Table of Contents

 

 

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 June 30, 2016

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 August 12, 2016: 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 June  30, 2016 and December 31, 2015			1
Consolidated Statements of Operations (Unaudited) for the three and sixmonths ended June 30, 2016 and 2015			2
Consolidated Statements of Comprehensive Loss (Unaudited) for the three and sixmonths ended June 30, 2016 and 2015			3
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)for the six months ended June 30, 2016 and 2015			4
Consolidated Statements of Cash Flows (Unaudited) for the six monthsended June 30, 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			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			33
PART II—Other Information
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3. Defaults Upon Senior Securities			34
Item 4. Mine Safety Disclosures			34
Item 5. Other Information			34
Item 6. Exhibits			34
Form 10-Q Signatures			35

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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 per share data)

(Unaudited)

 

		June 30,				December 31,
		2016				2015
ASSETS
Cash and due from banks		$	1,884			$	958
Interest-earning deposit accounts and federal funds sold			8,571				8,307
Cash and cash equivalents			10,455				9,265
Certificates of deposit in other financial institutions			3,675				4,635
Securities available for sale at fair value			7,493				10,484
Loans receivable, net (allowance for loan losses:
$981; at June 30, 2016—$991 at December 31, 2015)			56,614				57,536
Federal Home Loan Bank stock			921				921
Premises and equipment, net			953				475
Repossessed assets, net			476				476
Accrued interest receivable			157				185
Other assets			108				80
Total assets		$	80,852			$	84,057
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Demand deposits—non-interest-bearing		$	4,232			$	4,569
Demand deposits—interest-bearing			9,665				9,733
Savings deposits			11,997				10,932
Money market deposits			12,410				13,165
Certificates of deposit			32,542				35,158
Total deposits			70,846				73,557
Advances from borrowers for taxes and insurance			543				559
Other liabilities			461				387
Common stock in ESOP subject to contingent purchase obligation			212				155
Total liabilities			72,062				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 June 30, 2016 and 696,339 at December 31, 2015			7				7
Additional paid-in-capital			10,294				10,308
Retained deficit			(787	)			(177	)
Unearned Employee Stock Ownership Plan (ESOP) shares			(531	)			(563	)
Accumulated other comprehensive income			19				(21	)
Reclassification of ESOP shares			(212	)			(155	)
Total equity			8,790				9,399
Total liabilities and stockholders’ equity		$	80,852			$	84,057

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								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Interest income
Loans		$	625				694			$	1,341			$	1,408
Securities			34				33				72				59
Federal funds sold and interest earningdeposit accounts			22				11				43				19
			681				738				1,456				1,486
Interest expense
Deposits			76				92				157				186
			76				92				157				186
Net interest income			605				646				1,299				1,300
Credit for loan losses			(33	)			—				(33	)			—
Net interest income after provision for loan losses			638				646				1,332				1,300
Non-interest income
Service fee income			19				19				37				37
Gain on sale of repossessed assets, net			—				—				—				34
Other			13				19				24				31
			32				38				61				102
Non-interest expense
Compensation and employee benefits			412				488				866				982
Occupancy and equipment			155				150				307				313
Data processing services			76				77				159				167
Professional fees			138				97				284				223
FDIC insurance premiums			43				46				87				93
Repossessed asset expenses, net			18				28				38				68
Other			173				107				287				206
			1,015				993				2,028				2,052
Loss before income taxes			(345	)			(309	)			(635	)			(650	)
Income tax			2				10				(25	)			(5	)
Net loss		$	(347	)		$	(319	)		$	(610	)		$	(645	)
Loss per common share basic and diluted			(0.53	)			(0.49	)			(0.92	)			(0.98	)

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								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Net loss		$	(347	)		$	(319	)		$	(610	)		$	(645	)
Other comprehensive income (loss)
Unrealized holding gains (losses) arising during the period			(5	)			(24	)			65				14
Tax effect			2				10				(25	)			(5	)
Net of tax			(3	)			(14	)			40				9
Comprehensive loss		$	(350	)		$	(333	)		$	(570	)		$	(636	)

See accompanying notes to consolidated financial statements

 

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BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 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			—				—				—				(610	)			—				—				—				(610	)
Other comprehensive income			—				—				—				—				—				40				—				40
Earned ESOP shares			—				(14	)			—				—				32				—				—				18
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation			—				—				—				—				—				—				(57	)			(57	)
Balance at June 30, 2016		$	7			$	10,294			$	—			$	(787	)		$	(531	)		$	19			$	(212	)		$	8,790
Balance at January 1, 2015		$	20			$	8,233			$	(462	)		$	855			$	(355	)		$	2			$	(114	)		$	8,179
Net loss			—				—				—				(645	)			—				—				—				(645	)
Other comprehensive income			—				—				—				—				—				9				—				9
Earned ESOP shares			—				(16	)			—				—				31				—				—				15
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			—				—				—				—				—				—				(38	)			(38	)
Balance at June 30, 2015		$	7			$	10,322			$	—			$	210			$	(597	)		$	11			$	(152	)		$	9,801

See accompanying notes to consolidated financial statements

 

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BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		Six Months Ended
		June 30,
		2016				2015
Cash flows from operating activities
Net loss		$	(610	)		$	(645	)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation			43				56
ESOP and other stock based compensation, net			18				15
Credit for loan losses			(33	)			—
Gain on sale of repossessed assets			—				(34	)
Changes in:
Deferred loan costs			13				(4	)
Accrued interest receivable			28				14
Other assets			(53	)			1,139
Other liabilities			74				(129	)
Net cash from operating activities			(520	)			412
Cash flows from investing activities
Principal repayments on mortgage-backed securities			56				61
Calls and maturities of securities available for sale			6,000				2,000
Maturities of certificates of deposit in other financial institutions			2,920				—
Purchase of securities available for sale			(3,000	)			(3,000	)
Purchase of certificates of deposit in other financial institutions			(1,960	)			(3,900	)
Net decrease in loans			942				3,317
Sales of repossessed assets			—				92
Expenditures for premises and equipment			(521	)			(8	)
Net cash from investing activities			4,437				(1,438	)
Cash flows from financing activities
Net decrease in deposits			(2,711	)			(3,322	)
Net proceeds from common stock offering			—				2,231
Funds from termination of MHC			—				50
Net change in advances from borrowers for taxes and insurance			(16	)			(58	)
Net cash from financing activities			(2,727	)			(1,099)
Net change in cash and cash equivalents			1,190				(2,125	)
Cash and cash equivalents at beginning of year			9,265				19,014
Cash and cash equivalents at end of period		$	10,455			$	16,889
Supplemental disclosures
Interest paid		$	156			$	185
Transfers from loans to repossessed assets			—				351
To be settled security purchases			—				2,000

See accompanying notes to consolidated financial statements

 

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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 $610 for the six months ended June 30, 2016 and $1,032 during the year ended December 31, 2015. The losses are largely due to declining interest earning assets and our non-interest expenses exceeding our net interest income. Non-interest expense has been impacted by the increase in our professional fees and in 2016, an operational loss not reimbursable from our insurance. Despite these losses, the Bank’s total capital to risk-based capital ratio and Tier 1 leverage capital to average assets ratio were 17.3% and 9.9% respectively, at June 30, 2016.

The Company had $274 and $334 of cash at June 30, 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 June 30, 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.

 

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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.

In June 2016 the FASB issued accounting standards update 2016-13 Measurement of Credit Losses on Financial Instruments. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The provisions of this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Management has not yet determined the impacts of this update 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
June 30, 2016
U.S. government-sponsored entities		$	7,000			$	5			$	—			$	7,005
Residential mortgage-backed			462				26				—				488
Total		$	7,462			$	31			$	—			$	7,493
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 six months ended June 30, 2016 or 2015. There were no securities pledged to secure any of the borrowings of the Company as of June 30, 2016 and December 31, 2015.

The amortized cost and fair value of available-for-sale securities are shown by contractual maturity as of June 30, 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.

 

		June 30, 2016
		Amortized				Fair
		Cost				Value
U.S. government-sponsored entities
Within one year		$	—			$	—
One to five years			7,000				7,005
Five to ten years			—				—
Residential mortgage-backed			462				488
Total		$	7,462			$	7,493

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 December 31, 2015, aggregated by major security type and length of time in a continuous unrealized loss position. There were no securities with unrealized losses at June 30, 2016.

 

		Less Than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
2015
U.S. government sponsored entities		$	5,947			$	(53	)		$	988			$	(12	)		$	6,935			$	(65	)

As of June 30, 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

		June 30, 2016								December 31, 2015
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
First mortgage loans:
Secured by one- to four family		$	28,771				49.90	%		$	30,368				51.84	%
Secured by multi-family			7,651				13.27				7,592				12.96
Secured by commercial real estate			14,688				25.47				13,941				23.80
Secured by land			181				0.31				192				0.33
Secured by construction			164				0.28				—				—
Total first mortgage loans			51,455				89.23				52,093				88.93
Commercial, consumer and other loans:
Home equity lines-of-credit			4,421				7.67				4,574				7.81
Commercial business loans			1,214				2.11				1,112				1.90
Automobile loans			553				0.96				798				1.36
Other consumer loans			15				0.03				—				—
Total commercial, consumer and other loans			6,203				10.77				6,484				11.07
Gross loans			57,658				100.00				58,577				100.00
Premiums and net deferred loan costs			(63	)							(50	)
Allowance for loan losses			(981	)							(991	)
Total loans, net		$	56,614							$	57,536

 

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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 six months ended June 30, 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 June 30, 2016
Allowance for loan losses
Beginning balance		$	333			$	146			$	397			$	5			$	10			$	75			$	14			$	32			$	—			$	1,012
Provision for loan losses			(24	)			(12	)			16				—				(7	)			1				(1	)			(6	)			—				(33	)
Loans charged-off			—				—				—				—				—				—				—				—				—				—
Recoveries			—				—				—				—				2				—				—				—				—				2
Total ending allowance balance June 30, 2015		$	309			$	134			$	413			$	5			$	5			$	76			$	13			$	26			$	—			$	981
For the three months ended June 30, 2015
Allowance for loan losses
Beginning balance		$	370			$	340			$	288			$	6			$	14			$	92			$	7			$	62			$	—			$	1,179
Provision for loan losses			92				(155	)			87				—				(10	)			(6	)			—				(8	)			—				—
Loans charged-off			—				—				—				—				—				—				—				—				—				—
Recoveries			—				—				—				—				3				—				—				—				—				3
Total ending allowance balance June 30, 2015		$	462			$	185			$	375			$	6			$	7			$	86			$	7			$	54			$	—			$	1,182
For the six months ended June 30, 2016
Allowance for loan losses
Beginning balance		$	326			$	157			$	385			$	5			$	—			$	70			$	12			$	36			$	—			$	991
Provision for loan losses			(17	)			(23	)			28				—				(18	)			6				1				(10	)			—				(33	)
Loans charged-off			—				—				—				—				—				—				—				—				—				—
Recoveries			—				—				—				—				23				—				—				—				—				23
Total ending allowance balance June 30, 2016		$	309			$	134			$	413			$	5			$	5			$	76			$	13			$	26			$	—			$	981
For the six months ended June 30, 2015
Allowance for loan losses
Beginning balance		$	392			$	354			$	277			$	6			$	7			$	96			$	8			$	66			$	—			$	1,206
Provision for loan losses			70				(141	)			98				—				(4	)			(10	)			(1	)			(11	)			(1	)			—
Loans charged-off			—				(28	)			—				—				—				—				—				(1	)			—				(29	)
Recoveries			—				—				—				—				4				—				—				—				1				5
Total ending allowance balance June 30, 2015		$	462			$	185			$	375			$	6			$	7			$	86			$	7			$	54			$	—			$	1,182

 

10

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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
June 30, 2016
One-to-four-family		$	1,627			$	27,144			$	28,771			$	65			$	244			$	309
Multi-family			1,337				6,314				7,651				21				113				134
Commercial real estate			—				14,688				14,688				—				413				413
Land			—				181				181				—				5				5
Construction			—				164				164				—				5				5
Home equity lines of credit			—				4,421				4,421				—				76				76
Commercial			—				1,214				1,214				—				13				13
Automobile			—				553				553				—				26				26
Other consumer			—				15				15				—				—				—
Total		$	2,964			$	54,694			$	57,658			$	86			$	895			$	981
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

 

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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 six months ended June 30, 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
June 30, 2016
With no related allowance recorded
One-to-four-family		$	1,513			$	1,093			$	—			$	1,095			$	—			$	—
Multi-family			796				621				—				622				16				16
Commercial real estate			—				—				—				—				—				—
Land			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			—				—				—				—				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Total with no related allowance recorded			2,309				1,714				—				1,717				16				16
With an allowance recorded
One-to-four-family			534				534				65				537				13				13
Multi-family			716				716				21				722				18				18
Commercial real estate			—				—				—				—				—				—
Land			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			—				—				—				—				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Total with a related allowance recorded			1,250				1,250				86				1,259				31				31
Total		$	3,559			$	2,964			$	86			$	2,976			$	47			$	47

 

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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)
June 30, 2015
With no related allowance recorded
One-to-four-family		$	541			$	405			$	—			$	754			$	—			$	—
Multi-family			798				623				—				1,683				40				40
Commercial real estate			—				—				—				—				—				—
Land			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			262				59				—				74				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Total with no related allowance recorded			1,601				1,087				—				2,511				40				40
With an allowance recorded
One-to-four-family			1,558				1,558				134				720				13				13
Multi-family			742				742				64				747				19				19
Commercial real estate			—				—				—				—				—				—
Land			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Home equity line of credit			—				—				—				—				—				—
Commercial			—				—				—				—				—				—
Automobile			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Total with a related allowance recorded			2,300				2,300				198				1,467				32				32
Total		$	3,901			$	3,387			$	198			$	3,978			$	72			$	72

 

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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
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

 

14

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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)
June 30, 2016
One-to-four-family		$	—			$	—			$	—			$	1,093			$	27,678			$	28,771
Multi-family			—				—				—				346				7,305				7,651
Commercial real estate			—				—				—				—				14,688				14,688
Land			—				—				—				—				181				181
Construction			—				—				—				—				164				164
Home equity line of credit			—				—				—				—				4,421				4,421
Commercial			—				—				—				—				1,214				1,214
Automobile			—				—				—				—				553				553
Other consumer			—				—				—				—				15				15
Total		$	—			$	—			$	—			$	1,439			$	56,219			$	57,658
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.

 

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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)
June 30, 2016
One-to-four-family		$	27,678			$	1,093			$	—			$	28,771
Multi-family			7,305				346				—				7,651
Commercial real estate			14,688				—				—				14,688
Land			181				—				—				181
Construction			164				—				—				164
Home equity lines of credit			4,421				—				—				4,421
Commercial			1,214				—				—				1,214
Automobile			553				—				—				553
Other consumer			15				—				—				15
Total		$	56,219			$	1,439			$	—			$	57,658
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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Troubled Debt Restructurings

Our troubled debt restructurings totaled $1,934 at June 30, 2016 and $1,964 at December 31, 2015. There were no loans modified as troubled debt restructurings during the six months ended June 30, 2016 or the year ended December 31, 2015.

There were two loans modified as troubled debt restructurings with a balance of $409 as of June 30, 2016, which are being reported as nonaccrual, one of which totaling $63 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 six months ended June 30, 2016, one multi-family loan totaling $346 had payment defaults and was reported as non-accrual at June 30, 2016 and December 31, 2015.

The Company has allocated $86 to specific reserves on $1,250 of loans to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 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 June 30, 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								For the Six Months Ended
		June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
Net income (loss) (Dollars in thousands)		$	(347	)		$	(319	)		$	(610	)		$	(645	)
Weighted average common shares outstanding (1)			660,734				657,465				660,339				660,401
Basic and diluted income (loss) per share (1)		$	(0.53	)		$	(0.49	)		$	(0.92	)		$	(0.98	)

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.

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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)
June 30, 2016
Assets
Securities available for sale
U.S. government-sponsored entities		$	7,005			$	—			$	7,005			$	—
Residential mortgaged-backed			488				—				488				—
		$	7,493			$	—			$	7,493			$	—
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 six-months ended June 30, 2016 or the year ended December 31, 2015.

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)
June 30, 2016
Assets
Impaired loans
One-to-four-family		$	725			$	—			$	—			$	725
Multi-family			695				—				—				695
Total impaired loans		$	1,420			$	—			$	—			$	1,420
Repossessed assets
Land		$	87				—				—			$	87
Total repossessed assets		$	87			$	—			$	—			$	87

 

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(Unaudited)

 

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 $1,441 with a $21 valuation allowance at June 30, 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 and six months ended June 30, 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 June 30, 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 and six months ended June 30, 2016 and 2015.

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 June 30, 2016 and December 31, 2015:

June 30, 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

$

695

Sales comparison approach

Adjustment for differences between the comparable sales

(1.9%) – 2.64%

Other real estate owned

Land

$

87

Sales comparison approach

Adjustment for differences between the comparable sales

(11.6%) – .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%

 

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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
						June 30, 2016 (Unaudited) Using:
		Carrying Amount				Level 1				Level 2				Level 3				Total
Financial assets
Cash and cash equivalents		$	10,455			$	10,455			$	—			$	—			$	10,455
Certificates of deposit in other other financial institutions			3,675				—				3,675				—				3,675
Securities available-for-sale			7,493				—				7,493				—				7,493
Loans receivable, net			56,614				—				—				57,233				57,233
FHLB stock			921				N/A				N/A				N/A				N/A
Accrued interest receivable			157				1				17				139				157
Financial liabilities
Demand, money market, and savings		$	38,304			$	38,304			$	—			$	—			$	38,304
Certificates of deposits			32,542				—				32,655				—				32,655
Advances by borrowers for taxes and insurance			543				543				—				—				543
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 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

 

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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 June 30, 2016, the Bank’s capital conservation buffer stood at 9.28%.

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.

 

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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 June 30, 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:

 

										Minimum Required for Capital								Minimum Required
		Actual								Adequacy Purposes								By the Order
		Amount				Ratio				Amount				Ratio				Amount				Ratio
June 30, 2016
Total capital (to risk-weighted assets)		$	8,700				17.3	%		$	4,028				8.0	%		$	6,042				12.0	%
Common equity Tier 1 capital (torisk-weighted assets)			8,067				16.0				2,266				4.5				N/A				N/A
Tier 1 (core) capital (torisk-weighted assets)			8,067				16.0				3,021				6.0				N/A				N/A
Tier 1 (core) capital (to average total assets)			8,067				9.9				3,263				4.0				6,527				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 (torisk-weighted assets)			8,607				17.3				2,245				4.5				N/A				N/A
Tier 1 (core) capital (torisk-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

 

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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 began at 0.625% January 1, 2016 and becomes fully phased in at 2.5% on January 1, 2019.

 

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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, 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. 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 June 30, 2016 and December 31, 2015

Assets. Total assets at June 30, 2016 were $80.9 million compared to $84.1 million at December 31, 2015, a decrease of $3.2 million, or 3.8%. This decrease was primarily due to the $3.0 million decrease in the balance of our securities available for sale, the $922,000 decrease in our loan portfolio, and the $960,000 decrease in our certificate of deposits in other financial institutions, partially offset by the $1.2 million increase in the balance of our cash and cash equivalents.

The decrease in our loan portfolio balance during the first six months of 2016 was primarily due to the $1.6 million decrease in our one- to four family residential loan portfolio, partially offset by the $747,000 increase in our commercial real estate loan portfolio. The decrease in our one- to four family residential loan portfolio was primarily due to the repayments from existing loans exceeding the $1.0 million of new loans originated. Management intends to purchase loan pools from other sources as outlined in our strategic plan to supplement our internal origination efforts to increase the balance of our loan portfolio and generate additional interest income.

 

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At June 30, 2016 our allowance for loan losses was $981,000, or 1.70% of total loans, compared to $991,000, or 1.69% of total loans, at December 31, 2015. Our allowance reflected $23,000 of recoveries for the six months ended June 30, 2016 and a credit for loan losses of $33,000. Our loans classified as substandard or doubtful, which also represents our non-accrual loans, were $1.4 million or 2.50% of total loans at June 30, 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 June 30, 2016 of which $1.5 million were accruing, which was relatively unchanged from the amounts at December 31, 2015.

Our securities portfolio decreased $3.0 million or 28.5% to $7.5 million at June 30, 2016 compared to $10.5 million at December 31, 2015. The decrease was primarily due to the call of $6.0 million of government sponsored entities notes, partially offset by the purchase of $3.0 million of callable notes and the repayments on mortgage-backed securities. Our cash and cash equivalents increased $1.2 million to $10.5 million at June 30, 2016. Our certificates of deposit with other financial institutions decreased $960,000 primarily due to the maturity of $2.9 million of such certificates of deposit, partially offset by the purchase of $2.0 million.

Our premises and equipment increased $478,000 or 100.6% due to the leasehold improvements, furniture, and equipment for our branch office that we are upgrading and relocating within the shopping center where it is located. The upgraded branch will provide a drive-up facility that was not present in the existing location and will provide other improvements to promote that branch location. The new office opened on July 5, 2016. Total costs for leasehold improvements and equipment for the branch office are anticipated to total $780,000.

Liabilities. Our total liabilities decreased $2.6 million or 3.5% to $72.1 million at June 30, 2016. Our deposits decreased by $2.8 million or 3.7% to $70.8 million at June 30, 2016 compared to $73.6 million at December 31, 2015, primarily due to the $2.6 million or 7.4% decrease in our certificate of deposit accounts and the $755,000 or 5.7% decrease in our money market accounts, partially offset by the $1.1 million or 9.7% increase in the balance of our savings accounts. At the end of June, we offered a certificate of deposit account with a competitive market rate to help promote the new branch office location and to offset the decreases we have experienced within the certificate of deposit portfolio.

Stockholders’ Equity. Total stockholders’ equity at June 30, 2016 was $8.8 million, a decrease of $609,000 or 6.5% from December 31, 2015. The decrease resulted primarily from our net loss of $610,000 for the six months ended June 30, 2016.

Comparison of Operating Results for the Three Months Ended June 30, 2016 and 2015

General. For the three months ended June 30, 2016 our net loss was $347,000 compared to a net loss of $319,000 for the three months ended June 30, 2015. The increase in our net loss was primarily due to the decreases in our net interest income and increase in our non-interest expense, partially offset by the credit for loan losses.

Interest Income. Interest income was $681,000 for the three months ended June 30, 2016, $57,000, or 7.7%, lower than the prior year period. Interest income from loans decreased $69,000 or 9.9% primarily due to a one-time charge of $73,000 related to changes in our processing for certain loan payments. The one-time charge contributed to the decrease in the yield of our loan portfolio to 4.47% for the three months ended June 30, 2016 compared to 4.88% for the prior year period. Excluding the effect of the charge, the yield on our loan portfolio would have been 4.99%. The average balance of our loan portfolio decreased $1.0 million for the three months ended June 30, 2016 compared to the prior year period primarily due to the $2.0 million decrease in our home equity line-of-credit loans, the $2.0 million decrease in the average balance of our one- to four-family residential loans, and the $523,000 decrease in our consumer loans. These decreases were partially offset by the $3.4 million increase in the average balance of our multi-family and commercial real estate loans and the $435,000 increase in our commercial business loans.

Interest income from securities increased $1,000 or 3.0% to $34,000 for the three months ended June 30, 2016. Interest income from other interest earning assets increased $11,000 or 100.0% to $22,000 for the three months ended June 30, 2016 compared to the prior year period. The average balance of our other interest earning assets decreased $4.8 million primarily due to the decrease in our customer deposits while the yield increased 0.36% to 0.61% for the three months ended June 30, 2016 as we purchased certificates of deposit from 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 June 30, 2016 totaled $4.0 million compared to $2.2 million in the comparable period during 2015.

 

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Interest Expense. Interest expense for the three months ended June 30, 2016 was $76,000, a decrease of $16,000 or 17.4% from the prior year period due to the decrease in interest expense on deposits. The average cost of deposits decreased to 0.45% for the three months ended June 30, 2016 compared to 0.51% for the prior year period as the average cost of our certificate of deposit accounts decreased to 0.79% for the three months ended June 30, 2016 compared to 0.84% for the prior year period. The average balance of our certificate of deposit accounts decreased $6.4 million to $32.7 million. This decrease was partially offset by the $1.9 million increase in the average balance of our savings accounts for the three months ended June 30, 2016. At the end of June we offered a certificate of deposit account with a competitive market rate to help promote our new relocated branch office and offset the decreases we have experienced in our certificate of deposit portfolio.

Net Interest Income. Net interest income for the three months ended June 30, 2016 was $605,000 compared to $646,000 for the three months ended June 30, 2015. For the three months ended June 30, 2016, the average yield on interest-earning assets was 3.44% and the average cost of interest-bearing liabilities was 0.45% compared to 3.47% and 0.51%, respectively, for the three months ended June 30, 2015. These changes resulted in a net interest rate spread and net interest margin to 2.99% and 3.06% respectively for the three months ended June 30, 2016 compared to a net interest rate spread of 2.96% and net interest margin of 3.03% for the prior year period.

Provision for Loan Losses. We had a $33,000 credit for loan losses for the three months ended June 30, 2016 compared to no provision for the three months ended June 30, 2015. The credit was the result of decrease in specific reserve for one of our multi-family impaired loans due to an increase in market value, and a decrease in our historical loss ratios. At June 30, 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 June 30, 2016, non-interest income was $32,000 compared to $38,000 for the three months ended June 30, 2015 primarily due to the $6,000 decrease in fees for originating loans for other financial institutions.

Non-interest Expense. For the three months ended June 30, 2016, our non-interest expense increased $22,000 or 2.2% compared to the prior year period. Professional fees increased $41,000 primarily due to the $14,000 increase for loan consulting fees, $17,000 internal audit and tax fees, and the $7,000 increase in our legal fees. Our other costs increased $66,000 primarily due to a one-time $40,000 operational loss that was below the insurance deductible and which is not expected to be recovered. Our compensation and employee benefit costs decreased $76,000 or 15.6% primarily due to the staffing changes and salary adjustment that were implemented in 2015 and the beginning of 2016.

Income Tax. We recorded immaterial amounts for income taxes for the three months ended June 30, 2016 and 2015.

Comparison of Operating Results for the Six Months Ended June 30, 2016 and 2015

General. For the six months ended June 30, 2016 our net loss was $610,000 compared to a net loss of $645,000 for the six months ended June 30, 2015. The decrease in our net loss was primarily due to the credit for loan losses and the decrease in our non-interest expenses, partially offset by the decrease in our non-interest income.

Interest Income. Interest income was $1.5 million for the six months ended June 30, 2016, $30,000, or 2.0%, lower than the prior year period. Interest income from loans was $67,000 or 4.8% lower for the six months ended June 30, 2016 compared to the prior year period primarily due to a one-time charge of $73,000 related to changes in our processing for certain loan payments. The average balance of our loan portfolio decreased $2.0 million for the six months ended June 30, 2016 compared to the prior year period primarily due to the $2.2 million decrease in our home equity line-of-credit loans, the $1.8 million decrease in the average balance of our one- to four-family residential loans, and the $537,000 decrease in our consumer loans. These decreases were partially offset by the $2.4 million increase in the average balance of our multi-family and commercial real estate loans and the $419,000 increase in our commercial business loans. The average yield on loans for the six months ended June 30, 2016 was 4.78% compared to 4.86% for the prior year period primarily due to the $73,000 one-time charge. Excluding the effect of the charge, the yield on our loan portfolio would have been 5.04%.

 

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Interest income from securities increased $13,000 or 22.0% to $72,000 for the six months ended June 30, 2016 primarily due to the $1.3 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. The yield on our securities was 1.45% for the six months ended June 30, 2016 compared to 1.38% for the prior year period. Interest income from other interest earning assets increased $24,000 or 126.3% to $43,000 for the six months ended June 30, 2016. The average balance of our other interest earning assets decreased $4.7 million primarily due to the decrease in the average balance of our deposits, while the yield increased 0.42% to 0.62% 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 six months ended June 30, 2016 totaled $4.3 million compared to $1.1 million the prior your period.

Interest Expense. Interest expense for the six months ended June 30, 2016 was $157,000, a decrease of $29,000 or 15.6% from the prior year period due to the decrease in interest expense on deposits. The average cost of deposits decreased to 0.47% for the six months ended June 30, 2016 compared to 0.52% for the prior year period as the average cost of our certificate of deposit accounts decreased to 0.81% for the six months ended June 30, 2016 compared to 0.85% for the prior year period. The average balance of our certificate of deposit accounts decreased $6.0 million to $33.6 million, partially offset by the $1.6 million increase in the average balance of our savings accounts for the six months ended June 30, 2016.

Net Interest Income. Net interest income for the six months ended June 30, 2016 was $1.3 million, relatively unchanged from the six months ended June 30, 2015. For the six months ended June 30, 2016, the average yield on interest-earning assets was 3.64% and the average cost of interest-bearing liabilities was 0.47% compared to an average yield of 3.49% and average cost of 0.52%, respectively, for the six months ended June 30 2015. These changes resulted in an increase in our net interest rate spread and net interest margin to 3.17% and 3.25% respectively for the first six months of 2016 compared to a net interest rate spread of 2.97% and net interest margin of 3.05% for the prior year period.

Provision for Loan Losses. We had a $33,000 credit for loan losses for the six months ended June 30, 2016 and no provision for 2015. The credit was the result of decrease in the specific reserve for one of our multi-family impaired loans due to an increase in market value, and a decrease in our historical loss ratios. At June 30, 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 six months ended June 30, 2016, non-interest income was $61,000 compared to $102,000 for the six months ended June 30, 2015. The decrease was primarily due to the $34,000 net gain on the sale of repossessed assets for the six months ended June 30, 2015.

Non-interest Expense. For the six months ended June 30, 2016, our non-interest expense decreased $24,000 or 1.2% compared to the prior year period. Professional fees increased $61,000 primarily due to the $19,000 increase for loan consulting fees, $25,000 for internal audit tax fees, and the $37,000 increase in our legal fees. Our other costs increased $81,000 primarily due to a one-time $40,000 operational loss that was below the insurance deductible which is not expected to be recovered, $14,000 for problem loan costs, $10,000 for provision for off balance sheet commitments, and $9,000 for cost related to the annual meeting. Our compensation and employee benefit costs decreased $116,000 or 11.8% primarily due to staffing changes and salary adjustment that were implemented in 2015 and the beginning of 2016.

Income Tax. We recorded immaterial amounts for income taxes for the six months ended June 30, 2016 and 2015.

 

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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.

 

		June 30, 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			63				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			409				415
Total non-performing loans			1,439				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		$	1,915			$	1,921
Total accruing troubled debt restructured loans		$	1,525			$	1,549
Ratios:
Non-performing loans and non-performing troubled-debt-restructurings to gross loans			2.50	%			2.47	%
Non-performing assets to total assets			2.37	%			2.29	%
Non-performing assets and accruing troubled debt restructurings to total assets			4.25	%			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

 

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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 June 30,
		2016												2015
		Average Outstanding Balance				Interest				Yield/ Cost				Average Outstanding Balance				Interest				Yield/Cost
		(Dollars in thousands)
Assets:
Loans		$	56,002			$	625				4.47	%		$	57,021			$	694				4.88	%
Securities (1)			9,182				34				1.45				9,453				33				1.38
Other interest-earning assets (2)			14,029				22				0.61				18,795				11				0.25
Total interest-earning assets			79,213			$	681				3.44				85,269			$	738				3.47
Non-interest-earning assets			2,381												2,515
Total assets		$	81,594											$	87,784
Liabilities and stockholders’ equity:
Savings deposits		$	11,635			$	5				0.15			$	9,770			$	3				0.15
Demand deposits			9,735				2				0.05				10,282				2				0.08
Money market deposits			12,532				4				0.14				13,370				5				0.15
Certificates of deposit			32,673				65				0.79				39,108				82				0.84
Total deposits			66,575				76				0.45				72,530				92				0.51
Non-interest-bearing deposits			4,760												4,038
Other liabilities			1,026												1,047
Total liabilities			72,361												77,615
Stockholders’ equity			9,233												10,169
Total liabilities and stockholders’ equity		$	81,594											$	87,784
Net interest income						$	605											$	646
Net interest rate spread											2.99	%											2.96	%
Net interest-earning assets		$	12,638											$	12,739
Net interest margin											3.06	%											3.03	%
Average of interest-earning assets to interest-bearing Liabilities											118.98	%											117.56	%

 

 

(1)	Securities include Federal Home Loan Bank stock with an average balance of $921,000 for the three months ended June 30, 2016 and 2015, respectively.

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

 

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		Six Months Ended June 30,
		2016												2015
		Average Outstanding Balance				Interest				Yield/Cost				Average Outstanding Balance				Interest				Yield/Cost
		(Dollars in thousands)
Assets:
Loans		$	56,240			$	1,341				4.78	%		$	58,216			$	1,408				4.86	%
Securities (1)			9,906				72				1.45				8,562				59				1.38
Other interest-earning assets (2)			14,053				43				0.62				18,705				19				0.20
Total interest-earning assets			80,199			$	1,456				3.64				85,483			$	1,486				3.49
Non-interest-earning assets			2,258												2,548
Total assets		$	82,457											$	88,031
Liabilities and stockholders’ equity:
Savings deposits		$	11,312			$	9				0.15			$	9,749			$	7				0.15
Demand deposits			9,602				3				0.06				9,867				3				0.07
Money market deposits			12,907				9				0.15				13,395				10				0.15
Certificates of deposit			33,556				136				0.81				39,520				166				0.85
Total deposits			67,377				157				0.47				72,531				186				0.52
Non-interest-bearing deposits			4,683												4,290
Other liabilities			1,034												1,114
Total liabilities			73,094												77,935
Stockholders’ equity			9,363												10,096
Total liabilities and stockholders’ equity		$	82,457											$	88,031
Net interest income						$	1,299											$	1,300
Net interest rate spread											3.17	%											2.97	%
Net interest-earning assets		$	12,822											$	12,952
Net interest margin											3.25	%											3.05	%
Average of interest-earning assets to interest-bearing Liabilities											119.03	%											117.86	%

 

(1)	Securities include Federal Home Loan Bank stock with an average balance of $921,000 for the six months ended June 30, 2016 and 2015, respectively.

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

 

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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 June 30, 2016 vs. 2015												Six Months Ended June 30, 2016 vs. 2015
		Increase (Decrease) Due to								Total Increase				Increase (Decrease) Due to								Total Increase (Decrease)
		Volume				Rate				(Decrease)				Volume				Rate
		(Dollars in thousands)
Interest-earning assets:
Loans		$	(2	)		$	(67	)		$	(69	)		$	(32	)		$	(35	)		$	(67	)
Securities			(1	)			2				1				10				3				13
Other interest-earning assets			(3	)			14				11				(6	)			30				24
Total interest-earning assets			(6	)			(51	)			(57	)			(28	)			(2	)			(30	)
Interest-bearing liabilities:
Savings deposits			2				—				2				—				2				2
Demand accounts			—				—				—				—				—				—
Money market accounts			(1	)			—				(1	)			—				(1	)			(1	)
Certificates of deposit			(13	)			(4	)			(17	)			(7	)			(23	)			(30	)
Total deposits			(12	)			(4	)			(16	)			(7	)			(22	)			(29	)
Change in net interest income		$	6			$	(47	)		$	(41	)		$	(21	)		$	20			$	(1	)

 

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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 June 30, 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

In addition to the other information contained in the Quarterly Report on Form 10-Q, the follow risk factor represents material updates and additions to the risk factors previously disclosed in our Annual report on Form 10-K for the fiscal year ended December 31, 2015as filed with the Securities and Exchange Commission. Additional risks not presently know to us, or that we currently deem immaterial may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward looking statements made by or on behalf of us.

A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted Accounting Standard Update 2016-13, which will be effective for Ben Franklin Financial, Inc. and Ben Franklin Bank of Illinois for our first quarter of 2020. This standard , often referred to as “CECL” (reflecting ac current expected credit loss model), will require companies to recognize an allowance for credit losses based on estimates of losses expected to be realized over the contractual lives of the loans. Under current U.S .GAAP, companies generally recognize credit losses only when it is probable that a loss has been incurred as of the balance sheet date. The new standard will require us to collect and review increased types and amounts of data for us to determine the appropriate level of allowance for loan losses, and may require us to increase our allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses and have a material adverse effect on our financial condition and results of operations. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

 

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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 June 30, 2016 and December 31, 2015, (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015, (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 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

 

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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: August 12, 2016						/s/ C. Steven Sjogren
						C. Steven Sjogren
						President and Chief Executive Officer

 

Date: August 12, 2016						/s/ Glen A. Miller
						Glen A. Miller
						Senior Vice President and Chief Financial Officer

 

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