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EX-99.4 - EX-99.4 - Ben Franklin Financial, Inc.d781983dex994.htm
Table of Contents

As filed with the Securities and Exchange Commission on October 29, 2014

Registration No. 333-198702

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

PRE-EFFECTIVE AMENDMENT NO. 1

TO THE

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Ben Franklin Financial, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland   6712   61-1746204
(State or Other Jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
Incorporation or Organization)   Classification Code Number)   Identification Number)

830 East Kensington Road

Arlington Heights, Illinois 60004

(847) 398-0990

(Address, Including Zip Code, and Telephone Number, Including Area Code, of

Registrant’s Principal Executive Offices)

 

 

Mr. C. Steven Sjogren

Chairman, President and Chief Executive Officer

830 East Kensington Road

Arlington Heights, Illinois 60004

(847) 398-0990

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Kip Weissman, Esq.

Michael Brown, Esq.

Luse Gorman Pomerenk & Schick, P.C.

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

(202) 274-2000

 

Daniel C. McKay, II

Jennifer Durham King

Vedder Price

222 North LaSalle Street
Chicago, Illinois 60601

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  x

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

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   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Amount to be
registered
  Proposed maximum
offering price per
share
  Proposed maximum
aggregate offering
price
  Amount of
registration fee

Common Stock, $0.01 par value per share

  998,488 shares   $10.00   $ 9,984,880 (1)   $ 1,287 (2)

 

 

(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

PROSPECTUS

BEN FRANKLIN FINANCIAL, INC.

(Proposed Holding Company for Ben Franklin Bank of Illinois)

Up to 486,828 Shares of Common Stock

(Subject to Increase to up to 559,852 Shares)

 

 

Ben Franklin Financial, Inc., a Maryland corporation, is offering up to 486,828 shares of common stock for sale at $10.00 per share on a best efforts basis in connection with the conversion of Ben Franklin Financial, MHC from the mutual holding company to the stock holding company form of organization. The shares we are offering represent the ownership interest in Ben Franklin Financial, Inc., a federal corporation, currently held by Ben Franklin Financial, MHC. In this prospectus, we refer to Ben Franklin Financial, Inc., the Maryland corporation, as “New Ben Franklin,” and we refer to Ben Franklin Financial, Inc., the federal corporation, as “Old Ben Franklin.” Old Ben Franklin owns all of the outstanding shares of common stock of Ben Franklin Bank of Illinois, a federal savings bank which we will refer to as “Ben Franklin Bank” or the “Bank”, and will be succeeded by New Ben Franklin upon completion of the conversion. Transactions in Old Ben Franklin’s common stock are currently quoted on the OTCQB tier operated by OTC Markets Group, Inc. under the symbol “BFFI,” and we expect transactions in the shares of New Ben Franklin common stock will be quoted on the OTC Pink tier operated by OTC Markets Group, Inc. under the symbol “BFFI.” We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

The shares of common stock are first being offered in a subscription offering to eligible depositors of Ben Franklin Bank, and to the tax-qualified employee benefit plans of Ben Franklin Bank. Shares not purchased in the subscription offering may be offered for sale to the public in a community offering, with a preference given to natural persons (including trusts of natural persons) residing in Cook County, Illinois and then to public stockholders of Old Ben Franklin. We also may offer for sale shares of common stock not purchased in the subscription or community offerings through a syndicate of broker-dealers, referred to in this prospectus as the syndicated offering. The syndicated offering may commence before the subscription and community offerings (including any extensions) have expired. However, no shares purchased in the subscription offering or the community offering will be issued until the completion of any syndicated offering.

We must sell a minimum of 359,829 shares in order to complete the offering and the conversion. We may sell up to 559,852 shares of common stock because of demand for the shares of common stock or changes in market conditions, without resoliciting subscribers.

In addition to the shares we are selling in the offering, the shares of Old Ben Franklin held by the public will be exchanged for shares of common stock of New Ben Franklin based on an exchange ratio that will result in the public stockholders of Old Ben Franklin owning approximately the same percentage of New Ben Franklin common stock as they owned of Old Ben Franklin common stock immediately prior to the completion of the conversion. We will issue up to 381,424 shares in the exchange, which may be increased to up to 438,636 shares if we sell 559,852 shares of common stock in the offering.

The minimum order is 25 shares. The subscription offering and community offerings are expected to expire at 12:00 noon, Central Time, on December 17, 2014. We may extend this expiration date without notice to you until January 31, 2015. Once submitted, orders are irrevocable unless the subscription offering and/or community offering are terminated or extended, with regulatory approval, beyond January 31, 2015, or the number of shares of common stock to be sold is increased to more than 559,852 shares or decreased to less than 359,829 shares. If the offering is extended past January 31, 2015, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest at [interest rate]% per annum or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 559,852 shares or decreased to less than 359,829 shares, we will resolicit subscribers, and all funds received for the purchase of shares of common stock will be returned promptly with interest. Funds received in the subscription and the community offerings will be held in a segregated account at Ben Franklin Bank and will earn interest at [interest rate]% per annum until completion or termination of the offering.

Sterne, Agee & Leach, Inc., will assist us in selling the shares on a best efforts basis in the subscription and community offerings, and will serve as sole book-running manager for any syndicated offering. Sterne, Agee & Leach, Inc. is not required to purchase any shares of common stock offered for sale in the subscription and community offerings.

OFFERING SUMMARY

Price: $10.00 per Share

 

     Minimum      Midpoint      Maximum      Adjusted
Maximum
 

Number of shares

     359,829         423,329         486,828         559,852   

Gross offering proceeds

   $ 3,598,290       $ 4,233,290       $ 4,868,280       $ 5,598,520   

Estimated offering expenses, excluding selling agent and underwriters’ commissions and expenses (1)

   $ 804,500       $ 804,500       $ 804,500       $ 804,500   

Selling agent and underwriters’ commissions and expenses (2)

   $ 305,000       $ 305,000       $ 305,000       $ 305,000   

Selling agent and underwriters’ commissions and expenses per share (2)

   $ 0.85       $ 0.72       $ 0.63       $ 0.54   

Estimated net proceeds

   $ 2,488,790       $ 3,123,790       $ 3,758,780       $ 4,489,020   

Estimated net proceeds per share (2)

   $ 6.92       $ 7.38       $ 7.72       $ 8.02   

 

(1) Includes $35,000 payable to Sterne, Agee & Leach, Inc. for records management services.
(2)

The amounts shown assume that all of the shares are sold in the subscription and/or community offerings. See “The Conversion and Offering—Plan of Distribution; Selling Agent and Underwriter Compensation” for information regarding compensation to be received by Sterne, Agee & Leach, Inc. in the subscription and community offerings and the compensation to be received by Sterne, Agee & Leach, Inc., and the other broker-dealers that may participate in a syndicated community offering. If all shares of common stock were sold in the syndicated community offering, excluding insider purchases and shares purchased by our employee stock ownership plan, for which no fee will be paid, the selling agent and broker-dealers’


Table of Contents
  commissions and expenses would be approximately $305,000, $305,000, $334,850 and $375,600, or approximately $0.82, $0.72, $0.69 and $0.67 per share, at the minimum, midpoint, maximum and adjusted maximum levels of the offering, respectively. In addition, if all of the shares were sold in the syndicated community offering, the estimated net proceeds would be approximately $2.5 million, $3.1 million, $3.7 million, and $4.4 million, or approximately $6.92, $7.38, $7.66, and $7.89 per share, at the minimum, midpoint, maximum and adjusted maximum levels of the offering, respectively.

This investment involves a degree of risk, including the possible loss of principal.

Please read “Risk Factors” beginning on page 17.

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Neither the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

Sterne Agee

For assistance, please contact the Stock Information Center, toll-free, at [stock center number].

The date of this prospectus is [prospectus date].


Table of Contents

 

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

RISK FACTORS

     17   

FORWARD-LOOKING STATEMENTS

     32   

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     34   

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

     42   

OUR DIVIDEND POLICY

     43   

MARKET FOR THE COMMON STOCK

     45   

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

     46   

CAPITALIZATION

     47   

PRO FORMA DATA

     48   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     54   

BUSINESS OF NEW BEN FRANKLIN AND OLD BEN FRANKLIN

     68   

BUSINESS OF BEN FRANKLIN BANK

     68   

SUPERVISION AND REGULATION

     92   

FEDERAL, STATE AND LOCAL TAXATION

     103   

MANAGEMENT

     105   

BENEFICIAL OWNERSHIP OF COMMON STOCK

     114   

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

     115   

THE CONVERSION AND OFFERING

     116   

COMPARISON OF STOCKHOLDERS’ RIGHTS FOR EXISTING STOCKHOLDERS OF OLD BEN FRANKLIN

     138   

RESTRICTIONS ON ACQUISITION OF NEW BEN FRANKLIN

     144   

DESCRIPTION OF CAPITAL STOCK OF NEW BEN FRANKLIN FOLLOWING THE CONVERSION

     148   

TRANSFER AGENT

     149   

EXPERTS

     149   

LEGAL MATTERS

     149   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     149   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

i


Table of Contents

SUMMARY

The following summary explains the significant aspects of the conversion, the offering and the exchange of existing shares of Old Ben Franklin common stock for shares of New Ben Franklin common stock. It may not contain all of the information that is important to you. Before making an investment decision, you should read this entire document carefully, including the consolidated financial statements and the notes thereto, and the section entitled “Risk Factors.”

Our Organizational Structure and the Proposed Conversion

Ben Franklin Bank became the wholly owned subsidiary of Old Ben Franklin in October 2006 when Ben Franklin Bank reorganized from a federally chartered mutual savings and loan association into the two-tiered mutual holding company structure. At June 30, 2014, Old Ben Franklin had consolidated assets of $92.1 million, total deposits of $82.0 million and total equity of $9.1 million. Old Ben Franklin’s parent company is Ben Franklin Financial, MHC, a federally chartered mutual holding company. At June 30, 2014, Old Ben Franklin had 1,949,956 shares of common stock outstanding, of which 858,894 shares, or 44.0%, were owned by the public and the remaining 1,091,062 shares of common stock of Old Ben Franklin were held by Ben Franklin Financial, MHC.

Pursuant to the terms of the plan of conversion and reorganization, we are now converting from the mutual holding company corporate structure to the fully public stock holding company corporate structure. Upon completion of the conversion, Ben Franklin Financial, MHC and Old Ben Franklin will cease to exist, and New Ben Franklin will become the successor corporation to Old Ben Franklin and the parent holding company for Ben Franklin Bank. The shares of New Ben Franklin being offered in this offering represent the majority ownership interest in Old Ben Franklin that is currently held by Ben Franklin Financial, MHC. Public stockholders of Old Ben Franklin will receive shares of common stock of New Ben Franklin in exchange for their shares of Old Ben Franklin at an exchange ratio intended to preserve the same aggregate ownership interest in New Ben Franklin as they had in Old Ben Franklin, adjusted downward to reflect certain assets held by Ben Franklin Financial, MHC. Shares of Old Ben Franklin held by Ben Franklin Financial, MHC will be cancelled.

The following diagram shows our current organizational structure, reflecting ownership percentages as of June 30, 2014:

 

LOGO

 

 

1


Table of Contents

After the conversion and offering are completed, we will be organized as a fully public holding company, as follows:

 

LOGO

Our Business

Our business operations are conducted through our wholly-owned subsidiary, Ben Franklin Bank, which 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. We conduct our business from our main office and one branch office. Both of our offices are located in the northwestern corridor of the Chicago metropolitan area.

Our principal business consists of attracting retail deposits from the general public in our market and investing those deposits, together with funds generated from operations, 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 and consumer loans. In the past we have also made construction and 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.

Ben Franklin Bank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency (the “OCC”), and New Ben Franklin will be subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System, also referred to herein as the Federal Reserve Board.

New Ben Franklin’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 prospectus.

Regulatory Matters

On December 19, 2012, Ben Franklin Bank entered into a Consent Order (the “Consent Order”) with the OCC. The Consent Order requires that the Bank take specific actions to correct certain weaknesses identified by the OCC during regulatory examinations. The OCC has also designated Ben Franklin Bank as being in “troubled condition” under the OCC’s prompt corrective action rules. Consequently, the Bank is subject to additional

 

 

2


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regulatory restrictions. In addition, pursuant to the Consent Order, the Bank has been directed by the OCC to maintain a minimum Tier 1 Leverage capital ratio of 9% and a minimum Total Risk-Based capital ratio of 13%. At June 30, 2014, Ben Franklin Bank was in compliance with the capital requirements of the Consent Order with a Tier 1 Leverage capital ratio of 9.1% and a Total Risk-Based capital ratio of 15.6%.

In addition, on March 27, 2014, Old Ben Franklin 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 Old Ben Franklin stock without prior written approval from the Federal Reserve Board.

For more information on the Consent Order and the board resolutions requested by the Federal Reserve Board, see “Supervision and Regulation—Consent Order and Board Resolutions.”

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 adopted a strategic plan to increase our net interest income by growing our loan portfolio. Since 2012, we have added three experienced commercial lenders, including the Bank’s new President, and an experienced commercial credit analyst. We have also improved our credit underwriting, review and administration policies and procedures, and have experienced a significant improvement in asset quality. As a result of our addition of experienced staff, and our improvements to our lending policies and procedures, we believe that our current infrastructure is sufficient to support an expansion of our loan portfolio without incurring significant additional operating expenses. We believe that the additional capital raised in the conversion, will allow us to refocus our lending efforts and grow our loan portfolio.

Highlights of our business strategy include:

 

    Focusing on relationship banking. We are focused on meeting the financial needs of our customer base through offering a full complement of loan, deposit and online banking solutions (including remote deposit capture and mobile banking). In recent years we have introduced new products and services in order to more fully serve and deepen the relationship with our customers. We believe that these products and services will enable us to grow our core deposit base, which generally represents a customer’s primary banking relationship. Quality customer relationships provide opportunities for cross selling products to existing customers in an effort to deepen our “share of wallet” and we intend to actively develop such opportunities. In addition, we believe our emphasis on commercial business relationships such as commercial real estate and multi-family real estate lending will provide opportunities for transaction account relationships.

 

    Growing our commercial real estate and multi-family residential real estate lending. We believe we can enhance interest income in the current interest rate environment by continuing to emphasize the origination of short-term fixed-rate and adjustable-rate commercial real estate and multi-family residential real estate loans. In addition to providing higher yields than our conforming one- to four-family loans, these shorter term and adjustable-rate loans assist us in managing our interest rate risk. In 2008, as a result of the economic downturn’s impact on commercial real estate generally in the Chicago market, and our regulatory capital concerns, we decreased our commercial lending focus. As our local economy improves, we intend to resume originating commercial and multi-family real estate loans consistent with our conservative loan underwriting policies and procedures.

 

   

Continuing our traditional emphasis on the origination of one- to four-family residential loans and home equity lines of credit. We intend to continue to emphasize the origination of one- to

 

 

3


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four-family loans. We offer a wide variety of one- to four-family residential loan products, including a bi-weekly loan product that we believe differentiates us from our competitors while providing benefits to our borrowers. We are also developing a new home equity line of credit product that has an interest only five-year draw period, and then automatically converts to a fully amortizing loan for the next 15 years. We believe this product will allow us to retain a higher percentage of our currently maturing or soon to mature lines of credit and is competitive to new borrowers.

 

    Continuing to focus on asset quality. We have sought to build strong asset quality through our addition of experienced loan and credit administration staff, and through enhanced lending and credit policies and procedures and credit administration procedures and controls. Our non-performing assets have decreased from a peak of $6.7 million at December 31, 2010, to $2.4 million at June 30, 2014.

Reasons for the Conversion and Offering

Our primary reasons for converting to the fully public stock form of ownership and undertaking the stock offering are to:

 

    Enhance our regulatory capital position. A strong capital position is essential to achieving our long-term objective of building stockholder value. While Ben Franklin Bank currently meets the individual minimum capital requirements of the Consent Order with the OCC, the proceeds from the offering will further strengthen our capital position and support our strategic growth plan. Minimum regulatory capital requirements will also increase in the future under recently adopted regulations, and compliance with these new requirements will be essential to the continued implementation of our business strategy.

 

    Support the future growth contemplated by our business strategy. As a result of regulatory capital concerns, including the increased capital requirements under the Consent Order, the Bank has significantly decreased the size of its balance sheet over the last few years, including the size of its loan portfolio. The decrease in loans, and increased level of non-performing loans, as well as the increase in the balance of our lower yielding cash equivalents, has negatively impacted our net interest income. The proceeds from the offering will strengthen our capital position and enable us to support the increased lending contemplated by our business strategy. See “—Business Strategy” above.

 

    Transition us to a more familiar and flexible organizational structure. The stock holding company structure is a more familiar form of organization, which we believe will make our common stock more appealing to investors, and will give us greater flexibility to access the capital markets through possible future equity and debt offerings, although we have no current plans, agreements or understandings regarding any additional securities offerings. In addition, although we are not permitted to consider a transaction that would result in a change in control for a period of three years following the conversion, we believe that the stock holding company structure could be attractive to merger partners.

 

    Eliminate the uncertainties associated with the mutual holding company structure under financial reform legislation. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, the Federal Reserve Board became the federal regulator of all savings and loan holding companies and mutual holding companies, which has resulted in changes in regulations applicable to Ben Franklin Financial, MHC and Old Ben Franklin. The conversion will eliminate the risk that the Federal Reserve Board will amend existing regulations applicable to the conversion process in a manner disadvantageous to our public stockholders or depositors.

 

 

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Terms of the Offering

We are offering between 359,829 and 486,828 shares of common stock to eligible depositors of Ben Franklin Bank, to our tax-qualified employee benefit plans and, to the extent shares remain available, in a community offering to residents of Cook County, Illinois, and to our existing public stockholders and to the general public. If necessary, we may also offer shares to the general public in a syndicated offering. The number of shares of common stock to be sold may be increased to up to 559,852 shares as a result of demand for the shares of common stock in the offering or changes in market conditions. Unless the number of shares of common stock to be offered is increased to more than 559,852 shares or decreased to fewer than 359,829 shares, or the subscription and community offerings are extended beyond January 31, 2015, subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the offering is extended past January 31, 2015, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will cancel your stock order, promptly return your funds with interest for funds received in the subscription and community offerings or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 559,852 shares or decreased to less than 359,829 shares, all subscribers’ stock orders will be cancelled, their withdrawal authorizations will be cancelled and funds received for the purchase of shares of common stock in the subscription and community offerings will be returned promptly with interest. We will then resolicit subscribers, giving them an opportunity to place new orders for a period of time. No shares purchased in the subscription offering and community offering will be issued until the completion of a syndicated offering, if any.

The purchase price of each share of common stock offered for sale in the offering is $10.00. All investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, the community offering or a syndicated offering. Investors will not be charged a commission to purchase shares of common stock in the offering. Sterne, Agee & Leach, Inc., our marketing agent in the subscription and community offerings, will use its best efforts to assist us in selling shares of our common stock but is not obligated to purchase any shares of common stock being offered for sale in the subscription and community offerings.

How We Determined the Offering Range, the Exchange Ratio and the $10.00 Per Share Stock Price

The amount of common stock we are offering for sale and the exchange ratio for the exchange of shares of Old Ben Franklin for shares of New Ben Franklin are based on an independent appraisal of the estimated market value of New Ben Franklin, assuming the offering has been completed. Keller and Company, Inc., our independent appraiser, has estimated that, as of August 15, 2014, this market value was $7,550,000. Based on federal regulations, this market value forms the midpoint of a valuation range with a minimum of $6,417,500 and a maximum of $8,682,500. Based on this valuation range, the 56.07% pro forma ownership interest of Ben Franklin Financial, MHC in Old Ben Franklin as of June 30, 2014 being sold in the offering and the $10.00 per share price, the number of shares of common stock being offered for sale by New Ben Franklin ranges from 359,829 shares to 486,828 shares. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The exchange ratio ranges from 0.3282 of a share at the minimum of the offering range to 0.4441 of a share at the maximum of the offering range, and will preserve the existing percentage ownership of public stockholders of Old Ben Franklin (excluding any new shares purchased by them in the stock offering and their receipt of cash in lieu of fractional shares, and taking into account the assets of Ben Franklin Financial, MHC). If demand for shares or market conditions warrant, the appraisal can be increased by 15%, which would result in an appraised value of $9,984,875, an offering of 559,852 shares of common stock, and an exchange ratio of 0.5107 shares.

 

 

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The appraisal is based in part on Old Ben Franklin’s financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of ten publicly traded thrift holding companies listed in the table below that Keller and Company, Inc. considers comparable to Old Ben Franklin. The larger asset size of the comparable group is related to the fact that one of the general parameters for the selection of the comparables is that they must all be traded on one of the three major stock exchanges—the NYSE, American Stock Exchange or NASDAQ. As a result, these financial institutions are noticeably larger in size then institutions quoted on the OTCQB.

 

Company Name

   Ticker
Symbol
   Headquarters    Total Assets (1)  
               (in millions)  

Citizens Community Bancorp, Inc.

   CZWI    Eau Claire, WI    $ 564.8   

First Clover Leaf Financial Corp.

   FCLF    Edwardsville, IL      639.4   

First Federal of Northern Michigan Bancorp, Inc.

   FFNM    Alpena, MI      219.8   

First Savings Financial Group, Inc.

   FSFG    Clarksville, IN      701.8   

IF Bancorp, Inc.

   IROQ    Watseka, IL      551.3   

Jacksonville Bancorp, Inc.

   JXSB    Jacksonville, IL      308.8   

Laporte Bancorp, Inc.

   LPSB    La Porte, IN      535.2   

United Community Bancorp

   UCBA    Lawrenceburg, IN      530.5   

Wayne Savings Bancshares, Inc.

   WAYN    Wooster, OH      415.4   

Wolverine Bancorp, Inc.

   WBKC    Midland, MI      337.8   

 

(1) Assets as of June 30, 2014, as used in the appraisal.

The following table presents a summary of selected pricing ratios for New Ben Franklin (on a pro forma basis) and the peer group companies used by Keller & Company, Inc., our independent appraiser, in its appraisal. These ratios are based on Old Ben Franklin’s book value and tangible book value as of and for the twelve months ended June 30, 2014 and the latest date for which complete financial data were publicly available for the peer group as of August 15, 2014, the date of the appraisal. Compared to the average pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 22.06% on a price-to-book value basis and a discount of 22.06% on a price-to-tangible book value basis.

 

     Price-to-earnings
multiple
     Price-to-book
value ratio
    Price-to-tangible
book value ratio
 

New Ben Franklin (on a pro forma basis, assuming completion of the conversion)

       

Adjusted Maximum

     NM         76.63     76.63

Maximum

     NM         70.18     70.18

Midpoint

     NM         63.98     63.98

Minimum

     NM         57.15     57.15

Valuation of peer group companies, all of which are fully converted (on an historical basis)

       

Averages

     25.04x         81.91     89.30

Medians

     22.51x         82.47     89.73

 

NM Not meaningful.

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were used by Keller and Company, Inc. to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering—Stock Pricing and Number of Shares to be Issued.”

 

 

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Effect of Ben Franklin Financial, MHC’s Assets on Minority Stock Ownership

In the exchange, the public stockholders of Old Ben Franklin will receive shares of common stock of New Ben Franklin in exchange for their shares of common stock of Old Ben Franklin pursuant to an exchange ratio that is designed to provide, subject to adjustment, existing public stockholders with the same ownership percentage of the common stock of New Ben Franklin after the conversion as their ownership percentage in Old Ben Franklin immediately prior to the conversion, without giving effect to new shares purchased in the offering or cash paid in lieu of any fractional shares. However, the exchange ratio will be adjusted downward to reflect assets held by Ben Franklin Financial, MHC (other than shares of stock of Old Ben Franklin), which assets consist primarily of cash. Ben Franklin Financial, MHC had net assets of $52,000 as of June 30, 2014, not including Old Ben Franklin common stock. This adjustment would decrease Old Ben Franklin’s public stockholders’ ownership interest in New Ben Franklin from 44.04% to 43.93%, and would increase the ownership interest of persons who purchase stock in the offering from 55.96% (the amount of Old Ben Franklin’s outstanding common stock held by Ben Franklin Financial, MHC) to 56.07%.

The Exchange of Existing Shares of Old Ben Franklin Common Stock

If you are currently a stockholder of Old Ben Franklin, your shares will be exchanged for shares of common stock of New Ben Franklin. The number of shares of common stock you will receive will be based on the exchange ratio, which will depend upon our final appraised value, the percentage of outstanding shares of Old Ben Franklin common stock owned by public stockholders immediately prior to the completion of the conversion, and the number of shares sold in the offering. Depending on the exchange ratio and the market value of Old Ben Franklin common stock at the time of the exchange, the initial market value of the New Ben Franklin common stock that you receive in the share exchange could be less than the market value of the Old Ben Franklin common stock that you currently own. The following table shows how the exchange ratio will adjust, based on the appraised value of New Ben Franklin as of August 15, 2014, assuming public stockholders of Old Ben Franklin own 44.0% of Old Ben Franklin common stock and Ben Franklin Financial, MHC had net assets of $52,000 immediately prior to the completion of the conversion. The table also shows the number of shares of New Ben Franklin common stock a hypothetical owner of Old Ben Franklin common stock would receive in exchange for 100 shares of Old Ben Franklin common stock owned at the completion of the conversion, depending on the number of shares of common stock issued in the offering.

 

     Shares to be Sold in
This Offering
   

 

 

Shares of New Ben Franklin to
be Issued for Shares of Old
Ben Franklin

    Total Shares
of Common
Stock to be
Issued in
Exchange and
Offering
     Exchange
Ratio
     Equivalent
Value of
Shares
Based
Upon
Offering
Price (1)
     Equivalent
Pro Forma
Tangible
Book Value
Per
Exchanged
Share (2)
     Shares to
be
Received
for 100
Existing
Shares (3)
 
     Amount      Percent     Amount      Percent                

Minimum

     359,829         56.1     281,921         43.9     641,750         0.3282       $ 3.28       $ 5.74         33   

Midpoint

     423,329         56.1     331,672         43.9     755,001         0.3862         3.86         6.04         39   

Maximum

     486,828         56.1     381,422         43.9     868,250         0.4441         4.44         6.33         44   

Adjusted Maximum

     559,852         56.1     438,636         43.9     998,488         0.5107         5.11         6.66         51   

 

(1) Represents the value of shares of New Ben Franklin common stock to be received in the conversion by a holder of one share of Old Ben Franklin, pursuant to the exchange ratio, based upon the $10.00 per share purchase price.
(2) Represents the pro forma tangible book value per share at each level of the offering range multiplied by the respective exchange ratio.
(3) Cash will be paid in lieu of fractional shares.

If you own shares of Old Ben Franklin common stock in a brokerage account in “street name,” your shares will be exchanged automatically within your account, so you do not need to take any action to exchange your shares of common stock. If your shares are represented by physical Old Ben Franklin stock certificates, after the completion of the conversion, our transfer agent will mail to you a transmittal form with instructions to surrender your stock certificate(s). You should not submit a stock certificate until you receive a transmittal form. A statement reflecting your ownership of New Ben Franklin common stock will be mailed to you after the transfer agent receives a properly executed transmittal form and your Old Ben Franklin stock certificate(s). New Ben Franklin will not issue stock certificates.

 

 

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No fractional shares of New Ben Franklin common stock will be issued to any public stockholder of Old Ben Franklin. For each fractional share that otherwise would be issued, New Ben Franklin will pay in cash an amount equal to the product obtained by multiplying the fractional share interest to which the holder otherwise would be entitled by the $10.00 per share offering price.

Outstanding options to purchase shares of Old Ben Franklin common stock also will convert into and become options to purchase shares of New Ben Franklin common stock based upon the exchange ratio. The aggregate exercise price, duration and vesting schedule of these options will not be affected by the conversion. At June 30, 2014, there were 86,740 outstanding options to purchase shares of Old Ben Franklin common stock, all of which have vested. Such outstanding options will be converted into options to purchase 28,468 shares of common stock at the minimum of the offering range and 38,521 shares of common stock at the maximum of the offering range. Because federal regulations prohibit us from repurchasing our common stock during the first year following the conversion unless compelling business reasons exist for such repurchases, we may use authorized but unissued shares to fund option exercises that occur during the first year following the conversion. If all existing options were exercised and funded with authorized but unissued shares of common stock following the offering, stockholders would experience ownership dilution of approximately 3.6% at the minimum of the offering range.

How We Intend to Use the Proceeds From the Offering

We intend to invest the greater of $2.0 million or 65.0% of the net proceeds from the stock offering in Ben Franklin Bank, loan funds to our employee stock ownership plan to fund its expected purchase of 7% of the shares of common stock sold in the offering and retain the remainder of the net proceeds from the offering at New Ben Franklin. Therefore, assuming we sell 423,329 shares of common stock in the stock offering, and have net proceeds of $3.1 million, we intend to invest $2.03 million in Ben Franklin Bank, loan $296,000 to our employee stock ownership plan to fund its purchase of shares of common stock and retain the remaining $797,000 of the net proceeds at New Ben Franklin.

The remainder of the net proceeds will be used by New Ben Franklin for general corporate purposes. Funds invested in Ben Franklin Bank will be used to increase capital levels and to support our business strategy, including our planned lending activity, to support the development of new products and services, to invest in securities and for other general corporate purposes. Initially, we anticipate that a substantial portion of the net proceeds will be invested in mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored entities and other securities issued by U.S. Government sponsored entities or U.S. Government agencies.

Please see the section of this prospectus entitled “How We Intend to Use the Proceeds from the Offering” for more information on the proposed use of the proceeds from the offering.

Persons Who May Order Shares of Common Stock in the Offering

We are offering the shares of common stock in a subscription offering in the following descending order of priority:

 

  (i) To depositors with accounts at Ben Franklin Bank with aggregate balances of at least $50 at the close of business on June 30, 2013.

 

  (ii) To our tax-qualified employee benefit plans (including Ben Franklin Bank’s employee stock ownership plan), which may subscribe for in the aggregate up to 10% of the shares of common stock sold in the offering. Although we expect our employee stock ownership plan to purchase 7% of the shares of common stock sold in the stock offering, we reserve the right to have the employee stock ownership plan purchase more than 7% of the shares sold in the offering to the extent necessary to complete the offering at the minimum of the offering range.

 

  (iii) To depositors with accounts at Ben Franklin Bank with aggregate balances of at least $50 at the close of business on September 30, 2014.

 

  (iv) To depositors of Ben Franklin Bank at the close of business on October 31, 2014.

 

 

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Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to natural persons (including trusts of natural persons) residing in Cook County, Illinois. To the extent shares of common stock remain available, we may also offer the shares to Old Ben Franklin’s public stockholders as of October 31, 2014 and then to the general public. The community offering may begin at the same time as or after the subscription offering commences. We also may offer for sale shares of common stock not purchased in the subscription offering or the community offering through a syndicated offering. Sterne, Agee & Leach, Inc. will act as sole book-running manager in the event of a syndicated offering. We have the right to accept or reject, in whole or in part, in our sole discretion, orders received in the community offering or syndicated offering. Any determination to accept or reject stock orders in the community offering or syndicated offering will be based on the facts and circumstances available to management at the time of the determination.

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated first to categories in the subscription offering. A detailed description of the subscription offering, the community offering and the syndicated offering, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Offering.”

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased in the offering is 25.

Generally, no person, or multiple persons exercising subscription rights through a single account, may purchase more than 15,000 shares ($150,000) of common stock. If any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 25,000 shares ($250,000) of common stock:

 

    your spouse or relatives of you or your spouse living in your house;

 

    most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior position; or

 

    other persons who may be your associates or persons acting in concert with you.

Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to the overall purchase limitation of 25,000 shares ($250,000).

In addition to the above purchase limitations, there is an ownership limitation for stockholders of Old Ben Franklin other than our employee stock ownership plan. Shares of common stock that you purchase in the offering individually and together with persons described above, plus any shares you and they receive in exchange for existing shares of Old Ben Franklin common stock, may not exceed 9.9% of the total shares of common stock of New Ben Franklin to be issued and outstanding after the completion of the conversion.

Subject to regulatory approval, we may increase or decrease the purchase and ownership limitations at any time. See the detailed description of the purchase limitations in “The Conversion and Offering—Additional Limitations on Common Stock Purchases.”

How You May Purchase Shares of Common Stock in the Subscription and Community Offerings

In the subscription and community offerings, you may pay for your shares only by:

 

  (i) personal check, bank check or money order made payable to Ben Franklin Financial, Inc.; or

 

  (ii) authorizing us to withdraw available funds from the types of Ben Franklin Bank deposit accounts designated on the stock order form.

 

 

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Ben Franklin Bank is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the offering. Additionally, you may not use a Ben Franklin Bank line of credit check or any type of third-party check to pay for shares of common stock. Please do not submit cash or wire transfers. You may not designate a withdrawal from a Ben Franklin Bank deposit account with check-writing privileges; instead, please submit a check. If you request that we directly withdraw the funds from your Ben Franklin Bank checking account, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. Additionally, you may not authorize direct withdrawal from a Ben Franklin Bank retirement account. See “—Using Retirement Account Funds to Purchase Shares of Common Stock.”

You may subscribe for shares of common stock in the subscription and community offerings by delivering a signed and completed original stock order form, together with full payment payable to Ben Franklin Financial, Inc. or authorization to withdraw funds from one or more of your Ben Franklin Bank deposit accounts, provided that the stock order form is received before 12:00 noon, Central Time, on December 17, 2014, which is the expiration of the subscription and community offering period. You may submit your stock order form and payment in one of three ways: by mail using the stock order reply envelope provided; by overnight delivery to our Stock Information Center at the address noted on the stock order form; or by hand-delivery to Ben Franklin Bank’s executive office located at 830 East Kensington Road, Arlington Heights, Illinois 60004. Hand-delivered stock order forms will only be accepted at this location. We will not accept stock order forms at our branch office. Please do not mail stock order forms to Ben Franklin Bank.

Please see “The Conversion and Offering—Procedure for Purchasing Shares in Subscription and Community Offerings—Payment for Shares” for a complete description of how to purchase shares in the subscription and community offerings.

Using Retirement Account Funds to Purchase Shares of Common Stock

You may be able to subscribe for shares of common stock using funds in your individual retirement account, or IRA. If you wish to use some or all of the funds in your Ben Franklin Bank IRA or other retirement account, the applicable funds must first be transferred to a self-directed retirement account maintained by an independent trustee or custodian, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee and/or a fee to establish the account may be payable to the independent trustee. Because individual circumstances differ and the processing of retirement account orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the December 17, 2014 offering deadline, for assistance with purchases using your individual retirement account or other retirement account held at Ben Franklin Bank or elsewhere. Whether you may use such funds for the purchase of shares in the stock offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

See “The Conversion and Offering—Procedure for Purchasing Shares in Subscription and Community Offerings—Payment for Shares” and “—Using Retirement Account Funds” for a complete description of how to use IRA funds to purchase shares in the stock offering.

Market for Common Stock

Old Ben Franklin’s common stock is not currently listed on a national securities exchange. Trades in the common stock are quoted on the OTCQB tier operated by OTC Markets Group, Inc. under the symbol “BFFI.” Upon completion of the conversion, the shares of common stock of New Ben Franklin will replace the existing shares of Old Ben Franklin common stock. We expect transactions in the shares of New Ben Franklin common stock will be quoted on OTC Pink operated by OTC Markets Group, Inc. under the symbol “BFFI”. In order to have our stock quoted on the OTC Pink tier, we are required to have at least one broker-dealer who will make a market in our common stock. Sterne, Agee & Leach, Inc. has advised us that it intends to make a market in our common stock following the offering, but is under no obligation to do so.

 

 

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Our Dividend Policy

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. Any future payment of dividends will depend upon the board of directors’ consideration of a number of factors, including the amount of net proceeds retained by us in the offering, investment opportunities available to us, capital requirements, our financial condition and results of operations, 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, they will not be reduced or eliminated in future periods.

Old Ben Franklin and Ben Franklin Financial, MHC have 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 New Ben Franklin would no longer be subject to the conditions of the board resolutions. See “Supervision and Regulation—Consent Order and Board Resolutions.”

Purchases by Officers and Directors

We expect our directors and executive officers, together with their associates, will subscribe for 28,000 shares of common stock in the offering, representing 7.8% of shares to be sold at the minimum of the offering range. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Following the offering, our directors and executive officers, together with their associates, are expected to beneficially own 104,626 shares of New Ben Franklin common stock (including stock options exercisable within 60 days of October 31, 2014, or 15.6% of our total outstanding shares of common stock at the minimum of the offering range, which includes shares they currently own that will be exchanged for shares of New Ben Franklin.

See “Subscriptions by Directors and Executive Officers” for more information on the proposed purchases of shares of common stock by our directors and executive officers.

Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

The deadline for subscribing for shares of common stock in the subscription offering and community offering is 12:00 noon, Central Time, on December 17, 2014, unless we extend this deadline. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time.

Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 12:00 noon, Central Time, on December 17, 2014 (unless extended) whether or not we have been able to locate each person entitled to subscription rights.

See “The Conversion and Offering—Procedure for Purchasing Shares in Subscription and Community Offerings—Expiration Date” for a complete description of the deadline for subscribing in the stock offering.

You May Not Sell or Transfer Your Subscription Rights

Federal regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action, including reporting persons to federal agencies, against anyone who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe you have sold or transferred your subscription rights. On the stock order form, you cannot add the names of others for joint stock registration unless they are also named on the qualifying account. Doing so

 

 

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may jeopardize your subscription rights. In addition, the stock order form requires that you list all deposit accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation if there is an oversubscription.

Delivery of Shares of Common Stock in the Subscription and Community Offerings

Stock certificates will not be issued (except to directors and executive officers, whose ability to sell their shares of common stock is restricted by federal securities and banking laws). Instead, all shares of common stock sold in the subscription and community offerings will be issued in book-entry form, through the Direct Registration System, which allows each investor’s shares to be maintained on the books of our transfer agent. Shortly after the conversion is completed, our transfer agent will issue DRS statements to investors, reflecting their stock ownership. Statements will be sent by first class mail to the stock registration address noted by the investor on the stock order form. Though investors will not possess a stock certificate, they will retain all stockholder rights, including the ability to sell shares. Although the shares of common stock will have begun trading, brokerage firms may require that you have received your statement prior to selling your shares. You will be able to purchase additional shares of New Ben Franklin common stock through a brokerage firm. If you are currently a stockholder of Old Ben Franklin, see “The Conversion and Offering—The Exchange of Existing Shares of Old Ben Franklin Common Stock.”

Conditions to Completion of the Conversion

We cannot complete the conversion and offering unless:

 

    The plan of conversion and reorganization is approved by at least a majority of votes eligible to be cast by members of Ben Franklin Financial, MHC (depositors of Ben Franklin Bank) as of October 31, 2014;

 

    The plan of conversion and reorganization is approved by Old Ben Franklin stockholders holding at least two-thirds of the outstanding shares of common stock of Old Ben Franklin as of October 31, 2014, including shares held by Ben Franklin Financial, MHC;

 

    The plan of conversion and reorganization is approved by Old Ben Franklin stockholders holding at least a majority of the outstanding shares of common stock of Old Ben Franklin as of October 31, 2014, excluding shares held by Ben Franklin Financial, MHC;

 

    We sell at least the minimum number of shares of common stock offered in the offering; and

 

    We receive final approval of the Federal Reserve Board to complete the conversion and offering.

Ben Franklin Financial, MHC intends to vote its shares in favor of the plan of conversion and reorganization. At October 31, 2014, Ben Franklin Financial, MHC owned 56.0% of the outstanding shares of common stock of Old Ben Franklin. The directors and executive officers of Old Ben Franklin and their affiliates owned 151,593 shares of Old Ben Franklin (excluding exercisable options), or 7.8% of the outstanding shares of common stock and 17.6% of the outstanding shares of common stock excluding shares held by Ben Franklin Financial, MHC. They intend to vote those shares in favor of the plan of conversion and reorganization.

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

If we do not receive orders for at least 359,829 shares of common stock, we may take several steps in order to sell the minimum number of shares of common stock in the offering range. Specifically, we may:

 

  (i) increase the purchase and ownership limitations; and/or

 

 

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  (ii) seek regulatory approval to extend the offering beyond January 31, 2015, so long as we resolicit subscribers who previously submitted subscriptions in the offering; and/or

 

  (iii) increase the number of shares purchased by the employee stock ownership plan.

If we extend the offering beyond January 31, 2015, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will cancel your stock order, promptly return your funds with interest for funds received in the subscription and community offerings or cancel your deposit account withdrawal authorization. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the corresponding maximum amount will be given the opportunity to increase their subscriptions up to the new limit. In our sole discretion, we may also resolicit other subscribers to give them the opportunity to increase their subscriptions up to the new limit.

Possible Change in the Offering Range

Keller and Company, Inc. will update its appraisal before we complete the offering. If our pro forma market value at that time is either below $6,417,500 or above $9,984,875, then, after consulting with the Federal Reserve Board, we may:

 

    terminate the stock offering, promptly return all funds (with interest paid on funds received in the subscription and community offerings) and cancel any deposit account withdrawal authorizations;

 

    set a new offering range; or

 

    take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission.

If we set a new offering range, we will cancel all stock orders, promptly return funds with interest for funds received for purchases in the subscription and community offerings, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. We will then resolicit subscribers, allowing them to place a new stock order for a period of time.

Possible Termination of the Offering

We may terminate the offering at any time prior to the special meeting of members of Ben Franklin Financial, MHC that has been called to vote on the plan of conversion and reorganization, and at any time after member approval with the approval of the Federal Reserve Board. If we terminate the offering, we will cancel all stock orders, promptly return funds with interest for funds received in the subscription and community offerings, and we will cancel deposit account withdrawal authorizations.

Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion

We expect our employee stock ownership plan, which is a tax-qualified retirement plan for the benefit of all of our employees, to purchase up to 7% of the shares of common stock we sell in the offering.

Federal regulations permit us to implement one or more new stock-based benefit plans no earlier than six months after completion of the conversion. Our current intention is to implement one or more new stock-based benefit plans, but we have not determined whether we would adopt the plans within 12 months following the completion of the conversion or more than 12 months following the completion of the conversion. Stockholder approval of these plans would be required. If we implement stock-based benefit plans within 12 months following the completion of the conversion, the stock-based benefit plans would reserve a number of shares (i) up to 4% of the shares of common stock sold in the offering for awards of restricted stock to key employees and directors, at no cost to the recipients (unless the Bank’s tangible capital is less than 10% upon completion of the offering in which case awards of restricted stock will be limited to 3% of the common stock sold in the offering), and (ii) up to 10% of the shares of common stock sold in the offering for issuance pursuant to the exercise of stock options by key employees

 

 

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and directors. If the stock-based benefit plan is adopted more than 12 months after the completion of the conversion, it would not be subject to the percentage limitations set forth above. We currently intend to adopt a stock-based benefit plan that would reserve for the exercise of stock options and the grant of stock awards a number of shares equal to 10% and 3%, respectively, of the shares sold in the stock offering. We have not yet determined the number of shares that would be reserved for issuance under these plans. For a description of our current stock-based benefit plan, see “Management—Benefit Plans.”

The following table summarizes the number of shares of common stock and the aggregate dollar value of grants that would be available under one or more stock-based benefit plans if such plans reserve a number of shares of common stock equal to 3% and 10% of the shares sold in the stock offering for restricted stock awards and stock options, respectively. The table shows the dilution to stockholders if all such shares are issued from authorized but unissued shares, instead of purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all qualifying employees.

 

     Number of Shares to be Granted or Purchased     Dilution
Resulting
From Issuance
of Shares for
Stock-Based
Benefit Plans
    Value of Grants
(In Thousands) (1)
 
   At Minimum
of Offering
Range
     At Adjusted
Maximum of
Offering
Range
     As a
Percentage of
Common
Stock to be
Sold in the
Offering
     
             At
Minimum
of Offering
Range
     At
Adjusted
Maximum
of Offering
Range
 

Employee stock ownership plan

     25,188         39,190         7.00     NA  (2)    $ 252       $ 392   

Restricted stock awards

     10,795         16,796         3.00        1.65     108         168   

Stock options

     35,983         55,985         10.00        5.30     360         560   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

 

Total

     71,966         111,971         20.00     6.79   $ 720       $ 1,120   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

 

 

(1) The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value for stock awards is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $2.19 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; an expected option term of 10 years; a dividend yield of 0%; a risk-free rate of return of 2.52%; and expected volatility of 18.32%. The actual value of option grants will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted.
(2) No dilution is reflected for the employee stock ownership plan because these shares are assumed to be purchased in the stock offering.

We may fund our stock-based benefit plans through open market purchases, as opposed to new issuances of stock; however, if any options previously granted under our existing Equity Incentive Plan are exercised during the first year following completion of the offering, they will be funded with newly issued shares as federal regulations do not permit us to repurchase our shares during the first year following the completion of the offering except to fund the grants of restricted stock under our existing stock-based benefit plan or under extraordinary circumstances.

 

 

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The following table presents information as of June 30, 2014 regarding our employee stock ownership plan, our Equity Incentive Plan and our proposed stock-based benefit plan. The table below assumes that 868,250 shares are outstanding after the offering, which includes the sale of 486,828 shares in the offering at the maximum of the offering range and the issuance of new shares in exchange for shares of Old Ben Franklin using an exchange ratio of 0.4441. It also assumes that the value of the stock is $10.00 per share.

 

Existing and New Stock Benefit
Plans

   Participants    Shares at Maximum
of Offering Range
    Estimated Value of
Shares
    Percentage of
Shares Outstanding
After the
Conversion
 

Employee Stock Ownership Plan:

   Officers and Employees       

Shares purchased in 2006 offering (1)

        34,535 (2)    $ 345,350        3.98

Shares to be purchased in this offering

        34,078        340,780        3.92
     

 

 

   

 

 

   

 

 

 

Total employee stock ownership plan shares

        68,613      $ 686,130        7.90
     

 

 

   

 

 

   

 

 

 

Restricted Stock Awards:

   Directors, Officers and
Employees
      

Equity Incentive Plan (1)

        17,267 (3)    $ 172,670 (4)      1.99

New shares of restricted stock

        14,605        146,050 (4)      1.68
     

 

 

   

 

 

   

 

 

 

Total shares of restricted stock

        31,872      $ 318,720        3.67
     

 

 

   

 

 

   

 

 

 

Stock Options:

   Directors, Officers and
Employees
      

Equity Incentive Plan (1)

        43,168 (5)    $ 94,538 (6)      4.97

New stock options

        48,683        106,616 (6)      5.61
     

 

 

   

 

 

   

 

 

 

Total stock options

        91,861      $ 201,154        10.58
     

 

 

   

 

 

   

 

 

 

Total of stock benefit plans

        192,318      $ 1,205,724        22.15
     

 

 

   

 

 

   

 

 

 

 

(1) The number of shares indicated has been adjusted for the 0.4441 exchange ratio at the maximum of the offering range.
(2) As of June 30, 2014, 14,515 of these shares, or 32,685 shares prior to adjustment for the exchange, have been allocated.
(3) As of June 30, 2014, 15,310 of these shares, or 34,476 shares prior to adjustment for the exchange, have been awarded and all of these shares have vested.
(4) The value of restricted stock awards is determined based on their fair value as of the date grants are made. For purposes of this table, the fair value of awards under the new stock-based benefit plan is assumed to be the same as the offering price of $10.00 per share.
(5) As of June 30, 2014, options to purchase 38,521 of these shares, or 86,740 shares prior to adjustment for the exchange, have been awarded and are outstanding, and all such options have vested.
(6) The weighted-average fair value of stock options to be granted has been estimated at $2.19 per option, using the Black-Scholes option pricing model. The fair value of stock options uses the Black-Scholes option pricing model with the following assumptions: exercise price, $10.00; trading price on date of grant, $10.00; dividend yield, 0%; expected term, 10 years; expected volatility, 18.32%; and risk-free rate of return, 2.52%. The actual value of option grants will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. The weighted-average fair value of the new stock options of $2.19 per option has been used to illustrate the estimated fair value of the existing equity incentive plan.

In addition to the stock-based benefit plans that we may adopt, in the future New Ben Franklin may enter into employment agreements with certain senior executives. If adopted, such employment agreements will contain terms substantially similar to those set forth in the existing Ben Franklin Bank employment agreements, and will have terms of up to three years. In addition, as permitted by applicable law, New Ben Franklin may enter into separate change in control agreements with certain officers which would provide a severance benefit in the event of a change in control equal to up to two times compensation (as defined in the change in control agreements). See “Management—Executive Compensation—Employment Agreements.”

Tax Consequences

Ben Franklin Financial, MHC, Old Ben Franklin, Ben Franklin Bank and New Ben Franklin have received an opinion of counsel, Luse Gorman Pomerenk & Schick, P.C., regarding the material federal income tax consequences of the conversion, and have received an opinion of Crowe Horwath LLP regarding the material Illinois state income tax consequences of the conversion. As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Ben Franklin Financial, MHC, Old Ben Franklin (except for cash paid for fractional shares), Ben Franklin Bank, New Ben Franklin, persons eligible to subscribe in the subscription offering, or existing stockholders of Old Ben Franklin. Existing stockholders of Old Ben Franklin who receive cash in lieu of fractional shares of New Ben Franklin will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share.

Emerging Growth Company Status

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012. For as long as we are an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation

 

 

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and stockholder approval of any golden parachute payment not previously approved, and an exemption from Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that our independent auditors review and attest as to the effectiveness of our internal control over financial reporting. In addition, 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. New Ben Franklin has elected to comply with new or amended accounting pronouncements in the same manner as a private company. See “Supervision and Regulation—Emerging Growth Company Status”.

How You Can Obtain Additional Information—Stock Information Center

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, please call our Stock Information Center. The toll-free telephone number is [stock center number]. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Central Time. The Stock Information Center will be closed on weekends and bank holidays.

 

 

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RISK FACTORS

You should consider carefully the following risk factors in evaluating an investment in the shares of common stock.

Risks Related to Our Business

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. Old Ben Franklin and Ben Franklin Financial, MHC have also adopted board resolutions requested by the Federal Reserve Board which, among other things, prohibit us from paying dividends, increasing our debt or redeeming shares of Old Ben Franklin 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 December 19, 2012, the Bank entered into a Consent Order with the OCC. The Consent Order requires that the Bank correct certain weaknesses identified by the OCC during regulatory examinations. Specifically, the Consent Order required that the board of directors take the following actions, among others.

 

    develop, adopt, implement, and ensure adherence to a three-year capital plan.

 

    maintain a Tier 1 leverage ratio of at least 9% and a total risk-based capital ratio of at least equal to 13%.

 

    develop, adopt, implement and ensure adherence to a detailed three-year strategic plan that establishes objectives and projections for the Bank’s overall risk profile, earnings performance, balance sheet mix, off-balance sheet activities, liability structure, capital and liquidity adequacy, reduction in the volume of nonperforming assets, product line development and market segments that the Bank intends to promote or develop, together with specific strategies to achieve those objectives.

 

    ensure that Ben Franklin Bank has competent and effective management, and add two new independent board members.

 

    adopt, implement and ensure adherence to workout plans for each of the Bank’s criticized assets, including review of quarterly management reports of criticized assets. The Consent Order also prohibits the Bank from extending any further credit with respect to criticized assets unless certain requirements are met, including a requirement that a majority of the board of directors approve the extension of credit and document in writing why such extension of credit is in the best interests of the Bank.

 

    revise the Bank’s risk rating program to ensure that proper risk ratings are assigned to Bank assets and that the Bank’s assets are timely placed on nonaccrual status.

 

    adopt, implement and ensure adherence to a program for obtaining and analyzing certain credit and collateral information to monitor consumer/retail credit risk, properly account for loans, and assign accurate risk ratings. The Consent Order also prohibits the Bank from extending any loan, lease, or other extension of credit unless certain requirements have been met, including documenting the specific reason(s) for the extension of credit, identifying the expected source of repayment in writing, structuring the repayment terms to coincide with the expected source of repayment, obtaining and analyzing current and satisfactory credit information, and adequately documenting the current value of collateral.

 

    revise the Bank’s appraisal policies and obtain current appraisals on certain loans identified by the OCC.

 

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    conduct semiannual, independent loan and lease reviews, provide a written report to the board of directors of the findings noted in such reviews, and document board action in response to the written report to ensure appropriate remedial action on findings noted in such reviews has been taken.

 

    adopt, implement and ensure adherence to policies and procedures for maintaining an adequate allowance for loan losses.

 

    establish written policies and procedures designed to identify, measure, monitor, and control concentrations of credit, and perform an analysis of concentrations at least annually.

 

    establish a comprehensive formal liquidity risk management policy consistent with regulatory guidance.

 

    revise, implement, and thereafter ensure Bank adherence to written policies and procedures designed to address and correct weaknesses in the Bank’s consumer compliance program identified in regulatory exams.

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. Consequently, Ben Franklin Bank is in troubled condition, and is subject to additional regulatory restrictions that require it to:

 

    obtain the prior written approval of the OCC before appointing any new director or senior executive officer;

 

    obtain the prior written approval of the OCC before making or entering into any “golden parachute” payments or agreements;

 

    obtain the prior written approval of the OCC before declaring or paying any dividends or making any other capital distributions; and

 

    provide advance notice to and receive a written notice of non-objection from the OCC before entering into or amending any contractual arrangements for compensation or benefits with any director or senior executive officer of Ben Franklin Bank.

The Consent 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 Consent Order will remain in effect until the OCC suspends or terminates the Consent Order. While the board of directors believes that the Bank is in substantial compliance with the Consent Order, it has not achieved full compliance because the Bank has not been able to adhere to all of the financial projections set forth in its three-year strategic plan. The Bank has submitted a new strategic plan in connection with the conversion. Failure to comply with the Consent Order could result in additional enforcement actions by the OCC. We have incurred significant expense in complying with the Consent Order, and continued compliance with the Consent 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 Consent Order, and the actions that we have taken to comply with the Consent Order, see “Supervision and Regulation—Consent Order and Board Resolutions.”

On March 27, 2014, Old Ben Franklin 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 Old Ben Franklin 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 Consent Order could result in additional enforcement actions by the Federal Reserve Board. We cannot determine when New Ben Franklin would no longer be subject to the conditions of the board resolutions.

 

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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 September 2014, the Board of Directors of Ben Franklin Bank approved a strategic plan that contemplates growth in assets and liabilities, including significant loan growth, over the next several years. Under the plan, we intend to increase our 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. We have incurred substantial additional expenses due to the implementation of our strategic plan, including salaries related to new lending officers and related support staff. Many of these increased expenses are considered fixed expenses. 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. While we believe we have the management resources and internal systems in place to successfully manage our future growth, 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. Assuming the successful execution of our business plan, we do not expect that we will return to profitability until fiscal 2017. 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.

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

At June 30, 2014, our non-performing assets were 2.56% of our total assets and consisted of $877,000 of non-accrual troubled debt restructurings, $516,000 of non-accrual loans, and $965,000 of repossessed assets. In addition, our classified assets totaled $2.4 million at June 30, 2014. 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 June 30, 2014, a portion (13.1%) of our loan portfolio was comprised of fixed-rate loans with remaining terms of over 15 years while a significant portion (41.3%) 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.

 

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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 June 30, 2014, the fair value of our portfolio of investment securities classified as available for sale totaled $4.8 million. At that date, net unrealized gains on these securities totaled $18,000.

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, following the offering we intend to increase our level of 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 June 30, 2014, we had $92.1 million of total assets, $64.0 million of loans receivable, net of the allowance for loan losses, $4.8 million of available-for-sale investment securities, $82.0 million of total deposits and $9.1 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.

 

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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 remain 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 increases 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:

 

    demand for our loans, deposits and services may decline;

 

    loan delinquencies, problem assets and foreclosures may increase;

 

    weak economic conditions may limit the demand for loans by creditworthy borrowers, limiting our capacity to leverage our retail deposits and maintain our net interest income;

 

    the value of the collateral for our loans may decline; and

 

    the amount of our low-cost or non-interest-bearing deposits may decrease.

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 June 30, 2014, our allowance for loan losses was $1.3 million, or 92.89% of non-performing loans and 1.98% of gross loans, compared to $1.3 million, or 56.41% non-performing loans and 1.81% of gross loans at December 31, 2013.

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.

 

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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 June 30, 2014, we had a $2.6 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 June 30, 2014, our valuation allowance was $2.6 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 June 30, 2014 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 carryfowards, 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.

 

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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:

 

    the OCC became the primary federal regulator for federal savings associations such as Ben Franklin Bank (replacing the Office of Thrift Supervision), and the Federal Reserve Board now supervises and regulates all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision, including Old Ben Franklin and Ben Franklin Financial, MHC;

 

    the Federal Reserve Board is required to set minimum capital levels for depository institution holding companies that are as stringent as those required for their insured depository subsidiaries, and the components of Tier 1 capital are required to be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. There is a five-year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital requirements will apply to savings and loan holding companies. However, the new rule for savings and loan holding companies has set January 1, 2015 as the date the new capital requirements will begin to apply. See “Supervision and Regulation—Capital Requirements;”

 

    the federal banking regulators are required to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives;

 

    a new Consumer Financial Protection Bureau has been established, which has broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like Ben Franklin Bank, will be examined by their applicable bank regulators; and

 

    federal preemption rules that have been applicable for national banks and federal savings banks have been weakened, and state attorneys general have the ability to enforce federal consumer protection laws.

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.

 

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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 New Ben Franklin. 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 will be effective for Ben Franklin Bank and New Ben Franklin 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% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. 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 Consent Order requires that Ben Franklin Bank currently maintain capital levels above those required by the new rules described above, the new rules will impact Ben Franklin Bank and New Ben Franklin when the Consent Order is terminated. The application of more stringent capital requirements for Ben Franklin Bank and New Ben Franklin 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.

 

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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 $10.0 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 this offering, we will become 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.

 

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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:

 

    excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

 

    interest-only payments;

 

    negative-amortization; and

 

    terms longer than 30 years.

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.

Risks Related to the Offering

The future price of the shares of our common stock may be less than the $10.00 purchase price per share in the offering.

If you purchase shares of our common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price in the offering. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates,

 

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assumptions and projections, all of which are subject to change from time to time. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in federal tax laws, new regulations, investor perceptions of New Ben Franklin and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

There may be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.

We expect transactions in the shares of New Ben Franklin common stock will be quoted on the OTC Pink tier operated by OTC Markets Group, Inc. under the symbol “BFFI”. In order to have our stock quoted on OTC Pink, we are required to have at least one broker-dealer who will make a market in our common stock. Sterne, Agee & Leach, Inc. has advised us that it intends to make a market in our common stock following the offering, but is under no obligation to do so or to continue to do so once it begins.

The development of an active trading market for our common stock depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. If you purchase shares of common stock, you may not be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

We are an emerging growth company within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions from reporting requirements that are available to emerging growth companies, our common stock could be less attractive to investors.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, as modified by the Jumpstart Our Business Startups Act of 2012. We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure about our executive compensation and omission of compensation discussion and analysis, disclosure, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. We also will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act of 2002, including the requirement that an independent registered public accounting firm attest to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important. If we take advantage of any of these exemptions, some investors may find our common stock less attractive, which could hurt our stock price. In addition, 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 may remain an emerging growth company until the earlier of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities in the stock offering; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (which would generally require us to have at least $700 million of voting and non-voting equity held by non-affiliates).

 

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Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance and the value of our common stock.

We intend to invest between $1.2 million and $2.2 million of the net proceeds of the offering in Ben Franklin Bank. We may use the remaining net proceeds to invest in short-term investments or for other general corporate purposes. We also expect to use a portion of the net proceeds we retain to fund a loan to our employee stock ownership plan to purchase shares of common stock in the offering. Ben Franklin Bank may use the net proceeds it receives to fund new loans, purchase investment securities or for other general corporate purposes, including enhancing our branch facilities. However, with the exception of the loan to the employee stock ownership plan, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and when we reinvest such proceeds. We have not established a timetable for reinvesting the net proceeds, and we cannot predict how long we will require to reinvest the net proceeds. Our failure to utilize these funds effectively would reduce our profitability and may adversely affect the value of our common stock.

Our stock-based benefit plans will increase our expenses and negatively impact our results of operations.

We intend to adopt one or more new stock-based benefit plans after the conversion, subject to stockholder approval, which will increase our annual compensation and benefit expenses related to the stock options and stock awards granted to participants under a stock-based benefit plan(s). The actual amount of these new stock-related compensation and benefit expenses will depend on the number of options and stock awards actually granted, the fair market value of our stock or options on the date of grant, the vesting period, and other factors which we cannot predict at this time. In the event we adopt a stock-based benefit plan within 12 months following the conversion, the total shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plans will be limited by regulation to 4% and 10%, respectively, of the total shares of our common stock sold in the stock offering (unless the Bank’s tangible capital is less than 10% upon completion of the offering in which case awards of restricted stock will be limited to 3% of the shares sold in the Offering). If we award shares of restricted common stock or grant options in excess of these amounts under stock-based benefit plans adopted more than 12 months after the completion of the conversion, our costs would increase further. We intend to adopt a stock-based benefit plan that would reserve for the exercise of stock options and the grant of stock awards a number of shares equal to 10% and 3%, respectively, of the shares sold in the stock offering.

In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the offering for shares purchased in the offering has been estimated to be approximately $59,000 at the adjusted maximum of the offering range assuming the employee stock ownership plan purchases 7.0% of the shares of common stock sold in the offering as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of our proposed stock-based plans, see “Management—Benefits to be Considered Following Completion of the Conversion.”

The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.

We intend to adopt one or more new stock-based benefit plans following the stock offering. These plans may be funded either through open market purchases or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of common stock to fund these plans will be subject to many factors, including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses for our capital and our financial performance. While our intention is to fund the new stock-based benefit plans through open market purchases, stockholders would experience a 6.79% dilution in ownership interest at the adjusted maximum of the offering range in the event newly issued shares of our common stock are used to fund stock options and shares of restricted common stock in an amount equal to 10% and 3%, respectively, of the shares sold in the offering. In the event we adopt a stock-based benefit plan more than 12 months following the conversion, new stock-based benefit plans would not be subject to these limitations and stockholders could experience greater dilution.

 

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Although the implementation of the stock-based benefit plans would be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

We have not determined when we will adopt one or more new stock-based benefit plans. Stock-based benefit plans adopted more than 12 months following the completion of the conversion may exceed regulatory restrictions on the size of stock-based benefit plans adopted within 12 months, which would further increase our costs.

If we adopt stock-based benefit plans more than 12 months following the completion of the conversion, then grants of shares of restricted common stock or stock options under our existing and proposed stock-based benefit plans may exceed 4% and 10%, respectively, of shares of common stock sold in the offering (unless the Bank’s tangible capital is less than 10% upon completion of the offering in which case awards of restricted stock will be limited to 3% of the common stock sold in the offering). Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our expenses and negatively impact our results of operations.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.” Although the implementation of stock-based benefit plans would be subject to stockholder approval, the determination as to when such plans would be implemented will be at the discretion of our board of directors.

Various factors may make takeover attempts more difficult to achieve.

Our articles of incorporation and bylaws, federal regulations, Ben Franklin Bank’s charter, Maryland law, shares of restricted stock and stock options that we have granted or may grant to employees and directors, stock ownership by our management and directors, employment agreements or change in control agreements that we have entered into, or may enter into to, with our executive officers and other factors may make it more difficult for companies or persons to acquire control of New Ben Franklin without the consent of our board of directors. You may want a takeover attempt to succeed because, for example, a potential acquiror could offer a premium over the then prevailing price of our common stock.

For additional information, see “Restrictions on Acquisition of New Ben Franklin,” “Management—Executive Compensation—Employment Agreements” and “—Benefits to be Considered Following Completion of the Conversion.”

There may be a decrease in stockholders’ rights for existing stockholders of Old Ben Franklin.

As a result of the conversion, existing stockholders of Old Ben Franklin will become stockholders of New Ben Franklin. In addition to the provisions discussed above that may discourage takeover attempts that may be favored by stockholders, some rights of stockholders of New Ben Franklin will be reduced compared to the rights stockholders currently have in Old Ben Franklin. The reduction in stockholder rights results from differences between the federal and Maryland chartering documents and bylaws, and from differences between federal and Maryland law. Many of the differences in stockholder rights under the articles of incorporation and bylaws of New Ben Franklin are not mandated by Maryland law but have been chosen by management as being in the best interests of New Ben Franklin and its stockholders. The articles of incorporation and bylaws of New Ben Franklin include the following provisions: (i) greater lead time required for stockholders to submit proposals for new business or to nominate directors; and (ii) approval by at least 80% of the outstanding shares of capital stock entitled to vote generally is required to amend the bylaws and certain provisions of the articles of incorporation. See “Comparison of Stockholders’ Rights For Existing Stockholders of Old Ben Franklin” for a discussion of these differences.

You may not revoke your decision to subscribe for New Ben Franklin common stock in the subscription or community offerings after you submit your stock order.

Funds submitted or deposit account withdrawals authorized in connection with the purchase of shares of common stock in the subscription and community offerings will be held by us until the completion or termination of

 

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the conversion and offering, including any extension of the expiration date and consummation of a syndicated offering. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by Keller and Company, Inc., among other factors, there may be one or more delays in completing the conversion and offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond January 31, 2015, or the number of shares to be sold in the offering is increased to more than 559,852 shares or decreased to fewer than 359,829 shares.

The distribution of subscription rights could have adverse income tax consequences.

If the subscription rights granted to certain current or former depositors of Ben Franklin Bank are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion of counsel, Luse Gorman Pomerenk & Schick, P.C., that it is more likely than not that such rights have no value; however, such opinion is not binding on the Internal Revenue Service.

We may be adversely affected by the soundness of other financial institutions.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Bank and non-bank financial services companies are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to different industries and counterparties and through transactions with counterparties in the bank and non-bank financial services industries, including brokers and dealers, commercial banks, investment banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more bank or non-bank financial services companies, or the bank or non-bank financial services industries generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have an adverse effect on our business, financial condition and results of operations.

We rely heavily on our management team and could be adversely affected by the unexpected loss of key officers.

We are led by an experienced core management team with substantial experience in the markets that we serve and the financial products that we offer. Our operating strategy focuses on providing products and services through long-term relationship managers. Accordingly, our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior management. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business plan may be lengthy. We may not be successful in retaining our key employees and the unexpected loss of services of one or more of our key personnel could have a material adverse effect on our business because of their skills, knowledge of our market and financial products, years of industry experience, long-term customer relationships and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, which could have an adverse effect on our business, financial condition and results of operations.

A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition and results of operations.

Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, the sale of our investment securities, Federal Home Loan Bank of Chicago advances, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.

 

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Other primary sources of funds consist of cash flows from operations, investment maturities and sales of investment securities Additional liquidity is provided by the ability to borrow from the Federal Home Loan Bank of Chicago. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the bank or non-bank financial services industries or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the bank or non-bank financial services industries.

Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or meet deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

 

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FORWARD-LOOKING STATEMENTS

This prospectus 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:

 

    statements of our goals, intentions and expectations;

 

    statements regarding our business plans, prospects, growth and operating strategies;

 

    statements regarding the quality of our loan and investment portfolios; and

 

    estimates of our risks and future costs and benefits.

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:

 

    our ability to execute on our business strategy to increase our origination of loans;

 

    our ability to comply with the Consent Order, including our individual minimum capital requirements, or the board resolutions requested by the Federal Reserve Board;

 

    general economic conditions, either nationally or in our market areas, that are worse than expected, and our ability to manage operations in such economic conditions;

 

    changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

    our ability to access cost-effective funding;

 

    fluctuations in real estate values and both residential and commercial real estate market conditions;

 

    demand for loans and deposits in our market area;

 

    competition among depository and other financial institutions;

 

    inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues or reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;

 

    adverse changes in the securities or secondary mortgage markets;

 

    changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

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    the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;

 

    our ability to manage market risk, credit risk and operational risk in the current economic conditions;

 

    our ability to enter new markets successfully and capitalize on growth opportunities;

 

    our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we have acquired or may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

 

    changes in consumer spending, borrowing and savings habits;

 

    changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

    changes in our organization, compensation and benefit plans;

 

    changes in the level of government support for housing finance;

 

    significant increases in our loan losses; and

 

    changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see “Risk Factors” beginning on page 17.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth selected consolidated historical financial and other data of Old Ben Franklin and its subsidiaries for the periods and at the dates indicated. The following is only a summary and you should read it in conjunction with the business and financial information regarding Old Ben Franklin contained elsewhere in this prospectus, including the consolidated financial statements and notes beginning on page F-1 of this prospectus. The information at December 31, 2013 and 2012 and for the years ended December 31, 2013 and 2012 is derived in part from the audited consolidated financial statements that appear in this prospectus. The information at December 31, 2011 and for the fiscal year then ended is derived in part from audited consolidated financial statements that are not included in this prospectus. The information at June 30, 2014 and for the six months ended June 30, 2014 and 2013 is unaudited and reflects only normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the six months ended June 30, 2014 are not necessarily indicative of the results to be achieved for all of 2014 or any other interim period.

 

     At June 30,
2014
     At December 31,  
        2013      2012      2011  
     (In thousands)         

Selected Financial Condition Data:

           

Total assets

   $ 92,094       $ 96,361       $ 100,782       $ 106,005   

Cash and cash equivalents

     20,420         19,960         12,236         10,771   

Loans receivable, net

     64,044         70,560         81,429         84,289   

Securities available for sale at fair value

     4,821         2,904         3,232         5,621   

Federal Home Loan Bank stock

     921         921         921         1,337   

Total deposits

     81,976         85,744         89,407         92,561   

Total equity

     9,100         9,617         10,482         12,536   

 

     For the Six Months
Ended June 30,
    For the Years Ended
December 31,
 
     2014     2013     2013     2012     2011  
     (In thousands)        

Selected Operating Data:

          

Interest income

   $ 1,672      $ 2,042      $ 3,882      $ 4,449      $ 4,784   

Interest expense

     231        293        559        703        954   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,441        1,749        3,323        3,746        3,830   

Provision for loan losses

     —          —          565        1,903        815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     1,441        1,749        2,758        1,843        3,015   

Non-interest income

     75        115        204        90        87   

Non-interest expense

     2,043        1,902        3,757        4,040        3,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (527     (38     (795     (2,107     (713

Income tax provision (benefit)

     (4     25        32        13        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (523   $ (63   $ (827   $ (2,120   $ (703
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     At or For the Six
Months Ended

June 30,
    At or For the Years Ended
December 31,
 
     2014     2013     2013     2012     2011  
     (unaudited)                    

Selected Financial Ratios and Other Data:

          

Performance Ratios (1):

          

Return on assets (ratio of net income (loss) to average total assets)

     (1.10 )%      (0.12 )%      (0.84 )%      (2.07 )%      (0.64 )% 

Return on equity (ratio of net income (loss) to average equity)

     (10.94 )%      (1.20 )%      (7.87 )%      (18.12 )%      (5.32 )% 

Interest rate spread (2)

     3.10     3.58     3.41     3.76     3.60

Net interest margin (3)

     3.16     3.65     3.49     3.85     3.70

Efficiency ratio (4)

     134.21     105.67     108.84     103.32     94.52

Non-interest expense to average total assets

     4.32     3.80     3.80     3.95     3.48

Average interest-earning assets to average interest-bearing liabilities

     112.48     111.84     112.07     111.57     111.01

Loans to deposits

     79.70     87.44     83.81     93.42     92.29

Average equity to average total assets

     10.10     10.58     10.62     11.43     12.04

Asset Quality Ratios:

          

Non-performing loans to gross loans

     2.13     2.01     3.21     1.22     2.08

Non-performing assets to total assets

     2.56     2.43     3.52     2.65     3.96

Allowance for loan losses to non-performing loans

     92.89     130.61     56.41     205.19     64.09

Allowance for loan losses to total loans

     1.98     2.62     1.81     2.51     1.33

Net charge-offs to average gross loans

     0.02     0.19     1.77     1.12     1.17

Capital Ratios:

          

Equity to total assets at end of period

     9.9     10.57     10.0     10.4     11.8

Total capital (to risk-weighted assets) (5)

     15.6     14.6     14.8     12.0     12.2

Tier I capital (to risk-weighted assets) (5)

     14.4     13.3     13.6     10.7     10.9

Tier I capital (to total adjusted assets) (5)

     9.1     9.3     9.2     8.2     8.4

Other Data:

          

Number of full service banking offices

     2        2        2        2        2   

Full-time equivalent employees

     26        23        24        22        22   

 

(1) All ratios are expressed as percentages. Performance ratios for the six months ended June 30, 2014 and 2013 are annualized, where appropriate.
(2) The interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the period.
(3) The net interest margin represents net interest income as a percent of average interest-earning assets for the period.
(4) The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
(5) Capital ratios are for Ben Franklin Bank only.

 

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RECENT DEVELOPMENTS

The following tables set forth certain consolidated historical financial and other data of Old Ben Franklin and its subsidiaries for the periods and at the dates indicated. The information at December 31, 2013 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of Old Ben Franklin beginning on page F-1 of this prospectus. The information at or for the three and nine months ended September 30, 2014 and 2013 is unaudited and reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of the results to be achieved for the remainder of fiscal 2014 or any other interim period.

 

     At September 30,
2014
     At December 31,
2013
 
     (Unaudited)         
     (In thousands)  

Financial Condition Data:

     

Total assets

   $ 87,218       $ 96,361   

Cash and cash equivalents

     18,014         19,960   

Loans receivable, net

     61,532         70,560   

Securities available for sale at fair value

     4,683         2,904   

Federal Home Loan Bank stock

     921         921   

Total deposits

     77,670         85,744   

Total equity

     8,683         9,617   

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2014     2013     2014     2013  
     (Unaudited)  
     (In thousands)  

Selected Operating Data:

        

Interest income

   $ 795      $ 948      $ 2,467      $ 2,990   

Interest expense

     105        136        336        429   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     690        812        2,131        2,561   

Provision for loan losses

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     691        812        2,131        2,561   

Non-interest income

     (14     36        61        151   

Non-interest expense

     1,054        958        3,098        2,860   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (378     (110     (906     (148

Income tax provision (benefit)

     6        3        1        28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (384   $ (113   $ (907   $ (176
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     At or for the Three Months
Ended

September 30,
    At or for the Nine Months
Ended

September 30,
 
     2014     2013     2014     2013  
     (Unaudited)  

Selected Financial Ratios and Other Data:

    

Performance Ratios (1):

        

Return on assets (ratio of net income (loss) to average total assets)

     (1.72 )%      (0.48 )%      (1.31 )%      (0.24 )% 

Return on equity (ratio of net income (loss) to average equity)

     (16.92 )%      (4.32 )%      (13.48 )%      (2.23 )% 

Interest rate spread (2)

     3.10     3.30     3.10     3.50

Net interest margin (3)

     3.16     3.40     3.16     3.57

Efficiency ratio (4)

     145.78     112.97     137.93     108.01

Non-interest expense to average total assets

     4.68     3.92     4.45     3.84

Average interest-earning assets to average interest-bearing liabilities

     112.55     112.33     112.50     112.00

Loans to deposits

     80.89     85.06     80.89     85.06

Average equity to average total assets

     10.10     10.71     9.68     10.62

Asset Quality Ratios:

        

Non-performing loans to gross loans

     2.17     2.22     2.17     2.22

Non-performing assets to total assets

     2.38     3.06     2.38     3.06

Allowance for loan losses to non-performing loans

     95.08     123.89     95.08     123.89

Allowance for loan losses to total loans

     2.06     2.75     2.06     2.75

Net charge-offs to average gross loans

     (0.01 )%      (0.05 )%      0.01     0.11

Capital Ratios:

        

Equity to total assets at end of period

     9.96     10.51     9.96     10.51

Total capital (to risk-weighted assets) (5)

     15.61     15.04     15.61     15.04

Tier I capital (to risk-weighted assets) (5)

     14.35     13.77     14.35     13.77

Tier I capital (to total adjusted assets) (5)

     9.11     9.38     9.11     9.38

Other Data:

        

Number of full service banking offices

     2        2        2        2   

Full-time equivalent employees

     26        24        26        24   

 

(1) All ratios are expressed as percentages. Performance ratios for the three and nine months ended September 30, 2014 and 2013 are annualized, where appropriate.
(2) The interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the period.
(3) The net interest margin represents net interest income as a percent of average interest-earning assets for the period.
(4) The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
(5) Capital ratios are for Ben Franklin Bank only.

Comparison of Financial Condition at September 30, 2014 and December 31, 2013

Assets. Total assets at September 30, 2014 were $87.2 million compared to $96.4 million at December 31, 2013, a decrease of $9.2 million or 9.5%. This decrease was primarily due to the $9.0 million decrease in the balance of our loan portfolio and $1.9 million decrease in the balance of our interest earning deposits, partially offset by the $1.8 million increase in the balance of our securities available for sale.

During the first nine months of 2014, our home equity line of credit loan portfolio decreased $3.6 million, our multi-family loan portfolio decreased $2.0 million, our commercial real estate loan portfolio decreased $1.0 million, our commercial business loan portfolio decreased $784,000, and our automobile loan portfolio decreased $800,000. The decreases were primarily due to the repayments from existing loans exceeding the $6.3 million of new loans and lines of credit originated and purchased during the first nine months of 2014.

At September 30, 2014 our allowance for loan losses was $1.3 million or 2.06% of total loans compared to $1.3 million or 1.81% of total loans at December 31, 2013. Our allowance reflected $221,000 of loans charged-off during the first nine months of 2014 offset by $214,000 of recoveries primarily due to the discounted payoff settlement of a non-performing loan, resulting in a recovery of $186,000. Our loans classified as substandard or doubtful decreased to $1.4 million or 2.2% of total loans at September 30, 2014 compared to $2.3 million or 3.2% of

 

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total loans at December 31, 2013. Our nonaccrual loans totaled $1.4 million or 2.17% of total loans at September 30, 2014 compared to $2.3 million or 3.2% of total loans at December 31, 2013. Our loans classified as TDRs totaled $4.1 million at September 30, 2014 of which $3.2 million were accruing compared to $4.3 million of TDRs at December 31, 2013 of which $3.0 million were accruing.

Our securities portfolio increased $1.8 million or 61.3% to $4.7 million at September 30, 2014 primarily due to the purchase of $3.0 million of callable government sponsored entities notes during 2014 to increase interest income earned on our excess liquidity until loan origination volume begins to increase. These increases were partially offset by the maturity of a $1.0 million note and the repayments on mortgage-backed securities. The three $1.0 million notes have rates of 1.25%, 1.65%, and 2.14% and terms of 3.5 years, 4.0 years, and 5.75 years, respectively. Our cash and cash equivalents decreased $1.9 million to $18.0 million at September 30, 2014.

Our repossessed assets decreased $374,000 during the first nine months of 2014 primarily due to the sale of two properties with a recorded value of $285,000 and the $190,000 write down of three real estate properties. These decreases were partially offset by the $102,000 transfer from loans to vacant land. During 2014, we repossessed three automobiles totaling $66,000. All of our repossessed automobiles were sold during the first six months of 2014.

Liabilities. Our total liabilities decreased $8.2 million or 9.5% to $78.5 million at September 30, 2014. Our deposits decreased by $8.0 million or 9.3% to $77.7 million at September 30, 2014 compared to $85.7 million at December 31, 2013, primarily due to the $6.2 million or 13.0% decrease in our certificate of deposit accounts to $41.8 million at September 30, 2014 and the $2.5 million or 15.9% decrease in our money market accounts. These decreases were partially offset by the $891,000 or 9.4% increase in our savings accounts. Management has elected to not aggressively price deposits resulting in some deposit run-off to help manage the Company’s capital and liquidity position over the past several years.

Stockholders’ Equity. Total stockholders’ equity at September 30, 2014 was $8.7 million, a decrease of $934,000 or 9.7% from December 31, 2013. The decrease resulted primarily from the net loss of $907,000 for the nine months ended September 30, 2014, a decrease of $25,000 for ESOP and other stock-based compensation and the $2,000 decrease in the unrealized gains on available-for-sale securities.

Comparison of Operating Results for the Nine Months Ended September 30, 2014 and 2013

General. For the nine months ended September 30, 2014 our net loss was $907,000 compared to a net loss of $176,000 for the nine months ended September 30, 2013. The increase in our net loss was primarily due to the decreases in our net interest income and non-interest income and the increase in our non-interest expenses.

Interest Income. Interest income was $2.5 million for the nine months ended September 30, 2014, $523,000 or 17.5% less than the prior year period. Interest income from loans decreased $534,000 or 18.3% to $2.4 million for the nine months ended September 30, 2014 primarily due to the $10.4 million decrease in the average balance of our loan portfolio to $65.8 million for the nine months ended September 30, 2014 compared to $76.2 million for the prior year period. The decrease in the average balance of our loan portfolio was due to repayments, pay-offs, transfers of loans to repossessed assets, and low origination volume for loans and included a $4.7 million decrease in the average balance of our multi-family and commercial real estate loan portfolio, a $2.9 million decrease in the average balance of our home equity line of credit portfolio, and a $2.0 million decrease in the average balance of our commercial business loan portfolio. The average yield of our loan portfolio was 4.85% for the first nine months of 2014 compared to 5.13% for the prior year period primarily due to the payoff of higher yielding loans.

Interest income from securities was $52,000 for the nine months ended September 30, 2014 compared to $45,000 for the prior year period. The average balance of our securities portfolio increased $932,000 to $4.5 million for the nine months ended September 30, 2014 compared to the prior year period primarily due to the purchase of $3.0 million of government sponsored entity notes during 2014 partially offset by the maturity of a $1.0 million note and the repayments on mortgage-backed securities. The average yield on securities for the nine months ended September 30, 2014 was 1.55% compared to 1.69% for the prior year period. Interest income from interest earning deposits increased $4,000 to $23,000 for the nine months ended September 30, 2014 compared to the prior year

 

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period. The average balance of our interest earning deposits increased $3.6 million to $19.7 million for the nine months ended September 30, 2014 compared to the prior year period primarily due to the decrease in our loan portfolio.

Interest Expense. Interest expense for the nine months ended September 30, 2014 was $336,000, a decrease of $93,000 or 21.7% from the prior year period due to the decrease in interest expense on deposits. The average cost of deposits decreased to 0.56% for the nine months ended September 30, 2014 compared to 0.67% for the prior year period as the average cost of our certificate of deposit and money market accounts decreased to 0.89% and 0.15%, respectively, for the nine months ended September 30, 2014 compared to 0.98% and 0.29% respectively, for the prior year period due to the general low market interest rates. The average balance of our certificate of deposit accounts decreased $5.7 million to $45.5 million for the first nine months of 2014. We have not aggressively priced our certificate of deposit accounts to stabilize the decline, given our high level of liquidity and low loan origination volume.

Net Interest Income. Net interest income for the nine months ended September 30, 2014 was $2.1 million compared to $2.6 million for the nine months ended September 30, 2013. For the nine months ended September 30, 2014, the average yield on interest-earning assets was 3.66% and the average cost of interest-bearing liabilities was 0.56% compared to 4.17% and 0.67%, respectively, for the nine months ended September 30, 2013. The decrease in the average yield of our interest earning assets was primarily due to the decline in the average balance of our loan portfolio due to the payoff of higher yielding loans and the increase in the balance of our lower yielding interest earning deposits. These changes resulted in a decrease in our net interest rate spread and net interest margin to 3.10% and 3.16% respectively for the first nine months of 2014 compared to a net interest rate spread of 3.50% and net interest margin of 3.57% for the prior year period.

Provision for Loan Losses. We had no provision for loan losses for the nine months ended September 30, 2014 and 2013. At September 30, 2014, 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. The improvement in the credit quality of our portfolio is reflected in the $7,000 net charge-offs for the nine months ended September 30, 2014

Non-interest Income. For the nine months ended September 30, 2014, non-interest income was $61,000 compared to $151,000 for the nine months ended September 30, 2013 primarily due to $54,000 loss on sale of other repossessed assets for the first nine months of 2014 compared to the $64,000 gain on sale of such assets the prior year period. Fees for originating loans for other institutions decreased $13,000 during the first nine months of 2014 compared to the prior year period. These decreases were partially offset by the $39,000 increase in rental income from other repossessed assets.

Non-interest Expense. For the nine months ended September 30, 2014, our non-interest expense totaled $3.1 million compared to $2.9 million for the nine months ended June 30, 2013, an increase of $238,000 or 8.3%. Our repossessed asset costs increased $109,000 primarily due to the $190,000 partial write down of three real estate properties during 2014. Our compensation and employee benefit costs increased $100,000 or 7.8% primarily due to the increase in staff during 2014. Data processing fees increased $27,000 primarily due to system enhancements. Professional fees decreased $44,000 primarily due to the $40,000 decrease in foreclosure related legal fees and the $29,000 decrease in consulting fees. Our FDIC insurance premium decreased $19,000 primarily due to the decrease in our assessment base. Other costs increased $54,000 and included $47,000 for costs related to the collateral reviews of our retail loan portfolio.

Income Tax. We recorded immaterial amounts for income taxes for the nine months ended September 30, 2014 and 2013.

Comparison of Operating Results for the Three Months Ended September 30, 2014 and 2013

General. For the three months ended September 30, 2014 our net loss was $384,000 compared to a net loss of $113,000 for the three months ended September 30, 2013. The increase in our net loss was primarily due to the decreases in our net interest income and non-interest income and an increase in our non-interest expenses.

 

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Interest Income. Interest income was $795,000 for the three months ended September 30, 2014, $153,000, or 16.1%, less than the prior year period. Interest income from loans decreased $158,000 or 17.1% to $767,000 for the three months ended September 30, 2014 primarily due to the $11.0 million decrease in the average balance of our loan portfolio to $62.9 million for the three months ended September 30, 2014 compared to $73.9 million for the prior year period. The decrease in the average balance of our loan portfolio included a $5.2 million decrease in our multi-family and commercial real estate loans, a $3.5 million decrease in our home equity line-of-credit loans, a $1.2 million decrease in our commercial business loans, and $831,000 decrease in our consumer loans. The decrease in the average balance of our loan portfolio was due to repayments, pay-offs, transfers of loans to repossessed assets, and low origination volume for loans. The average yield on loans for the three months ended September 30, 2014 was 4.86% compared to 4.99% in the prior year period.

Interest income from securities was $21,000 for the three months ended September 30, 2014 compared to $15,000 for the prior year period. The average balance of our securities portfolio was $5.5 million for the three months ended September 30, 2014 compared to the prior year period primarily due to the purchase of $3.0 million of government sponsored entity notes during 2014 partially offset by maturity of a $1.0 million note and the repayments on mortgage-backed securities. The average yield on securities for the three months ended September 30, 2014 was 1.55% compared to 1.58% for the prior year period. Interest income from interest earning deposits was $7,000 for the three months ended September 30, 2014 compared $8,000 the prior year period. The average balance of our interest earning deposits increased $1.4 million to $18.6 million for the three months ended September 30, 2014. The yield on our interest earning deposits was 0.16% for the three months ended September 30, 2014 compared to 0.17% the prior year period.

Interest Expense. Interest expense for the three months ended September 30, 2014 was $105,000, a decrease of $31,000 or 22.8% from the prior year period due to the decrease in interest expense on deposits. The average cost of deposits decreased to 0.54% for the three months ended September 30, 2014 compared to 0.64% for the prior year period as the average cost of our certificate of deposit and money market accounts decreased to 0.86% and 0.15%, respectively, for the three months ended September 30, 2014 compared to 0.96% and 0.24%, respectively, for the prior year period due to the general low market interest rates. The average balance of our certificate of deposit accounts decreased $6.6 million to $43.4 million for the three months ended September 30, 2014. We have not aggressively priced our certificate of deposit accounts to stabilize the decline, given our high level of liquidity and low loan origination volume.

Net Interest Income. Net interest income for the three months ended September 30, 2014 was $690,000 compared to $812,000 for the three months ended September 30, 2013. For the three months ended September 30, 2014, the average yield on interest-earning assets was 3.64% and the average cost of interest-bearing liabilities was 0.54% compared to 3.97% and 0.64%, respectively, for the three months ended September 30, 2013. The decrease in the average yield of our interest earning assets was primarily due to the decline in the average balance of our loan portfolio due to the payoff of higher yielding loans and the increase in the balance of our lower yielding interest earning deposits. These changes resulted in a decrease in our net interest rate spread and net interest margin to 3.10% and 3.16% respectively for the first three months of 2014 compared to a net interest rate spread of 3.33% and net interest margin of 3.40% for the prior year period.

Provision for Loan Losses. We had no provision for loan losses for the three months ended September 30, 2014 and 2013. At September 30, 2014, management concluded that the balance in our allowance for loan losses appropriately reflected the probable incurred credit losses in the portfolio based on an analysis of the Bank’s historical loss history and other current factors including market values and current economic conditions and trends.

Non-interest Income. For the three months ended September 30, 2014, non-interest income was a loss of $14,000 compared to income of $36,000 for the three months ended September 30, 2013 primarily due to 47,000 loss on the sale of two repossessed assets for the three months ended September 30, 2014 and the $9,000 decrease in fees from originating loans for other institutions. These decreases were partially offset by the $10,000 increase in rental income from other repossessed assets.

Non-interest Expense. For the three months ended September 30, 2014, our non-interest expense totaled $1.1 million compared to $958,000 for the three months ended September 30, 2013, an increase of $96,000 or

 

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10.0%. Our compensation and employee benefit costs increased $85,000 or 21.0% primarily due to the increase in staff and the health insurance costs during 2014. Professional fees increased $16,000 primarily due to the $35,000 increase in audit fees partially offset the $18,000 decrease in consulting fees. Our FDIC insurance premium decreased $6,000 primarily due to the decrease in our assessment base.

Income Tax. We recorded immaterial amounts for income taxes for the three months ended September 30, 2014 and 2013.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $2.5 million and $4.5 million.

We intend to distribute the net proceeds as follows:

 

    Based Upon the Sale at $10.00 Per Share of  
    359,829 Shares     423,329 Shares     486,828 Shares     559,852 Shares (1)  
    Amount     Percent of
Net
Proceeds
    Amount     Percent of
Net
Proceeds
    Amount     Percent of
Net
Proceeds
    Amount     Percent of
Net
Proceeds
 
    (Dollars in thousands)  

Offering proceeds

  $ 3,598        $ 4,233        $ 4,868        $ 5,599     

Less offering expenses

    (1,110       (1,110       (1,110       (1,110  
 

 

 

     

 

 

     

 

 

     

 

 

   

Net offering proceeds

  $ 2,488        100.0   $ 3,123        100.0   $ 3,758        100.0   $ 4,489        100.0
 

 

 

     

 

 

     

 

 

     

 

 

   

Distribution of net proceeds:

               

To Ben Franklin Bank

  $ (2,000     (80.38 )%    $ (2,030     (65.00 )%    $ (2,443     (65.00 )%    $ (2,918     (65.00 )% 

To fund loan to employee stock ownership plan

  $ (252     (10.13 )%    $ (296     (9.48 )%    $ (341     (9.07 )%    $ (392     (8.73 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Retained by New Ben Franklin (2)(3)

  $ 236        9.49   $ 797        25.52   $ 974        25.93   $ 1,179        26.27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) In the event stock-based benefit plans providing for stock awards and stock options are approved by stockholders, and assuming shares are purchased for stock awards at $10.00 per share, an additional $108,000, $127,000, $146,000 and $168,000 of net proceeds will be used by New Ben Franklin. In this case, the net proceeds retained by New Ben Franklin would be $128,000, $670,000, $828,000 and $1.0 million, respectively, or approximately 5.1%, 21.5%, 22.0% and 22.5% of the net offering proceeds, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range.
(3) The table above assumes that the employee stock ownership plan will purchase 7% of the shares sold in the offering. The employee stock ownership plan could purchase up to 10% of the shares sold in the offering in order to sell the minimum number of shares required to complete the offering. If the employee stock ownership plan were to purchase 10% of the shares of common stock sold in the offering in order to reach the minimum of the offering range, the proceeds retained by New Ben Franklin would equal approximately $128,000.

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Ben Franklin Bank’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if we were required to use a syndicated offering to sell some of the shares that we are offering. In addition, amounts shown for the distribution of the net proceeds at the minimum of the offering range to fund the loan to the employee stock ownership plan and proceeds to be retained by New Ben Franklin may change if we exercise our right to have the employee stock ownership plan purchase more than 7% of the shares of common stock offered if necessary to complete the offering at the minimum of the offering range.

New Ben Franklin may use the proceeds it retains from the offering:

 

    to invest in securities; and

 

    for other general corporate purposes.

In addition, we may, if necessary, distribute additional proceeds to Ben Franklin Bank in the future.

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. Under current federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund management recognition plans (which would require notification to the Federal Reserve Board) or tax-qualified employee stock benefit plans.

 

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Ben Franklin Bank may use the net proceeds it receives from the offering:

 

    to fund new loans;

 

    to improve existing products and services and to support the development of new products and services;

 

    to invest in securities;

 

    to enhance our existing branch presence; and

 

    for other general corporate purposes.

Until we are able to deploy funds as set forth above, we anticipate that a substantial portion of the net proceeds will be invested in mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored entities and other securities issued by U.S. Government-sponsored entities or U.S. Government agencies. We have not determined specific amounts of the net proceeds that would be used for the purposes described above. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, and overall market conditions.

OUR DIVIDEND POLICY

Old Ben Franklin and Ben Franklin Financial, MHC have 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 New Ben Franklin would 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, New Ben Franklin will be subject to Maryland state law limitations on the payment of dividends. See “Description of Capital Stock of New Ben Franklin Following the Conversion—Common Stock—Dividends.” Further, New Ben Franklin 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 New Ben Franklin 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 New Ben Franklin 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

 

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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 New Ben Franklin 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 New Ben Franklin, see “Taxation—Federal Taxation” and “Supervision and Regulation—Capital Distributions.”

New Ben Franklin will file 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.

 

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MARKET FOR THE COMMON STOCK

Old Ben Franklin’s common stock is not currently listed on a national securities exchange. Trades in Old Ben Franklin’s common stock are quoted on the OTCQB tier operated by OTC Markets Group, Inc. under the symbol “BFFI.” Upon completion of the conversion, the shares of common stock of New Ben Franklin will replace the existing shares of Old Ben Franklin common stock. We expect that transactions in the shares of New Ben Franklin common stock will be quoted on the OTC Pink tier operated by OTC Markets Group, Inc. under the symbol “BFFI.” In order to have our stock quoted on OTC Pink, we are required to have at least one broker-dealer who will make a market in our common stock. Sterne, Agee & Leach, Inc. has advised us that it intends to make a market in our common stock following the offering, but is under no obligation to do so.

The following table sets forth the high and low bid quotations for shares of Old Ben Franklin common stock for the periods indicated, as obtained from the OTCQB. 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. As of the close of business on October 31, 2014, there were 1,949,956 shares of Old Ben Franklin common stock outstanding, including 858,894 publicly held shares (shares held by stockholders other than Ben Franklin Financial, MHC), and approximately                  stockholders of record of Old Ben Franklin.

 

     Bid Price Per Share  
     High      Low  

Year Ending December 31, 2014

             

Fourth quarter (through October 31, 2014)

   $                    $                

Third quarter

     

Second quarter

     2.75         2.25   

First quarter

     2.85         2.25   

Year Ended December 31, 2013

             

Fourth quarter

     3.48         2.80   

Third quarter

     3.19         1.99   

Second quarter

     1.99         1.80   

First quarter

     2.01         1.60   

Year Ended December 31, 2012

             

Fourth quarter

     1.68         1.25   

Third quarter

     1.73         1.47   

Second quarter

     2.00         1.02   

First quarter

     2.00         1.02   

On September 5, 2014, the business day immediately preceding the public announcement of the conversion, and on             , 2014, the closing prices of Old Ben Franklin common stock as reported on the OTCQB were $2.60 per share and $         per share, respectively. On the effective date of the conversion, all publicly held shares of Old Ben Franklin common stock, including shares of common stock held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of New Ben Franklin common stock determined pursuant to the exchange ratio. See “The Conversion and Offering—Share Exchange Ratio for Public Stockholders.” Options to purchase shares of Old Ben Franklin common stock will be converted into options to purchase a number of shares of New Ben Franklin common stock determined pursuant to the exchange ratio, for the same aggregate exercise price. See “Beneficial Ownership of Common Stock.”

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

To be categorized as well capitalized under the federal Prompt Corrective Action rules, a savings bank must maintain minimum a Tier 1 leverage capital ratio of 5.0%, a Tier 1 risk-based capital ratio of 6% and a total risk based capital ratio of 10%. However, on December 19, 2012, Ben Franklin Bank entered into a Consent Order with the OCC (see “Supervision and Regulation—Consent Order and Board Resolutions”) which among other things included an individual minimum capital requirement to maintain a total risk-based capital ratio of at least 13% and a minimum Tier 1 leverage capital ratio of at least 9% beginning on March 31, 2013. As a result of entering into the Consent Order, Ben Franklin Bank’s capital classification under the Prompt Corrective Action rules was “adequately capitalized” at June 30, 2014. At June 30, 2014, Ben Franklin Bank met the individual minimum capital requirements of the Consent Order with a Tier 1 leverage capital level of $8.3 million, or 9.1% of adjusted total assets, and a total risk-based capital level of $9.1 million, or 15.6% of risk-weighted assets.

The table below sets forth the historical equity capital and regulatory capital of Ben Franklin Bank at June 30, 2014, and the pro forma equity capital and regulatory capital of Ben Franklin Bank, after giving effect to the sale of shares of common stock at $10.00 per share. The table assumes the receipt by Ben Franklin Bank of the greater of $2.0 million or 65% of the net offering proceeds. The table does not include the effect of $325,000 that Old Ben Franklin intends to distribute to Ben Franklin Bank in the quarter ending December 31, 2014. The capital requirements shown in the table do not include the individual minimum capital requirements of the Consent Order. See “How We Intend to Use the Proceeds from the Offering.”

 

    Ben Franklin Bank
Historical at

June 30, 2014
   

 

Pro Forma at June 30, 2014, Based Upon the Sale in the Offering of (1)

 
      359,829 Shares     423,329 Shares     486,828 Shares     559,852 Shares (2)  
    Amount     Percent of
Assets (3)
    Amount     Percent of
Assets (3)
    Amount     Percent of
Assets (3)
    Amount     Percent of
Assets (3)
    Amount     Percent of
Assets (3)
 
    (Dollars in thousands)  

Equity

  $ 8,341        9.1   $ 9,981        10.6   $ 9,948        10.6   $ 10,297        10.9   $ 10,699        11.3

Tier 1 leverage capital

  $ 8,330        9.1   $ 9,970        10.6   $ 9,937        10.6   $ 10,286        10.9   $ 10,688        11.3

Leverage requirement (4)

    4,601        5.0        4,701        5.0        4,702        5.0        4,723        5.0        4,746        5.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

  $ 3,729        4.1   $ 5,270        5.6   $ 5,235        5.6   $ 5,563        5.9   $ 5,941        6.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 risk-based capital (5)

  $ 8,330        14.4   $ 9,970        17.1   $ 9,937        17.0   $ 10,286        17.6   $ 10,688        18.2

Risk-based requirement (4)

    3,480        6.0        3,504        6.0        3,504        6.0        3,509        6.0        3,515        6.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

  $ 4,850        8.4   $ 6,466        11.1   $ 6,433        11.0   $ 6,777        11.6   $ 7,173        12.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total risk-based capital (5)

  $ 9,062        15.6   $ 10,702        18.3   $ 10,669        18.3   $ 11,018        18.8   $ 11,420        19.5

Risk-based requirement (4)

    5,800        10.0        5,840        10.0        5,840        10.0        5,849        10.0        5,858        10.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

  $ 3,262        5.6   $ 4,863        8.3   $ 4,829        8.3   $ 5,169        8.8   $ 5,562        9.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of capital infused into Ben Franklin Bank:

                   

Net proceeds to Ben Franklin Bank

      $ 2,000        $ 2,030        $ 2,443        $ 2,918     

Less: Common stock acquired by stock-based benefit plan

        108          127          146          168     

Less: Common stock acquired by employee stock ownership plan

        252          296          341          392     
     

 

 

     

 

 

     

 

 

     

 

 

   

Pro forma increase

      $ 1,640        $ 1,607        $ 1,956        $ 2,358     
     

 

 

     

 

 

     

 

 

     

 

 

   

 

(1) Pro forma capital levels assume that the employee stock ownership plan purchases 7% of the shares of common stock sold in the stock offering with funds we lend to such plan. Pro forma generally accepted accounting principles (“GAAP”) capital and regulatory capital have been reduced by the amount required to fund this plan. See “Management” for a discussion of the employee stock ownership plan.
(2) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(3) Tier 1 leverage capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(4) On December 19, 2012, we entered into a Consent Order with the OCC which included an individual minimum capital requirement, that requires that Ben Franklin Bank to maintain a Tier 1 leverage capital ratio of 9.0% and a total risk-based capital ratio of 13.0%. Effective January 1, 2015, the Prompt Corrective Action Well Capitalized Thresholds will be 5%, 8% and 10% for the tier 1 leverage capital requirement, tier 1 risk-based capital requirement and total risk-based capital requirement, respectively. Additionally, effective January 1, 2015, a new capital standard, common equity tier 1 capital ratio, will be implemented with a 6.5% well capitalized threshold. At June 30, 2014, assuming the completion of the conversion and offering, Ben Franklin Bank would have capital that exceeds all of the requirements described in this footnote.
(5) Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

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CAPITALIZATION

The following table presents the historical consolidated capitalization of Old Ben Franklin at June 30, 2014 and the pro forma consolidated capitalization of New Ben Franklin after giving effect to the conversion and offering, based upon the assumptions set forth in the “Pro Forma Data” section.

 

     Old Ben
Franklin
Historical at
June 30, 2014
    Pro Forma at June 30, 2014
Based upon the Sale in the Offering at
$10.00 per Share of
 
       359,829
Shares
    423,329
Shares
    486,828
Shares
    559,852
Shares (1)
 
     (Dollars in thousands)  

Deposits (2)

   $ 81,976      $ 81,976      $ 81,976      $ 81,976      $ 81,976   

Stockholders’ equity:

          

Preferred stock, $0.01 par value, 1,000,000 shares authorized (post-conversion) (3)

     —          —          —          —          —     

Common stock, $0.01 par value, 30,000,000 shares authorized (post-conversion); shares to be issued as reflected (3) (4)

     20        6        8        9        10   

Additional paid-in capital (3)

     8,250        10,752        11,385        12,019        12,749   

Retained earnings (5)

     1,748        1,748        1,748        1,748        1,748   

Accumulated other comprehensive income

     11        11        11        11        11   

Less:

          

Treasury stock

     (462     (462     (462     (462     (462

Common stock to be acquired by existing stock-based benefit plan

     (467     (467     (467     (467     (467
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common stock held by employee stock ownership plan (6)

     —          (252     (296     (341     (392

Common stock acquired by new stock-based benefit plan (7)

     —          (108     (127     (146     (168
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 9,100      $ 11,228      $ 11,800      $ 12,371      $ 13,029   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Shares Outstanding

          

Shares offered for sale

     —          359,829        423,329        486,828        559,852   

Exchange shares issued

     —          281,921        331,672        381,422        438,636   

Total shares outstanding

     1,949,956        641,750        755,001        868,250        998,488   

Total stockholders’ equity as a percentage of total assets

     9.88     11.92     12.45     12.97     13.57

Tangible equity as a percentage of total assets

     9.88     11.92     12.45     12.97     13.57

 

(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(3) Old Ben Franklin currently has 1,000,000 authorized shares of preferred stock and 20,000,000 authorized shares of common stock, par value $0.01 per share. On a pro forma basis, common stock and additional paid-in capital have been revised to reflect the number of shares of New Ben Franklin common stock to be outstanding.
(4) No effect has been given to the issuance of additional shares of New Ben Franklin common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the offering, an amount up to 10% of the shares of New Ben Franklin common stock sold in the offering will be reserved for issuance upon the exercise of options under the plans. No effect has been given to the exercise of options currently outstanding. See “Management.”
(5) The retained earnings of Ben Franklin Bank will be substantially restricted after the conversion. See “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Capital Distributions.”
(6) Assumes that 7% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from New Ben Franklin (although the employee stock ownership plan may purchase more than 7% of the shares sold in the offering to the extent such purchases are necessary to complete the offering at the minimum of the offering range). The loan will be repaid principally from Ben Franklin Bank’s contributions to the employee stock ownership plan. Since New Ben Franklin will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on New Ben Franklin’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.

 

(footnotes continue on following page)

 

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(continued from previous page)

 

(7) Assumes a number of shares of common stock equal to 3% of the shares of common stock to be sold in the offering will be purchased for grant by one or more stock-based benefit plans. The funds to be used by the plan to purchase the shares will be provided by New Ben Franklin. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. New Ben Franklin will accrue compensation expense to reflect the vesting of shares pursuant to the plan and will credit capital in an amount equal to the charge to operations. Implementation of the plan will require stockholder approval.

PRO FORMA DATA

The following tables summarize historical data of Old Ben Franklin and pro forma data of New Ben Franklin at and for the six months ended June 30, 2014 and at and for the year ended December 31, 2013. This information is based on assumptions set forth below and in the tables, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

The net proceeds in the tables are based upon the following assumptions:

 

  (i) all shares of common stock will be sold in the subscription and community offerings;

 

  (ii) our employee stock ownership plan will purchase 7% of the shares of common stock sold in the offering with a loan from New Ben Franklin. The loan will be repaid in substantially equal payments of principal and interest (at the prime rate of interest, calculated as of the date of the origination of the loan) over a period of 20 years. Interest income that we earn on the loan will offset the interest paid by Ben Franklin Bank;

 

  (iii) we will pay Sterne, Agee & Leach, Inc. a fee (including reimbursable expenses and legal fees) equal to $305,000; and

 

  (iv) total expenses of the offering, other than the sales fees and commissions to be paid to Sterne, Agee & Leach, Inc. will be $804,500.

We calculated pro forma consolidated net loss for the six months ended June 30, 2014 and the year ended December 31, 2013, as if the estimated net proceeds we received had been invested at the beginning of each period at an assumed interest rate of 1.70%. This represents the yield on the five-year U.S. Treasury Note as of August 15, 2014, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by federal regulations.

We further believe that the reinvestment rate is factually supportable because:

 

    the yield on the U.S Treasury Note can be determined and/or estimated from third-party sources; and

 

    we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest.

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net loss and stockholders’ equity by the indicated number of shares of common stock. For purposes of pro forma loss per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for each period as if the shares of common stock were outstanding at the beginning of each period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

The pro forma tables give effect to the implementation of one or more stock-based benefit plans. Subject to the receipt of stockholder approval, we have assumed that the stock-based benefit plans will acquire for restricted

 

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stock awards a number of shares of common stock equal to 3% of the shares of common stock sold in the stock offering at the same price for which they were sold in the stock offering. We assume that awards of common stock granted under the plans vest over a five-year period.

We have also assumed that options will be granted under stock-based benefit plans to acquire shares of common stock equal to 10% of the shares of common stock sold in the stock offering. In preparing the tables below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $2.19 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 18.32% for the shares of common stock, a dividend yield of 0%, an expected option term of 10 years and a risk-free rate of return of 2.52%.

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of the shares of common stock sold in the stock offering and that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the stock offering.

As discussed under “How We Intend to Use the Proceeds from the Stock Offering,” we intend to contribute the greater of $2.0 million or 65% of the net proceeds from the stock offering to Ben Franklin Bank, and we will retain the remainder of the net proceeds from the stock offering. We will use a portion of the proceeds we retain for the purpose of making a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.

The pro forma tables do not give effect to:

 

    withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the stock offering;

 

    our results of operations after the stock offering; or

 

    changes in the market price of the shares of common stock after the stock offering.

The following pro forma information may not be representative of the financial effects of the offering at the date on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Moreover, pro forma stockholders’ equity per share does not give effect to the liquidation accounts to be established in the conversion or, in the unlikely event of a liquidation of Ben Franklin Bank, to the tax effect of the recapture of the bad debt reserve. See “The Conversion and Offering—Liquidation Rights.”

 

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     At or for the Six Months Ended June 30, 2014
Based upon the Sale at $10.00 Per Share of
 
     359,829
Shares
    423,329
Shares
    486,828
Shares
    559,852
Shares (1)
 
     (Dollars in thousands, except per share amounts)  

Gross proceeds of offering

   $ 3,598      $ 4,233      $ 4,868      $ 5,599   

Market value of shares issued in the exchange

     2,820        3,317        3,815        4,386   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma market capitalization

   $ 6,418      $ 7,550      $ 8,683      $ 9,985   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross proceeds of offering

   $ 3,598      $ 4,233      $ 4,868      $ 5,599   

Expenses

     (1,110     (1,110     (1,110     (1,110
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net proceeds

     2,488        3,123        3,758        4,489   

Common stock purchased by employee stock ownership plan

     (252     (296     (341     (392

Common stock purchased for new stock awards

     (108     (127     (146     (168
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net proceeds, as adjusted

   $ 2,128      $ 2,700      $ 3,271      $ 3,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the Six Months Ended June 30, 2014

    

Consolidated net loss:

    

Historical

   $ (523   $ (523   $ (523   $ (523

Pro forma adjustments:

    

Income on adjusted net proceeds

     18        23        28        33   

Employee stock ownership plan (2)

     (6     (7     (9     (10

Stock awards (3)

     (11     (13     (15     (17

Stock options (4)

     (8     (9     (11     (12
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss

   $ (530   $ (529   $ (530   $ (529
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share (5):

    

Historical

   $ (0.87   $ (0.74   $ (0.64   $ (0.56

Pro forma adjustments:

    

Income on adjusted net proceeds

     0.03        0.03        0.03        0.03   

Employee stock ownership plan (2)

     (0.01     (0.01     (0.01     (0.01

Stock awards (3)

     (0.02     (0.02     (0.02     (0.02

Stock options (4)

     (0.01     (0.01     (0.01     (0.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma loss per share (5)

   $ (0.88   $ (0.75   $ (0.65   $ (0.56
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price to pro forma net loss per share

     (5.68 )x      (6.67 )x      (7.69 )x      (8.93 )x 

Number of shares used in loss per share calculations

     603,881        710,445        817,012        939,565   

At June 30, 2014

    

Stockholders’ equity:

    

Historical

   $ 9,100      $ 9,100      $ 9,100      $ 9,100   

Estimated net proceeds

     2,488        3,123        3,758        4,489   

Common stock acquired by employee stock ownership plan (2)

     (252     (296     (341     (392

Common stock acquired for new stock awards (3)

     (108     (127     (146     (168
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity

   $ 11,228      $ 11,800      $ 12,371      $ 13,029   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma tangible stockholders’ equity (6)

   $ 11,228      $ 11,800      $ 12,371      $ 13,029   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity per share (7):

    

Historical

   $ 14.18      $ 12.05      $ 10.48      $ 9.11   

Estimated net proceeds

     3.88        4.14        4.33        4.50   

Common stock acquired by employee stock ownership plan (2)

     (0.39     (0.39     (0.39     (0.39

Common stock acquired for new stock awards (3)

     (0.17     (0.17     (0.17     (0.17
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share (6) (7)

   $ 17.50      $ 15.63      $ 14.25      $ 13.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets

   $ 0.00      $ 0.00      $ 0.00      $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma tangible stockholders’ equity per share (6) (7)

   $ 17.50      $ 15.63      $ 14.25      $ 13.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as percentage of pro forma stockholders’ equity per share

     57.14     63.98     70.18     76.63

Offering price as percentage of pro forma tangible stockholders’ equity per share

     57.14     63.98     70.18     76.63

Number of shares outstanding for pro forma book value per share calculations

     641,750        755,001        868,250        998,488   

 

(footnotes begin on following page)

 

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(continued from previous page)

 

(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) Assumes that 7% of the shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from New Ben Franklin. Ben Franklin Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Ben Franklin Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification 718-40, “Employers’ Accounting for Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Ben Franklin Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects no combined federal or state taxes. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 630, 741, 852 and 980 shares were committed to be released at the beginning of the period at the minimum, midpoint, maximum and maximum, as adjusted of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of net income per share calculations.
(3) Assumes that, if approved by New Ben Franklin’s stockholders, one or more stock-based benefit plans purchase an aggregate number of shares of common stock equal to 3% of the shares to be sold in the offering (and may be a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from New Ben Franklin or through open market purchases. Shares in the stock-based benefit plan are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by New Ben Franklin. The table assumes that (i) the stock-based benefit plan acquires the shares through open market purchases at $10.00 per share, (ii) 10% of the amount contributed to the plan is amortized as an expense during the six months ended June 30, 2014, and (iii) the plan expense reflects an effective combined federal and state tax rate of 0.0%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 3.0% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 1.46%.
(4) Assumes that, if approved by New Ben Franklin’s stockholders, one or more stock-based benefit plans grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering (and may be a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.19 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 5.7%.
(5) Per share figures include publicly held shares of Old Ben Franklin common stock that will be exchanged for shares of New Ben Franklin common stock in the conversion. See “The Conversion and Offering—Share Exchange Ratio for Public Stockholders.” Net loss per share computations are determined by taking the number of shares assumed to be sold in the offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares which have not been committed for release during the period. See note 1. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.
(6) The retained earnings of Ben Franklin Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Capital Distributions.”
(7) Per share figures include publicly held shares of Old Ben Franklin common stock that will be exchanged for shares of New Ben Franklin common stock in the conversion. Stockholders’ equity per share calculations are based upon the sum of (i) the number of shares assumed to be sold in the offering and (ii) shares to be issued in exchange for publicly held shares at the minimum, midpoint and maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 0.3282, 0.3862, 0.4441 and 0.5107 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The number of shares actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

 

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     At or for the Year Ended December 31, 2013
Based upon the Sale at $10.00 Per Share of
 
     359,829
Shares
    423,329
Shares
    486,828
Shares
    559,852
Shares (1)
 
     (Dollars in thousands, except per share amounts)  

Gross proceeds of offering

   $ 3,598      $ 4,233      $ 4,868      $ 5,599   

Market value of shares issued in the exchange

     2,820        3,317        3,815        4,386   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma market capitalization

   $ 6,418      $ 7,550      $ 8,683      $ 9,985   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross proceeds of offering

   $ 3,598      $ 4,233      $ 4,868      $ 5,599   

Expenses

     (1,110     (1,110     (1,110     (1,110
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net proceeds

     2,488        3,123        3,758        4,489   

Common stock purchased by employee stock ownership plan

     (252     (296     (341     (392

Common stock purchased for new stock awards

     (108     (127     (146     (168
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net proceeds, as adjusted

   $ 2,128      $ 2,700      $ 3,271      $ 3,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the Year Ended December 31, 2013

        

Consolidated net loss:

        

Historical

   $ (827   $ (827   $ (827   $ (827

Pro forma adjustments:

        

Income on adjusted net proceeds

     36        46        56        67   

Employee stock ownership plan (2)

     (13     (15     (17     (20

Stock awards (3)

     (22     (25     (29     (34

Stock options (4)

     (16     (19     (21     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss

   $ (842   $ (840   $ (838   $ (839
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share (5):

        

Historical

   $ (1.37   $ (1.16   $ (1.01   $ (0.88

Pro forma adjustments:

        

Income on adjusted net proceeds

     0.06        0.06        0.07        0.07   

Employee stock ownership plan (2)

     (0.02     (0.02     (0.02     (0.02

Stock awards (3)

     (0.04     (0.04     (0.04     (0.04

Stock options (4)

     (0.03     (0.03     (0.03     (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma loss per share (5)

   $ (1.40   $ (1.19   $ (1.03   $ (0.90
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price to pro forma net loss per share

     (7.18 )x      (8.47 )x      (9.76 )x      (11.21 )x 

Number of shares used in loss per share calculations

     604,510        711,186        817,864        940,545   

At December 31, 2013

        

Stockholders’ equity:

        

Historical

   $ 9,617      $ 9,617      $ 9,617      $ 9,617   

Estimated net proceeds

     2,488        3,123        3,758        4,489   

Common stock acquired by employee stock ownership plan (2)

     (252     (296     (341     (392

Common stock acquired for new stock awards (3)

     (108     (127     (146     (168
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity

   $ 11,745      $ 12,317      $ 12,888      $ 13,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma tangible stockholders’ equity (6)

   $ 11,745      $ 12,317      $ 12,888      $ 13,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity per share (7):

        

Historical

   $ 14.99      $ 12.74      $ 11.08      $ 9.63   

Estimated net proceeds

     3.88        4.14        4.33        4.50   

Common stock acquired by employee stock ownership plan (2)

     (0.39     (0.39     (0.39     (0.39

Common stock acquired for new stock awards (3)

     (0.17     (0.17     (0.17     (0.17
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share (6) (7)

   $ 18.31      $ 16.32      $ 14.85      $ 13.57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets

   $ 0.00      $ 0.00      $ 0.00      $ 0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma tangible stockholders’ equity per share (6) (7)

   $ 18.31      $ 16.32      $ 14.85      $ 13.57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as percentage of pro forma stockholders’ equity per share

     54.61     61.27     67.34     73.69

Offering price as percentage of pro forma tangible stockholders’ equity per share

     54.61     61.27     67.34     73.69

Number of shares outstanding for pro forma book value per share calculations

     641,750        755,001        868,250        998,488   

 

(footnotes begin on following page)

 

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(continued from previous page)

 

(1) As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2) Assumes that 7% of the shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from New Ben Franklin. Ben Franklin Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Ben Franklin Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. ASC 718-40 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Ben Franklin Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects no federal or state taxes. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 1,259, 1,482, 1,704 and 1,960 shares were committed to be released at the beginning of the year at the minimum, midpoint, maximum and maximum, as adjusted of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the year were considered outstanding for purposes of net income per share calculations.
(3) Assumes that, if approved by New Ben Franklin’s stockholders, one or more stock-based benefit plans purchase an aggregate number of shares of common stock equal to 3% of the shares to be sold in the offering (and may be a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from New Ben Franklin or through open market purchases. Shares in the stock-based benefit plan are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by New Ben Franklin. The table assumes that (i) the stock-based benefit plan acquires the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the plan is amortized as an expense during the year ended December 31, 2013, and (iii) the plan expense reflects an effective combined federal and state tax rate of 0.0%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4.0% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.91%.
(4) Assumes that, if approved by New Ben Franklin’s stockholders, one or more stock-based benefit plans grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering (and may be a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.19 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 5.7%.
(5) Per share figures include publicly held shares of Old Ben Franklin common stock that will be exchanged for shares of New Ben Franklin common stock in the conversion. See “The Conversion and Offering—Share Exchange Ratio for Public Stockholders.” Net loss per share computations are determined by taking the number of shares assumed to be sold in the offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares which have not been committed for release during the year. See note 1. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.
(6) The retained earnings of Ben Franklin Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering—Liquidation Rights” and “Supervision and Regulation—Capital Distributions.”
(7) Per share figures include publicly held shares of Old Ben Franklin common stock that will be exchanged for shares of New Ben Franklin common stock in the conversion. Stockholders’ equity per share calculations are based upon the sum of (i) the number of shares assumed to be sold in the offering and (ii) shares to be issued in exchange for publicly held shares at the minimum, midpoint and maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 0.3282, 0.3862, 0.4441 and 0.5107 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The number of shares actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from audited and unaudited consolidated financial statements, which appear beginning on page F-1 of this prospectus. You should read the information in this section in conjunction with the business and financial information regarding Old Ben Franklin and the financial statements provided in this prospectus.

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 2013, and for the six months ended June 30, 2014. 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.

To improve asset quality and enhance our credit review and underwriting processes and procedures, in 2012 we added two experienced commercial lenders and an experienced commercial credit analyst and implemented a detailed problem asset resolution plan. We also enhanced our lending and credit policies and procedures and our credit administration procedures and controls. As a result, non-performing assets have decreased from a peak of $6.7 million, or 5.81% of total assets at December 31, 2010, to $2.4 million, or 2.56% of total assets, at June 30, 2014. In addition, the provision for loan losses has decreased from a peak of $1.9 million for the year ended December 31, 2012, to $565,000 for the year ended December 31, 2013 and no provision for the six months ended June 30, 2014.

Despite the improvements in asset quality, we have continued to record net losses. Net losses equaled $2.1 million in 2012, $827,000 for 2013 and $523,000 for the six months ended June 30, 2014. 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, a heightened level of non-performing loans and an increase in the balance of our lower yielding cash equivalents. We have decreased our asset size, primarily by decreasing the size of our loan portfolio, to address regulatory capital concerns following the increase in non-performing assets and losses due to the recession. At the same time, the severe recession resulted in lower loan demand which impacted our loan origination volumes. More recently, we have been required to shrink our assets further in order to meet increased capital requirements under the Consent Order (the “Consent Order”) we entered into with the OCC on December 19, 2012. 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. We do not believe that we can materially reduce our 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.

 

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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 adopted a strategic plan to increase our net interest income by growing our loan portfolio. Since 2012, we have added three experienced commercial lenders, including the Bank’s new President, and an experienced commercial credit analyst. We have also improved our credit underwriting, review and administration policies and procedures, and have experienced a significant improvement in asset quality. As a result of our addition of experienced staff, and our improvements to our lending policies and procedures, we believe that our current infrastructure is sufficient to support an expansion of our loan portfolio without incurring significant additional operating expenses. We believe that the additional capital raised in the conversion, will allow us to refocus our lending efforts and grow our loan portfolio.

Highlights of our business strategy include:

 

    Focusing on relationship banking. We are focused on meeting the financial needs of our customer base through offering a full complement of loan, deposit and online banking solutions (including remote deposit capture and mobile banking). In recent years we have introduced new products and services in order to more fully serve and deepen the relationship with our customers. We believe that these products and services will enable us to grow our core deposit base, which generally represents a customer’s primary banking relationship. Quality customer relationships provide opportunities for cross selling products to existing customers in an effort to deepen our “share of wallet” and we intend to actively develop such opportunities. In addition, we believe our emphasis on commercial business relationships such as commercial real estate and multi-family real estate lending will provide opportunities for transaction account relationships.

 

    Growing our commercial real estate and multi-family residential real estate lending. We believe we can enhance interest income in the current interest rate environment by continuing to emphasize the origination of short-term fixed-rate and adjustable-rate commercial real estate and multi-family residential real estate loans. In addition to providing higher yields than our conforming one- to four-family loans, these shorter term and adjustable-rate loans assist us in managing our interest rate risk. In 2008, as a result of the economic downturn’s impact on commercial real estate generally in the Chicago market, and our regulatory capital concerns, we decreased our commercial lending focus. As our local economy improves, we intend to resume originating commercial and multi-family real estate loans consistent with our conservative loan underwriting policies and procedures.

 

    Continuing our traditional emphasis on the origination of one- to four-family residential loans and home equity lines of credit. We intend to continue to emphasize the origination of one- to four-family loans. We offer a wide variety of one- to four-family residential loan products, including a bi-weekly loan product that we believe differentiates us from our competitors while providing benefits to our borrowers. We are also developing a new home equity line of credit product that has an interest only five-year draw period, and then automatically converts to a fully amortizing loan for the next 15 years. We believe this product will allow us to retain a higher percentage of our currently maturing or soon to mature lines of credit and is competitive to new borrowers.

 

    Continuing to focus on asset quality. We have sought to build strong asset quality through our addition of experienced loan and credit administration staff, and through enhanced lending and credit policies and procedures and credit administration procedures and controls. Our non-performing assets have decreased from a peak of $6.7 million at December 31, 2010, to $2.4 million at June 30, 2014.

 

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Anticipated Increase in Non-interest expense

Although the capital raised in the conversion will support our efforts to increase the size of our loan portfolio, the conversion will have a short-term adverse impact on our operating results due to increased expenses. These additional expenses include the costs of becoming a public company, increased compensation expenses associated with our new employee stock ownership plan and the possible implementation of one or more new stock-based benefit plans after the completion of the conversion. See “Risk Factors—Our new stock-based benefit plans will increase our expenses and negatively impact our results of operations;” and “Management—Benefits to be Considered Following Completion of the Conversion.”

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, 2017. 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

 

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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 June 30, 2014 and December 31, 2013

Assets. Total assets at June 30, 2014 were $92.1 million compared to $96.4 million at December 31, 2013, a decrease of $4.3 million or 4.4%. This decrease was primarily due to the $6.5 million decrease in our loan portfolio, partially offset by the $1.9 million increase in the balance of our securities available-for-sale.

During the first six months of 2014, our multi-family loan portfolio decreased $1.9 million, our home equity line of credit loan portfolio decreased $1.9 million, our commercial real estate loan portfolio decreased $1.2 million, our commercial business loan portfolio decreased $651,000, and our automobile loan portfolio decreased $589,000. These decreases were primarily due to the repayments from existing loans exceeding the $4.5 million of new loans and lines of credit originated and purchased during the first six months of 2014.

At June 30, 2014 our allowance for loan losses was $1.3 million or 1.98% of total loans compared to $1.3 million or 1.81% of total loans at December 31, 2013. Our allowance reflected $209,000 of loans charged-off during the first six months of 2014 partially offset by $201,000 of recoveries primarily due to the discounted payoff settlement of a non-performing loan, resulting in a recovery of $186,000. Our loans classified as substandard or doubtful decreased to $1.5 million or 2.3% of total loans at June 30, 2014 compared to $2.3 million or 3.2% of total loans at December 31, 2013. Our nonaccrual loans totaled $1.4 million or 2.1% of total loans at June 30, 2014 compared to $2.3 million or 3.2% of total loans at December 31, 2013. Our loans classified as TDRs totaled $4.1 million at June 30, 2014 of which $3.2 million were accruing compared to $4.3 million of TDRs at December 31, 2013 of which $3.0 million were accruing.

Our securities portfolio increased $1.9 million or 66.0% to $4.8 million at June 30, 2014 primarily due to the purchase of $2.0 million of callable government sponsored entities notes to increase interest income earned on our excess liquidity until loan origination volume begins to increase. These increases were partially offset by the repayments on mortgage-backed securities. The two $1.0 million notes have rates of 1.25% and 2.14% and terms of 3.5 years and 5.75 years, respectively. Our cash and cash equivalents increased $460,000 to $20.4 million at June 30, 2014.

Our repossessed assets decreased $123,000 during the first six months of 2014 primarily due to the $122,000 write down of three real estate properties. During 2014, we repossessed three automobiles totaling $66,000. All of our repossessed automobiles were sold during the first six months of 2014.

Liabilities. Our total liabilities decreased $3.8 million or 4.3% to $83.0 million at June 30, 2014. Our deposits decreased by $3.8 million or 4.4% to $82.0 million at June 30, 2014 compared to $85.7 million at December 31, 2013, primarily due to the $2.8 million or 5.8% decrease in our certificate of deposit accounts to $45.2 million at June 30, 2014 and the $1.2 million or 7.2% decrease in our money market accounts. Management has elected to not aggressively price deposits resulting in some deposit run-off to help manage the Company’s capital and liquidity position over the past several years.

 

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Stockholders’ Equity. Total stockholders’ equity at June 30, 2014 was $9.1 million, a decrease of $517,000 or 5.4% from December 31, 2013. The decrease resulted primarily from the net loss of $523,000 for the six months ended June 30, 2014, partially offset by an increase of $1,000 for ESOP and other stock-based compensation and the $7,000 increase in the unrealized gains on available-for-sale securities.

Comparison of Financial Condition at December 31, 2013 and December 31, 2012

Assets. At December 31, 2013, total assets decreased by $4.4 million or 4.4% to $96.4 million compared to $100.8 million at December 31, 2012 primarily due to the $10.9 million decrease in our net loan portfolio, the $564,000 decrease in our repossessed assets, and the $328,000 decrease in our securities available-for-sale. These decreases were partially offset by the $7.7 million increase in our cash and cash equivalents. Our loan portfolio, net of allowance, decreased to $70.6 million at December 31, 2013 compared to $81.4 million at December 31, 2012 primarily due to repayments and charge-offs exceeding loan originations and purchases. During 2013, our loan origination and purchase activity for our portfolio, excluding home equity lines of credit, was $7.0 million compared to $8.6 million during 2012. Originations of our home equity-lines of credit were $1.5 million in 2013 compared to $2.1 million in 2012. Lower origination volume, charge-offs, and payment activity for 2013 also resulted in a decrease of $3.8 million in our commercial business loan portfolio, a $2.7 million decrease in our commercial real estate loan portfolio, a $2.3 million decrease in our home equity line of credit loan portfolio, and a $900,000 decrease in our one- to four-family residential mortgage loan portfolio.

At December 31, 2013 our allowance for loan losses was $1.3 million or 1.81% of total loans compared to $2.1 million or 2.51% of total loans at December 31, 2012. The decrease in the balance of our allowance for loan losses at December 31, 2013 was primarily due to the $1.4 million of net charge-offs offset by the $565,000 provision during 2013 compared to the $945,000 of net charge-offs and the $1.9 million provision in the prior year. Charge-offs during 2013 included $539,000 related to a commercial real estate loan which was downgraded and classified as “doubtful” at year end 2013 and $554,000 related to TDRs in accordance with recently issued regulatory guidance. Our loans classified as substandard or doubtful decreased $4.2 million to $2.3 million at December 31, 2013 compared to $6.5 million at December 31, 2012. The decrease in our classified loans was primarily due to the upgrade of $2.8 million of loans due to their improved credit conditions; $1.3 million of charge-offs on substandard and doubtful classified loans; and the payoff of $459,000 of such loans. These decreases were partially offset by the addition of two new substandard loans totaling $614,000. Our nonperforming loans, including non-accruing TDR loans, totaled $2.3 million or 3.21% of total loans at December 31, 2013 compared to $1.0 million or 1.22% of total loans at December 31, 2012 primarily due to changes related to the treatment of TDR loans. Our loans classified as performing TDRs totaled $3.0 million at December 31, 2013 compared to $4.4 million at December 31, 2012 due to several loans that were classified as non-performing due to the change in their accrual status during 2013 along with regular payments applied to the performing TDRs.

Our securities portfolio decreased $328,000 to $2.9 million at December 31, 2013 compared to $3.2 million at the prior year end. This decrease in our securities portfolio was primarily due to the call of $1.0 million in U.S. government sponsored entity notes, repayments on our mortgage-backed securities, and the decrease in the unrealized gain on the securities portfolio as a result of the increase in interest rates during the second half of 2013. This decrease in securities was partially offset by the purchase of a $1.0 million U.S. government sponsored entity note.

Cash and cash equivalents increased $7.8 million to $20.0 million at December 31, 2013 from $12.2 million at December 31, 2012 due to the decrease in loan originations in 2013.

The balance of our repossessed assets decreased $564,000 to $1.1 million at December 31, 2013 compared to $1.7 million at December 31, 2012. We sold $1.0 million of repossessed assets and had charge-offs that totaled $102,000 during 2013, partially offset by the transfer of a $552,000 loan to repossessed assets.

Liabilities. Total deposits decreased $3.7 million or 4.1% to $85.7 million at December 31, 2013 compared to $89.4 million at December 31, 2012. Our certificate of deposit accounts decreased $5.0 million or 9.4% to $48.0 million at December 31, 2013 compared to $53.0 million at the prior year-end. Our savings, demand, and money market account balances increased $1.3 million to $37.7 million at December 31, 2013 compared to $36.4 million at the prior year-end. This increase reflects a preference of our customers to remain in short term liquid investment in this low interest rate environment.

 

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Stockholders’ Equity. Total stockholders’ equity decreased $865,000 or 8.3% to $9.6 million at December 31, 2013 compared to $10.5 million at December 31, 2012. The decrease resulted from the net loss of $827,000 in 2013 and a $50,000 decrease in the unrealized gain on available-for-sale securities, partially offset by a $12,000 increase in ESOP and stock incentive compensation amounts. As part of the Consent Order, the Bank is required to maintain Tier 1 and Total Risk Based capital ratios of 9% and 13%, respectively. The Company contributed an additional $1.3 million to the Bank to meet these minimum capital requirements during 2013. At December 31, 2013, the Bank was in compliance with the capital requirements of the Consent Order.

Comparison of Operating Results for the Six Months Ended June 30, 2014 and 2013

General. For the six months ended June 30, 2014 our net loss was $523,000 compared to a net loss of $63,000 for the six months ended June 30, 2013. The increase in our net loss was primarily due to the decreases in our net interest income and non-interest income and an increase in our non-interest expenses.

Interest Income. Interest income was $1.7 million for the six months ended June 30, 2014, $370,000 or 18.1% less than the prior year period. Interest income from loans decreased $376,000 or 18.8% to $1.6 million for the six months ended June 30, 2014 primarily due to the $10.0 million decrease in the average balance of our loan portfolio to $67.3 million for the six months ended June 30, 2014 compared to $77.3 million for the prior year period. The decrease in the average balance of loan portfolio was due to repayments, pay-offs, transfers of loans to repossessed assets, and low origination volume for loans and included a $4.4 million decrease in the average balance of our multi-family and commercial real estate loan portfolio, a $2.6 million decrease in the average balance of our home equity line of credit portfolio, and a $2.6 million decrease in the average balance of our commercial business loan portfolio. The average yield of our loan portfolio was 4.85% for the first six months of 2014 compared to 5.20% for the prior year period primarily due to the payoff of higher yielding loans.

Interest income from securities was $31,000 for the six months ended June 30, 2014 compared to $30,000 the prior year period. The average balance of our securities portfolio increased $593,000 to $4.0 million for the six months ended June 30, 2014 compared to the prior year period primarily due to the purchase of $2.0 million of government sponsored entity notes during the second quarter of 2014 partially offset by repayments on mortgage-backed securities. The average yield on securities for the six months ended June 30, 2014 was 1.55% compared to 1.75% for the prior year period. Interest income from interest earning deposits increased $5,000 to $16,000 for the six months ended June 30, 2014 compared to prior year period. The average balance of our interest earning deposits increased $4.7 million to $20.2 million for the six months ended June 30, 2014 compared to the prior year period primarily due to the decrease in our loan portfolio.

Interest Expense. Interest expense for the six months ended June 30, 2014 was $231,000, a decrease of $62,000 or 21.2% from the prior year period due to the decrease in interest expense on deposits. The average cost of deposits decreased to 0.57% for the six months ended June 30, 2014 compared to 0.69% for the prior year period as the average cost of our certificate of deposit and money market accounts decreased to 0.91% and 0.15%, respectively, for the six months ended June 30, 2014 compared to 1.00% and 0.37%, respectively, for the prior year period due to the general low market interest rates. The average balance of our certificate of deposit accounts decreased $5.3 million to $46.6 million for the first six months of 2014. We have not aggressively priced our certificate of deposit accounts to stabilize the decline, given our high level of liquidity and low loan origination volume.

Net Interest Income. Net interest income for the six months ended June 30, 2014 was $1.4 million compared to $1.7 million for the six months ended June 30, 2013. For the six months ended June 30, 2014, the average yield on interest-earning assets was 3.67% and the average cost of interest-bearing liabilities was 0.57% compared to 4.27% and 0.69%, respectively, for the six months ended June 30, 2013. The decrease in the average yield of our interest earning assets was primarily due to the decline in the average balance of our loan portfolio due to the payoff of higher yielding loans and the increase in the balance of our lower yielding interest earning deposits. These changes resulted in a decrease in our net interest rate spread and net interest margin to 3.10% and 3.15% respectively for the first six months of 2014 compared to a net interest rate spread of 3.58% and net interest margin of 3.64% for the prior year period.

 

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Provision for Loan Losses. We had no provision for loan losses for the six months ended June 30, 2014 and 2013. At June 30, 2014, 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. The improvement in the credit quality of our portfolio is reflected in the $8,000 net charge-offs for the six months ended June 30, 2014

Non-interest Income. For the six months ended June 30, 2014, non-interest income was $75,000 compared to $115,000 for the six months ended June 30, 2013 primarily due to the $7,000 loss on the sale of repossessed assets for the first six months of 2014 compared to the $64,000 gain on sales for the prior year period which included the sale of a single family residential property and a commercial real estate property and loss on the sale of a repossessed automobile. This decrease was partially offset by the $31,000 increase in income from repossessed assets for the first six months of 2014 compared to the prior year period.

Non-interest Expense. For the six months ended June 30, 2014, our non-interest expense totaled $2.0 million compared to $1.9 million for the six months ended June 30, 2013, an increase of 7.4%. Our repossessed asset costs increased $114,000 primarily due to the $122,000 partial write down of three real estate properties. Our data processing fees increased by $22,000 primarily related to upgrades and new applications. Our compensation and employee benefit expense increased $15,000 primarily due to the increase in staff during 2014. Our professional fees decreased $60,000 due to a $41,000 decrease in legal fees, primarily related to non-performing assets, a $16,000 decrease in consulting fees, and a $16,000 decrease in internal audit related fees. Our FDIC insurance premium decreased $13,000 due to the decrease in our assessment base. Other costs increased $58,000 and included $38,000 for costs related to the collateral reviews of our retail loan portfolio.

Income Tax. We recorded immaterial amounts for income taxes for the six months ended June 30, 2014 and 2013.

Comparison of Operating Results for the Years Ended December 31, 2013 and December 31, 2012

General. Our net loss for the year ended December 31, 2013 was $827,000 compared to a net loss of $2.1 million for the prior year. The decrease in our net loss was primarily due to the decrease in our provision for loan losses of $1.3 million and the decrease in non-interest expense due to the decrease in costs related to our repossessed assets. Our efforts to reduce our problem assets was aided in 2013 by improving real estate values in our local market as the economy slowly recovers from the deep recession.

Interest Income. Interest income decreased $567,000 or 12.7% to $3.9 million for 2013. Interest income from loans decreased $547,000 or 12.6% to $3.8 million for the year ended December 31, 2013 compared to the prior year. This decrease was primarily due to the decrease in the average balance of our loan portfolio to $74.9 million during 2013 compared to $82.9 million in 2012. The decrease in the average balance of our loan portfolio was primarily due to decreases in the average balance of: $3.5 million in our multi-family and commercial real estate loans, $2.2 million in our home equity line of credit loans, $170,000 in our commercial business loans, and $745,000 in our consumer loans. These decreases in the average balance of our loans were primarily due to the impact of low origination volumes and the repayment of existing loans. The average yield on loans for the year ended December 31, 2013 was 5.07% compared to 5.24% in the prior year.

Interest income from securities decreased $37,000 or 38.1% to $60,000 for the year ended December 31, 2013 compared to the prior year. The average balance of our securities portfolio for 2013 was $3.6 million compared to $5.1 million for the prior year primarily due to the call of $3.0 million of government sponsored entities notes during 2012 and the pay down of our mortgage-backed securities during 2013. The average yield on our securities portfolio for the year ended December 31, 2013 was 1.65% compared to 1.89% for the prior year. The average balance of our Federal Home Loan Bank of Chicago stock was $921,000 for the year ended December 31, 2013 compared to $996,000 for the prior year due to the redemption of stock during 2012. For the year ended December 31, 2013, interest from other interest earning assets was $26,000 compared to $9,000 for the prior year primarily due to the $7.4 million increase in the average balance of other interest earning assets to $16.8 million for year ended December 31, 2013 compared to $9.4 million for the prior year.

 

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Interest Expense. Interest expense for the year ended December 31, 2013 was $559,000, a decrease of $144,000 or 20.5% from the prior year. The decrease was primarily due to the decrease in the average cost of deposits to 0.66% for 2013 compared to 0.81% for 2012 as the average cost of our certificates of deposit decreased to 0.97% for the year ended December 31, 2013 compared to 1.11% for the prior year as the general low market interest rates led to the downward repricing of maturing certificate of deposit accounts. The average balance of our deposits decreased $2.2 million to $85.1 million for 2013 due to a decrease of $3.9 million in the average balance of our certificate of deposit accounts to $50.6 million, partially offset by a $1.7 million increase in the average balance of our savings, demand, and money market accounts to $34.5 million for the year ended December 31, 2013.

Net Interest Income. Net interest income for the year ended December 31, 2013 decreased $423,000 or 11.3% to $3.3 million from the prior year primarily due to the change in our asset mix as the average balance of our lower yielding interest earning deposits increased and the average balance of our loan portfolio decreased. The average yield on interest-earning assets for 2013 was 4.07% compared to 4.57% for the prior year primarily due to the change in our asset mix. The average cost of interest-bearing liabilities decreased to 0.66% in 2013 from 0.81% in 2012. The result was a net interest rate spread of 3.41% for the year ended December 31, 2013 compared to 3.76% for the prior year. Our net interest margin also decreased to 3.49% in 2013 compared to 3.85% in 2012 due to the decrease in the net interest rate spread.

Provision for Loan Losses. Our provision for loan losses was $565,000 for the year ended December 31, 2013 compared to $1.9 million in 2012. The decrease was primarily due to the decrease in the collateral value of our loans individually evaluated for impairment in 2012 and the stabilization of collateral values of real estate in our market area during 2013 and the decrease in the balance of our loan portfolio. Our $565,000 provision for loan losses for the year ended December 31, 2013 included $163,000 related to our multi-family loans, $277,000 related to our commercial real estate loans, and $115,000 related to our commercial business loans. Our provision for loan losses for the year ended December 31, 2012 included $1.2 million related to our one- to four-family residential loans, $333,000 related to our commercial real estate loans, $187,000 related to our multi-family loans, and $147,000 related to our home equity line of credit loans.

Non-interest Income. Non-interest income increased $114,000 to $204,000 for the year ended December 31, 2013 compared to $90,000 for the prior year. Our gain on sale of repossessed assets was $75,000 for the year ended December 31, 2013 compared to a loss of $74,000 for the prior year. Our service fee income decreased $45,000 primarily due to a $32,000 decrease in fees for originating loans for another financial institution.

Non-interest Expense. Non-interest expense totaled $3.8 million for the year ended December 31, 2013, a decrease of $283,000 or 7.0% from the prior year. Our repossessed asset expense decreased $595,000 to $160,000 in 2013 compared to $755,000 for the prior year primarily due to a decrease in write-downs of $337,000. Our write-downs for 2013 consisted of $12,000 for commercial real estate and $90,000 for land. Our total write-downs for 2012 included $194,000 related to commercial real estate, $96,000 for land, $93,000 for one- to four-family real estate, $39,000 for multi-family real estate, and $17,000 for other assets. Compensation and employee benefits expenses increased $136,000 primarily due to the increase in staff. Data processing costs increased $28,000 due to the installation of new software applications. Our FDIC insurance premium increased $81,000 due to the change in our regulatory classification. Professional fees increased $19,000 primarily due to a $56,000 increase in internal audit and compliance related fees partially offset by a $64,000 decrease in foreclosure related legal fees. Other expenses increased $43,000 on a net basis including $15,000 for the provision for losses on off balance sheet commitments and a $21,000 increase for regulatory fees.

Income Tax. We recorded immaterial amounts for income taxes for the years ended December 31, 2013 and 2012.

 

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Average Balances and Yields

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

 

           For the Six Months Ended June 30,  
   At     2014     2013  
     June 30, 2014     Average                   Average                
           Outstanding             Yield/     Outstanding             Yield/  
   Yield/Cost     Balance      Interest      Cost (1)     Balance      Interest      Cost (1)  
           (Dollars in thousands)  

Interest-earning assets:

                  

Loans

     4.78   $ 67,332       $ 1,625         4.85   $ 77,322       $ 2,001         5.20

Available-for-sale securities

     1.55     3,987         31         1.55     3,393         30         1.75

Other interest-earning assets (2)

     0.16     20,190         16         0.16     15,508         11         0.15
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     3.59     91,509         1,672         3.67     96,223         2,042         4.27
       

 

 

         

 

 

    

Noninterest-earning assets

       3,181              3,800         
    

 

 

         

 

 

       

Total assets

     $ 94,690            $ 100,023         
    

 

 

         

 

 

       

Interest-bearing liabilities:

                  

Demand deposit accounts

     0.06   $ 9,458         3         0.06   $ 8,697         5         0.16

Money market accounts

     0.15     15,457         12         0.15     16,432         25         0.37

Savings accounts

     0.15     9,881         7         0.15     9,044         7         0.15

Certificates of deposit

     0.88     46,562         209         0.91     51,867         256         1.00
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     0.55     81,358         231         0.57     86,040         293         0.69

Noninterest-bearing demand deposits

       2,826              2,670         

Other liabilities

       939              733         
    

 

 

         

 

 

       

Total liabilities

       85,123              89,443         

Stockholders’ equity

       9,567              10,580         
    

 

 

         

 

 

       

Total liabilities and stockholders’ equity

     $ 94,690            $ 100,023         
    

 

 

         

 

 

       

Net interest income

        $ 1,441            $ 1,749      
       

 

 

         

 

 

    

Net interest rate spread (3)

     3.04           3.10           3.58
  

 

 

         

 

 

         

 

 

 

Net interest-earning assets (4)

     $ 10,151            $ 10,183         
    

 

 

         

 

 

       

Net interest margin (5)

     3.10           3.15           3.64
  

 

 

         

 

 

         

 

 

 

Average interest-earning assets to interest-bearing liabilities

     113.00           112.48           111.84
  

 

 

         

 

 

         

 

 

 

 

(1) Yield and costs for the six months ended June 30, 2014 and 2013 are annualized.
(2) Consists of stock in the FHLB of Chicago and cash and cash equivalents.
(3) Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.

 

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     For the Years Ended December 31,  
   2013     2012  
     Average
Outstanding
Balance
    Interest      Yield/
Cost
    Average
Outstanding
Balance
    Interest      Yield/
Cost
 
     (Dollars in thousands)  

Interest-earning assets:

              

Loans

   $ 74,895      $ 3,796         5.07   $ 82,850      $ 4,343         5.24

Available-for-sale securities

     3,632        60         1.65     5,149        97         1.89

Other interest-earning assets (1)

     16,816        26         0.16     9,368        9         0.09
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     95,343        3,882         4.07     97,367        4,449         4.57
    

 

 

        

 

 

    

Noninterest-earning assets

     3,515             5,004        
  

 

 

        

 

 

      

Total assets

   $ 98,858           $ 102,371        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Demand deposit accounts

   $ 8,834        9         0.10   $ 8,391        11         0.13

Money market accounts

     16,437        44         0.27     16,058        76         0.47

Savings accounts

     9,209        14         0.15     8,322        12         0.15

Certificates of deposit

     50,596        492         0.97     54,502        604         1.11
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     85,076        559         0.66     87,273        703         0.81

Noninterest-bearing demand deposits

     2,551             2,639        

Other liabilities

     729             757        
  

 

 

        

 

 

      

Total liabilities

     88,356             90,669        

Stockholders’ equity

     10,502             11,702        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 98,858           $ 102,371        
  

 

 

        

 

 

      

Net interest income

     $ 3,323           $ 3,746      
    

 

 

        

 

 

    

Net interest rate spread (2)

          3.41          3.76
       

 

 

        

 

 

 

Net interest-earning assets (3)

   $ 10,267           $ 10,094        
  

 

 

        

 

 

      

Net interest margin (4)

          3.49          3.85
       

 

 

        

 

 

 

Average interest-earning assets to interest-bearing liabilities

     112.07          111.57     
  

 

 

        

 

 

      

 

(1) Consists of stock in the FHLB of Chicago and cash and cash equivalents.
(2) Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.

 

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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.

 

     For the Six Months Ended June 30,
2014 vs. 2013
    For the Years December 31,
2013 vs. 2012
 
     Increase (Decrease) Due to     Total     Increase (Decrease) Due to     Total  
           Increase           Increase  
     Volume     Rate     (Decrease)     Volume     Rate     (Decrease)  
     (In thousands)  

Interest-earning assets:

            

Loans

   $ (254   $ (122   $ (376   $ (433   $ (114   $ (547

Investment securities

     10        (9     1        (26     (11     (37

Other interest-earning assets

     4        1        5        9        8        17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     (240     (130     (370     (450     (117     (567
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Demand deposit accounts

     1        (3     (2     1        (3     (2

Money market accounts

     (2     (11     (13     2        (34     (32

Savings accounts

     —          —          —          2        —          2   

Certificates of deposit

     (25     (22     (47     (41     (71     (112
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (26     (36     (62     (36     (108     (144
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ (214   $ (94   $ (308   $ (414   $ (9   $ (423
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30, 2014 in the event of designated changes in the United States Treasury yield curve.

 

At June 30, 2014

 
            Estimated Increase (Decrease)
in NPV
    NPV as Percentage of Present Value
of Assets (3)
 
Changes in Interest    Estimated                  Changes in Basis  

Rates (basis points)(1)

   NPV (2)      Amount     Percent     NPV Ratio(4)     Points  
     (Dollars in thousands)  
+300    $ 13,107       $ 753        6     15.18     1.72
+200      13,041         687        6        14.77        1.31   
+100      12,735         381        3        14.13        0.67   
0      12,354         —          —          13.46        —     
-100      11,466         (888     (7     12.25        (1.21

 

(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) NPV Ratio represents NPV divided by the present value of assets.

 

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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 June 30, 2015 in the event of designated changes in the United States Treasury yield curve.

 

For the Twelve Months Ended June 30, 2015  
              Estimated Increase (Decrease)
in Net Interest Income
 
Changes in Interest      Estimated Net               

Rates (basis points)(1)

     Interest Income      Amount     Percent  
(Dollars in thousands)  
  +300       $ 3,551       $ 656        23
  +200         3,352         457        16   
  +100         3,127         232        8   
  0         2,895         —          —     
  -100         2,674         (221     (6

 

(1) Assumes an instantaneous uniform change in interest rates at all maturities.

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 six months ended June 30, 2014 and the year ended December 31, 2013 were ($352,000) and $329,000. Net cash from investing activities consisted primarily of disbursements for loan originations and purchases, offset by principal collections on loans and payments on investment securities and sales of repossessed assets. Net cash flows from investing activities for the six months ended June 30, 2014 and the year ended December 31, 2013 were $4.6 million and $11.0. Net cash from financing activities consisted primarily of activity in deposits and escrow accounts. Net cash flows from financing activities for the six months ended June 30, 2014 and the year ended December 31, 2013 were ($3.7) million and ($3.6) 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 June 30, 2014, cash and cash equivalents totaled $20.4 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.

 

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At June 30, 2014, we had $11.8 million of outstanding commitments to originate loans, including $11.7 million in 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 June 30, 2014 totaled $18.7 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 December 19, 2012, Ben Franklin Bank entered into the Consent 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 13% and a minimum Tier 1 leverage capital ratio of at least 9% beginning on March 31, 2013. As a result of entering into the Consent Order to achieve and maintain specific capital levels, Ben Franklin Bank’s capital classification under the Prompt Corrective Action rules was “adequately capitalized” at June 30, 2014. At June 30, 2014, Ben Franklin Bank met the requirements of the minimum capital ratios established by the Consent Order with a Tier 1 leverage capital level of $8.3 million, or 9.1% of adjusted total assets, and a total risk-based capital level of $9.1 million, or 15.6% of risk-weighted assets.

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 Old Ben Franklin’s consolidated financial statements beginning on page F-9 of this prospectus.

For the six months ended June 30, 2014 and the years ended December 31, 2013 and 2012, 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 Old Ben Franklin, please see Note 1 of the notes to Old Ben Franklin’s consolidated financial statements beginning on page F-9 of this prospectus.

 

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Effect of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented herein regarding Old Ben Franklin 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 Old Ben Franklin’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on Old Ben Franklin’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.

 

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BUSINESS OF NEW BEN FRANKLIN AND OLD BEN FRANKLIN

New Ben Franklin

New Ben Franklin is a Maryland corporation that was organized in September 2014. Upon completion of the conversion, New Ben Franklin will become the holding company of Ben Franklin Bank and will succeed to all of the business and operations of Old Ben Franklin and each of Old Ben Franklin and Ben Franklin Financial, MHC will cease to exist.

Initially following the completion of the conversion, New Ben Franklin will have approximately $357,000 in cash and other assets held by Old Ben Franklin and Ben Franklin Financial, MHC as of June 30, 2014, and the net proceeds it retains from the offering, part of which will be used to make a loan to the Ben Franklin Bank employee stock ownership plan, and will have no significant liabilities. See “How We Intend to Use the Proceeds From the Offering.” New Ben Franklin intends to use the support staff and offices of Ben Franklin Bank and will pay Ben Franklin Bank for these services. If New Ben Franklin expands or changes its business in the future, it may hire its own employees.

New Ben Franklin intends to invest the net proceeds of the offering as discussed under “How We Intend to Use the Proceeds From the Offering.” In the future, we may pursue other business activities, including mergers, investment alternatives and diversification of operations. There are, however, no current understandings or agreements with respect to any of these activities.

Old Ben Franklin

Old Ben Franklin is a federally chartered corporation that owns all of the outstanding shares of common stock of Ben Franklin Bank. At June 30, 2014, Old Ben Franklin had consolidated total assets of $92.1 million, total deposits of $82.0 million and total equity of $9.1 million.

Ben Franklin Bank became the wholly owned subsidiary of Old Ben Franklin in October 2006 when Ben Franklin Bank reorganized from a federally chartered mutual savings bank into the two-tiered mutual holding company structure. At June 30, 2014, Old Ben Franklin had 1,949,956 shares of common stock outstanding, of which 858,894 shares, or 44.0%, were owned by the public and will be exchanged for shares of common stock of New Ben Franklin as part of the conversion. The remaining 1,091,062 shares of common stock of Old Ben Franklin are held by Ben Franklin Financial, MHC, a federally chartered mutual holding company. The shares of common stock being offered by New Ben Franklin represent Ben Franklin Financial, MHC’s ownership interest in Old Ben Franklin. Upon completion of the conversion and offering, Ben Franklin Financial, MHC’s shares of Old Ben Franklin stock will be cancelled and Old Ben Franklin will no longer exist.

BUSINESS OF BEN FRANKLIN BANK

Ben Franklin Bank 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. We conduct our business from our main office and one branch office. Both of our offices are located in the northwestern corridor of the Chicago metropolitan area.

Our principal business consists of attracting retail deposits from the general public in our market and investing those deposits, together with funds generated from operations, 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 and consumer loans. In the past we have also made construction and 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.

 

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Market Area

We conduct business through our main office located at 830 East Kensington Road, Arlington Heights, Illinois and our branch office located at 3148 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. Over the last 20 years, these communities have experienced per capita income levels which are well above the state and national averages. However, 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 experienced a slow recovery from the economic downturn that caused the real estate values to decline over the past several years. While in 2013, the monthly median home price and sales activity for the Chicago Primary Statistical Metropolitan Area consistently reported year over year increases, the results for the first six months of 2014 have been mixed as sales activity has resulted in monthly declines year over year, while the median home price has continued the monthly increase year over year. During June 2014, the median price of a home in the Chicago Primary Statistical Metropolitan Area was $220,000 compared to $150,000 during December 2012 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, 2013, the latest date for which FDIC data is available, we ranked eighth of 13 bank and thrift institutions with offices in Arlington Heights, with a 2.45% market share. As of that same date we ranked sixth of ten bank and thrift institutions with offices in Rolling Meadows, with a 0.77% market share. Our market share in Cook County overall was 0.04%.

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 and consumer loans. In the past we have also made construction and land loans, and we may determine to resume making such loans in the future. At June 30, 2014, our gross loans totaled $65.4 million, of which $32.0 million, or 49.0%, were one- to four-family residential loans, $20.3 million, or 31.1%, were multi-family residential and commercial real estate loans, and $9.6 million, or 14.8%, were home equity lines of credit.

Prior to 2010, we implemented a strategic plan to expand and diversify our overall loan portfolio, increase the yield of our loans and shorten asset duration. This plan included expanding our multi-family and commercial real estate lending, home equity line of credit lending, commercial business loans and automobile loans. However, due to the effects of the severe economic recession that began in 2008, and the related negative impact on our real estate market, we experienced higher non-performing assets and losses during the last several years which has required that we shrink our balance sheet to maintain adequate capital levels. As a result, our loan portfolio, net of allowance, decreased to $64.0 million, or 69.5% of total assets, at June 30, 2014 compared to $104.6 million, or 87.4% of total assets, at December 31, 2009. The decrease in loans was primarily due to repayments and charge-offs exceeding loan originations and purchases. During that period we experienced decreases in all loan categories, while one- to four-family residential loans as a percentage of gross loans increased from 38.0% to 49.0%.

 

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Following the offering, we intend to grow our loan portfolio at a modest rate as part of our effort to increase our interest income. Specifically, we expect to grow our commercial real estate and multi-family residential loan portfolios, while maintaining our current level of one- to four-family residential lending. In the longer term, we may also seek to increase our commercial business lending. 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 June 30, 2014, December 31, 2013 and December 31, 2012, respectively.

 

     At June 30, 2014     At December 31,  
       2013     2012  
     Amount     Percent     Amount     Percent     Amount     Percent  
     (Dollars in thousands)  

Real estate loans:

  

One- to four-family residential

   $ 32,036        49.01   $ 32,301        44.94   $ 33,181        39.73

Multi-family

     10,637        16.27        12,567        17.48        13,356        16.00   

Commercial

     9,701        14.84        10,929        15.21        13,604        16.29   

Construction

     —          —          —          —          319        0.38   

Land

     326        0.50        335        0.47        381        0.46   

Home equity lines of credit

     9,643        14.75        11,506        16.01        13,800        16.53   

Commercial business loans

     1,104        1.69        1,755        2.44        5,575        6.68   

Automobile loans

     1,892        2.89        2,481        3.45        3,205        3.84   

Other consumer loans

     30        0.05        3        —          79        0.09   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   $ 65,369        100.00   $ 71,877        100.00   $ 83,500        100.00
    

 

 

     

 

 

     

 

 

 

Other items:

        

Net deferred loan fees

     (31       (15       24     

Allowance for loan losses

     (1,294       (1,302       (2,095  
  

 

 

     

 

 

     

 

 

   

Total loans, net

   $ 64,044        $ 70,560        $ 81,429     
  

 

 

     

 

 

     

 

 

   

 

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Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2013, excluding loans on nonaccrual. 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 and scheduled principal amortization.

 

     One- to Four-Family
Real Estate
    Multi-family
Real Estate
    Commercial
Real Estate
    Construction     Land  
     Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
 
     (Dollars in thousands)        

Due During the Years Ending December 31,

                         

2014

   $ 3,442         5.39   $ 3,221         5.31   $ 1,987         5.97   $ —           —     $ 9         6.41

2015

     2,365         5.11        1,895         6.25        1,906         5.82        —           —          140         6.49   

2016

     3,103         5.26        2,447         4.66        2,840         5.65        —           —          7         6.37   

2017 to 2018

     4,748         4.92        3,796         5.42        2,734         5.78        —           —          77         6.50   

2019 to 2023

     7,746         4.60        115         5.88        704         4.70        —           —          —           —     

2024 to 2028

     6,069         4.36        154         5.88        53         3.00        —           —          —           —     

2029 and beyond

     4,314         3.74        3         5.88        218         3.00        —           —          —           —     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 31,787         4.67   $ 11,631         5.38   $ 10,442         5.64   $ —           —     $ 233         6.49
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

     Home Equity
Lines of Credit
    Commercial
business
    Automobile     Other Consumer     Total  
     Amount      Weighted
Average
Rate
    Amount      Weighted
Average

Rate
    Amount      Weighted
Average

Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
 
     (Dollars in thousands)  

Due During the Years Ending December 31,