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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2015

OR

 

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

For the transition period from                      to                     

Commission file number 000-55352

 

 

Ben Franklin Financial, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland		67-1746204
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
830 East Kensington Road, Arlington Heights, Illinois		60004
(Address of principal executive offices)		(Zip Code)

(847) 398-0990

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

Large Accelerated Filer		¨		Accelerated Filer		¨
Non-accelerated Filer		¨		Smaller Reporting Company		x

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

Number of outstanding shares of common stock as of November 13, 2015: 696,339

 

 

 

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BEN FRANKLIN FINANCIAL, INC.

INDEX

 

				PAGE NO.
PART I – Financial Information
Item 1.		Financial Statements of Ben Franklin Financial, Inc.
Consolidated Statements of Financial Condition (Unaudited) as of September  30, 2015 and December 31, 2014					1
Consolidated Statements of Operations (Unaudited) for the three and nine months ended September  30, 2015 and 2014					2
Consolidated Statements of Comprehensive Loss (Unaudited) for the three and nine months ended September 30, 2015 and 2014					3
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2015 and 2014					4
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September  30, 2015 and 2014					5
Notes to Consolidated Financial Statements (Unaudited)					6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			34
Item 4.		Controls and Procedures			34
PART II - Other Information
Item 1.		Legal Proceedings			35
Item 1A.		Risk Factors			35
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3.		Defaults Upon Senior Securities			35
Item 4.		Mine Safety Disclosures			35
Item 5.		Other Information			35
Item 6.		Exhibits			35
Form 10-Q Signatures					36

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PART I – Financial Information

Item 1. Financial Statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands except share data)

(Unaudited)

 

		September 30, 2015				December 31, 2014
ASSETS
Cash and due from banks		$	1,028			$	969
Interest-earning deposit accounts and federal funds sold			16,023				18,045
Cash and cash equivalents			17,051				19,014
Securities available for sale			9,588				6,636
Loans receivable, net of allowance for loan losses of $967 at September 30, 2015 and $1,206 at December 31, 2014			56,300				60,405
Federal Home Loan Bank stock			921				921
Premises and equipment, net			491				557
Repossessed assets, net			476				504
Accrued interest receivable			188				188
Other assets			142				1,259
Total assets		$	85,157			$	89,484
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Demand deposits - noninterest-bearing		$	4,013			$	5,983
Demand deposits - interest-bearing			9,621				9,530
Savings deposits			10,531				10,199
Money market deposits			13,294				13,680
Certificates of deposit			37,230				40,593
Total deposits			74,689				79,985
Advances from borrowers for taxes and insurance			289				682
Other liabilities			343				524
Common stock in ESOP subject to contingent purchase obligation			161				114
Total liabilities			75,482				81,305
Stockholders’ equity
Preferred stock, no par value; authorized 1,000,000 shares no shares issued and outstanding:
Common stock, par value $0.01 per share; authorized 20,000,000 shares issued and outstanding, net of treasury shares, at:
September 30, 2015 – 696,339 shares
December 31, 2014 – 694,574 shares (1)			7				20
Additional paid-in-capital			10,315				8,233
Treasury stock, at cost – 0 shares at September 30, 2015 and 24,318 at December 31, 2014 (1)			—				(462	)
Retained earnings, substantially restricted			68				855
Unearned Employee Stock Ownership Plan (ESOP) shares			(580	)			(355	)
Accumulated other comprehensive income			26				2
Reclassification of ESOP shares			(161	)			(114	)
Total stockholders’ equity			9,675				8,179
Total liabilities and stockholders’ equity		$	85,157			$	89,484

 

1.	Share amounts for 2014 have been adjusted to reflect the completion of the Company’s conversion offering on January 22, 2015 and the exchange of the existing shares of Ben Franklin Financial, Inc. (a Federal corporation) at an exchange ratio of .3562 for each existing share.

See accompanying notes to consolidated financial statements

 

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BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Interest income
Loans		$	708				767			$	2,116			$	2,392
Securities			36				21				95				52
Federal funds sold and interest earning deposit accounts			16				7				35				23
			760				795				2,246				2,467
Interest expense
Deposits			92				105				278				336
			92				105				278				336
Net interest income			668				690				1,968				2,131
Provision for loan losses			55				—				55				—
Net interest income after provision for loan losses			613				690				1,913				2,131
Non-interest income
Service fee income			38				21				86				69
Gain (loss) on sale of repossessed assets, net			141				(47	)			175				(54	)
Other			9				12				29				46
			188				(14	)			290				61
Non-interest expense
Compensation and employee benefits			478				489				1,460				1,386
Occupancy and equipment			160				153				473				450
Data processing services			78				86				245				258
Professional fees			104				87				327				255
FDIC insurance premiums			46				47				139				149
Repossessed asset expenses, net			3				96				71				260
Other			84				96				290				340
			953				1,054				3,005				3,098
Loss before income taxes			(152	)			(378	)			(802	)			(906	)
Income tax			(10	)			6				(15	)			1
Net loss		$	(142	)		$	(384	)		$	(787	)		$	(907	)
Loss per common share basic and diluted (1)			(0.22	)			(0.56	)			(1.19	)			(1.33	)

 

1.	Per share amounts for 2014 have been adjusted to reflect the completion of the Company’s conversion offering on January 22, 2015 and the exchange of the existing shares of Ben Franklin Financial, Inc. (a Federal corporation) at an exchange ratio of .3562 for each existing share.

See accompanying notes to consolidated financial statements

 

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BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net loss		$	(142	)		$	(384	)		$	(787	)		$	(907	)
Other comprehensive income (loss)
Unrealized holding gains (losses) arising during the period			25				(15	)			39				(4	)
Tax effect			(10	)			6				(15	)			2
Net of tax			15				(9	)			24				(2	)
Comprehensive loss		$	(127	)		$	(393	)		$	(763	)		$	(909	)

See accompanying notes to consolidated financial statements

 

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BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2015 and 2014 – (Unaudited)

(Dollars in thousands)

 

		Common Stock				Additional Paid-In Capital				Treasury Stock				Retained Earnings				Unearned ESOP Shares				Accumulated Other Comprehensive Income				Amount Reclassified on ESOP Shares				Total
Balance at January 1, 2015		$	20			$	8,233			$	(462	)		$	855			$	(355	)		$	2			$	(114	)		$	8,179
Net loss			—				—				—				(787	)			—				—				—				(787	)
Other comprehensive income			—				—				—				—				—				24				—				24
Earned ESOP shares and other stock based compensation			—				(23	)			—				—				48				—				—				25
Reclassification due to conversion			(13	)			13				—				—				—				—				—				—
Net proceeds from common stock offering			—				2,504				—				—				—				—				—				2,504
Funds from termination of MHC			—				50				—				—				—				—				—				50
Addition to ESOP due to conversion			—				—				—				—				(273	)			—				—				(273	)
Retirement of treasury stock due to conversion			—				(462	)			462				—				—				—				—				—
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation			—				—				—				—				—				—				(47	)			(47	)
Balance at September 30, 2015		$	7			$	10,315			$	—			$	68			$	(580	)		$	26			$	(161	)		$	9,675
Balance at January 1, 2014		$	20			$	8,269			$	(462	)		$	2,271			$	(406	)		$	4			$	(79	)		$	9,617
Net loss			—				—				—				(907	)			—				—				—				(907	)
Other comprehensive income			—				—				—				—				—				(2	)			—				(2	)
Earned ESOP shares and other stock based compensation			—				(28	)			—				—				38				—				—				10
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation			—				—				—				—				—				—				(35	)			(35	)
Balance at September 30, 2014		$	20			$	8,241			$	(462	)		$	1,364			$	(368	)		$	2			$	(114	)		$	8,683

See accompanying notes to consolidated financial statements

 

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BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2015				2014
Cash flows from operating activities
Net loss		$	(787	)		$	(907	)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation			81				88
ESOP and other stock based compensation, net			25				10
(Gain) loss on sale of repossessed assets			(175	)			54
Provision for loan losses			55				—
Write-down of repossessed assets			14				190
Changes in:
Deferred loan costs			(8	)			19
Accrued interest receivable			—				30
Other assets			1,102				(516	)
Other liabilities			(181	)			25
Net cash from operating activities			126				(1,007	)
Cash flows from investing activities
Principal repayments on mortgage-backed securities			87				217
Calls of securities available for sale			5,000				1,000
Purchase of securities available for sale			(8,000	)			(3,000	)
Net decrease in loans			3,707				8,840
Sales of repossessed assets			540				295
Expenditures for premises and equipment			(15	)			(26	)
Net cash from investing activities			1,319				7,326
Cash flows from financing activities
Net decrease in deposits			(5,296	)			(8,074	)
Net proceeds from common stock offering			2,231				—
Funds from termination of MHC			50				—
Net change in advances from borrowers for taxes and insurance			(393	)			(191	)
Net cash from financing activities			(3,408	)			(8,265	)
Net change in cash and cash equivalents			(1,963	)			(1,946	)
Cash and cash equivalents at beginning of year			19,014				19,960
Cash and cash equivalents at end of period		$	17,051			$	18,014
Supplemental disclosures
Interest paid		$	278			$	335
Transfers from loans to repossessed assets			351				169

See accompanying notes to consolidated financial statements

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Financial Statement Presentation

The accompanying consolidated financial statements of Ben Franklin Financial, Inc. (the “Company”) and its wholly owned subsidiary Ben Franklin Bank of Illinois (the “Bank”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with SEC rules and regulations. Accordingly, the statements do not include all the information and footnotes required by GAAP for complete financial statements. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto that were included in the Company’s Annual Report for the year ended December 31, 2014. All significant intercompany transactions are eliminated in consolidation. In the opinion of the Company’s management, all adjustments necessary (i) for a fair presentation of the financial statements for the interim periods included herein and (ii) to make such financial statements not misleading have been made and are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year.

In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates. For further information with respect to significant accounting policies followed by the Company in preparation of the financial statements, refer to the Company’s 2014 Annual Report.

The Bank is a federally chartered stock savings bank and a member of the Federal Home Loan Bank (“FHLB”) system. The Bank maintains insurance on deposit accounts with the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”).

On September 12, 2014, Ben Franklin Financial filed a Registration Statement on Form S-1 with the Securities and Exchange Commission in connection with the mutual to stock conversion of Ben Franklin Financial, MHC and the related offering of common stock by Ben Franklin Financial, Inc. The Registration Statement (File No. 333-198702) was declared effective by the Securities and Exchange Commission on November 12, 2014. Ben Franklin Financial, Inc. registered 998,488 shares of common stock, par value $0.01 per share, pursuant to the Registration Statement. The stock offering commenced on November 21, 2014, and ended on January 8, 2015.

The stock offering closed January 22, 2015 and resulted in gross proceeds of $3.9 million, through the sale of 390,474 shares of common stock, including 27,333 purchased by the ESOP, at a price of $10.00 per share. Expenses related to the offering were approximately $1.4 million. Net proceeds of the offering were approximately $2.5 million.

As part of the conversion, the MHC’s ownership interest of the Company was offered for sale in a public offering. The existing publicly held shares of the Company, were exchanged for 0.3562 new shares of common stock of Ben Franklin Financial. The exchange ratio ensured that immediately after the conversion and public offering, the public shareholders of Company owned the same aggregate percentage of Ben Franklin Financial common stock that they owned immediately prior to that time (excluding shares purchased in the stock offering and cash received in lieu of fractional shares). When the conversion and public offering was completed, Ben Franklin Financial became the holding company of Ben Franklin Bank of Illinois and succeeded to all of the business and operations of the Company and each of the Company and the MHC ceased to exist. The financial statements do not include the transactions and balances of the MHC.

Ben Franklin Financial, Inc. contributed $2.0 million of the net proceeds of the offering to the Bank. In addition, $273,000 of the net proceeds were used to fund the loan to the employee stock ownership plan and approximately $314,000 of the net proceeds were retained by Ben Franklin Financial, Inc. The net proceeds contributed to the Bank have been invested in interest earning deposits and investment securities, and are expected to be used for funding future loan growth. The net proceeds retained by Ben Franklin Financial, Inc. were deposited with the Bank.

Note 2 – Recent Losses and Management Plans

The Company incurred net losses of $787,000 during the nine months ended September 30, 2015 and $1.4 million during the year ended December 31, 2014. The losses are largely a result of our declining net interest income and increasing non-interest expense related to professional fees, and in 2014, write-downs on repossessed assets. Despite these losses, the Bank’s total capital to risk-based capital ratio and Tier 1 leverage capital to average assets ratio was 19.3% and 10.1% at September 30, 2015 and 15.5% and 8.7% at December 31, 2014. Due to our

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

financial condition over the past several years, the Bank entered into a Consent Order (“Order”) with the Office of the Comptroller of the Currency (“OCC”) on December 19, 2012. The Order outlines areas of weakness that the Bank must improve related to asset quality including valuations, classifications, monitoring, concentrations, and allowance for loan losses; capital and strategic planning; liquidity management; consumer compliance; and management and board structure along with time frames for completion. The Order mandated that the Bank maintain a total risk-based capital ratio of at least 13% and a Tier 1 leverage ratio of at least 9% beginning on March 31, 2014. At September 30, 2015, the Bank was in compliance with the required minimum ratios. At December 31, 2014, prior to the completion of the Company’s stock offering, the Bank was not in compliance with the Tier 1 leverage ratio but was in compliance with the total risk based capital ratio.

Management has initiated specific plans to reduce credit risk and improve the Bank’s regulatory capital ratios including the completion of the public offering in 2015. The Company has $335,000 and $43,000 of cash at September 30, 2015 and December 31, 2014. If the Bank is unable to meet the capital requirements and other requirements of the Order, the OCC may institute other corrective measures and has enforcement powers to impose additional restrictions on the Bank’s operations, including seizure. Although management believes that it will successfully maintain the required capital ratios, there can be no assurance that they will be able to do so, nor that they will be able to comply fully with the provisions of the Order. Only the OCC has the ability to determine whether or not the provisions of the Order have been met.

Note 3 – New Accounting Standards

In May 2014 in an effort to foster additional consistency in recognizing revenue the FASB issued accounting standards update 2014-09 Revenue from Contracts with Customers. The main provisions of the update require the identification of performance obligations within a contract and require the recognition of revenue based on a stand-alone allocation of contract revenue to each performance obligation. Performance obligations may be satisfied and revenue recognized over a period of time if: (i) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs, or (ii) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (iii) the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. After a recent one-year deferral of the effective date, the amendments of the update are to be effective for public entities beginning with interim and annual reporting period beginning after December 31, 2017. Management does not expect the impacts of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 4 – Securities Available for Sale

The amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(Dollars in thousands)
September 30, 2015
U.S. government-sponsored entities		$	9,000			$	16			$	(4	)		$	9,012
Residential mortgage-backed			545				31				—				576
Total		$	9,545			$	47			$	(4	)		$	9,588
December 31, 2014
U.S. government-sponsored entities		$	6,000			$	—			$	(34	)		$	5,966
Residential mortgage-backed			632				38				—				670
Total		$	6,632			$	38			$	(34	)		$	6,636

There were no sales of securities available for sale during the nine months ended September 30, 2015 or 2014. There were no securities pledged to secure any of the borrowings of the Company as of September 30, 2015 and December 31, 2014.

The amortized cost and fair value of available-for-sale securities are shown by contractual maturity as of September 30, 2015. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

		September 30, 2015
		Amortized Cost				Fair Value
		(Dollars in thousands)
U.S. government-sponsored entities
Within one year		$	—			$	—
One to five years			8,000				8,011
Five to ten years			1,000				1,001
Residential mortgage-backed			545				576
Total		$	9,545			$	9,588

Anticipated maturities on mortgage-backed securities are not readily determinable as borrowers have the right to prepay their obligation with or without penalties.

The following table summarizes securities with unrealized losses at September 30, 2015 and December 31, 2014, aggregated by major security type and length of time in a continuous unrealized loss position.

 

		Less Than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
		(Dollars in thousands)
September 30. 2015
U.S. government sponsored entities		$	—			$	—			$	996			$	(4	)		$	996			$	(4	)
December 31, 2014
U.S. government sponsored entities		$	3,985			$	(15	)		$	981			$	(19	)		$	4,966			$	(34	)

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of September 30, 2015 and December 31, 2014, all of the Company’s securities available for sale were issued by U.S. government-sponsored entities and agencies which the government has affirmed its commitment to support.

Unrealized losses on securities have not been recognized into income because the issuer’s securities are of high credit quality (rated AA or higher at the time of purchase), management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity.

Note 5 – Loans

The following table sets forth the composition of our loan portfolio by segment and class, at the dates indicated.

 

		September 30, 2015								December 31, 2014
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
First mortgage loans:
Secured by one- to four-family		$	29,934				52.24	%		$	31,430				50.98	%
Secured by multi-family			7,665				13.38				9,834				15.95
Secured by commercial real estate			12,545				21.89				10,324				16.75
Secured by construction			174				0.30				260				0.42
Secured by land			198				0.35				213				0.35
Total first mortgage loans			50,516				88.16				52,061				84.45
Commercial, consumer and other loans:
Home equity lines-of-credit			5,135				8.96				7,360				11.94
Commercial business loans			755				1.32				826				1.34
Automobile loans			892				1.56				1,401				2.27
Other consumer loans			—				0.00				2				0.00
Total commercial, consumer and other loans			6,782				11.84				9,589				15.55
Gross loans			57,298				100.00				61,650				100.00
Premiums and net deferred loan costs			(31	)							(39	)
Allowance for loan losses			(967	)							(1,206	)
Total loans, net		$	56,300							$	60,405

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

		First Mortgages																				Commercial, Consumer and Other
		(Dollars in thousands)
		One-to-four family				Multi- family				Commercial real estate				Land				Construction				Home equity lines-of- credit				Commercial				Automobile				Other Consumer				Total
For the three months ended September 30, 2015
Allowance for loan losses
Beginning balance		$	462			$	185			$	375			$	6			$	7			$	86			$	7			$	54			$	—			$	1,182
Provision for loan losses			123				(16	)			(7	)			(1	)			(16	)			(17	)			—				(11	)			—				55
Loans charged-off			(284	)			—				—				—				—				—				—				—				—				(284	)
Recoveries			—				—				—				—				14				—				—				—				—				14
Total ending allowance balance September 30, 2015		$	301			$	169			$	368			$	5			$	5			$	69			$	7			$	43			$	—			$	967
For the three months ended September 30, 2014
Allowance for loan losses
Beginning balance		$	609			$	186			$	273			$	7			$	—			$	120			$	11			$	88			$	—			$	1,294
Provision for loan losses			(53	)			28				26				—				(1	)			(18	)			(7	)			(2	)			27				—
Loans charged-off			(12	)			—				—				—				—				—				—				—				—				(12	)
Recoveries			6				—				—				—				1				—				6				—				—				13
Total ending allowance balance September 30, 2014		$	550			$	214			$	299			$	7			$	—			$	102			$	10			$	86			$	27			$	1,295
For the nine months ended September 30, 2015
Allowance for loan losses
Beginning balance		$	392			$	354			$	277			$	6			$	7			$	96			$	8			$	66			$	—			$	1,206
Provision for loan losses			193				(157	)			91				(1	)			(20	)			(27	)			(1	)			(22	)			(1	)			55
Loans charged-off			(284	)			(28	)			—				—				—				—				—				(1	)			—				(313	)
Recoveries			—				—				—				—				18				—				—				—				1				19
Total ending allowance balance September 30, 2015		$	301			$	169			$	368			$	5			$	5			$	69			$	7			$	43			$	—			$	967
For the nine months ended September 30, 2014
Allowance for loan losses
Beginning balance		$	589			$	252			$	300			$	7			$	—			$	78			$	20			$	56			$	—			$	1,302
Provision for loan losses			(30	)			(38	)			(187	)			6				(4	)			42				140				44				27				—
Loans charged-off			(15	)			—				—				(6	)			—				(18	)			(166	)			(16	)			—				(221	)
Recoveries			6				—				186				—				4				—				16				2				—				214
Total ending allowance balance September 30, 2014		$	550			$	214			$	299			$	7			$	—			$	102			$	10			$	86			$	27			$	1,295

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table represents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and class based on the impaired method at the dates indicated. The recorded investment in loans excludes accrued interest and loan origination fees due to immateriality.

 

		Loan Balance												Allowance
		(Dollars in thousands)
		Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Total Recorded Investment				Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Total Recorded Investment
September 30, 2015
One-to-four-family		$	1,648			$	28,286			$	29,934			$	41			$	260			$	301
Multi-family			1,359				6,306				7,665				58				111				169
Commercial real estate			—				12,545				12,545				—				368				368
Land			—				198				198				—				5				5
Construction			—				174				174				—				5				5
Home equity lines of credit			—				5,135				5,135				—				69				69
Commercial			41				714				755				—				7				7
Automobile			—				892				892				—				43				43
Other consumer			—				—				—				—				—				—
Total		$	3,048			$	54,250			$	57,298			$	99			$	868			$	967
December 31, 2014
One-to-four-family		$	1,403			$	30,027			$	31,430			$	78			$	314			$	392
Multi-family			2,985				6,849				9,834				247				107				354
Commercial real estate			—				10,324				10,324				—				277				277
Land			—				213				213				—				6				6
Construction			—				260				260				—				7				7
Home equity lines of credit			—				7,360				7,360				—				96				96
Commercial			95				731				826				—				8				8
Automobile			—				1,401				1,401				—				66				66
Other consumer			—				2				2				—				—				—
Total		$	4,483			$	57,167			$	61,650			$	325			$	881			$	1,206

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables present information related to loans individually evaluated for impairment by class of loans as of and for the nine months ended September 30, 2015 and 2014 and as of and for the year ended December 31, 2014.

 

		Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated				Average Recorded Investment				Interest Income Recorded				Cash Basis Interest Recorded
		(Dollars in thousands)
September 30, 2015
With no related allowance recorded:
One-to-four-family		$	1,523			$	1,103			$	—			$	1,020			$	—			$	—
Multi-family			798				623				—				1,329				46				46
Commercial real estate			—				—				—				—				—				—
Land			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			244				41				—				65				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Total with no related allowance recorded			2,565				1,767				—				2,414				46				46
With an allowance recorded:
One-to-four-family			545				545				41				550				22				22
Multi-family			736				736				58				743				28				28
Commercial real estate			—				—				—				—				—				—
Land			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			—				—				—				—				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Total with a related allowance recorded			1,281				1,281				99				1,293				50				50
Total		$	3,846			$	3,048			$	99			$	3,707			$	96			$	96

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

		Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated				Average Recorded Investment				Interest Income Recorded				Cash Basis Interest Recorded
		(Dollars in thousands)
September 30, 2014
With no related allowance recorded:
One-to-four-family		$	999			$	612			$	—			$	514			$	—			$	—
Multi-family			2,828				2,477				—				2,503				67				67
Commercial real estate			—				—				—				132				1				1
Land			—				—				—				90				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			361				158				—				194				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Total with no related allowance recorded			4,188				3,247				—				3,433				68				68
With an allowance recorded:
One-to-four-family			559				559				106				576				24				24
Multi-family			760				760				83				768				35				35
Commercial real estate			—				—				—				95				—				—
Land			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			—				—				—				—				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Total with a related allowance recorded			1,319				1,319				189				1,439				59				59
Total		$	5,507			$	4,566			$	189			$	4,872			$	127			$	127

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

		Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated				Average Recorded Investment				Interest Income Recorded				Cash Basis Interest Recorded
		(Dollars in thousands)
December 31, 2014
With no related allowance recorded:
One-to-four-family		$	1,011			$	543			$	—			$	541			$	—			$	—
Multi-family			811				636				—				889				14				14
Commercial real estate			—				—				—				99				—				—
Land			—				—				—				68				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			339				95				—				178				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—								—
Total with no related allowance recorded			2,161				1,274				—				1,775				14				14
With an allowance recorded:
One-to-four-family			860				860				78				588				27				27
Multi-family			2,349				2,349				247				2,369				103				103
Commercial real estate			—				—				—				71				—				—
Land			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			—				—				—				—				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Total with a related allowance recorded			3,209				3,209				325				3,028				130				130
Total		$	5,370			$	4,483			$	325			$	4,803			$	144			$	144

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the aging of the recorded investment in past due loans at the dates indicated by class of loans.

 

		30 - 59 Days Past due				60 - 89 Days Past due				Greater than 90 Days Past Due Still on Accrual				Nonaccrual				Loans Not Past Due				Total
										(Dollars in thousands)
September 30, 2015
One-to-four-family		$	—			$	—			$	—			$	1,103			$	28,831			$	29,934
Multi-family			—				—				—				—				7,665				7,665
Commercial real estate			—				—				—				—				12,545				12,545
Land			—				—				—				—				198				198
Construction			—				—				—				—				174				174
Home equity line of credit			—				—				—				—				5,135				5,135
Commercial			—				—				—				41				714				755
Automobile			—				—				—				—				892				892
Other consumer			—				—				—				—				—				—
Total		$	—			$	—			$	—			$	1,144			$	56,154			$	57,298
December 31, 2014
One-to-four-family		$	—			$	—			$	—			$	847			$	30,583			$	31,430
Multi-family			—				—				—				353				9,481				9,834
Commercial real estate			—				—				—				—				10,324				10,324
Land			—				—				—				—				213				213
Construction			—				—				—				—				260				260
Home equity line of credit			—				—				—				—				7,360				7,360
Commercial			—				—				—				95				731				826
Automobile			—				—				—				—				1,401				1,401
Other consumer			—				—				—				—				2				2
Total		$	—			$	—			$	—			$	1,295			$	60,355			$	61,650

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

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(Unaudited)

 

Credit Quality Indicators

The Bank categorizes loans into risk categories based on relevant information about the ability of a borrower to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. The analysis includes the non-homogeneous loans, such as multi- family, commercial real estate, construction, and commercial loans. The analysis is performed on a quarterly basis. Homogeneous loans are monitored based on past due status of the loan. The risk category of these loans is evaluated at origination, when a loan becomes delinquent or when a borrower requests a concession.

Substandard

Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful

Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. The following table reflects the risk category by loans at the dates indicated based on the most recent analysis performed.

 

		Pass				Substandard				Doubtful				Total
		(Dollars in thousands)
September 30, 2015
One-to-four-family		$	28,831			$	1,103			$	—			$	29,934
Multi-family			7,665				—				—				7,665
Commercial real estate			12,545				—				—				12,545
Land			198				—				—				198
Construction			174				—				—				174
Home equity lines of credit			5,135				—				—				5,135
Commercial			714				41				—				755
Automobile			892				—				—				892
Other consumer			—				—				—				—
Total		$	56,154			$	1,144			$	—			$	57,298
December 31, 2014
One-to-four-family		$	30,583			$	847			$	—			$	31,430
Multi-family			9,481				353				—				9,834
Commercial real estate			10,324				—				—				10,324
Land			213				—				—				213
Construction			260				—				—				260
Home equity lines of credit			7,360				—				—				7,360
Commercial			731				95				—				826
Automobile			1,401				—				—				1,401
Other consumer			2				—				—				2
Total		$	60,355			$	1,295			$	—			$	61,650

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Troubled Debt Restructurings (Dollars in thousands)

Our troubled debt restructurings totaled $2,018 at September 30, 2015 and $3,736 at December 31, 2014. There was one loan totaling $1,561 that paid off during the nine months ended September 30, 2015 which resulted in a $28 charge-off. There were no loans modified as troubled debt restructurings during the nine months ended September 30, 2015 or the year ended December 31, 2014.

There were two loans modified as troubled debt restructurings but paying as agreed under the terms of the modification with a balance of $114 as of September 30, 2015, which are being reported as nonaccrual. There were three loans modified as troubled debt restructurings with a balance of $548 which are being reported as nonaccrual as of December 31, 2014, two of which totaling $448 are paying as agreed under the terms of the modification.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no loans with payments in default during the nine months ended September 30, 2015. During the year ended December 31, 2014 one loan totaling $231, secured by a multi-family building, had payments in default and subsequently paid off resulting in a $60 recovery.

The Company has allocated $99 to specific reserves on $1,281 of loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2015. At December 31, 2014, the Company has allocated $293 to specific reserves on $2,904 of loans to customers whose loan terms have been modified in troubled debt restructurings. The Company has not committed to lend additional amounts as of September 30, 2015 and December 31, 2014 to customers with outstanding loans that are classified as troubled debt restructurings.

Note 6 – Loss Per Share

The following table presents a reconciliation of the components used to compute basic and diluted earnings (loss) per share:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30, 2015				September 30, 2014				September 30, 2015				September 30, 2014
Net income (loss) (Dollars in thousands)		$	(142	)		$	(384	)		$	(787	)		$	(907	)
Weighted average common shares outstanding (1)			658,260				681,254				659,679				680,777
Basic and diluted income (loss) per share (1)		$	(0.22	)		$	(0.56	)		$	(1.19	)		$	(1.33	)

 

1.	Share and per share amounts for 2014 have been adjusted to reflect the completion of the Company’s conversion offering on January 22, 2015 and the exchange of the existing shares of Ben Franklin Financial, Inc. (a Federal corporation) at an exchange ratio of .3562 for each existing share.

The outstanding options and restricted shares are considered antidilutive because of the net loss.

Note 7 – Fair Value Measures

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

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(Unaudited)

 

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Securities Available for Sale: The fair values of securities available-for-sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Assets Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below:

 

						Fair Value Measurements Using
		Balance				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
						(Dollars in thousands)
September 30, 2015
Assets
Securities available for sale
U.S. government-sponsored entities		$	9,012			$	—			$	9,012			$	—
Residential mortgaged-backed			576				—				576				—
		$	9,588			$	—			$	9,588			$	—
December 31, 2014
Assets
Securities available for sale
U.S. government-sponsored entities		$	5,966			$	—			$	5,966			$	—
Residential mortgaged-backed			670				—				670				—
		$	6,636			$	—			$	6,636			$	—

There were no transfers between Level 1, Level 2, and Level 3 during the nine-months ended September 30, 2015 or the year ended December 31, 2014.

 

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(Unaudited)

 

Assets Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below:

 

						Fair Value Measurements Using
		Balance				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
						(Dollars in thousands)
September 30, 2015
Assets
Impaired loans
One-to-four-family		$	725			$	—			$	—			$	725
Multi-family			677				—				—				677
Total impaired loans		$	1,402			$	—			$	—			$	1,402
Repossessed assets
Commercial real estate		$	389			$	—			$	—			$	389
Land			87				—				—				87
Total repossessed assets		$	476			$	—			$	—			$	476
December 31, 2014
Assets
Impaired loans
One-to-four-family		$	272			$	—			$	—			$	272
Multi-family			2,102				—				—				2,102
Total impaired loans		$	2,374			$	—			$	—			$	2,374
Repossessed assets
Commercial real estate		$	389			$	—			$	—			$	389
Land			102				—				—				102
Automobile			13				—				—				13
Total repossessed assets		$	504			$	—			$	—			$	504

Impaired loans, which are measured for impairment using the fair value of the collateral (less cost to sell) for collateral dependent loans, had an aggregate balance of $1,460,000 with a $58,000 valuation allowance at September 30, 2015. The impaired loans resulted in a $55,000 provision for loan loss for the three and nine months ended September 30, 2015. At December 31, 2014, impaired loans had an aggregate balance of $2,653,000 with a $279,000 valuation allowance. The impaired loans resulted in no provision for loan loss for the three and nine months ended September 30, 2014.

Repossessed assets, consisting of other real estate owned, repossessed automobiles, and other repossessed assets are measured at the lower of cost or fair value less costs to sell. Repossessed assets were carried at $476,000 at September 30, 2015 consisting of the cost basis of $644,000 and a valuation allowance of $168,000. Repossessed assets were carried at $504,000 at December 31, 2014, consisting of the cost basis of $657,000 and a valuation allowance of $153,000. There was $14,000 of write-downs on repossessed assets for the three and nine months ended September 30, 2015. There was $68,000 and $190,000 of write-downs for the three and nine months ended September 30, 2014, respectively.

 

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(Unaudited)

 

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2015 and December 31, 2014:

 

September 30, 2015 (Dollars in thousands)
		Fair Value				Valuation Technique		Unobservable Inputs		Range
Impaired loans
One-to-four-family		$	725			Sales comparison approach		Adjustment for differences between the comparable sales		(9.9%) – 14.1%
Multi-family		$	677			Sales comparison approach		Adjustment for differences between the comparable sales		(6.7%) – 13.2%
Other real estate owned
Commercial real estate		$	389			Sales comparison approach		Adjustment for differences between the comparable sales		(16.8%) – (167.3%)
Land		$	87			Sales comparison approach		Adjustment for differences between the comparable sales		(11.6%) – 31.0%

 

December 31, 2014 (Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Inputs

Range

Impaired loans

One-to-four-family

$

272

Sales comparison approach

Adjustment for differences between the comparable sales

(18.9%) – 15.0%

Multi-family

$

2,102

Sales comparison approach

Adjustment for differences between the comparable sales

(11.6%) – 20.7%

Other real estate owned

Commercial real estate

$

389

Sales comparison approach

Adjustment for differences between the comparable sales

(1.2%) – (21.7%)

Land

$

102

Sales comparison approach

Adjustment for differences between the comparable sales

(48.2%) – 4.5%

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

 

						Fair Value Measurements at September 30, 2015 (Unaudited) Using:
		Carrying Amount				Level 1				Level 2				Level 3				Total
						(Dollars in thousands)
Financial assets
Cash and cash equivalents		$	17,051			$	17,051			$	—			$	—			$	17,051
Securities available-for-sale			9,588				—				9,588				—				9,588
Loans receivable, net			56,300				—				—				56,734				56,734
FHLB stock			921				N/A				N/A				N/A				N/A
Accrued interest receivable			188				—				20				168				188
Financial liabilities
Demand, money market, and savings		$	37,459			$	37,459			$	—			$	—			$	37,459
Certificates of deposits			37,230				—				37,312				—				37,312
Advances by borrowers for taxes and insurance			289				289				—				—				289
Accrued interest payable			1				—				1				—				1

 

						Fair Value Measurements at December 31, 2014 Using:
		Carrying Amount				Level 1				Level 2				Level 3				Total
						(Dollars in thousands)
Financial assets
Cash and cash equivalents		$	19,014			$	19,014			$	—			$	—			$	19,014
Securities available-for-sale			6,636				—				6,636				—				6,636
Loans receivable, net			60,405				—				—				61,858				61,858
FHLB stock			921				N/A				N/A				N/A				N/A
Accrued interest receivable			188				—				15				173				188
Financial liabilities
Demand, money market, and savings		$	39,392			$	39,392			$	—			$	—			$	39,392
Certificates of deposits			40,593				—				40,566				—				40,566
Advances by borrowers for taxes and insurance			682				682				—				—				682
Accrued interest payable			—				—				—				—				—

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1

(b) Loans receivable, net

Fair values of loans receivable, net are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(c) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(d) Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value and is classified as Level 2 for securities and Level 3 for loans.

(e) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest demand, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) and are classified as Level 1. The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date are classified as a Level 2. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Accrued Interest Payable

The carrying amount of accrued interest payable approximates its fair value and is classified as Level 2.

Note 8 – Regulatory Capital Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s operations and financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to help ensure capital adequacy require the Bank to maintain minimum amounts and ratios of common equity, Tier I, and total capital as defined in the regulations to risk-weighted assets as defined and of Tier I capital to average total assets as defined. To be categorized as well capitalized, the Bank must maintain minimum common equity, Tier I risk-based, total risk-based, and Tier I leverage ratios. In March 2015, the Bank implemented the Basel III capital rules that reformed the regulatory capital framework.

On December 19, 2012, the Bank entered into the Order with the OCC, which, among other things, included a requirement to maintain a total risk-based capital ratio of at least 13% and a minimum Tier 1 leverage capital ratio of at least 9% beginning on March 31, 2014. As a result of entering into the Order to achieve and maintain specific capital levels, the Bank’s capital classification under the Prompt Corrective Action rules was “adequately capitalized” at September 30, 2015 and December 31, 2014. Although the Bank’s capital levels at September 30, 2015 were above the levels required to be considered “well capitalized” under federal bank regulatory agency definitions, the Bank cannot be consider “well capitalized” as long as it remains under the Order. During 2014, the Bank met the risk-based capital requirement but did not meet the Tier 1 capital requirement. With the completion of the conversion and stock offering on January 22, 2015, the Company did meet the capital requirement of the Order at September 30, 2015. The minimum capital ratios set forth in the Order may be increased and other minimum capital requirements may be established to comply with the Basel III requirements now applicable to the Bank.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If undercapitalized, asset growth and expansion are limited and plans for capital restoration are required.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Actual capital levels and minimum required levels for the Bank were:

 

		Actual								Minimum Required for Capital Adequacy Purposes								Minimum Required By the Current Order (effective March 31, 2013)
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
September 30, 2015
Total capital (to risk-weighted assets)		$	9,442				19.3	%		$	3,911				8.0	%		$	6,355				13.0	%
Common equity Tier 1 capital (to risk-weighted assets)			8,827				18.1				2,200				4.5				N/A				N/A
Tier 1 capital (to risk-weighted assets)			8,827				18.1				2,933				6.0				N/A				N/A
Tier 1 capital (to average total assets)			8,827				10.1				3,493				4.0				7,859				9.0
December 31, 2014
Total capital (to risk-weighted assets)		$	8,510				15.5	%		$	4,387				8.0	%		$	7,129				13.0	%
Tier 1 (core) capital (to risk-weighted assets)			7,818				14.3				2,193				4.0				N/A				N/A
Tier 1 (core) capital (to adjusted total assets)			7,818				8.7				3,580				4.0				8,054				9.0

Under Basel III a capital conservation buffer of 2.5%, comprised of Common Equity Tier 1, is established above the regulatory minimum capital requirement. The capital conservation buffer will be phased in between January 1, 2016 and year end 2018 becoming fully effective on January 1, 2019.

The Bank made the one-time AOCI opt-out election on the first Call Report filed after January 1, 2015, which allows community banks under $250 billion with a one-time opt-out election to remove the impact of certain unrealized capital gains and losses from the calculation of capital. There is no opportunity to change methodology in future periods.

 

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

Forward-Looking Statements

This quarterly report may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management. Words such as “expects,” “believes,” “should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimates,” “assumes,” “likely,” and variations of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to: statements of our goals, intentions, and expectations; statements regarding our business plans and prospects and 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. For this presentation, the Company and its subsidiary claim the protection of the safe harbor for forward-looking statements contained in the PSLRA.

Factors that could cause future results to vary from current management expectations include, but are not limited to: our ability to manage the risk from our one-to four-family, home equity line-of-credit, multi-family, commercial real estate, construction, land, commercial business, and automobile lending including purchased loans; our ability to comply with the terms of the Consent Order (the “Order”) entered into between the Bank and the Office of the Comptroller of the Currency (the “OCC”); the future level of deposit insurance premiums applicable to us; significantly increased competition among depository and other financial institutions; our ability to execute our plan to grow our assets on a profitable basis; changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; inflation; general economic conditions, both nationally and in our market area; adverse changes in the securities and national and local real estate markets (including loan demand, housing demand, and real estate values); our ability to originate a satisfactory amount of high quality loans in an unfavorable economic environment; legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Reform Act, our ability to enter new markets successfully and take advantage of growth opportunities; changes in consumer spending, borrowing and savings habits; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the authoritative accounting bodies; the performance of our investment in FHLB of Chicago stock; changes in our organization, compensation and benefit plans; and other factors. Additional factors that may affect our results are discussed in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission under the heading “Risk Factors.” The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

New Capital Requirements

In July, 2014, the Office of the Comptroller of the Currency and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets, to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule became effective for us on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

 

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General

The Bank is a federally chartered savings bank headquartered in Arlington Heights, Illinois. The Bank was originally founded in 1893 as a building and loan association. We conduct our business from our main office and one branch office. Both of our offices are located in the northwestern corridor of the Chicago metropolitan area.

Our principal business consists of attracting retail deposits from the general public in our market and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans and, to a lesser extent, home equity lines-of-credit, commercial real estate loans, multi-family real estate loans, commercial business loans, construction and land loans, and other loans. We also invest in mortgage-backed and other securities. Our revenues are derived principally from the interest on loans and securities, fees for loan origination services, loan fees, and fees levied on deposit accounts. Our primary sources of funds are deposits and principal and interest payments on loans and securities.

On September 8, 2014 the Board of Directors of the Company, together with the Board of Directors of Ben Franklin Financial, MHC (the “MHC”), adopted a Plan of Conversion and Reorganization pursuant to which the Bank reorganized from the two-tier mutual holding company structure to the stock holding company structure and new Ben Franklin, a Maryland corporation formed to become the new holding company for the Bank, to offer shares of its common stock.

On January 22, 2015, the Company completed the stock offering as set forth in the Plan of Conversion and Reorganization. Proceeds of the offering totaled $2.5 million net of $1.4 million of costs. $2.0 million of the proceeds were used for an additional capital contribution to the Bank. $273,000 of shares sold in the offering were purchased by the Ben Franklin Bank Employee Stock Ownership Plan (the “ESOP”) using a loan from the Company.

Critical Accounting Policies

Certain of our accounting policies are important to the reporting of our financial results, since they require management to make difficult, complex and/or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in performance of the local economy, changes in the financial condition of borrowers, and changes in value of loan collateral such as real estate. As discussed in the Company’s Annual Report for the year ended December 31, 2014, management believes that its critical accounting policies include determining the allowance for loan losses and accounting for deferred income taxes.

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.

Comparison of Financial Condition at September 30, 2015 and December 31, 2014

Assets. Total assets at September 30, 2015 were $85.2 million compared to $89.5 million at December 31, 2014, a decrease of $4.3 or 4.8%. This decrease was primarily due to the $4.1 million decrease in the balance of our loan portfolio, the $2.0 million decrease in our cash and cash equivalents, and a $1.1 million decrease in our other assets, partially offset by the $3.0 million increase in the balance of our securities available for sale.

During the first nine months of 2015, our home equity line-of-credit portfolio decreased $2.2 million, our multi-family loan portfolio decreased $2.2 million, our one- to four- family residential loan portfolio decreased $1.5 million, and our automobile portfolio decreased $509,000. These decreases were partially offset by the $2.2 million increase in our commercial real estate loan portfolio. The net decrease in the portfolio balance was primarily due to the repayments from existing loans exceeding the $7.1 million of new loans originated and the $985,000 of new equity line-of-credit commitments during the first nine months of 2015.

 

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At September 30, 2015 our allowance for loan losses was $967,000 or 1.69% of total loans compared to $1.2 million or 1.96% of total loans at December 31, 2014. The reduction in our allowance reflected $313,000 of loans charged-off during the first nine months of 2015 and $19,000 of recoveries partially offset by a provision of $55,000. Our non-accrual loans, which also represents our total loans classified as substandard or doubtful, was $1.1 million or 2.00% of total loans at September 30, 2015 compared to $1.3 million or 2.10% of total loans at December 31, 2014. During the first nine months of 2015, one loan totaling $1.0 million was placed in non-accrual status and had a subsequent partial charge-off of $284,000, two loans totaling $340,000 were transferred to other real estate owned, and two loans totaling $440,000 were upgraded to accrual status. Our loans classified as troubled debt restructurings (TDR) totaled $2.0 million at September 30, 2015 of which $1.9 million were accruing compared to $3.7 million of TDRs at December 31, 2014 of which $3.2 million were accruing. The decrease in the balance of our TDR’s was primarily the result of the discounted payoff of one loan totaling $1.6 million which resulted in a $28,000 charge-off.

Our securities portfolio increased $3.0 million or 44.5% to $9.6 million at September 30, 2015 compared to $6.6 million at December 31, 2014. The increase was primarily due to the purchase of $8.0 million of callable government sponsored entities notes to increase interest income earned on our excess liquidity until loan origination volume begins to increase. The increase was partially offset by the call of $5.0 million of government sponsored entities notes and the repayments on mortgage-backed securities. The notes purchased have rates ranging between 1.00% and 1.70% and maturities ranging between 3 and 7 years. Two $1.0 million notes purchased have periodic rate increases with initial rates of 1.00% and maturities of 5 years and 7 years. Our cash and cash equivalents decreased $1.9 million to $17.1 million at September 30, 2015.

Our repossessed assets decreased $28,000 during the first nine months of 2015 primarily due the sale of three automobiles with a recorded value of $24,000 and the sale of two repossessed residential properties with a recorded value of $340,000, partially offset by the transfer of two residential loans totaling $340,000 and two automobile loans totaling $11,000 into repossessed assets. The sales of repossessed assets resulted in a net gain of $175,000 for the nine months ended September 30, 2015.

Our other assets decreased $1.1 million primarily due to $812,000 of deferred costs incurred related to the stock offering of the Company that were netted against the proceeds received from the offering which closed January 22, 2015.

Liabilities. Our total liabilities decreased $5.8 million or 7.2% to $75.5 million at September 30, 2015. Our deposits decreased by $5.3 million or 6.6% to $74.7 million at September 30, 2015 compared to $80.0 million at December 31, 2014, primarily due to the $3.4 million or 8.3% decrease in our certificate of deposit accounts to $37.2 million, and the $1.9 million or 12.1% decrease in our demand deposit accounts to $13.6 million at September 30, 2015. The decrease in our demand deposits was primarily due to the $2.9 million of funds held for the subscription stock offering at December 31, 2014 being applied to capital at the closing.

Stockholders’ Equity. Total stockholders’ equity at September 30, 2015 was $9.7 million, an increase of $1.5 million or 18.3% from December 31, 2014. The increase resulted primarily from the $2.5 million of net proceeds from the stock offering partially offset by the net loss of $787,000 for the nine months ended September 30, 2015 and the $273,000 for the new ESOP shares in the conversion.

 

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Comparison of Operating Results for the Three Months Ended September 30, 2015 and 2014

General. For the three months ended September 30, 2015 our net loss was $142,000 compared to a net loss of $384,000 for the three months ended September 30, 2014. The decrease in our net loss was primarily due to the increase in our non-interest income due the gains on the sale of repossessed assets and decrease in non-interest expense, partially offset by the increase in our provision for loan losses and the decrease in our net interest income as interest income declined due to the decline in our average loan portfolio balance.

Interest Income. Interest income was $760,000 for the three months ended September 30, 2015, $35,000, or 4.4%, less than the prior year period. Interest income from loans decreased $59,000 or 7.7% to $708,000 for the three months ended September 30, 2015 primarily due to the $6.4 million decrease in the average balance of our loan portfolio to $56.5 million for the three months ended September 30, 2015 compared to $62.9 million for the prior year period. The decrease in the average balance of our loan portfolio included the $3.5 million decrease in our home equity line-of-credit loans, the $1.4 million decrease in our one- to- four family loans, the $754,000 decrease in our consumer loans, and the $535,000 decrease in our commercial business loans. The decrease in the average balance of our loan portfolio was due to repayments, pay-offs, and transfers of loans to repossessed assets that exceeded our origination volume for loans. The average yield on loans for the three months ended September 30, 2015 was 4.99% compared to 4.86% in the prior year period primarily due to maturing low rate home equity line-of-credit loans which were originated prior to the implementation of an interest rate floor for this product.

Interest income from securities was $36,000 for the three months ended September 30, 2015 compared to $21,000 for the prior year period. The average balance of our securities portfolio was $11.3 million for the three months ended September 30, 2015 compared to $5.5 million the prior year period primarily due to the purchase of $10.0 million of government sponsored entity notes since September 30, 2014 partially offset by calls of $5.0 million of notes and the repayments on mortgage-backed securities. The average yield on securities for the three months ended September 30, 2015 was 1.26% compared to 1.55% for the prior year period. The decrease in yield was primarily due to the call of higher yielding securities and the purchase of lower yielding securities including several adjustable rate notes. The interest income from interest earning deposits increased $9,000 primarily due the investment in higher yielding term bank deposits for the three months ended September 30, 2015.

Interest Expense. Interest expense for the three months ended September 30, 2015 was $92,000, a decrease of $13,000 or 12.4% from the prior year period due to the decrease in interest expense on deposits. The average balance of our deposit accounts decreased $6.0 million to $71.3 million for the three months ended September 30, 2015 primarily due to the $5.4 million decrease in the average balance of our certificate of deposit accounts to $37.9 million and the $1.2 million decrease in the average balance of our money market accounts. These decreases were partially offset by the $597,000 increase in the average balance of our checking accounts. The average cost of deposits decreased to 0.51% for the three months ended September 30, 2015 compared to 0.54% for the prior year period. We have not aggressively priced our certificate of deposit accounts to stabilize the decline, given our high level of liquidity and low loan origination volume.

Net Interest Income. Net interest income for the three months ended September 30, 2015 was $668,000 compared to $690,000 for the three months ended September 30 2014. For the three months ended September 30, 2015, the average yield on interest-earning assets was 3.56% and the average cost of interest-bearing liabilities was 0.51% compared to 3.64% and 0.54%, respectively, for the three months ended September 30, 2014. The decrease in the average yield of our interest earning assets was primarily due to the decline in the average balance of our loan portfolio due to the payoff of higher yielding loans and the increase in the balance of our lower yielding securities portfolio. These changes resulted in a decrease in our net interest rate spread and net interest margin to 3.05% and 3.13% respectively for the three months ended September 30, 2015 compared to a net interest rate spread of 3.10% and net interest margin of 3.16% for the prior year period.

Provision for Loan Losses. Our provision for loan losses for the three months ended September 30, 2015 was $55,000 compared to no provision in the prior year period. Our provision for the three months ended September 30, 2015 was primarily due to the impact of the $284,000 charge-off taken during the quarter on a residential property. Management concluded that this charge-off reflected the nature of the specific credit rather than general market conditions of the collateral within the portfolio. The impact of the charge-off was partially offset by the improving conditions reflected in the other qualitative factors that management reviews when considering the adequacy of the allowance including; the improving labor market as reflected in the declining unemployment rate, the improving local real estate market as evidenced by the trends in the Case Schiller index, and the overall improvement in the

 

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credit quality of our loan portfolio as evidenced by the trend in the low amount of loan delinquencies and the declining balance of our TDRs. Based on these factors and the additional provision, management believes the balance of our allowance for loan losses appropriately reflected the probable incurred credit losses in the portfolio based on an analysis of the Bank’s historical loss history and other current factors including market values and current economic conditions and trends.

Non-interest Income. For the three months ended September 30, 2015, non-interest income was $188,000 compared to $(14,000) for the three months ended September 30, 2014 primarily due to the $141,000 gain on the sale of a residential real estate property in third quarter of 2015 compared to the $47,000 loss on the sale of two repossessed assets for the three months ended September 30, 2014. Our fees for the origination of loans for other institutions was $17,000 for the three months ended September 30, 2015 compared to none in the prior year period.

Non-interest Expense. For the three months ended September 30, 2015, our non-interest expense totaled $951,000 compared to $1.1 million for the three months ended September 30, 2014, a decrease of $101,000 or 9.6%. Our repossessed asset costs decreased $93,000 or 96.9% for the three months ended September 30, 2015 compared to the prior year period primarily due to the $54,000 decrease in write-downs and a $30,000 refund of prior real estate taxes paid. Our employee compensation and benefit costs decreased $11,000. Our professional fees increased $17,000 primarily due to an increase in legal fees. Our other costs decreased $14,000 primarily due to an adjustment to our reserve for off-balance sheet commitments.

Income Tax. We recorded immaterial amounts for income taxes for the three months ended September 30, 2015 and 2014.

Comparison of Operating Results for the Nine Months Ended September 30, 2015 and 2014

General. For the nine months ended September 30, 2015 our net loss was $787,000 compared to a net loss of $907,000 for the nine months ended September 30, 2014. The decrease in our net loss was primarily due to the increases in our non-interest income due the gains on the sale of repossessed assets and the decrease in non-interest expense, partially offset by the increase in our provision for loan losses and the decrease in our net interest income as interest income declined due to the decline in our average loan portfolio balance.

Interest Income. Interest income was $2.2 million for the nine months ended September 30, 2015, $221,000, or 9.0%, less than the prior year period. Interest income from loans decreased $276,000 or 11.5% to $2.1 million for the nine months ended September 30, 2015 primarily due to the $8.2 million decrease in the average balance of our loan portfolio to $57.6 million for the nine months ended September 30, 2015 compared to $65.8 million for the prior year period. The decrease in the average balance of our loan portfolio included the $2.3 million decrease in our multi-family and commercial real estate loans, the $3.8 million decrease in our home equity line-of-credit loans, the $851,000 decrease in our consumer loans, and the $743,000 decrease in our commercial business loans. The decrease in the average balance of our loan portfolio was due to repayments, pay-offs, and transfers of loans to repossessed assets that exceeded our origination volume for loans. The average yield on loans for the nine months ended September 30, 2015 was 4.90% compared to 4.85% in the prior year period primarily due to maturing low rate home equity line-of-credit loans which were originated prior to the implementation of an interest rate floor for this product.

Interest income from securities was $95,000 for the nine months ended September 30, 2015 compared to $52,000 for the prior year period. The average balance of our securities portfolio was $9.5 million for the nine months ended September 30, 2015 compared to $4.5 million the prior year period primarily due to the purchase of $10.0 million of government sponsored entity notes since September 30, 2014 partially offset by calls of $5.0 million of notes and the repayments on mortgage-backed securities. The average yield on securities for the nine months ended September 30, 2015 was 1.33% compared to 1.55% for the prior year period due to the call of higher yielding securities and purchase of lower yielding rate securities including several adjustable rate notes. The interest income from interest earning deposits increased $12,000 primarily due the investment in higher yielding term bank deposits for the nine months ended September 30, 2015.

Interest Expense. Interest expense for the nine months ended September 30, 2015 was $278,000, a decrease of $58,000 or 17.3% from the prior year period due to the decrease in interest expense on deposits. The average balance of our deposit accounts decreased $7.9 million as the balance of our certificate of deposit accounts

 

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decreased $6.5 million to $39.0 million and the average balance of our money market accounts decreased $1.8 million to $13.4 million for the nine months ended September 30, 2015. These decreases were partially offset by the $472,000 increase in the average balance of our checking accounts. The average cost of deposits decreased to 0.52% for the nine months ended September 30, 2015 compared to 0.56% for the prior year period. We have not aggressively priced our certificate of deposit accounts to stabilize the decline, given our high level of liquidity and low loan origination volume.

Net Interest Income. Net interest income for the nine months ended September 30, 2015 was $2.0 million compared to $2.1 million for the prior year period. For the nine months ended September 30, 2015, the average yield on interest-earning assets was 3.51% and the average cost of interest-bearing liabilities was 0.52% compared to 3.66% and 0.56%, respectively, for the nine months ended September 30, 2014. The decrease in the average yield of our interest earning assets was primarily due to the decline in the average balance of our loan portfolio due to the payoff of higher yielding loans and the increase in the balance of our lower yielding securities portfolio. These changes resulted in a decrease in our net interest rate spread and net interest margin to 2.99% and 3.08% respectively for the first nine months of 2015 compared to a net interest rate spread of 3.10% and net interest margin of 3.16% for the prior year period.

Provision for Loan Losses. Our provision for loan losses for the nine months ended September 30, 2015 was $55,000 compared to no provision in the prior year period. Our provision for the nine months ended September 30, 2015 was primarily due to the impact of the $284,000 charge-off taken during the third quarter on a residential property. Management concluded that this charge-off reflected the nature of the specific credit rather than general market conditions of the collateral within the portfolio. The impact of the charge-off was partially offset by the improving conditions reflected in the other qualitative factors that management reviews when considering the adequacy of the allowance including; the improving labor market as reflected in the declining unemployment rate, the improving local real estate market as evidenced by the trends in the Case Schiller index, and the overall improvement in the credit quality of our loan portfolio as evidenced by the trend in the low amount of loan delinquencies and the declining balance of our TDRs. Based on these factors and the additional provision, management believes the balance in our allowance for loan losses appropriately reflected the probable incurred credit losses in the portfolio based on an analysis of the Bank’s historical loss history and other current factors including market values and current economic conditions and trends.

Non-interest Income. For the nine months ended September 30, 2015, non-interest income was $290,000 compared to $61,000 for the nine months ended September 30, 2014 primarily due to the $175,000 net gain on the sale of repossessed assets for the nine months ended September 30, 2015 compared to the $54,000 net loss for the prior year period. Our fees for the origination of loans for other institutions was $27,000 for the nine months ended September 30, 2015 compared to none the prior year period. These increase were partially offset by the $13,000 decrease in rental income from other repossessed assets for the first nine months of 2015 compared to the prior year period.

Non-interest Expense. For the nine months ended September 30, 2015, our non-interest expense totaled $3.0 million compared to $3.1 million for the nine months ended September 30, 2014 a decrease of $93,000 or 3.0%. Our compensation and employee benefit costs increased $74,000 or 5.3% primarily due to the increase in staff during the second quarter of 2014, the increase in the cost of health insurance, and ESOP cost due the additional shares related to the stock offering. Professional fees increased $72,000 primarily due to the $23,000 increase in consulting fees, due to the one time consulting fees related to vendor contract reviews, and the $44,000 increase in legal fees. Our repossessed asset costs decreased $189,000 primarily due to the $175,000 decrease in write-downs. Other expenses decreased $50,000 primarily due our loan portfolio review costs incurred for the nine months ended September 30, 2014.

Income Tax. We recorded immaterial amounts for income taxes for the three months ended September 30, 2015 and 2014.

 

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Non-Performing Assets

The following table sets forth the amounts and categories of our non-performing assets at the dates indicated.

 

		September 30, 2015				December 31, 2014
		(Dollars in thousands)
Non-accrual loans (excluding troubled debt restructurings):
Real estate loans:
One- to four-family residential		$	1,030			$	747
Multi-family			—				—
Commercial			—				—
Construction			—				—
Land			—				—
Home equity lines of credit			—				—
Commercial business loans			—				—
Automobile loans			—				—
Other consumer loans			—				—
Total non-accrual loans			1,030				747
Loans 90 days or more past due and still accruing:
Real estate loans:
One- to four-family residential			—				—
Multi-family			—				—
Commercial			—				—
Construction			—				—
Land			—				—
Home equity lines of credit			—				—
Commercial business loans			—				—
Automobile loans			—				—
Other consumer loans			—				—
Total loans 90 days or more past due and still accruing			—				—
Non-accruing troubled debt restructurings:
Real estate loans:
One- to four-family residential			73				100
Multi-family			—				353
Commercial			—				—
Construction			—				—
Land			—				—
Home equity lines of credit			—				—
Commercial business loans			41				95
Automobile loans			—				—
Other consumer loans			—				—
Total non-accruing troubled debt restructured loans			114				548
Total non-performing loans			1,144				1,295
Repossessed Assets:
Real estate loans:
One- to four-family residential			—				—
Multi-family			—				—
Commercial			389				389
Construction			—				—
Land			87				102
Home equity lines of credit			—				—
Commercial business loans			—				—
Automobile loans			—				13
Other consumer loans			—				—
Total foreclosed assets			476				504
Total non-performing assets		$	1,620			$	1,799
Total accruing troubled debt restructured loans		$	1,904			$	3,188
Ratios:
Non-performing loans and non-performing troubled-debt-restructurings to gross loans			2.00	%			2.10	%
Non-performing assets to total assets			1.90	%			2.01	%
Non-performing assets and accruing troubled debt restructurings to total assets			4.14	%			5.57	%

 

(1)	Non-performing loans consist of non-accruing loans and non-accruing trouble debt restructurings

(2)	Non-performing assets consist of non-performing loans and repossessed assets

 

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Analysis of Net Interest Income

Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

 

		Three Months Ended September 30,
		2015												2014
		Average Outstanding Balance				Interest				Yield/Cost				Average Outstanding Balance				Interest				Yield/Cost
		(Dollars in thousands)
Assets:
Loans		$	56,488			$	708				4.99	%		$	62,882			$	767				4.86	%
Securities (1)			11,296				36				1.26				5,490				21				1.55
Other interest-earning assets			17,180				16				0.37				18,640				7				0.16
Total interest-earning assets			84,964			$	760				3.56				87,012			$	795				3.64
Non-interest-earning assets			2,359												2,933
Total assets		$	87,323											$	89,945
Liabilities and stockholders’ equity:
Savings deposits		$	10,138			$	4				0.15			$	10,129			$	3				0.15
Demand deposits			9,901				2				0.06				9,304				2				0.06
Money market deposits			13,313				5				0.15				14,519				5				0.15
Certificates of deposit			37,916				81				0.85				43,356				95				0.86
Total deposits			71,268				92				0.51				77,308				105				0.54
Non-interest-bearing deposits			4,604												2,712
Other liabilities			1,465												842
Total liabilities			77,337												80,862
Stockholders’ equity			9,986												9,083
Total liabilities and stockholders’ equity		$	87,323											$	89,945
Net interest income						$	668											$	690
Net interest rate spread											3.05	%											3.10	%
Net interest-earning assets		$	13,696											$	9,704
Net interest margin											3.13	%											3.16	%
Average of interest-earning assets to interest-bearing Liabilities											119.22	%											112.55	%

 

(1)	Securities include Federal Home Loan Bank stock with an average balance of $921,000 for the three months ended September 30, 2015 and 2014, respectively.

 

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		Nine Months Ended September 30,
		2015												2014
		Average Outstanding Balance				Interest				Yield/Cost				Average Outstanding Balance				Interest				Yield/Cost
		(Dollars in thousands)
Assets:
Loans		$	57,634			$	2,116				4.90	%		$	65,832			$	2,392				4.85	%
Securities (1)			9,542				95				1.33				4,493				52				1.55
Other interest-earning assets			18,175				35				0.26				19,668				23				0.16
Total interest-earning assets			85,351			$	2,246				3.51				89,993			$	2,467				3.66
Non-interest-earning assets			2,486												2,668
Total assets		$	87,837											$	92,661
Liabilities and stockholders’ equity:
Savings deposits		$	9,864			$	11				0.15			$	9,964			$	11				0.15
Demand deposits			9,878				5				0.06				9,406				4				0.06
Money market deposits			13,367				15				0.15				15,141				17				0.15
Certificates of deposit			38,980				247				0.85				45,482				304				0.89
Total deposits			72,089				278				0.52				79,993				336				0.56
Non-interest-bearing deposits			4,396												2,788
Other liabilities			1,272												906
Total liabilities			77,757												83,687
Stockholders’ equity			10,080												8,974
Total liabilities and stockholders’ equity		$	87,837											$	92,661
Net interest income						$	1,968											$	2,131
Net interest rate spread											2.99	%											3.10	%
Net interest-earning assets		$	13,262											$	10,000
Net interest margin											3.08	%											3.16	%
Average of interest-earning assets to interest-bearing Liabilities											118.40	%											112.50	%

 

(1)	Securities include Federal Home Loan Bank stock with an average balance of $921,000 for the nine months ended September 30, 2015 and 2014, respectively

 

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Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of Ben Franklin Financial, Inc.’s interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

 

		Three Months Ended September 30, 2015 vs. 2014												Nine Months Ended September 30, 2015 vs. 2014
		Increase (Decrease) Due to								Total Increase (Decrease)				Increase (Decrease) Due to								Total Increase (Decrease)
		Volume				Rate								Volume				Rate
		(Dollars in thousands)
Interest-earning assets:
Loans		$	(75	)		$	16			$	(59	)		$	(295	)		$	19			$	(276	)
Securities			19				(4	)			15				51				(8	)			43
Other interest-earning assets			—				9				9				(2	)			14				12
Total interest-earning assets			(56	)			21				(35	)			(246	)			25				(221	)
Interest-bearing liabilities:
Savings deposits			1				—				1				—				—				—
Demand accounts			—				—				—				1				—				1
Money market accounts			—				—				—				(2	)			—				(2	)
Certificates of deposit			(12	)			(2	)			(14	)			(43	)			(14	)			(57	)
Total deposits			(11	)			(2	)			(13	)			(44	)			(14	)			(58	)
Change in net interest income		$	(45	)		$	23			$	(22	)		$	(202	)		$	39			$	(163	)

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

This item is not applicable because we are a smaller reporting company.

 

Item 4.

Controls and Procedures

We have adopted disclosure controls and procedures designed to facilitate our financial reporting. The disclosure controls currently consist of communications among the Chief Executive Officer, the Chief Financial Officer and each department head to identify any transactions, events, trends, risks or contingencies which may be material to our operations. Our disclosure controls also contain certain elements of our internal controls adopted in connection with applicable accounting and regulatory guidelines. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls as of the end of the period covered by this report and found them to be effective. Our Chief Executive Officer, Chief Financial Officer, and the Audit Committee also meet on a quarterly basis.

We maintain internal control over financial reporting. There have not been any significant changes in such internal control over financial reporting in the last quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - Other Information

 

Item 1.

Legal Proceedings

At September 30, 2015 there were no material pending legal proceedings to which the Company or the Bank is a party other than ordinary routine litigation incidental to their respective businesses.

 

Item 1A.

Risk Factors

This item is not applicable because we are a smaller reporting company.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

 

Item 3.

Defaults upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

 

Item 5.

Other Information

Not Applicable

 

Item 6.

Exhibits

(a) Exhibits

 

31.1

Rule 13(a) – 14(a) Certification (Chief Executive Officer)

 

31.2

Rule 13(a) – 14(a) Certification (Chief Financial Officer)

 

32.1

Section 1350 Certification (Chief Executive Officer)

 

32.2

Section 1350 Certification (Chief Financial Officer)

 

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014, (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, and (v) the notes to the Consolidated Financial Statements

 

101.INS

XBRL Instance Document

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

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Signatures

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

 

BEN FRANKLIN FINANCIAL, INC.
						(Registrant)
Date: November 13, 2015						/s/ C. Steven Sjogren
						C. Steven Sjogren
						President and Chief Executive Officer
Date: November 13, 2015						/s/ Glen A. Miller
						Glen A. Miller
						Senior Vice President and Chief Financial Officer

 

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