Ben Franklin Financial, Inc. - FORM 10-Q

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EX-31.2 - EX-31.2 - Ben Franklin Financial, Inc.	d115592dex312.htm
EX-32.1 - EX-32.1 - Ben Franklin Financial, Inc.	d115592dex321.htm
EX-31.1 - EX-31.1 - Ben Franklin Financial, Inc.	d115592dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2016

¨	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):

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 May 13, 2016: 696,339

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 March 31, 2016 and December 31, 2015		1

Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2016 and 2015		2

Consolidated Statements of Comprehensive Loss (Unaudited) for the three months ended March 31, 2016 and 2015		3

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three months ended March 31, 2016 and 2015		4

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2016 and 2015		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		31

Item 4. Controls and Procedures		31

PART II - Other Information

Item 1. Legal Proceedings		32
Item 1A. Risk Factors		32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3. Defaults Upon Senior Securities		32
Item 4. Mine Safety Disclosures		32
Item 5. Other Information		32
Item 6. Exhibits		32
Form 10-Q Signatures		33

PART I – Financial Information

Item 1. Financial Statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands except share data)

(Unaudited)


	March 31,			December 31,
	2016			2015
ASSETS
Cash and due from banks	$	908		$	958
Interest-earning deposit accounts and federal funds sold		9,465			8,307

Cash and cash equivalents		10,373			9,265
Certificates of deposit in other financial institutions		4,635			4,635
Securities available-for-sale at fair value		8,531			10,484
Loans receivable, net (allowance for loan losses: $1,012; at March 31, 2016 - $991 at December 31, 2015		55,863			57,536
Federal Home Loan Bank stock		921			921
Premises and equipment, net		577			475
Repossessed assets, net		476			476
Accrued interest receivable		199			185
Other assets		160			80


Total assets	$	81,735		$	84,057


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Demand deposits - non-interest-bearing	$	3,097		$	4,569
Demand deposits - interest-bearing		10,571			9,733
Savings deposits		11,582			10,932
Money market deposits		12,975			13,165
Certificates of deposit		33,436			35,158

Total deposits		71,661			73,557
Advances from borrowers for taxes and insurance		363			559
Other liabilities		369			387
Common stock in ESOP subject to contingent purchase obligation		187			155

Total liabilities		72,580			74,658

Stockholders’ equity
Preferred stock, no par value; 1,000,000 authorized shares; no shares issued and outstanding		—			—
Common stock, par value $0.01 per share; authorized 20,000,000 shares; issued and outstanding, 696,339 shares at March 31, 2016 and December 31, 2015		7			7
Additional paid-in-capital		10,301			10,308
Retained deficit		(440	)		(177	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(548	)		(563	)
Accumulated other comprehensive income		22			(21	)
Reclassification of ESOP shares		(187	)		(155	)

Total equity		9,155			9,399


Total liabilities and stockholders’ equity	$	81,735		$	84,057

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share amounts)

(Unaudited)


	Three Months Ended
	March 31,
	2016			2015
Interest income
Loans	$	716		$	714
Securities		38			27
Federal funds sold and interest earning deposit accounts		21			7

		775			748

Interest expense
Deposits		81			94

		81			94


Net interest income		694			654

Provision for loan losses		—			—


Net interest income after provision for loan losses		694			654

Non-interest income
Service fee income		18			18
Gain on sale of other assets, net		—			34
Other		11			12

		29			64

Non-interest expense
Compensation and employee benefits		454			494
Occupancy and equipment		152			163
Data processing services		83			90
Professional fees		146			126
FDIC insurance premiums		44			47
Repossessed asset expenses, net		20			40
Other		114			99

		1,013			1,059


Loss before income taxes		(290	)		(341	)

Income tax benefit		(27	)		(15	)


Net loss	$	(263	)	$	(326	)


Loss per common share basic and diluted		(0.40	)		(0.49	)

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands except per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2016			2015

Net loss	$	(263	)	$	(326	)

Other comprehensive loss
Unrealized holding gains arising during the period		70			38
Tax effect		(27	)		(15	)

Net of tax		43			23

Comprehensive loss	$	(220	)	$	(303	)

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2016 and 2015 – (Unaudited)

(Dollars in thousands)


	Common Stock			Additional Paid-In Capital			Treasury Stock			Retained Earnings (Deficit)			Unearned ESOP Shares			Accumulated Other Comprehensive Income			Amount Reclassified on ESOP Shares			Total

Balance at January 1, 2016	$	7		$	10,308		$	—		$	(177	)	$	(563	)	$	(21	)	$	(155	)	$	9,399
Net loss		—			—			—			(263	)		—			—			—			(263	)
Other comprehensive income		—			—			—			—			—			43			—			43
Earned ESOP shares and other stock based compensation		—			(7	)		—			—			15			—			—			8
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—			—			—			—			—			—			(32	)		(32	)


Balance at March 31, 2016	$	7		$	10,301		$	—		$	(440	)	$	(548	)	$	22		$	(187	)	$	9,155


Balance at January 1, 2015	$	20		$	8,233		$	(462	)	$	855		$	(355	)	$	2		$	(114	)	$	8,179
Net loss		—			—			—			(326	)		—			—			—			(326	)
Other comprehensive income		—			—			—			—			—			23			—			23
Earned ESOP shares and other stock based compensation		—			(8	)		—			—			15			—			—			7
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		—			—			—			—			—			—			(3	)		(3	)


Balance at March 31, 2015	$	7		$	10,330		$	—		$	529		$	(613	)	$	25		$	(117	)	$	10,161

See accompanying notes to consolidated financial statements

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities
Net loss	$	(263	)	$	(326	)
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation		21			28
ESOP and other stock based compensation, net		8			7
Gain on sale of repossessed assets		—			(34	)
Changes in:
Deferred loan costs		2			1
Accrued interest receivable		(14	)		(9	)
Other assets		(106	)		825
Other liabilities		(18	)		(32	)

Net cash from operating activities		(370	)		460

Cash flows from investing activities
Principal repayments on mortgage-backed securities		23			33
Calls and maturities of securities available for sale		3,000			1,000
Maturities of certificates of deposit in other financial institutions		980			—
Purchase of securities available for sale		(1,000	)		(3,000	)
Purchase of certificates of deposit in other financial institutions		(980	)		—
Net decrease in loans		1,670			2,408
Sales of repossessed assets		—			90
Expenditures for premises and equipment		(123	)		(4	)

Net cash from investing activities		3,570			527

Cash flows from financing activities
Net decrease in deposits		(1,896	)		(4,414	)
Net proceeds from common stock offering		—			2,504
Funds from termination of MHC		—			50
Net change in advances from borrowers for taxes and insurance		(196	)		(218	)

Net cash from financing activities		(2,092	)		(2,078	)


Net change in cash and cash equivalents		1,108			(1,091	)

Cash and cash equivalents at beginning of year		9,265			19,014


Cash and cash equivalents at end of period	$	10,373		$	17,923


Supplemental disclosures
Interest paid	$	80		$	93
Transfers from loans to repossessed assets		—			45

See accompanying notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands)

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, 2015. 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 2015 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”).

Note 2 – Recurring Losses

The Company has incurred losses since 2008. The Company recently incurred net losses of $263 for the three months ended March 31, 2016 and $1,032 during the year ended December 31, 2015. The losses are a result of our declines in interest earnings assets and our non-interest expenses exceeding our net interest income. Despite these losses, the Bank’s total capital to risk-based capital ratio and Tier 1 leverage capital to average assets ratio was 18.5% and 10.0% at March 31, 2016.

The Company had $319 and $334 of cash at March 31, 2016 and December 31, 2015. The Company completed the public offering of common stock in January 2015, raising $2,504, net of $1,401 in conversion costs. The proceeds of the public stock offering were used to contribute $2,000 of additional capital to the Bank. In addition, $273 of the net proceeds were used to fund the loan to the employee stock ownership plan and approximately $314 of the net proceeds were retained by Ben Franklin Financial, Inc.

On November 25, 2015 the Bank entered into a revised Consent Order (the “New Order”) with the Office of the Comptroller of the Currency (“OCC”) that reduces the Bank’s regulatory compliance burden. Concurrent with the execution of the New Order, the Bank’s prior Consent Order (the “Old Order”) entered into between the Bank and the OCC dated December 19, 2012 was terminated. The New Order is comprised of two substantive articles as opposed to 12 substantive articles under the Old Order. The New Order reduced the Bank’s minimum required Tier 1 leverage capital ratio to 8% from 9% under the Old Consent Order and its minimum total risk-based capital ratio to 12% from 13% under the Old Consent Order. The New Consent Order requires the Bank to revise its current capital plan to include a capital distribution policy. Additionally, the New Order requires the Bank to revise its strategic plan to identify parameters and triggers which would cause the board of directors to market the Bank for merger or sale, in the event it failed to meet the 8% and 12% capital requirements under the New Order. The New Order continues to require quarterly reporting to the OCC and board monitoring requirements. At March 31, 2016 and December 31, 2015 the Bank was in compliance with the required minimum ratios.

If the Bank is unable to meet the capital requirements and other requirements of the New 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – New Accounting Standards

In January 2016 the FASB released accounting standards update 2016-01 Recognition and Measurement of Financial Assets and Liabilities. The main provisions of the update are to eliminate the available for sale classification of accounting for equity securities and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value will be adjustments to the income statement. A practical expedient is provided for equity securities without a readily determinable fair value, such that these securities can be carried at cost less any impairment. The provisions of this update become effective for interim and annual periods beginning after December 15, 2017. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2016, the FASB issued accounting standards update 2016-02 Leases. The update requires all leases, with the exception of short-term leases that have contractual terms no greater than one year, to be recorded on the balance sheet. Under the provisions of the update, leases classified as operating will be reflected on the balance sheet with the recognition of both a right-of-use asset and a lease liability. Under the update, a distinction will exist between finance and operating type leases and the rules for determining which classification a lease will fall into are similar to existing rules. For public business entities, the amendments of this update are effective for interim and annual periods beginning after December 15, 2018. The update requires a modified retrospective transition under which comparative balance sheets from the earliest historical period presented will be revised to reflect what the financials would have looked like were the provisions of the update applied consistently in all prior periods. Management has not yet determined the impacts of this update on the Company’s financial position, results of operations or cash flows.

In March 2016 the FASB issued accounting standards update 2016-09 Compensation-Stock Compensation. The purpose of the update was to simplify the accounting for share-based payment transactions, including the income tax consequences of such transactions. Under the provisions of the update the income tax consequences of excess tax benefits and deficiencies should be recognized in income tax expense in the reporting period in which the awards vest. Currently, excess tax benefits or deficiencies impact stockholders’ equity directly to the extent there is a cumulative excess tax benefit. In the event that a tax deficiency has occurred during the reporting period and a cumulative excess tax benefit does not exist, the tax deficiency is recognized in income tax expense under current GAAP. The update also provides that entities may continue to estimate forfeitures in accounting for stock based compensation or recognize them as they occur. The provisions of this update become effective for interim and annual periods beginning after December 15, 2016. The update requires a modified retrospective transition under which a cumulative effect to equity will be recognized in the period of adoption. Management has not yet determined the impacts of this update on the Company’s financial position, results of operations or cash flows.

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
March 31, 2016
U.S. government-sponsored entities	$	8,000	$	9	$	—		$	8,009
Residential mortgage-backed		495		27		—			522


Total	$	8,495	$	36	$	—		$	8,531


December 31, 2015
U.S. government-sponsored entities	$	10,000	$	4	$	(65	)	$	9,939
Residential mortgage-backed		518		27		—			545


Total	$	10,518	$	31	$	(65	)	$	10,484

There were no sales of securities available-for-sale during the three months ended March 31, 2016 or the three months ended March 31, 2015. There were no securities pledged to secure any of the borrowings of the Company as of March 31, 2016 and December 31, 2015.

The amortized cost and fair value of available-for-sale securities are shown by contractual maturity as of March 31, 2016. 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.


	March 31, 2016
	Amortized Cost		Fair Value
U.S. government-sponsored entities
Within one year	$	—	$	—
One to five years		8,000		8,009
Five to ten years		—		—
Residential mortgage-backed		495		522


Total	$	8,495	$	8,531

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes securities with unrealized losses at March 31, 2016 and December 31, 2015, 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

2016
U.S. government sponsored entities	$	—	$	—		$	—	$	—		$	—	$	—


2015
U.S. government sponsored entities	$	5,947	$	(53	)	$	988	$	(12	)	$	6,935	$	(65	)

As of March 31, 2016 and December 31, 2015, 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.


	March 31, 2016						December 31, 2015
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
First mortgage loans:
Secured by one- to four- family	$	29,231			51.35	%	$	30,368			51.84	%
Secured by multi-family		7,006			12.31			7,592			12.96
Secured by commercial real estate		13,892			24.40			13,941			23.80
Secured by land		187			0.33			192			0.33
Secured by construction		331			0.58			—			—

Total first mortgage loans		50,647			88.97			52,093			88.93

Commercial, consumer and other loans:
Home equity lines-of-credit		4,243			7.45			4,574			7.81
Commercial business loans		1,356			2.38			1,112			1.90
Automobile loans		678			1.19			798			1.36
Other consumer loans		3			0.01			—			—

Total commercial, consumer and other loans		6,280			11.03			6,484			11.07


Gross loans		56,927			100.00			58,577			100.00

Premiums and net deferred loan costs		(52	)					(50	)
Allowance for loan losses		(1,012	)					(991	)

Total loans, net	$	55,863					$	57,536

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 months ended March 31, 2016 and 2015.


	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 March 31, 2016
Allowance for loan losses
Beginning balance	$	326		$	157		$	385	$	5	$	—		$	70		$	12		$	36		$	—		$	991
Provision for loan losses		7			(11	)		12		—		(11	)		5			2			(4	)		—			—
Loans charged-off		—			—			—		—		—			—			—			—			—			—
Recoveries		—			—			—		—		21			—			—			—			—			21

Total ending allowance balance March 31, 2016	$	333		$	146		$	397	$	5	$	10		$	75		$	14		$	32		$	—		$	1,012


For the three months ended March 31, 2015
Allowance for loan losses
Beginning balance	$	392		$	354		$	277	$	6	$	7		$	96		$	8		$	66		$	—		$	1,206
Provision for loan losses		(22	)		14			11		—		6			(4	)		(1	)		(3	)		(1	)		—
Loans charged-off		—			(28	)		—		—		—			—			—			(1	)		—			(29	)
Recoveries		—			—			—		—		1			—			—			—			1			2

Total ending allowance balance March 31, 2015	$	370		$	340		$	288	$	6	$	14		$	92		$	7		$	62		$	—		$	1,179

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
March 31, 2016

One-to-four-family	$	1,634	$	27,597	$	29,231	$	66	$	267	$	333
Multi-family		1,345		5,661		7,006		45		101		146
Commercial real estate		—		13,892		13,892		—		397		397
Land		—		187		187		—		5		5
Construction		—		331		331		—		10		10
Home equity lines of credit		—		4,243		4,243		—		75		75
Commercial		—		1,356		1,356		—		14		14
Automobile		—		678		678		—		32		32
Other consumer		—		3		3		—		—		—

Total	$	2,979	$	53,948	$	56,927	$	111	$	901	$	1,012


December 31, 2015

One-to-four-family	$	1,640	$	28,728	$	30,368	$	67	$	259	$	326
Multi-family		1,354		6,238		7,592		52		105		157
Commercial real estate		—		13,941		13,941		—		385		385
Land		—		192		192		—		5		5
Construction		—		—		—		—		—		—
Home equity lines of credit		—		4,574		4,574		—		70		70
Commercial		—		1,112		1,112		—		12		12
Automobile		—		798		798		—		36		36
Other consumer		—		—		—		—		—		—

Total	$	2,994	$	55,583	$	58,577	$	119	$	872	$	991

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 three months ended March 31, 2016 and 2015 and as of and for the year ended December 31, 2015


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recorded		Cash Basis Interest Recorded
March 31, 2016
With no related allowance recorded
One-to-four-family	$	1,516	$	1,096	$	—	$	1,096	$	—	$	—
Multi-family		798		623		—		623		10		10
Commercial real estate		—		—		—		—		—		—
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Automobile		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—

Total with no related allowance recorded		2,314		1,719		—		1,719		10		10

With an allowance recorded
One-to-four-family		538		538		66		539		6		6
Multi-family		722		722		45		725		9		9
Commercial real estate		—		—		—		—		—		—
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Automobile		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—

Total with a related allowance recorded		1,260		1,260		111		1,264		15		15


Total	$	3,574	$	2,979	$	111	$	2,983	$	25	$	25

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

March 31, 2015
With no related allowance recorded
One-to-four-family	$	1,186	$	811	$	—	$	854	$	—	$	—
Multi-family		802		627		—		630		6		6
Commercial real estate		—		—		—		—		—		—
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Commercial		280		77		—		83		—		—
Automobile		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—

Total with no related allowance recorded		2,268		1,515		—		1,567		6		6

With an allowance recorded
One-to-four-family		552		552		45		554		7		7
Multi-family		2,338		2,310		208		2,342		26		26
Commercial real estate		—		—		—		—		—		—
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Automobile		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—

Total with a related allowance recorded		2,890		2,862		253		2,896		33		33


Total	$	5,158	$	4,377	$	253	$	4,463	$	39	$	39

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
December 31, 2015
With no related allowance recorded
One-to-four-family	$	1,519	$	1,099	$	—	$	1,040	$	50	$	50
Multi-family		800		625		—		1,154		—		—
Commercial real estate		—		—		—		—		—		—
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Commercial		—		—		—		49		—		—
Automobile		—		—		—		—		—		—
Other consumer		—		—		—		—				—

Total with no related allowance recorded		2,319		1,724		—		2,243		50		50

With an allowance recorded
One-to-four-family		541		541		67		548		26		26
Multi-family		729		729		52		740		38		38
Commercial real estate		—		—		—		—		—		—
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Automobile		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—

Total with a related allowance recorded		1,270		1,270		119		1,288		64		64


Total	$	3,589	$	2,994	$	119	$	3,531	$	114	$	114

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)
March 31, 2016

One-to-four-family	$	—	$	—	$	—	$	1,096	$	28,135	$	29,231
Multi-family		—		—		—		346		6,660		7,006
Commercial real estate		—		—		—		—		13,892		13,892
Land		—		—		—		—		187		187
Construction		—		—		—		—		331		331
Home equity line of credit		—		—		—		—		4,243		4,243
Commercial		—		—		—		—		1,356		1,356
Automobile		—		—		—		—		678		678
Other consumer		—		—		—		—		3		3


Total	$	—	$	—	$	—	$	1,442	$	55,485	$	56,927


December 31, 2015

One-to-four-family	$	—	$	—	$	—	$	1,099	$	29,269	$	30,368
Multi-family		—		—		—		346		7,246		7,592
Commercial real estate		—		—		—		—		13,941		13,941
Land		—		—		—		—		192		192
Construction		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		4,574		4,574
Commercial		—		—		—		—		1,112		1,112
Automobile		—		—		—		—		798		798
Other consumer		—		—		—		—		—		—


Total	$	—	$	—	$	—	$	1,445	$	57,132	$	58,577

Nonperforming loans (non-accrual and loans past due 90 days and still on accrual) include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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)
March 31, 2016

One-to-four-family	$	28,135	$	1,096	$	—	$	29,231
Multi-family		6,660		346		—		7,006
Commercial real estate		13,892		—		—		13,892
Land		187		—		—		187
Construction		331		—		—		331
Home equity lines of credit		4,243		—		—		4,243
Commercial		1,356		—		—		1,356
Automobile		678		—		—		678
Other consumer		3		—		—		3


Total	$	55,485	$	1,442	$	—	$	56,927


December 31, 2015

One-to-four-family	$	29,269	$	1,099	$	—	$	30,368
Multi-family		7,246		346		—		7,592
Commercial real estate		13,941		—		—		13,941
Land		192		—		—		192
Construction		—		—		—		—
Home equity lines of credit		4,574		—		—		4,574
Commercial		1,112		—		—		1,112
Automobile		798		—		—		798
Other consumer		—		—		—		—


Total	$	57,132	$	1,445	$	—	$	58,577

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Troubled Debt Restructurings

Our troubled debt restructurings totaled $1,949 at March 31, 2016 and $1,964 at December 31, 2015. There were no loans modified as troubled debt restructurings during the three months ended March 31, 2016 or the year ended December 31, 2015.

There were two loans modified as troubled debt restructurings with a balance of $412 as of March 31, 2016, which are being reported as nonaccrual, one of which totaling $66 is paying as agreed under the terms of the modification. There were two loans modified as troubled debt restructurings with a balance of $415 which are being reported as nonaccrual as of December 31, 2015, one of which totaling $69 is 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. During the three months ended March 31, 2016, one multi-family loan totaling $346 had payment defaults and was reported as non-accrual at March 31, 2016 and December 31, 2015. During the year ended December 31, 2015, there were no payment defaults following the modifications.

The Company has allocated $11 to specific reserves on $1,260 of loans to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2016. At December 31, 2015, the Company has allocated $119 to specific reserves on $1,271 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 March 31, 2016 and December 31, 2015 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
	March 31,			March 31,
	2016			2015
Net income (loss) (Dollars in thousands)	$	(263	)	$	(326	)
Weighted average common shares outstanding		659,945			663,369
Basic and diluted income (loss) per share	$	(0.40	)	$	(0.49	)

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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.

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)
March 31, 2016
Assets
Securities available for sale
U.S. government-sponsored entities	$	8,009	$	—	$	8,009	$	—
Residential mortgaged-backed		522		—		522		—


	$	8,531	$	—	$	8,531	$	—


December 31, 2015
Assets
Securities available for sale
U.S. government-sponsored entities	$	9,939	$	—	$	9,939	$	—
Residential mortgaged-backed		545		—		545		—


	$	10,484	$	—	$	10,484	$	—

There were no transfers between Level 1, Level 2, and Level 3 during the three-months ended March 31, 2016 or the year ended December 31, 2015.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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)
March 31, 2016
Assets
Impaired loans
One-to-four-family	$	725	$	—	$	—	$	725
Multi-family		677		—		—		677


Total impaired loans	$	1,402	$	—	$	—	$	1,402


Repossessed assets
Land	$	87		—		—	$	87


Total repossessed assets	$	87	$	—	$	—	$	87


December 31, 2015
Assets
Impaired loans
One-to-four-family	$	725	$	—	$	—	$	725
Multi-family		677		—		—		677


Total impaired loans	$	1,402	$	—	$	—	$	1,402


Repossessed assets
Land	$	87		—		—	$	87


Total repossessed assets	$	87	$	—	$	—	$	87

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 $1,447 with a $45 valuation allowance at March 31, 2016 and an aggregate balance of $1,454 with a $52 valuation allowance at December 31, 2015. The impaired loans resulted in no provision for loan loss for the three months ended March 31, 2016 and 2015.

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 $87 at March 31, 2016 and December 31, 2015 consisting of the cost basis of $101 and a valuation allowance of $14. There were no write-downs on repossessed assets for the three months ended March 31, 2016 and 2015.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 March 31, 2016 and December 31, 2015:

March 31, 2016


	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
Land	$	87	Sales comparison approach	Adjustment for differences between the comparable sales	(11.6%) – 31.0%

December 31, 2015


	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
Land	$	87	Sales comparison approach	Adjustment for differences between the comparable sales	(11.6%) – 31.0%

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 March 31, 2016 (Unaudited) Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	10,373	$	10,373	$	—	$	—	$	10,373
Certificates of deposit in other financial institutions		4,635		—		4,635		—		4,635
Securities available-for-sale		8,531		—		8,531		—		8,531
Loans receivable, net		55,863		—		—		55,795		55,795
FHLB stock		921		N/A		N/A		N/A		N/A
Accrued interest receivable		199		2		33		164		199

Financial liabilities
Demand, money market, and savings	$	38,225	$	38,225	$	—	$	—	$	38,225
Certificates of deposits		33,436		—		33,452		—		33,452
Advances by borrowers for taxes and insurance		363		363		—		—		363
Accrued interest payable		1		—		1		—		1


			Fair Value Measurements at December 31, 2015 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	9,265	$	9,265	$	—	$	—	$	9,265
Certificates of deposit in other financial institutions		4,635		—		4,635		—		4,635
Securities available-for-sale		10,484		—		10,484		—		10,484
Loans receivable, net		57,536		—		—		57,469		57,469
FHLB stock		921		N/A		N/A		N/A		N/A
Accrued interest receivable		185		3		20		162		185

Financial liabilities
Demand, money market, and savings	$	38,399	$	38,399	$	—	$	—	$	38,399
Certificates of deposits		35,158		—		35,024		—		35,024
Advances by borrowers for taxes and insurance		559		559		—		—		559
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) Certificates of deposit in other financial institutions.

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.

(c) 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

(d) FHLB Stock

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

(e) 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.

(f) 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.

(g) 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 federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel Ill rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.

Effective as of January 1, 2016, financial institutions are required to maintain a capital conservation buffer to avoid restrictions on capital distributions and other payments. If a financial institution’s capital conservation buffer falls below the minimum requirement, its maximum payout amount for capital distributions and discretionary payments declines to a set percentage of eligible retained income based on the size of the buffer. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a three-year period (increasing by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019). As of March 31, 2016, the Bank’s capital conservation buffer stood at 10.46%.

Quantitative measures established by regulation to help ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital as defined in the regulations to risk-weighted assets as defined and of Tier I capital to adjusted total assets as defined. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios. On November 25, 2015 the Bank entered into a New Order with the OCC that reduces the Bank’s regulatory compliance burden. Concurrent with the execution of the New Order, the Old Order entered into between the Bank and the OCC dated December 19, 2012 was terminated. The New Order reduced the Bank’s minimum required Tier 1 leverage capital ratio to 8% from 9% under the Old Consent Order and its minimum total risk-based capital ratio to 12% from 13% under the Old Order.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As a result of entering into the New Order to achieve and maintain specific capital levels, the Bank’s capital classification under the Prompt Corrective Action rules was “adequately capitalized” at March 31, 2016 and December 31, 2015. While under the New and Old Order, the Bank cannot be consider “well capitalized”.

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.

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


	Actual					Minimum Required for Capital Adequacy Purposes					Minimum Required By the Respective Orders
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2016
Total capital (to risk-weighted assets)	$	8,979		18.5	%	$	3,891		8.0	%	$	5,837		12.0	%
Common equity Tier 1 capital (to risk-weighted assets)		8,366		17.2			2,189		4.5			N/A		N/A
Tier 1 (core) capital (to risk-weighted assets)		8,366		17.2			2,919		6.0			N/A		N/A
Tier 1 (core) capital (to average total assets)		8,366		10.0			3,333		4.0			6,666		8.0

December 31, 2015
Total capital (to risk-weighted assets)	$	9,235		18.5	%	$	3,992		8.0	%	$	5,988		12.0	%
Common equity Tier 1 capital (to risk-weighted assets)		8,607		17.3			2,245		4.5			N/A		N/A
Tier 1 (core) capital (to risk-weighted assets)		8,607		17.3			2,994		6.0			N/A		N/A
Tier 1 (core) capital (to average total assets)		8,607		10.0			3,450		4.0			6,901		8.0

Note 9 – Subsequent Events

In April 2016, the Bank recognized an operational loss below its insurance deductible. The loss will be reflected in the second quarter of 2016. Management does not anticipate any recoveries of the loss.

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 began January 1, 2016 and ends January 1, 2019, when the full capital conservation buffer requirement will be effective.

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, automobile, 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.

Our board of directors has also adopted a strategic plan to increase our net interest income by growing our loan portfolio through a combination of our origination efforts and through the acquisition of loan pools from other sources. To meet our internal growth assumptions we have developed referral sources to help us meet our multi-family real estate production goals. The strategic plan also includes a reduction in non-interest expense primarily compensation expense through salary adjustments for senior officers and changes in staffing through realignment of positions and the elimination of a vacant opening. While we believe that the capital raised in the conversion will allow us to refocus our lending efforts and grow our loan portfolio, it may take a significant amount of time for us to accomplish our goals. The board of directors recognizes that continuing to decrease asset size in order to maintain capital levels is not a viable business strategy and that the Bank needs to increase asset size through the increase in the loan portfolio in order to reach and sustain profitability.

Based on the above, we do not anticipate net income until we experience significant growth in our earning assets base pursuant to our business plan. Assuming the successful execution of our business plan, we expect that we will return to profitability for the year ending December 31, 2018. There can be no assurances, however, that we will successfully execute on our business plan and be able to return to profitability in the timeframe we expect or at all.

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, 2015, management believes that its critical accounting policies include determining the allowance for loan losses and accounting for deferred income taxes.

Comparison of Financial Condition at March 31, 2016 and December 31, 2015

Assets. Total assets at March 31, 2016 were $81.7 million compared to $84.1 million at December 31, 2015, a decrease of $2.4 million, or 2.8%. This decrease was primarily due to the $2.0 million decrease in the balance of our securities available for sale and the $1.7 million decrease in our loan portfolio, partially offset by the $1.1 million increase in the balance of our cash and cash equivalents.

The decrease in our loan portfolio balance during the first three months of 2016 was primarily due to the $1.1 million decrease in our one- to four- family residential loan portfolio and the $600,000 decrease in our multi-family loan portfolio. The decreases were primarily due to the repayments from existing loans exceeding the $2.4 million of new loans originated and $845,000 of new equity line-of-credit commitments during the first three months of 2016.

At March 31, 2016 our allowance for loan losses was $1.0 million, or 1.78% of total loans, compared to $991,000, or 1.69% of total loans, at December 31, 2015. Our allowance reflected $21,000 of recoveries for the

three months ended March 31, 2016. Our loans classified as substandard or doubtful, which also represents our non-accrual loans, were $1.4 million or 2.53% of total loans at March 31, 2016 compared to $1.4 million or 2.47% of total loans at December 31, 2015. Our loans classified as TDRs totaled $1.9 million at March 31, 2016 of which $1.5 million were accruing relatively unchanged from the amounts at December 31, 2015.

Our securities portfolio decreased $2.0 million or 18.6% to $8.5 million at March 31, 2016 compared to $10.5 million at December 31, 2015. The decrease was primarily due to the call of $3.0 million of government sponsored entities notes, partially offset by the purchase of a $1.0 million callable note and the repayments on mortgage-backed securities. Our cash and cash equivalents increased $1.1 million to $10.4 million at March 31, 2016.

Liabilities. Our total liabilities decreased $2.1 million or 2.8% to $72.6 million at March 31, 2016. Our deposits decreased by $1.9 million or 2.6% to $71.7 million at March 31, 2016 compared to $73.6 million at December 31, 2015, primarily due to the $1.7 million or 4.9% decrease in our certificate of deposit accounts to $33.4 million at March 31, 2016.

Stockholders’ Equity. Total stockholders’ equity at March 31, 2016 was $9.2 million, a decrease of $244,000 or 2.6% from December 31, 2015. The decrease resulted primarily from our net loss of $263,000 for the three months ended March 31, 2016, partially offset by the $43,000 increase in the unrealized gain of our available for sale securities.

Comparison of Operating Results for the Three Months Ended March 31, 2016 and 2015

General. For the three months ended March 31, 2016 our net loss was $263,000 compared to a net loss of $326,000 for the three months ended March 31, 2015. The decrease in our net loss was primarily due to the increases in our net interest income and decrease in our non-interest expenses, partially offset by the decrease in our non-interest income.

Interest Income. Interest income was $775,000 for the three months ended March 31, 2016, $27,000, or 3.6%, higher than the prior year period. Interest income from securities increased $11,000 or 40.7% to $38,000 for the three months ended March 31, 2016 primarily due to the $3.0 million increase in the average balance of our securities portfolio as we increased our portfolio of government entity securities during 2015 to increase our interest income from earning assets. Interest income from other interest earning assets increased $14,000 or 200.0% to $21,000 for the three months ended March 31, 2016. The average balance of our other interest earning assets decreased $4.5 million primarily due to the purchase of securities while the yield increased 0.45% as we purchased certificates of deposit in other financial institutions to increase our interest income. The balance of each certificate of deposit was less than $250,000 with maturities that ranged from six to 18 months. The average balance of the certificates of deposit for the three months ended March 31, 2016 totaled $4.6 million compared to none in the comparable period during 2015.

The average balance of our loan portfolio decreased $2.9 million for the three months ended March 31, 2016 compared to the prior year period primarily due to the $2.5 million decrease in our home equity line-of-credit loans, the $1.7 million decrease in the average balance of our one- to four-family residential loans, and the $550,000 decrease in our consumer loans. These decreases were partially offset by the $1.5 million increase in the average balance of our multi-family and commercial real estate loans and the $401,000 increase in our commercial business loans. The decrease in the average balance of our loan portfolio was due to repayments and pay-offs that exceeded our origination volume for loans. The average yield on loans for the three months ended March 31, 2016 was 5.08% compared to 4.84% for the prior year period primarily due to prepayment fees totaling $14,000 and the payoff of lower yielding home equity line-of-credit loans.

Interest Expense. Interest expense for the three months ended March 31, 2016 was $81,000, a decrease of $13,000 or 13.8% from the prior year period due to the decrease in interest expense on deposits. The average cost of deposits decreased to 0.48% for the three months ended March 31, 2016 compared to 0.52% for the prior year period as the average cost of our certificate of deposit accounts decreased to 0.82% for the three months ended March 31, 2016 compared to 0.85% for the prior year period. The average balance of our certificate of deposit accounts decreased $5.5 million to $34.4 million, partially offset by the $1.3 million increase in the average balance of our savings accounts for the three months ended March 31, 2016. 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 March 31, 2016 was $694,000 compared to $654,000 for the three months ended March 31, 2015. For the three months ended March 31, 2016, the average yield on interest-earning assets was 3.83% and the average cost of interest-bearing liabilities was 0.48% compared to 3.51% and 0.52%, respectively, for the three months ended March 31, 2015. The increase in the average yield of our interest earning assets was primarily due to the increase in yield our loan portfolio and the yield on our other interest earning assets. These changes resulted in an increase in our net interest rate spread and net interest margin to 3.35% and 3.43% respectively for the first three months of 2016 compared to a net interest rate spread of 2.99% and net interest margin of 3.07% for the prior year period.

Provision for Loan Losses. We had no provision for loan losses for the three months ended March 31, 2016 and 2015. At March 31, 2016, management concluded that 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 three months ended March 31, 2016, non-interest income was $29,000 compared to $64,000 for the three months ended March 31, 2015 primarily due to the $34,000 net gain on the sale of repossessed assets for the three months ended March 31, 2015.

Non-interest Expense. For the three months ended March 31, 2016, our non-interest expense decreased $46,000 or 4.3% compared to the prior year period. Our compensation and employee benefit costs decreased $40,000 or 8.1% primarily due to the salary adjustment that were implemented in 2015 and the beginning of 2016. Professional fees increased $20,000 primarily due to the increase in our legal fees. Our other costs increased $15,000 primarily due to the $10,000 provision for off balance sheet commitments for the three months ended March 31, 2016.

Income Tax. We recorded immaterial amounts for income taxes for the three months ended March 31, 2016 and 2015.

Non-Performing Assets

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


	March 31, 2016			December 31, 2015
	(Dollars in thousands
Non-accrual loans (excluding troubled debt restructurings):
Real estate loans:
One- to four-family residential	$	1,030		$	1,030
Multi-family		—			—
Commercial		—			—
Construction		—			—
Land		—			—
Home equity lines of credit		—			—
Commercial business loans		—			—
Automobile loans		—			—
Other consumer loans		—			—

Total non-accrual loans		1,030			1,030


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		66			69
Multi-family		346			346
Commercial		—			—
Construction		—			—
Land		—			—
Home equity lines of credit		—			—
Commercial business loans		—			—
Automobile loans		—			—
Other consumer loans		—			—

Total non-accruing troubled debt restructured loans		412			415


Total non-performing loans		1,442			1,445


Repossessed Assets:
Real estate loans:
One- to four-family residential		—			—
Multi-family		—			—
Commercial		389			389
Construction		—			—
Land		87			87
Home equity lines of credit		—			—
Commercial business loans		—			—
Automobile loans		—			—
Other consumer loans		—			—

Total foreclosed assets		476			476


Total non-performing assets	$	1,918		$	1,921

Total accruing troubled debt restructured loans	$	1,537		$	1,549


Ratios:
Non-performing loans and non-performing troubled-debt-restructurings to gross loans		2.53	%		2.47	%
Non-performing assets to total assets		2.35	%		2.29	%
Non-performing assets and accruing troubled debt restructurings to total assets		4.23	%		4.13	%

(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

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 March 31,
	2016							2015
	Average Outstanding Balance		Interest		Yield/Cost			Average Outstanding Balance		Interest		Yield/Cost
	(Dollars in thousands)

Assets:
Loans	$	56,480	$	716		5.08	%	$	59,425	$	714		4.84	%
Securities (1)		10,638		38		1.45			7,661		27		1.40
Other interest-earning assets ⁽²⁾		14,078		21		0.61			18,613		7		0.16

Total interest-earning assets		81,196	$	775		3.83			85,699	$	748		3.51
Non-interest-earning assets		2,133							2,588

Total assets	$	83,329						$	88,287


Liabilities and stockholders’ equity:
Savings deposits	$	10,986	$	4		0.15		$	9,728	$	4		0.15
Demand deposits		9,469		1		0.06			9,447		1		0.06
Money market deposits		13,287		5		0.15			13,421		5		0.15
Certificates of deposit		34,447		71		0.82			39,937		84		0.85

Total deposits		68,189		81		0.48			72,533		94		0.52

Non-interest-bearing deposits		4,606							4,545
Other liabilities		1,041							1,189

Total liabilities		73,836							78,267
Stockholders’ equity		9,493							10,020

Total liabilities and stockholders’ equity	$	83,329						$	88,287

Net interest income			$	694						$	654

Net interest rate spread						3.35	%						2.99	%

Net interest-earning assets	$	13,007						$	13,166

Net interest margin						3.43	%						3.07	%

Average of interest-earning assets to interest-bearing Liabilities						119.07	%						118.15	%

(1)	Securities include Federal Home Loan Bank stock with an average balance of $921,000 for the three months ended March 31, 2016 and 2015, respectively.

(2)	Other interest earning assets include certificates of deposit in other financial institutions and cash equivalents.

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 March 31, 2016 vs. 2015
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate			Total Increase (Decrease)
	(Dollars in thousands)

Interest-earning assets:
Loans	$	(25	)	$	27		$	2
Securities		10			1			11
Other interest-earning assets		(2	)		16			14

Total interest-earning assets		(17	)		44			27


Interest-bearing liabilities:
Savings deposits		—			—			—
Demand accounts		—			—			—
Money market accounts		—			—			—
Certificates of deposit		(11	)		(2	)		(13	)

Total deposits		(11	)		(2	)		(13	)

Change in net interest income	$	(6	)	$	46		$	40

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 President and Chief Executive Officer, the Sr. Vice President and 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 President and Chief Executive Officer and Sr. Vice President 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 President and Chief Executive Officer, Sr. Vice President and 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.

PART II - Other Information

Item 1.

Legal Proceedings

At March 31, 2016 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 and Chief Financial Officer)

101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015, (ii) the Consolidated Statements of Income for the three months ended March 31, 2016 and 2015, (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, 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

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: May 13, 2016						/s/ C. Steven Sjogren
						C. Steven Sjogren
						President and Chief Executive Officer

Date: May 13, 2016						/s/ Glen A. Miller
						Glen A. Miller
						Senior Vice President and Chief Financial Officer

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company