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EX-3.2 - EXHIBIT 3.2 - Best Hometown Bancorp, Inc.t1600568_ex3-2.htm
EX-3.1 - EXHIBIT 3.1 - Best Hometown Bancorp, Inc.t1600568_ex3-1.htm
EX-8.1 - EXHIBIT 8.1 - Best Hometown Bancorp, Inc.t1600568_ex8-1.htm
EX-1.1 - EXHIBIT 1.1 - Best Hometown Bancorp, Inc.t1600568_ex1-1.htm
EX-99.3 - EXHIBIT 99.3 - Best Hometown Bancorp, Inc.t1600568_ex99-3.htm
EX-99.2 - EXHIBIT 99.2 - Best Hometown Bancorp, Inc.t1600568_ex99-2.htm
EX-23.3 - EXHIBIT 23.3 - Best Hometown Bancorp, Inc.t1600568_ex23-3.htm
EX-10.1 - EXHIBIT 10.1 - Best Hometown Bancorp, Inc.t1600568_ex10-1.htm
EX-10.2 - EXHIBIT 10.2 - Best Hometown Bancorp, Inc.t1600568_ex10-2.htm
EX-99.1 - EXHIBIT 99.1 - Best Hometown Bancorp, Inc.t1600568_ex99-1.htm
EX-23.2 - EXHIBIT 23.2 - Best Hometown Bancorp, Inc.t1600568_ex23-2.htm
EX-4 - EXHIBIT 4 - Best Hometown Bancorp, Inc.t1600568_ex4.htm
EX-2 - EXHIBIT 2 - Best Hometown Bancorp, Inc.t1600568_ex2.htm
EX-5 - EXHIBIT 5 - Best Hometown Bancorp, Inc.t1600568_ex5.htm
EX-21 - EXHIBIT 21 - Best Hometown Bancorp, Inc.t1600568_ex21.htm
EX-16 - EXHIBIT 16 - Best Hometown Bancorp, Inc.t1600568_ex16.htm

 

As filed with the Securities and Exchange Commission on March 11, 2016

 

Registration No. 333-________ 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

Best Hometown Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 6035 To be Applied For
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)

 

100 East Clay Street

Collinsville, Illinois 62234

(618) 345-1121

(Address, Including Zip Code, and Telephone Number, Including Area Code, of

Registrant’s Principal Executive Offices)

 

Mr. Ronnie R. Shambaugh

President and Chief Executive Officer

100 East Clay Street

Collinsville, Illinois 62234

(618) 345-1121

(Address, Including Zip Code, and Telephone Number, Including Area Code, of

Agent for Service)

 

Copies to:

Lawrence M.F. Spaccasi, Esq.

Michael J. Brown, Esq.

Luse Gorman, PC

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

(202) 274-2000

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: x

 

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

 

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)    

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of
securities to be registered
  Amount to be
registered
   Proposed maximum
offering price per share
   Proposed maximum
aggregate offering price
   Amount of
registration fee
 
Common Stock, $0.01 par value per share   859,625 shares    $10.00   $8,596,250(1)  $866 

 

(1)Estimated solely for the purpose of calculating the registration fee.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

 

PROSPECTUS

Best Hometown Bancorp, Inc.

(Proposed Holding Company for Home Federal Savings and Loan Association of Collinsville)

Up to 747,500 shares of Common Stock

(Subject to Increase to up to 859,625 shares)

 

Best Hometown Bancorp, Inc., a Maryland corporation and the proposed holding company for Home Federal Savings and Loan Association of Collinsville (“Home Federal”), is offering shares of common stock for sale at $10.00 per share in connection with the conversion of Home Federal from the mutual to the stock form of organization. There is currently no established market for our common stock. We expect that our common stock will be quoted on the OTC Pink Marketplace (“OTCPK”) operated by OTC Markets Group, upon conclusion of the stock offering. We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

 

We are offering up to 747,500 shares of common stock for sale at a price of $10.00 per share on a best efforts basis. We may sell up to 859,625 shares of common stock because of demand for the shares of common stock or changes in market conditions, without resoliciting subscribers. We must sell a minimum of 552,500 shares in order to complete the offering.

 

We are offering the shares of common stock in a “subscription offering” to eligible depositors and borrowers of Home Federal. Shares of common stock not purchased in the subscription offering may be offered for sale to the public in a “community offering,” with a preference given to natural persons and trusts of natural persons residing in Madison and St. Clair Counties, Illinois. We also may offer for sale shares of common stock not purchased in the subscription offering or community offering to the general public through a “syndicated community offering” managed by Raymond James & Associates, Inc. (“Raymond James”).

 

The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares of common stock that can be ordered by any person in the offering is 10,000 shares ($100,000), and no person, together with an associate or group of persons acting in concert, may purchase more than 12,500 shares ($125,000) in the offering.

 

The offering is expected to expire at [Expiration Time] p.m., Central Time, on [Expiration Date]. We may extend this expiration date without notice to you until [Extension #1]. The Office of the Comptroller of the Currency may approve a later date, which may not be beyond [Extension #2]. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond [Extension #1], or the number of shares of common stock to be sold is increased to more than 859,625 shares or decreased to less than 552,500 shares. If the offering is extended past [Extension #1], we will resolicit subscribers, and you will have the opportunity to confirm, change or cancel your order within a specified period of time. If you do not respond during that period, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at [Interest Rate]% per annum. If the number of shares to be sold is increased to more than 859,625 shares or decreased to less than 552,500 shares, all funds submitted for the purchase of shares of common stock in the offering will be returned promptly with interest at [Interest Rate]% per annum. We may then resolicit all subscribers, giving them an opportunity to place a new order within a specified period of time. Funds received in the subscription and the community offerings and, if applicable, the syndicated community offering will be held in a segregated account at Home Federal and will earn interest at [Interest Rate]% per annum until completion or termination of the offering.

 

Raymond James will assist us in selling our shares of common stock on a best efforts basis in the offering, but Raymond James is not required to purchase any of the shares of common stock that are being offered for sale.

 

OFFERING SUMMARY

Price: $10.00 per Share

   Minimum   Midpoint   Maximum   Adjusted Maximum 
Number of shares    552,500    650,000    747,500    859,625 
Gross offering proceeds   $5,525,000   $6,500,000   $7,475,000   $8,596,250 
Estimated offering expenses, excluding selling agent commissions   $979,600   $979,600   $979,600   $979,600 
Selling agent commissions (1)(2)   $250,000   $250,000   $250,000   $250,000 
Estimated net proceeds   $4,295,400   $5,270,400   $6,245,400   $7,366,650 
Estimated net proceeds per share   $7.77   $8.11   $8.36   $8.57 

 

(1)See “The Conversion and Offering—Marketing and Distribution; Compensation” for a discussion of Raymond James & Associates, Inc.’s compensation for this offering.
(2)Assumes all shares are sold in the subscription or community offerings, and excludes reimbursable expenses and conversion agent fees, which are included in estimated offering expenses. If all shares of common stock are sold in the syndicated community offering, excluding shares purchased by the employee stock ownership plan and shares purchased by insiders of Best Hometown Bancorp, Inc., for which no selling agent commissions would be paid, the maximum selling agent commissions and expenses would be $516,580 at the minimum, $570,400 at the midpoint, $624,220 at the maximum and $686,113 at the maximum, as adjusted. See “The Conversion and Offering—Marketing and Distribution; Compensation” for a discussion of fees to be paid to Raymond James & Associates, Inc. and other FINRA member firms in the event that all shares are sold in a syndicated community offering.

 

This investment involves a degree of risk, including the possible loss of principal.

Please read “Risk Factors” beginning on page 17.

 

   

 

 

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. None of the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System or any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

 

Raymond James

 

 

For assistance, please contact the Stock Information Center, toll-free, at [SIC Number].

The date of this prospectus is [Date of Prospectus].

 

   

 

  

[MAP TO BE INSERTED ON INSIDE FRONT COVER]

 

   

 

 

TABLE OF CONTENTS

 

  Page
   
SUMMARY 1
RISK FACTORS 17
SELECTED FINANCIAL AND OTHER DATA OF Home Federal Savings and Loan Association of Collinsville 35
FORWARD-LOOKING STATEMENTS 37
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING 39
OUR DIVIDEND POLICY 41
MARKET FOR THE COMMON STOCK 41
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE 43
CAPITALIZATION 44
PRO FORMA DATA 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 50
BUSINESS OF BEST HOMETOWN BANCORP, INC. 66
BUSINESS OF Home Federal Savings and Loan Association of Collinsville 66
REGULATION AND SUPERVISION 92
TAXATION 103
MANAGEMENT 104
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS 112
THE CONVERSION AND OFFERING 113
RESTRICTIONS ON ACQUISITION OF BEST HOMETOWN BANCORP, INC. 135
DESCRIPTION OF CAPITAL STOCK OF BEST HOMETOWN BANCORP, INC. 142
TRANSFER AGENT 144
EXPERTS 144
CHANGE IN ACCOUNTANTS 144
LEGAL MATTERS 145
WHERE YOU CAN FIND ADDITIONAL INFORMATION 145
INDEX TO FINANCIAL STATEMENTS OF HOME FEDERAL SAVINGS AND LOAN ASSOCIATION OF COLLINSVILLE F-1

  

 i 

 

SUMMARY

 

The following summary explains the significant aspects of Home Federal Savings and Loan Association of Collinsville’s mutual-to-stock conversion and the related offering of Best Hometown Bancorp, Inc. common stock. It may not contain all of the information that is important to you. For additional information before making an investment decision, you should read this entire document carefully including the financial statements and the notes to the financial statements and the section entitled “Risk Factors.”

 

In this prospectus, the terms “we,” “our,” and “us” refer to Best Hometown Bancorp, Inc. and Home Federal Savings and Loan Association of Collinsville, unless the context indicates another meaning. In addition, we sometimes refer to Best Hometown Bancorp, Inc. as “Best Hometown Bancorp” or the “Company” and to Home Federal Savings and Loan Association of Collinsville as “Home Federal” or the “Bank.”

 

Home Federal Savings and Loan Association of Collinsville

 

Home Federal is a federal mutual savings and loan association that was organized in 1887. In connection with the completion of the conversion, the Bank intends to change its name to Best Hometown Bank. We conduct our operations from our main office in Collinsville, Illinois and our full-service branch office in Maryville, Illinois. Our primary deposit market includes the areas surrounding our banking offices in Collinsville and Maryville, Illinois. Our primary lending market is Madison and St. Clair Counties, Illinois and, to a lesser extent, St. Louis County, Missouri.

 

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in loans. Our primary lending activity includes one- to four-family residential real estate loans, including non-owner occupied one- to four-family real estate loans, commercial and multi-family real estate loans and construction and land loans. To a lesser extent, we also make commercial business loans and consumer loans, including home equity loans and lines of credit. At December 31, 2015, $52.2 million, or 68.5% of our total loan portfolio was comprised of owner occupied one- to four-family real estate loans, and $14.9 million, or 19.5% of our total loan portfolio, was comprised of commercial and multi-family real estate loans. Our commercial and multi-family real estate loan portfolio has grown $11.2 million from $3.7 million at December 31, 2013 to $14.9 million at December 31, 2015.

 

We also invest in securities, which at December 31, 2015, consisted of securities issued by U.S. government agencies and U.S. government-sponsored enterprises.

 

We offer a variety of deposit accounts, including interest-bearing and non interest-bearing checking accounts, savings and money market accounts and certificates of deposit. We have recently expanded the products we offer our customers, including online banking, remote deposit capture and ATM cards and debit cards. We are also in the process of adding mobile banking.

 

We utilize advances from the Federal Home Loan Bank of Chicago (“FHLB – Chicago”).

 

In 2015, we began offering brokerage services to our customers through a networking arrangement with a registered broker-dealer.

 

For the years ended December 31, 2015 and 2014, we had net losses of $702,000 and $1.3 million, respectively. See “—Recent Losses from Operations / Restructuring of Management and Business Operations” below and “Management Discussion and Analysis of Financial Condition and

 

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Results of Operation—Comparison of Operating Results for the Years Ended December 31, 2015 and 2014.”

 

Our current business strategy includes managed growth to support profitability through greater economies of scale, including increasing our emphasis on commercial and multi-family real estate lending and, to a lesser extent, continuing to diversify our loan portfolio by increasing our commercial business lending and consumer lending. We also expect to increase our non-interest income through our entrance into the secondary market with the origination and sale of one- to four-family residential loans with terms of 20 years or more, and the addition of our new brokerage services. In addition, we intend to replace our higher-cost FHLB – Chicago advances and certificates of deposit as they mature with lower-cost FHLB – Chicago advances and core deposits. Most importantly, we will continue to adhere to our conservative underwriting standards of recent years which we believe have resulted in our improved credit quality. See “—Business Strategy.”

 

We are subject to comprehensive regulation and examination by our primary federal regulator, the Office of the Comptroller of the Currency (“OCC”).

 

Recent Losses from Operations / Restructuring of Management and Business Operations

 

We have experienced operating losses in recent years. As a result, we have a deferred tax asset of $3.2 million (before deferred tax liabilities and valuation allowance) which includes a deferred tax asset of $1.7 million for net operating losses.

 

In order to address the Bank’s losses, the Board has made significant changes to our management and operating processes. In April 2012, we hired Ronnie R. Shambaugh to our executive staff, and in May 2013, Mr. Shambaugh was promoted to President and Chief Executive Officer and appointed to the Board of Directors. Mr. Shambaugh has 44 years of experience in community banking, including past experience as a President and Chief Executive Officer. In 2013, we hired Cynthia T. Knebel, with over 44 years of experience in community bank management, operations, accounting and compliance, as our Chief Financial Officer; and in 2014 we hired David W. Gansner, a commercial and residential lender with over 33 years of community banking experience, as our Executive Vice President—Chief Loan Officer. Overall, the community banking experience of our new executive management team averages over 41 years. In addition, in February 2016 we hired a new loan officer with lending and underwriting experience. Since 2012 we have added two new loan officers, and only one of the Bank’s four loan officers as of 2012 is still working for the Bank.

 

Our new management’s initial task was to reduce the Bank’s non-performing assets and improve the Bank’s credit administration policies and procedures. The Bank has implemented new procedures for obtaining and analyzing credit and collateral information to better monitor credit risk. Beginning in 2013, our new management team has also aggressively worked through the Bank’s nonperforming loans, placing loans into foreclosed real estate where appropriate and managing the sale of such properties. Many of the Bank’s nonperforming loans were due to prior management’s origination of high-risk loans, such as loans for the rehabilitation of residential properties. The Bank no longer makes these loans. In addition, the Bank has adopted and implemented new procedures for dealing with delinquent loans, including contacting delinquent borrowers earlier and actively monitoring each delinquent loan.

 

The purposes of the upgrades to our policies and procedures were to reduce nonperforming assets and the likelihood of future credit problems, and to provide a platform for managed growth. Our efforts to reduce nonperforming assets has been largely successful, as nonperforming assets have decreased from $2.2 million, or 2.29% of total assets at December 31, 2012, to $1.2 million, or 1.17% of total assets at December 31, 2015.

 

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Although our asset quality has improved, we have continued to experience losses. For the year ended December 31, 2015 and 2014, we had net losses of $702,000 and $1.3 million, respectively. Our losses in 2014 and 2015 were largely due to declines in our net interest income. Our net interest income has been negatively impacted by a decline in our asset base as we have dealt with problem assets. During 2014, we also recognized a $1.2 million provision for income taxes due to an increase in the valuation allowance on our deferred tax asset.

 

To increase net interest income, management has focused on lowering the Bank’s borrowing expenses, which are elevated due to higher costing FHLB – Chicago advances entered into in the past. At December 2015, we had $9.0 million of FHLB – Chicago advances with an average cost of 4.47%. We intend, subject to market conditions, to replace our higher-cost FHLB – Chicago advances as they mature with lower-cost FHLB – Chicago advances and core deposits. In January 2016, we repaid a matured $3.0 million FHLB – Chicago advance that had a cost of 3.90%. During 2016, we will also repay a maturing $5.0 million FHLB – Chicago advance with an interest rate of 4.62% with $5.0 million of FHLB-Chicago advances costing approximately 1.99%.

 

Going forward, our business strategy includes becoming a profitable, well-managed community bank. We aim to achieve profitability through increasing our earnings base, including continuing to increase our commercial real estate and multi-family real estate lending and, to a lesser extent, continuing to diversify our loan portfolio by increasing our commercial business lending and consumer lending. We also expect to increase our non-interest income through our entrance into the secondary market with the origination and sale of one- to four-family residential loans with terms of 20 years or more. In addition, in 2015 we began offering brokerage services to our customers through a networking arrangement with a registered broker-dealer. We expect brokerage services to increase our noninterest income in the future. Most importantly, we will continue to adhere to our conservative underwriting standards of recent years which we believe have resulted in our improved credit quality. See “—Business Strategy.”

 

Finally, in order to set the stage for improved results of operations, we intend to terminate our employer defined benefit pension plan subsequent to the completion of the conversion. However, the timing of the termination of the plan will depend on our post-conversion capital levels and needs, our evaluation of future interest rates and annuity cost trends, and the estimated cost to terminate the plan, as it may change from time to time. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity, a $1.9 million decrease in regulatory capital and an annual pre-tax cost savings of $117,000 ($77,000 after tax cost savings), which has been reflected in the pro forma data in this prospectus.

 

Based on the above, we do not anticipate net income until we experience significant growth in our earnings base pursuant to our business strategy. Assuming the successful execution of our business plan, we do not expect that we will return to profitability until fiscal 2017. We may be unsuccessful, however, in executing on our business plan and may not return to profitability in the timeframe we expect, or at all.

 

Best Hometown Bancorp, Inc.

 

The shares being offered will be issued by Best Hometown Bancorp, a newly formed Maryland corporation that will own all of the outstanding shares of common stock of Home Federal upon completion of Home Federal’s mutual-to-stock conversion. Best Hometown Bancorp was incorporated on March 7, 2016 and has not engaged in any business to date. Upon completion of the conversion, Best Hometown Bancorp will register as a savings and loan holding company and will be subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

 

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Best Hometown Bancorp’s executive office is located at 100 East Clay Street, Collinsville, Illinois 62234, and its telephone number at this address is (618) 345-1121.

 

The Conversion and Our Organizational Structure

 

Pursuant to the terms of the plan of conversion, Home Federal will convert from a mutual (meaning no stockholders) savings and loan association to a stock savings bank. As part of the conversion, Best Hometown Bancorp, the newly formed proposed holding company for Home Federal, will offer for sale shares of its common stock in a subscription offering, and, if necessary, a community offering and a syndicated community offering. Upon the completion of the conversion and stock offering, Best Hometown Bancorp will be 100% owned by stockholders and Home Federal will be a wholly owned subsidiary of Best Hometown Bancorp. See “The Conversion and Offering” for a full description of the conversion.

 

Business Strategy

 

Our principal objective is to build long-term value for our stockholders by operating a profitable community-oriented financial institution dedicated to meeting the banking needs of our customers. We will seek to achieve this by emphasizing personalized and efficient customer service. Highlights of our current business strategy, subject to market conditions, include:

 

·Prudently and opportunistically growing our assets and liabilities by increasing our presence in the southwest Illinois communities we currently serve.

 

·Increasing our emphasis on short-term commercial and multi-family real estate loans and, to a lesser extent, increasing our commercial business loans and consumer loans.

 

·Replacing our higher-cost certificates of deposit and FHLB – Chicago advances as they mature with lower-cost FHLB – Chicago advances and core deposits. This will include leveraging our relationships with commercial borrowers to increase lower cost commercial deposits.

 

·Increasing our non-interest income through the origination and sale of conforming one to-four-family residential real estate loans with terms of 20 years or more, and through our newly offered brokerage services.

 

·In addition to selling our one- to four-family loans with terms of 20 years or more, we also intend to introduce adjustable-rate loans to help mitigate our interest rate risk.

 

·Expanding our menu of deposit products and continuing to improve customer service to meet the demands of current customers and attract new, younger customers in our market area.

 

·

Implementing improvements to modernize our offices, including replacing traditional teller lines with customer friendly teller pods. We intend to utilize new technologies to enhance the customer experience, and to rebrand our institution and promote our new identity while emphasizing the new products and services we offer.

 

·Implementing a managed growth strategy to improve our profitability, without compromising our asset quality.

 

These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes

 

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necessitated by future market conditions and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy” for a further discussion of our business strategy.

 

Reasons for the Conversion and Offering

 

Consistent with our business strategy, our primary reasons for converting and raising additional capital through the offering are:

 

·to increase capital to support future growth and profitability;

 

·to have greater flexibility to structure and finance the opportunistic expansion of our operations;

 

·to retain and attract qualified personnel by establishing stock-based benefit plans for management and employees; and

 

·to offer our customers and employees an opportunity to purchase our stock.

 

See “The Conversion and Offering” for a more complete discussion of our reasons for conducting the conversion and offering.

 

As of December 31, 2015, Home Federal was considered “well capitalized” for regulatory purposes. As a result of the conversion, the proceeds from the stock offering will further improve our capital position during a period of significant economic, regulatory and political uncertainty.

 

Terms of the Offering

 

We are offering between 552,500 shares and 747,500 shares of common stock to eligible depositors and borrowers of Home Federal and to our tax-qualified employee benefit plans in a subscription offering. To the extent shares remain available, we may offer shares for sale in a community offering, with a preference given to natural persons and trusts of natural persons residing in Madison and St. Clair Counties, Illinois. We may also offer for sale shares of common stock not purchased in the subscription offering or the community offering to the general public in a syndicated community offering. The number of shares of common stock to be sold may be increased to up to 859,625 shares as a result of demand for the shares of common stock in the offering or changes in market conditions. Unless the number of shares of common stock offered is increased to more than 859,625 shares or decreased to fewer than 552,500 shares, or the offering is extended beyond [Extension #1], subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the offering is extended past [Extension #1], we will resolicit subscribers. You will have the opportunity to confirm, change or cancel your order within a specified period of time. If you do not respond during that period of time, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at [Interest Rate]% per annum. If the number of shares to be sold is increased to more than 859,625 shares or decreased to less than 552,500 shares, all subscribers’ stock orders will be cancelled, their deposit account withdrawal authorizations will be cancelled and funds delivered for the purchase of shares of common stock in the offering will be returned promptly with interest at [Interest Rate]% per annum. We may then give these subscribers an opportunity to place new orders for a specified period of time.

 

The purchase price of each share of common stock to be offered for sale in the offering is $10.00. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the offering. Raymond James, our marketing agent in the offering,

 

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will use its best efforts to assist us in selling shares of our common stock but is not obligated to purchase any shares of common stock in the offering.

 

How We Determined the Offering Range and the $10.00 Per Share Stock Price

 

The amount of common stock we are offering for sale is based on an independent appraisal of the estimated market value of Best Hometown Bancorp, assuming the conversion and offering are completed. Keller & Company, Inc., our independent appraiser, has estimated that, as of February 12, 2016, this market value was $6,500,000. Based on regulations of the OCC, this market value forms the midpoint of a valuation range with a minimum of $5,525,000 and a maximum of $7,475,000. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale by us will range from 552,500 shares to 747,500 shares. We may sell up to 859,625 shares of common stock because of demand for the shares or changes in market conditions without resoliciting subscribers. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.

 

The appraisal is based in part on Home Federal’s financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering, the pro forma effect of the costs associated with the termination of our employer defined benefit pension plan, and an analysis of a peer group of ten publicly traded thrift holding companies with assets between $306 million and $774 million as of September 30, 2015, that Keller & Company, Inc. considers comparable to Best Hometown Bancorp. The appraisal peer group consists of the following companies.

 

Company Name  Ticker Symbol  Exchange  Headquarters  Total Assets at
September 30, 2015
 
            (In thousands) 
Bay Bancorp, Inc.  BYBK  NASDAQ  Columbia, MD  $474,135 
Central Federal Corporation  CFBK  NASDAQ  Fairlawn, OH   329,451 
Elmira Savings Bank  ESBK  NASDAQ  Elmira, NY   566,361 
First Federal of Northern Michigan Bancorp, Inc.  FFNM   NASDAQ  Alpena, MI   338,552 
HMN Financial, Inc.  HMNF  NASDAQ  Rochester, MN   617,529 
Jacksonville Bancorp, Inc.  JXSB  NASDAQ  Jacksonville, IL   306,186 
Poage Bankshares, Inc.  PBSK  NASDAQ  Ashland, KY   425,432 
Severn Bancorp, Inc.  SVBI  NASDAQ  Annapolis, MD   773,875 
Wayne Savings Bancshares, Inc.  WAYN  NASDAQ  Wooster, OH   424,471 
Wolverine Bancorp, Inc.  WBKC  NASDAQ  Midland, MI   343,550 

 

The following table presents a summary of selected pricing ratios for the peer group companies and for Best Hometown Bancorp (on a pro forma basis) utilized by Keller & Company, Inc. in its appraisal. These ratios are based on Best Hometown Bancorp’s book value, tangible book value and net income as of and for the twelve months ended December 31, 2015, as adjusted for the impact of the cost to terminate the defined benefit pension plan. The peer group ratios are based on the latest date for which complete financial data are publicly available and stock prices as of February 12, 2016. Compared to the average pricing ratios of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 28.3% on a price-to-book value basis and a discount of 33.3% on a price-to-tangible book value basis.

 

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Price-to-earnings

multiple

   Price-to-book
value ratio
   Price-to-tangible
book value ratio
 
Best Hometown Bancorp (on a pro forma basis, assuming completion of the conversion):               
Adjusted Maximum    N/M    65.82%   65.82%
Maximum    N/M    61.92%   61.92%
Midpoint    N/M    57.96%   57.96%
Minimum    N/M    53.35%   53.35%
                
Valuation of peer group companies, all of which are fully converted (on an historical basis):               
Averages    13.72x   80.86%   86.93%
Medians    13.92x   84.25%   86.01%

 

 
N/MNot meaningful.

(1)Pricing ratios for Best Hometown Bancorp, Inc. in the section of the Prospectus entitled “Pro Forma Data” are at and for the twelve months ended December 31, 2015, and therefore, these ratios are different than the ratios that appear in the above table.

 

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were utilized by Keller & Company, Inc. to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

 

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering—Determination of Share Price and Number of Shares to be Issued.”

 

How We Intend to Use the Proceeds From the Stock Offering

 

We intend to invest in Home Federal net proceeds equal to $4.55 million; provided, that Best Hometown Bancorp shall retain sufficient funds so that immediately following the completion of the conversion and the loan from Best Hometown Bancorp to the ESOP to purchase 8% of the shares sold in the offering, Best Hometown Bancorp shall have at least $125,000. We anticipate that Best Hometown Bancorp will invest in Home Federal $3.73 million at the minimum of the offering range and $4.55 million at the midpoint, maximum and adjusted maximum of the offering range. Of the remaining funds, we intend that Best Hometown Bancorp will loan funds to our employee stock ownership plan to fund the plan’s purchase of shares of common stock in the stock offering and retain the remainder of the net proceeds from the offering. Assuming we sell 650,000 shares of common stock in the stock offering and have net proceeds of $5,270,400, we anticipate that Best Hometown Bancorp will invest $4.55 million in Home Federal, loan $520,000 to our employee stock ownership plan to fund its purchase of shares of common stock and retain the remaining $200,400 of the net proceeds. Best Hometown Bancorp may use the funds that it retains for investments, to pay cash dividends, to repurchase shares of common stock (subject to compliance with regulatory requirements) or for other general corporate purposes.

 

Home Federal intends to use a portion of the proceeds that it receives to pay costs associated with its planned termination of its employer defined benefit pension plan. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity, a $1.9 million decrease in regulatory capital and an annual pre-tax cost savings of $117,000 ($77,000 after tax cost savings). However, the timing of the termination of the plan will depend on our post conversion capital levels and needs, our evaluation of future interest rates and annuity cost trends, and the estimated cost to terminate the plan, as it may change from time to time. Home Federal

 

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may use the remaining net proceeds it receives from us to fund new loans, primarily commercial and multi-family real estate loans and, to a lesser extent, commercial business loans and consumer loans, enhance existing products and services, invest in securities or for other general corporate purposes. For more information on the proposed use of the proceeds from the offering, see “How We Intend to Use the Proceeds from the Offering.”

 

Persons Who May Order Shares of Common Stock in the Offering

 

We are offering the shares of common stock in a subscription offering in the following descending order of priority:

 

·First, to depositors with accounts at Home Federal with aggregate balances of at least $50 at the close of business on December 31, 2014.

 

·Second, to our tax-qualified employee benefit plans (including Home Federal’s employee stock ownership plan), which will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering. We expect our employee stock ownership plan to purchase up to 8% of the shares of common stock sold in the offering.

 

·Third, to depositors with accounts at Home Federal with aggregate balances of at least $50 at the close of business on March 31, 2016.

 

·Fourth, to depositors and borrowers of Home Federal at the close of business on [Voting Record Date].

 

Shares of common stock not purchased in the subscription offering may be offered for sale in a community offering, with a preference given to natural persons and trusts of natural persons residing in Madison and St. Clair Counties, Illinois. The community offering may begin concurrently with, during or after the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering or the community offering to the general public through a syndicated community offering, which will be managed by Raymond James. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering. Any determination to accept or reject stock orders in the community offering or the syndicated community offering will be based on the facts and circumstances available to management at the time of the determination.

 

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated first to categories in the subscription offering. A detailed description of the subscription offering, the community offering and the syndicated community offering, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Offering.”

 

Limits on How Much Common Stock You May Purchase

 

The minimum number of shares of common stock that may be purchased is 25.

 

Generally, no individual (or group of individuals exercising subscription rights through a single deposit or loan account held jointly) may purchase more than 10,000 shares ($100,000) of common stock. If any of the following persons or entities purchase shares of common stock, their purchases, in all categories of the offering combined, when combined with your purchases, cannot exceed 12,500 shares ($125,000) of common stock:

 

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·your spouse or relatives of you or your spouse who reside with you;

 

·most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior position; or

 

·other persons who may be your associates or persons acting in concert with you.

 

Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to the overall purchase limitation of 12,500 shares ($125,000).

 

Subject to OCC approval, we may increase or decrease the purchase limitations at any time. See the detailed description of the purchase limitations in the section of this prospectus headed “The Conversion and Offering—Limitations on Common Stock Purchases.”

 

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

 

In the subscription offering and community offering, you may pay for your shares only by:

 

·personal check, bank check or money order made payable directly to Best Hometown Bancorp, Inc.; or

 

·authorizing us to withdraw available funds from the types of Home Federal deposit accounts identified on the stock order form.

 

Please do not submit cash or wire transfers. Home Federal is not permitted to lend funds to anyone to purchase shares of common stock in the offering. Additionally, you may not use a Home Federal line of credit check or any type of third-party check to pay for shares of common stock. On the stock order form, you may not designate withdrawal from Home Federal accounts with check-writing privileges; instead, please submit a check. If you request that we directly withdraw the funds from an account with check-writing privileges, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. Funds received in the subscription and community offerings and, if applicable, the syndicated community offering, will be held in a segregated account at Home Federal and will earn interest at [Interest Rate]% per annum until completion or termination of the offering. You may not authorize direct withdrawal from a Home Federal retirement account. See “—Using Retirement Account Funds to Purchase Shares of Common Stock in the Subscription and Community Offerings.”

 

You may subscribe for shares of common stock in the offering by delivering a signed and completed stock order form, together with full payment payable to Best Hometown Bancorp, Inc. or authorization to withdraw funds from one or more of your Home Federal deposit accounts, provided that the stock order form is received before [Expiration Time] p.m., Central Time, on [Expiration Date]. You may submit your stock order form and payment by mail using the stock order reply envelope provided, by overnight delivery to our Stock Information Center at the address noted on the stock order form or by hand-delivery to Home Federal’s main office, located at 100 East Clay Street, Collinsville, Illinois. Please do not mail stock order forms to Home Federal. Once submitted, your order will be irrevocable unless the offering is terminated or is extended beyond [Extension #1], or the number of shares of common stock to be sold is increased to more than 859,625 shares or decreased to less than 552,500 shares.

 

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For a complete description of how to purchase shares in the stock offering, see “The Conversion and Offering—Procedure for Purchasing Shares.”

 

Using Retirement Account Funds to Purchase Shares of Common Stock in the Subscription and Community Offerings

 

You may be able to subscribe for shares of common stock using funds in your individual retirement account (“IRA”), or other retirement account. If you wish to use some or all of the funds in your IRA or other retirement account held at Home Federal, the applicable funds must be transferred to a self-directed account maintained by an independent custodian or trustee, such as a brokerage firm, before you place your stock order. If you do not have such an account, you will need to establish one. An annual administrative fee may be payable to the independent custodian or trustee. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [Expiration Date] offering deadline, for assistance with purchases using funds in your IRA or other retirement account held at Home Federal or elsewhere. Whether you may use such funds to purchase shares in the stock offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

 

For a complete description of how to use IRA funds to purchase shares in the stock offering, see “The Conversion and Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Using Retirement Account Funds.”

 

You May Not Sell or Transfer Your Subscription Rights

 

Federal regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action against anyone who we believe has sold or transferred his or her subscription rights. In addition, we intend to advise the appropriate federal agencies of any person who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. On the stock order form, you may not add the names of others for joint stock registration who do not have subscription rights or who qualify only in a lower subscription offering priority than you do. You may add only those who were eligible to purchase shares of common stock in the subscription offering at your date of eligibility. In addition, the stock order form requires that you list all qualifying accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation if there is an oversubscription.

 

Purchases by Executive Officers and Directors

 

We expect our directors and executive officers, together with their associates, to subscribe for 64,000 shares ($640,000) of common stock in the offering, representing 11.6% of shares to be sold at the minimum of the offering range. However, there can be no assurance that any individual director or executive officer, or the directors and executive officers as a group, will purchase any specific number of shares of our common stock. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Our directors and executive officers will be subject to the same minimum purchase requirements and purchase limitations as other participants in the offering set forth under “—Limits on How Much Common Stock You May Purchase.”

 

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Purchases by our directors, executive officers and their associates will be included in determining whether the required minimum number of shares has been subscribed for in the offering. Any purchases made by our directors or executive officers, or their associates, for the explicit purpose of meeting the minimum number of shares of common stock required to be sold to complete the offering will be made for investment purposes only and not with a view toward redistribution.

 

For more information on the proposed purchases of shares of common stock by our directors and executive officers, see “Subscriptions by Directors and Executive Officers.”

 

Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

 

The deadline for submitting orders for shares of common stock in the subscription and community offerings is [Expiration Time] p.m., Central Time, on [Expiration Date], unless we extend the subscription offering and/or the community offering. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by the deadline.

 

Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at [Expiration Time] p.m., Central Time, on [Expiration Date], whether or not we have been able to locate each person entitled to subscription rights.

 

For a complete description of the deadline for purchasing shares in the stock offering, see “The Conversion and Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Expiration Date.”

 

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

 

If we do not receive orders for at least 552,500 shares of common stock, we may take additional steps in order to issue the minimum number of shares of common stock in the offering range. Specifically, we may:

 

·increase the purchase limitations; and/or

 

·seek regulatory approval to extend the offering beyond [Extension #1].

 

If we extend the offering past [Extension #1], we will resolicit subscribers. You will then have the opportunity to confirm, change or cancel your order within a specified period of time. If you do not respond during that period of time, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at [Interest Rate]% per annum from the date the stock order was processed. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount and who indicated a desire to be resolicited on the stock order form will be and, in our sole discretion, some other large subscribers may be, given the opportunity to increase their subscriptions up to the newly applicable limit.

 

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Conditions to Completion of the Conversion

 

The board of directors of Home Federal has approved the plan of conversion. In addition, the OCC has conditionally approved the plan of conversion and the Federal Reserve Board has conditionally approved our holding company application. We cannot complete the conversion unless:

 

·The plan of conversion is approved by a majority of votes eligible to be cast by members of Home Federal (depositors and borrowers of Home Federal) as of [Voting Record Date];

 

·We have received orders for at least the minimum number of shares of common stock offered; and

 

·We receive the final approval required from the OCC to complete the conversion and offering and the final approval from the Federal Reserve Board on the holding company application.

 

Any approval by the OCC or the Federal Reserve Board does not constitute a recommendation or endorsement of the plan of conversion.

 

Our Dividend Policy

 

Our board of directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements; however, we do not expect to pay a dividend until our results of operations improve. The payment and amount of dividends, if any, in the future would depend upon a number of factors, including: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; statutory and regulatory limitations; and general economic conditions. See “Our Dividend Policy.”

 

Market for Common Stock

 

We anticipate that the common stock sold in the offering will be quoted on the OTC Pink Marketplace (“OTCPK”) operated by OTC Markets Group following the completion of the stock offering. Raymond James currently intends to make a market in the shares of our common stock, but is under no obligation to do so. See “Market for the Common Stock.”

 

Delivery of Shares of Stock

 

All shares of common stock of Best Hometown Bancorp sold in the subscription offering and community offering will be issued in book entry form and held electronically on the books of our transfer agent. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock sold in the offering will be mailed by our transfer agent to the persons entitled thereto at the address noted by them on their stock order form as soon as practicable following consummation of the conversion. Shares of common stock sold in the syndicated community offering, if any, may be delivered electronically through the services of The Depository Trust Company. We expect trading in the stock to begin on the business day of or on the business day immediately following the completion of the conversion and stock offering. It is possible that until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers will not be able to sell the shares of common stock that they ordered, even though the common stock will have begun trading. Your ability to sell the shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

 

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Possible Change in the Offering Range

Keller & Company, Inc. will update its appraisal before we complete the offering. If, as a result of demand for the shares or changes in market conditions, Keller & Company, Inc. determines that our pro forma market value has increased, we may sell up to 859,625 shares in the offering without further notice to you. If our pro forma market value at that time is either below $5,525,000 or above $8,596,250 then, after consulting with the OCC, we may:

 

·terminate the stock offering, cancel deposit account withdrawal authorizations and promptly return all funds received in the offering with interest at [Interest Rate]% per annum;

 

·set a new offering range; or

 

·take such other actions as may be permitted by the OCC, the Federal Reserve Board, the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission.

 

If we set a new offering range, we will promptly return funds, with interest at [Interest Rate]% per annum for funds received in the offering, cancel deposit account withdrawal authorizations and commence a resolicitation. In connection with the resolicitation, we will notify subscribers of their right to place a new stock order for a specified period of time.

 

Possible Termination of the Offering

We may terminate the offering at any time prior to the special meeting of members of Home Federal that is being called to vote on the conversion, and at any time after member approval with the concurrence of the OCC. In addition, we must sell a minimum of 552,500 shares to complete the offering. If we terminate the offering, we will promptly return funds, as described above.

 

Benefits to Management and Potential Dilution to Stockholders

 

We expect our employee stock ownership plan, which is a tax-qualified retirement plan for the benefit of all of our employees being established in connection with the conversion and stock offering, to purchase up to 8% of the shares of common stock that we sell in the offering. The purchase of stock by the employee stock ownership plan will be funded by a loan from Best Hometown Bancorp. If we receive orders for more shares of common stock than the maximum of the offering range, the employee stock ownership plan will have first priority to purchase shares over this maximum, up to a total of 8% of the shares of common stock that we sell in the offering. This would reduce the number of shares available for allocation to eligible depositors. For further information, see “Management—Benefit Plans and Agreements—Employee Stock Ownership Plan.”

 

Purchases by the employee stock ownership plan in the offering will be included in determining whether the required minimum number of shares have been sold in the offering. Subject to market conditions and receipt of regulatory approval, the employee stock ownership plan may instead elect to purchase shares of common stock in the open market following the completion of the offering in order to fill all or a portion of the employee stock ownership plan’s intended subscription.

 

We also intend to implement one or more stock-based benefit plans after completion of the conversion. Stockholder approval of these plans will be required, and the stock-based benefit plans cannot be implemented until at least six months after the completion of the conversion pursuant to applicable OCC regulations. If the stock-based benefit plans are adopted within 12 months following the

 

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completion of the conversion, the OCC conversion regulations would allow for the stock-based benefit plans to reserve a number of shares of common stock equal to not more than 4% of the shares sold in the offering, or up to 34,385 shares of common stock at the adjusted maximum of the offering range, for restricted stock awards to key employees and directors, at no cost to the recipients. If adopted within 12 months following the completion of the conversion, the stock-based benefit plans will also reserve a number of shares equal to not more than 10% of the shares of common stock sold in the offering, or up to 85,963 shares of common stock at the adjusted maximum of the offering range, for the exercise of stock options granted to key employees and directors. If the stock-based benefit plans are adopted after 12 months from the date of the completion of the conversion, the 4% and 10% limitations described above will no longer apply, and we may adopt stock-based benefit plans encompassing more than 120,348 shares of our common stock assuming the adjusted maximum of the offering range. We have not yet determined whether we will present these plans for stockholder approval within or after 12 months following the completion of the conversion.

 

If 4% of the shares of common stock sold in the conversion are awarded under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of 3.85% in their ownership interest of Best Hometown Bancorp. If 10% of the shares of common stock sold in the conversion are issued upon the exercise of options granted under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of 9.09% in their ownership interest in Best Hometown Bancorp. In the event newly issued shares are used to fund both stock options and awards of shares of common stock under these plans in an amount totaling 14% of the shares sold in the stock offering, stockholders would experience a dilution in their ownership interest in Best Hometown Bancorp of 12.28%.

 

The following table summarizes the number of shares of common stock and aggregate dollar value of grants that would be available under one or more stock-based benefit plans if such plans are adopted within one year following the completion of the conversion and the offering. The table shows the dilution to stockholders if all these shares are issued from authorized but unissued shares, instead of shares purchased in the open market. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all employees. A portion of the stock grants shown in the table below may be made to non-management employees.

   

   Number of Shares to be Granted or Purchased (1)   Dilution
Resulting
   Value of Grants (2) 
   At
Minimum
of Offering
Range
   At
Maximum
of Offering
Range
   As a
Percentage
of Common
Stock to be
Issued
   From
Issuance of
Shares for
Stock Benefit
Plans
  

At
Minimum
of

Offering
Range

  

At
Maximum
of

Offering
Range

 
                         
Employee stock ownership plan    44,200    59,800    8.00%   n/a(3)  $442,000   $598,000 
Stock awards    22,100    29,900    4.00    3.85%   221,000    299,000 
Stock options    55,250    74,750    10.00    9.09%   169,065    228,735 
Total    121,550    164,450    22.00%   12.28%  $832,065   $1,125,735 

 

 
(1)The stock-based benefit plans may award a greater number of options and shares, respectively, if the plans are adopted more than 12 months after the completion of the conversion.
(2)The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $3.06 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0.0%; an expected option life of 10 years; a risk-free interest rate of 1.85%; and a volatility rate of 18.56%. The actual expense of stock options granted under a stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted, which may or may not be the Black-Scholes model.
(3)No dilution is reflected for the employee stock ownership plan because these shares are assumed to be purchased in the offering.

 

Following the conversion and subject to the receipt of necessary regulatory approvals, Home Federal intends to enter into employment agreements with its President and Chief Executive Officer,

 

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Ronnie R. Shambaugh, its Executive Vice President—Chief Loan Officer, David W. Gansner, and one other executive officer. Best Hometown Bancorp will act as guarantor under the agreements. In the event of termination of employment other than for cause, or in the event of certain types of termination following a change in control, as set forth in the employment agreements, and assuming the agreements were in effect, the agreements will provide for cash severance benefits that would cost us up to $878,500 in the aggregate based on information as of December 31, 2015. For additional information see “—Benefit Plans and Agreements—Proposed Employment Agreements.”

 

Tax Consequences

 

Home Federal and Best Hometown Bancorp have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences of the conversion, including an opinion that it is more likely than not that the fair market value of the nontransferable subscription rights to purchase the common stock will be zero and, accordingly, no gain or loss will be recognized by members upon the distribution to them of the nontransferable subscription rights to purchase the common stock and no taxable income will be realized by members as a result of the exercise of the nontransferable subscription rights. Home Federal and Best Hometown Bancorp have also received an opinion of BKD, LLP regarding the material Illinois state tax consequences of the conversion. As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Home Federal, Best Hometown Bancorp or persons eligible to subscribe in the subscription offering. See the section of this prospectus entitled “Taxation” for additional information regarding taxes.

 

Emerging Growth Company Status

 

The Jumpstart Our Business Startups Act (the “JOBS Act”), which was signed into law on April 5, 2012, made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” We qualify as an “emerging growth company” and believe that we will continue to qualify as an “emerging growth company” for five years from the completion of the stock offering.

 

As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

 

Additionally, we are in the process of evaluating the benefits of relying on the reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), (iii) hold non-binding stockholder votes regarding annual executive compensation or executive compensation payable in connection with a merger or similar corporate transaction, (iv) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (v) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

 

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We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

 

How You Can Obtain Additional Information—Stock Information Center

 

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have questions regarding the conversion or offering, please call our Stock Information Center. The toll-free telephone number is [SIC Number]. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Central Time. The Stock Information Center will be closed on weekends and bank holidays.

 

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RISK FACTORS

 

You should consider carefully the following risk factors in evaluating an investment in the shares of common stock.

 

Risks Related to Our Business

 

We incurred net losses in nine of the last ten fiscal years, and we may not achieve profitability from our business strategies in the timeframe we expect, or at all.

 

During the years ended December 31, 2015 and 2014, we had net losses of $702,000 and $1.3 million, respectively. In addition, we have had losses each year since 2006, except for 2013. As a result, we have a deferred tax asset of $3.2 million (before deferred tax liabilities and valuation allowance) which includes a deferred tax asset of $1.7 million for net operating losses.

 

The primary reasons for our net losses from 2007 through 2012 were increases in our provision for loan losses and loans charged off. While our provision for loan losses decreased significantly in fiscal 2013, our net interest income before provision for loan losses has continued to decrease as we have focused on reducing our nonperforming loans and our interest earning assets have declined. At December 31, 2015, we had $98.7 million of total assets and $74.3 million of loans, compared to $136.2 million of total assets and $89.0 million of loans, net at December 31, 2008. Our results of operations will continue to be negatively impacted until we are able to increase our net interest income and/or noninterest income relative to our noninterest expenses. Although we have focused on reducing the growth of our noninterest expenses, we do not believe that we can materially reduce such expenses in the current environment without impairing our competitiveness and our ability to maintain regulatory compliance. To improve our results of operations we have adopted a plan to grow our earnings base, especially our higher yielding loans, while reducing our noninterest expenses to the extent feasible. Although the capital raised in the conversion will support this effort, the conversion will have a short-term adverse impact on our operating results due to additional expenses incurred in connection with the conversion. These additional expenses include costs related to operating as a public company, increased compensation expenses associated with our employee stock ownership plan and the possible implementation of one or more stock-based benefit plans after the completion of the conversion. In addition, we expect to incur a one-time expense upon the termination of our employer defined benefit pension plan.

 

Based on the above, we do not anticipate net income until we experience significant growth in our earnings base pursuant to our business plan. Assuming the successful execution of our business plan, we do not expect that we will return to profitability until fiscal 2017. We may be unsuccessful, however, in executing on our business plan and may not return to profitability in the timeframe we expect, or at all. While we believe we have the management resources and internal systems in place to successfully implement our strategy, it will take time to fully implement our strategy. A number of factors may inhibit us from executing on our business plan or impair our ability to achieve profitability as expected, or at all, including adverse economic conditions, the level of competition from other financial institutions, adverse changes in the interest rate environment and the securities markets and other risks and uncertainties outlined in this “Risk Factors” section.

 

During the period we are implementing our plan, we expect our results of operations to be negatively impacted. In addition, even if our strategy is successfully implemented, it may not produce positive results.

 

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We participate in an employer defined benefit pension plan for the benefit of certain of our employees. We expect to incur a substantial expense in connection with the termination of the plan, which will reduce the proceeds of the offering available for other purposes.

 

We participate in an employer defined benefit pension plan for the benefit of employees of Home Federal who were employees prior to October 14, 2010, the date on which we froze the future accrual of benefits under this plan. During the year ended December 31, 2015, we incurred $92,000 in costs related to this plan. We intend to terminate the plan at some time following the completion of the conversion, although the time of the termination is uncertain. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity, and a $1.9 million decrease in regulatory capital. We intend to use a portion of the proceeds of the offering to fund the costs associated with the termination of the plan, which will reduce the amount of proceeds available to support our managed growth strategy and other business purposes. Because the cost to terminate the plan is primarily dependent on the value of the plan’s assets and applicable interest rates at the time of our termination of the plan, we will not know the actual costs associated with the termination of the plan until the date of the termination, and the actual cost could be significantly higher than the estimated cost.

 

In addition, management of Home Federal has discretion in how the assets of the employer defined benefit pension plan are invested. The cost of terminating the plan will depend in part on the return received on the investment of the plan’s assets. Home Federal’s investment strategy for the plan’s assets is to maintain a diversified investment portfolio. As a result of the amount of equities held, actual return of plan assets for any one year may fluctuate significantly due to changes in the stock market. If the return on the investment of the plans assets is lower than expected, the cost of terminating the plan could be materially more than estimated.

 

Our commercial and multi-family real estate loans and commercial business loans generally carry greater credit risk than loans secured by owner occupied one- to four-family real estate, and these risks will increase if we succeed in our plan to increase these types of loans.

 

At December 31, 2015, $15.6 million, or 20.4%, of our loan portfolio consisted of commercial and multi-family real estate loans and commercial business loans. These types of loans generally expose a lender to greater credit risk than loans secured by owner occupied one- to four-family real estate because they often have larger balances and are often dependent on income being generated in amounts sufficient to cover operating expenses and debt service. Also, some of our borrowers have more than one of these types of loans outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential real estate loan.

 

If loans that are collateralized by commercial and multi-family real estate or other business assets become troubled and the value of the collateral has been significantly impaired, we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses which would in turn adversely affect our operating results and financial condition.

 

Furthermore, a key component of our strategy is to continue to increase our origination of commercial and multi-family real estate loans, and to continue to diversify our loan portfolio by increasing commercial business loans, in order to increase the yields on our loans. The proposed increase in these types of loans significantly increases our exposure to the risks inherent in these types of loans.

 

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Our loan portfolio contains a significant portion of commercial and multi-family real estate loans that are unseasoned. It is difficult to judge the future performance of unseasoned loans.

 

Our portfolio of commercial and multi-family real estate loans has grown $11.2 million, or over 300%, to $14.9 million at December 31, 2015, from $3.7 million at December 31, 2013. It is difficult to assess the future performance of these loans recently added to our portfolio because our relatively limited experience with such loans does not provide us with a significant payment history from which to judge future collectability. In addition, most of our commercial real estate loans are secured by non-owner occupied properties. These loans are considered to involve more credit risk than owner-occupied commercial real estate loans. Our unseasoned commercial and multi-family real estate loans may experience higher delinquency or charge-off levels than our historical loan portfolio experience, which could adversely affect our future performance.

 

Approximately 6.3% of our loans are secured by non owner occupied one- to four-family properties, which increases our credit risk.

 

At December 31, 2015, approximately $4.8 million, or 6.3%, of our loans were secured by non owner occupied one- to four-family properties (“investor loans”). These loans generally have more credit risk than owner-occupied one- to four-family residential loans. This is because repayment of investor loans often depends primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner-occupied properties can be below that of owner-occupied properties due to lax property maintenance standards, which can have a negative impact on the value of the collateral properties. Moreover, the borrowers to whom we make these loans may have more than one loan secured by investment properties, which results in a greater degree of risk, including concentration risk, than the extension of the same amount of credit to several unrelated borrowers. As a result, our investor loans expose us to a greater risk of nonpayment and loss then loans secured by owner-occupied properties.

 

Our small size makes it more difficult for us to compete.

 

Our small asset size makes it more difficult to compete with other financial institutions which are generally larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base makes it difficult to generate meaningful non-interest income. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

 

We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

 

We are dependent upon the services of the members of our senior management team who direct our strategy and operations, and who have all been hired since 2012. Our management team is comprised of experienced executives, with our top three executives possessing an average of over 41 years of community bank experience. Members of our senior management team, or lending personnel who possess expertise in our markets and key business relationships, could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy

 

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and could have a material adverse effect on our results of operations and our ability to compete in our markets. See “Management of Best Hometown Bancorp.”

 

We have a high concentration of loans secured by real estate in our market area which makes our business highly susceptible to downturns in the local economy and could adversely affect our financial condition and results of operations.

 

Unlike larger financial institutions that are more geographically diversified, we are a community banking franchise located in southwest Illinois. At December 31, 2015, almost all of our loans were secured by real estate located in Madison and St. Clair Counties, Illinois. As a result, we have a greater risk of loan defaults and losses in the event of further weakness and/or an economic downturn in our market area, as adverse economic conditions may have a negative effect on the ability of our borrowers to make timely payments of their loans.

 

The State of Illinois has significant financial difficulties, and this could adversely impact certain borrowers and the economic vitality of the state.

 

The State of Illinois has significant financial difficulties, including material pension funding shortfalls. The State of Illinois’ debt rating has been downgraded and its executive and legislative branches of government have been unable to reach agreement on a budget for the current fiscal year. These issues could impact the economic vitality of the state and the businesses operating there, encourage businesses to leave the State of Illinois, and discourage new employers from starting or moving businesses to the state. These issues could also result in delays in the payment of accounts receivable owed to borrowers that are employed by or who do business with the State of Illinois, and impair their ability to repay their loans when due.

 

Our business may be adversely affected by credit risk associated with residential property.

 

At December 31, 2015, $56.9 million, or 74.8%, of our total loan portfolio, was secured by one- to four-family real estate (of which $4.7 million is non-owner occupied). One- to four-family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the Illinois housing market has reduced the value of the real estate collateral securing these types of loans. Many of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because of the decline in home values in our market areas. As a result, we have increased risk that we could incur losses if borrowers default on their loans because we may be unable to recover all or part of the defaulted loans by selling the real estate collateral. In addition, if the borrowers sell their homes, they may be unable to repay their loans in full from the sale proceeds. For these reasons, we may experience higher rates of delinquencies, default and losses on our residential loans.

 

Future changes in interest rates could reduce our profits and asset values.

 

Net income is the amount by which net interest income and non-interest income exceeds non-interest expense and the provision for loan losses and income taxes. Net interest income makes up a majority of our income and is based on the difference between interest income earned on interest-earning assets, such as loans and securities.

 

We are vulnerable to changes in interest rates including changes in the shape of the yield curve because of a mismatch between the terms to repricing of our assets and liabilities. For the years ended December 31, 2015 and 2014, our net interest margin was 2.46% and 2.54%, respectively. Changes in

 

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interest rates also can affect: (1) our ability to originate loans; (2) the value of our interest-earning assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of our borrowers to repay their loans. Our Asset/Liability Committee utilizes a net portfolio value simulation model to provide an analysis of estimated changes in net portfolio value in various interest rate scenarios. At December 31, 2015, in the event of an immediate 100 basis point decrease in interest rates, our model projects a decrease in our net portfolio value of 7.17%, and in the event of an immediate 100 basis point increase in interest rates, our model projects a decrease in net portfolio value of 2.87%. Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet.

 

Historically low interest rates may adversely affect our net interest income and profitability.

 

In recent years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at lower levels than available prior to 2008. This has been a significant factor in the decrease in the amount of our interest income to $3.4 million for the year ended December 31, 2015 from $7.2 million for the year ended December 31, 2008. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets. Our ability to lower our interest expense is limited at these interest rate levels while the average yield on our interest-earning assets may continue to decrease. In December 2015, the Federal Reserve Board increased its targeted federal funds rate for the first time since 2006, from 0.25% to 0.50%. However, interest rates remain at historically low levels. Accordingly, our net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may continue to decrease, which will have an adverse effect on our profitability.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings and capital could decrease.

 

We are exposed to the risk that our borrowers may default on their obligations. A borrower’s default on its obligations may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection and work-out of the loan. In certain situations, where collection efforts are unsuccessful or acceptable work-out arrangements cannot be reached, we may have to charge-off the loan in whole or in part. In such situations, we may acquire real estate or other assets, if any, that secure the loan through foreclosure or other similar available remedies, and the amount owed under the defaulted loan may exceed the value of the assets acquired.

 

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate other factors including, among other things, current economic conditions. If our assumptions are incorrect, or if delinquencies or non-performing loans increase, our allowance for loan losses may not be sufficient to cover actual losses in our loan portfolio, which would require additions to our allowance and could materially decrease our results of operations.

 

In addition, we are subject to periodic examination by our primary regulator, the OCC, which may require us to increase our allowance for loan losses or recognize further loan charge-offs. An increase in our allowance for loan losses or loan charge-offs as required by the OCC may result in a decrease of our net

 

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operating results and, possibly, our capital position, which may have a material adverse effect on our financial condition and results of operations.

 

In December 2012, the Financial Accounting Standards Board issued for public comment a Proposed Accounting Standards Update that would remove the existing “probable” threshold in U.S. generally accepted accounting principles (“GAAP”) for recognizing credit losses and broaden the range of information that must be considered in measuring the allowance for expected credit losses. This proposal, if adopted as presented, could have a material negative impact on our reported results of operations and capital.

 

At the minimum of the offering range, Best Hometown Bancorp will retain only $125,000 of the offering proceeds, which will limit its ability to pay dividends or repurchase shares.

 

At the minimum of the offering range, Best Hometown Bancorp will invest in Home Federal $3.73 million of the net proceeds and retain only $125,000 after making a loan to the ESOP to purchase shares in the offering. Following the offering, Best Hometown Bancorp will depend on earnings from the investment of the net proceeds from the offering that it retains, and any dividends it receives from Home Federal. We do not expect that Home Federal will pay dividends to Best Hometown Bancorp until Home Federal's results of operations improve. As a result, if the offering is completed at or near the minimum of the offering range, the ability of Best Hometown Bancorp to pay dividends or repurchase shares will be limited.

 

If our foreclosed real estate is not properly valued, we may need to record write-downs, which would negatively impact our results of operations.

 

We obtain updated valuations in the form of appraisals when a property becomes foreclosed real estate and at certain other times during the holding period of the asset. At the time of foreclosure, foreclosed real estate is recorded at fair value less estimated selling costs and thereafter is compared to the updated fair value of the foreclosed property less estimated selling costs. A write-down is recorded for any excess in the asset’s carrying value over its fair value less estimated selling costs. If our valuation process is incorrect, or if property values decline, the fair value of our foreclosed real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional write-downs. Significant write-downs to our foreclosed real estate could have a material adverse effect on our financial condition and results of operations. In addition, we are subject to periodic examination by our primary regulator, the OCC, which may require us to recognize further write-downs. Any increase in our write-downs may have a material adverse effect on our financial condition and results of operations.

 

If our nonperforming assets increase, our results of operations will be adversely affected.

 

At December 31, 2015, our nonperforming assets, which consist of non-performing loans and other real estate owned, were $1.2 million, or 1.17%, of total assets.  Our nonperforming assets adversely affect our results of operations in various ways:

 

·we record interest income only on the cash basis or cost-recovery method for non-accrual loans;

 

·we must provide for probable loan losses through a current period charge to the provision for loan losses;

 

·noninterest expense increases when we write-down the value of properties in our foreclosed real estate portfolio to reflect changing market values;

 

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·there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees related to our foreclosed real estate; and

 

·the resolution of nonperforming assets requires the active involvement of management, which can prevent them from engaging in more profitable activity.

 

If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and nonperforming assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.

 

Strong competition within our market areas may limit our growth and profitability.

 

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market area. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected

 

The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

 

A significant percentage of our assets are invested in securities and deposits with banks which typically have a lower yield than our loan portfolio.

 

Our results of operations are substantially dependent on our net interest income. At December 31, 2015, 17.9% of our assets were invested in investment securities and time deposits with banks. These investments yield substantially less than the loans we hold in our portfolio. While we intend to invest a greater proportion of our assets in loans with the goal of increasing our net interest income, we may not be able to increase the origination of loans acceptable to us.

 

We have a significant amount of net operating losses that we may not be able to utilize.

 

In recent years, we have generated significant net operating losses and unrealized tax losses (collectively, “NOLs”). As of December 31, 2015, we had an estimated federal NOL carryforward of $3.8 million. A valuation allowance has been recorded against the entire future tax benefit. These NOLs generally may be carried forward for a 20-year period to offset future taxable income and reduce our federal income tax liability. As a result of our reorganization and conversion from the mutual to stock form of ownership and our contemporaneous stock offering, it is possible that we could incur an “ownership change”

 

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under Section 382 of the Internal Revenue Code (“Section 382”). An ownership change will occur if after the reorganization, the persons who are considered “owners” of Home Federal before the reorganization own less than 50% of the stock holding company’s common stock immediately after the reorganization. This could occur if we are required to sell a significant number of our shares in a community or syndicated offering to persons other than our members. In addition, an ownership change will occur if, over a rolling three-year period, the percentage of the company stock owned by shareholders holding 5% or more of our common stock has increased by more than 50 percent over the lowest percentage of common stock owned by such shareholders during the three-year period.

 

In general, if a company incurs an ownership change under Section 382, the company’s ability to utilize an NOL carryforward to offset its taxable income becomes limited to a certain amount per year. This limitation is computed by multiplying the company’s fair market value immediately before the ownership change (if, in our case, the ownership change occurs as a result of the conversion and stock offering,) by a rate equal to the long-term tax-exempt rate for the month in which the ownership change occurs. Our federal NOL carryforwards expire substantially beginning in 2031.

 

If we are unable to offset our taxable income to the maximum permitted amount, we would incur additional income tax liability, which would adversely affect our results of operations.

 

Government responses to economic conditions may adversely affect our operations, financial condition and earnings.

 

The Dodd-Frank Act has changed the bank regulatory framework. For example, it has created an independent Consumer Financial Protection Bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, established more stringent capital standards for banks and bank holding companies and gives the Federal Reserve Board exclusive authority to regulate savings and loan holding companies. The legislation has also resulted in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Home Federal, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. Banks and savings institutions with $10.0 billion or less in assets will continue to be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings and loan associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and in the domestic and international credit markets, and the effect of new legislation and regulatory actions in response to these conditions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans.

 

The full impact of the Dodd-Frank Act on our business will not be known until all of the regulations implementing the statute are adopted and implemented. As a result, we cannot at this time predict the extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However, compliance with these new laws and regulations may require us to make changes to our business and operations and will likely result in additional costs and divert management’s time from other business activities, any of which may adversely impact our results of operations, liquidity or financial condition.

 

Furthermore, the Federal Reserve Board, in an attempt to help the overall economy, has, among other things, adopted a low interest rate policy through its targeted federal funds rate and the purchase of mortgage-backed securities. If the Federal Reserve Board significantly increases the federal funds rate,

 

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market interest rates would likely rise, which may negatively affect the housing markets and the U.S. economic recovery.

 

Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.

 

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur and may not be adequately addressed if they do occur. In addition any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

 

In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

 

The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business, subject us to additional regulatory scrutiny or expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

 

The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

 

As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

 

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.

 

In July 2013, the federal banking agencies approved a new rule that has substantially amended regulatory risk-based capital rules. The final rule implements the regulatory capital reforms from the Basel Committee on Banking Supervision (“Basel III”) and changes required by the Dodd-Frank Act. The final rule includes new minimum risk-based capital and leverage ratios, which were effective for us on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii)

 

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a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. We have elected to exercise our one-time option to opt-out of the requirement under the final rule to include certain “available-for-sale” securities holdings for purposes of calculating our regulatory capital requirements. The final rule also establishes a “capital conservation buffer” of 2.5%, and, when fully phased in, will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

 

We have analyzed the effects of these new capital requirements, and we believe that, upon completion of the offering, we would meet all of these new requirements, including the full 2.5% capital conservation buffer, as if these new requirements had been in effect as of December 31, 2015.

 

The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying out dividends or buying back shares. Specifically, our ability to pay dividends will be limited if we do not have the capital conservation buffer required by the new capital rules, which may further limit our ability to pay dividends to shareholders. See “Supervision and Regulation—Federal Bank Regulation—Capital Requirements.”

 

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

 

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We believe the net proceeds of this offering will be sufficient to permit Home Federal to maintain regulatory capital compliance for the foreseeable future. Nonetheless, we may at some point need to raise additional capital to support continued growth.

 

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by the Federal Reserve Board or the OCC, we may be subject to adverse regulatory action. See “Regulation and Supervision.”

 

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We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

 

Following the conversion, we will be subject to extensive regulation, supervision, and examination by the Federal Reserve Board, the OCC and, to a lesser extent, the Federal Deposit Insurance Corporation (the “FDIC”). Such regulators govern the activities in which we may engage, primarily for the protection of depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets by a financial institution, and the adequacy of a financial institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation could have a material impact on us and our operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. Laws, rules and regulations may be adopted in the future that could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. See “Regulation and Supervision” for a discussion of the regulations to which we are subject.

 

Changes in accounting standards could affect our reported results of operations.

 

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

 

In December 2012, the Financial Accounting Standards Board issued for public comment a Proposed Accounting Standards Update that would remove the existing “probable” threshold in U.S. generally accepted accounting principles (“GAAP”) for recognizing credit losses and broaden the range of information that must be considered in measuring the allowance for expected credit losses. This proposal, if adopted as presented, could have a material negative impact on our reported results of operations and capital.

 

Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers.

 

There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. If proposals such as these, or other proposals limiting our rights as a creditor, are implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.

 

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

 

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers. If our reputation is negatively affected, by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to

 

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current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

 

Risks Related to the Offering

 

The future price of our common stock may be less than the purchase price in the stock offering.

 

If you purchase shares of common stock in the stock offering, you may not be able to sell them at or above the purchase price in the stock offering. The purchase price in the offering is based upon an independent third-party appraisal of the pro forma market value of Home Federal, pursuant to federal banking regulations and subject to review and approval by the OCC. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. Our aggregate pro forma market value as reflected in the final independent appraisal may exceed the market price of our shares of common stock after the completion of the offering, which may result in our stock trading below the initial offering price of $10.00 per share.

 

After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions. Publicly traded stocks, including stocks of financial institutions, often experience substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded.

 

We have broad discretion in using the proceeds of the stock offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.

 

We intend to invest between $3.73 million and $4.55 million of the net proceeds of the offering in Home Federal. We also expect to use a portion of the net proceeds we retain to fund a loan for the purchase of shares of common stock in the offering by the employee stock ownership plan. We may use the remaining net proceeds to invest in short-term and other investments, repurchase shares of common stock, pay dividends, or for other general corporate purposes. Home Federal intends to use a portion of the proceeds that it receives from us to pay costs associated with its planned termination of its employer defined benefit pension plan, and may use the remaining net proceeds it receives to fund new loans, primarily commercial and multi-family real estate loans and, to a lesser extent, commercial business loans and consumer loans. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations. Home Federal also may enhance existing products and services, invest in securities or use the proceeds for other general corporate purposes. However, with the exception of the loan to the employee stock ownership plan and the withdrawal from the defined benefit pension plan, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and the timing of such applications. Also, certain of these uses, such as acquiring other financial institutions may require the approval of the OCC or the Federal Reserve Board. We have not established a timetable for investing the net proceeds, and, accordingly, we may not invest the net proceeds at the time that is most beneficial to Best Hometown Bancorp, Home Federal or the stockholders.

 

There will be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.

 

We have never issued capital stock and there is no established market for our common stock. We expect that our common stock will be quoted on the OTC Pink Marketplace (OTCPK), subject to completion

 

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of the offering and compliance with certain conditions. Raymond James has advised us that it intends to make a market in our common stock following the offering, but it is under no obligation to do so or to continue to do so if it begins. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. If you purchase shares of common stock, you may not be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

 

You may not be able to sell your shares of common stock until you have received ownership statements, which will affect your ability to take advantage of changes in the stock price immediately following the offering.

 

Statements of ownership for the shares of common stock purchased in the offering may not be delivered for several days after the completion of the offering and the commencement of trading in the common stock. Your ability to sell the shares of common stock before receiving your ownership statement will depend on arrangements you may make with a brokerage firm, and you may not be able to sell your shares of common stock until you have received these statements. As a result, you may not be able to take advantage of fluctuations in the price of the common stock immediately following the offering.

 

The capital we raise in the stock offering will negatively affect our return on equity when, and if, we achieve profitability. This could negatively affect the trading price of our shares of common stock.

 

Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. Following the stock offering, we expect our consolidated equity to increase from $6.9 million at December 31, 2015 to between $10.4 million at the minimum of the offering range and $13.1 million at the adjusted maximum of the offering range. We have had experienced significant losses in recent periods, and we expect our return on equity to remain relatively low until we are able to leverage the additional capital we receive from the stock offering. Although we anticipate increasing net interest income using proceeds of the stock offering, our return on equity will remain low due to the capital raised in the stock offering, higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and the stock-based benefit plans we intend to adopt. Even if we can increase our net interest income and non-interest income, our return on equity may reduce the value of our shares of common stock.

 

You may not receive dividends on our common stock.

 

Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments, and we do not expect to pay dividends until our operations are sufficiently profitable to support the payment of dividends. See “—Risks Related to Our Business—We incurred net losses in nine of the last ten fiscal years, and we may not achieve profitability from our business strategies in the timeframe we expect, or at all.” The declaration and payment of future cash dividends will be subject to, among other things, our then current and projected operating results, financial condition, tax considerations, future growth plans, general economic conditions, and other factors

 

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our board of directors deems relevant. We may also be limited in the payment of dividends under statutory and regulatory provisions. See “—Risks Related to Our Business—We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.”; “Regulation and Supervision—Federal Banking Regulation—Capital Requirements”; “—Capital Distributions”; and “—Holding Company Regulation—Dividends.”

 

Our stock-based benefit plans will increase our costs, which will reduce our income.

 

We anticipate that our employee stock ownership plan will purchase up to 8% of the shares of common stock sold in the stock offering with funds borrowed from Best Hometown Bancorp. The cost of acquiring the shares of common stock for the employee stock ownership plan in the first year following completion of the offering is expected to be between $442,000 at the minimum of the offering range and $687,700 at the adjusted maximum of the offering range. We will record annual employee stock ownership plan expense equal to the fair value of shares of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase. Subject to market conditions and receipt of regulatory approval, the employee stock ownership plan may instead elect to purchase shares of common stock in the open market following the completion of the conversion in order to fill all or a portion of the employee stock ownership plan’s intended subscription.

 

We also may adopt one or more stock-based benefit plans after the conversion that would award participants (at no cost to them) shares of our common stock and/or options to purchase shares of our common stock. The number of shares reserved for awards of restricted stock or grants of stock options under any initial stock-based benefit plan may not exceed 4% and 10%, respectively, of the total shares sold in the offering, if these plans are adopted within 12 months after the completion of the conversion. We may reserve shares of common stock for stock awards and stock options in excess of these amounts, provided the stock-based benefit plan is adopted more than one year following the stock offering (subject to any applicable regulatory conditions to the approval of the conversion).

 

Assuming the market price of the common stock is $10.00 per share; the options are granted with an exercise price of $10.00 per share; the dividend yield on the stock is 0.0%; the expected option life is ten years; the risk free interest rate is 1.85% (based on the ten-year Treasury rate) and the volatility rate on the shares of common stock is 18.56% (based on an index of publicly traded thrift institutions), the estimated grant-date fair value of the options using a Black-Scholes option pricing analysis is $3.06 per option granted. Assuming this value is amortized over a five-year vesting period, the corresponding annual expense associated with the stock options in the first year after the offering would be $48,100 at the adjusted maximum of the offering range. In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual expense associated with restricted stock awarded under the stock-based benefit plan would be $45,400 at the adjusted maximum of the offering range in the first year after the offering. Moreover, if we grant shares of common stock or options in excess of these amounts, such grants would increase our costs further.

 

The fair value of the shares of restricted stock on the date granted under the stock-based benefit plan will be expensed by us over the vesting period of the shares. If the shares of restricted stock to be granted under the plan are repurchased in the open market (rather than issued directly from authorized but unissued shares by Best Hometown Bancorp) and cost the same as the purchase price in the stock offering, the reduction to stockholders’ equity due to the stock-based benefit plan would be between $221,000 at the minimum of the offering range and $344,000 at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the grants of shares under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders’ equity

 

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would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders’ equity would be less than the range described above.

 

The implementation of stock-based benefit plans will dilute your ownership interest.

 

We may adopt one or more stock-based benefit plans, which will allow participants to be awarded shares of common stock (at no cost to them) and/or options to purchase shares of our common stock, following the conversion. If these stock-based benefit plans are funded from the issuance of authorized but unissued shares of common stock, stockholders would experience a dilution in ownership interest of 12.28%. Although the implementation of the stock-based benefit plan will be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

 

We have not determined whether we will adopt stock-based benefit plans more than one year following the conversion. Stock-based benefit plans adopted more than one year following the conversion may exceed regulatory restrictions on the size of stock-based benefit plans adopted within one year, which would increase our costs and the dilution to other stockholders.

 

If we adopt stock-based benefit plans within one year following the completion of the conversion, then we may grant shares of common stock or stock options under our stock-based benefit plans for up to 4% and 10%, respectively, of our total outstanding shares. The amount of stock awards and stock options available for grant under the stock-based benefit plans may exceed these amounts, provided the stock-based benefit plans are adopted more than one year following the stock offering. Although the implementation of the stock-based benefit plan will be subject to stockholder approval, the determination as to the timing of the implementation of such a plan will be at the discretion of our board of directors (and subject to any applicable regulatory conditions to the approval of the conversion). Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our costs, which will reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans will dilute your ownership interest.”

 

Certain provisions of our articles of incorporation and bylaws, and state and federal law could prevent or impede the ability of stockholders to obtain representation on our board of directors, and may discourage hostile acquisitions of control of Best Hometown Bancorp, which could negatively affect our stock value.

 

Certain provisions in our articles of incorporation and bylaws may discourage attempts to acquire Best Hometown Bancorp, pursue a proxy contest for control of Best Hometown Bancorp, assume control of Best Hometown Bancorp by a holder of a large block of common stock, or remove Best Hometown Bancorp’s management, all of which stockholders might think are in their best interests. These provisions include:

 

·restrictive requirements regarding eligibility for service on the board of directors, including residency requirements, age requirements, a prohibition on service by persons who are, or have been during the last ten years, the subject of certain legal or regulatory proceedings, a prohibition on service by persons who are party to agreements that may affect their voting discretion, and a prohibition on service by nominees or representatives (as defined in applicable Federal Reserve Board regulations) of another person who would not be eligible for service or of an entity the partners or controlling persons of which would not be eligible for service;

 

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·the election of directors to staggered terms of three years;

 

·provisions requiring advance notice of stockholder proposals and director nominations;

 

·a limitation on voting rights of persons who directly or indirectly beneficially own more than 10% of the outstanding shares of common stock;

 

·a prohibition on cumulative voting;

 

·a requirement that the calling of a special meeting by stockholders requires the request of a majority of all votes entitled to be cast at the special meeting;

 

·a requirement that directors may only be removed for cause and by a majority of the votes entitled to be cast;

 

·the ability of the board of directors to fill vacancies on the board;

 

·the board of directors’ ability to cause Best Hometown Bancorp to issue preferred stock without stockholder approval;

 

·the ability of the board of directors to amend and repeal the bylaws and the required stockholder vote to amend or repeal the bylaws;

 

·the ability of the board of directors to consider a variety of factors in evaluating offers to purchase or acquire Best Hometown Bancorp; and

 

·the requirement of the vote of 80% of the votes entitled to be cast in order to amend certain provisions of the articles of incorporation, including those set forth above.

 

For further information, see “Restrictions on Acquisition of Best Hometown Bancorp, Inc.—Best Hometown Bancorp, Inc.’s Articles of Incorporation and Bylaws.”

 

Federal regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of Home Federal or Best Hometown Bancorp without the prior approval of the OCC. In addition, the business corporation law of Maryland, the state where Best Hometown Bancorp is incorporated, provides for certain restrictions on acquisition of Best Hometown Bancorp. See “Restrictions on Acquisitions of Best Hometown Bancorp, Inc.—Maryland Corporate Law,” “—Home Federal Savings and Loan Association of Collinsville’s Charter” and “—Change in Control Regulations.”

 

A significant percentage of our common stock will be held or controlled by our directors and executive officers and benefit plans.

 

Our board of directors and executive officers intend to purchase in the aggregate approximately 11.6% and 7.4% of our common stock at the minimum and adjusted maximum of the offering range, respectively. These purchases, together with the purchase by the employee stock ownership plan of 8.0% of the aggregate shares sold in the offering, as well as the potential acquisition of common stock through the proposed equity incentive and stock award plan (assuming no dilution) could result in ownership by insiders of Best Hometown Bancorp and Home Federal of approximately 33.6% of the total shares issued in the

 

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offering at the minimum and approximately 29.4% of the total shares issued in the offering at the adjusted maximum of the offering range. The ownership by executive officers, directors and our stock plans could result in actions being taken that are not in accordance with other stockholders’ wishes, and could prevent any action requiring a supermajority vote under our articles of incorporation and bylaws (including the amendment of certain protective provisions of our articles and bylaws discussed immediately above).

 

Our stock value may be negatively affected by federal regulations that restrict takeovers.

 

For three years following the conversion, OCC regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the OCC, or successor regulator. See “Restrictions on Acquisition of Best Hometown Bancorp, Inc.” for a discussion of applicable OCC regulations regarding acquisitions. Certain prospective investors may choose to purchase shares of a company if they believe that the company will be acquired, thereby potentially increasing its market value. Because federal regulations will restrict any such acquisition of us or Home Federal for at least three years after the completion of the conversion, these regulations may negatively affect our stock value.

 

We are an emerging growth company within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

 

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933 (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”), including the additional level of review of our internal control over financial reporting as may occur when outside auditors attest as to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important.

 

We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. Taking advantage of any of these exemptions may adversely affect the value and trading price of our common stock.

 

We have elected to delay the adoption of new and revised accounting pronouncements, which means that our financial statements may not be comparable to those of other public companies.

 

As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

 

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We may take other actions to meet the minimum required sales of shares if we cannot find enough purchasers in the community.

 

If we are not able to reach the minimum of the offering range, we may do any of the following: increase the maximum purchase limitations and allow all maximum purchase subscribers to increase their orders to the new maximum purchase limitations; terminate the offering and promptly return all funds; set a new offering range, notify all subscribers of the opportunity to confirm, cancel or change their orders; or take such other actions as may be permitted, to the extent such permission is required, by the OCC and the Financial Industry Regulatory Authority.

 

The distribution of subscription rights could have adverse income tax consequences and the cost basis of the stock to purchasers with subscription rights could be less than the purchase price.

 

If the subscription rights granted to certain current or former depositors or certain borrowers of Home Federal are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. Additionally, if the subscription rights were deemed to have an ascertainable value, it is possible that the cost basis of the stock to any purchaser who used subscription rights could be reduced by an amount equal to the value ascribed to the subscription rights. We have received an opinion of counsel, Luse Gorman, PC, that it is more likely than not that such rights have no value and that it is more likely than not that the basis of the common stock to its stockholders will be the purchase price thereof; however, such opinion is not binding on the Internal Revenue Service.

 

Our common stock will not be listed on an exchange, so we will not be subject to certain corporate governance requirements under the listing rules of the exchanges.

 

We expect that our common stock will be quoted on the OTC Pink Marketplace operated by the OTC Markets Group upon completion of the stock offering. Because of the small size of the offering, we will not qualify for a listing on the Nasdaq Stock Market or on one of the other stock exchanges. Accordingly, we will not be subject to various listing rules of the exchanges including their corporate governance requirements. These corporate governance requirements include rules regarding independent director oversight and requiring a majority of independent directors on certain committees of the board, shareholder approval requirements for certain corporate transactions and incentive compensation claw-back rules in the event of a restatement of the financial statements.

 

We intend to enter into employment agreements with certain of our officers, which may increase our compensation costs upon the occurrence of certain events or increase the cost of acquiring us.

 

Following the conversion and subject to the receipt of necessary regulatory approvals, we intend to enter into employment agreements with our President and Chief Executive Officer, Ronnie R. Shambaugh, our Executive Vice President—Chief Loan Officer, David W. Gansner, and one other executive officer. In the event of termination of employment other than for cause, or in the event of certain types of termination following a change in control, as set forth in the employment agreements, and assuming the agreements were in effect, the agreements will provide for cash severance benefits that would cost us up to $878,500 in the aggregate based on information as of December 31, 2015.

 

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SELECTED FINANCIAL AND OTHER DATA OF Home Federal Savings and Loan Association of Collinsville

 

The following tables set forth selected historical financial and other data of Home Federal for the years and at the dates indicated. The following information is only a summary, and should be read in conjunction with the business and financial information contained elsewhere in this prospectus. The information at and for the years ended December 31, 2015 and 2014 is derived in part from, and should be read together with, the audited financial statements and notes thereto of Home Federal beginning at page F-1 of this prospectus. The following information is only a summary, and should be read in conjunction with our financial statements and notes beginning on page F-1 of this prospectus.

  

   At December 31, 
   2015   2014 
   (In thousands) 
Selected Financial Condition Data:          
           
Total assets   $98,656   $90,441 
Cash and cash equivalents    9,100    9,794 
Stock in FHLB – Chicago    837    837 
Investment securities available for sale    11,224    11,772 
Loans, net    74,302    65,420 
Premises and equipment, net    1,881    1,834 
Foreclosed real estate, net    667    365 
Deposits    80,013    71,085 
Borrowings (1)    9,000    9,000 
Accrued expenses and other liabilities    2,781    2,732 
Total equity    6,862    7,624 

 

 
(1)At December 31, 2015 and 2014 consisted entirely of advances from the FHLB – Chicago.

 

   For the Years Ended
December 31,
 
   2015   2014 
   (In thousands) 
Selected Data:          
           
Interest and dividend income   $3,362   $3,440 
Interest expense    1,179    1,116 
Net interest income    2,183    2,324 
Provision for loan losses    268    150 
Net interest income after provision for loan losses    1,915    2,174 
Noninterest income    96    613 
Noninterest expense    2,713    2,850 
Loss before income tax expense (benefit)    (702)   (63)
Income tax expense (benefit)        1,203 
Net loss   $(702)  $(1,266)

 

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   At or For the Years Ended
December 31,
 
   2015   2014 
         
Selected Financial Ratios and Other Data (1):          
           
Performance Ratios:          
Return on average assets    (0.74)%   (1.33)%
Return on average equity    (9.41)%   (13.00)%
Interest rate spread (2)    2.32%   2.33%
Net interest margin (3)    2.46%   2.54%
Efficiency ratio (4)    119.04%   97.04%
Non-interest expense to average total assets    2.87%   3.00%
Average interest-earning assets to average
interest-bearing liabilities
   110.96%   117.34%
Average equity to average total assets    7.89%   10.27%
           
Asset Quality Ratios:          
Non-performing assets to total assets    1.17%   2.15%
Non-performing loans to total gross loans    0.64%   2.32%
Allowance for loan losses to non-performing loans    255.42%   68.38%
Allowance for loan losses to total gross loans (5)    1.64%   1.58%
Net charge-offs to average loans outstanding    0.14%   0.74%
           
Capital Ratios:          
Total capital (to risk-weighted assets)    17.88%   22.70%
Tier 1 capital (to risk-weighted assets)    16.62%   21.43%
Common equity tier 1 capital (to risk-weighted assets)    16.62%      NA 
Tier 1 capital (to average assets)    8.96%   10.47%
           
Other Data:          
Number of full-service offices    2    2 
Full-time equivalent employees    22    22 

 

 
(1)All ratios expressed as percentages.
(2)Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year.
(3)The net interest margin represents net interest income as a percent of average interest-earning assets for the year.
(4)The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.
(5)Gross loans represent loans before loans in process and deferred loan fees.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” 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 prospectus.

 

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:

 

·our ability to manage our operations under the current economic conditions nationally and in our market area;

 

·adverse changes in the financial industry, securities, credit and national local real estate markets (including real estate values);

 

·significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses;

 

·credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

 

·competition among depository and other financial institutions;

 

·our success in increasing our commercial and multi-family real estate loans, commercial business loans and consumer loans;

 

·our ability to attract and maintain deposits and our success in introducing new financial products;

 

·our ability to improve our asset quality even as we increase our commercial and multi-family real estate, commercial business and consumer lending;

 

·changes in interest rates generally, including changes in the relative differences between short-term and long-term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

 

·fluctuations in the demand for loans;

 

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·technological changes that may be more difficult or expensive than expected;

 

·changes in consumer spending, borrowing and savings habits;

 

·declines in the yield on our assets resulting from the current low interest rate environment;

 

·risks related to a high concentration of loans secured by real estate located in our market area;

 

·our ability to enter new markets successfully and capitalize on growth opportunities;

 

·changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations, and the resources we have available to address such changes;

 

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

 

·changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans;

 

·loan delinquencies and changes in the underlying cash flows of our borrowers;

 

·our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;

 

·the failure or security breaches of computer systems on which we depend;

 

·the ability of key third-party service providers to perform their obligations to us; and

 

·other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this prospectus.

 

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. Please see “Risk Factors” beginning on page 17.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $4,295,400 and $6,245,400, or $7,366,650 if the offering range is increased by 15%. See “Pro Forma Data” for the assumptions used to arrive at these amounts.

 

We intend to distribute the net proceeds as follows:

 

   Based Upon the Sale at $10.00 Per Share of
   552,500 shares   650,000 shares   747,500 shares   859,625 shares (1) 
   Amount  

Percent

of Net
Proceeds

   Amount   Percent
of Net
Proceeds
   Amount   Percent
of Net
Proceeds
   Amount   Percent
of Net  
Proceeds
 
   (Dollars in thousands)
                                 
Offering proceeds   $5,525        $6,500        $7,475        $8,596      
Less offering expenses    (1,230)        (1,230)        (1,230)        (1,230)     
Net offering proceeds (2)   4,295    100.00%  5,270    100.00%  6,245    100.00%  7,366    100.00%
                                         
Distribution of net proceeds:                                       
To Home Federal   (3,728)   (86.80)%  (4,550)   (86.34)%  (4,550)   (72.86)%  (4,550)   (61.77)%
To fund loan to employee stock ownership plan   (442)   (10.29)%  (520)   (9.87)%  (598)   (9.58)%  (688)   (9.34)%
Retained by Best Hometown Bancorp   $125    2.91%  $200    3.79%  $1,097    17.56%  $2,128    28.89%

  

 
(1)As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Assumes that all shares of common stock are sold in the subscription and community offerings.

 

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Home Federal’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription and community offerings.

 

Best Hometown Bancorp intends to fund a loan to the employee stock ownership loan to purchase shares of common stock in the stock offering. Best Hometown Bancorp may also use the proceeds it retains from the offering:

 

·to invest in short-term and other securities consistent with our investment policy;

 

·to pay cash dividends to our stockholders;

 

·to repurchase shares of our common stock subject to compliance with applicable regulatory requirements;

 

·to expand our retail banking franchise by acquiring another financial institution as opportunities arise, although we do not currently have any understandings or agreements to acquire any financial institutions; and

 

·for other general corporate purposes.

 

With the exception of the funding of the loan to the employee stock ownership plan, Best Hometown Bancorp has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, we intend to invest a substantial portion of the net proceeds in investment grade

 

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securities, including securities issued by U.S. Government agencies, U.S. treasuries and obligations issued by U.S. Government agencies and U.S. Government-sponsored enterprises. We may also invest the proceeds in a deposit account.

 

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. Under applicable federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund management recognition plans (which would require notification to the Federal Reserve Board) or tax-qualified employee stock benefit plans.

 

We intend to invest in Home Federal net proceeds equal to $4.55 million; provided, that Best Hometown Bancorp shall retain sufficient funds so that immediately following the completion of the conversion and the loan from Best Hometown Bancorp to the ESOP to purchase 8% of the shares sold in the offering, Best Hometown Bancorp shall have at least $125,000. Best Hometown Bancorp will invest in Home Federal from the net proceeds of the offering $3.73 million at the minimum of the offering range and $4.55 million at the midpoint, maximum and adjusted maximum of the offering range. Home Federal intends to use a portion of the proceeds that it receives from us to pay costs associated with its planned termination of its employer defined benefit pension plan. However, the timing of the termination of the plan will depend on our post conversion capital levels and needs, our evaluation of future interest rates and annuity cost trends, and the estimated cost to terminate the plan, as it may change from time to time. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity, a $1.9 million decrease in regulatory capital and an annual pre-tax cost savings of $117,000 ($77,000 after tax cost savings).

 

Home Federal may use the remainder of the net proceeds it receives from the stock offering:

 

·to fund primarily commercial real estate and commercial business loans;

 

·to enhance existing products and services and to support the development of new products and services;

 

·to invest in U.S. treasuries, securities issued by U.S. Government agencies and obligations issued by U.S. Government agencies and U.S. Government-sponsored enterprises, and other securities in accordance with our investment policy; and

 

·for other general corporate purposes.

 

With the exception of the payment of costs associated with its planned termination of the employer defined benefit pension plan, Home Federal has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, a substantial portion of the net proceeds will be invested in securities issued by U.S. Government agencies, U.S. treasuries and obligations issued by U.S. Government agencies and U.S. Government-sponsored enterprises. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, our relative position in the financial services industry, the attractiveness of opportunities to expand our operations through acquiring other financial institutions, our ability to receive regulatory approval for any such expansion activities, and overall market conditions.

 

We expect our return on equity to decrease as compared to our performance in recent years, until we are able to reinvest effectively the additional capital raised in the stock offering. See “Risk Factors—

 

 40 

 

Risks Related to the Offering—We have broad discretion in using the proceeds of the stock offering. Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance and the value of our common stock.”

 

OUR DIVIDEND POLICY

 

Following completion of the stock offering, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements; however, we do not expect to pay a dividend until our results of operations improve. The payment and amount of dividends, if any, in the future would depend upon a number of factors, including: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; statutory and regulatory limitations; and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, they will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by applicable law, regulations and policy, may be paid in addition to, or in lieu of, regular cash dividends.

 

We will file a consolidated federal tax return with Home Federal. Accordingly, it is anticipated that any cash distributions that we make to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to OCC regulations, during the three-year period following the stock offering, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

 

Pursuant to our articles of incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock of Best Hometown Bancorp, Inc.—Common Stock.” Dividends we can declare and pay will depend, in part, upon receipt of dividends from Home Federal, because initially we will have no source of income other than dividends from Home Federal and earnings from the investment of the net proceeds from the sale of shares of common stock retained by Best Hometown Bancorp and interest payments received in connection with the loan to the employee stock ownership plan. Regulations of the OCC impose limitations on capital distributions by savings institutions. See “Regulation and Supervision—Federal Banking Regulation—Capital Distributions.”

 

Any payment of dividends by Home Federal to us that would be deemed to be drawn out of Home Federal’s bad debt reserves, if any, would require a payment of taxes at the then-current tax rate by Home Federal on the amount of earnings deemed to be removed from the reserves for such distribution. Home Federal does not intend to make any distribution to us that would create such a federal tax liability. See “Taxation.”

 

MARKET FOR THE COMMON STOCK

 

Best Hometown Bancorp is a newly formed company and has never issued capital stock. Home Federal, as a mutual institution, has never issued capital stock. Best Hometown Bancorp expects that its common stock will be quoted on the OTC Pink Marketplace (“OTCPK”) operated by OTC Markets Group, upon conclusion of the stock offering. Raymond James has advised us that it intends to make a market in our common stock following the conversion and stock offering, but it is under no obligation to do so.

 

 41 

 

The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

 

 42 

 

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

 

At December 31, 2015, Home Federal exceeded all of the applicable regulatory capital requirements and was considered “well capitalized.” The table below sets forth the historical equity capital and regulatory capital of Home Federal at December 31, 2015, and the pro forma equity capital and regulatory capital of Home Federal after giving effect to the sale of shares of common stock at $10.00 per share. The table assumes the receipt by Home Federal of $3,728,000 at the minimum of the offering range, and $4,550,000 at the midpoint, maximum and adjusted maximum of the offering range. See “How We Intend to Use the Proceeds from the Offering.”

 

   Home Federal
Historical at
   Pro Forma at December 31, 2015, Based Upon the Sale in the Offering of (1) 
   December 31, 2015   552,500 shares   650,000 shares   747,500 shares   859,625 shares (2) 
   Amount   Percent of
Assets (3)
   Amount   Percent of
Assets (3)
   Amount   Percent of
Assets (3)
   Amount   Percent of
Assets (3)
   Amount   Percent of
Assets (3)
 
   (Dollars in thousands) 
     
Equity  $6,862    7.0%  $8,214    8.0%  $8,958    8.7%  $8,880    8.6%  $8,790    8.5%
                                                   
Tier 1 leverage capital   8,789    9.0%   10,141    10.0%   10,885    10.6%   10,807    10.6%   10,717    10.5%
Tier 1 leverage capital requirement (4)   4,891    5.0%   5,071    5.0%   5,112    5.0%   5,112    5.0%   5,112    5.0%
Excess  $3,898    4.0%  $5,070    5.0%  $5,773    5.6%  $5,695    5.6%  $5,605    5.5%
                                                   
Tier 1 risk-based
capital
   8,789    16.6%   10,141    19.0%   10,885    20.3%   10,807    20.1%   10,717    20.0%
Risk-based requirement (4)   4,231    8.0%   4,280    8.0%   4,293    8.0%   4,293    8.0%   4,293    8.0%
Excess  $4,558    8.6%  $5,861    11.0%  $6,592    12.3%  $6,514    12.1%  $6,424    12.0%
                                                   
Total risk-based
capital (4)
  $9,457    17.9%  $10,809    20.2%  $11,553    21.5%  $11,475    21.4%  $11,385    21.2%
Risk-based requirement   5,289    10.0%   5,349    10.0%   5,366    10.0%   5,366    10.0%   5,366    10.0%
Excess  $4,168    7.9%  $5,460    10.2%  $6,187    11.5%  $6,109    11.4%  $6,019    11.2%
                                                   
Common equity Tier 1 risk-based capital (4)  $8,789    16.6%  $10,141    19.0%  $10,885    20.3%  $10,807    20.1%  $10,717    20.0%
Risk-based requirement   3,438    6.5%   3,477    6.5%   3,488    6.5%   3,488    6.5%   3,488    6.5%
Excess  $5,351    10.1%  $6,664    12.5%  $7,397    13.8%  $7,319    13.6%  $7,229    13.5%
                                                   
Reconciliation of capital infused into Home Federal:                                                  
Proceeds to Home Federal            $3,728        $4,550        $4,550        $4,550      
Cost to terminate defined benefit pension plan (5)             (137)        (137)        (137)        (137)     
Unrealized loss on defined benefit pension plan             (1,797)        (1,797)        (1,797)        (1,797)     
Common stock acquired by employee stock ownership plan             (442)        (520)        (598)        (688)     
Pro forma increase            $1,352        $2,096        $2,018        $1,928      

 

 
(1)Pro forma capital levels assume that the employee stock ownership plan purchases 8% of the shares of common stock sold in the stock offering with funds we lend and that restricted stock awards equal to 4% of the shares sold in the offering are funded with authorized but unissued common stock. Pro forma capital calculated under GAAP and regulatory capital have been reduced by the amount required to fund the employee stock ownership plan. See “Management” for a discussion of the employee stock ownership plan. The pro forma capital levels also assume that Best Hometown Bancorp will invest in Home Federal net proceeds equal to We intend to invest in Home Federal net proceeds equal to $4.55 million; provided, that Best Hometown Bancorp shall retain sufficient funds so that immediately following the completion of the conversion and the loan from Best Hometown Bancorp to the ESOP to purchase 8% of the shares sold in the offering, Best Hometown Bancorp shall have at least $125,000.
(2)As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(3)Core capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(4)Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.
(5)Home Federal intends to terminate its employer defined benefit pension plan. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity and a $1.9 million decrease in regulatory capital. The actual costs associated with the termination of the plan cannot be known until the time of the termination, and may exceed our estimates.

 

 43 

 

CAPITALIZATION

 

The following table presents the historical capitalization of Home Federal at December 31, 2015 and the pro forma consolidated capitalization of Best Hometown Bancorp after giving effect to the conversion and offering, based upon the assumptions set forth in the “Pro Forma Data” section.

 

   Home Federal at  

Pro Forma at December 31, 2015

Based upon the Sale in the Offering at $10.00 per Share of

 
   December 31,
2015
   552,500
Shares
   650,000
Shares
   747,500
Shares
   859,625
Shares (1)
 
   (Dollars in thousands, except per share amounts) 
                     
Deposits (2)  $80,013   $80,013   $80,013   $80,013   $80,013 
Borrowings   9,000    9,000    9,000    9,000    9,000 
Total deposits and borrowings  $89,013   $89,013   $89,013   $89,013   $89,013 
                          
Stockholders’ equity:                         
Preferred stock, $0.01 par value, 1,000,000 shares authorized (post-conversion)  $   $   $   $   $ 
Common stock, $0.01 par value, 30,000,000 shares authorized (post-conversion); shares to be issued as reflected (3)       6    7    7    9 
Additional paid-in capital (4)       4,289    5,263    6,238    7,357 
Retained earnings (5)   8,789    8,789    8,789    8,789    8,789 
Accumulated other comprehensive loss (6)   (1,927)   (1,927)   (1,927)   (1,927)   (1,927)
                          
Cost to terminate defined benefit plan (7)       (137)   (137)   (137)   (137)
Common stock held by employee stock ownership plan (8)       (442)   (520)   (598)   (688)
Common stock to be acquired by stock-based benefit plan (9)       (221)   (260)   (299)   (344)
Total stockholders’ equity  $6,862   $10,357   $11,215   $12,073   $13,059 
                          
Total shares outstanding        552,500    650,000    747,500    859,625 
Total stockholders’ equity as a percentage of total assets (2)   6.96%   10.14%   10.89%   11.62%   12.46%
Tangible equity as a percentage of tangible assets (2)   6.96%   10.14%   10.89%   11.62%   12.46%

 

 
(1)As adjusted to give effect to an increase in the number of shares of common stock that could occur due to a 15% increase in the offering range to reflect demand for shares or changes in market conditions following the commencement of the subscription and community offerings.
(2)Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(3)No effect has been given to the issuance of additional shares of Best Hometown Bancorp common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the offering, an amount up to 10% of the shares of Best Hometown Bancorp common stock sold in the offering will be reserved for issuance upon the exercise of options under the plans.
(4)On a pro forma basis, common stock and additional paid-in capital have been revised to reflect the number of shares of Best Hometown Bancorp common stock to be outstanding.
(5)The retained earnings of Home Federal will be substantially restricted due to the establishment of a liquidation account. See “The Conversion and Offering—Liquidation Rights” and “Regulation and Supervision.”
(6)Includes net unrealized losses as follows:
Investment securities  $(85)
Defined benefit pension plan   (1,797)
Post retirement medical plan   (45)
   $(1,927)
(7)Home Federal intends to terminate its employer defined benefit pension plan. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity and a $1.9 million decrease in regulatory capital. The actual costs associated with the termination of the pension plan cannot be known until the time of the termination, and may exceed our estimates.
(8)Assumes that 8% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from Best Hometown Bancorp. The loan will be repaid principally from Home Federal’s contributions to the employee stock ownership plan. Since Best Hometown Bancorp will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on Best Hometown Bancorp’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.
(9)Assumes that restricted stock awards equal to 4% of the shares sold in the offering will be funded with authorized but unissued common stock. Implementation of the stock-based benefit plans will require stockholder approval.

 

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PRO FORMA DATA

 

The following tables summarize historical data of Home Federal and pro forma data of Best Hometown Bancorp at and for the year ended December 31, 2015. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

 

The net proceeds in the tables are based upon the following assumptions:

 

·all shares of common stock will be sold in the subscription offering;

 

·our employee stock ownership plan will purchase 8% of the shares of common stock sold in the stock offering with a loan from Best Hometown Bancorp. The loan will be repaid in substantially equal payments of principal and interest (at the prime interest rate, adjusted annually) over a period of 20 years;

 

·the Bank will use a portion of the net proceeds to pay costs associated with the termination of the Bank’s employer defined benefit pension plan. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity, a $1.9 million decrease in regulatory capital and an annual pre-tax cost savings of $117,000 ($77,000 after tax cost savings).

 

·expenses of the stock offering, including fees and expenses to be paid to Raymond James, will be approximately $1.2 million.

 

Pro forma earnings on net proceeds have been calculated assuming the stock has been sold at the beginning of the period and the net proceeds have been invested at a yield of 1.78% for the year ended December 31, 2015. This represents the five-year U.S. Treasury Note rate as of December 31, 2015, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by regulations of the OCC. The pro forma after-tax yield on the net proceeds from the offering is assumed to be 1.17% for the year ended December 31, 2015, based on an effective tax rate of 34%.

 

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net loss and stockholders’ equity by the indicated number of shares of common stock. We adjusted results of operations to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for each period as if the shares of common stock were outstanding at the beginning of each period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

The pro forma tables give effect to the implementation of stock-based benefit plans. Subject to the receipt of stockholder approval, we have assumed that restricted stock awards equal to 4% of the shares sold in the offering will be funded with authorized but unissued common stock. We assume that shares of common stock are granted under the plans in awards that vest over a five-year period.

 

We have also assumed that the stock-based benefit plans will grant options to acquire shares of common stock equal to 10% of our outstanding shares of common stock. In preparing the table below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $3.06 for each option. In addition to the terms of the options described above, the

 

 45 

 

Black-Scholes option pricing model assumed an estimated volatility rate of 18.56% for the shares of common stock, a dividend yield of 0.0%, an expected option life of 10 years and a risk-free interest rate of 1.85%. Finally, we assumed that 25% of the stock options were non-qualified options granted to directors, resulting in a tax benefit (at an assumed tax rate of 34%) for a deduction equal to the grant-date fair value of the options.

 

We may reserve shares for the exercise of stock options and the grant of stock awards under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the stock offering. In addition, we may grant options and award shares that vest more rapidly than over a five-year period if the stock-based benefit plans are adopted more than one year following the stock offering.

 

As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to invest in Home Federal from the proceeds of the stock offering $3.73 million at the minimum of the offering range and $4.55 million at the midpoint, maximum and adjusted maximum of the offering range. We will retain the remainder of the net proceeds from the stock offering. We will use portions of the proceeds we retain to make a loan to the employee stock ownership plan. We will retain the rest of the proceeds for future use.

 

The pro forma tables do not give effect to: (i) withdrawals from deposit accounts to purchase shares of common stock in the stock offering; (ii) our results of operations after the stock offering; or (iii) changes in the market price of the shares of common stock after the stock offering.

 

The following pro forma information may not represent the financial effects of the stock offering at the date on which the stock offering actually occurs and you should not use the table to indicate future results of operations. Pro forma stockholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with GAAP. We did not increase or decrease stockholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Pro forma stockholders’ equity does not give effect to the impact of a bad debt reserve or the liquidation account we will establish in the conversion in the unlikely event we are liquidated.

 

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At or for the year ended December 31, 2015

Based upon the Sale at $10.00 Per Share of

 
  

552,500

Shares

  

650,000

Shares

  

747,500

Shares

  

859,625

Shares (1)

 
   (Dollars in thousands, except per share amounts) 
                 
Gross proceeds of offering  $5,525   $6,500   $7,475   $8,596 
Less: Expenses   (1,230)   (1,230)   (1,230)   (1,230)
Estimated net proceeds   4,295    5,270    6,245    7,366 
Less: Common stock acquired by ESOP (2)   (442)   (520)   (598)   (688)
Less: Common stock awards under stock-based benefit plans (3)   (221)   (260)   (299)   (344)
Estimated net proceeds, as adjusted  $3,632   $4,490   $5,348   $6,334 
                     
For the year ended December 31, 2015                    
Consolidated net loss:                    
Historical  $(702)  $(702)  $(702)  $(702)
Pro forma adjustments:                    
Expense savings from terminating defined benefit plan (4)   77    77    77    77 
Income on adjusted net proceeds   43    53    63    74 
Employee stock ownership plan (2)   (15)   (17)   (20)   (23)
Stock awards (3)   (29)   (34)   (39)   (45)
Stock options (5)   (31)   (36)   (42)   (48)
Pro forma net loss  $(657)  $(659)  $(663)  $(667)
                     
Loss per share:                    
Historical  $(1.38)  $(1.17)  $(1.02)  $(0.88)
Pro forma adjustments:                    
Expense savings from terminating defined benefit plan (4)   0.15    0.13    0.11    0.10 
Income on adjusted net proceeds   0.08    0.09    0.09    0.09 
Employee stock ownership plan (2)   (0.03)   (0.03)   (0.03)   (0.03)
Stock awards (3)   (0.06)   (0.06)   (0.06)   (0.06)
Stock options (5)   (0.06)   (0.06)   (0.06)   (0.06)
Pro forma loss per share (7)  $(1.30)  $(1.10)  $(0.97)  $(0.84)
                     
Offering price to pro forma net loss per share   (7.69)x   (9.09)x   (10.31)x   (11.90)x
Number of shares used in loss per share calculations (8)   510,510    600,600    690,690    794,294 
                     
At December 31, 2015                    
Stockholders’ equity:                    
Historical  $6,862   $6,862   $6,862   $6,862 
Estimated net proceeds   4,295    5,270    6,245    7,366 
Less: Cost to terminate defined benefit plan (6)   (137)   (137)   (137)   (137)
Less: Common stock acquired by ESOP (2)   (442)   (520)   (598)   (688)
Less: Common stock acquired by stock-based benefit plan (3)   (221)   (260)   (299)   (344)
Pro forma stockholders’ equity (7)  $10,357   $11,215   $12,073   $13,059 
                     
Stockholders’ equity per share: (8)                    
Historical  $12.42   $10.56   $9.18   $7.98 
Estimated net proceeds   7.77    8.11    8.35    8.57 
Less: Cost to terminate defined benefit plan (6)   (0.25)   (0.21)   (0.18)   (0.16)
Less: Common stock acquired by ESOP (2)   (0.80)   (0.80)   (0.80)   (0.80)
Less: Common stock acquired by stock-based benefit plan (3)   (0.40)   (0.40)   (0.40)   (0.40)
Pro forma stockholders’ equity per share (8)  $18.74   $17.26   $16.15   $15.19 
                     
Pro forma price to book value   53.35%   57.96%   61.92%   65.82%
Number of shares outstanding for pro forma book value per share calculations   552,500    650,000    747,500    859,625 

 

(Footnotes begin on following page)

 

 47 

___________________________

 

(1)As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)Assumes that 8% of shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Best Hometown Bancorp. Home Federal intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Home Federal’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification 718-40, “Employers’ Accounting for Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Home Federal, the fair value of the common stock remains equal to the subscription price of $10.00 and the employee stock ownership plan expense reflects an effective tax rate of 34%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net loss further assumes that 2,210, 2,600, 2,990 and 3,439 shares were committed to be released during the year ended December 31, 2015 at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the year were considered outstanding for purposes of income per share calculations.
(3)Assumes that Best Hometown Bancorp’s stockholders approve one or more stock-based benefit plans within one-year after completion of the conversion, but no earlier than six months after the conversion, and an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering are issued as restricted stock awards using shares purchased in the open market or acquired from Best Hometown Bancorp from authorized but unissued common stock. The shares may also be acquired through open market purchases. We have assumed that (i) the stock-based benefit plans acquire the shares from Best Hometown Bancorp and are issued from authorized but unissued common stock, (ii) 20% of the amount contributed to the stock-based benefit plans is amortized as an expense during the year, and (iii) the stock-based benefit plans expense reflects an effective tax rate of 34%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock equal to 4% of the shares sold in the offering are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 3.85%.
(4)Represents cost savings associated with Home Federal’s termination of the defined benefit pension plan. As of December 31, 2015, the Bank estimated that terminating its employer defined benefit pension plan would result in an annual cost savings of $77,000, assuming an effective tax rate of 34%. The actual cost savings will not be known until after Home Federal terminates the defined benefit pension plan.
(5)If approved by Best Hometown Bancorp’s stockholders, one or more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock options to be granted under stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.06 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options and that 25% of the amortization expense (or the assumed portion relating to non-qualified options granted to directors) resulted in a tax benefit using an assumed tax rate of 34%. The actual expense of the stock options to be granted under the stock-based benefit plans will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based benefit plans is obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock used to fund stock options (equal to 10% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 9.09%.
(6)Represents costs associated with Home Federal’s withdrawal from the defined benefit pension plan. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity and a $1.9 million decrease in regulatory capital. The actual costs will not be known until the date of Home Federal’s withdrawal from the defined benefit pension plan, and may exceed our estimates.
(7)The retained earnings of Home Federal will be substantially restricted due to the establishment of a liquidation account. See “Our Dividend Policy,” “The Conversion and Offering—Liquidation Rights” and “Regulation and Supervision.” The

 

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number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering.

(8)Loss per share computations are determined by taking the number of shares assumed to be sold in the offering and, in accordance with applicable accounting standards for employee stock ownership plans, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See note 2, above.

 

 49 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

This discussion and analysis reflects our financial information and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited financial statements, which appear beginning on page F-1 of this prospectus. You should read the information in this section in conjunction with the business and financial information regarding Home Federal provided in this prospectus.

 

Overview

 

Home Federal is a federal mutual savings and loan association that was organized in 1887. Following completion of the conversion, the Bank intends to change its name to Best Hometown Bank. We conduct our operations from our main office in Collinsville, Illinois and our full-service branch office in Maryville, Illinois. Our primary deposit market includes the areas surrounding our banking offices in Collinsville and Maryville, Illinois. Our primary lending market is Madison and St. Clair Counties, Illinois and, to a lesser extent, St. Louis County, Missouri.

 

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in loans. Our primary lending activity includes one- to four-family residential real estate loans, including non-owner occupied one- to four-family real estate loans, commercial and multi-family real estate loans and construction and land loans. To a lesser extent, we also make commercial business loans and consumer loans, including home equity loans and lines of credit. At December 31, 2015, $52.2 million, or 68.5% of our total loan portfolio was comprised of owner occupied one- to four-family real estate loans, and $14.9 million, or 19.5% of our total loan portfolio, was comprised of commercial and multi-family real estate loans. Our commercial and multi-family real estate loan portfolio has grown $11.2 million from $3.7 million at December 31, 2013 to $14.9 million at December 31, 2015.

 

We also invest in securities, which at December 31, 2015, consisted of securities issued by U.S. government agencies and U.S. government-sponsored enterprises.

 

We offer a variety of deposit accounts, including interest-bearing and non interest-bearing checking accounts, savings and money market accounts and certificates of deposit. We have recently expanded the products we offer our customers, including online banking, remote deposit capture and ATM cards and debit cards. We are also in the process of adding mobile banking.

 

We utilize advances from the FHLB – Chicago.

 

In 2015, we began offering brokerage services to our customers through a networking arrangement with a registered broker-dealer.

 

For the years ended December 31, 2015 and 2014, we had net losses of $702,000 and $1.3 million, respectively. See “—Recent Losses from Operations / Restructuring of Management and Business Operations” below and “Management Discussion and Analysis of Financial Condition and Results of Operation—Comparison of Operating Results for the Years Ended December 31, 2015 and 2014.”

 

Our current business strategy includes managed growth to support profitability through greater economies of scale, including increasing our emphasis on commercial and multi-family real estate lending and, to a lesser extent, continuing to diversify our loan portfolio by increasing our commercial business lending and consumer lending. We also expect to increase our non-interest income through our entrance

 

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into the secondary market with the origination and sale of one- to four-family residential loans with terms of 20 years or more, and the addition of our new brokerage services. In addition, we intend to replace our higher-cost FHLB – Chicago advances and certificates of deposit as they mature with lower-cost FHLB – Chicago advances and core deposits. Most importantly, we will continue to adhere to our conservative underwriting standards of recent years which we believe have resulted in our improved credit quality. See “—Business Strategy.”

 

We are subject to comprehensive regulation and examination by our primary federal regulator, the Office of the Comptroller of the Currency (“OCC”).

 

Our main office is located at 100 East Clay Street, Collinsville, Illinois 62234, and our telephone number at this address is (618) 345-1121. Our website address is www.homefed24.com. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.

 

Recent Losses from Operations / Restructuring of Management and Business Operations

 

We have experienced operating losses in recent years. As a result, we have a deferred tax asset of $3.2 million (before deferred tax liabilities and valuation allowance) which includes a deferred tax asset of $1.7 million for net operating losses.

 

In order to address the Bank’s losses, the Board has made significant changes to our management and operating processes. In April 2012, we hired Ronnie R. Shambaugh to our executive staff, and in May 2013, Mr. Shambaugh was promoted to President and Chief Executive Officer and appointed to the Board of Directors. Mr. Shambaugh has 44 years of experience in community banking, including past experience as a President and Chief Executive Officer. In 2013, we hired Cynthia T. Knebel, with over 44 years of experience in community bank management, operations, accounting and compliance, as our Chief Financial Officer; and in 2014 we hired David W. Gansner, a commercial and residential lender with over 33 years of community banking experience, as our Executive Vice President—Chief Loan Officer. Overall, the community banking experience of our new executive management team averages over 41 years. In addition, in February 2016 we hired a new loan officer with lending and underwriting experience. Since 2012 we have added two new loan officers, and only one of the Bank’s four loan officers as of 2012 is still working for the Bank.

 

Our new management’s initial task was to reduce the Bank’s non-performing assets and improve the Bank’s credit administration policies and procedures. The Bank has implemented new procedures for obtaining and analyzing credit and collateral information to better monitor credit risk. Beginning in 2013, our new management team has also aggressively worked through the Bank’s nonperforming loans, placing loans into foreclosed real estate where appropriate and managing the sale of such properties. Many of the Bank’s nonperforming loans were due to prior management’s origination of high-risk loans, such as loans for the rehabilitation of residential properties. The Bank no longer makes these loans. In addition, the Bank has adopted and implemented new procedures for dealing with delinquent loans, including contacting delinquent borrowers earlier and actively monitoring each delinquent loan.

 

The purposes of the upgrades to our policies and procedures were to reduce nonperforming assets and the likelihood of future credit problems, and to provide a platform for managed growth. Our efforts to reduce nonperforming assets has been largely successful, as nonperforming assets have decreased from $2.2 million, or 2.29% of total assets at December 31, 2012, to $1.2 million, or 1.17% of total assets at December 31, 2015.

 

Although our asset quality has improved, we have continued to experience losses. For the year ended December 31, 2015 and 2014, we had net losses of $702,000 and $1.3 million, respectively. Our

 

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losses in 2014 and 2015 were largely due to declines in our net interest income. Our net interest income has been negatively impacted by a decline in our asset base as we have dealt with problem assets. During 2014, we also recognized a $1.2 million provision for income taxes due to an increase in the valuation allowance on our deferred tax asset.

 

To increase net interest income, management has focused on lowering the Bank’s borrowing expenses, which are elevated due to higher costing FHLB – Chicago advances entered into in the past. At December 2015, we had $9.0 million of FHLB – Chicago advances with an average cost of 4.47%. We intend, subject to market conditions, to replace our higher-cost FHLB – Chicago advances as they mature with lower-cost FHLB – Chicago advances and core deposits. In January 2016, we repaid a matured $3.0 million FHLB – Chicago advance that had a cost of 3.90%. During 2016, we will also repay a maturing $5.0 million FHLB – Chicago advance with an interest rate of 4.62% with $5.0 million of FHLB-Chicago advances costing approximately 1.99%.

 

Going forward, our business strategy includes becoming a profitable, well-managed community bank. We aim to achieve profitability through increasing our earnings base, including continuing to increase our commercial real estate and multi-family real estate lending and, to a lesser extent, continuing to diversify our loan portfolio by increasing our commercial business lending and consumer lending. We also expect to increase our non-interest income through our entrance into the secondary market with the origination and sale of one- to four-family residential loans with terms of 20 years or more. In addition, in 2015 we began offering brokerage services to our customers through a networking arrangement with a registered broker-dealer. We expect our brokerage services to increase noninterest income in the future. Most importantly, we will continue to adhere to our conservative underwriting standards of recent years which we believe have resulted in our improved credit quality. See “—Business Strategy.”

 

Finally, in order to set the stage for improved results of operations, we intend to terminate our employer defined benefit pension plan subsequent to the completion of the conversion. However, the timing of the termination of the plan will depend on our post conversion capital levels and needs, our evaluation of future interest rates and annuity cost trends, and the estimated cost to terminate the plan, as it may change from time to time. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity, a $1.9 million decrease in regulatory capital and an annual pre-tax cost savings of $117,000 ($77,000 after tax cost savings), which has been reflected in the pro forma data in this prospectus.

 

Based on the above, we do not anticipate net income until we experience significant growth in our earnings base pursuant to our business strategy. Assuming the successful execution of our business plan, we do not expect that we will return to profitability until fiscal 2017. We may be unsuccessful, however, in executing on our business plan and may not return to profitability in the timeframe we expect, or at all.

 

Business Strategy

 

Our principal objective is to build long-term value for our stockholders by operating a profitable community-oriented financial institution dedicated to meeting the banking needs of our customers. We will seek to achieve this by emphasizing personalized and efficient customer service. Highlights of our current business strategy, subject to market conditions, include:

 

·Prudently and opportunistically growing our assets and liabilities by increasing our presence in the southwest Illinois communities we currently serve.

 

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·Increasing our emphasis on short-term commercial and multi-family real estate loans and, to a lesser extent, increasing our commercial business loans and consumer loans.

 

·Replacing our higher-cost certificates of deposit and FHLB – Chicago advances as they mature with lower-cost FHLB – Chicago advances and core deposits. This will include leveraging our relationships with commercial borrowers to increase lower cost commercial deposits.

 

·Increasing our non-interest income through the origination and sale of conforming one to-four-family residential real estate loans with terms of 20 years or more, and through our newly offered brokerage services.

 

·In addition to selling our one- to four-family loans with terms of 20 years or more, we also intend to introduce adjustable-rate loans to help mitigate our interest rate risk.

 

·Expanding our menu of deposit products and continuing to improve customer service to meet the demands of current customers and attract new, younger customers in our market area.

 

·

Implementing improvements to modernize our offices, including replacing traditional teller lines with customer friendly teller pods. We intend to utilize new technologies to enhance the customer experience, and to rebrand our institution and promote our new identity while emphasizing the new products and services we offer.

 

·Implementing a managed growth strategy to improve our profitability, without compromising our asset quality.

 

These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy” for a further discussion of our business strategy.

 

Anticipated Increase in Noninterest Expense

 

Following the completion of the conversion, our noninterest expense is expected to increase because of the increased costs associated with operating as a public company and the increased compensation expenses associated with the purchase of shares of common stock by our employee stock ownership plan. Our expenses will also increase if we implement one or more stock-based benefit plans, if approved by our stockholders, no earlier than six months after the completion of the conversion. For further information, see “Summary—Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion;” “Risk Factors—Risks Related to the Offering—Our stock-based benefit plans will increase our costs, which will reduce our income;” and “Management—Benefits to be Considered Following Completion of the Stock Offering”.

 

In addition, following the conversion, we expect to incur a non-recurring expense to terminate our employer defined benefit pension plan. As of December 31, 2015, the Bank estimated that terminating the plan would result in a $1.9 million charge to operations, a $137,000 decrease in equity, and a $1.9 million decrease in regulatory capital. We also expect to incur $1.2 million of expenses for branch improvements and modernization, which will be capitalized and result in an annual expense of approximately $60,000.

 

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Critical Accounting Policies

 

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with generally accepted accounting principles used in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be our critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

 

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

 

The following represents our critical accounting policies:

 

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

 

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

 

The analysis has two components, specific and general. The specific component is for losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the present value of expected future cash flows or fair value of the collateral is less than the loan’s carrying value, a charge to operations is recorded for the difference. The general component, which is for loans reviewed collectively, is determined by segregating the remaining loans by type of loan. We also analyze historical loss experience for the past two years and qualitative factors that are applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that are reviewed collectively. These qualitative factors include the existence and effect of any concentrations of credit and changes in the level of such concentrations, changes in national, regional and local economic conditions that affect the collectability of the loan portfolio, changes in levels or trends in charge-offs and recoveries, changes in the volume and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or loss, changes in the size and composition of the loan portfolio and terms of loans, changes in lending policies and procedures, risk selection and underwriting standards, changes in the experience, ability and depth of lending management and other relevant staff, quality of loan review and board of directors oversight, changes in the value of underlying collateral for collateral-dependent loans, and the effect of other external factors, trends or uncertainties that could affect management’s estimate of probable losses, such as competition

 

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and legal and regulatory requirements. The qualitative component is critical in determining the allowance for loan losses as certain trends may indicate the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Not incorporating a qualitative component could misstate the allowance for loan losses. Actual loan losses may be significantly more than the allowances we have established, which could result in a material negative effect on our financial results.

 

Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Bank estimates the fair value of a financial instrument and any related asset impairment using several valuation methods. Where financial instruments are actively traded, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Bank estimates fair value. These estimates are subjective in nature and imprecision can impact the resulting fair value. For further information related to the fair values measured at each level of the fair value hierarchy and the methodology utilized by the Bank, see Note 13 of Notes to Financial Statements, “Fair Value Measurements and Fair Value of Financial Instruments.”

 

Defined Benefit Pension and Postretirement Medical Plans. Our defined benefit pension and postretirement medical plan net obligations are measured using several assumptions such as the discount rate, expected rate of return on plan assets, mortality rates and healthcare cost trend rate. We evaluate these assumptions with our actuarial consultants and select assumptions that we believe reflect the economics underlying our pension and post-retirement net obligations. Any changes in the assumptions could have a material impact on our reported results of operations. For further information on the actuarial assumptions used to measure our defined benefit pension and postretirement medical plan net obligations, see Note 10 of Notes to Financial Statements, “Employee Benefits.”

 

Income Tax Expense. Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations. A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carryback and carryforward periods, including consideration of available tax planning strategies. Tax related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the views of legal counsel and other advisors, experience of the Bank or other enterprises in similar matters, if any, and management’s intended response to any assessment.

 

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Comparison of Financial Condition at December 31, 2015 and 2014

 

Summary of Selected Balance Sheet Data

 

  

At December 31,

   Increase     
   2015   2014   (Decrease)   % Change 
   (Dollars in thousands)     
                 
Total assets  $98,656   $90,441   $8,215    9.1%
Cash and cash equivalents   9,100    9,794    (694)   (7.1)
Investment securities   11,224    11,772    (548)   (4.7)
Stock in Federal Home Loan Bank of Chicago (“FHLB – Chicago”)   837    837         
Loans receivable, net   74,302    65,420    8,882    13.6 
Premises and equipment, net   1,881    1,834    47    2.6 
Foreclosed real estate held for sale, net   667    365    302    82.7 
Other assets (1)   645    419    226    53.9 
Deposits   80,013    71,085    8,928    12.6 
Advances from FHLB – Chicago   9,000    9,000         
Accrued defined benefit pension plan   1,464    1,495    (31)   (2.1)
Accrued postretirement medical plan   985    1,013    (28)   (2.8)
Other liabilities   332    224    108    48.2 
Stockholders’ equity   6,862    7,624    (762)   (10.0)

 

 

(1)Includes accrued interest receivable, deferred tax asset and other assets.

 

Total Assets. Total assets increased $8.2 million, or 9.1%, to $98.7 million at December 31, 2015 from $90.5 million at December 31, 2014. The increase in total assets was due primarily to an increase in loans receivable. As part of our business strategy, we intend to increase our emphasis on short-term commercial and multi-family real estate loans and, to a lesser extent, increase our commercial business loans and consumer loans.

 

Loans Receivable, Net. Net loans increased $8.9 million, or 13.6%, to $74.3 million at December 31, 2015 from $65.4 million at December 31, 2014. The increase in loans was funded with an increase in deposits. In August 2014, we hired a senior loan officer to generate commercial real estate and business loans and oversee our lending operations. Commercial and multi-family real estate loans increased $9.0 million, or 154.0%, to $14.9 million at December 31, 2015 from $5.9 million at December 31, 2014. In contrast, single-family, non-owner occupied loans decreased $678,000, or 12.4%, as result of principal repayments by borrowers. There were modest changes in the other loan segments. In February 2016, we hired an additional loan officer to enhance growth in commercial loans and, to a lesser extent, other areas of lending. We intend to continue to increase our commercial and multi-family real estate lending and, to a lesser extent, our commercial business lending and consumer lending. We seek to minimize credit risks associated with these loans by diversifying our customer base.

 

Investment Securities. At December 31, 2015 and 2014, all investment securities were classified as available for sale and included primarily mortgage-backed securities. Investment securities decreased $548,000, or 4.7%, to $11.2 million at December 31, 2015 due to the sale of $1.1 million of mortgage-backed securities, along with principal collections on mortgage-backed securities of $2.8 million and amortization of premiums on mortgage-backed securities of $247,000, partially offset by purchases of mortgage-backed securities of $3.7 million.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased $694,000, or 7.1%, to $9.1 million at December 31, 2015 from $9.8 million at December 31, 2014. During 2015, we transferred our excess funds from the FHLB – Chicago demand account to a money market account at another financial institution to improve our yield on other interest-earning assets. Historically, we have maintained a

 

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higher level of liquidity. In January 2016, we reduced our money market account by $3.0 million to repay an FHLB – Chicago advance that matured.

 

Foreclosed Real Estate Held for Sale, Net. Foreclosed real estate held for sale increased $302,000, or 82.7%, to $667,000 at December 31, 2015 from $365,000 at December 31, 2014. The increase was primarily due to the foreclosure of four residential properties from one borrower relationship.

 

Deposits. Deposits increased $8.9 million, or 12.6%, to $80.0 million at December 31, 2015 from $71.1 million at December 31, 2014. The majority of the increase in deposits was due to the Bank offering attractive rates on 3, 4 and 5-year certificates of deposit. Certificates of deposit increased $8.0 million to $59.2 million at December 31, 2015 from $51.2 million at December 31, 2014. The increase in deposits was used to fund loans during 2015. Core deposits, which include non-interest-bearing checking, interest-bearing checking, savings and money market accounts, increased $959,000, or 4.8%, to $20.8 million at December 31, 2015 from $19.8 million at December 31, 2014. We intend to increase our core deposits, in particular, checking and money market accounts, through our existing and new commercial loan customers and aggressive marketing efforts.

 

Advances from FHLB – Chicago. At December, 2015, we had $9.0 million of FHLB – Chicago advances with an average cost of 4.47%. We intend, subject to market conditions, to replace our higher-cost FHLB – Chicago advances as they mature with lower-cost FHLB – Chicago advances and core deposits. In January 2016, we repaid a matured $3.0 million FHLB – Chicago advance with a cost of 3.90%. During 2016, we intend to repay a maturing $5.0 million FHLB – Chicago advance with an interest rate of 4.62% with $5.0 million of FHLB – Chicago advances costing approximately 1.99%. As a result, we expect that our cost for borrowings will be lower in 2016.

 

Equity. Equity decreased to $6.9 million at December 31, 2015 from $7.6 million at December 31, 2014, primarily as a result of a net loss of $702,000 for the year ended December 31, 2015.

 

Comparison of Results of Operations for the Years Ended December 31, 2015 and December 31, 2014

 

Net Loss. We had a net loss of $702,000 for the year ended December 31, 2015, compared to a net loss of $1.3 million for the year ended December 31, 2014. Our net loss for 2015 was lower primarily due to the recognition of a $1.2 million provision for income taxes in 2014. Our loss before income taxes was $702,000 in 2015 compared to $63,000 in 2014. The increased loss before taxes in 2015 was due to lower non-interest income and net interest income, partially offset by lower non-interest expense. The provision for income taxes in 2014 resulted from an increase in the valuation allowance on our deferred tax assets.

 

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Summary of Net Interest Income

 

  

For the Years Ended

December 31,

   Increase     
   2015   2014   (Decrease)   % Change 
   (Dollars in thousands)     
                 
Interest income:                    
Loans receivable  $3,162   $3,095   $67    2.2%
Investment securities   183    340    (157)   (46.2)
Other interest-earning assets   17    5    12    240.0 
Total interest income   3,362    3,440    (78)   (2.3)
                     
Interest expense:                    
Checking accounts   1        1    N/M 
Savings accounts   5    5        0.0 
Money market deposit accounts   9    7    2    28.6 
Certificates of deposits   759    701    58    8.3 
Total deposits   774    713    61    8.6 
Advances from FHLB – Chicago   405    403    2    0.5 
Total interest expense   1,179    1,116    63    5.6 
Net interest income  $2,183   $2,324   $(141)   (6.1)%

 

 

N/M - Not meaningful.

 

Interest Income. Interest income decreased $78,000, or 2.3%, to $3.3 million for 2015 from $3.4 million for 2014. The decline in interest income is due principally to a lower average balance of interest-earning assets to $88.8 million for 2015 from $91.4 million for 2014, partially offset by a 3 basis point increase in the average yield earned on interest-earning assets to 3.79% for 2015 from 3.76% for 2014.

 

Interest Expense. Interest expense increased $63,000, or 5.6%, to $1.2 million for 2015 from $1.1 million for 2014 as a result of a slightly higher average rate and average balance on interest-bearing liabilities. The average rate paid on interest-bearing liabilities increased to 1.47% for 2015 from 1.43% for 2014. In addition, the average balance on interest-bearing liabilities increased to $80.0 million for 2015 from $77.9 million for 2014.

 

Net Interest Income. Net interest income decreased $141,000, or 6.1%, to $2.2 million for the year ended December 31, 2015 from $2.3 million for the year ended December 31, 2014. The decrease in net interest income was most attributable to a lower average balance and yield on investment securities. The average balance of investment securities decreased due to the sale of $13.8 million of mortgage-backed securities in January, September and December 2014. These sales were principally made to reduce our interest rate risk exposure. The average balance of investment securities decreased $5.2 million, or 29.1%, to $12.6 million for the year ended December 31, 2015 from $17.8 million for the year ended December 31, 2014. The average yield on investment securities decreased 46 basis points to 1.46% for 2015 from 1.92% for 2014. Although a portion of the proceeds were reinvested in loans, our highest interest-earning assets, the impact of the higher average balance on loans was offset by a lower average yield on loans in 2015 and a higher average balance of and rate on our deposits.

 

The average balance of loans increased $3.8 million, or 5.8%, to $69.3 million for 2015 from $65.5 million for 2014. In contrast, the average yield on loans decreased by 16 basis points to 4.57% for 2015 from 4.73% for 2014. The decrease in average yield was due to lower market interest rates and competitive yields offered on commercial loans originated during 2015.

 

The average balance of deposits increased $1.9 million, or 2.8%, to $70.8 million for the year ended December 31, 2015 from $68.9 million for the year ended December 31, 2014. In addition, the average rate on deposits increased 6 basis points to 1.09% for 2015 from 1.03% for 2014. The increase in

 

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the average balance and average rate was primarily attributable to an increase in certificates of deposit accounts.

 

Net interest-earning assets decreased to $8.8 million for 2015 from $13.5 million for 2014. This decrease is due to a lower average balance of interest earning assets and a higher average balance of interest bearing liabilities. We maintained a higher level of non-interest earning demand accounts for a majority of 2015 for liquidity purposes and to improve our interest rate risk position.

 

The net interest rate spread decreased 1 basis point to 2.32% for 2015 from 2.33% for 2014. Our average yield on interest-earning assets increased 3 basis points while the average cost of interest- bearing liabilities increased 4 basis points.

 

Provision for Loan Losses. The provision for loan losses increased $118,000 to $268,000 for the year ended December 31, 2015, compared to $150,000 for the year ended December 31, 2014. The provision for loan losses increased due primarily to the growth in the loan portfolio, in particular, commercial and multi-family real estate loans. These loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers.

 

Summary of Noninterest Income

 

  

For the Years Ended

December 31,

   Increase     
   2015   2014   (Decrease)   % Change 
   (Dollars in thousands)     
                 
Noninterest income:                    
Loan service charges  $15   $19   $(4)   (21.1)%
Gain on investment securities available for sale   2    47    (45)   (95.7)
Income from settlement award       473    (473)   (100.0)
Other   79    74    5    6.8 
Total noninterest income  $96   $613   $(517)   (84.3)%

 

Noninterest Income. Noninterest income decreased $517,000, or 84.3%, to $96,000 for the year ended December 31, 2015 from $613,000 for the year ended December 31, 2014. The decrease is due primarily to $473,000 of income recorded in January 2014 as a result of litigation settled with a former vendor. In addition, $2,000 in gains on sale of investment securities were recognized in the year ended December 31, 2015, compared to $47,000 for the year ended December 31, 2014. During 2014, we sold $13.8 million of mortgage-backed securities in order to reduce our interest rate risk exposure.

 

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Summary of Noninterest Expense

 

  

For the Years Ended

December 31,

   Increase     
   2015   2014   (Decrease)   % Change 
   (Dollars in thousands)     
                 
Noninterest expense:                    
Compensation and benefits  $1,500   $1,321   $179    13.6%
Occupancy expense   243    229    14    6.1 
Equipment expense   159    218    (59)   (27.1)
Data processing   208    175    33    18.9 
FDIC premium expense   79    224    (145)   (64.7)
Professional services   252    270    (18)   (6.7)
Insurance costs   45    54    (9)   (16.7)
Advertising   56    72    (16)   (22.2)
Supplies   48    44    4    9.1 
Operations from foreclosed real estate   (45)   82    (127)   (154.9)
Other   168    161    7    4.3 
Total noninterest expense  $2,713   $2,850   $(137)   (4.8)%

 

Noninterest Expense. Noninterest expense decreased $137,000, or 4.8%, to $2.7 million for the year ended December 31, 2015 from $2.9 million for the year ended December 31, 2014. The decrease was due primarily to decreases in FDIC premium expense, costs of operations of foreclosed real estate and equipment expense, partially offset by higher compensation and benefits and data processing expense.

 

FDIC premium expense decreased substantially as a result of a lower assessment rate due to our improved risk category. Such expenses were $79,000 for the year ended December 31, 2015 versus $224,000 for the comparable prior year. Costs of operations from foreclosed real estate decreased to a credit of $45,000 for the year ended December 31, 2015, compared to an expense of $82,000 for the year ended December 31, 2014. During 2015, we recognized $120,000 in gains on sale of foreclosed real estate versus $62,000 for 2014. In addition, we incurred net expenses on foreclosed real estate of $75,000 for 2015, compared to $144,000 for 2014. The decrease in net expenses for the year ended December 31, 2015 is related to a lower volume of foreclosures and, to a lesser extent, increase in rental income from foreclosed real estate. Equipment expense decreased $59,000, or 27.1%, to $159,000 for 2015, compared to $218,000 for 2014 due to a higher level of amortization of software costs and maintenance costs in 2014.

 

Compensation and benefits increased $179,000, or 13.6%, to $1.5 million for the year ended December 31, 2015 from $1.3 million for the year ended December 31, 2014 due primarily to higher salary levels and defined benefit pension plan costs. During August 2014, we hired a senior lending officer to originate commercial real estate and business loans and oversee the lending operations. Costs of our defined benefit pension plan increased to $92,000 for the year ended December 31, 2015, compared to $38,000 for the year ended December 31, 2014. The increase was due to a higher level of amortization of actuarial losses primarily as a result of the change in the discount rate assumption, which decreased to 3.80% at December 31, 2014 from 4.80% at December 31, 2013, and changes in the mortality tables and, to a lesser extent, a lower than expected return on plan assets. Data processing expense increased $33,000, or 18.9%, to $208,000 for 2015 from $175,000 for 2014 resulting from expansion of products and services in lending and deposit operations.

 

Following the conversion we expect our noninterest expenses to increase. See “―Anticipated Increase in Noninterest Expense,” above.

 

Income Tax Expense. There was no provision for income taxes for the year ended December 31, 2015, compared to $1.2 million for the year ended December 31, 2014. The $1.2 million provision for

 

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income taxes relates to the increase in the valuation allowance on deferred tax assets. Management increased the valuation allowance based upon our cumulative operating losses in recent years. A valuation allowance has been recorded against all components of the net deferred tax asset, except for the unrealized loss on available for sale securities. The deferred tax asset will only be recognized in future periods upon Home Federal’s ability to realize and maintain profitable results of operations.

 

Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the years indicated. No tax-equivalent yield adjustments have been made, as we had no tax-exempt interest-earning assets during the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income.

 

       For the Year Ended December 31, 
       2015   2014 
   At December
31, 2015
Yield/Rate
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
   Average
Outstanding
Balance
   Interest   Average
Yield/Rate
 
   (Dollars in thousands) 
Interest-earning assets:                                   
Loans   4.34%  $69,265   $3,162    4.57%  $65,480   $3,095    4.73%
Investment securities   1.45    12,573    183    1.46    17,741    340    1.92 
Other interest-earning assets   0.47    6,983    17    0.24    8,189    5    0.06 
Total interest-earning assets   3.70    88,821    3,362    3.79    91,410    3,440    3.76 
Non-interest-earning assets        5,767              3,465           
Total assets       $94,588             $94,875           
                                    
Interest-bearing liabilities:                                   
Checking accounts   0.59   $76   $1    0.66   $   $     
Savings accounts   0.05    7,985    5    0.06    8,156    5    0.06 
Money market accounts   0.18    7,507    9    0.12    7,364    7    0.10 
Certificates of deposit   1.51    55,274    759    1.37    53,384    701    1.31 
Total interest-bearing deposits   1.21    70,842    774    1.09    68,904    713    1.03 
Borrowings (1)   4.47    9,205    405    4.40    9,000    403    4.48 
Total interest-bearing liabilities   1.55    80,047    1,179    1.47    77,904    1,116    1.43 
Non-interest-bearing checking accounts        4,356              5,039           
Other non-interest-bearing liabilities        2,726              2,190           
Total liabilities        87,129              85,133           
Equity        7,459              9,742           
Total liabilities and equity       $94,588             $94,875           
Net interest income            $2,183             $2,324      
Net interest rate spread (2)   2.15%             2.32%             2.33%
Net interest-earning assets (3)       $8,774             $13,506           
Net interest margin (4)                  2.46%             2.54%
Average interest-earning assets to interest-bearing liabilities   111.73%             110.96%             117.34%

 

 

(1)Consists entirely of advances from the FHLB – Chicago.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis

 

The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated to the changes due to volume and the changes due to rate in proportion to the absolute dollar amount of the change in each.

 

  

Years Ended December 31,

2015 vs. 2014

 
   Increase (Decrease)
Due to
   Total
Increase
 
   Volume   Rate   (Decrease) 
   (In thousands) 
             
Interest-earning assets:               
Loans  $175   $(108)  $67 
Investment securities   (86)   (71)   (157)
Other interest-earning assets   (1)   13    12 
                
Total interest-earning assets   88    (166)   (78)
                
Interest-bearing liabilities:               
Checking accounts       1    1 
Savings accounts            
Money market accounts       2    2 
Certificates of deposit   25    33    58 
Total interest-bearing deposits   25    36    61 
                
Borrowings   9    (7)   2 
                
Total interest-bearing liabilities   34    29    63 
                
Change in net interest income  $54   $(195)  $(141)

 

Management of Market Risk

 

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset-Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.

 

Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we use to manage interest rate risk are:

 

·paying off our higher-cost FHLB – Chicago advances as they become due and replacing them, subject to market conditions, with lower-cost FHLB – Chicago advances and core deposits;

 

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·originating commercial and multi-family real estate loans, which tend to have shorter terms and higher interest rates than owner occupied one- to four-family residential real estate loans;

 

·increasing the term of customers’ certificates of deposit and increasing core deposits;

 

·increasing noninterest income as a percentage of total income to decrease our reliance on interest rate spread; and

 

·continuing to invest in short- to medium-term investment securities.

 

Our board of directors is responsible for the review and oversight of our Asset-Liability Committee. This committee is charged with developing and implementing an asset/liability management plan, and meets at least quarterly to review pricing and liquidity needs and to assess our interest rate risk. We currently use a Net Portfolio Value Simulation Analysis to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and to manage this risk consistent with the guidelines approved by the board of directors.

 

Net Portfolio Value Simulation Analysis. We compute the amounts by which the net present value of our cash flow from assets, liabilities and off-balance sheet items (the institution’s net portfolio values or “NPV”) would change in the event of a range of assumed changes in market interest rates. Given the current low level of market interest rates, we do not prepare a net portfolio value calculation for an interest rate decrease of greater than 100 basis points.

 

The tables below set forth, at December 31, 2015, the estimated changes in our net portfolio value that would result from the designated instantaneous changes across the United States Treasury yield curve based on information produced by a third-party consultant. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. This data is for Home Federal only and does not include any yield curve changes in the assets of Best Hometown Bancorp.

 

         NPV as a Percentage of
Present Value of Assets (3)
 
Change in      Estimated Increase       Increase 
Interest Rates  Estimated   (Decrease) in NPV   NPV   (Decrease) 
(basis points) (1)  NPV (2)   Amount   Percent   Ratio (4)   (basis points) 
(Dollars in thousands)
                     
+300  $12,367   $(2,314)   (15.76)%   13.42%   (104)
+200   13,356    (1,325)   (9.03)%   14.01%   (45)
+100   14,260    (421)   (2.87)%   14.46%    
   14,681            14.46%    
-100   13,628    (1,053)   (7.17)%   13.16%   (130)

 

 

(1)Assumes an immediate uniform change in interest rates at all maturities.
(2)NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)NPV Ratio represents NPV divided by the present value of assets.

 

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the

 

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table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. The table also does not measure the changes in credit and liquidity risk that may occur as a result of changes in general interest rates. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on our net portfolio value and will differ from actual results.

 

Liquidity and Capital Resources

 

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, advances from the Federal Home Loan Bank of Chicago (“FHLB – Chicago”), and repayments, maturities and calls of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2015.

 

We regularly monitor and adjust our investments in liquid assets based upon our assessment of: (i) expected loan demand; (ii) expected deposit flows; (iii) yields available on interest-earning deposits and securities; and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning and non interest-earning deposits and short- and medium-term securities.

 

Our most liquid assets are cash and cash equivalents. The levels of these assets are affected by our operating, financing, lending and investing activities during any given period. At December 31, 2015, cash and cash equivalents totaled $9.1 million.

 

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Statements of Cash Flows included in our financial statements.

 

At December 31, 2015, we had $1.4 million in loan commitments outstanding including loans in process. Certificates of deposit due within one year of December 31, 2015 totaled $16.1 million, or 20.1% of total deposits. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2016.

 

The additional capital that we are raising in the offering will provide additional liquidity. Moreover, it is our intention as we grow our commercial and multi-family real estate portfolio, to emphasize lower cost deposit relationships with these commercial loan customers and thereby replace our higher cost certificates with lower cost deposits. We have the ability to attract and retain deposits by adjusting the interest rates we offer.

 

Our primary investing activity is originating loans. During the years ended December 31, 2015 and December 31, 2014, we originated $19.5 million and $9.3 million of loans, respectively. In addition, during 2015 we sold a $1.9 million participating interest in a commercial real estate loan, and purchased a

 

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$338,000 interest in a commercial real estate loan. We did not sell or purchase any loans or loan participations during 2014.

 

Financing activities consist primarily of activity in deposit accounts and FHLB – Chicago advances. We had a net increase of $8.9 million and a net decrease of $3.4 million in deposits for the years ended December 31, 2015 and 2014, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

 

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB-Chicago, which provides an additional source of funds. Our FHLB – Chicago advances totaled $9.0 million at December 31, 2015. At December 31, 2015, we had the ability to borrow up to an additional $34.6 million from the FHLB – Chicago, subject to pledging additional collateral. We also have an unused open line of credit at The Independent BankersBank that would allow us to borrow up to $2.5 million at December 31, 2015.

 

Home Federal is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2015, Home Federal exceeded all regulatory capital requirements. Home Federal is considered “well capitalized” under regulatory guidelines. See “Regulation and Supervision—Federal Banking Regulation—Capital Requirements” and Note 11 – Equity and Regulatory Capital beginning on page F-1 of this prospectus.

 

The net proceeds from the stock offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of new loans. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, resulting in increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, our return on equity will be adversely affected.

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. For additional information, see Note 12 – Financial Instruments with Off-Balance Sheet Risk of the notes to the financial statements included in this prospectus.

 

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

 

Recent Accounting Pronouncements

 

Please refer to Note 1 – Summary of Significant Accounting Policies to our financial statements beginning on page F-1 of this prospectus for a description of recent accounting pronouncements that may affect our financial condition and results of operations.

 

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Impact of Inflation and Changing Price

 

The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes 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 of 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 does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

BUSINESS OF BEST HOMETOWN BANCORP, INC.

 

Best Hometown Bancorp is incorporated in the State of Maryland, and has not engaged in any business to date. Upon completion of the conversion, Best Hometown Bancorp will own all of the issued and outstanding stock of Home Federal. We intend to contribute at least 50% of the net proceeds from the stock offering to Home Federal. Best Hometown Bancorp will retain the remainder of the net proceeds from the stock offering and use a portion of the retained net proceeds to make a loan to the employee stock ownership plan. Depending on the amount of net proceeds retained at the holding company, we may use the net proceeds to pay dividends to stockholders and repurchase shares of common stock, subject to our planned growth, capital needs and regulatory limitations. We will invest our initial capital as discussed in “How We Intend to Use the Proceeds from the Offering.”

 

After the conversion and the offering are complete, Best Hometown Bancorp, as the holding company of Home Federal, will be authorized to pursue other business activities permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies or the expansion of our branch network through de novo branching or branch acquisitions. See “Regulation and Supervision—Holding Company Regulation” for a discussion of the activities that are permitted for savings and loan holding companies. We currently have no understandings or agreements to acquire other financial institutions or to expand our branch network, although we may determine to do so in the future. We may also borrow funds for reinvestment in Home Federal.

 

Following the offering, our cash flow will depend on earnings from the investment of the net proceeds from the offering that we retain, and any dividends we receive from Home Federal. Home Federal is subject to regulatory limitations on the amount of dividends that it may pay. See “Regulation and Supervision—Federal Banking Regulation—Capital Distributions.” Initially, Best Hometown Bancorp will neither own nor lease any property, but will instead pay a fee to Home Federal for the use of its premises, equipment and furniture. At the present time, we intend to employ only persons who are officers of Home Federal to serve as officers of Best Hometown Bancorp. We will, however, use the support staff of Home Federal from time to time. We will pay a fee to Home Federal for the time devoted to Best Hometown Bancorp by employees of Home Federal; however, these persons will not be separately compensated by Best Hometown Bancorp. Best Hometown Bancorp may hire additional employees, as appropriate, to the extent it expands its business in the future.

 

BUSINESS OF Home Federal Savings and Loan Association of Collinsville

 

General

 

Home Federal is a federal mutual savings and loan association that was organized in 1887. Following completion of the conversion, the Bank intends to change its name to Best Hometown Bank. We conduct our operations from our main office in Collinsville, Illinois and our full-service branch office in Maryville, Illinois. Our primary deposit market includes the areas surrounding our banking offices in

 

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Collinsville and Maryville, Illinois. Our primary lending market is Madison and St. Clair Counties, Illinois and, to a lesser extent, St. Louis County, Missouri.

 

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in loans. Our primary lending activity includes one- to four-family residential real estate loans, including non-owner occupied one- to four-family real estate loans, commercial and multi-family real estate loans and construction and land loans. To a lesser extent, we also make commercial business loans and consumer loans, including home equity loans and lines of credit. At December 31, 2015, $52.2 million, or 68.5% of our total loan portfolio was comprised of owner occupied one- to four-family real estate loans, and $14.9 million, or 19.5% of our total loan portfolio, was comprised of commercial and multi-family real estate loans. Our commercial and multi-family real estate loan portfolio has grown $11.2 million from $3.7 million at December 31, 2013 to $14.9 million at December 31, 2015.

 

We also invest in securities, which at December 31, 2015, consisted of securities issued by U.S. government agencies and U.S. government-sponsored enterprises.

 

We offer a variety of deposit accounts, including interest-bearing and non interest-bearing checking accounts, savings and money market accounts and certificates of deposit. We have recently expanded the products we offer our customers, including online banking, remote deposit capture and ATM cards and debit cards. We are also in the process of adding mobile banking.

 

We utilize advances from the FHLB – Chicago.

 

In 2015, we began offering brokerage services to our customers through a networking arrangement with a registered broker-dealer.

 

We are subject to comprehensive regulation and examination by our primary federal regulator, the Office of the Comptroller of the Currency (“OCC”).

 

Our main office is located at 100 East Clay Street, Collinsville, Illinois 62234, and our telephone number at this address is (618) 345-1121. Our website address is www.homefed24.com. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.

 

Recent Losses from Operations / Restructuring of Management and Business Operations

 

We have experienced operating losses in recent years. As a result, we have a deferred tax asset of $3.2 million (before deferred tax liabilities and valuation allowance) which includes a deferred tax asset of $1.7 million for net operating losses.

 

In order to address the Bank’s losses, the Board has made significant changes to our management and operating processes. In April 2012, we hired Ronnie R. Shambaugh to our executive staff, and in May 2013, Mr. Shambaugh was promoted to President and Chief Executive Officer and appointed to the Board of Directors. Mr. Shambaugh has 44 years of experience in community banking, including past experience as a President and Chief Executive Officer. In 2013, we hired Cynthia T. Knebel, with over 44 years of experience in community bank management, operations, accounting and compliance, as our Chief Financial Officer; and in 2014 we hired David W. Gansner, a commercial and residential lender with over 33 years of community banking experience, as our Executive Vice President—Chief Loan Officer. Overall, the community banking experience of our new executive management team averages over 41 years. In addition, in February 2016 we hired a new loan officer with lending and underwriting

 

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experience. Since 2012 we have added two new loan officers, and only one of the Bank’s four loan officers as of 2012 is still working for the Bank.

 

Our new management’s initial task was to reduce the Bank’s non-performing assets and improve the Bank’s credit administration policies and procedures. The Bank has implemented new procedures for obtaining and analyzing credit and collateral information to better monitor credit risk. Beginning in 2013, our new management team has also aggressively worked through the Bank’s nonperforming loans, placing loans into foreclosed real estate where appropriate and managing the sale of such properties. Many of the Bank’s nonperforming loans were due to prior management’s origination of high-risk loans, such as loans for the rehabilitation of residential properties. The Bank no longer makes these loans. In addition, the Bank has adopted and implemented new procedures for dealing with delinquent loans, including contacting delinquent borrowers earlier and actively monitoring each delinquent loan.

 

The purposes of the upgrades to our policies and procedures were to reduce nonperforming assets and the likelihood of future credit problems, and to provide a platform for managed growth. Our efforts to reduce nonperforming assets has been largely successful, as nonperforming assets have decreased from $2.2 million, or 2.29% of total assets at December 31, 2012, to $1.2 million, or 1.17% of total assets at December 31, 2015.

 

Although our asset quality has improved, we have continued to experience losses. For the year ended December 31, 2015 and 2014, we had net losses of $702,000 and $1.3 million, respectively. Our losses in 2014 and 2015 were largely due to declines in our net interest income. Our net interest income has been negatively impacted by a decline in our asset base as we have dealt with problem assets. During 2014, we also recognized a $1.2 million provision for income taxes due to an increase in the valuation allowance on our deferred tax asset.

 

To increase net interest income, management has focused on lowering the Bank’s borrowing expenses, which are elevated due to higher costing FHLB – Chicago advances entered into in the past. At December 2015, we had $9.0 million of FHLB – Chicago advances with an average cost of 4.47%. We intend, subject to market conditions, to replace our higher-cost FHLB – Chicago advances as they mature with lower-cost FHLB – Chicago advances and core deposits. In January 2016, we repaid a matured $3.0 million FHLB – Chicago advance that had a cost of 3.90%. During 2016, we will also repay a maturing $5.0 million FHLB – Chicago advance with an interest rate of 4.62% with $5.0 million of FHLB-Chicago advances costing approximately 1.99%.

 

Going forward, our business strategy includes becoming a profitable, well-managed community bank. We aim to achieve profitability through increasing our earnings base, including continuing to increase our commercial real estate and multi-family real estate lending and, to a lesser extent, continuing to diversify our loan portfolio by increasing our commercial business lending and consumer lending. We also expect to increase our non-interest income through our entrance into the secondary market with the origination and sale of one- to four-family residential loans with terms of 20 years or more. In addition, in 2015 we began offering brokerage services to our customers through a networking arrangement with a registered broker-dealer. We expect brokerage services to increase our noninterest income in the future. Most importantly, we will continue to adhere to our conservative underwriting standards of recent years which we believe have resulted in our improved credit quality. See “—Business Strategy.”

 

Finally, in order to set the stage for improved results of operations, we intend to terminate our employer defined benefit pension plan subsequent to the completion of the conversion. However, the timing of the termination of the plan will depend on our post conversion capital levels and needs, our evaluation of future interest rates and annuity cost trends, and the estimated cost to terminate the plan, as it may change from time to time. As of December 31, 2015, the estimated charge to operations to terminate the plan was $1.9 million.

 

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Based on the above, we do not anticipate net income until we experience significant growth in our earnings base pursuant to our business strategy. Assuming the successful execution of our business plan, we do not expect that we will return to profitability until fiscal 2017. We may be unsuccessful, however, in executing on our business plan and may not return to profitability in the timeframe we expect, or at all.

 

Market Area

 

We conduct our operations from our two full-service banking offices located in Madison County, Illinois. Our primary deposit market includes the areas surrounding our banking offices in Collinsville and Maryville, Illinois. Our primary lending market includes Madison and St. Clair Counties, Illinois and, to a lesser extent, St. Louis County, Missouri.

 

In 2010, the services industry, wholesale/retail trade industry, and manufacturing industry provided the first, second and third highest levels of employment, respectively, for both Madison and St. Clair Counties and for Illinois. Based on data from the U.S. Bureau of Labor Statistics, through November of 2015, unemployment rates were 6.7%, 9.8%, 5.8%, and 4.8% in Madison County, St. Clair County, the state of Illinois and the United States, respectively.

 

According to the U.S. Census Bureau, from 2000 to 2010 the populations of Madison County and St. Clair County increased by 4.0% and 5.5%, respectively, while the population of Illinois and the United States increased by 3.3% and 9.7%, respectively. Through 2019, the population of Madison County is projected to decrease by less than 0.1% and the population of St. Clair County is projected to decrease by 2.0%, while the population of Illinois and the United States are projected to increase by 2.3% and 6.6%, respectively. From 2000 to 2010, median household income increased by 24.0%, 29.7%, 13.7% and 19.2% to $51,506, $50,728, $52,972 and $50,046 in Madison County, St. Clair County, the State of Illinois and the United States, respectively. From 2010 through 2019, median household income is projected to increase 10.9% to $57,130 in Madison County and increase 4.5% to $53,033 in St. Clair County, while the median household income of the State of Illinois and the United States are projected to increase by 21.1% and 22.9%, respectively, to $64,135 and $61,485.

 

Competition

 

We face significant competition within our market both in making loans and attracting deposits. Our market area has a high concentration of financial institutions, including large money center, regional and super regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies.

 

As of June 30, 2015 (the latest date for which information is available), our deposit market share represented 1.61% of FDIC-insured deposits in Madison County, Illinois, ranking us thirteenth out of twenty-six FDIC-insured institutions with offices in the county. This data does not include credit unions, with whom we also compete.

 

Lending Activities

 

General. Our principal lending activity is originating one- to four-family residential loans, commercial real estate and multi-family loans and, to a lesser extent, construction and land loans, commercial business loans and consumer loans, including home equity loans. At December 31, 2015, our

 

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gross loans totaled $76.2 million, of which $52.2 million, or 68.5%, were owner occupied one- to four-family residential loans, $14.9 million, or 19.5%, were commercial and multi-family real estate loans and $4.8 million, or 6.3% were investor loans.

 

Historically, our principal lending activity has been the origination of one- to four-family residential loans. In late 2014, we changed our strategic plan to expand our commercial and multi-family real estate lending to increase the yield of our loans and shorten asset duration. As a result, our portfolio of commercial and multi-family real estate loans has increased from $5.9 million, or 8.6% of total gross loans, at December 31, 2014, to $14.9 million, or 19.5% of total loans, at December 31, 2015. As part of our business strategy of managed growth following the conversion we intend to increase our emphasis on commercial and multi-family real estate loans and, to a lesser extent, continue to diversify our loan portfolio by increasing our commercial business lending, consumer lending and loans to investors for the purchase and refinance of non-owner occupied one- to four-family real estate properties. In addition, we intend to increase our non-interest income through our entrance into the secondary market with the origination and sale of one- to four-family residential loans with terms of 20 years or more. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy” for a further discussion of our business strategy.

 

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. We had no loans classified as held for sale at the dates indicated.

 

   At December 31, 
   2015   2014 
   Amount   Percent   Amount   Percent 
   (Dollars in thousands) 
Real estate mortgage loans:                    
One- to four-family, owner occupied  $52,163    68.5%  $52,963    77.7%
One- to four-family, non-owner occupied   4,780    6.3    5,458    8.0 
Commercial and multi-family (1)   14,876    19.5    5,857    8.6 
Construction and land   3,034    4.0    2,980    4.4 
Commercial business loans   713    0.9    514    0.8 
Consumer loans   623    0.8    381    0.5 
Total gross loans  $76,189    100.0%  $68,153    100.0%
                     
Less:                    
Deferred loan fees, net   (79)        (114)     
Allowance for losses   (1,249)        (1,079)     
Loans in process   (559)        (1,520)     
Deferred income            (20)     
Total loans  $74,302        $65,420      

______________________________

(1)At December 31, 2015 and 2014 included $4.3 million and $277,000, respectively, of multi-family real estate loans.

 

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Loan Portfolio Maturities and Yields. The following table summarizes the contractual maturities of our loan portfolio at December 31, 2015. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect the effects of possible prepayments. Contractual maturities of balloon loans have been included for the amortized term, since such loans have been assumed to renew at each balloon date. Actual maturities may differ due to prepayments or due to balloon loans not being renewed.

 

December 31, 2015  One- to Four-
Family,
Owner
Occupied
   One- to Four-
Family, 
Non-owner
Occupied
   Commercial
and Multi-
Family Real
Estate
   Construction
and Land
 
       (In thousands) 
                 
Amounts due in:                    
One year or less  $1,666   $153   $695   $1,661 
More than one to two years   1,741    159    721    119 
More than two to three years   1,819    167    748    124 
More than three to five years   3,886    356    1,581    266 
More than five to ten years   11,344    1,040    4,505    775 
More than ten to 15 years   14,123    1,294    5,418    89 
More than 15 years   17,584    1,611    1,208     
Total  $52,163   $4,780   $14,876   $3,034 

 

December 31, 2015  Commercial
Business
   Consumer   Total 
   (In thousands) 
             
Amounts due in:               
One year or less  $228   $168   $4,571 
More than one to two years   238    175    3,153 
More than two to three years   247    183    3,288 
More than three to five years       97    6,186 
More than five to ten years           17,664 
More than ten to 15 years           20,924 
More than 15 years           20,403 
Total  $713   $623   $76,189 

 

The following table sets forth our fixed-rate and balloon and adjustable-rate loans at December 31, 2015 that are contractually due after December 31, 2016. At December 31, 2015, we had only one adjustable rate loan, which was a commercial real estate loan for $674,000. Our balloon loans have been included with our adjustable-rate loans in the table below because they effectively reprice at the end of their term, which is generally 61 months, similar to an adjustable-rate loan.

 

   Due After December 31, 2016 
   Fixed-Rate   Balloon and
Adjustable-Rate
   Total 
   (In thousands) 
             
Real estate mortgage loans:               
One- to four-family, owner occupied  $34,867   $15,630   $50,497 
One- to four-family, non-owner occupied   1,473    3,154    4,627 
Commercial and multi-family   12,282    1,899    14,181 
Construction and land   294    1,079    1,373 
Commercial business loans   485        485 
Consumer loans   175    280    455 
Total loans  $49,576   $22,042   $71,618 

 

One- to Four-Family Residential Real Estate Lending. At December 31, 2015, we had $52.2 million of loans secured by owner occupied one- to four-family real estate, representing 68.5% of our total loan portfolio. We also make loans to investors for the purchase and refinance of one- to four-family residential properties that are not owner-occupied, which are described below under “One- to Four-Family Investment Property Loans”.

 

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We have offered both fixed-rate loans and balloon loans secured by owner occupied one- to four-family residential real estate. At December 31, 2015, approximately 31.0% of our owner occupied one- to four-family real estate loans were balloon loans, and the rest of such loans were fixed-rate, fully amortizing loans. We expect that in the future we will make less balloon loans and, eventually, offer an adjustable-rate loan instead.

 

Our fixed-rate loans generally have terms of 15 to 30 years, and our balloon loans generally have terms of 61 months and amortize over 10-30 years. We generally limit the loan-to-value ratios of our one- to four-family residential mortgage loans to 80% of the purchase price or appraised value, whichever is lower. We do not offer loans with higher loan-to-value ratios to borrowers obtaining private mortgage insurance.

 

In the past, we have retained in our portfolio all of the one- to four-family residential real estate loans that we have originated. Going forward, we intend to sell our conforming loans with terms of 20 years or more to the secondary market, including sales to Fannie Mae and Freddie Mac.

 

Our fixed-rate one- to four-family residential real estate loans are generally underwritten according to Freddie Mac guidelines. We have also originated, on a much more limited basis, jumbo loans, which we define as loans over $500,000. The jumbo loans that we have originated are generally fixed-rate loans with terms of 15 to 30 years and a maximum loan-to-value ratio of 80%. At December 31, 2015, we had $4.7 million of jumbo loans in our portfolio. We do not offer FHA and VA loans. At December 31, 2015, almost all of our one- to four-family residential loans were secured by properties located in our market area.

 

Although balloon mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they reprice at the end of the term, the ability of the borrower to renew or repay the loan and the marketability of the underlying collateral may be adversely affected if real estate values decline or in a rising interest rate environment.

 

We have not offered “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also have not offered loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We have not had a “subprime lending” program for one-to four- family residential real estate loans (i.e., loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or “Alt-A” loans (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).

 

All residential mortgage loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property, subject to the mortgage and the loan is not repaid. All borrowers are required to obtain title insurance for the benefit of Home Federal. We also require homeowner’s insurance and fire and casualty insurance and, where circumstances warranted, flood insurance on properties securing real estate loans.

 

One- to Four-Family Investment Property Loans. We originate loans on one- to four-family investment properties, which we refer to herein as investor loans. The subject properties are non-owner occupied. At December 31, 2015, investor loans totaled $4.8 million, or 6.3% of total loans. Our investor loans are generally balloon loans with terms of 61 months and amortizing over 15-20 years. Our

 

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real estate underwriting policies provide that such loans may be made in amounts of up to 80% of the appraised value of the property. At December 31, 2015, our average investor loan had a balance of $68,000. All of our investor loans are secured by properties located in our primary lending area.

 

We underwrite investor loans under our commercial real estate lending policies. In reaching a decision on whether to make an investor loan, we consider the net operating income of the property, the borrower’s expertise and credit history, the global cash flow of the borrowers and the value of the underlying property. We generally require that the properties securing these loans have debt service coverage ratios (the ratio of projected earnings before debt service to debt service) of at least 1.10x. Generally, investor loans made to business entities require the principals to execute the loan agreements in their individual capacity, as well as signing on behalf of such business entity.

 

A borrower’s financial information is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews and periodic face-to-face meetings with the borrower. We require borrowers receiving investor loans to provide annually updated financial statements and federal tax returns, as we do of individual principals on our commercial real estate loans. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including a rent roll and copies of leases, as applicable. The largest investor loan in our portfolio at December 31, 2015 was a $364,000 loan collateralized by a single-family non-owner occupied property. This loan was performing according to its terms at December 31, 2015.

 

Commercial and Multi-Family Real Estate Lending. Consistent with our strategy to increase our yield and reduce our interest rate risk, in 2014 we began to emphasize the origination of commercial and multi-family real estate loans. At December 31, 2015, we had $14.9 million in commercial real estate and multi-family loans, representing 19.5% of our total loan portfolio. Of these loans, $4.3 million were multi-family real estate loans.

 

Our commercial and multi-family real estate loans are generally written as mortgages with balloon maturities of 5 or 7 years and amortizations of 15 to 20 years. In the past we have also offered some fixed-rate, fully amortizing and adjustable-rate commercial real estate loans. At December 31, 2015, we had just one adjustable-rate loan for $674,000, which was secured by an office building and the remaining loans were fixed-rate.

 

The maximum loan-to-value ratio of our commercial and multi-family real estate loans is generally 80% of the lower of cost or appraised value of the property securing the loan.

 

Set forth below is information regarding our commercial and multi-family real estate loans at December 31, 2015. At December 31, 2015, $5.6 million of our commercial and multi-family real estate loans were secured by non-owner occupied properties. These loans are considered to involve more credit risk than owner-occupied commercial real estate loans, and are subject to regulatory concentration limits.

 

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Industry Type  Number of Loans   Balance 
       (Dollars in thousands) 
           
Apartment complexes   9   $4,332 
Office buildings   9    3,313 
Churches   1    1,563 
Nursing homes   1    1,530 
Day care centers   1    820 
Laundromats   1    752 
Restaurants and bars   1    720 
Other retail or service establishments   5    635 
Motels   1    508 
Other miscellaneous   3    703 
Total   32   $14,876 

 

At December 31, 2015, the average loan balance of our outstanding commercial and multi-family real estate loans was $465,000, and the largest of such loans was a $1.6 million loan secured by a church located in our market area. This loan was performing in accordance with its terms at December 31, 2015.

 

We consider a number of factors in originating commercial real estate and multi-family loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service ratio of at least 1.10x. All commercial real estate and multi-family loans are appraised by outside independent appraisers approved by the board of directors.

 

Personal guarantees are generally obtained from the principals of commercial real estate and multi-family loans, although this requirement may be waived in limited circumstances depending upon the loan-to-value ratio and the debt service coverage ratio associated with the loan. We require property and casualty insurance and flood insurance if the property is determined to be in a flood zone area. In addition, most borrowers are required to obtain title insurance.

 

Commercial and multi-family real estate loans entail greater credit risks compared to owner occupied one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial and multi-family real estate than residential properties.

 

Construction and Land Lending. At December 31, 2015, $3.0 million, or 4.0% of our total loan portfolio, consisted of construction and land loans. Of these, $1.4 million were loans to builders or individuals for the purchase of raw land for future residential use and custom home loans, and $1.6 million were loans to builders for the construction of homes that have not been sold prior to commencement of construction, or for land for commercial use. We generally limit our commitments to builders to one or two loans for speculative use at any one time. At December 31, 2015, our largest

 

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construction and land loan was a $487,000 loan secured by vacant land for residential use. This loan was performing in accordance with its original terms at December 31, 2015.

 

Our construction loans are generally fixed-rate, interest only loans for a term of 6 to 9 months and convert to a permanent mortgage loan at the end of the term. Our land loans are generally balloon loans with initial terms of 3 to 5 years and amortization periods of not more than 20 years. The maximum loan-to-value ratio of our construction and land loans is 80% of the lesser of the appraised value or the purchase price of the property.

 

Our construction and land lending generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction or land loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. Land loans pose additional risk because the property generally does not produce income and may be relatively illiquid.

 

Commercial Business Lending. At December 31, 2015, we had $713,000 of commercial business loans, representing 0.9% of our total loan portfolio. These loans are typically fully amortizing fixed-rate loans with terms of 4 to 5 years. We also offer commercial lines of credit that reprice on a yearly basis, although we had no commercial lines of credit outstanding at December 31, 2015. We generally obtain personal guarantees with respect to all commercial business lines of credit.

 

We generally originate commercial business loans on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, the experience and stability of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of any collateral securing the loan. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment in our market area. Therefore, commercial business loans that we originate have greater credit risk than owner occupied one- to four-family residential real estate loans. In addition, commercial business loans may result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require substantially greater evaluation and oversight efforts.

 

At December 31, 2015, the average loan balance of our outstanding commercial business loans was $51,000, and the largest outstanding balance was a $192,000 loan secured by trucks.

 

Consumer Lending. To a lesser extent, we offer a variety of consumer loans, including home equity loans and lines of credit. These loans are typically made as an accommodation to an existing customer in our market area. At December 31, 2015, our consumer loan portfolio totaled $623,000, or 0.8% of our total loan portfolio. At this date, $442,000 of our consumer loans were home equity loans and home improvement loans secured by properties upon which we have the first mortgage, and $7,000 of our consumer loans were unsecured (excluding overdraft accounts).

 

Our consumer loans generally have fixed rates of interest and terms of up to 5 years, depending on the type of collateral and the creditworthiness of the borrower. Our consumer loans may be secured by deposits, automobiles or real estate in the case of home equity loans. Consumer loans are generally made based on an individual’s credit score and income. Automobile loans may generally be made in an amount

 

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up to 100% of the purchase price of a new vehicle, based on the borrower’s credit score. In the case of a used vehicle, loans are made up to 100% of the NADA retail value, subject to the borrower having a high enough credit score. Loans of up to $2,000 may be unsecured depending on the creditworthiness of the borrower.

 

Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

 

Consumer and other loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are unsecured or secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are primarily dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

 

Loan Originations, Participations, Purchases and Sales.

 

Most of our loan originations are generated by our loan personnel operating at our main office and other full-service banking office location. All loans we originate are underwritten pursuant to our policies and procedures. Our volume of loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our loan originations can vary from period to period.

 

Currently, we generally hold all of the loans we originate in our portfolio. Prior to selling a $1.9 million participating interest in a commercial real estate loan in 2015, we had not sold any loans that we originated in recent years. Similarly, until we purchased a loan participation for $338,000 in 2015, we had not purchased any loans or entered into any participations with other banks in recent years. As part of our business strategy, we have begun originating conforming one- to four-family loans with terms of twenty years or more for sale into the secondary market.

 

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The following table shows our loan origination, purchases, sales and repayment activities for the years indicated.

 

   Years Ended December 31, 
   2015   2014 
   (In thousands) 
         
Total gross loans at  beginning of year  $68,153   $67,199 
           
Loans originated:          
Real estate loans:          
One- to four-family, owner occupied   4,315    3,371 
One- to four-family, non-owner occupied   75    350 
Commercial and multi-family   12,102    3,064 
Construction and land   1,669    1,841 
Commercial business   539    545 
Consumer   828    159 
Total loans originated   19,528    9,330 
           
Total loans purchased:          
Commercial and multi-family real estate   338     
           
Loans sold:        
Real estate loans:        
One- to four-family, owner occupied        
One- to four-family, non-owner occupied        
Commercial and multi-family (1)   (1,880)    
Construction and land        
Commercial business        
Consumer        
Total loans sold   (1,880)    
           
Other:          
Principal repayments and other   (9,950)   (8,376)
           
Net loan activity   8,036    954 
Total gross loans at end of year  $76,189   $68,153 

 

(1) Represents a loan participation interest sold.

 

Loan Approval Procedures and Authority.

 

Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of our unimpaired capital and surplus. At December 31, 2015, our largest credit relationship totaled $1.6 million, consisting of three loans secured by an office building, a restaurant/bar and an apartment complex, all in our market area. At December 31, 2015, the loans to this borrower were performing in accordance with their current terms.

 

Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the board of directors. In the approval process for residential loans, we assess the borrower’s ability to repay the loan and the value of the property securing the loan. To assess the borrower’s ability to repay, we review the borrower’s income and expenses and employment and credit history. In the case of commercial and multi-family real estate loans, we also review projected income, expenses and the viability of the project being financed. Projected income is also reviewed for loans secured by non-owner occupied one- to four-family residential properties. We generally require appraisals of all real property securing loans. Appraisals are performed by independent licensed appraisers who are approved by our board of directors. We generally require borrowers to obtain title insurance. All real estate secured loans generally require fire and casualty insurance and, if warranted, flood insurance in amounts at least equal to the principal amount of the loan or the maximum amount available. Our loan approval policies and limits are also established by our board of directors. All loans originated by the Bank are subject to our underwriting guidelines.

 

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Our Branch Manager can approve loans secured by real estate up to $100,000 (with approval of our Senior Loan Officer or our President in the case of a self-employed borrower). Our Branch Manager may also approve secured loans, other than real estate loans, up to $25,000, and unsecured loans up to $2,000. Our Vice President—Lending may approve loans secured by real estate up to $200,000 (with approval of our Senior Loan Officer or our President in the case of a self-employed borrower). Our Vice President—Lending may also approve secured loans, other than real estate loans, up to $30,000, and unsecured loans up to $5,000. Our President and our Senior Loan Officer may each approve loans secured by real estate up to $500,000, and secured loans, other than real estate loans, up to $250,000. Our President and our Senior Loan Officer may approve unsecured loans up to $50,000 and $10,000, respectively. Our Loan Committee, consisting of our President and Chief Executive Officer, Executive Vice President—Chief Loan Officer and one outside director, may approve loans secured by real estate up to $1,000,000. Loans over $1,000,000 must be approved by the full board of directors.

 

Delinquencies, Non-Performing Assets and Classified Assets

 

Delinquency Procedures. When a residential mortgage loan or consumer loan becomes more than 15 days delinquent, Home Federal’s computer system sends an automatic notice advising the borrower of the delinquency. If the mortgage loan remains delinquent 30 days after the due date, Home Federal sends a 30-day default letter giving the borrower approximately 10 days to cure the delinquency. This letter also includes credit counseling information. If the loan still remains delinquent following the 30-day letter, an additional letter is sent at approximately 45 days from the due date giving the borrower an additional 10 days to bring the loan current. If the loan is not made current by approximately 60 days from the due date, a demand letter is sent by regular and certified mail giving the borrower 30 days to cure the delinquency or foreclosure proceedings will begin. If the borrower fails to bring the loan current within 90 days from the due date or fails to make arrangements to make the loan current over a longer period of time, the matter is referred to legal counsel and foreclosure or other collection proceedings are instituted.

 

Commercial business and commercial real estate delinquent borrowers are contacted approximately 10 days after the past due date and in writing thereafter.

 

When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate held for sale. The real estate is recorded at fair value less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new appraisal, which is obtained as soon as practicable, typically after the foreclosure process is completed. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

 

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Delinquent Loans. The following table sets forth our loan delinquencies by type and amount at the dates indicated.

 

   At December 31, 2015 
   30-89 Days   90 Days and Over   Total 
   Number   Amount   Number   Amount   Number   Amount 
   (Dollars in thousands) 
Real estate mortgage loans:                              
One- to four-family, owner occupied   10   $494       $    10   $494 
One- to four-family, non-owner occupied   1    26            1    26 
Commercial and multi-family                        
Construction and land   1    15            1    15 
Commercial business loans                        
Consumer loans   1    2    1    1    2    3 
Total   13   $537    1   $1    14   $538 

 

   At December 31, 2014 
   30-89 Days   90 Days and Over   Total 
   Number   Amount   Number   Amount   Number   Amount 
   (Dollars in thousands) 
Real estate mortgage loans:                              
One- to four-family, owner occupied   12   $668    1   $129    13   $797 
One- to four-family, non-owner occupied   4    311            4    311 
Commercial and multi-family                        
Construction and land   1