Ben Franklin Financial, Inc. - FORM 10-Q

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EX-32.1 - EX-32.1 - Ben Franklin Financial, Inc.	EX-32.1_3.htm
EX-31.2 - EX-31.2 - Ben Franklin Financial, Inc.	EX-31.2_2.htm
EX-31.1 - EX-31.1 - Ben Franklin Financial, Inc.	EX-31.1_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2016

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

For the transition period from to

Commission file number 000-55352

Ben Franklin Financial, Inc.

(Exact name of registrant as specified in its charter)


Maryland		67-1746204
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No. )

830 East Kensington Road, Arlington Heights, Illinois		60004
(Address of principal executive offices)		(Zip Code)

(847) 398-0990

(Registrant’s telephone number, including area code)

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

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

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

Number of outstanding shares of common stock as of November 10, 2016: 694,419

BEN FRANKLIN FINANCIAL, INC.

INDEX

Table of Content	Page NO.
PART I – Financial Information	1
Item 1. Financial Statements of Ben Franklin Financial, Inc.	1
Consolidated Statements of Financial Condition (Unaudited) as of September 30, 2016 and December 31, 2015	1
Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2016 and 2015	2
Consolidated Statements of Comprehensive Loss (Unaudited) for the three and nine months ended September 30, 2016 and 2015	3
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2016 and 2015	4
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 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	33
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

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)


	September 30,			December 31,
	2016			2015
ASSETS
Cash and due from banks	$	758		$	958
Interest-earning deposit accounts and federal funds sold		9,000			8,307
Cash and cash equivalents		9,758			9,265
Certificates of deposit in other financial institutions		3,920			4,635
Securities available for sale at fair value		7,501			10,484
Loans receivable, net (allowance for loan losses:
$962; at September 30, 2016—$991 at December 31, 2015)		55,572			57,536
Federal Home Loan Bank stock		921			921
Premises and equipment, net		1,207			475
Repossessed assets, net		701			476
Accrued interest receivable		186			185
Other assets		103			80
Total assets	$	79,869		$	84,057
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Demand deposits—non-interest-bearing	$	4,485		$	4,569
Demand deposits—interest-bearing		8,690			9,733
Savings deposits		12,339			10,932
Money market deposits		11,834			13,165
Certificates of deposit		33,188			35,158
Total deposits		70,536			73,557
Advances from borrowers for taxes and insurance		262			559
Other liabilities		366			387
Common stock in ESOP subject to contingent purchase obligation		179			155
Total liabilities		71,343			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 shares – 694,419 at September 30, 2016 and 696,339 at December 31, 2015		7			7
Additional paid-in-capital		10,267			10,308
Retained deficit		(1,067	)		(177	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(516	)		(563	)
Accumulated other comprehensive income		14			(21	)
Reclassification of ESOP shares		(179	)		(155	)
Total equity		8,526			9,399
Total liabilities and stockholders’ equity	$	79,869		$	84,057

See accompanying notes to consolidated financial statements

Table of Contents

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Interest income
Loans	$	705			708		$	2,046		$	2,116
Securities		30			36			102			95
Federal funds sold and interest earning deposit accounts		21			16			64			35
		756			760			2,212			2,246
Interest expense
Deposits		81			92			238			278
		81			92			238			278
Net interest income		675			668			1,974			1,968
Provision (credit) for loan losses		(95	)		55			(128	)		55
Net interest income after provision for loan losses		770			613			2,102			1,913
Non-interest income
Service fee income		17			21			54			58
Gain on sale of repossessed assets, net		—			141			—			175
Other		8			26			32			57
		25			188			86			290
Non-interest expense
Compensation and employee benefits		422			478			1,288			1,460
Occupancy and equipment		179			160			486			473
Data processing services		78			78			237			245
Professional fees		133			104			417			327
FDIC insurance premiums		43			46			130			139
Repossessed asset expenses, net		79			3			117			71
Other		138			84			425			290
		1,072			953			3,100			3,005
Loss before income taxes		(277	)		(152	)		(912	)		(802	)
Income tax (benefit)		3			(10	)		(22	)		(15	)
Net loss	$	(280	)	$	(142	)	$	(890	)	$	(787	)
Loss per common share basic and diluted		(0.42	)		(0.22	)		(1.35	)		(1.19	)

See accompanying notes to consolidated financial statements

Table of Contents

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands except per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Net loss	$	(280	)	$	(142	)	$	(890	)	$	(787	)
Other comprehensive income (loss)
Unrealized holding gains (losses) arising during the period		(8	)		25			57			39
Tax effect		3			(10	)		(22	)		(15	)
Net of tax		(5	)		15			35			24
Comprehensive loss	$	(285	)	$	(127	)	$	(855	)	$	(763	)

See accompanying notes to consolidated financial statements

Table of Contents

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 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		—			—			—			(890	)		—			—			—			(890	)
Other comprehensive income		—			—			—			—			—			35			—			35
Earned ESOP shares		—			(20	)		—			—			47			—			—			27
Purchase of common stock (1,920 shares)		—			(21	)		—			—			—			—			—			(21	)
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—			—			—			—			—			—			(24	)		(24	)
Balance at September 30, 2016	$	7		$	10,267		$	—		$	(1,067	)	$	(516	)	$	14		$	(179	)	$	8,526
Balance at January 1, 2015	$	20		$	8,233		$	(462	)	$	855		$	(355	)	$	2		$	(114	)	$	8,179
Net loss		—			—			—			(787	)		—			—			—			(787	)
Other comprehensive income		—			—			—			—			—			24			—			24
Earned ESOP shares		—			(23	)		—			—			48			—			—			25
Reclassification due to conversion		(13	)		13			—			—			—			—			—			—
Net proceeds from common stock offering		—			2,504			—			—			—			—			—			2,504
Funds from termination of MHC		—			50			—			—			—			—			—			50
Addition to ESOP due to conversion		—			—			—			—			(273	)		—			—			(273	)
Retirement of treasury stock due to conversion		—			(462	)		462			—			—			—			—			—
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation		—			—			—			—			—			—			(47	)		(47	)
Balance at September 30, 2015	$	7		$	10,315		$	—		$	68		$	(580	)	$	26		$	(161	)	$	9,675

See accompanying notes to consolidated financial statements

Table of Contents

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2016			2015
Cash flows from operating activities
Net loss	$	(890	)	$	(787	)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation		88			81
ESOP and other stock based compensation, net		27			25
(Provision) credit for loan losses		(128	)		55
Write-down of repossessed assets		68			14
Gain on sale of repossessed assets		—			(175	)
Changes in:
Deferred loan costs		14			(8	)
Accrued interest receivable		(1	)		—
Other assets		(45	)		1,102
Other liabilities		(21	)		(181	)
Net cash from operating activities		(888	)		126
Cash flows from investing activities
Principal repayments on mortgage-backed securities		79			87
Calls and maturities of securities available for sale		8,000			5,000
Maturities of certificates of deposit in other financial institutions		3,655			490
Purchase of securities available for sale		(5,039	)		(8,000	)
Purchase of certificates of deposit in other financial institutions		(2,940	)		(5,860	)
Net decrease in loans		1,785			3,707
Sales of repossessed assets		—			540
Expenditures for premises and equipment		(820	)		(15	)
Net cash from investing activities		4,720			(4,051	)
Cash flows from financing activities
Net decrease in deposits		(3,021	)		(5,296	)
Net proceeds from common stock offering		—			2,231
Repurchase of ESOP shares subject to contingent repurchase obligation		(21	)		—
Funds from termination of MHC		—			50
Net change in advances from borrowers for taxes and insurance		(297	)		(393	)
Net cash from financing activities		(3,339	)		(3,408	)
Net change in cash and cash equivalents		493			(7,333	)
Cash and cash equivalents at beginning of year		9,265			19,014
Cash and cash equivalents at end of period	$	9,758		$	11,681
Supplemental disclosures
Interest paid	$	237		$	278
Transfers from loans to repossessed assets		293			351

See accompanying notes to consolidated financial statements

Table of Contents

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 $890 for the nine months ended September 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 16.84% and 9.70% respectively, at September 30, 2016.

The Company had $304 and $334 of cash at September 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 reduced 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 Order and its minimum total risk-based capital ratio to 12% from 13% under the Old Order. The New 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 September 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 authority to determine whether or not the provisions of the New Order have been met.

Table of Contents

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 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 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.

In August 2016, the FASB issued accounting standards update 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments. The update addresses the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. 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.

Table of Contents

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
September 30, 2016
U.S. government-sponsored entities	$	6,000	$	1	$	(2	)	$	5,999
Residential mortgage-backed		1,478		24		—			1,502
Total	$	7,478	$	25	$	(2	)	$	7,501
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 nine months ended September 30, 2016 or 2015. There were no securities pledged to secure any of the borrowings of the Company as of September 30, 2016 and December 31, 2015.

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


	September 30, 2016
	Amortized		Fair
	Cost		Value
U.S. government-sponsored entities
Within one year	$	—	$	—
One to five years		6,000		5,999
Five to ten years		—		—
Residential mortgage-backed		1,478		1,502
Total	$	7,478	$	7,501

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

The following table summarizes securities with unrealized losses at September 30, 2016 and December 31, 2015, aggregated by major security type and length of time in a continuous unrealized loss position.


	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
2016
U.S. government sponsored entities	$	998	$	(2	)	$	—	$	—		$	998	$	(2	)
2015
U.S. government sponsored entities	$	5,947	$	(53	)	$	988	$	(12	)	$	6,935	$	(65	)

As of September 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.

Table of Contents

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.


	September 30, 2016						December 31, 2015
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
First mortgage loans:
Secured by one- to four family	$	27,792			49.10	%	$	30,368			51.84	%
Secured by multi-family		7,896			13.95			7,592			12.96
Secured by commercial real estate		13,893			24.55			13,941			23.80
Secured by land		176			0.31			192			0.33
Secured by construction		218			0.39			—			—
Total first mortgage loans		49,975			88.30			52,093			88.93
Commercial, consumer and other loans:
Home equity lines-of-credit		4,967			8.78			4,574			7.81
Commercial business loans		1,199			2.12			1,112			1.90
Automobile loans		441			0.78			798			1.36
Other consumer loans		13			0.02			—			—
Total commercial, consumer and other loans		6,620			11.70			6,484			11.07
Gross loans		56,595			100.00			58,577			100.00
Premiums and net deferred loan costs		(61	)					(50	)
Allowance for loan losses		(962	)					(991	)
Total loans, net	$	55,572					$	57,536

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the activity in the allowance for loan losses by portfolio segment and class for the three and nine months ended September 30, 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 September 30, 2016
Allowance for loan losses
Beginning balance	$	309		$	134		$	413		$	5		$	5		$	76		$	13		$	26		$	—		$	981
Provision (credit) for loan losses		12			42			(128	)		—			—			(8	)		(1	)		(12	)		—			(95	)
Loans charged-off		(11	)		—			—			—			—			—			—			—			—			(11	)
Recoveries		—			—			86			—			1			—			—			—			—			87
Total ending allowance balance September 30, 2016	$	310		$	176		$	371		$	5		$	6		$	68		$	12		$	14		$	—		$	962
For the three months ended September 30, 2015
Allowance for loan losses
Beginning balance	$	462		$	185		$	375		$	6		$	7		$	86		$	7		$	54		$	—		$	1,182
Provision (credit) for loan losses		123			(16	)		(7	)		(1	)		(16	)		(17	)		—			(11	)		—			55
Loans charged-off		(284	)		—			—			—			—			—			—			—			—			(284	)
Recoveries		—			—			—			—			14			—			—			—			—			14
Total ending allowance balance September 30, 2015	$	301		$	169		$	368		$	5		$	5		$	69		$	7		$	43		$	—		$	967
For the nine months ended September 30, 2016
Allowance for loan losses
Beginning balance	$	326		$	157		$	385		$	5		$	—		$	70		$	12		$	36		$	—		$	991
Provision (credit) for loan losses		(5	)		19			(100	)		—			(18	)		(2	)		—			(22	)		—			(128	)
Loans charged-off		(11	)		—			—			—			—			—			—			—			—			(11	)
Recoveries		—			—			86			—			24			—			—			—			—			110
Total ending allowance balance September 30, 2016	$	310		$	176		$	371		$	5		$	6		$	68		$	12		$	14		$	—		$	962
For the nine months ended September 30, 2015
Allowance for loan losses
Beginning balance	$	392		$	354		$	277		$	6		$	7		$	96		$	8		$	66		$	—		$	1,206
Provision (credit) for loan losses		193			(157	)		91			(1	)		(20	)		(27	)		(1	)		(22	)		(1	)		55
Loans charged-off		(284	)		(28	)		—			—			—			—			—			(1	)		—			(313	)
Recoveries		—			—			—			—			18			—			—			—			1			19
Total ending allowance balance September 30, 2015	$	301		$	169		$	368		$	5		$	5		$	69		$	7		$	43		$	—		$	967

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Loan Balance						Allowance
	(Dollars in thousands)
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Recorded Investment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Recorded Investment
September 30, 2016
One-to-four-family	$	1,312	$	26,480	$	27,792	$	63	$	247	$	310
Multi-family		1,058		6,838		7,896		71		105		176
Commercial real estate		542		13,351		13,893		—		371		371
Land		—		176		176		—		5		5
Construction		—		218		218		—		6		6
Home equity lines of credit		—		4,967		4,967		—		68		68
Commercial		—		1,199		1,199		—		12		12
Automobile		—		441		441		—		14		14
Other consumer		—		13		13		—		—		—
Total	$	2,912	$	53,683	$	56,595	$	134	$	828	$	962
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

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present information related to loans individually evaluated for impairment by class of loans as of and for the nine months ended September 30, 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
September 30, 2016
With no related allowance recorded
One-to-four-family	$	1,202	$	782	$	—	$	1,059	$	—	$	—
Multi-family		—		—		—		184		23		23
Commercial real estate		542		542		—		121		—		—
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Automobile		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—
Total with no related allowance recorded		1,744		1,324		—		1,364		23		23
With an allowance recorded
One-to-four-family		530	$	530	$	63		535		19		19
Multi-family		1,058		1,058		71		1,065		31		31
Commercial real estate		—		—		—		—		—		—
Land		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Home equity line of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Automobile		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—
Total with a related allowance recorded		1,588		1,588		134		1,600		50		50
Total	$	3,332	$	2,912	$	134	$	2,964	$	73	$	73

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


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

Table of Contents

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

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	30 - 59 Days Past due		60 - 89 Days Past due		Greater than 90 Days Past Due Still on Accrual		Nonaccrual		Loans Not Past Due		Total
	(Dollars in thousands)
September 30, 2016
One-to-four-family	$	—	$	—	$	—	$	782	$	27,010	$	27,792
Multi-family		—		—		—		346		7,550		7,896
Commercial real estate		—		—		—		542		13,351		13,893
Land		—		—		—		—		176		176
Construction		—		—		—		—		218		218
Home equity line of credit		—		—		—		—		4,967		4,967
Commercial		—		—		—		—		1,199		1,199
Automobile		—		—		—		—		441		441
Other consumer		—		—		—		—		13		13
Total	$	—	$	—	$	—	$	1,670	$	54,925	$	56,595
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.

Table of Contents

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)
September 30, 2016
One-to-four-family	$	27,010	$	782	$	—	$	27,792
Multi-family		7,550		346		—		7,896
Commercial real estate		13,351		542		—		13,893
Land		176		—		—		176
Construction		218		—		—		218
Home equity lines of credit		4,967		—		—		4,967
Commercial		1,199		—		—		1,199
Automobile		441		—		—		441
Other consumer		13		—		—		13
Total	$	54,925	$	1,670	$	—	$	56,595
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

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Troubled Debt Restructurings

Our troubled debt restructurings totaled $1,644 at September 30, 2016 and $1,964 at December 31, 2015. There were no loans modified as troubled debt restructurings during the nine months ended September 30, 2016 or the year ended December 31, 2015.

There were two loans modified as troubled debt restructurings with a balance of $402 as of September 30, 2016, which are being reported as nonaccrual. 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 nine months ended September 30, 2016, one multi-family loan totaling $346 had payment defaults and was reported as non-accrual at September 30, 2016 and December 31, 2015.

The Company has allocated $134 to specific reserves on $1,587 of loans to customers whose loan terms have been modified in troubled debt restructurings as of September 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 September 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 Nine Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Net income (loss) (Dollars in thousands)	$	(280	)	$	(142	)	$	(890	)	$	(787	)
Weighted average common shares outstanding (1)		659,607			658,260			660,093			659,679
Basic and diluted income (loss) per share (1)	$	(0.42	)	$	(0.22	)	$	(1.35	)	$	(1.19	)

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:

Table of Contents

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.

Table of Contents

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)
September 30, 2016
Assets
Securities available for sale
U.S. government-sponsored entities	$	5,999	$	—	$	5,999	$	—
Residential mortgaged-backed		1,502		—		1,502		—
	$	7,501	$	—	$	7,501	$	—
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 nine-months ended September 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)
September 30, 2016
Assets
Impaired loans
One-to-four-family	$	725	$	—	$	—	$	725
Multi-family		987		—		—		987
Total impaired loans	$	1,712	$	—	$	—	$	1,712
Repossessed assets
One-to-four-family	$	293	$	—	$	—	$	293
Commercial real estate		321		—		—		321
Land		87		—		—		87
Total repossessed assets	$	701	$	—	$	—	$	701

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

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $1,783 with a $71 valuation allowance at September 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 losses for the three and nine months ended September 30, 2016 and 2015.

Repossessed assets, consisting of other real estate owned, are measured at the lower of cost or fair value less costs to sell. Repossessed assets were carried at $701 at September 30, 2016 consisting of the cost basis and of $947 and a valuation allowance of $246. Repossessed assets were carried at $87 at December 31, 2015 consisting of the cost basis and of $101 and a valuation allowance of $14. There was $68 of write-downs on repossessed assets for the three and nine months ended September 30, 2016 and $14 for the three and nine months ended September 30, 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 September 30, 2016 and December 31, 2015:

September 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

(17.0%) –
8.7%

Multi-family

987

Sales comparison approach

Adjustment for differences between the comparable sales

(1.9%) –
2.6%

Other real estate owned

One-to-four-family

293

Sales comparison approach

Adjustment for differences between the comparable sales

(4.4%) –

2.4%

Commercial real estate

321

Sales comparison approach

Adjustment for differences between the comparable sales

(23.6%) –

16.7%

Land

Sales comparison approach

Adjustment for differences between the comparable sales

(8.0%) –
86.0%

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

Sales comparison approach

Adjustment for differences between the comparable sales

(11.6%) –
31.0%

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


			Fair Value Measurements at
			September 30, 2016 (Unaudited) Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	9,758	$	9,758	$	—	$	—	$	9,758
Certificates of deposit in other financial institutions		3,920		—		3,920		—		3,920
Securities available-for-sale		7,501		—		7,501		—		7,501
Loans receivable, net		55,572		—		—		56,029		56,029
FHLB stock		921		N/A		N/A		N/A		N/A
Accrued interest receivable		186		—		32		154		186
Financial liabilities
Demand, money market, and savings	$	37,348	$	37,348	$	—	$	—	$	37,348
Certificates of deposits		33,188		—		33,262		—		33,262
Advances by borrowers for taxes and insurance		262		262		—		—		262
Accrued interest payable		1		—		1		—		1

			Fair Value Measurements at
			December 31, 2015 Using:
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	9,265	$	9,265	$	—	$	—	$	9,265
Certificates of deposit in other financial institutions		4,635		—		4,635		—		4,635
Securities available-for-sale		10,484		—		10,484		—		10,484
Loans receivable, net		57,536		—		—		57,469		57,469
FHLB stock		921		N/A		N/A		N/A		N/A
Accrued interest receivable		185		3		20		162		185
Financial liabilities
Demand, money market, and savings	$	38,399	$	38,399	$	—	$	—	$	38,399
Certificates of deposits		35,158		—		35,024		—		35,024
Advances by borrowers for taxes and insurance		559		559		—		—		559
Accrued interest payable		—		—		—		—		—

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

(a)

Cash and Cash Equivalents

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

(b)

Certificates of deposit in other financial institutions.

Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(c)

Loans receivable, net

Fair values of loans receivable, net are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3

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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 September 30, 2016, the Bank’s capital conservation buffer stood at 8.84%.

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 reduced 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 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 September 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
September 30, 2016
Total capital (to risk-weighted assets)	$	8,438		16.8	%	$	4,008		8.0	%	$	6,012		12.0	%
Common equity Tier 1 capital (to risk-weighted assets)		7,808		15.6			2,255		4.5			N/A		N/A
Tier 1 (core) capital (to risk-weighted assets)		7,808		15.6			3,006		6.0			N/A		N/A
Tier 1 (core) capital (to average total assets)		7,808		9.7			3,221		4.0			6,442		8.0
December 31, 2015
Total capital (to risk-weighted assets)	$	9,235		18.5	%	$	3,992		8.0	%	$	5,988		12.0	%
Common equity Tier 1 capital (to risk-weighted assets)		8,607		17.3			2,245		4.5			N/A		N/A
Tier 1 (core) capital (to risk-weighted assets)		8,607		17.3			2,994		6.0			N/A		N/A
Tier 1 (core) capital (to average total assets)		8,607		10.0			3,450		4.0			6,901		8.0

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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 strategic plan to increase income includes growing our loan portfolio through a combination of our internal origination efforts and through the acquisition of loan pools from other sources. We believe we must continue to increase our level of higher interest earning assets to become profitable. During 2016, the Bank experienced a number of personnel changes within the lending department that impacted our ability to generate the origination levels in our plan. The changes included the departure of our primary lending officer and his subsequent replacement several months later. This position is primarily responsible for our residential lending portfolio and fee generation through originations for other institutions. At the end of October 2016, we hired a senior loan officer to assume the Chief Lending Officer position. This function had been the responsibility of the Bank’s President. The new Chief Lending Officer will be responsible for the implementing strategies to attain our loan origination goals as well as overseeing our credit and loan administration functions. Prior to accepting this position, this individual provided loan consulting service to the Bank since March of 2016. We believe that our new loan department structure along with our other referral sources, will help us meet our future production goals. While we have been presented with several pool purchase opportunities, we have not identified any that meet our strategic income and risk objectives. We may still pursue pool purchases in the future.

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 September 30, 2016 and December 31, 2015

Assets. Total assets at September 30, 2016 were $79.9 million compared to $84.1 million at December 31, 2015, a decrease of $4.2 million, or 5.0%. This decrease was primarily due to the $3.0 million decrease in the balance of our securities available for sale, the $2.0 decrease in our loan portfolio, and the $715,000 decrease in our certificate of deposits in other financial institutions, partially offset by the $732,000 increase in the balance of our premise and equipment and $493,000 increase in our cash and cash equivalents.

The decrease in our loan portfolio balance during the first nine months of 2016 was primarily due to the $2.6 million decrease in our one- to four family residential loan portfolio and $357,000 decrease in our automobile loan portfolio, partially offset by the $393,000 increase in our home equity line- of -credit loan portfolio and the $304,000 increase in our multi-family loan portfolio. The decrease in our one- to four family residential loan portfolio was primarily due to the repayments from existing loans exceeding the $2.2 million of new loans originated. Management has reviewed several options for the purchase of loan pools from other sources as outlined in our strategic plan to supplement our internal origination, however, we have not identified a pool that meets our strategic income and risks objectives.

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At September 30, 2016 our allowance for loan losses was $962,000, or 1.70% of total loans, compared to $991,000, or 1.69% of total loans, at December 31, 2015. Our allowance reflected $110,000 of recoveries for the nine months ended September 30, 2016 primarily from the $86,000 recovery from the discounted payoff of a multi-family loan and a credit for loan losses of $128,000, partially offset by an $11,000 charge-off related to a residential loan that was transferred to other real estate owned. Our loans classified as substandard or doubtful, which also represents our non-accrual loans, were $1.7 million or 2.95% of total loans at September 30, 2016 compared to $1.4 million or 2.47% of total loans at December 31, 2015. The increase reflects the downgrade of a $542,000 loan secured by a commercial real estate property, partially offset by the transfer of a residential loan with a book value of $293,000 to other real estate owned. Our loans classified as TDRs totaled $1.6 million at September 30, 2016 of which $1.2 million were accruing, compared to $2.0 million at December 31, 2015 of which $1.5 million was accruing. The decrease was primarily due to the discounted payoff of a loan secured by a multi-family property.

Our securities portfolio decreased $3.0 million or 28.5% to $7.5 million at September 30, 2016 compared to $10.5 million at December 31, 2015. The decrease was primarily due to the call of $8.0 million of government sponsored entities notes and the repayments on mortgage-backed securities, partially offset by the purchase of $4.0 million of fixed rate callable notes with maturities of four years or less and $1.0 million of a 15 year fixed rate mortgage-backed security. Our cash and cash equivalents increase $493,000 to $9.8 million at September 30, 2016. Our certificates of deposit with other financial institutions decreased $715,000 primarily due to the maturity of $3.7 million of such certificates of deposit, partially offset by the purchase of $2.9 million.

Our premises and equipment increased $732,000 or 154.1% primarily due to the leasehold improvements, furniture, and equipment for our branch office that we upgraded and relocated within the existing shopping center. The new office opened on July 5, 2016. Total costs for leasehold improvements and equipment for the branch office totaled $780,000.

Liabilities. Our total liabilities decreased $3.3 million or 4.4% to $71.3 million at September 30, 2016. Our deposits decreased by $3.1 million or 4.2% to $70.5 million at September 30, 2016 compared to $73.6 million at December 31, 2015, primarily due to the $2.0 million or 5.6% decrease in our certificate of deposit accounts the $1.3 million or 10.1% decrease in our money market accounts, and the $1.1 million or 7.8% decrease in our checking accounts, partially offset by the $1.4 million or 12.9% increase in the balance of our savings accounts.

Stockholders’ Equity. Total stockholders’ equity at September 30, 2016 was $8.5 million, a decrease of $873,000 or 9.3% from December 31, 2015. The decrease resulted primarily from our net loss of $890 for the nine months ended September 30, 2016.

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

General. For the three months ended September 30, 2016 our net loss was $280,000 compared to a net loss of $142,000 for the three months ended September 30, 2015. The increase in our net loss was primarily due to the decreases in our non-interest income and the increase in our non-interest expense, partially offset by the credit for loan losses.

Interest Income. Interest income was $756,000 for the three months ended September 30, 2016, $4,000, or 0.5%, lower than the prior year period. Interest income from our loan portfolio decreased $3,000 or 0.4%. The average balance of our loan portfolio for the three months ended September 30, 2016 was $314,000 lower than the prior year period primarily due to the $1.9 million decrease in our one- to four-family residential loans, the $444,000 decrease in our consumer loans and the $303,000 decrease in our home equity line-of-credit loans. These decreases were partially offset by the $1.7 million increase in the average balance of our multi-family and commercial real estate loans and the $517,000 increase in our commercial business loans. The yield on our loan portfolio was 5.03% for the three months ended September 30, 2016 compared to 4.99% the prior year period.

Interest income from securities decreased $6,000 or 16.7% to $30,000 for the three months ended September 30, 2016 primarily due to the $2.8 million decrease in the average balance of our securities portfolio to $8.5 million. The average yield for our securities portfolio was 1.42% for the three months ended September 30, 2016 compared to 1.26% for the prior year period. Interest income from other interest earning assets increased $5,000 or 31.3% to $21,000 for the three months ended September 30, 2016 compared to the prior year period. The average balance of our other interest earning assets decreased $4.1 million primarily due to the decrease in our customer deposits while the yield increased 0.26% to 0.63% for the three months ended September 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 nine to 18 months. The average balance of the certificates of deposit for the three months ended September 30, 2016 totaled $3.5 million compared to $5.0 million in the comparable period of 2015.

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Interest Expense. Interest expense for the three months ended September 30, 2016 was $81,000, a decrease of $11,000 or 12.0% from the prior year period due to the decrease in interest expense on deposits as the average balance of interest bearing deposits decreased $5.0 million. The average balance of our certificate of deposit accounts decreased $4.3 million to $33.6 million, the average balance of our money market accounts decreased $1.4 million, and the average balance of our checking accounts decreased $988,000. These decreases were partially offset by the $1.7 million increase in the average balance of our savings accounts for the three months ended September 30, 2016. The average cost of deposits decreased to 0.49% for the three months ended September 30, 2016 compared to 0.51% for the prior year period.

Net Interest Income. Net interest income for the three months ended September 30, 2016 was $675,000 compared to $668,000 for the three months ended September 30, 2015. For the three months ended September 30, 2016, the average yield on interest-earning assets was 3.90% and the average cost of interest-bearing liabilities was 0.49% compared to 3.56% and 0.51%, respectively, for the three months ended September 30, 2015. These changes resulted in a net interest rate spread and net interest margin to 3.41% and 3.48% respectively for the three months ended September 30, 2016 compared to a net interest rate spread of 3.05% and net interest margin of 3.13% for the prior year period. The increase in the net interest rate spread and margin was primarily due to the increase in the yield of our investments and other interest earning assets.

Provision for Loan Losses. We had a $95,000 credit for loan losses for the three months ended September 30, 2016 compared to a $55,000 provision for the three months ended September 30, 2015. The credit was primarily the result of an $86,000 recovery on the discounted payoff of a loan secured by a multi-family property partially offset by an $11,000 charge-off on a residential loan that was transferred to other real estate owned. Our provision for the three months ended September 30, 2015 was primarily due to the impact of the $284,000 charge-off taken during the quarter on a residential property. At September 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 September 30, 2016, non-interest income was $25,000 compared to $188,000 for the three months ended September 30, 2015 primarily due to the $141,000 gain on the sale of a residential real estate property in third quarter of 2015. Fees for originating loans for other financial institutions decreased $17,000 for the three months ended September 30, 2016 compared to the prior year period.

Non-interest Expense. For the three months ended September 30, 2016, our non-interest expense increased $119,000 or 12.5% compared to the prior year period. Repossessed assets costs increased $76,000 primarily due to the $68,000 write-down of a commercial real estate property for the three months ended September 30, 2016 compared to $14,000 for the prior year period. Professional fees increased $29,000 primarily due to the $10,000 increase for other consulting fees, and the $17,000 increase in our legal fees. Our other costs increased $54,000 or 64.3% primarily due to the $5,000 provision for off balance sheet commitments for the three months ended September 30, 2016 compared to the $15,000 recovery the prior year period; the $17,000 increase in marketing costs primarily related to the new office relocation; and $17,000 real estate taxes for loans in the processes of foreclosure. Our occupancy costs increased $19,000 primarily due to the increase in our depreciation expense for the leasehold improvements for our branch office. Our compensation and employee benefit costs decreased $56,000 or 11.7% 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 September 30, 2016 and 2015.

Comparison of Operating Results for the Nine Months Ended September 30, 2016 and 2015

General. For the nine months ended September 30, 2016 our net loss was $890,000 compared to a net loss of $787,000 for the nine months ended September 30, 2015. The increase in our net loss was primarily due to the decrease in our non-interest income and increase in our non-interest expenses, partially offset by the credit for loan losses.

Interest Income. Interest income was $2.2 million for the nine months ended September 30, 2016, $34,000, or 1.5%, lower than the prior year period. Interest income from loans was $2.0 million, $70,000 or 3.3% lower for the nine months ended September 30, 2016 compared to the prior year period primarily due to $1.4 million decrease in the average balance of our loan portfolio. The decrease in average balance included decreases of $1.9 million in our one- to four-family residential loans, $1.6 million in our home equity line-of-credit loans, and $505,000 in our consumer loans. These decreases were partially offset by the $2.2 million increase in the average balance of our multi-family and commercial real estate loans and the $452,000 increase in the average balance of our commercial business loans. The average yield on loans for the nine months ended September 30, 2016 was 4.86% compared to 4.90%.

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Interest income from securities increased $7,000 or 7.4% to $102,000 for the nine months ended September 30, 2016 primarily due to the increase in yield on our securities to 1.44% for the nine months ended September 30, 2016 compared to 1.33% for the prior year period. Interest income from other interest earning assets increased $29,000 or 82.9% to $64,000 for the nine months ended September 30, 2016. The average balance of our other interest earning assets decreased $4.5 million primarily due to the decrease in the average balance of our deposits, while the yield increased to 0.62% from 0.26% 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 nine to 18 months. The average balance of the certificates of deposit for the nine months ended September 30, 2016 totaled $4.0 million compared to $2.4 million for the prior your period.

Interest Expense. Interest expense for the nine months ended September 30, 2016 was $238,000, a decrease of $40,000 or 14.4% from the prior year period due to the decrease in interest expense on deposits. The average balance of interest bearing deposits decreased $5.1 million for the nine months ended September 30, 2016 compared to the prior year period as the average balance of our certificate of deposit accounts decreased $5.4 million to $33.6 million, and the average balance of our checking and money market accounts decreased $1.3 million. These decrease was partially offset by the $1.6 million increase in the average balance of our savings accounts for the nine months ended September 30, 2016. The average cost of deposits decreased to 0.47% for the nine months ended September 30, 2016 compared to 0.52% for the prior year period.

Net Interest Income. Net interest income for the nine months ended September 30, 2016 was $2.0 million, relatively unchanged from the nine months ended September 30, 2015. For the nine months ended September 30, 2016, the average yield on interest-earning assets was 3.72% and the average cost of interest-bearing liabilities was 0.47% compared to an average yield of 3.51% and average cost of 0.52%, respectively, for the nine months ended September 30 2015. These changes resulted in an increase in our net interest rate spread and net interest margin to 3.25% and 3.32% respectively for the first nine months of 2016 compared to a net interest rate spread of 2.99% and net interest margin of 3.08% for the prior year period. The increase in the net interest rate spread and margin was primarily due to the increase in the yield of our investments and other interest earning assets.

Provision for Loan Losses. We had a $128,000 credit for loan losses for the nine months ended September 30, 2016 compared to a $55,000 provision for the nine months ended September 30, 2015. The credit was primarily the result of an $86,000 recovery on the discounted payoff of a loan secured by a multi-family property and a $24,000 recovery from a residential construction loan, partially offset by an $11,000 charge-off on a residential loan that was transferred to other real estate owned. Our provision for the nine months ended September 30, 2015 was primarily due to the impact of the $284,000 charge-off taken on a residential property. At September 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 loss history and other current factors including market values and current economic conditions and trends.

Non-interest Income. For the nine months ended September 30, 2016, non-interest income was $86,000 compared to $290,000 for the nine months ended September 30, 2015. The decrease was primarily due to the $175,000 net gain on the sale of repossessed assets for the nine months ended September 30, 2015. Fees for originating loans for other financial institutions decreased $21,000 for the nine months ended September 30, 2016 compared to the prior year period.

Non-interest Expense. For the nine months ended September 30, 2016, our non-interest expense increased $95,000 or 3.2% compared to the prior year period. Professional fees increased $90,000 primarily due to the $51,000 increase for legal fees, $33,000 for tax and accounting related fees, and $9,000 for other consulting fees. Our other costs increased $135,000 primarily due to a one-time $40,000 operational loss that was below the insurance deductible which is not expected to be recovered, $31,000 for problem loan costs, a $15,000 provision for off balance sheet commitments for the nine months ended September 30, 2016 compared to the $15,000 recovery the prior year period; and $9,000 related to the annual meeting. Our compensation and employee benefit costs decreased $172,000 or 11.8% primarily due to staffing changes and salary adjustments that were implemented in 2015 and the beginning of 2016.

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

Non-Performing Assets

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

	September 30, 2016			December 31, 2015
	(Dollars in thousands)
Non-accrual loans (excluding troubled debt restructurings):
Real estate loans:
One- to four-family residential	$	726		$	1,030
Multi-family		—			—
Commercial		542			—
Construction		—			—
Land		—			—
Home equity lines of credit		—			—
Commercial business loans		—			—
Automobile loans		—			—
Other consumer loans		—			—
Total non-accrual loans		1,268			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		56			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		402			415
Total non-performing loans		1,670			1,445
Repossessed Assets:
Real estate loans:
One- to four-family residential		293			—
Multi-family		—			—
Commercial		321			389
Construction		—			—
Land		87			87
Home equity lines of credit		—			—
Commercial business loans		—			—
Automobile loans		—			—
Other consumer loans		—			—
Total foreclosed assets		701			476
Total non-performing assets	$	2,371		$	1,921
Total accruing troubled debt restructured loans	$	1,242		$	1,549
Ratios:
Non-performing loans and non-performing troubled-debt-restructurings to gross loans		2.95	%		2.47	%
Non-performing assets to total assets		2.97	%		2.29	%
Non-performing assets and accruing troubled debt restructurings to total assets		4.52	%		4.13	%

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


	Three Months Ended September 30,
	2016							2015
	Average Outstanding Balance		Interest		Yield/ Cost			Average Outstanding Balance		Interest		Yield/Cost
	(Dollars in thousands)
Assets:
Loans	$	56,174	$	705		5.03	%	$	56,488	$	708		4.99	%
Securities (1)		8,496		30		1.42			11,296		36		1.26
Other interest-earning assets (2)		13,035		21		0.63			17,180		16		0.37
Total interest-earning assets		77,705	$	756		3.90			84,964	$	760		3.56
Non-interest-earning assets		2,819							2,359
Total assets	$	80,524						$	87,323
Liabilities and stockholders’ equity:
Savings deposits	$	11,853	$	4		0.15		$	10,138	$	4		0.15
Demand deposits		8,914		1		0.06			9,901		2		0.06
Money market deposits		11,881		5		0.15			13,313		5		0.15
Certificates of deposit		33,575		71		0.84			37,916		81		0.85
Total deposits		66,223		81		0.49			71,268		92		0.51
Non-interest-bearing deposits		4,558							4,604
Other liabilities		830							1,465
Total liabilities		71,611							77,337
Stockholders’ equity		8,913							9,986
Total liabilities and stockholders’ equity	$	80,524						$	87,323
Net interest income			$	675						$	668
Net interest rate spread						3.41	%						3.05	%
Net interest-earning assets	$	11,482						$	13,696
Net interest margin						3.48	%						3.13	%
Average of interest-earning assets to interest-bearing Liabilities						117.34	%						119.22	%

(1)	Securities include Federal Home Loan Bank stock with an average balance of $921,000 for the three months ended September 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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	Nine Months Ended September 30,
	2016							2015
	Average Outstanding Balance		Interest		Yield/Cost			Average Outstanding Balance		Interest		Yield/Cost
	(Dollars in thousands)
Assets:
Loans	$	56,218	$	2,046		4.86	%	$	57,634	$	2,116		4.90	%
Securities (1)		9,432		102		1.44			9,542		95		1.33
Other interest-earning assets (2)		13,711		64		0.62			18,175		35		0.26
Total interest-earning assets		79,361	$	2,212		3.72			85,351	$	2,246		3.51
Non-interest-earning assets		2,447							2,486
Total assets	$	81,808						$	87,837
Liabilities and stockholders’ equity:
Savings deposits	$	11,510	$	13		0.15		$	9,864	$	11		0.15
Demand deposits		9,371		4		0.06			9,878		5		0.06
Money market deposits		12,563		14		0.15			13,367		15		0.15
Certificates of deposit		33,562		207		0.82			38,980		247		0.85
Total deposits		67,006		238		0.47			72,089		278		0.52
Non-interest-bearing deposits		4,641							4,396
Other liabilities		963							1,272
Total liabilities		72,610							77,757
Stockholders’ equity		9,198							10,080
Total liabilities and stockholders’ equity	$	81,808						$	87,837
Net interest income			$	1,974						$	1,968
Net interest rate spread						3.25	%						2.99	%
Net interest-earning assets	$	12,355						$	13,262
Net interest margin						3.32	%						3.08	%
Average of interest-earning assets to interest-bearing Liabilities						118.44	%						118.40	%

(1)	Securities include Federal Home Loan Bank stock with an average balance of $921,000 for the nine months ended September 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 September 30, 2016 vs. 2015									Nine Months Ended September 30, 2016 vs. 2015
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate			(Decrease)			Volume			Rate			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
Loans	$	(6	)	$	3		$	(3	)	$	(29	)	$	(41	)	$	(70	)
Securities		(10	)		4			(6	)		(1	)		8			7
Other interest-earning assets		(4	)		9			5			(10	)		39			29
Total interest-earning assets		(20	)		16			(4	)		(40	)		6			(34	)
Interest-bearing liabilities:
Savings deposits		—			—			—			2			—			2
Demand accounts		(1	)		—			(1	)		(1	)		—			(1	)
Money market accounts		—			—			—			(1	)		—			(1	)
Certificates of deposit		(9	)		(1	)		(10	)		(32	)		(8	)		(40	)
Total deposits		(10	)		(1	)		(11	)		(32	)		(8	)		(40	)
Change in net interest income	$	(10	)	$	17		$	7		$	(8	)	$	14		$	6

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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 September 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

On July 15, 2016, the Company repurchased 1,920 shares of its common stock at a price of $11.00 per share for a total of $21,120. The shares purchased represent the distribution to terminated ESOP participants who exercised their put option under the ESOP plan document. The Company then retired the shares which were returned to authorized but unissued common stock. The price was determine by an appraisal as required by the ESOP plan document.

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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 September 30, 2016 and December 31, 2015, (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015, (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 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: November 10, 2016		/s/ C. Steven Sjogren
		C. Steven Sjogren
		President and Chief Executive Officer

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company