SECURITIES AND EXCHANGE COMMISSION

100 F Street NE

Washington, D.C. 20549

---

FORM 10-K

---

x	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Fiscal Year Ended December 31, 2016

Or

 

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File No. 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)		(I.R.S. Employer Identification Number)

830 East Kensington Road, Arlington Heights, Illinois		60004
(Address of Principal Executive Offices)		(Zip Code)

(847) 398-0990

(Registrant’s telephone number)

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value

---

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨     NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨     NO  x

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 twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.    YES  x     NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨		Smaller reporting company		x

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

As of March 29, 2017, there were issued and outstanding 710,038 shares of the Registrant’s Common Stock.

As of June 30, 2016, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $6.8 million

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on May 24, 2017. (Part III).

 

 

​

TABLE OF CONTENTS

 

PART I

 

Forward-Looking Statements

This From 10-K contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

 

 

 

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic, regulatory and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Ben Franklin Financial, Inc.

Ben Franklin Financial, Inc., a Maryland corporation (“Ben Franklin Financial” or the “Company”) was organized in September 2014. Upon completion of the mutual-to-stock conversion of Ben Franklin Financial, MHC in January 2015, Ben Franklin Financial became the holding company of Ben Franklin Bank of Illinois (“Ben Franklin Bank”) and succeeded to all of the business and operations of Ben Franklin Financial, Inc., a Federal Corporation (“Ben Franklin-Federal”) and each of Ben Franklin-Federal and Ben Franklin Financial, MHC ceased to exist. Since the completion of the mutual-to-stock conversion, the Company has not engaged in any significant business activity other than owning the common stock of and having deposits in the Bank. Our executive offices are located at 830 East Kensington Road, Arlington Heights, Illinois 60004, and our telephone number at that address is (847) 398-0990. Our Internet address is www.benfrankbank.com. Information on this website is not and should not be considered to be a part of this document.

Ben Franklin Bank of Illinois

Ben Franklin Bank of Illinois is a federally-chartered savings bank headquartered in Arlington Heights, Illinois. Ben Franklin Bank was originally founded in 1893 as a building and loan association.

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, in one- to four-family residential mortgage

 

 

loans, commercial real estate loans, multi-family real estate loans, home equity lines of credit and, to a much lesser extent, commercial business loans, construction loans, and consumer loans. In the past we have also made land loans, and we may determine to resume making such loans in the future. We also invest in U.S. government sponsored entity mortgage-backed securities and other securities issued by U.S. government sponsored entities. 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 and to a lesser extent advances from the Federal Home Loan Bank.

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. Ben Franklin Bank’s executive offices are located at 830 East Kensington Road, Arlington Heights, Illinois 60004, and our telephone number at that address is (847) 398-0990. Our Internet address is www.benfrankbank.com. Information on this website is not and should not be considered to be a part of this annual report.

Market Area

We conduct business through our main office located at 830 East Kensington Road, Arlington Heights, Illinois and our branch office located at 3266 Kirchoff Road, Rolling Meadows, Illinois.

Our offices are located in relatively affluent suburban communities located approximately 15 miles to the northwest of Chicago, Illinois, which is located in Cook County, Illinois. In 2016, Cook County experienced a 4.2% increase in median household income and a 4.9% increase in per capita income compared to 2015. We believe that Arlington Heights and, to a lesser extent, Rolling Meadows may be classified as “mature” suburbs and that more rapid growth is occurring in the counties immediately surrounding Chicago.

Our market area has continued to experience a recovery from the economic downturn in 2008 that caused the real estate values to decline for several years after the initial downturn.  Sales activity for single family and condominiums during 2016 in the nine county Chicago Primary Statistical Metropolitan Area increased 4.3% compared to 2015 and the 2016 year-end median price was $222,500 compared to $210,000 in 2015 as reported by the Illinois Association of Realtors. This price is still below the market high of $247,800 in December 2007.

Competition

We face intense competition within our market area both in making loans and attracting deposits. The Chicago metropolitan area has a high concentration of financial institutions, including large money center and regional banks, community banks and credit unions, all of which are our competitors to varying degrees. Most of our competitors are significantly larger institutions with greater financial resources than we have, and many offer products and services that we do not or cannot provide.

Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our deposit sources are primarily concentrated in the communities surrounding our banking offices located in Arlington Heights and Rolling Meadows in Cook County, Illinois. As of June 30, 2016, the latest date for which FDIC data is available, we had approximately 1.58% of market share in Arlington Heights. As of that same date we had approximately 1.56% of market share in Rolling Meadows. Our market share in Cook County overall was 0.03%.

Lending Activities

General. Our principal lending activity is originating and acquiring one- to four-family residential loans, commercial real estate loans, multi-family real estate loans, home equity lines of credit and, to a much lesser extent, commercial business loans, construction loans and consumer loans. In the past we have also made land loans, and we may determine to resume making such loans in the future. At December 31, 2016, our gross loans totaled $63.3 million, of which $30.3 million, or 47.9%, were one- to four-family residential loans, $25.3 million, or 40.0%, were multi-family residential and commercial real estate loans, and $5.4 million, or 8.5%, were home equity lines of credit.

 

 

Our loan portfolio has decreased from $109.8 million at December 31, 2008 to $62.3 million at December 31, 2016 primarily due to the effects of the severe economic recession that began in 2008, and the related negative impact on our real estate market. During the economic downturn, we experienced higher non-performing assets and losses during the subsequent years. We are currently subject to a Consent Order with the Office of the Comptroller of the Currency which imposes certain minimum regulatory capital ratios which has required that we shrink our balance sheet to maintain adequate capital levels. Our current strategy is to increase our loan portfolio, especially our portfolio of commercial and multi-family real estate loans, and to a lesser extent commercial business loans, to increase our interest income and return to profitability.  The successful implementation of our business strategy may require that we raise additional capital to maintain those minimums capital requirements as we gradually return to profitability.  Such capital may not be available on terms that allow us to successfully implement our plan.

During 2016, the Bank experienced a number of personnel changes within the lending department that impacted our ability to generate the loan origination levels in our business 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 is responsible for 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.  

In order to achieve profitability, our business plan anticipates growth in our one- to four-family residential, commercial real estate, and multi-family residential loan portfolios. In the longer term, we may also seek to increase our commercial business lending. We plan to supplement our internal loan production with purchases of one- to four-family residential and multi-family real estate loans and participations subject to our underwriting criteria. Loan growth will be subject to regulatory and market conditions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy.”

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. We had no loans held for sale at December 31, 2016 and December 31, 2015, respectively.

 

 

 

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2016, including scheduled principal amortization but excluding non-accruing loans.  Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Maturities are based on the final contractual payment date and do not reflect the effect of prepayments.

 

 

 

The following table sets forth our fixed- and adjustable-rate loans at December 31, 2016 that are due after December 31, 2017.

 

Loan Approval Procedures and Authority. Pursuant to federal law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Ben Franklin Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2016, based on the 15% limitation, our loans-to-one-borrower limit was approximately $1.3 million. On the same date, we had four borrowers with outstanding balances and or commitments in excess of this amount. These outstanding balances and or commitments were within the respective limits at the time they were originated.  As of December 31, 2016, the largest dollar amount outstanding to one borrower, or group of related borrowers, was $1.4 million consisting of two loans, each secured by a commercial retail property which were performing in accordance with its terms at December 31, 2016.  

Our lending is subject to written underwriting standards and origination procedures. Decisions on formal loan applications or written credit requests (“loan applications”) are made on the basis of sufficiently detailed applications submitted by the prospective borrower and/or guarantor and property valuations (consistent with our real estate appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors if secured by real estate or business assets. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements, tax returns and/or confirmations.

Under our loan policy, the individual lender that is processing an application is responsible for ensuring that all documentation is obtained prior to the submission of the application for approval. Additionally, each recommendation is formally documented in writing, using a loan presentation format appropriate for the request type. This document must memorialize the recommendation by providing all factors which support the decision. An independent officer then performs a credit review of these materials and assesses whether the requested loan meets our underwriting guidelines. Upon satisfactory secondary review, the loan is then presented for approval by the committee which has sufficient lending authority. As a general rule, under our loan policy, we do not originate or purchase “subprime loans” (loans that are made with low down-payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), “Alt-A loans” (defined as loans having less than full documentation) or no document loans. When a loan application is recommended for approval with characteristics that demonstrate the potential for the loan being considered a subprime loan, the lender must provide compelling support as to why the funding of this loan is in the best interests of the Bank. Further, any policy exception on loans in excess of $150,000 must be identified and thoroughly mitigated and approved by the Board prior to funding.

While our loan policy provides for individual lending authorities, our general practice is that all loans, regardless of size, are reviewed and approved by a loan committee possessing sufficient lending authority. We have two such loan committees; the Board Loan Committee and the Officers Loan Committee. The Board Loan Committee reviews all loan requests of $500,000 up to $1.0 million and recommends for approval by the board all requests of $1.0 million and greater. The Board Loan Committee also ratifies all loans approved by the Officer Loan Committee.   The Officers Loan Committee reviews all loans, regardless of size and has approval authority for all loans under $500,000. The Board ratifies all loans approved by the Board Loan Committee and the Officer Loan Committees and approves all loans of $150,000 and greater that contain policy exceptions.  As per the loan policy, our senior lending officer has approval authority for real

 

 

estate loans of up to $350,000 and home equity loans of up to $250,000. Real estate loans and home equity loans above those amounts require the approval of our President or Chief Executive Officer. Our senior lending officer has approval authority for secured commercial loans up to $300,000, construction loans up to $350,000 and secured consumer loans of up to $250,000. Secured commercial loans, construction loans and secured consumer loans above those amounts require approval of our President or Chief Executive Officer. Per our loan policy, our President and Chief Executive Officers have approval authority for real estate loans, home equity, secured commercial, secured consumer loans, and construction loans up to $500,000 each. Loans of $500,000 and greater require the approval of our Officers Loan Committee.  Loans of $1.0 million and greater require approval by our Board Loan Committee. In addition, all loans are ratified by our board of directors. Loans in excess of $150,000 that are subject to policy exceptions require the approval of the full board of directors.

Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance to protect the property securing our interest when the property is located in a flood plain. In addition, we require escrow for property taxes, insurance and flood insurance (where appropriate) on the majority of our real estate secured loans, particularly on conventional one- to four-family residential loans.

One- to Four-Family Residential Real Estate Lending. At December 31, 2016, $30.3 million, or 47.9% of our gross loan portfolio consisted of residential mortgage loans. Of these loans, $23.4 million were secured by owner occupied one- to four-family residences, and $6.9 million were non-owner occupied. Our average outstanding one- to four-family residential loan balance $174,000 and our largest outstanding residential loan had a principal balance of $1.1 million at December 31, 2016. The vast majority of the residential loans we originate are secured by properties located in our market area.

We offer both adjustable-rate and fixed-rate one- to four-family residential loans. However, due to consumer demand in the current and prolonged low interest rate environment, a significant portion of our one- to four-family residential loan portfolio consists of fixed-rate loans with original terms in excess of 15 years. At December 31, 2016, $21.4 million, or 70.6% of our one- to four-family residential loans had fixed rates of interest. Of such loans, $7.6 million had original contractual maturities of 10 years or less, $7.5 million had original contractual maturities between 10 and 20 years and $6.3 million had original contractual maturities in excess of 21 years in our portfolio.

While borrower preference favors fixed rates for one- to four-family residential mortgage loans given the historically low market rates, we offer adjustable-rate and short- and medium-term one- to four-family residential loans to help meet our asset/liability objectives. Our current adjustable-rate mortgage loans carry interest rates which adjust annually at a margin (generally 275 to 295 basis points) over the yield on one-year U.S. Treasury securities. These adjustable-rate loans generally have a fixed rate for the first 3 to 7 years of the loan term. Such loans carry terms to maturity of up to 30 years. The adjustable-rate mortgage loans currently offered by us generally provide for a 200 basis point annual interest rate change cap and a lifetime cap of 500 to 600 basis points over the initial rate. The initial interest rate on such loans is often fixed for a period of up to seven years. We determine whether a borrower qualifies for an adjustable-rate mortgage loan in conformance with the underwriting guidelines set forth by Fannie Mae and Freddie Mac in the secondary mortgage market.

Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice, as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Also, many of our adjustable-rate one- to four-family residential loans have fixed rates of interest for an initial period of up to seven years. As a result, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates. At December 31, 2016, $8.9 million, or 29.4% of our one- to four-family residential loans, had adjustable rates of interest.

 

 

As an alternative to adjustable-rate mortgage loans, we offer a bi-weekly fixed rate mortgage product that is unique to our market. We are not currently aware of any local competitor offering a similar product. As this product requires 26 payments per year, or the equivalent of 13 monthly payments each year, there is an accelerated amortization. For example, on a 25 year bi-weekly mortgage, if paid on time, it will fully amortize within 21.7 years. We offer bi-weekly mortgages at customizable terms within terms of 15, 20, 25 and 30 years.

Our current bi-weekly rate mortgage loans carry fixed interest rates priced from 3.625% to 4.625% for terms ranging from 15 years to 30 years.  Although this is not a secondary mortgage market product, we generally determine whether a borrower qualifies for a bi-weekly mortgage loan in conformance with the underwriting guidelines set forth by Fannie Mae and Freddie Mac.  We recently discontinued offering bi-weekly loans for non-owner-occupied mortgages.

We evaluate both the borrower’s ability to make principal, interest and escrow payments and the value of the property that will secure the loan. We currently originate residential mortgage loans for our portfolio with loan-to-value ratios of up to 80% for owner-occupied one- to four-family homes and up to 75% for non-owner occupied homes. With private mortgage insurance, we will lend up to 95% for owner-occupied loans to well-qualified borrowers.

We generally do not offer “interest only” mortgage loans on one- to four-family residential properties. We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans. Option ARM loans allow the borrower to pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan.

In the past, we have made construction loans to builders and developers for the construction of one- to four- and multi-family residential units and to individuals for the construction of their primary or secondary residence. Our constructions loans generally require that the property is under contract for sales upon completion. Although we have curtailed our construction lending during the last few years, we believe that construction and land development lending is consistent with our community bank strategy. Construction and land lending generally affords us an opportunity to receive higher origination and other loan fees. In addition, such loans are generally made for relatively short terms. Nevertheless, construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value is inaccurate, we may be confronted with a project, when completed, with a value that is insufficient to ensure full repayment of the loan.

At December 31, 2016 we had a one- to four-family residential mortgage loan with an outstanding balance of $726,000 which was 90 days or more delinquent and in non-accrual status and one troubled debt restructuring with an outstanding balance of $61,000 that was in non-accrual status.

Commercial Real Estate Lending. Our commercial real estate loan portfolio was $15.3 million at December 31, 2016 compared to $13.9 million at December 31, 2015.  Our efforts to increase this segment of the portfolio are primarily the result of the personnel changes in our lending department, referrals from external sources, and expanded relationships with other financial institutions for participations in loans they originate as we implement our strategic plan. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy.”

Our commercial real estate loans generally have a maximum term of 5 years and are subject to a balloon payment at maturity. The amortization period for these loans is typically 25 years or less. These loans have fixed rates of interest for the entire term. At maturity, the borrower, and if applicable, guarantor, and the collateral are subjected to underwriting and valuation reviews. If this review process still finds these loans to be satisfactory, they are extended for an additional period of three to five years. Renewal rates are tied to certain indices, including the relevant Constant Maturity Treasury Bill Index or prime, plus a margin. In 2016 we also introduced a ten year term loan with a fixed interest rate for the first five years and then an annual rate adjustment each year for the remaining five year term.  The amortization term for these loans is generally 25 years or less subject to a balloon payment at maturity.  The initial rate and subsequent rate adjustments are tied to the relevant Constant Maturity Treasury Bill Index. Commercial real estate loans are generally made in amounts of up to 80% of the lesser of the appraised value or the purchase price of the property with a projected debt service coverage ratio of at least 120%. Most of our commercial real estate loans have principal balances less than $1.0 million and include penalties for early repayment.

 

 

We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower and/or guarantor, including their credit history, profitability and expertise, as well as the value and condition of the mortgaged property securing the loan. When evaluating the qualifications of the borrower and/or guarantor, we consider their financial resources, their debt to income and global debt service coverage ratios, their ability to provide outside support through income sources unrelated to the income producing property, their experience in owning or managing similar property and their payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property, the condition of the property and the debt service coverage ratio (the ratio of net operating income to debt service) to assess whether it is at least 120% of the monthly debt service. All commercial real estate loans are appraised by outside independent appraisers approved by the board of directors. Appraisals on all loans equal to or greater than $500,000 or considered complex are reviewed by outside, independent third party review appraisers. All other appraisals are reviewed by one of our lenders or credit analysts who are independent of the transaction. Where the borrower is not an individual (such as a C or S corporation, limited liability company, partnership or land trust or other shell entity), we generally require personal guarantees on these loans.

The borrower’s financial information on commercial real estate loans is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews, periodic face-to-face meetings, and site visits. We require such borrowers to provide annually updated financial statements and federal tax returns. These requirements also apply to the guarantors and/or principals of our corporate borrowers. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including rent rolls/tenant lists, copies of leases and other information, as applicable.

Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate. At December 31, 2016, we had one commercial real estate loan with an outstanding balance of $542,000 which was 90 days or more delinquent and in non-accrual status.

At December 31, 2016, our largest commercial real estate loan totaled $1.3 million and was secured by an owner/user single occupant retail appliance store. At December 31, 2016, this loan was performing in accordance with its terms.

Multi-Family Real Estate Lending. At December 31, 2016, we had multi-family real estate loans of $10.0 million compared to $7.6 million at December 31, 2015. Our efforts to increase this segment of the portfolio are primarily the result of personnel changes in our lending department, referrals from external sources, and expanded relationships with other financial institutions for participations in loans they originate as we implement our strategic plan. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy.”

The multi-family real estate loans we originate generally have a maximum term of five years and are subject to balloon payments at maturity. The amortization period for these loans is typically 25 years or less. The interest rates on these loans are generally fixed for the entire term. At maturity, the borrower, and if applicable, guarantor, and the collateral are subjected to underwriting and valuation reviews.  If this review process still finds these loans to be satisfactory, they are extended for an additional period of three to five years.  Should the loan be renewed at maturity, the rates are adjusted to current market rates and the loan is extended for an additional three to five years. Renewal rates are tied to certain indices, including the relevant Constant Maturity Treasury Bill Index or prime, plus a margin.  In 2016, we also introduced a ten year term loan with a fixed interest rate for the first five years and then an annual rate adjustment each year for the remaining five year term.  The amortization term for these loans is generally 25 years or less subject to a balloon payment at maturity.  The initial rate and subsequent rate adjustments are tied to the relevant Constant Maturity Treasury Bill Index. These loans are generally made in amounts of up to 80% of the lesser of the appraised value or the purchase price of the property with a projected debt service coverage ratio of at least 120%.  Most of our multi-family loans have principal balances less than $1.0 million and include penalties for early repayment. Our multi-family real estate loans are secured by apartment buildings located within the greater Chicago area.

Appraisals on properties securing multi-family real estate loans are performed by an outside independent appraiser designated by us at the time the loan is made. All appraisals on multi-family real estate loans are reviewed. Appraisals on all loans equal to or greater than $500,000 or considered complex are reviewed by outside, independent third party review appraisers. All other appraisals are reviewed by one of our lenders or credit analysts who are independent of the transaction. Our underwriting procedures include considering the borrower’s and/or the guarantor’s expertise and require verification of their credit history, sources of income and financial statements, banking relationships, references and income projections for the property. Where the borrower is not an individual (such as a C or S corporation, limited liability company, partnership or land trust or other shell entity), we generally require personal guarantees on these loans.

 

 

The borrower’s financial information on multi-family loans is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews, periodic face-to-face meetings, and site visits. We require such borrowers to provide annually updated financial statements and federal tax returns. These requirements also apply to the guarantors and/or principals of our corporate borrowers. We also require borrowers with rental investment property to provide an annual report of income and expenses for the property, including rent rolls/tenant lists, copies of leases and other information, as applicable.

Multi-family real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower’s ability to repay the loan may be impaired. At December 31, 2016, we had one multi-family real estate loan with an aggregate outstanding balance of $284,000 which was in non-accrual status.

At December 31, 2016, our largest multi-family loan had a balance of $891,000 and was a secured by two apartment buildings with a total of 24 units. At December 31, 2016, this loan was performing in accordance with its terms and subsequently was paid off in February of 2017.

Home Equity Lending. We originate variable-rate home equity lines of credit and, to a lesser extent, fixed- and variable-rate loans secured by a lien on the borrower’s primary residence. Our home equity products are limited to 80% of the property value less any other mortgages.

In 2016, we began offering a new home equity line product.  The new structure combines a 10 year draw period with a 15 year (second lien) or 20 year (first lien) fully amortizing loan.  At the tenth anniversary of the date of funding, the outstanding balance at that time will automatically convert to the fully amortizing structure. This product carries an interest rate tied to the prime rate published in the Wall Street Journal for the entire term of the loan with a margin that ranges from prime to prime minus 100 basis points and a floor of 3.50% for first lien loans and a margin that ranges from prime to prime minus 50 basis points and a floor of 4.00% for second lien loans.  The product has a rate ceiling of 17.5%.  A prepayment penalty is assessed if the line is closed within one year.

We continue to offer a seven-year balloon home equity line of credit product, meaning the entire balance is due at maturity. To determine the pro forma payment at the end of the original term for underwriting purposes, we assume the commitment is fully drawn and we use a 2.0% shock over the current rate and amortize the loan over a seven year term. This product carries an interest rate tied to the prime rate published in the Wall Street Journal with a margin that ranges from prime to prime minus 125 basis points. The product has a rate ceiling of 17.5% and a floor of 4.00% for first lien position loans and 5.00% for second lien position loans. A prepayment penalty is assessed if the line is closed within one year.

We currently also offer fixed rate fully amortizing home equity loans with a term of five years. We use the same underwriting standards for home equity loans as we use for one- to four-family residential mortgage loans. Our current home equity loan product carries an interest rate of 6.00% with no origination fees or 5.00% with a 1.00% fee. We discontinued offering fixed rate home equity loans subject to balloon payments. 

 

 

At December 31, 2016, we had $5.4 million, or 8.5%, of gross loans in home equity loans and outstanding advances under home equity lines of credit and an additional $5.0 million of funds committed, but not advanced, under home equity lines of credit.  At December 31, 2016, we had one loan with an outstanding balance of $241,000 that was in non-accrual status.

Commercial Business Loans. We originate or purchase secured or unsecured loans to professionals, sole proprietorships and small businesses for commercial, corporate and business purposes. Commercial business lending products include term loans, revolving lines of credit and leases. We also may make commercial business loans under certain programs of the U.S. Small Business Administration. Our commercial business loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture.

Our commercial business loans totaled $1.2 million at December 31, 2016.  We have a relationship with a private lending firm from which we purchase individual loans to medical practitioners for financing medical equipment and for working capital for establishing private practices. These loans are treated as a loan to one borrower, as the originating firm can replace any loan that is not performing as agreed with another performing loan from its own captive portfolio. We focus on the private lender as our primary source of repayment and require annual financial updates. At December 31, 2016, there were 19 loans purchased from this firm that made up $1.2 million, or 99.0%, of our commercial loan portfolio. None of the loans purchased from this source have defaulted. We expect that we will continue this line of lending in the future.

When making commercial business loans, we consider the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. Commercial business loans are generally secured by accounts receivable, inventory, equipment and/or real estate. Depending on the amount of the loan and the collateral used to secure the loan, commercial business loans are made in amounts of up to 75% of the value of the collateral securing the loan. Commercial business loans are made with terms usually less than five years with either variable or fixed rates of interest. Variable rates are based on the prime rate plus a margin. Fixed-rate commercial business loans are set at a margin above prime rate.

Commercial business loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards.

At December 31, 2016, our largest commercial business loan relationship was the aforementioned private lending firm’s loans to medical practitioners with a balance of $1.2 million. At December 31, 2016, these loans were performing in accordance with their original terms.

Consumer Lending. In the past we purchased new and used automobiles under an agreement with a local bank to diversify our portfolio and increase our interest income.  In January 2014, we suspended new purchases under this agreement based on the review of risk concentrations in our portfolio, liquidity requirements, and economic conditions. Between December 31, 2009 and December 31, 2016, purchased automobile loans decreased from $7.2 million to $357,000. At this time we do not anticipate the resumption of the automobile purchase program.

We also offer consumer loans directly to customers in our market area with acceptable credit ratings. At December 31, 2016, we had $14,000 of consumer loans other than automobile loans.

 

 

Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances as well as the current slowing economy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 2016, we had no repossessed automobiles. There were no non-performing consumer loans at December 31, 2016. While the current amount of our repossessed assets and non-performing consumer loans is low, there can be no assurance that delinquencies in our consumer loan portfolio will not increase in the future.

Originations, Sales and Purchases of Loans

We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders, attorneys and others in the community. We occasionally offer incentives to employees for these loan referrals.

From time to time we sell loans based on asset/liability, risk-sharing and regulatory considerations. For instance, we may sell participation interests in our large multi-family, commercial real estate and commercial loans in order to diversify our risk or accommodate a borrower with a need in excess of our legal lending limit. At December 31, 2016, we do not service any one- to four-family loans for others.

We have purchased, and may purchase in the future, loans from third parties to supplement loan production. In particular, we may purchase loans of a type which are not available to us with favorable terms in our own market area.  In 2016, we purchased $5.5 million in participations with other institutions. We generally use the same underwriting and approval standards in evaluating loan purchases as we do in originating loans. At December 31, 2016, approximately $11.2 million of our loan portfolio was serviced by others. While we intend to focus on internally generated originations, we may from time to time purchase participations in multi-family, commercial real estate and commercial loans with other financial institutions. The following table shows our loan origination, purchase and principal repayment activity during the periods indicated. Loans are presented net of loans in process and the allowance for loan losses. We did not sell any loans during the periods covered by the table.

 

 

The following table sets forth our loan origination, purchase, sale and principal repayment activity during the periods indicated.

 

Asset Quality

Delinquency Procedures. When a borrower fails to make a required payment on a loan, we attempt to cause the delinquency to be cured by contacting the borrower. A late notice is generated and is sent to all mortgage loans 15 days delinquent and to all consumer loans 10 days delinquent. The borrower is contacted within at least 20 days after the due date of all loans. Another late notice along with any required demand letters as set forth in the loan contract are sent 30 days after the due date. Additional written and verbal contacts may be made with the borrower between 30 and 60 days after the due date. If the delinquency is not cured by the 60th day, the customer is normally provided 30 days written notice that the account will be referred to counsel for collection and foreclosure, if necessary. If it becomes necessary to foreclose, the property is sold at public sale and we may bid on the property to protect our interest.

All loan charge-offs are recommended and approved by the Bank’s Loan Monitoring Committee or its Risk Rating sub-committee and ratified by our President or the Chief Executive Officer. Our procedures for repossession and sale of collateral are subject to various requirements under Illinois state consumer protection laws.

When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure it is classified as a repossessed asset until it is sold. The real estate is recorded at estimated fair value, less estimated cost to sell, at the date of acquisition, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Subsequent decreases in the value of the property are recorded through expense. After acquisition, all rental income is recognized through increases in non-interest income, while costs incurred in maintaining the property are recorded through expense. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

 

 

Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies by type and amount at the dates indicated.

 

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities, considered to be of lesser quality as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it performs an impairment analysis and charges off the impaired portion of the loan through the allowance for loan and lease losses. Under certain instances, the bank may establish specific loss allowances in an amount deemed prudent by management to cover probable incurred losses. General allowances represent loss allowances which have been established to cover probable incurred losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets or portions of assets as “loss,” it is required to charge-off the impaired amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, who may order the establishment of additional general or specific loss allowances.

In accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.

 

 

The following table sets forth our amounts of classified assets, assets designated as special mention and total criticized assets (classified assets and loans designated as special mention) as of the dates indicated. Amounts shown at December 31, 2016 and December 31, 2015, include approximately $1.9 million and $1.4 million of nonperforming loans, respectively.

 

Non-Performing Assets. We cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due on non-consumer secured loans, and 120 days past due on consumer loans as per Interagency Guidance on Uniform Retail Credit Classification and Account Management Policy, or if management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

 

 

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

 

 

Non-performing Loans. At December 31, 2016, our non-performing loans, other than non-accruing troubled debt restructurings described below, totaling $1.5 million, includes a one- to four-family loan, one multi-family loan, and one commercial real estate loan. 

For the years ended December 31, 2016 and 2015, interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was immaterial. No interest income was recognized on such loans for the years ended December 31, 2016 and 2015.

Troubled Debt Restructurings. Troubled debt restructurings are loan restructurings in which we, for economic or legal reasons related to an existing borrower’s financial difficulties, grant a concession to the debtor that we would not otherwise consider. Typically, a troubled debt restructuring involves a modification of terms of a debt, such as reduction of the stated interest rate for the remaining original life of the debt, extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, reduction of the face amount of the debt, or reduction of accrued interest. We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral pledged. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests.

Loans on non-accrual status at the date of modification are initially classified as non-accrual troubled debt restructurings. At December 31, 2016 and 2015, we had $345,000 and $415,000 in non-accruing troubled debt restructurings, respectively. At December 31, 2016, non-accrual troubled debt restructurings included a single one- to four-family residential loan for $61,000 and one multi-family loan for $284,000.

Our policy provides that troubled debt restructured loans are returned to accrual status after a period of satisfactory and reasonable future payment performance under the terms of the restructuring. Satisfactory payment performance is generally no less than six consecutive months of timely payments and demonstrated ability to continue to repay. At December 31, 2016 and 2015, we had $1.2 million and $1.5 million in accruing troubled debt restructurings, respectively. At December 31, 2016, accruing troubled debt restructurings included two one- to four-family residential loans totaling $526,000 and one multi-family loan totaling $705,000 million collateralized by a 12 unit apartment building.

For the years ended December 31, 2016 and 2015, interest income that would have been recorded had our troubled debt restructurings been current in accordance with their original terms was $93,000 and $131,000, respectively. Interest income recognized on such loans for the years ended December 31, 2016 and 2015 was $68,000 and $98,000, respectively.

Other Loans of Concern. At December 31, 2016, there were no other loans or other assets that are not disclosed above, including criticized and non-performing assets, where known information about the possible credit problems of borrowers caused us to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

 

 

Allowance for Loan Losses

Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to absorb probable incurred losses in our loan portfolio at the balance sheet date. We evaluate the need to establish loss allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific valuation allowances for individually impaired loans and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

Specific Allowances for Impaired Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less selling cost. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency.

General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not individually impaired by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience adjusted for current environmental factors such as, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to help ensure their relevance in the current real estate environment.

As an integral part of their examination process, the OCC will periodically review our allowance for loan losses, and may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

 

 

Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the years indicated.

 

 

 

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total allocated loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

At December 31, 2016, our allowance for loan losses represented 1.43% of gross loans and 48.76% of non-performing loans.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely or positively affected if circumstances differ substantially from the assumptions used in making our determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

 

 

Investment Activities

General. We utilize mortgage-backed and other securities in our asset/liability management. In making investment decisions, management considers, among other things, our yield and interest rate objectives, our interest rate risk and credit risk position, our loan volume, and our liquidity and cash flow. As of December 31, 2016, all of our investment securities were available-for-sale and were issued by U.S. government sponsored entities which the government has affirmed its commitment to support.

We maintain minimum levels of liquid assets to help ensure we have adequate cash to fund anticipated needs. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Cash flow projections are reviewed and updated regularly to assure that adequate liquidity is maintained. Our level of liquidity is a result of management’s asset/liability strategy.

Government sponsored entities residential mortgage-backed securities and other government sponsored entity securities carry a yield generally lower than that of the corresponding type of residential loan. Accordingly, if the proportion of our assets consisting of government sponsored entities residential mortgage-backed securities and other government sponsored entity securities increases, our asset yields would likely be somewhat adversely affected. We will evaluate government sponsored entity securities purchases in the future based on our asset/liability objectives, market conditions and alternative investment opportunities.

Investment Securities Portfolio. The following table sets forth the composition of our investment securities portfolio at the dates indicated, excluding stock of the Federal Home Loan Bank of Chicago. All securities were held for sale at the dated indicated.

 

 

 

Securities Portfolio Maturities and Yields. The composition and contractual maturities of the investment securities portfolio at December 31, 2016 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. All of our securities at December 31, 2016 were taxable securities.

 

 

Other Securities. During recent years, our investment in securities other than residential mortgage-backed securities, cash and cash equivalents, and Federal Home Loan Bank of Chicago stock have been quite limited. However, in the future, depending on asset/liability management considerations and market considerations, we may determine to invest in other securities including securities issued by the U.S. Treasury and U.S Government agencies, corporate debt securities and, to a lesser extent, corporate equity securities.

Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. From time to time we have also used borrowings, primarily Federal Home Loan Bank of Chicago advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Historically, our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We have not accepted brokered deposits in the past. Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service and long-standing relationships with customers are relied upon to attract and retain deposits.

The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Our ability to gather deposits is impacted by the competitive market in which we operate which includes numerous financial institutions of varying sizes offering a wide range of products. We often use promotional rates to meet asset/liability and market segment goals.

The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on our experience, we believe that statement savings, demand and NOW accounts may be somewhat more stable sources of deposits than certificates of deposits. However, it can be difficult to attract and maintain such deposits at favorable interest rates under current market conditions.

As we focus on providing business banking products and services and through meaningful and directed relationship development, we try to capture additional low cost deposits, such as commercial demand deposits and savings accounts, not for profit demand deposit accounts and commercial money market accounts.  Further, we endeavor to develop a “house-holding” approach to relationship management.  By this we mean developing whole banking relationships that include not only business related accounts, but also the related personal and employee based accounts. Additionally, we will require depository accounts with borrowing relationships.

 

 

Deposits. The following table sets forth the distribution of our total deposits by account type, for the periods indicated.

 

As of December 31, 2016, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was $12.4 million. The following table sets forth the maturity of those certificates as of December 31, 2016.

 

Borrowings. Our borrowings currently consist solely of advances from the Federal Home Loan Bank of Chicago.  At December 31, 2016, we had access to additional Federal Home Loan Bank advances of up to $5.2 million.  The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances with terms of one year or less at the dates and for the periods indicated.

Subsidiary Activities

Ben Franklin Financial has no direct or indirect subsidiaries other than Ben Franklin Bank of Illinois.

Personnel

At December 31, 2016, we had a total of 26 full-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relationships with our employees.

 

 

SUPERVISION AND REGULATION

General

Ben Franklin Bank is examined and supervised by the OCC and is subject to examination by the Federal Deposit Insurance Corporation. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance fund and depositors, and not for the protection of security holders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to matters such as their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Ben Franklin Bank also is regulated to a lesser extent by the Federal Reserve Board, governing reserves to be maintained against deposits and other matters. The OCC examines Ben Franklin Bank and prepares reports for the consideration of our board of directors on any operating deficiencies. Ben Franklin Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Ben Franklin Bank’s loan documents. Ben Franklin Bank also is a member of and owns stock in the Federal Home Loan Bank of Chicago, which is one of the twelve regional banks in the Federal Home Loan Bank System.

As a savings and loan holding company, the Company is required to comply with the rules and regulations of the Federal Reserve Board. It is required to file certain reports with the Federal Reserve Board and is subject to examination by and the enforcement authority of the Federal Reserve Board. The Company is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in applicable laws or regulations, whether by the Federal Deposit Insurance Corporation, the OCC, the Federal Reserve Board or Congress, could have a material adverse impact on the operations and financial performance of Ben Franklin Financial and Ben Franklin Bank.

Set forth below is a brief description of material regulatory requirements that are or will be applicable to the Company and Ben Franklin Bank. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on the Company and Ben Franklin Bank.

Consent Order and Board Resolutions

On November 25, 2015 the Bank entered into a revised Consent Order (the “New Order”) with the OCC that reduces the Bank’s regulatory compliance burden. Concurrent with the execution of the New Order, the Bank’s prior Consent Order (the “Old Order”) entered into between the Bank and the OCC dated December 19, 2012 was terminated. The New Order is comprised of two substantive articles as opposed to 12 substantive articles under the Old Order. The New Order reduced the Bank’s minimum required Tier 1 leverage capital ratio to 8% from 9% under the Old Consent Order and its minimum total risk-based capital ratio to 12% from 13% under the Old 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.

A federal savings bank is considered to be in “troubled condition” if (i) it has a composite rating of 4 or 5 under the Uniform Financial Institutions Rating System, (ii) it is informed in writing by the OCC that it has been designated as being in troubled condition, or (iii) it is subject to a formal enforcement order with the OCC, such as the New Order. Consequently, Ben Franklin Bank is in troubled condition, and is subject to additional regulatory restrictions that require it to:

 

 

 

 

 

The New Order requires that we make periodic reports to the OCC as to our compliance with the requirements of the New Order. The requirements of the New Order will remain in effect until the OCC suspends or terminates the New Order.

On March 27, 2014, Ben Franklin-Federal and Ben Franklin Financial, MHC adopted board resolutions requested by the Federal Reserve Board which prohibit us from paying dividends, increasing our debt or redeeming shares of Ben Franklin-Federal stock without prior written approval from the Federal Reserve Board. This resolution remains in effect for the Company with the completion of the reorganization in January 2015. We cannot determine when the Company would no longer be subject to the conditions of the board resolutions.

 

 

Business Activities

A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OCC. Under these laws and regulations, Ben Franklin Bank may originate mortgage loans secured by residential and commercial real estate, commercial business loans and consumer loans, and it may invest in certain types of debt securities and certain other assets. Certain types of lending, such as commercial and consumer loans, are subject to aggregate limits calculated as a specified percentage of Ben Franklin Bank’s capital or assets. Ben Franklin Bank also may establish service corporation subsidiaries that may engage in a variety of activities, including some that are not otherwise permissible for Ben Franklin Bank, including real estate investment and securities and insurance brokerage.

The Dodd-Frank Act removed federal statutory restrictions on the payment of interest on commercial demand deposit accounts, effective July 21, 2011.

Loans-to-One-Borrower

We generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of our unimpaired capital and unimpaired surplus. An additional amount may be lent, equal to 10% of unimpaired capital and unimpaired surplus, if the loan is secured by readily marketable collateral, which is defined to include certain financial instruments and bullion, but generally does not include real estate. At December 31, 2016, based on the 15% limitation, our loans-to-one-borrower limit was approximately $1.3 million. On the same date, we had four borrowers with outstanding balances and or commitments in excess of this amount.  These outstanding balances or commitments were within the limits at the time they were originated.

Qualified Thrift Lender Test

We are required to satisfy a qualified thrift lender (“QTL”) test, which required us to either qualify as a “domestic building and loan” association as defined by the Internal Revenue Code or maintain at least 65% of our “portfolio assets” in “qualified thrift investments.” “Qualified thrift investments” consist primarily of residential mortgages and related investments, including mortgage-backed and related securities. “Portfolio assets” generally means total assets less specified liquid assets up to 20% of total assets, goodwill and other intangible assets and the value of property used to conduct business. A savings institution that fails the qualified thrift lender test must operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL test also subject to agency enforcement action for a violation of law. As of December 31, 2016, we maintained 96.6% of our portfolio assets in qualified thrift investments and, therefore, we satisfied the QTL test.

Standards for Safety and Soundness

Federal law requires each federal banking agency to prescribe for insured depository institutions under its jurisdiction standards relating to, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, employee compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to submit or implement an acceptable plan, the appropriate federal banking agency may issue an enforceable order requiring correction of the deficiencies.

Capital Requirements

Federal regulations require savings associations to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of regulations implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

 

 

Risk-based capital standards for savings associations require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6.0% and 8.0%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated other comprehensive income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.

On November 25, 2015, Ben Franklin Bank entered into a New Order with the OCC (see “—Consent Order and Board Resolutions Above” above) which included a requirement to maintain a total risk-based capital ratio of at least 12% and a minimum Tier 1 leverage capital ratio of at least 8%. As a result of entering into the New Order to achieve and maintain specific capital levels, Ben Franklin Bank’s capital classification under the Prompt Corrective Action rules was “adequately capitalized” at December 31, 2016 and 2015. At December 31, 2016, Ben Franklin Bank had a Tier 1 leverage capital level of $7.5 million, or 9.3% which met the requirement of the minimum capital ratio established by the New Order. The Bank had a total risk-based capital level of $8.2 million, or 14.5% of risk-weighted assets which met the requirement of the New Order.

Prompt Corrective Regulatory Action

Under prompt corrective action regulations, the Federal Reserve Board is authorized and, under certain circumstances, required to take supervisory actions against undercapitalized member banks. For this purpose, a member bank is placed in one of the following five categories based on the bank’s capital:

 

 

 

 

 

 

 

Capital Distributions

Federal regulations restrict capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution. A federal savings institution must file an application with the OCC for approval of the capital distribution if:

 

 

 

 

A savings institution that is a subsidiary of a holding company, which is the case with Ben Franklin Bank, must file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution, and must receive Federal Reserve Board non-objection to the payment of the dividend.

Applications or notices may be denied if the institution would be undercapitalized after the dividend, the proposed dividend raises safety and soundness concerns or the proposed dividend would violate a law, regulation enforcement order or regulatory condition.

In the event a savings institution’s capital falls below its regulatory requirements or is notified by the regulatory agency that it is in need of more than normal supervision, its ability to make capital distributions would be restricted. In addition, any proposed capital distribution could be prohibited if the regulatory agency determines that the distribution would constitute an unsafe or unsound practice.

Transactions with Related Parties

A savings institution’s authority to engage in transactions with related parties or “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve Board’s Regulation W. The term “affiliate” generally means any company that controls or is under common control with an institution, including Ben Franklin Financial and its non-savings institution subsidiaries. Applicable law limits the aggregate amount of “covered” transactions with any individual affiliate, including loans to the affiliate, to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain covered transactions with affiliates, such as loans to or guarantees issued on behalf of affiliates, are required to be secured by specified amounts of collateral. Purchasing low quality assets from affiliates is generally prohibited. Regulation W also provides that transactions with affiliates, including covered transactions, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited by law from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

Our authority to extend credit to executive officers, directors or 10% or greater stockholders (“insiders”), as well as entities controlled by these persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Federal Reserve Board Regulation O. Among other things, loans to insiders must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for bank-wide lending programs that do not discriminate in favor of insiders. Regulation O also places individual and aggregate limits on the amount of loans that may be made to insiders based, in part, on the

 

 

institution’s capital position, and requires that certain prior board approval procedures be followed. Extensions of credit to executive officers are subject to additional restrictions on the types and amounts of loans that may be made. At December 31, 2016, we were in compliance with these regulations.

Enforcement

The OCC has primary enforcement responsibility over federal savings institutions, including the authority to bring enforcement action against “institution-related parties,” which includes officers, directors, certain stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors of the institution, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day.

Deposit Insurance

Ben Franklin Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit accounts in Ben Franklin Bank are insured up to a maximum of $250,000 for each separately insured depositor.

The Federal Deposit Insurance Corporation assesses deposit insurance premiums on all insured depository institutions. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by Federal Deposit Insurance Corporation regulations, with institutions that are deemed less risky paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s aggregate deposits.

In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation is authorized to impose and collect, through the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the Financing Corporation in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the Financing Corporation are due to mature in 2017 through 2019. For the quarter ended December 31, 2016, the annualized Financing Corporation assessment was equal to 0.6 basis points of total assets less tangible capital.

The Dodd-Frank Act increased the minimum target ratio for the Deposit Insurance Fund from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits, and the Federal Deposit Insurance Corporation must achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are required to fund the increase. The Dodd-Frank Act also eliminated the 1.5% maximum fund ratio, and instead gives the Federal Deposit Insurance Corporation discretion to determine the maximum fund ratio. The Federal Deposit Insurance Corporation has exercised this discretion by establishing a long-term fund ratio of 2%.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Any significant increases would have an adverse effect on the results of operations of Ben Franklin Bank. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. Management of Ben Franklin Bank does not know of any practice, condition or violation that may lead to termination of our deposit insurance.

 

 

Federal Home Loan Bank System

Ben Franklin Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Chicago, we are required to acquire and hold a specified amount of shares of capital stock in the Federal Home Loan Bank.

Community Reinvestment Act and Fair Lending Laws

Savings institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on certain activities such as branching and acquisitions. Ben Franklin Bank received a “Satisfactory” Community Reinvestment Act rating in its most recent examination.

Other Regulations

Interest and other charges collected or contracted for by Ben Franklin Bank are subject to state usury laws and federal laws concerning interest rates. Ben Franklin Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

 

 

 

 

 

 

 

 

The operations of Ben Franklin Bank also are subject to the:

 

 

 

 

 

 

Holding Company Regulation

The Company is a unitary savings and loan holding company subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Ben Franklin Bank.

As a savings and loan holding company, the Company’s activities will be limited to those activities permissible by law for financial holding companies, under certain circumstances described below, bank holding companies under section 4(c)(8) of the Bank Holding Company Act of 1956, as amended, or multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, incidental to financial activities or complementary to a financial activity. Such activities include lending activities, insurance and underwriting equity securities. A savings and loan holding company must elect such status in order to engage in activities permissible for a financial holding company, must meet the qualitative requirements for a bank holding company to qualify as a financial holding company and conduct the activities in accordance with the requirements that would apply to a financial holding company’s conduct of the activity.

Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or savings and loan holding company without prior written approval of the Federal Reserve Board, and from acquiring or retaining control of any depository institution not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider such things as the financial and managerial resources and future prospects of the company and institutions involved, the effect of the acquisition on and the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors. A savings and loan holding company may not acquire a savings institution in another state and hold the target institution as a separate subsidiary unless it is a supervisory acquisition under Section 13(k) of the Federal Deposit Insurance Act or the law of the state in which the target is located authorizes such acquisitions by out-of-state companies.

Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. However, the Dodd-Frank Act requires the Federal Reserve Board to set for all depository institution holding companies minimum consolidated capital levels that are as stringent as those required for the insured depository subsidiaries. The components of Tier 1 capital are restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions, which excludes instruments such as trust preferred securities and cumulative preferred stock. Instruments issued before May 19, 2010 are grandfathered for companies with consolidated assets of $15 billion or less. The final capital rule discussed above implements the consolidated capital requirements for savings and loan holding companies effective January 1, 2015.

 

 

The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. That doctrine requires holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The guidance also states that a holding company should notify the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Ben Franklin Financial to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

Federal Securities Laws

The Company’s common stock is registered with the Securities and Exchange Commission and is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of common stock issued in the Company’s public offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of Ben Franklin Financial may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If the Company meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of the Company that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of the Company, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, the Company may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have existing policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as an emerging growth company under the JOBS Act.

An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over

 

 

financial reporting, and can provide scaled disclosure regarding executive compensation; however, the Company will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company.

A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

Change in Control Regulations

Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company such as the Company unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquirer has the power, directly or indirectly, to exercise a controlling influence over the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as will be the case with the Company, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

In addition, federal regulations provide that no company may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board.

Federal Taxation

General. The Company and Ben Franklin Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below.  During the past five years, one tax return is in the process of being audited.  The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or Ben Franklin Bank.

Method of Accounting. For federal income tax purposes, we report income and expenses on the accrual method of accounting and use a tax year ending December 31 for filing federal and state income tax returns.

Bad Debt Reserves. Prior to the Small Business Protection Act of 1996 (the “1996 Act”), Ben Franklin Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. Ben Franklin Bank was required to use the specific charge off method in computing its bad debt deduction beginning with its 1997 federal tax return. Savings institutions were required to recapture any excess reserves established after December 31, 1987. The reserve balance as of December 31, 1987 is referred to as the base year reserve.

 

 

Taxable Distributions and Recapture. Prior to the 1996 Act, federal tax bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if the thrift institution failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated these thrift-related recapture rules.

At December 31, 2016, our total federal and Illinois pre-1988 base year tax bad debt reserve was approximately $355,000. Under current law, pre-1988 federal base year reserves remain subject to recapture if a thrift institution makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a thrift or bank charter.

Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of AMT may be used as credits against regular tax liabilities in future years. We have not been subject to the AMT and have no such amounts available as credits for carryover.

Net Operating Loss Carryovers. Generally we may carry back federal net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2016, we have federal net operating losses of approximately $7.4 million which are being carried forward and available to reduce future taxable income. These carryforwards expire beginning 2030 through 2036. For financial reporting purposes, at December 31, 2016, we continue to maintain a valuation allowance established at December 31, 2009, based on our assessment of our ability to realize our net deferred tax asset due to continuing losses incurred.

Corporate Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from Ben Franklin Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is 80% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated return, and owns more than 20% of the stock. A corporation receiving a dividend may deduct only 70% of dividends if the corporation owns less than 20% of the dividend paying corporation.

State and Local Taxation

Illinois State Taxation. The Company and Ben Franklin Bank are required to file Illinois income tax returns and pay tax at a stated tax rate of 9.5% of Illinois taxable income. For these purposes, Illinois taxable income generally means federal taxable income subject to certain modifications, primarily the exclusion of interest income on United States obligations. As of December 31, 2016, we have Illinois net operating losses of approximately $9.2 million which are being carried forward and available to reduce future taxable income. These carryforwards expire beginning 2019 through 2028.

As a Maryland business corporation, The Company is required to file an annual report with and pay franchise taxes to the state of Maryland.

 

Ben Franklin Bank is subject to a Consent Order with the OCC, including an individual minimum capital requirement that may adversely affect our operations and our financial performance. The Company has also adopted a board resolution requested by the Federal Reserve Board which, among other things, prohibit us from paying dividends, increasing our debt or redeeming shares of the Company’s stock without prior written approval from the Federal Reserve Board. Continued compliance with the Consent Order and board resolutions may restrict our operations and adversely affect our financial condition and results of operations.

On November 25, 2015 the Bank entered into a revised Consent Order (the “New Order”) with the OCC that reduces the Bank’s regulatory compliance burden. Concurrent with the execution of the New Order, the Bank’s prior Consent Order (the “Old Order”) entered into between the Bank and the OCC dated December 19, 2012 was terminated. The New Order is comprised of two substantive articles as opposed to 12 substantive articles under the

 

 

Old Order. The New Order reduced the Bank’s minimum required Tier 1 leverage capital ratio to 8% from 9% under the Old 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.

A federal savings bank is considered to be in “troubled condition” if (i) it has a composite rating of 4 or 5 under the Uniform Financial Institutions Rating System, (ii) it is informed in writing by the OCC that it has been designated as being in troubled condition, or (iii) it is subject to a formal enforcement order with the OCC, such as the New Order. Consequently, Ben Franklin Bank is in troubled condition, and is subject to additional regulatory restrictions that require it to:

 

 

 

 

The New Order requires that we make quarterly progress reports to the OCC as to our compliance with the requirements of the Consent Order. The requirements of the New Order will remain in effect until the OCC suspends or terminates the New Order. Failure to comply with the New Order could result in additional enforcement actions by the OCC. We have incurred significant expense in complying with the Old Order, and continued compliance with the New Order may restrict our operations or result in continued expense, either of which may adversely affect our financial condition and results of operations. For more information regarding the New Order, see “Regulation and Supervision—Consent Order and Board Resolutions.”

On March 27, 2014, Ben Franklin-Federal and Ben Franklin Financial, MHC adopted board resolutions requested by the Federal Reserve Board that prohibit us from paying dividends, increasing our debt or redeeming shares of Ben Franklin-Federal stock without prior written approval from the Federal Reserve Board. Continued compliance with the board resolutions may restrict our operations and adversely affect our financial condition and results of operations. Failure to comply with the board resolutions could result in additional enforcement actions by the Federal Reserve Board.

We cannot determine when Ben Franklin Financial would no longer be subject to the New Order or conditions of the board resolutions.

Our business strategy, which contemplates asset and liability growth, including significant loan growth, was recently adopted and implemented and has not yet had the time to be proven successful. If we fail to grow or fail to manage our growth effectively, our financial condition and results of operations could be negatively affected.

In January 2016, the Board of Directors of Ben Franklin Bank approved a strategic plan which was submitted it to the OCC for their supervisory non-objection in accordance with the New Order. The plan contemplates growth in assets and liabilities, including significant loan growth, over the next several years. Under the plan, we intend to increase our one-to four- family, commercial and multi-family real estate loans, home equity lines of credit and, to a lesser extent, commercial business loans, while attracting favorably priced deposits. The plan includes the purchase of one- to four-family and multi-family loans to supplement our internal production to

 

 

increase our interest income. The plan also includes a decrease in compensation and benefits primarily due to salary adjustments and staffing changes. Over the past several years we have incurred substantial additional expenses including salaries related to new lending officers and related support staff. Unless we can successfully implement our strategic plan, our financial condition and results of operations will continue to be negatively affected by these increased costs.

The successful implementation of our strategic plan will require, among other things, that we increase our market share by attracting new customers that currently bank at other financial institutions in our market area. In addition, our ability to successfully grow will depend on several factors, including continued favorable market conditions, the competitive responses from other financial institutions in our market area, and our ability to maintain high asset quality as we increase our commercial and multi-family real estate loans, home equity lines of credit and commercial business loans. Growth opportunities may not be available and we may not be successful in implementing our business strategy. Further, it will take time to implement our business strategy, especially for our lenders to originate enough loans and for our branches to attract enough favorably priced deposits to generate the revenue needed to offset the associated expenses. In addition, the successful implementation of our business strategy may require that we raise additional capital, which may not be available on terms that allow us to successfully implement our plan.   Assuming the successful execution of our business plan, we do not expect that we will return to profitability until fiscal 2019. We may be unsuccessful, however, in executing on our business plan and may not be able to return to profitability in the timeframe we expect, or at all.

The implementation of our business strategy, which includes significant growth of our loan portfolio, may require that we raise additional capital. Such capital may not be available on terms that are consistent with our business strategy, which could cause our business strategy to fail.

           We may need to raise additional capital in the future to support operations and the significant growth of our loan portfolio that is contemplated by our business strategy. Our ability to raise capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control and our financial performance. If we cannot raise additional capital when needed on terms that are consistent with the successful implementation of our business strategy, it would affect our operations and could cause our business strategy to be unsuccessful.

If our problem assets increase, our results of operations may decline.

At December 31, 2016, our non-performing assets, which were also our classified assets, totaled $1.9 million or 2.7% of our total assets and consisted of $345,000 of non-accrual troubled debt restructurings, $1.5 million of non-accrual loans, and $408,000 of repossessed assets. Our problem assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or repossessed assets. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. We also write down the value of properties in our repossessed assets to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our repossessed assets. Further, the resolution of problem assets requires the active involvement of management, which could detract from the overall supervision of our operations and implementation of our business strategy. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly.

Changes in interest rates could adversely affect our results of operations and financial condition.

Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, a sustained increase in interest rates generally would tend to reduce our interest income. At December 31, 2016, a portion (16.9%) of our loan portfolio was comprised of fixed-rate loans with remaining terms of over 15 years while a significant portion (62.9%) of our certificates of deposit had terms of one year or less. In the event that interest rates suddenly rise our interest expense may rise more quickly than our interest income. Consequently, we may experience a related decrease in our net interest income.

Changes in interest rates also may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable-rate loans. Also, increases in interest rates may extend the life of fixed-rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive on a new investment.

 

 

Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of our securities classified as available for sale changes inversely with changes in interest rates. At December 31, 2016, the fair value of our portfolio of investment securities classified as available for sale totaled $8.2 million. At that date, net unrealized loss on these securities totaled $145.

Our business plan contemplates an increase in our origination of commercial and multi-family real estate loans and, to a lesser extent, commercial business loans, which carry greater credit risk than loans secured by owner occupied one- to four-family real estate.

Pursuant to our strategic plan, we intend to increase our level of one- to four-family, multi-family and commercial real estate loans and, to a lesser extent, our commercial business loan originations. Given their larger balances and the complexity of the underlying collateral, commercial and multi-family real estate loans generally expose a lender to greater credit risk than loans secured by owner occupied one- to four-family real estate. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and multi-family properties typically depends upon the successful operation of the real property securing the loan. If the cash flow from the property is reduced, the borrower’s ability to repay the loan may be impaired. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by non-real estate collateral that may depreciate over time, may be illiquid and may fluctuate in value based on the success of the business. A secondary market for most types of commercial real estate, commercial business and multi-family loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans. If these loans become non-performing, we may have to increase our provision for loan losses which would negatively affect our results of operations.

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

Our small asset size makes it more difficult to compete with other community banks which are generally larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. At December 31, 2016, we had $85.3 million of total assets, $62.3 million of loans receivable, net of the allowance for loan losses, $8.2 million of available-for-sale investment securities, $74.0 million of total deposits and $8.1 million of total equity. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Our small size also means that we are not always able to offer competitive salaries and benefits. In addition, our smaller customer base makes it relatively more difficult to generate significant noninterest income from other activities. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

A worsening of economic conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.

Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow and, until recently, unemployment levels remained high despite the Federal Reserve Board’s unprecedented efforts to encourage economic growth by maintaining low interest rates through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. Recovery by many businesses has been impaired by lower consumer spending. If the Federal Reserve Board continues to increase the federal funds rate or more rapidly curtails its bond purchasing program, higher interest rates would likely result, which may reduce our loan originations, and housing markets and U.S. economic activity would be negatively affected. Our operations are significantly affected by national and local economic conditions. Substantially all of our loans are to businesses and individuals in the metropolitan Chicago area. Both of our branches and most of our deposit customers also are located in this area. A decline in the economies in which we operate could have a material adverse effect on our business, financial condition and results of operations.

 

 

A deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:

 

 

 

 

 

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

If the allowance for loan losses is not sufficient to cover actual loan losses, our results of operations could decline.

Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If our assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to the allowance. Our emphasis on loan growth and on increasing our originations of multi-family and commercial real estate loans and commercial business loans, as well as any future credit deterioration, could require us to further increase our allowance in the future. Additions to the allowance would decrease our net income. At December 31, 2016, our allowance for loan losses was $904,000, or 48.76% of non-performing loans and 1.43% of gross loans, compared to $991,000, or 68.58% non-performing loans and 1.69% of gross loans at December 31, 2015.

Bank regulators also periodically review our allowance for loan losses and may require an increase in the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs would adversely affect our results of operations or our financial condition.

Changes in the valuation of our securities portfolio may impact our profits.

Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary impairment on a quarterly basis, with more frequent evaluation for selected issues. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. The declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

 

 

Strong competition and the changing banking environment may limit our growth and profitability.

Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms operating locally and elsewhere, and non-traditional financial institutions, including non-depository financial services providers. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Additionally, non-traditional financial institutions may not have the same regulatory requirements or burdens as we do even while playing a rapidly increasing role in the financial services industry, which could ultimately limit our growth, profitability and stockholder value. Our profitability depends upon our ability to successfully compete in our market areas and adapt to the changing financial services environment.

We may not be able to realize our deferred tax asset.

We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, 2016, we had a $3.8 million net deferred tax asset, excluding the valuation allowance. In 2009, we established a full valuation allowance for our net deferred tax asset after evaluating the positive and negative evidence regarding our ability to generate future taxable income in order to utilize the deferred tax asset in accordance with U.S. GAAP. At December 31, 2016, our valuation allowance was $3.8 million. U.S. GAAP requires more weight be given to objective evidence, and since realization is dependent on future operating results, our three-year cumulative operating loss carried more weight than forecasted earnings.

Management regularly reviews the net deferred tax asset for recoverability based on our history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of the net deferred tax asset ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. The net deferred tax asset at December 31, 2016 will not become fully realizable until our future earnings will support realization of the asset. In addition, future events such as the expiration of net operating loss carryforwards, capital raises or transactions that result in a change in control, could trigger the application of certain tax laws which materially limit the utilization of the net deferred tax asset. This is a complex analysis and requires us to make certain judgments in determining the annual limitation. It is possible that we could ultimately not be able to use or lose a significant portion of the net deferred tax asset. Realization of our net deferred tax asset would significantly improve our results of operations and capital.

Declines in property values can increase the loan-to-value ratios on our residential mortgage loan portfolio, which could expose us to greater risk of loss.

Some of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because either we originated the loan with a relatively high combined loan-to-value ratio or because of the decline in home values in our market areas. Residential loans with high combined loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the sale proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses.

Financial reform legislation has, among other things, eliminated the Office of Thrift Supervision, tightened capital standards and created a new Consumer Financial Protection Bureau, and will result in new laws and regulations that are expected to increase our costs of operations.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

 

 

Among other things, as a result of the Dodd-Frank Act:

 

 

 

 

 

In addition to the risks noted above, we expect that our operating and compliance costs, and possibly our interest expense, could increase as a result of the Dodd-Frank Act and the implementing rules and regulations. The need to comply with additional rules and regulations, as well as state laws and regulations to which we were not previously subject, will also divert management’s time from managing our operations. Higher capital levels would reduce our ability to grow and increase our interest-earning assets which would adversely affect our return on stockholders’ equity.

The short-term and long-term impact of the changing regulatory capital requirements and new capital rules are uncertain.

In July 2013, the OCC and the Federal Reserve Board approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to Ben Franklin Bank and Ben Franklin Financial. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

The final rule includes new minimum risk-based capital and leverage ratios, which became effective for Ben Franklin Bank and Ben Franklin Financial on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6.0% (increased from 4.5%); (iii) a total capital ratio of 8.0% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4.0%. The final rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

 

 

Although the New Order requires that Ben Franklin Bank currently maintain certain capital levels, the new rules described above, the new rules will impact Ben Franklin Bank and Ben Franklin Financial if the Consent Order is terminated. The application of more stringent capital requirements for Ben Franklin Bank and Ben Franklin Financial could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions such as the inability to pay dividends or repurchase shares if we were to be unable to comply with such requirements.

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

The Dodd-Frank Act has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect our operations by increasing ongoing compliance costs and restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.

If the Federal Reserve Board increases the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Changes in laws and regulations may increase our costs of compliance which may adversely affect our operations and our income.

In response to the financial crisis of 2008 and early 2009, Congress has taken actions that are intended to increase confidence and encourage liquidity in financial institutions, and the Federal Deposit Insurance Corporation has taken actions to increase insurance coverage on deposit accounts. In addition, there have been proposals made by members of Congress and others that would reduce the amount delinquent borrowers are otherwise contractually obligated to pay on their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral.

Moreover, bank regulatory agencies have responded aggressively to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. Bank regulatory agencies, such as the OCC and the Federal Deposit Insurance Corporation, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In addition, new laws and regulations are likely to increase our costs of regulatory compliance and costs of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge, and our ongoing operations, costs and profitability. Further, legislative proposals limiting our rights as a creditor could result in credit losses or increased expense in pursuing our remedies as a creditor. Regulations limit interchange fees for banks with assets of more than $10 billion. It is unclear whether in the future these limits will apply to smaller banks such as Ben Franklin Bank.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial

 

 

Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.

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

As a result of the completion of the offering, we became a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.

We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of: fraud by employees or persons outside our company; the execution of unauthorized transactions by employees; errors relating to transaction processing and technology; breaches of the internal control systems and compliance requirements; and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to negative publicity. In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in violations of consumer privacy laws including the Gramm-Leach-Bliley Act, cause significant liability to us and give reason for existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage and potential liability, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

 

 

Proposed and final regulations could restrict our ability to originate and sell loans.

The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:

 

 

 

 

Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive/and or time consuming to make these loans, which could limit our growth or profitability.

 

 

None

 

Properties

We operate from our main office in Arlington Heights, Illinois and our branch office in Rolling Meadows, Illinois. Set forth below is information related to our headquarters and branch locations. The net book value of our facilities was $1.0 million at December 31, 2016. The net book value of our real property described below in the table is as of December 31, 2016.

 

The net book value of our furniture, fixtures, and equipment (including computer software) at December 31, 2016 was $173,000.

 

As of the date of this annual report, we were not involved in any pending legal proceedings other than routine proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which management believes are immaterial to our financial condition, our results of operations and our cash flows.

 

Not applicable.

 

 

PART II

 

Our shares of common stock are quoted on the OTC Pink Marketplace under the symbol “BFFI”. The approximate number of shareholders of record of the Company common stock as of March 29, 2017 was 111. On that same date there were 710,038 shares of common stock outstanding.

The following table presents the high and low bid quotations for Company’s common stock for the years ended December 31, 2016 and 2015. The stated high and low bid quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions. We have never paid a dividend on our common stock. We have adjusted the share prices for 2014 to reflect the 0.3562 exchange ratio. The Company began trading on the OTC Pink Marketplace on January 23, 2015.

 

The Company adopted board resolutions requested by the Federal Reserve Board which, among other things, prohibit us from paying dividends without prior written approval from the Federal Reserve Board. We cannot determine when the Company will no longer be subject to the conditions of the board resolutions. See “Supervision and Regulation—Consent Order and Board Resolutions.”

We do not intend to pay dividends until such time as we are generating sufficient net income to support our strategic growth plan and the payment of any such dividends. In determining whether to pay a cash dividend and the amount of such cash dividend, the board of directors is expected to take into account a number of factors, including regulatory capital requirements, our financial condition and results of operations, other uses of funds for the long-term value of stockholders, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future.

 

 

The declaration of dividends on our shares of common stock is subject to statutory and regulatory requirements. Specifically, the Federal Reserve Board has issued a policy statement proving that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Federal regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with the its capital needs and overall financial condition. In addition, the Company will be subject to Maryland state law limitations on the payment of dividends. Further, the Company will not be permitted to pay dividends on its common stock if its stockholders’ equity would be reduced below the amount of the liquidation account established by the Company in connection with the conversion.

Dividends we can declare and pay to our stockholders will depend, in part, upon receipt of dividends from Ben Franklin Bank, because initially we will have no source of income other than dividends from Ben Franklin Bank, earnings from the investment of proceeds from the sale of shares of common stock, and interest payments received in connection with the loan to the employee stock ownership plan. Ben Franklin Bank will not be permitted to make a capital distribution to the Company if, after making such distribution, it would be undercapitalized. Ben Franklin Bank must generally file an application with the OCC for approval of a capital distribution if the total capital distributions for the applicable calendar year exceed the sum of Ben Franklin Bank’s net income for that year to date plus its retained net income for the preceding two years or Ben Franklin Bank would not be at least adequately capitalized following the distribution. In addition, any payment of dividends by Ben Franklin Bank to Ben Franklin Financial that would be deemed to be drawn from Ben Franklin Bank’s bad debt reserves established prior to 1988, if any, would require a payment of taxes at the then-current tax rate by Ben Franklin Bank on the amount of earnings deemed to be removed from the pre-1988 bad debt reserves for such distribution. Ben Franklin Bank does not intend to make any distribution that would create such a federal tax liability. For further information concerning additional federal law and regulations regarding the ability of Ben Franklin Bank to make capital distributions, including the payment of dividends to the Company, see “Taxation—Federal Taxation” and “Regulation and Supervision—Capital Distributions.”

The Company files a consolidated federal tax return with Ben Franklin Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal tax purposes. Additionally, pursuant to Federal Reserve Board regulations, during the three-year period following the conversion, we will not make any capital distribution to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

The Company repurchased 1,920 shares of its common stock during 2016 pursuant to the repurchase requirements of the Company's Employee Stock Ownership Plan for employees entitled to a distribution form the Plan.

 

 

The following tables set forth selected consolidated historical financial and other data of the Company and subsidiaries for the years and at the dates indicated. The following information is only a summary, and should be read in conjunction with the business and financial information contained elsewhere in this annual report. The information at and for the years ended December 31, 2016 and 2015 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of the Company, beginning at page 61 of this annual report. The information at and for the year ended December 31, 2014 is derived in part from audited financial statements that are not included in this annual report.

 

 

 

 

 

This section is intended to help potential investors understand the financial performance of the Company and its subsidiaries through a discussion of the factors affecting our financial condition at December 31, 2016 and 2015 and our results of operations for the years ended December 31, 2016 and 2015. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear beginning on page 61 of this annual report. The Company had not engaged in any activities at December 31, 2015; therefore, the information reflected in this section reflects the financial performance of Ben Franklin-Federal and subsidiaries.

Overview

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets (primarily cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting of deposits. Our results of operations also are affected by provisions for loan losses, noninterest income, and noninterest expense. Noninterest income consists of fees and service charges and other income. Noninterest expense consists of employee compensation and benefits, occupancy and equipment, data processing, professional fees, expenses associated with managing and working out our repossessed assets, FDIC assessments and other expenses.

We have recorded net losses in each of the years from 2008 through 2016. The primary reasons for our net losses during the years 2008 through 2012 were increases in non-performing assets due to the severe recession that began in 2008, which resulted in increases in loans charged off and provisions for loan losses. We also experienced increases in non-interest expenses, including expenses associated with managing and working out our repossessed assets, and regulatory compliance. In past three years, we have also experienced the decrease in interest income due to the decrease in the balance of our loan portfolio. Our efforts to address the credit related losses has result in the decrease in our non-performing assets from a peak of $6.7 million, or 5.81% of total assets at December 31, 2010, to $2.3 million, or 2.7% of total assets, at December 31, 2016. In addition, the provision for loan losses has decreased from a peak of $1.9 million for the year ended December 31, 2012, to a $128,000 credit for the year ended December 31, 2016.

Despite the improvements in asset quality, we have continued to record net losses. Net losses equaled $1.3 million for 2016 and $1.0 million for 2015. The primary reason for our continued losses is a reduction in net interest income due to a decrease in the size of our loan portfolio, ongoing costs to resolve our non-performing assets, and in 2015 and 2016 the additional costs associated with being a public company. Our asset size has decreased over the past several years primarily due to the decrease in the size of our loan portfolio. During the fourth quarter of 2016, we began to reverse the trend in our loan portfolio decline as our internal originations and purchases resulted in an increase in our loan portfolio balance to $62.3 million, a $4.8 million increase over the prior year-end balance.  Our efforts to resolve the requirements under the Old Order we entered into with the OCC on December 19, 2012 resulted in the Bank entering into the New Consent Order on November 25, 2015 that significantly reduces the Bank’s regulatory compliance burden focuses primarily on the Bank’s strategic and capital planning. 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 Consent 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. See “Supervision and Regulation—Consent Order and Board Resolutions.”

As with most financial institutions, our results of operations have also been impacted by the increased cost of operating in today’s regulatory environment. Our costs have also increased with the cost of being a public company. We do not believe that we can materially reduce certain noninterest expenses in the current environment without impairing our customer service, competitiveness and our ability to maintain regulatory compliance. Our results of operations will be negatively impacted until we are able to increase our net interest income relative to our noninterest expense. Accordingly, we have adopted a strategic plan to increase our net interest income by growing our earnings base, especially the size of our loan portfolio and reducing levels of non-interest expense.

 

 

Business Strategy

Our principal objective is to build long-term value for our stockholders by operating a community-oriented financial institution. We understand the financial needs of our local customers and we offer a broad range of financial products and services specifically designed to meet those needs. To further this key strategy, we seek opportunities to deepen our existing customer relationships and to establish our brand in areas of the community where we are not yet well recognized. Our board of directors has also recently amended our strategic plan.  Our primary objective is to increase our net interest income by growing our loan portfolio through a combination of our origination efforts and through the acquisition of loan pools from other sources.  In an effort to meet our internal growth assumptions we replaced our senior lender and added a residential lending officer and have developed referral sources to help us meet our multi-family real estate production goals.  These changes and the resulting impact on our loan portfolio took longer than anticipated and resulted in a higher than projected loss for 2016.  The board of directors realize that it will take a significant amount of time for us to accomplish our growth objective and that meeting the capital requirements of the New Order requires that alternative strategies need to be explored including the need for additional capital which may not be available at a cost consistent with the successful implementation of our strategic plan.

Based on the above, we do not anticipate net income until we experience significant growth in our earning assets base pursuant to our business plan. Assuming the successful execution of our business plan, we expect that we will return to profitability for the year ending December 31, 2019. 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

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012. As an emerging growth company, we can choose to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use the extended transition period to delay adoption of new or revised accounting standards applicable to public companies until such standards are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. We consider the following to be our critical accounting policies:

Allowance for Loan Losses. Our allowance for loan losses is the estimated amount considered necessary to absorb probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for Ben Franklin Bank. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the current factors assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the collateral value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan. The assumptions supporting such appraisals and discounted cash flow valuations are reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

 

 

Management performs a quarterly evaluation of the allowance for loan losses. The allowance of loan losses has two components: specific and general. The specific component relates to loans that are individually classified as impaired. The allowance related to impaired loans is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and estimated selling expenses. The general portion of the allowance is determined by historical loss experience and consideration of a variety of current factors including, but not limited to; levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on new information as it becomes known. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis measured using enacted tax rates. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. We have established a full valuation allowance for our deferred tax assets. Our assessment of our ability to realize the deferred tax asset was primarily based on our net losses during recent years.

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

Assets. Total assets at December 31, 2016 were $85.3 million compared to $84.1 million at December 31, 2015, an increase of $1.2 million or 1.4%. This increase was primarily due to the $4.8 million increase in our loan portfolio, and the $706,000 increase in premises and equipment, partially offset by the $2.2 million decrease in the balance of our securities available for sale, the $1.0 million decrease in our cash and cash equivalents, and the $960,000 million decrease in our certificates of deposit in other financial institutions.

The $4.8 million increase in our loan portfolio during the year ended December 31, 2016 was primarily due to the $2.4 million increase in our multi-family loan portfolio, the $1.4 million increase in our commercial real estate loan portfolio and the $796,000 increase in our home equity line of credit loan portfolio.  The increases were primarily due to the $16.5 million of new loans originated and purchased exceeding repayments during the year.  During the fourth quarter of 2016, our originations and purchases totaled $9.5 million, a result of changes to lending personnel and products that were implemented during the year.

At December 31, 2016 our allowance for loan losses was $904,000 or 1.43% of total loans compared to the $991,000 or 1.69% of total loans at December 31, 2015. Our allowance reflected a credit for loan losses of $128,000 for the year.  This credit included the effect of recoveries of $116,000 primarily due to the payoff settlement of a non-performing loan at a discounted amount, resulting in a recovery of $88,000, partially offset by $75,000 of loans charged-off for the year ended December 31, 2016.  Our loans classified as substandard or doubtful increased to $1.9 million or 2.9% of total loans at December 31, 2016 compared to $1.4 million or 2.5% of total loans at December 31, 2015 primarily due to the addition of two loans totaling $783,000, partially offset by the transfer to other repossessed assets of one loan with a balance of $293,000.  Our loans classified as troubled debt restructurings (“TDRs”) totaled $1.6 million at December 31, 2016 of which $1.2 million were accruing compared to $2.0 million of TDRs at December 31, 2015 of which $1.9 million were accruing.  The decrease in our TDRs was primarily due to the discounted loan payoff. Our allowance for loan losses reflects the improving credit quality of our loan portfolio, the decreasing historical losses, and the continued recoveries of prior charge-offs.

Our securities portfolio decreased $2.2 million or 21.4% to $8.2 million at December 31, 2016 primarily due to the call of $8.0 million of callable government sponsored entities notes, repayments on mortgage-backed securities, and the increase in the unrealized loss on our fixed rate securities as market rates began to rise at the end of 2016. These decreases were partially offset by the purchase of $4.0 million of callable government sponsored entities notes and a $1.0 million fixed rate residential mortgage-backed security.   Our cash and cash equivalents decreased $1.0 million or 11.1% to $8.2 million at December 31, 2016 primarily due to the funding of new loan originations and purchases at the end of 2016.

 

 

Our repossessed assets decreased $68,000 for the twelve months ended December 31, 2016, primarily due the $68,000 partial write-down of a commercial real estate property. During 2016, one loan secured by a residential property with a value of $292,000 was foreclosed and an automobile with a value of $5,000 was repossessed and both were transferred to other repossessed assets.  The property and the repossessed automobile were sold in 2016 resulting in a combined net gain of $53,000.

Our premise and equipment increase $706,000 primarily due to the leasehold improvements for our branch office, which was relocated within the existing retail center, and other furniture and equipment.  The new office opened in July of 2016.  The leasehold improvement costs for the new office totaled $694,000.

Liabilities. Our total liabilities increased $2.5 million or 3.4% to $77.2 million at December 31, 2016 primarily due to the $2.0 million increase in our Federal Home Loan Bank borrowings at the end of 2016 that were used to fund the increase in our loan portfolio.  Our deposits increased by $474,000 or 0.6% to $74.0 million at December 31, 2016 compared to $73.6 million at December 31, 2015. During the fourth quarter of 2016, our certificates of deposits increased $2.1 million primarily due to the promotion of a high yielding certificate account.  The funds from this promotion are expected to be used for future loan growth. 

Stockholders’ Equity. Total stockholders’ equity at December 31, 2016 was $8.1 million, a decrease of $1.3 million or 14.1% from December 31, 2015. The decrease resulted primarily from the $1.3 million loss for the year ended December 31, 2016.

Comparison of Operating Results for the Years ended December 31, 2016 and December 31, 2015

General. For the year ended December 31, 2016 our net loss was $1.3 million compared to a net loss of $1.0 million for the year ended December 31, 2015. The increase in our net loss was primarily due to the decrease in our non-interest income and an increase in our non-interest expenses, partially offset by an increase in our credit for loan losses.

Interest Income. Interest income was $3.0 million for the year ended December 31, 2016, $28,000 or 0.9% less than the 2015. Interest income from loans decrease $63,000 or 2.2% to $2.8 million for the year ended December 31, 2016. The decrease in interest income from loans was primarily due to the $1.0 million decrease in the average balance of our loan portfolio to $56.3 million for the year ended December 31, 2016 compared to $57.3 million for the prior year period and a $73,000 charge during the second quarter related to changes in processing for certain loan payments. The decrease in the average balance of loans was due to repayments, pay-offs, transfers of loans to repossessed assets, and low origination volume for loans during the first three quarters of 2016. The decrease included a $1.8 million decrease in the average balance of our one- to four- family residential loan portfolio and a $1.2 million decrease in the average balance of our home equity line of credit portfolio, partially offset by, a $2.1 million increase in the average balance of our multi-family and commercial real estate loan portfolio. The average yield of our loan portfolio was 4.89% for the year December 31, 2016 compared to 4.92% for 2015.

Interest income from securities was $134,000 for the year ended December 31, 2016 compared to $131,000 the prior year period. The average balance of our securities portfolio decreased $658,000 to $9.4 million for the year ended December 31, 2016 compared to the prior year period. The average yield on securities for the year ended December 31, 2016 was 1.43% compared to 1.30% for the prior year period.  Interest income from interest earning deposits increased to $85,000 for the year ended December 31, 2016 compared to $53,000 the prior year period. The average balance of our interest earning deposits decreased $4.5 million to $13.2 million for the year ended December 31, 2016 compared to 2015 primarily due to the funding of our loan portfolio growth.  The yield on our interest earning deposits was 0.64% for the year ended December 31, 2016 compared to 0.30% during 2015 due to the increase in the average balance of our certificates of deposit with other financial institutions.

 

 

Interest Expense. Interest expense for the year ended December 31, 2016 was $318,000, a decrease of $48,000 or 13.1% from 2015 primarily due to the decrease in interest expense on deposits. The average balance of our deposits decreased $4.8 million or 6.8% primarily due to the $4.9 million or 12.8% decrease in the average balance of our certificate of deposit accounts to $33.4 million.  We did not aggressively price our certificate of deposit accounts until the end of the year when loan production volumes began to increase.  The average cost of deposits decreased to 0.47% for the year ended December 31, 2016 compared to 0.51% for 2015.

Net Interest Income. Net interest income for the year ended December 31, 2016 was $2.7 million compared to $2.6 million for the year ended December 31, 2015, an increase of $20,000 or 0.8%. For the year ended December 31, 2016, the average yield on interest-earning assets was 3.77% and the average cost of interest-bearing liabilities was 0.47% compared to 3.53% and 0.51%, respectively, for the year ended December 31, 2015. The increase in the average yield of our interest earning assets was primarily due to the decrease in the average balance of our lower yielding interest earning deposit accounts. These changes resulted in an increase in our net interest rate spread and net interest margin to 3.29% and 3.37%, respectively for the year ended December 31, 2016 compared to a net interest rate spread of 3.02% and net interest margin of 3.10% for 2015.

Provision for Loan Losses. We had a $128,000 credit for loan losses for the year ended December 31, 2016 compared to a $40,000 credit for the year ended December 31, 2015. The credits reflect the continued recoveries of prior charge-offs. At December 31, 2016, management concluded that the balance in our allowance for loan losses appropriately reflected the probable incurred credit losses in the portfolio based on an analysis of the Bank’s historical loss history and other current factors including market values and current economic conditions and trends.

Non-interest Income. For the year ended December 31, 2016, non-interest income was $165,000 compared to $323,000 for the year ended December 31, 2015 primarily due to the $53,000 net gain on the sale of a single family residential properties and a repossessed automobile for 2016, compared to the $175,000 net gains on sales for the prior year period which included the sale of two single family residential properties and three repossessed automobiles. Fees for originating loans for other financial institutions decreased $26,000 for the year ended December 31, 2016 compared to the prior year period primarily due to the $1.7 million decrease in originations. 

Non-interest Expense. For the year ended December 31, 2016, our non-interest expense totaled $4.2 million compared to $4.0 million for the year ended December 31, 2015, an increase of 3.7%. Our professional fees increased $83,000 primarily due to an increase in accounting and legal fees. Our repossessed asset expense increased $63,000 primarily due to the $68,000 partial write-downs for real estate properties during 2016. Other expenses increased $176,000 primarily due to: the $80,000 increase in costs related to problem loans; the $40,00 operational loss which was below our insurance deductible; the $30,000 increase in marketing costs related to the opening of our relocated branch office; and the $30,000 increase in our provision for off-balance sheet commitments.  Our occupancy expense increased $50,000 primarily due to the increase in depreciation for the improvements and other equipment costs for our relocated branch office.  These increases were partially offset by the $179,000 decrease in our compensation and employee benefit expense primarily due to salary adjustments and staff changes. 

Income Tax. We recorded immaterial amounts for income taxes for the year ended December 31, 2016 and 2015.

 

 

Average Balances and Yields

The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. No tax-equivalent yield adjustments were made, as we had non-taxable interest-earning assets during the years presented. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred loan fees, discounts and premiums that are amortized or accreted to interest income or interest expense.

 

 

 

 

Rate/Volume Analysis

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

 

Management of Market Risk

Our asset/liability management strategy attempts to manage the impact on net interest income, our primary source of earnings, of changes in interest rates. An important measure of interest rate risk is the amount by which the net present value of an institution’s cash flow from assets, liabilities and off balance sheet items (the institution’s net portfolio value or “NPV”) changes in the event of a range of assumed changes in market interest rates. We have utilized an internal model to provide an analysis of estimated changes in our NPV under the assumed instantaneous changes in the United States Treasury yield curve. This financial model uses a discounted cash flow analysis for measuring the interest rate sensitivity of the NPV. Set forth below is an analysis of the estimated changes that would occur to our NPV as of December 31, 2016 in the event of designated changes in the United States Treasury yield curve.

 

 

 

Management also uses an internal model to forecast the impact of changes in market interest rates on the Bank’s net interest income over a twelve month time horizon. Set forth below is an analysis of the estimated changes that would occur to our net interest income for the twelve months ended December 31, 2016 in the event of designated changes in the United States Treasury yield curve.

 

 

Certain shortcomings are inherent in the methodology used in both of the interest rate risk measurement models above. Modeling changes in net portfolio value or net interest income requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value and net interest income tables presented above assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value and net interest income tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net portfolio value or net interest income, and the changes shown in the tables above will differ from actual results.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

 

 

Our cash flows are comprised of three primary classifications: (i) cash flows from operating activities, (ii) investing activities, and (iii) financing activities. Net cash flows from operating activities for the years ended December 31, 2016 and 2015 were ($1.1) million and ($24,000). Net cash from investing activities consisted primarily of disbursements for loan originations, investment security purchases, and investments in certificates of deposit in other financial institution purchases, offset by principal collections on loans, payments on investment securities, and sales of repossessed assets. Net cash flows from investing activities for the years ended December 31, 2016 and 2015 were ($2.4) million and ($5.5) million. Net cash from financing activities consisted primarily of activity in deposits and escrow accounts and in 2016, from the net proceeds of our stock offering and Federal Home Loan Bank advances. Net cash flows from financing activities for the years ended December 31, 2016 and 2015 were ($2.5) million and ($4.3) million.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. At December 31, 2016, cash and cash equivalents totaled $8.2 million. We may also utilize the sale of securities available-for-sale, federal funds purchased, Federal Home Loan Bank of Chicago advances and other borrowings as sources of funds.

At December 31, 2016, we had $6.9 million of outstanding commitments for unused lines of credit. Loan commitments have, in recent periods, been funded through liquidity and normal deposit flows. We anticipate that we will have sufficient funds available to meet our current loans commitments. Certificates of deposit scheduled to mature in one year or less from December 31, 2016 totaled $22.2 million. Management believes, based on past experience, that a significant portion of such deposits will remain with us. Based on the foregoing, in addition to our level of core deposits and capital, we consider our liquidity and capital resources sufficient to meet our outstanding short-term and long-term needs.

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, Federal funds sold, and mortgage-backed securities of short duration. If we require funds beyond our ability to generate them internally, we have additional borrowing capacity with the Federal Home Loan Bank of Chicago.

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

Quantitative measures established by regulation to help ensure capital adequacy require Ben Franklin 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, Ben Franklin Bank entered into the New Order with the OCC (see “Supervision and Regulation—Consent Order and Board Resolutions”) which among other things included a requirement to maintain a total risk-based capital ratio of at least 12% and a minimum Tier 1 leverage capital ratio of at least 8%. Ben Franklin Bank’s capital classification under the Prompt Corrective Action rules was “adequately capitalized” at December 31, 2016. At December 31, 2016, the Bank met the requirements of the minimum capital ratios of the New Order.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see note 11 of the notes to the consolidated financial statements beginning on page 88.

 

 

For the years ended December 31, 2016 and 2015, we did not engage in any off-balance-sheet transactions other than loan origination commitments and unused lines of credit in the normal course of our lending activities.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements that are applicable to Ben Franklin Financial, please see Note 1 of the notes to the consolidated financial statements beginning on page 66.

Effect of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented herein regarding Ben Franklin-Federal have been prepared in accordance with accounting principles generally accepted in the United States of America, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of Ben Franklin-Federal’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on Ben Franklin-Federal’s performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, because such prices are affected by inflation to a larger extent than interest rates.

 

Not required for smaller reporting companies.

 

 

Description​

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Ben Franklin Financial, Inc.

Arlington Heights, Illinois

We have audited the accompanying consolidated statements of financial condition of Ben Franklin Financial, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our audit included consideration of internal control over financial reporting as a basis of designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ben Franklin Financial, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

 

        Crowe Horwath LLP

Oak Brook, Illinois

March 29, 2017

 

 

 

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands except per share amounts)

 

		December 31,
		2016				2015
ASSETS
Cash and due from banks		$	2,903			$	958
Interest-earning deposit accounts and federal funds sold			5,329				8,307
Cash and cash equivalents			8,232				9,265
Certificates of deposit in other financial institutions			3,675				4,635
Securities available-for-sale at fair value			8,240				10,484
Loans receivable, net (allowance for loan losses: 2016 - $904; 2015 - $991			62,348				57,536
Federal Home Loan Bank stock			921				921
Premises and equipment, net			1,181				475
Repossessed assets, net			408				476
Accrued interest receivable			176				185
Other assets			84				80
Total assets		$	85,265			$	84,057
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Non-interest-bearing		$	4,852			$	4,569
Interest bearing			69,179				68,988
Total deposits			74,031				73,557
Federal Home loan Bank advances			2,000				—
Advances from borrowers for taxes and insurance			557				559
Other liabilities			435				387
Common stock in ESOP subject to contingent purchase obligation			169				155
Total liabilities			77,192				74,658
Stockholders’ equity
Preferred stock, no par value; 1,000,000 authorized shares; no shares issued and outstanding 2016 and 2015			—				—
Common stock, par value $0.01 per share; authorized 20,000,000 shares; issued and outstanding, net of treasury shares – 694,419 shares at December 31, 2016 and 696,339 shares December 31, 2015			7				7
Additional paid-in-capital			10,260				10,308
Retained deficit			(1,437	)			(177	)
Unearned Employee Stock Ownership Plan (ESOP) shares			(500	)			(563	)
Accumulated other comprehensive loss			(88	)			(21	)
Reclassification of ESOP shares			(169	)			(155	)
Total equity			8,073				9,399
Total liabilities and stockholders’ equity		$	85,265			$	84,057

 

See accompanying notes to financial statements

 

 

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share amounts)

 

 

See accompanying notes to financial statements

 

 

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands)

 

		Year Ended December 31,
		2016				2015
Net loss		$	(1,260	)		$	(1,032	)
Other comprehensive loss
Unrealized holding losses arising during the period			(111	)			(38	)
Tax effect			(44	)			(15	)
Total net comprehensive loss			(67	)			(23	)
Comprehensive loss		$	(1,327	)		$	(1,055	)

 

See accompanying notes to financial statements

 

 

 

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

 

 

See accompanying notes to financial statements

 

 

BEN FRANKLIN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

 

See accompanying notes to financial statements

 

 

BEN FRANKLIN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2016 and 2015

(Dollars in thousands except per share data)

 

 

 

 

(Continued)

 

 

BEN FRANKLIN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2016 and 2015

(Dollars in thousands except per share data)

 

 

 

(Continued)

 

 

BEN FRANKLIN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2016 and 2015

(Dollars in thousands except per share data)

 

 

 

(Continued)

 

 

BEN FRANKLIN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2016 and 2015

(Dollars in thousands except per share data)

 

 

NOTE 4 - LOANS RECEIVABLE (Continued)

(Continued)

 

 

BEN FRANKLIN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2016 and 2015

(Dollars in thousands except per share data)

 

 

(Continued)

 

 

BEN FRANKLIN FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Years Ended December 31, 2016 and 2015

(Dollars in thousands except per share data)

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable

 

Item 9A.

Controls and Procedures

 

(a)

Evaluation of disclosure controls and procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer, and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2016. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

(b)

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our system of internal control is designed under the supervision of management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).

 

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets, provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Boards of Directors of the Company and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.

 

As of December 31, 2016, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework established in 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon its assessment, management believes that the Company’s internal control over financial reporting as of December 31, 2016 is effective using these criteria.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to provisions of the Dodd-Frank Act that permit the Company to provide only management’s report in this annual report.

(c)

Changes in internal controls

There were no significant changes made in our internal control over financial reporting during the Company’s fourth quarter of the year ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B.

Other Information

Not Applicable

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

The “Proposal I—Election of Directors” section of the Company’s definitive proxy statement for the Company’s 2016 Annual Meeting of Shareholders (the “2016 Proxy Statement”) is incorporated herein by reference.

 

Item 11.

Executive Compensation

The “Proposal I—Election of Directors” section of the Company’s 2016 Proxy Statement is incorporated herein by reference.

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The “Proposal I—Election of Directors” section of the Company’s 2016 Proxy Statement is incorporated herein by reference.

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

The “Transactions with Certain Related Persons” section of the Company’s 2016 Proxy Statement is incorporated herein by reference.

 

Item 14.

Principal Accountant Fees and Services

The “Proposal II – Ratification of Appointment of Independent Registered Public Accounting Firm” Section of the Company’s 2016 Proxy Statement is incorporated herein by reference.

 

PART IV

Item 15.

Exhibits and Financial Statement Schedules

 

(a)(1)

Financial Statements

The following are filed as a part of this report by means of incorporation by reference to Ben Franklin Financial, Inc.’s 2016 Annual Report to Stockholders:

(A)

Report of Independent Registered Public Accounting Firm

 

(B)

Consolidated Statements of Financial Condition - at December 31, 2016 and 2015

 

(C)

Consolidated Statements of Operations - Years ended December 31, 2016 and 2015

 

(D)

Consolidated Statements of Comprehensive Loss – Years ended December 31, 2016 and 2015

 

(E)

Consolidated Statements of Cash Flows - Years ended December 31, 2016 and 2015

 

(F)

Notes to Consolidated Financial Statements.

 

(a)(2)

Financial Statement Schedules

None.

(a)(3)

Exhibits

 

(1)	Incorporated by reference to the Registration Statement on Form S-1 (Registration No. 333-198702), originally filed with the Securities and Exchange Commission on September 9, 2014, as amended.

(2)	Incorporated by reference to the Registration Statement on Form SB-2 (Registration No. 333-135562), originally filed with the Securities and Exchange Commission on June 30, 2006, as amended

(3)	Incorporated by reference to Appendix A to the Definitive Proxy Statement filed on February 6, 2008 (File No. 000-52240).

(4)	Incorporated by reference to the Current Report on Form 8-K filed on May 15, 2008 (File No. 000-52240).

(5)	Incorporated by reference to Appendix A to the Definitive Proxy Statement filed on April 11, 2016 (File No. 000-55352)

 

Item 16.

Form 10-K Summary

None

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 25, 2017				By:		/s/ C. Steven Sjogren
						C. Steven Sjogren
						President and Chief Executive Officer
						(Duly Authorized Representative)

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures		Title		Date
/s/ C. Steven Sjogren C. Steven Sjogren		President, Chief Executive Officer and Chairman (Principal Executive Officer)		March 29, 2017
/s/ Glen A, Miller Glen A. Miller		Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)		March 29, 2017
/s/ Robert A. Kotecki Robert A. Kotecki		Director		March 29, 2017
/s/ Nicholas J. Raino Nicholas J. Raino		Director		March 29, 2017
/s/ James M. Reninger James M. Reninger		Director		March 29, 2017
/s/ David R. Stafseth David R. Stafseth		Director		March 29, 2017

 

103

---