. Treasury yield curve. At December 31, 2015 and March 31, 2015, the Company did not have any available for sale securities.
17 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
Impaired loans are carried at fair value utilizing Level 3 inputs, consisting of appraisals of underlying collateral (collateral method) adjusted for selling costs (unobservable input) and discounted cash flow analysis. See note 3.
Assets Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis at December 31, 2015 and March 31, 2015 include impaired loans of $924,918 and $1,576,992, respectively, utilizing Level 3 inputs. The impaired loans are collateral dependent.
Following is a summary of the activity in the allowance for losses on impaired loans, including TDRs:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Balance, beginning of period | $ | 18,866 | $ | 61,311 | $ | 53,665 | $ | 65,525 | ||||||||
Loan charge-offs | - | - | (27,000 | ) | - | |||||||||||
Loan recoveries | - | - | - | - | ||||||||||||
Provision for (credit to) loan losses | 7,845 | (6,821 | ) | 46 | (11,035 | ) | ||||||||||
Balance, end of period | $ | 26,711 | $ | 54,490 | $ | 26,711 | $ | 54,490 |
Nonfinancial assets measured at fair value on a nonrecurring basis include foreclosed real estate which amounted to $397,396 at December 31, 2015 and $434,367 at March 31, 2015. Foreclosed real estate is initially recorded at fair value utilizing Level 2 units based on observable market data less costs to sell, establishing a new cost basis.
Fair Value of Financial Instruments
The carrying amount, fair value and the financial hierarchy of the Company’s financial instruments are summarized in the following table. Fair values of financial instruments have been estimated by the Company based upon available market information with the assistance of an independent consultant.
18 |
SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
December 31, | ||||||||||||||||||||
2015 | ||||||||||||||||||||
Carrying | Fair | Fair Value Measurements Using | ||||||||||||||||||
Amount | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Non-trading instruments and nonderivatives: | ||||||||||||||||||||
Cash and cash equivalents | $ | 16,000,004 | $ | 16,000,004 | $ | 16,000,004 | $ | - | $ | - | ||||||||||
Stock in FHLB of Chicago | 1,165,513 | 1,165,513 | - | 1,165,513 | - | |||||||||||||||
Loans receivable, net | 77,430,532 | 78,246,106 | - | 77,321,188 | 924,918 | |||||||||||||||
Accrued interest receivable on loans | 241,807 | 241,807 | - | 241,807 | - | |||||||||||||||
Deposits | 78,027,577 | 73,292,275 | - | 73,292,275 | - | |||||||||||||||
Accrued interest on deposits | 69,717 | 69,717 | - | 69,717 | - | |||||||||||||||
Advances from FHLB of Chicago | 5,000,000 | 5,197,375 | - | 5,197,375 | - |
March 31, | ||||||||||||||||||||
2015 | ||||||||||||||||||||
Carrying | Fair | Fair Value Measurements Using | ||||||||||||||||||
Amount | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Non-trading instruments and nonderivatives: | ||||||||||||||||||||
Cash and cash equivalents | $ | 16,720,008 | $ | 16,720,008 | $ | 16,720,008 | $ | - | $ | - | ||||||||||
Stock in FHLB of Chicago | 1,165,513 | 1,165,513 | - | 1,165,513 | - | |||||||||||||||
Loans receivable, net | 75,463,746 | 79,924,031 | - | 78,347,039 | 1,576,992 | |||||||||||||||
Accrued interest receivable on loans | 257,576 | 257,576 | - | 257,576 | - | |||||||||||||||
Deposits | 76,290,961 | 72,906,558 | - | 72,906,558 | - | |||||||||||||||
Accrued interest on deposits | 50,070 | 50,070 | - | 50,070 | - | |||||||||||||||
Advances from FHLB of Chicago | 5,000,000 | 5,353,750 | - | 5,353,750 | - |
The following methods and assumptions were used in estimating the fair values shown above:
· | Cash and cash equivalents are valued at their carrying amounts due to the relatively short period to maturity of instruments. |
· | Stock in FHLB of Chicago is valued at cost, which represents historical redemption value and approximates fair value. |
· | Fair values for the loan portfolio, certificates of deposit and advances from the FHLBC are computed using an analysis which considers the amount and timing of all future cash flows of the underlying instruments discounted at current market rates. |
· | Fair values of non-maturing deposits, such as checking, NOW, savings and money market deposit accounts, are computed using an analysis which uses decay rates to estimate the amount and timing of all future cash flows of the underlying instruments, which are discounted at current market rates. |
· | The carrying amounts of accrued interest receivable and payable approximate fair value. |
Off-balance sheet assets include the commitments to extend credit for which fair values were estimated based on interest rates and fees currently charged to enter into similar transactions. As a result of the short-term nature of the outstanding commitments, the fair values of fees on those commitments approximate the amount collected and the Company has not assigned a value to such instruments for purpose of this disclosure.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Notes To Consolidated Financial Statements (Unaudited)
There were no transfers between Level 1 and Level 2 categorizations and into or out of Level 3 categorization during the periods presented.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the financial condition and results of operations at December 31, 2015 and for the three and nine months ended December 31, 2015 and 2014 is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements (Unaudited) and the notes thereto, appearing in Part I, Item 1 of this report and the Consolidated Financial Statements (Audited) and the notes thereto, appearing in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015.
Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:
· | statements of our goals, intentions and expectations; |
· | statements regarding our business plans, prospects, growth and operating strategies; |
· | statements regarding the asset quality of our loan and investment portfolios; and |
· | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-Q, except as may be required under applicable law.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
· | general economic conditions, either nationally or in our market areas, that are worse than expected; |
· | competition among depository and other financial institutions; |
· | changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; |
· | adverse changes in the securities markets; |
· | changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; |
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
· | our ability to enter new markets successfully and capitalize on growth opportunities; |
· | changes in consumer spending, borrowing and savings habits; |
· | changes in accounting policies and practices, as may be adopted by the Federal Deposit Insurance Corporation, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; | |
· | changes in our organization, compensation and benefit plans; |
· | changes in our financial condition or results of operations that reduce capital; and |
· | changes in the financial condition or future prospects of issuers of securities that we own. |
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Overview-General
Our principal business is to acquire deposits from individuals and businesses in the communities surrounding our offices and to use these deposits to fund loans. We focus on providing our products and services to two segments of customers: individuals and small businesses. At December 31, 2015, we had total assets of $96.8 million, net loans of $77.4 million, total deposits of $78.0 million and stockholders’ equity of $12.9 million.
Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income.
A secondary source of income is noninterest income, which is revenue that we receive from providing products and services. The majority of our noninterest income generally comes from loan service charges and service charges on deposit accounts.
Expenses. The noninterest expenses we incur in operating our business consist of compensation and benefits expenses, occupancy expenses, equipment and data processing expenses, FDIC premiums, costs from operation of foreclosed real estate, professional and regulatory fees and other miscellaneous expenses, legal and accounting fees and expenses of stockholder communications and meetings.
Our largest noninterest expense is compensation and benefits, which consist primarily of salaries and wages paid to our employees, payroll taxes, expenses for health insurance, retirement plans and other employee benefits, including employee stock ownership plan allocations.
Critical Accounting Policy
In the preparation of our financial statements, we have adopted various accounting policies that govern the application of U.S. GAAP. Our significant accounting policies are described in note 1 of the notes to the consolidated financial statements.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations.
Allowance for Loan Losses. We consider the allowance for loan losses to be our critical accounting policy. The allowance for loan losses is the amount estimated by management as necessary to cover probable losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to operations. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of qualitative loss factors to be applied to the various segments of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly. The allowance consists of allocated and general components. The allocated component relates to loans that are individually classified as impaired, for which the carrying value of the loan exceeds the fair value of the collateral or the present value of expected future cash flows, or loans otherwise adversely classified. The general component covers non-impaired loans and is based on the historical loan loss experience for generally the last three years, including adjustments to historical loss experience, maintained to cover uncertainties that affect the Company’s estimate of probable losses for each loan type. The adjustments to historical loss experience are based on evaluation of several factors, including primarily changes in lending policies and procedures; changes in collection, charge-off and recovery practices; changes in the nature and volume of the loan portfolio; changes in the volume and severity of nonperforming loans; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and changes in current, national and local economic and business conditions. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency (“OCC”), as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.
Comparison of Financial Condition at December 31, 2015 and March 31, 2015
Cash and Cash Equivalents. Cash and cash equivalents decreased $720,000 to $16.0 million at December 31, 2015 from $16.7 million at March 31, 2015 primarily as a result of increased loan originations during the third quarter.
Loans. The largest segment of our loan portfolio is single-family owner occupied residential real estate loans. At December 31, 2015, single-family, owner occupied residential real estate loans totaled $62.4 million, or 80.3% of total loans, compared to $61.3 million, or 80.8% of total loans at March 31, 2015. The increase in single-family owner occupied residential real estate loans is the result of market forces and competition for this type of mortgage lending.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Single-family non-owner occupied residential real estate loans, the second largest segment of our loan portfolio, totaled $8.6 million, or 11.0% of total loans, at December 31, 2015 compared to $8.2 million, or 10.7% of total loans, at March 31, 2015. Single-family non-owner occupied residential real estate loan balances increased due to new originations.
Multi-family and commercial real estate loans totaled $3.4 million, or 4.4% of total loans, at December 31, 2015 compared to $3.6 million, or 4.7% of total loans, at March 31, 2015. Reductions in these loan segments were a result of repayments by borrowers largely as a result of the competitive environment for financing these types of mortgage loans.
Consumer loan balances totaled $1.9 million, or 2.5% of total loans, at December 31, 2015 compared to $1.6 million, or 2.0% of total loans, at March 31, 2015. The increase is a result of new originations.
Land loan balances totaled $1.4 million, or 1.8% of total loans, at December 31, 2015 compared to $1.2 million, or 1.6% of total loans, at March 31, 2015. The increase is a result of increased originations.
At December 31, 2015, fixed-rate loans, balloon loans and adjustable-rate loans totaled $40.2 million, $37.5 million and $15,000, respectively.
Loan originations for the three months ended December 31, 2015 increased $3.2 million to $6.6 million, from $3.4 million for the three months ended December 31, 2014. Loan originations for the nine months ended December 31, 2015 increased $5.3 million to $15.7 million from $10.4 million for the nine months ended December 31, 2014. The increase in the three month period and the nine month period ended December 31, 2015, compensated for slower than usual loan originations due to unusually cold weather during the first quarter followed by a second quarter that was cold and wet. Improved weather conditions and improved economic and employment has boosted the local real estate market.
Investments. At December 31, 2015, our investment portfolio totaled $1.2 million and consisted solely of our investment in the FHLBC stock. Our investment in FHLBC stock was unchanged from March 31, 2015. At December 31, 2015, $570,000 of our investment in FHLBC stock consisted of excess or voluntary stock.
Other Assets. Other assets totaled $365,000 at December 31, 2015, an increase of $33,000 from March 31, 2015. The increase over the period was due primarily to a higher prepaid benefit expense and the timing of other prepaid items.
Deposits. Deposits totaled $78.0 million at December 31, 2015, an increase of $1.7 million from March 31, 2015. We believe this increase in deposits was primarily due to funds migrating from an M&A target in the local area during the quarter ended December 31, 2015 and not the result of aggressive deposit pricing. The increase was predominantly in certificates of deposit. Our deposit base is comprised of noninterest-bearing NOW accounts, NOW accounts, savings accounts, money market accounts and certificates of deposit. We consider our deposit accounts other than certificates of deposit to be core deposits. At December 31, 2015 and March 31, 2015, the Bank had no brokered deposits.
Borrowings. We utilize FHLBC advances to supplement our supply of funds for loans. During the three months ended December 31, 2015 there were no new advances or repayments made.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Results of Operations for the Three Months Ended December 31, 2015 and 2014.
General. Net earnings of $1,600 were recorded for the three months ended December 31, 2015 compared with net earnings $70,900 for the three months ended December 31, 2014. The decrease in net earnings for the quarter was primarily due to lower net interest income and the credit to the provision for loan losses during the three months ended December 31, 2014, partially offset by lower income tax expense.
Total Interest Income. Total interest income decreased $4,900 to $830,000 for the three months ended December 31, 2015. The decrease was due primarily to a reduction in interest income on loans receivable caused by lower average loan portfolio yields as a result of the continuing protracted low interest environment.
Total Interest Expense. Total interest expense increased $57,000 to $232,000 for the three months ended December 31, 2015 from $175,000 for the three months ended December 31, 2014. The increase resulted primarily from higher certificate balances as a result of new deposits and an internal shift of funds from MMDA balances to certificates of deposit.
The Bank has a $5 million fixed rate advance that carries an interest rate of 4.77% and matures February 13, 2017. The advance was obtained in a substantially higher interest rate environment. The Bank has not prepaid the advance because it would involve a substantial penalty.
Net Interest Income. Net interest income decreased $62,000 to $598,000 for the three months ended December 31, 2015 from $660,000 for the three months ended December 31, 2014. The decrease is due primarily to a lower interest rate spread.
Provision for Loan Losses. We establish provisions for loan losses which are charged to operations at a level we believe to be appropriate to our risk profile. These provisions represent management’s best estimate of probable loan losses in the portfolio. In evaluating the allowance for loan losses, management considers historical loss experience, the composition of the loan portfolio, adverse situations that might impact a borrower’s ability to repay the loan, the value of the underlying collateral, and other information, including level of nonaccrual loans. During the quarter ended December 31, 2015, the Company did not record a loss provision. During the quarter ended December 31, 2014, the Company recorded a credit to provision of $45,000. The effects of the economic downturn and unemployment appear to have begun to moderate in our market area, and while delinquencies are still an issue to be monitored, employment in the local area is improving and home sales are improving collateral values.
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs, and are annualized. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances are now being calculated using daily balances for the three months ended December 31, 2015, and nonaccrual loans are included in average balances only. For the three months ended December 31, 2014, average balances were calculated using month end balances. Management does not believe that the transition from month-end balances to daily balances has caused any material differences in the information presented. Loan fees are included in interest income on loans and are insignificant. None of the income reflected in the following table is tax-exempt income.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Three Months Ended | ||||||||||||||||||||||||
December 31, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | and | Yield/ | Average | and | Yield/ | |||||||||||||||||||
(Dollars in thousands) | Balance | Dividends | Cost | Balance | Dividends | Cost | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 76,107 | $ | 819 | 4.30 | % | $ | 74,941 | $ | 828 | 4.42 | % | ||||||||||||
FHLBC Stock | 1,165 | 1 | 0.34 | 1,165 | 1 | 0.34 | ||||||||||||||||||
Other interest-earning assets | 14,844 | 9 | 0.24 | 10,641 | 6 | 0.23 | ||||||||||||||||||
Total interest-earning assets | 92,116 | 829 | 3.60 | 86,747 | 835 | 3.85 | ||||||||||||||||||
Noninterest-earning assets | 5,353 | 5,674 | ||||||||||||||||||||||
Total assets | 97,469 | 92,421 | ||||||||||||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
NOW accounts | $ | 6,526 | $ | 3 | 0.18 | % | $ | 6,311 | $ | 2 | 0.13 | % | ||||||||||||
Savings accounts | 13,996 | 9 | 0.26 | 13,603 | 9 | 0.26 | ||||||||||||||||||
Money market accounts | 13,774 | 16 | 0.46 | 17,451 | 20 | 0.46 | ||||||||||||||||||
Certificates of deposit | 40,655 | 144 | 1.42 | 32,316 | 84 | 1.04 | ||||||||||||||||||
Total interest-bearing deposits | 74,951 | 172 | 0.92 | 69,681 | 115 | 0.66 | ||||||||||||||||||
FHLBC advances | 5,000 | 60 | 4.80 | 5,000 | 60 | 4.80 | ||||||||||||||||||
Other borrowings | - | - | - | - | - | - | ||||||||||||||||||
Total interest-bearing liabilities | $ | 79,951 | $ | 232 | 1.16 | $ | 74,681 | $ | 175 | 0.94 | ||||||||||||||
Noninterest-bearing NOW accounts | 3,506 | 3,725 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 787 | 803 | ||||||||||||||||||||||
Total liabilities | 84,244 | 79,209 | ||||||||||||||||||||||
Stockholders’ equity | 13,225 | 13,212 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 97,469 | $ | 92,421 | ||||||||||||||||||||
Net interest income | $ | 597 | $ | 660 | ||||||||||||||||||||
Interest rate spread | 2.44 | % | 2.91 | % | ||||||||||||||||||||
Net interest margin | 2.59 | % | 3.04 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 115.22 | % | 116.16 | % |
Noninterest Income. Noninterest income includes service charges on deposit accounts, loan service charges, and other income. Total noninterest income increased $1,000 to $38,000 for the three month period ended December 31, 2015 from $37,000 for the three months ended December 31, 2014.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Noninterest Expense. Noninterest expense primarily consists of salaries and employee benefits, equipment and data processing, occupancy, FDIC premium expense and other expenses. Total noninterest expense increased by $5,000 to $630,000 for the three months ended December 31, 2015 from $625,000 for the three months ended December 31, 2014. Higher compensation and benefits and professional and regulatory expenses were partially offset by lower equipment and data processing expense and cost of operations of foreclosed real estate.
Compensation and benefit expense increased $32,000 to $347,000 for the three months ended December 31, 2015 from $315,000 for the comparable period in 2014.
Operations of foreclosed real estate decreased $36,000 to $6,000 for the three months ended December 31, 2015 from $42,000 for the three months ended December 31, 2014. This decrease was due to a lower level of losses on foreclosed real estate.
Income Taxes. Income taxes for the three months ended December 31, 2015 was $4,000 compared to $46,000 for the three months ended December 31, 2014. The decrease in tax expense is primarily attributable to lower pre-tax earnings.
Results of Operations for the Nine Months Ended December 31, 2015 and 2014
General. Net earnings for the nine months ended December 31, 2015 and 2014 were $43,000 and $184,000, respectively. The decrease was due primarily to lower yields on loans and higher rates paid on certificates of deposit.
Total Interest Income. Total interest income decreased $32,000 to $2.5 million for the nine months ended December 31, 2015 when compared to the nine months ended December 31, 2014. The decrease was due primarily to reductions in the average yield of the loan portfolio to 4.32% for the nine months ended December 31, 2015 compared to 4.46% for the same period in 2014. The loan yield decreased due to the continuing low interest rate environment.
Total Interest Expense. Total interest expense increased $146,000 to $662,000 for the nine months ended December 31, 2015 from $516,000 for the nine months ended December 31, 2014. The increase resulted primarily from higher certificates balances as a result of new deposits and an internal shift of funds from MMDA balances to certificates of deposit, as well as higher rates.
The Bank has a $5 million fixed rate advance that carries an interest rate of 4.77% and matures February 13, 2017. The advance was obtained in a substantially higher interest rate environment. The Bank has not prepaid the advance because it would involve a substantial penalty.
The average rate on interest-bearing liabilities increased to 1.11% for the nine months ended December 31, 2015 from 0.92% for the same period in 2014.
Net Interest Income. Net interest income decreased $178,000 to $1.8 million for the nine months ended December 31, 2015 from $2.0 million for the nine months ended December 31, 2014. The decrease was due primarily to lower yields on the loan portfolio and higher average deposit rates and balances.
Our interest rate spread decreased 44 basis points to 2.49% for the nine months ended December 31, 2015 from 2.93% for the comparable period in 2014.
The following table summarizes average balances and average yields and costs for the nine months ended December 31, 2015 and 2014. Yields are annualized.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Nine Months Ended | ||||||||||||||||||||||||
December 31, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | and | Yield/ | Average | and | Yield/ | |||||||||||||||||||
(Dollars in thousands) | Balance | Dividends | Cost | Balance | Dividends | Cost | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 75,405 | $ | 2,445 | 4.32 | % | $ | 74,238 | $ | 2,485 | 4.46 | % | ||||||||||||
FHLBC Stock | 1,165 | 4 | 0.46 | 1,165 | 4 | 0.46 | ||||||||||||||||||
Other interest-earning assets | 15,199 | 26 | 0.23 | 11,460 | 18 | 0.21 | ||||||||||||||||||
Total interest-earning assets | 91,769 | 2,475 | 3.60 | 86,863 | 2,507 | 3.85 | ||||||||||||||||||
Noninterest-earning assets | 5,630 | 5,847 | ||||||||||||||||||||||
Total assets | 97,399 | 92,710 | ||||||||||||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
NOW accounts | $ | 6,552 | $ | 7 | 0.14 | % | $ | 6,136 | $ | 7 | 0.15 | % | ||||||||||||
Savings accounts | 14,271 | 27 | 0.25 | 13,652 | 26 | 0.25 | ||||||||||||||||||
Money market accounts | 14,669 | 51 | 0.46 | 17,840 | 63 | 0.47 | ||||||||||||||||||
Certificates of deposit | 39,065 | 397 | 1.36 | 32,372 | 240 | 0.99 | ||||||||||||||||||
Total interest-bearing deposits | 74,557 | 482 | 0.86 | 70,000 | 336 | 0.64 | ||||||||||||||||||
FHLBC advances | 5,000 | 180 | 4.80 | 5,000 | 180 | 4.80 | ||||||||||||||||||
Other borrowings | - | - | - | - | - | - | ||||||||||||||||||
Total interest-bearing liabilities | $ | 79,557 | $ | 662 | 1.11 | $ | 75,000 | $ | 516 | 0.92 | ||||||||||||||
Noninterest-bearing NOW accounts | 3,622 | 4,153 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 905 | 998 | ||||||||||||||||||||||
Total liabilities | 84,084 | 80,151 | ||||||||||||||||||||||
Stockholders’ equity | 13,316 | 12,559 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 97,399 | $ | 92,710 | ||||||||||||||||||||
Net interest income | $ | 1,813 | $ | 1,991 | ||||||||||||||||||||
Interest rate spread | 2.49 | % | 2.93 | % | ||||||||||||||||||||
Net interest margin | 2.63 | % | 3.06 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 115.35 | % | 115.82 | % |
Provision for Loan Losses. For the nine months ended December 31, 2015, the Bank recorded a net credit to the provision for loan losses of $11,700. During the nine months ended December 31, 2014, the Company recorded a credit to the provision for loan losses of $62,000. The effects of the economic downturn and unemployment appear to have begun to moderate in our market area, and while delinquencies are still an issue to be monitored, employment in the local area are continuing to improve and increases in home sales are improving collateral values.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Noninterest Income. Noninterest income includes service charges on deposit accounts, loan service charges, and other income. Total noninterest income decreased $3,000 for the nine month period ended December 31, 2015 to $101,000 from $104,000 for the nine months ended December 31, 2014 due primarily to lower service charges on deposit accounts.
Noninterest Expense. Noninterest expense primarily consists of compensation and employee benefits, equipment and data processing, occupancy, FDIC premium expense and other expenses. Total noninterest expense increased $4,000 for the nine months ended December 31, 2015.
Compensation and benefit expense increased $15,000 to $995,000 for the nine months ended December 31, 2015 from $980,000 for the comparable period in 2014.
Operations of foreclosed real estate decreased $63,000 to $25,000 for the nine months ended December 31, 2015 from $88,000 for the nine months ended December 31, 2014. This decrease was due to a decrease in loss on sale of real estate owned and real estate owned expense.
Advertising expense decreased $16,000 for the nine months ended December 31, 2015 from $43,000 for the comparable period in 2014. The decrease is related primarily to the recognition of the Bank’s 125th anniversary celebration that occurred in 2014.
Income Taxes. Income tax expense for the nine months ended December 31, 2015 was $26,000 compared to $120,000 for the nine months ended December 31, 2014. The decrease in tax expense is primarily attributable to lower pre-tax income.
Analysis of Nonperforming and Classified Assets.
We consider foreclosed real estate, repossessed assets, nonaccrual loans and accruing troubled debt restructurings to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan. There were no changes in our nonaccrual loan policy during the nine months ended December 31, 2015 and 2014.
Troubled debt restructurings are loans where concessions have been granted to borrowers experiencing financial difficulties.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at fair market value at the date of foreclosure less estimated selling costs. Holding costs and declines in fair value after acquisition of the property result in charges against income.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Nonperforming Assets
Nonaccrual loans at December 31, 2015 consisted of two single-family, owner-occupied dwellings in the aggregate amount of $235,000. The largest lending relationship in the nonperforming loan category amounted to $195,000, which was secured by one single-family owner occupied dwelling. While improving, the level of nonaccrual loans continues to reflect a slow local and regional economy, job layoffs, divorce and health issues that impact borrowers.
Accruing troubled debt restructurings were $690,000 at December 31, 2015 and $1.2 million at March 31, 2015.
At December 31, 2015, there were no other loans known to management which caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure as nonaccrual, 90 days past due or impaired.
See Note 3 to our unaudited consolidated financial statements for a description by loan category of our classified assets as of December 31, 2015 and March 31, 2015.
Liquidity and Capital Management
Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, and borrowings from the FHLBC. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2015, cash and cash equivalents totaled $16.0 million. At December 31, 2015, the Bank had $5.0 million in FHLBC advances outstanding.
A significant use of our liquidity is the funding of loan originations. At December 31, 2015, the Bank had one loan commitment outstanding to refinance an existing mortgage on a single-family, owner occupied residence. Another significant use of our liquidity is the funding of deposit withdrawals. Certificates of deposit due within one year of December 31, 2015 totaled $13.5 million, or 33.7% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the recent low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2016. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
The Company is a separate legal entity from the Bank and must provide for its own liquidity. The Company’s ability to pay cash dividends may depend, in part, upon its receipt of dividends from Tempo Bank because Sugar Creek Financial has no source of income other than earnings from the $1.1 million held in overnight Fed Funds and Fed excess balances accounts. Payment of cash dividends on capital stock by a savings and loan holding company is limited by Federal Reserve Board regulations. The Company declared a $.12 per share dividend to stockholders of record as of August 11, 2015, which was paid as of August 26, 2015. At December 31, 2015, the Company (on an unconsolidated basis) had liquid assets of $1.4 million.
On November 12, 2015, the Board of Directors of the Company authorized the repurchase of up to $1.1 million of the outstanding shares of the Company's common stock. The Company intends to conduct any repurchases through open market purchases by means of a trading plan adopted under SEC Rule 10b5-1, subject to market conditions and other factors. There is no guarantee as to the exact dollar amount or number of shares that the Company may repurchase. At December 31, 2015, the Company had repurchased 30,000 shares in the amount of $352,600.
Our primary investing activity is the origination of loans. Our primary financing activities consist of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the rates paid and products offered by us and our local competitors and several other factors. We generally manage the pricing of our deposits to be competitive.
Capital Management. The Bank is subject to various regulatory capital requirements administered by the OCC, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2015, the Bank exceeded all of its regulatory capital requirements. The Bank is considered “well capitalized” under regulatory guidelines. See note 5 of notes to the consolidated financial statements.
The Bank may not declare or pay a cash dividend, if the effect of such dividends would be to cause the capital of the Bank to be reduced below the aggregate amount required by federal or state law. The Company may pay a dividend, if and when declared by its Board of Directors. Any repurchases of the Company’s common stock will be conducted in accordance with applicable laws and regulations.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.
For the three months ended December 31, 2015 and 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Impact of Recent Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” The provisions of ASU 2016-01 require certain equity investments to be measured at fair value with changes in fair value recognized in net income and simplify the impairment assessment of such investments; eliminate the requirement for public entities to disclose the methods and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost; require public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets and require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. For public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-01 is not expected to have a material impact on the Company's financial statements.
Effect of Inflation and Changing Prices
The financial statements and related financial data presented in this quarterly report have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2015. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended December 31, 2015, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, we are not a party to any pending legal proceeding, except as disclosed in Note 12 of Notes to Consolidated Financial Statements contained in the 2015 Annual Report on Form 10-K, that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Not applicable. |
(b) | Not applicable. |
(c) | The following table presents information regarding stock repurchases by the Company during the quarter ended December 31, 2015: |
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | ||||||||||||
October 1, 2015 through October 31, 2015 | N/A | N/A | N/A | N/A | ||||||||||||
November 1, 2015 through November 30, 2015 | 20,000 | $ | 11.65 | 20,000 | 74,400 | (1) | ||||||||||
December 1, 2015 through December 31, 2015 | 10,000 | $ | 11.96 | 10,000 | 62,500 | (1) | ||||||||||
Total | 30,000 | 30,000 |
(1) | The maximum number of shares that may yet be repurchased under the plans or programs is the equivalent of the remaining cash set aside for repurchase divided by the average share price for such period illustrated and rounded to the nearest 100 shares. |
On November 12, 2015, the Board of Directors of the Company authorized the repurchase of up to $1.1 million worth of the outstanding shares of the Company's common stock. The Company intends to conduct any repurchases through open market purchases by means of a trading plan adopted under SEC Rule 10b5-1, subject to market conditions and other factors. There is no guarantee as to the exact dollar amount or number of shares that the Company may repurchase.
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
3.1 | Articles of Amendment and Restatement to Articles of Incorporation of Sugar Creek Financial Corp. (1) | |
3.2 | Bylaws of Sugar Creek Financial Corp. (2) | |
4.0 | Form of Common Stock Certificate of Sugar Creek Financial Corp. (2) | |
31.0 | Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.0 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.0 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statement of Stockholder’s Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. |
(1) | Incorporated by reference into this document from the exhibits filed with the Quarterly Report on Form 10-Q for the period ended December 31, 2013. | |
(2) | Incorporated by reference into this document from the exhibits filed with the Registration Statement on Form S-1 (SEC File No. 333-192700) and amendments thereto. |
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SUGAR CREEK FINANCIAL CORP. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUGAR CREEK FINANCIAL CORP. | |
Date: February 12, 2016 | /s/ Robert J. Stroh, Jr. |
Robert J. Stroh, Jr. | |
Chief Executive Officer and Chief Financial Officer |
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