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BankFinancial CORP - Quarter Report: 2012 June (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period ended June 30, 2012

or

 

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

For transition period from              to             

Commission File Number 0-51331

 

 

BANKFINANCIAL CORPORATION

(Exact Name of Registrant as Specified in Charter)

 

 

 

Maryland   75-3199276

(State or Other Jurisdiction

of Incorporation)

 

(I.R.S. Employer

Identification No.)

15W060 North Frontage Road, Burr Ridge, Illinois   60527
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (800) 894-6900

Not Applicable

(Former name or former address, if changed since last report)

 

 

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See 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   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.

21,072,966 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of July 31, 2012.

 

 

 


Table of Contents

BANKFINANCIAL CORPORATION

Form 10-Q Quarterly Report

Table of Contents

 

  PART I   
         Page
Number
 

Item 1.

 

Financial Statements

     1   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     62   

Item 4.

 

Controls and Procedures

     64   
  PART II   

Item 1.

 

Legal Proceedings

     65   

Item 1A.

 

Risk Factors

     65   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     65   

Item 3.

 

Defaults Upon Senior Securities

     65   

Item 4.

 

Mine Safety Disclosures

     65   

Item 5.

 

Other Information

     65   

Item 6.

 

Exhibits

     65   

Signatures

     66   


Table of Contents

PART I

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except per share data) – (Unaudited)

 

 

 

     June 30,     December 31,  
     2012     2011  

ASSETS

    

Cash and due from other financial institutions

   $ 17,679      $ 24,247   

Interest-bearing deposits in other financial institutions

     203,028        96,457   
  

 

 

   

 

 

 

Cash and cash equivalents

     220,707        120,704   

Securities, at fair value

     75,040        92,832   

Loans held-for-sale

     505        1,918   

Loans receivable, net of allowance for loan losses:

    

June 30, 2012, $30,878 and December 31, 2011, $31,726

     1,118,928        1,227,391   

Other real estate owned

     17,251        22,480   

Stock in Federal Home Loan Bank, at cost

     10,160        16,346   

Premises and equipment, net

     38,934        39,155   

Accrued interest receivable

     4,527        5,573   

Core deposit intangible

     3,351        3,671   

Bank owned life insurance

     21,453        21,207   

FDIC prepaid expense

     3,738        4,351   

Income tax receivable

     694        1,809   

Other assets

     6,906        6,138   
  

 

 

   

 

 

 

Total assets

   $ 1,522,194      $ 1,563,575   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits

    

Noninterest-bearing

   $ 140,801      $ 142,084   

Interest-bearing

     1,148,666        1,190,468   
  

 

 

   

 

 

 

Total deposits

     1,289,467        1,332,552   

Borrowings

     10,081        9,322   

Advance payments by borrowers taxes and insurance

     10,798        10,976   

Accrued interest payable and other liabilities

     8,905        10,868   
  

 

 

   

 

 

 

Total liabilities

     1,319,251        1,363,718   

Commitments and contingent liabilities

    

Stockholders’ equity:

    

Preferred Stock, $0.01 par value, 25,000,000 shares authorized, none issued or outstanding

     —          —     

Common Stock, $0.01 par value, 100,000,000 shares authorized; 21,072,966 shares issued at June 30, 2012 and December 31, 2011

     211        211   

Additional paid-in capital

     193,723        193,801   

Retained earnings

     20,659        17,946   

Unearned Employee Stock Ownership Plan shares

     (12,725     (13,212

Accumulated other comprehensive income

     1,075        1,111   
  

 

 

   

 

 

 

Total stockholders’ equity

     202,943        199,857   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,522,194      $ 1,563,575   
  

 

 

   

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data) – (Unaudited)

 

 

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Interest and dividend income

        

Loans, including fees

   $ 15,312      $ 18,155      $ 31,424      $ 32,565   

Securities

     387        768        829        1,590   

Other

     125        77        205        193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     15,824        19,000        32,458        34,348   

Interest expense

        

Deposits

     1,084        1,849        2,298        3,749   

Borrowings

     28        61        54        157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,112        1,910        2,352        3,906   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     14,712        17,090        30,106        30,442   

Provision for loan losses

     1,745        3,175        2,741        5,599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     12,967        13,915        27,365        24,843   

Noninterest income

        

Deposit service charges and fees

     521        691        1,078        1,303   

Other fee income

     383        413        768        795   

Insurance commissions and annuities income

     112        155        234        324   

Gain on sale of loans, net

     118        39        385        58   

Loss on disposition of premises and equipment, net

     (157     (10     (157     (20

Loan servicing fees

     119        137        247        269   

Amortization and impairment of servicing assets

     (98     (51     (180     (105

Earnings on bank owned life insurance

     120        162        246        320   

Trust

     190        216        374        292   

Other

     110        127        255        214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,418        1,879        3,250        3,450   

Noninterest expense

        

Compensation and benefits

     6,461        7,120        13,120        13,720   

Office occupancy and equipment

     1,755        1,736        3,498        3,604   

Advertising and public relations

     217        260        311        497   

Information technology

     1,146        1,091        2,407        2,039   

Supplies, telephone, and postage

     408        439        838        814   

Amortization of intangibles

     157        470        320        852   

Nonperforming asset management

     1,117        1,279        2,357        1,734   

Operations of other real estate owned

     1,691        855        2,243        1,308   

FDIC insurance premiums

     309        186        657        753   

Acquisition costs

     —          230        —          1,761   

Other

     783        957        1,729        1,796   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     14,044        14,623        27,480        28,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     341        1,171        3,135        (585

Income tax expense (benefit)

     (457     145        —          (834
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 798      $ 1,026      $ 3,135      $ 249   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic income per common share

   $ 0.04      $ 0.05      $ 0.16      $ 0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income per common share

   $ 0.04      $ 0.05      $ 0.16      $ 0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     19,860,419        19,713,952        19,847,846        19,701,904   

Diluted weighted average common shares outstanding

     19,860,419        19,715,480        19,847,846        19,703,600   

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands) – (Unaudited)

 

 

 

     Three months ended
June  30,
    Six months ended
June 30,
 
     2012      2011     2012     2011  

Net income

   $ 798       $ 1,026      $ 3,135      $ 249   

Unrealized holding gain (loss) arising during the period

     19         (142     (36     (1,048

Tax effect

     —           54        —          399   
  

 

 

    

 

 

   

 

 

   

 

 

 

Change in other comprehensive income (loss), net of tax effect

     19         (88     (36     (649
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 817       $ 938      $ 3,099      $ (400
  

 

 

    

 

 

   

 

 

   

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

(In thousands, except per share data) – (Unaudited)

 

 

 

     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Unearned
Employee
Stock
Ownership
Plan Shares
    Accumulated
Other
Comprehensive
Income
    Total  

Balance at January 1, 2011

   $ 211       $ 194,186      $ 71,278      $ (14,190   $ 1,800      $ 253,285   

Net income

     —           —          249        —          —          249   

Change in other comprehensive income, net of tax effects

     —           —          —          —          (649     (649

Nonvested stock awards-stock-based compensation expense

     —           32        —          —          —          32   

Cash dividends declared on common stock ($0.14 per share)

     —           —          (2,950     —          —          (2,950

ESOP shares earned

     —           (74     —          485        —          411   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   $ 211       $ 194,144      $ 68,577      $ (13,705   $ 1,151      $ 250,378   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2012

   $ 211       $ 193,801      $ 17,946      $ (13,212   $ 1,111      $ 199,857   

Net income

     —           —          3,135        —          —          3,135   

Change in other comprehensive income, net of tax effects

     —           —          —          —          (36     (36

Nonvested stock awards-stock-based compensation expense

     —           41        —          —          —          41   

Cash dividends declared on common stock ($0.02 per share)

     —           —          (422     —          —          (422

ESOP shares earned

     —           (119     —          487        —          368   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 211       $ 193,723      $ 20,659      $ (12,725   $ 1,075      $ 202,943   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

Six months ended June 30, 2012 and 2011

(In thousands) – (Unaudited)

 

     2012     2011  

Cash flows from operating activities

    

Net income

   $ 3,135      $ 249   

Adjustments to reconcile net income to net cash from operating activities

    

Provision for loan losses

     2,741        5,599   

ESOP shares earned

     368        411   

Stock-based compensation expense

     41        32   

Depreciation and amortization

     2,283        2,216   

Amortization of premiums and discounts on securities and loans

     (1,633     (1,123

Amortization of core deposit intangible

     320        852   

Amortization and impairment of servicing assets

     180        105   

Net change in net deferred loan origination costs

     127        340   

Net loss (gain) on sale of other real estate owned

     (85     (109

Net gain on sale of loans

     (385     (58

Net loss disposition of premises and equipment

     157        20   

Loans originated for sale

     (9,585     (4,880

Proceeds from sale of loans

     11,383        7,654   

Net change in:

    

Deferred income tax

     —          (839

Accrued interest receivable

     1,046        (184

Earnings on bank owned life insurance

     (246     (320

Other assets

     1,481        1,421   

Accrued interest payable and other liabilities

     (1,963     (462
  

 

 

   

 

 

 

Net cash from operating activities

     9,365        10,924   

Cash flows from investing activities

    

Securities

    

Proceeds from maturities

     21,189        11,802   

Proceeds from principal repayments

     9,700        22,616   

Proceeds from sales of securities

     —          9,677   

Purchases of securities

     (13,184     (9,786

Loans receivable

    

Principal payments on loans receivable

     281,548        339,813   

Purchases of loans

     (398     (151,354

Originated for investment

     (177,554     (322,517

Proceeds of redemption of Federal Reserve Bank stock

     —          155   

Proceeds of redemption of Federal Home Loan Bank of Chicago stock

     6,186        —     

Proceeds from sale of other real estate owned

     7,456        2,300   

Purchases of premises and equipment, net

     (1,495     (413

Cash acquired in acquisition

     —          61,619   
  

 

 

   

 

 

 

Net cash from (used in) investing activities

     133,448        (36,088

(Continued)

 

 

See accompanying notes to consolidated financial statements.

 

7


Table of Contents

BANKFINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

Six months ended June 30, 2012 and 2011

(In thousands) – (Unaudited)

 

     2012     2011  

Cash flows from financing activities

    

Net change in deposits

     (42,969     (69,985

Net change in borrowings

     759        (11,154

Net change in advance payments by borrowers for taxes and insurance

     (178     2,925   

Cash dividends paid on common stock

     (422     (2,950
  

 

 

   

 

 

 

Net cash used in financing activities

     (42,810     (81,164
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     100,003        (106,328

Beginning cash and cash equivalents

     120,704        220,810   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 220,707      $ 114,482   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 2,378      $ 3,758   

Income taxes paid

     —          3   

Income taxes refunded

     1,115        —     

Loans transferred to other real estate owned

     3,766        7,869   

Supplemental disclosures of noncash investing activities – Acquisition:

    

Noncash assets acquired:

    

Securities

     $ 10,177   

Loans receivable

       118,147   

Other real estate owned

       6,965   

Stock in Federal Home Loan Bank and Federal Reserve Bank

       903   

Goodwill

       1,296   

Premises and equipment, net

       7,442   

Accrued interest receivable

       355   

Core deposit intangible

       2,660   

FDIC prepaid expense

       774   

Income tax receivable

       774   

Deferred taxes, net

       2,662   

Other assets

       42   
    

 

 

 

Total noncash items acquired

       152,197   

Liabilities assumed:

    

Deposits

       212,939   

Advance payments by borrowers taxes and insurance

       34   

Accrued interest payable and other liabilities

       843   
    

 

 

 

Total liabilities assumed

       213,816   
    

 

 

 

Cash and cash equivalents acquired

     $ 61,619   
    

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: BankFinancial Corporation, a Maryland corporation headquartered in Burr Ridge, Illinois, is the owner of all of the issued and outstanding capital stock of BankFinancial, F.S.B. (the “Bank”).

Principles of Consolidation: The interim unaudited consolidated financial statements include the accounts of and transactions of BankFinancial Corporation, the Bank, and the Bank’s wholly-owned subsidiaries, Financial Assurance Services, Inc. and BF Asset Recovery Corporation (collectively, “the Company”) and reflect all normal and recurring adjustments that are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany accounts and transactions have been eliminated. The results of operations for the three- and six-month periods ended June 30, 2012, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2012.

Certain information and note disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, mortgage servicing rights, deferred tax assets, stock-based compensation, the impairment of securities and the fair value of financial instruments are particularly subject to change and the effect of such change could be material to the financial statements.

Reclassifications: Certain reclassifications have been made in the prior period’s financial statements to conform them to the current period’s presentation.

These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission.

 

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Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 2 – EARNINGS PER SHARE

Amounts reported in earnings per share reflect earnings available to common stockholders for the period divided by the weighted average number of shares of common stock outstanding during the period, exclusive of unearned ESOP shares and unvested restricted stock shares. Stock options and restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent that they would have a dilutive effect if converted to common stock.

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Net income available to common shareholders

   $ 798      $ 1,026      $ 3,135      $ 249   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares outstanding

     21,072,966        21,072,966        21,072,966        21,072,966   

Less:

        

Unearned ESOP shares

     (1,209,023     (1,350,347     (1,221,191     (1,362,395

Unvested restricted stock shares

     (3,524     (8,667     (3,929     (8,667
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     19,860,419        19,713,952        19,847,846        19,701,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.04      $ 0.05      $ 0.16      $ 0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     19,860,419        19,713,952        19,847,846        19,701,904   

Net effect of dilutive stock options and unvested restricted stock

     —          1,528        —          1,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average diluted common shares outstanding

     19,860,419        19,715,480        19,847,846        19,703,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.04      $ 0.05      $ 0.16      $ 0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of anti-dilutive stock options excluded from the diluted earnings per share calculation

     1,881,053        2,202,553        1,881,053        2,202,553   

Weighted average exercise price of anti-dilutive stock options

   $ 16.58      $ 16.48      $ 16.58      $ 16.48   

 

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 3 – SECURITIES

The following table summarizes the amortized cost and fair value of securities and the corresponding gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) are as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

June 30, 2012

          

Certificates of deposit

   $ 21,930       $ —         $ —        $ 21,930   

Municipal securities

     515         27         —          542   

Equity mutual fund

     500         30         —          530   

Mortgage-backed securities – residential

     31,997         1,512         (1     33,508   

Collateralized mortgage obligations – residential

     18,296         209         (19     18,486   

SBA-guaranteed loan participation certificates

     44         —           —          44   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 73,282       $ 1,778       $ (20   $ 75,040   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Certificates of deposit

   $ 30,448       $ —         $ —        $ 30,448   

Municipal securities

     515         36         —          551   

Equity mutual fund

     500         24         —          524   

Mortgage-backed securities – residential

     34,691         1,385         —          36,076   

Collateralized mortgage obligations – residential

     24,837         372         (23     25,186   

SBA-guaranteed loan participation certificates

     47         —           —          47   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 91,038       $ 1,817       $ (23   $ 92,832   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair values of securities at June 30, 2012 by contractual maturity are shown below. Securities not due at a single maturity date are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2012  
     Amortized
Cost
     Fair
Value
 

Within one year

   $ 22,095       $ 22,097   

One to five years

     350         375   
  

 

 

    

 

 

 
     22,445         22,472   

Equity mutual fund

     500         530   

Mortgage-backed securities – residential

     31,997         33,508   

Collateralized mortgage obligations – residential

     18,296         18,486   

SBA-guaranteed loan participation certificates

     44         44   
  

 

 

    

 

 

 

Total

   $ 73,282       $ 75,040   
  

 

 

    

 

 

 

 

11


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 3 – SECURITIES (continued)

 

Securities with unrealized losses at June 30, 2012 and December 31, 2011 that were not recognized in income are as follows:

 

     Less than 12 Months      12 Months or More      Total  
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

June 30, 2012

                 

Mortgage-backed securities – residential

   $ 72       $ 1       $ —         $ —         $ 72       $ 1   

Collateralized mortgage obligations – residential

     —           —           2,106         19         2,106         19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 72       $ 1       $ 2,106       $ 19       $ 2,178       $ 20   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Collateralized mortgage obligations – residential

   $ —         $ —         $ 2,134       $ 23       $ 2,134       $ 23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company evaluates marketable investment securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under current accounting guidance, which generally provides that if a marketable security is in an unrealized loss position, whether due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the impairment is other-than-temporary.

Certain residential mortgage-backed securities and residential collateralized mortgage obligations that the Company holds in its investment portfolio remained in an unrealized loss position at June 30, 2012, but the unrealized losses were not considered significant under the Company’s impairment testing methodology. In addition, the Company does not intend to sell these securities, and it is likely that the Company will not be required to sell the securities before an anticipated recovery occurs.

NOTE 4 – LOANS RECEIVABLE

Loans receivable are as follows:

 

     June 30,
2012
    December 31,
2011
 

One-to-four family residential real estate loans

   $ 252,034      $ 272,032   

Multi-family mortgage loans

     390,112        423,615   

Nonresidential real estate loans

     299,567        311,641   

Construction and land loans

     15,391        19,852   

Commercial loans

     68,510        93,932   

Commercial leases

     121,356        134,990   

Consumer loans

     2,055        2,147   
  

 

 

   

 

 

 

Total loans

     1,149,025        1,258,209   

Net deferred loan origination costs

     781        908   

Allowance for loan losses

     (30,878     (31,726
  

 

 

   

 

 

 

Loans, net

   $ 1,118,928      $ 1,227,391   
  

 

 

   

 

 

 

 

12


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

The following tables present the balance in the allowance for loan losses and the loans receivable by portfolio segment and based on impairment method:

 

     Allowance for loan losses      Loan Balances  
     Individually
evaluated
for
impairment
     Purchased
impaired
loans
     Collectively
evaluated
for
impairment
     Total      Individually
evaluated for
impairment
     Purchased
impaired
loans
     Collectively
evaluated  for
impairment
     Total  

June 30, 2012

                       

One-to-four family residential real estate loans

   $ 2,255       $ 82       $ 4,695       $ 7,032       $ 15,225       $ 2,297       $ 234,512       $ 252,034   

Multi-family mortgage loans

     1,730         —           4,301         6,031         18,743         1,491         369,878         390,112   

Nonresidential real estate loans

     6,198         57         4,934         11,189         31,010         2,661         265,896         299,567   

Construction and land loans

     1,019         46         560         1,625         3,971         2,324         9,096         15,391   

Commercial loans

     2,838         39         1,413         4,290         3,657         677         64,176         68,510   

Commercial leases

     91         —           543         634         159         —           121,197         121,356   

Consumer loans

     3         —           74         77         3         —           2,052         2,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,134       $ 224       $ 16,520       $ 30,878       $ 72,768       $ 9,450       $ 1,066,807         1,149,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Net deferred loan origination costs

                          781   

Allowance for loan losses

                          (30,878
                       

 

 

 

Loans, net

                        $ 1,118,928   
                       

 

 

 

 

     Allowance for loan losses      Loan Balances  
     Individually
evaluated for
impairment
     Collectively
evaluated  for
impairment
     Total      Individually
evaluated for
impairment
     Purchased
impaired
loans
     Collectively
evaluated  for
impairment
     Total  

December 31, 2011

                    

One-to-four family residential real estate loans

   $ 1,883       $ 4,220       $ 6,103       $ 14,181       $ 3,941       $ 253,910       $ 272,032   

Multi-family mortgage loans

     1,881         4,201         6,082         20,380         1,418         401,817         423,615   

Nonresidential real estate loans

     8,126         5,630         13,756         32,669         3,375         275,597         311,641   

Construction and land loans

     959         725         1,684         3,263         4,788         11,801         19,852   

Commercial loans

     2,079         1,460         3,539         3,160         1,078         89,694         93,932   

Commercial leases

     22         482         504         22         —           134,968         134,990   

Consumer loans

     3         55         58         3         —           2,144         2,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,953       $ 16,773       $ 31,726       $ 73,678       $ 14,600       $ 1,169,931         1,258,209   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Net deferred loan origination costs

                       908   

Allowance for loan losses

                       (31,726
                    

 

 

 

Loans, net

                     $ 1,227,391   
                    

 

 

 

 

13


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Activity in the allowance for loan losses is as follows:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Beginning balance

   $ 31,638      $ 22,504      $ 31,726      $ 22,180   

Loans charged off

        

One-to-four family residential real estate loans

     (591     (415     (1,263     (2,043

Multi-family mortgage loans

     (135     (542     (689     (779

Nonresidential real estate loans

     (2,202     —          (2,635     —     

Construction and land loans

     (185     (1,771     (232     (2,149

Commercial loans

     (31     (42     (169     (42

Commercial leases

     —          —          —          —     

Consumer loans

     (11     (1     (23     (17
  

 

 

   

 

 

   

 

 

   

 

 

 
     (3,155     (2,771     (5,011     (5,030

Recoveries:

        

One-to-four family residential real estate loans

     74        5        185        7   

Multi-family mortgage loans

     96        32        480        121   

Nonresidential real estate loans

     284        5        315        63   

Construction and land loans

     58        —          242        —     

Commercial loans

     132        13        189        23   

Commercial leases

     —          —          —          —     

Consumer loans

     6        —          11        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries

     650        55        1,422        214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-off

     (2,505     (2,716     (3,589     (4,816

Provision for loan losses

     1,745        3,175        2,741        5,599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 30,878      $ 22,963      $ 30,878      $ 22,963   
  

 

 

   

 

 

   

 

 

   

 

 

 

Impaired Loans

Impaired loans are summarized as follows:

 

     June 30,
2012
     December 31,
2011
 

Loans with allocated allowance for loan losses

   $ 46,757       $ 45,649   

Loans with no allocated allowance for loan losses

     26,011         28,029   
  

 

 

    

 

 

 
     72,768         73,678   

Purchased impaired loans

     9,450         14,600   
  

 

 

    

 

 

 

Total impaired loans

   $ 82,218       $ 88,278   
  

 

 

    

 

 

 

 

14


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

The following table includes the unpaid principal balances and recorded investment for impaired loans, by class, with the associated allowance amount, if applicable. In addition, the table includes the average recorded investments in the impaired loans and the related amount of interest recognized for the duration of the impairment within the period reported.

 

                          For the Three Month ended
June 30, 2012
     For the Six Months  ended
June 30, 2012
 
     Loan
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
     Average
Investment
in Impaired
Loans
     Interest
Income
Recognized
     Average
Investment
in Impaired
Loans
     Interest
Income
Recognized
 

June 30, 2012

                    

With no related allowance recorded:

                    

One-to-four family residential real estate loans

   $ 1,891       $ 1,929       $ —         $ 2,159       $ 45       $ 2,121       $ 54   

One-to-four family residential real estate loans – non-owner occupied

     5,684         5,661         —           6,331         90         6,238         96   

Multi-family mortgage loans

     7,687         7,952         —           8,231         130         8,521         150   

Wholesale commercial lending

     3,301         3,279         —           3,302         69         3,302         69   

Nonresidential real estate loans

     6,546         6,904         —           6,350         14         6,690         80   

Land loans

     708         726         —           177         9         101         9   

Commercial loans – secured

     194         198         —           204         12         215         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     26,011         26,649         —           26,754         369         27,188         470   

With an allowance recorded:

                    

One-to-four family residential real estate loans

     4,772         4,951         1,155         3,562         13         3,711         43   

One-to-four family residential real estate loans – non-owner occupied

     2,878         3,068         1,100         2,314         —           2,117         11   

Multi-family mortgage loans

     7,755         8,278         1,730         7,335         7         7,680         71   

Nonresidential real estate loans

     24,464         25,655         6,198         25,798         57         25,648         98   

Land loans

     3,263         3,434         1,019         3,264         —           3,264         —     

Commercial loans – secured

     2,855         3,204         2,257         2,862         —           2,863         —     

Commercial loans – unsecured

     608         662         581         628         —           381         —     

Non-rated commercial leases

     159         161         91         56         4         42         4   

Consumer loans

     3         3         3         4         —           4         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     46,757         49,416         14,134         45,823         81         45,710         227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 72,768       $ 76,065       $ 14,134       $ 72,577       $ 450       $ 72,898       $ 697   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

     Loan
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
     Average
Investment
in Impaired
Loans
     Interest
Income
Recognized
 

December 31, 2011

              

With no related allowance recorded:

              

One-to-four family residential real estate loans

   $ 2,329       $ 2,347       $ —         $ 623       $ 24   

One-to-four family residential real estate loans – non-owner occupied

     5,945         5,868         —           2,499         266   

Multi-family mortgage loans

     8,910         9,113         —           5,567         378   

Wholesale commercial lending

     3,304         3,300         —           338         35   

Nonresidential real estate loans

     7,304         7,468         —           5,977         275   

Construction loans

     —           —           —           77         —     

Land loans

     —           —           —           70         —     

Commercial loans – secured

     237         244         —           448         45   

Commercial loans – unsecured

     —           —           —           —           41   

Commercial loans – other

     —           —           —           44         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     28,029         28,340         —           15,643         1,079   

With an allowance recorded:

              

One-to-four family residential real estate loans

     3,970         4,145         1,055         1,406         2   

One-to-four family residential real estate loans – non-owner occupied

     1,937         2,051         828         2,962         —     

Multi-family mortgage loans

     8,166         8,594         1,881         4,307         5   

Wholesale commercial lending

     —           —           —           4,066         —     

Nonresidential real estate loans

     25,365         26,157         8,126         12,134         75   

Construction loans

     —           —           —           1,392         —     

Land loans

     3,263         3,315         959         2,128         82   

Commercial loans – secured

     2,869         3,144         2,048         3,253         —     

Commercial loans – unsecured

     54         63         31         150         —     

Commercial loans – other

     —           —           —           22         —     

Non-rated commercial leases

     22         22         22         98         —     

Consumer loans

     3         3         3         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     45,649         47,494         14,953         31,918         164   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 73,678       $ 75,834       $ 14,953       $ 47,561       $ 1,243   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Purchased Impaired Loans

As a result of its acquisition of Downers Grove National Bank, the Company holds purchased loans for which there was evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected as of the date of the acquisition. The carrying amount of these purchased impaired loans is as follows:

 

     June 30,
2012
     December 31,
2011
 

One-to-four family residential real estate loans

   $ 2,297       $ 3,941   

Multi-family mortgage loans

     1,491         1,418   

Nonresidential real estate loans

     2,661         3,375   

Construction loans

     —           813   

Land loans

     2,324         3,975   

Commercial loans

     677         1,078   
  

 

 

    

 

 

 

Outstanding balance

   $ 9,450       $ 14,600   
  

 

 

    

 

 

 

Carrying amount, net of allowance:

     

$224,000 at June 30, 2012, none at December 31, 2011

   $ 9,227       $ 14,600   
  

 

 

    

 

 

 

Accretable yield, or income expected to be collected, related to purchased impaired loans is as follows:

 

     Three months ended
June  30,
     Six months ended
June 30,
 
     2012      2011      2012      2011  

Beginning balance

   $ 1,790       $ —         $ 2,270       $ —     

New loans purchased

     —           3,410         —           3,410   

Disposals

     395         —           522         —     

Accretion of income

     563         388         916         388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 832       $ 3,022       $ 832       $ 3,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the above purchased impaired loans, the Company decreased the allowance for loan losses by $114,000 during the three months ended June 30, 2012, and increased the allowance for loan losses by $224,000 during the six months ended June 30, 2012. No allowance for loan losses was recorded for these loans for the three and six months ended June 30, 2011.

 

17


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Purchased impaired loans for which it was probable at the date of acquisition that all contractually required payments would not be collected are as follows:

 

     June 30,
2012
     December 31,
2011
 

Contractually required payments receivable of loans purchased:

     

One-to-four family residential real estate loans

   $ 4,407       $ 5,886   

Multi-family mortgage loans

     3,456         3,456   

Nonresidential real estate loans

     4,308         5,395   

Construction loans

     —           1,314   

Land loans

     4,013         8,152   

Commercial loans

     7,274         7,672   

Consumer loans

     32         33   
  

 

 

    

 

 

 
   $ 23,490       $ 31,908   
  

 

 

    

 

 

 

At acquisition cash flows expected to be collected were $18.8 million, compared to the fair value of purchased impaired loans of $15.4 million.

 

18


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Nonaccrual loans

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans, excluding purchased impaired loans:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Loans Past
Due Over 90
Days, still
accruing
 

June 30, 2012

        

One-to-four family residential real estate loans

   $ 9,223       $ 9,577       $ —     

One-to-four family residential real estate loans – non owner occupied

     4,991         5,225         —     

Multi-family mortgage loans

     12,640         13,355         251   

Nonresidential real estate loans

     30,096         31,253         —     

Land loans

     4,005         4,161         —     

Commercial loans – secured

     2,870         3,204         —     

Commercial loans – unsecured

     663         711         —     

Non-rated commercial leases

     159         160         —     

Consumer loans

     13         13         —     
  

 

 

    

 

 

    

 

 

 
   $ 64,660       $ 67,659       $ 251   
  

 

 

    

 

 

    

 

 

 

December 31, 2011

        

One-to-four family residential real estate loans

   $ 6,199       $ 6,488       $ 40   

One-to-four family residential real estate loans – non owner occupied

     4,510         4,647         —     

Multi-family mortgage loans

     14,983         15,495         —     

Nonresidential real estate loans

     30,396         31,104         125   

Land loans

     3,263         3,315         185   

Commercial loans – secured

     2,885         3,144         —     

Commercial loans – unsecured

     55         63         —     

Non-rated commercial leases

     22         22         —     

Consumer loans

     3         3         —     
  

 

 

    

 

 

    

 

 

 
   $ 62,316       $ 64,281       $ 350   
  

 

 

    

 

 

    

 

 

 

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans.

The Company’s reserve for uncollected loan interest was $3.6 million and $2.7 million at June 30, 2012 and December 31, 2011, respectively. Except for purchased impaired loans, when a loan is on non-accrual status and the ultimate collectability of the total principal balance of the impaired loan is in doubt, all payments are applied to principal under the cost recovery method. Alternatively, when a loan is on non-accrual status but there is doubt concerning only the ultimate collectability of interest, contractual interest is credited to interest income only when received, under the cash basis method pursuant to the provisions of FASB ASC 310–10, as applicable. In all cases, the average balances are calculated based on the month–end balances of the financing receivables within the period reported pursuant to the provisions of FASB ASC 310–10, as applicable.

 

19


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Generally, the Company utilizes the “90 days delinquent, still accruing” category of loan classification when: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of payments actually received or the renewal of a loan has not occurred for administrative reasons.

 

20


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Past Due Loans

The following table presents the aging of the recorded investment in past due loans by class of loans, excluding purchased impaired loans:

 

     30-59 Days
Past Due
    60-89 Days
Past Due
    90 Days  or
Greater

Past Due
     Total Past
Due
     Loans Not
Past Due
     Total  

June 30, 2012

               

One-to-four family residential real estate loans

   $ 1,297      $ 652      $ 7,029       $ 8,978       $ 169,485       $ 178,463   

One-to-four family residential real estate loans – non-owner occupied

     3        1,220        4,913         6,136         65,290         71,426   

Multi-family mortgage loans

     1,060        938        10,689         12,687         317,310         329,997   

Wholesale commercial lending

     —          —          —           —           55,958         55,958   

Nonresidential real estate loans

     1,596        754        29,005         31,355         264,561         295,916   

Construction loans

     —          —          —           —           441         441   

Land loans

     —          —          4,161         4,161         8,642         12,803   

Commercial loans:

               

Secured

     —          —          3,204         3,204         22,374         25,578   

Unsecured

     102        27        708         837         8,494         9,331   

Municipal loans

     —          —          —           —           5,927         5,927   

Warehouse lines

     —          —          —           —           8,657         8,657   

Health care

     —          —          —           —           11,448         11,448   

Other

     —          —          —           —           7,510         7,510   

Commercial leases:

               

Investment rated commercial leases

     —          —          —           —           82,923         82,923   

Below investment grade

     —          —          —           —           8,624         8,624   

Non-rated

     —          —          71         71         26,336         26,407   

Lease pools

     —          —          —           —           4,235         4,235   

Consumer loans

     4        —          3         7         2,058         2,065   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,062  (1)    $ 3,591  (1)    $ 59,783       $ 67,436       $ 1,070,273       $ 1,137,709   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 33% of the combined 30-89 days past due loans have matured and are in the in the process of analysis and renewal.

 

21


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

The following table presents the aging of the recorded investment in past due purchased impaired loans by class of loans:

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days  or
Greater

Past Due
     Total Past
Due
     Loans Not
Past Due
     Total  

June 30, 2012

                 

One-to-four family residential real estate loans – non-owner occupied

   $ —         $ —         $ 1,583       $ 1,583       $ 714       $ 2,297   

Multi-family mortgage loans

     —           —           1,491         1,491         —           1,491   

Nonresidential real estate loans

     —           —           1,210         1,210         1,451         2,661   

Construction loans

     —           —           —           —           —           —     

Land loans

     —           —           2,049         2,049         271         2,320   

Commercial loans – secured

     —           —           677         677         —           677   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 7,010       $ 7,010       $ 2,436       $ 9,446   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

The following table presents the aging of the recorded investment in past due loans by class of loans, excluding purchased impaired loans:

 

     30-59 Days
Past Due
    60-89 Days
Past Due
    90 Days  or
Greater

Past Due
     Total Past
Due
     Loans Not
Past Due
     Total  

December 31, 2011

               

One-to-four family residential real estate loans

   $ 2,259      $ 605      $ 5,925       $ 8,789       $ 182,895       $ 191,684   

One-to-four family residential real estate loans – non-owner occupied

     2,307        122        3,005         5,434         71,114         76,548   

Multi-family mortgage loans

     6,002        4,176        13,237         23,415         327,488         350,903   

Wholesale commercial lending

     785        —          —           785         67,723         68,508   

Nonresidential real estate loans

     3,387        6,183        17,971         27,541         279,628         307,169   

Construction loans

     —          520        —           520         1,336         1,856   

Land loans

     5,445        1,152        462         7,059         6,273         13,332   

Commercial loans:

               

Secured

     17        —          3,143         3,160         26,193         29,353   

Unsecured

     435        3        63         501         9,387         9,888   

Municipal loans

     —          —          —           —           6,471         6,471   

Warehouse lines

     —          —          —           —           9,862         9,862   

Health care

     —          —          —           —           29,510         29,510   

Other

     —          —          —           —           8,425         8,425   

Commercial leases:

               

Investment rated commercial leases

     294        —          —           294         84,378         84,672   

Below investment grade

     —          —          —           —           6,263         6,263   

Non-rated

     290          23         313         37,053         37,366   

Lease pools

     —          —          —           —           7,824         7,824   

Consumer loans

     7        —          —           7         2,152         2,159   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 21,228  (1)    $ 12,761  (1)    $ 43,829       $ 77,818       $ 1,163,975       $ 1,241,793   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 46% of the combined 30-89 days past due loans have matured and are in the in the process of analysis and renewal.

 

23


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

The following table presents the aging of the recorded investment in past due purchased impaired loans by class of loans:

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days  or
Greater

Past Due
     Total Past
Due
     Loans Not
Past Due
     Total  

December 31, 2011

                 

One-to-four family residential real estate loans – non-owner occupied

   $ —         $ —         $ 2,835       $ 2,835       $ 1,087       $ 3,922   

Multi-family mortgage loans

     —           —           1,418         1,418         —           1,418   

Nonresidential real estate loans

     996         —           1,681         2,677         688         3,365   

Construction loans

     —           —           813         813         —           813   

Land loans

     —           —           3,578         3,578         369         3,947   

Commercial loans – secured

     —           —           807         807         162         969   

Commercial loans – unsecured

     —           —           34         34         —           34   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 996       $ —         $ 11,166       $ 12,162       $ 2,306       $ 14,468   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Troubled Debt Restructurings

The Company evaluates loan extensions and modifications in accordance with FASB ASC 310–40 with respect to the classification of the loan as a troubled debt restructuring (“TDR”). In general, if the Company grants a loan extension or modification to a borrower for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or another concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above.

The Company had $13.9 million of TDRs at June 30, 2012, compared to $18.1 million at December 31, 2011, with $292,000 in specific valuation allowances allocated to those loans at June 30, 2012, and $1.2 million in specific valuation reserves allocated at December 31, 2011. The Company had no outstanding commitments to borrowers whose loans are classified as TDRs.

The following table presents loans by class classified as TDRs:

 

     June 30, 2012      December 31,
2011
 

One-to-four family residential real estate

   $ 4,380       $ 5,619   

Multi-family mortgage

     5,369         5,783   

Nonresidential real estate

     1,012         2,220   

Commercial loans – secured

     195         238   
  

 

 

    

 

 

 

Troubled debt restructured loans – accrual loans

     10,956         13,860   

One-to-four family residential real estate

     1,018         556   

Multi-family mortgage

     1,605         717   

Nonresidential real estate

     296         2,960   

Commercial loans – secured

     —           —     

Consumer loans

     3         3   
  

 

 

    

 

 

 

Troubled debt restructured loans – nonaccrual loans

     2,922         4,236   
  

 

 

    

 

 

 

Total troubled debt restructured loans

   $ 13,878       $ 18,096   
  

 

 

    

 

 

 

During the three-and six-month periods ending June 30, 2012 and 2011, the terms of certain loans were modified and classified as TDRs. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

 

25


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

The following tables present loans, by loan class, that were modified as TDRs during the following periods:

 

     For the three months ended
June 30, 2012
     For the six months ended
June 30, 2012
 
     Number
of loans
     Pre-
Modification
outstanding
recorded
investment
     Post-
Modification
outstanding
recorded
investment
     Number
of loans
     Pre-
Modification
outstanding
recorded
investment
     Post-
Modification
outstanding
recorded
investment
 

One-to-four family residential real estate

     5       $ 267       $ 267         7       $ 659       $ 659   

Multi-family mortgage

     —           —           —           1         700         500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ 267       $ 267         8       $ 1,359       $ 1,159   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Due to
reduction in
interest rate
     Due to
extension of
maturity date
     Due to
permanent
reduction in
recorded
investment
     Total  

For the three months ended June 30, 2012

  

One-to-four family residential real estate

   $ 132       $ 135       $ —         $ 267   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2012

  

One-to-four family residential real estate

   $ 504       $ 155       $ —         $ 659   

Multi-family mortgage

     —           —           500         500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 504       $ 155       $ 500       $ 1,159   
  

 

 

    

 

 

    

 

 

    

 

 

 

The TDRs described above had no impact on interest income and increased the allowance for loan losses by $15,000 and $198,000 during the three and six months ended June 30, 2012, respectively. The TDRs above also resulted in charge offs of $470,000 for the six months ended June 30, 2012.

The following table presents loans, by loan class, that were modified as TDRs for which there was a payment default within twelve months following the modification during the following periods:

 

     For the three months ended
June 30, 2012
     For the six months  ended
June 30, 2012
 
     Number
of loans
     Recorded
investment
     Number
of loans
     Recorded
investment
 

One-to-four family residential real estate

     4       $ 586         5       $ 864   

Nonresidential real estate

     3         2,608         4         3,308   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7       $ 3,194         9       $ 4,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

The following tables present loans by class that were modified as TDRs during the following periods:

 

     For the three months ended
June 30, 2011
     For the six months ended
June 30, 2011
 
     Number
of
borrowers
     Pre-
Modification
outstanding
recorded
investment
     Post-
Modification
outstanding
recorded
investment
     Number
of
borrowers
     Pre-
Modification
outstanding
recorded
investment
     Post-
Modification
outstanding
recorded
investment
 

One-to-four family residential real estate-non-owner occupied

     1       $ 79       $ 79         2       $ 5,593       $ 4,279   

Multi-family mortgage

     2         1,130         1,130         2         1,129         1,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 1,209       $ 1,209         4       $ 6,722       $ 5,408   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Due to
reduction in
interest rate
     Due to
extension of
maturity date
     Due to
permanent
reduction in
recorded
investment
     Total  

For the three months ended June 30, 2011

  

One-to-four family residential real estate

   $ 79       $ —         $ —         $ 79   

Multi-family mortgage

     1,130         —           —           1,130   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,209       $ —         $ —         $ 1,209   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2011

  

One-to-four family residential real estate

   $ 79       $ —         $ —         $ 79   

Multi-family mortgage

     1,130         —           4,200         5,330   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,209       $ —         $ 4,200       $ 5,409   
  

 

 

    

 

 

    

 

 

    

 

 

 

The TDRs described above decreased interest income by $41,000, increased the allowance for loan losses by $757,000 and resulted in charge offs of $500,000 during the three months ended June 30, 2011.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

The terms of certain other loans were modified during the three and six months ended June 30, 2012 that did not meet the definition of a TDR. These loans have a total recorded investment as of June 30, 2012 of $1.7 million. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

27


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans based on credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:

Watch List. Loans classified as Watch List exhibit transitory risk. Loan debt service coverage is somewhat erratic, future coverage is uncertain, liquidity is strained and leverage capacity is considered minimal. Indicators of potential deterioration of repayment sources have resulted in uncertainty or unknown factors concerning credit status.

Special Mention. A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. The risk rating guidance published by the Office of the Comptroller of the Currency (“OCC”) clarifies that a loan with a well-defined weakness does not have to present a probability of default for the loan to be rated Substandard, and that an individual loan’s loss potential does not have to be distinct for the loan to be rated Substandard.

Doubtful. An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered “Pass” rated loans. Watch list loans are also considered “Pass” rated loans.

 

28


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

(unaudited)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

     Pass      Watch List      Special
Mention
     Substandard
(1), (2)
     Doubtful      Total  

June 30, 2012

                 

One-to-four family residential real estate loans

   $ 165,739       $ 2,090       $ —         $ 10,407       $ 8       $ 178,244   

One-to-four family residential real estate loans – non-owner occupied

     55,220         6,515         370         11,685         —           73,790   

Multi-family mortgage loans

     279,907         27,379         3,807         22,229         818         334,140   

Wholesale commercial lending

     49,697         3,513         —           2,762         —           55,972   

Nonresidential real estate loans

     203,808         26,392         22,092         47,275         —           299,567   

Construction loans

     —           —           440         —           —           440   

Land loans

     5,228         508         —           9,215         —           14,951   

Commercial loans:

                 

Secured

     19,704         1,713         805         3,432         221         25,875   

Unsecured

     4,712         683         247         3,019         582         9,243   

Municipal loans

     5,846         —           —           —           —           5,846   

Warehouse lines

     8,618         —           —           —           —           8,618   

Health care

     9,795         712         912         —           —           11,419   

Other

     7,374         135         —           —           —           7,509   

Commercial leases:

                 —        

Investment rated commercial leases

     82,344         —           —           —           —           82,344   

Below investment grade

     8,529         30         —           —           —           8,559   

Non-rated

     26,075         4         —           22         137         26,238   

Lease pools

     4,215         —           —           —           —           4,215   

Consumer loans

     2,042         —           —           13         —           2,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 938,853       $ 69,674       $ 28,673       $ 110,059       $ 1,766       $ 1,149,025   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company has assigned the purchased impaired loans that it acquired in its acquisition of Downers Grove National Bank to the Substandard risk classification category.
(2) The Dodd-Frank Act abolished the Bank’s former primary federal regulator, the Office of Thrift of Supervision (“OTS”), effective on July 21, 2011, and transferred the authority for examining, regulating and supervising federal savings banks from the OTS to the OCC. The OCC’s published guidance on the assignment of loan risk ratings is different in some respects from the published guidance of the OTS, particularly as it relates to performing loans with well-defined weaknesses that do not present a probability of default or loss. At June 30, 2012, $38.3 million of loans that were classified “Substandard” pursuant to applicable OCC loan risk rating guidance were performing and on accrual status.

 

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BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

(unaudited)

 

NOTE 4 – LOANS RECEIVABLE (continued)

 

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

     Pass      Watch List      Special
Mention
     Substandard
(1), (2)
     Doubtful      Total  

December 31, 2011

                 

One-to-four family residential real estate loans

   $ 183,611       $ 657       $ 51       $ 7,108       $ —         $ 191,427   

One-to-four family residential real estate loans – non-owner occupied

     61,455         7,058         —           12,092         —           80,605   

Multi-family mortgage loans

     301,339         24,288         6,021         21,855         1,648         355,151   

Wholesale commercial lending

     64,743         959         —           2,762         —           68,464   

Nonresidential real estate loans

     208,826         30,428         18,659         53,728         —           311,641   

Construction loans

     968         —           363         1,325         —           2,656   

Land loans

     7,519         143         —           9,534         —           17,196   

Commercial loans:

                 

Secured

     24,152         937         415         4,049         464         30,017   

Unsecured

     6,436         343         38         3,010         46         9,873   

Municipal loans

     6,381         —           —           —           —           6,381   

Warehouse lines

     9,830         —           —           —           —           9,830   

Health care

     27,046         1,014         1,376         —           —           29,436   

Other

     8,395         —           —           —           —           8,395   

Commercial leases:

                 —        

Investment rated commercial leases

     83,947         —           —           —           —           83,947   

Below investment grade

     6,004         205         —           —           —           6,209   

Non-rated

     36,944         82         —           22         —           37,048   

Lease pools

     7,786         —           —           —           —           7,786   

Consumer loans

     2,144         —           —           3         —           2,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,047,526       $ 66,114       $ 26,923       $ 115,488       $ 2,158       $ 1,258,209   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company has assigned the purchased impaired loans that it acquired in its acquisition of Downers Grove National Bank to the Substandard risk classification category.
(2) The Dodd-Frank Act abolished the Bank’s former primary federal regulator, the OTS, effective on July 21, 2011, and transferred the authority for examining, regulating and supervising federal savings banks from the OTS to the OCC. The OCC’s published guidance on the assignment of loan risk ratings is different in some respects from the published guidance of the OTS, particularly as it relates to performing loans with well-defined weaknesses that do not present a probability of default or loss. At December 31, 2011, $41.4 million of loans that were classified “Substandard” pursuant to applicable OCC loan risk rating guidance were performing and on accrual status.

 

30


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

(unaudited)

 

NOTE 5 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

   

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

   

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

   

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Securities: The fair values of marketable equity securities are generally determined by quoted prices, in active markets, for each specific security (Level 1). If Level 1 measurement inputs are not available for a marketable equity security, we determine its fair value based on the quoted price of a similar security traded in an active market (Level 2). The fair values of debt securities are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, if applicable. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. In addition, a discount is typically applied to account for sales and holding expenses. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The method utilized to estimate the fair value of loans does not necessarily represent an exit price.

Other Real Estate Owned: Assets acquired through foreclosure or transfers in lieu of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

31


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

(unaudited)

 

NOTE 5 – FAIR VALUE

 

Mortgage Servicing Rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. The fair values of mortgage servicing rights are based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2).

The following table sets forth the Company’s financial assets that were accounted for at fair value and are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

     Fair Value Measurements Using         
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  

June 30, 2012

           

Securities:

           

Certificates of deposit

   $ —         $ 21,930       $ —         $ 21,930   

Municipal securities

     —           542         —           542   

Equity mutual fund

     530         —           —           530   

Mortgage-backed securities – residential

     —           33,508         —           33,508   

Collateralized mortgage obligations – residential

     —           18,486         —           18,486   

SBA-guaranteed loan participation certificates

     —           44         —           44   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 530       $ 74,510       $ —         $ 75,040   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Securities:

           

Certificates of deposit

   $ —         $ 30,448       $ —         $ 30,448   

Municipal securities

     —           551         —           551   

Equity mutual fund

     524         —           —           524   

Mortgage-backed securities – residential

     —           36,076         —           36,076   

Collateralized mortgage obligations – residential

     —           25,186         —           25,186   

SBA-guaranteed loan participation certificates

     —           47         —           47   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 524       $ 92,308       $ —         $ 92,832   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

32


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

(unaudited)

 

NOTE 5 – FAIR VALUE (continued)

 

The following table sets forth the Company’s assets that were measured at fair value on a non-recurring basis:

 

     Fair Value Measurement Using         
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  

June 30, 2012

           

Impaired loans:

           

One-to-four family residential real estate loans

   $ —         $ —         $ 5,395       $ 5,395   

Multi-family mortgage loans

     —           —           6,025         6,025   

Nonresidential real estate loans

     —           —           18,266         18,266   

Construction and land loans

     —           —           2,244         2,244   

Commercial loans

     —           —           625         625   

Commercial leases

     —           —           68         68   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

   $ —         $ —         $ 32,623       $ 32,623   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned:

           

One-to-four family residential real estate

   $ —         $ —         $ 3,900       $ 3,900   

Multi-family mortgage

     —           —           2,645         2,645   

Nonresidential real estate

     —           —           5,423         5,423   

Land

     —           —           5,283         5,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned

   $ —         $ —         $ 17,251       $ 17,251   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ —         $ 258       $ —         $ 258   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Impaired loans:

           

One-to-four family residential real estate loans

   $ —         $ —         $ 4,024       $ 4,024   

Multi-family mortgage loans

     —           —           6,285         6,285   

Nonresidential real estate loans

     —           —           17,239         17,239   

Construction and land loans

     —           —           2,304         2,304   

Commercial loans

     —           —           844         844   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

   $ —         $ —         $ 30,696       $ 30,696   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned:

           

One-to-four family residential real estate

   $ —         $ —         $ 5,655       $ 5,655   

Multi-family mortgage

     —           —           3,655         3,655   

Nonresidential real estate

     —           —           7,451         7,451   

Land

     —           —           5,719         5,719   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned

   $ —         $ —         $ 22,480       $ 22,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ —         $ 344       $ —         $ 344   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

33


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

(unaudited)

 

NOTE 5 – FAIR VALUE (continued)

 

Impaired loans, excluding purchased impaired loans, that are measured for impairment using the fair value of the collateral for collateral-dependent loans, had a carrying amount of $72.8 million, with a valuation allowance of $14.1 million at June 30, 2012, compared to a carrying amount of $73.7 million, with a valuation allowance of $15.0 million at December 31, 2011, resulting in a decrease in the provision for loan losses for these impaired loans of $420,000 and $819,000 for the three and six months ended June 30, 2012, respectively.

Other real estate owned (“OREO”), which is carried at the lower of cost or fair value less costs to sell, had a carrying value of $17.3 million at June 30, 2012, which included write-downs of $1.0 million and $1.4 million for the three and six months ended June 30, 2012, respectively, compared to $22.5 million at December 31, 2011, which included write-downs of $4.0 million for the year ended December 31, 2011.

Mortgage servicing rights, which are carried at lower of cost or fair value, had a carrying amount of $1.1 million at June 30, 2012, of which $813,000 related to fixed rate loans and $286,000 related to adjustable rate loans. Mortgage servicing rights had a carrying amount of $1.2 million at December 31, 2011, of which $895,000 related to fixed rate loans and $309,000 related to adjustable rate loans. A pre-tax provision of $44,000 and $31,000 on our mortgage servicing rights portfolio was included in noninterest income for the three and six months ended June 30, 2012, respectively, compared to no provision for or recovery of mortgage servicing rights for the same periods in 2011.

 

34


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

(unaudited)

 

NOTE 5 – FAIR VALUE (continued)

 

The following table presents quantitative information, based on certain empirical data with respect to Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2012:

 

     Fair Value      Valuation
Technique(s)
  

Unobservable

Input(s)

   Range
(Weighted
Average)

Impaired loans:

           

One-to-four family residential real estate loans

   $ 5,395       Sales comparison    Discount applied to valuation    0%-30%

(7.49%)

Multi-family mortgage loans

     6,025       Sales comparison    Comparison between sales and income approaches    5%-21%

(11.11%)

      Income approach    Cap Rate    6.2% to 18.0%

(9.42%)

Nonresidential real estate loans

     18,266       Sales comparison    Comparison between sales and income approaches    0%-26%

(4.66%)

      Income approach    Cap Rate    7.3%-9.5%

(8.54%)

Construction and land loans

     2,244       Sales comparison    Discount applied to valuation    10%-100%

(30.97%)

Commercial loans

     625       Sales comparison    Discount applied to valuation    0%-30%

(28.75%)

Commercial leases

     68       Sales comparison    Discount based on forced liquidation    50%
  

 

 

          

Impaired loans

   $ 32,623            
  

 

 

          

Other real estate owned:

           

One-to-four family residential real estate

   $ 3,900       Sales comparison    Discount applied to valuation    0%-44%

(8.00%)

Multi-family mortgage

     2,645       Sales comparison    Comparison between sales and income approaches    -8% to 5%

(0%)

      Income approach    Cap Rate    9%-9.5%

(9.36%)

Nonresidential real estate

     5,423       Sales comparison    Comparison between sales and income approaches    5%-26%

(4.71%)

      Income approach    Cap Rate    8.5%-12.5%

(9.33%)

Land

     5,283       Sales comparison    Discount applied to valuation    1%-49%

(18.83%)

  

 

 

          

Other real estate owned

   $ 17,251            
  

 

 

          

Mortgage servicing rights

   $ 258       Third party
valuation
   Present value of future servicing income based on prepayment speeds    13.2 % - 27.2%

(18.86%)

  

 

 

          

Mortgage servicing rights

      Third party
valuation
   Present value of future servicing income based on default rates    12.0%

 

35


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

(unaudited)

 

NOTE 5 – FAIR VALUE (continued)

 

The carrying amount and estimated fair value of financial instruments is as follows:

 

           Fair Value Measurements at June 30, 2012 Using:  
     Carrying
Amount
    Level 1      Level 2     Level 3      Total  

Financial assets

            

Cash and cash equivalents

   $ 220,707      $ 17,679       $ 203,028      $ —         $ 220,707   

Securities

     75,040        542         74,498        —           75,040   

Loans held-for-sale

     505        —           505        —           505   

Loans receivable, net of allowance for

loan losses

     1,118,928        —           1,037,959        32,623         1,070,582   

FHLBC stock

     10,160        —           —          —           N/A   

Accrued interest receivable

     4,527        —           4,527        —           4,527   

Financial liabilities

            

Noninterest-bearing demand deposits

   $ (140,801   $ —         $ (140,801   $ —         $ (140,801

Savings deposits

     (144,875     —           (144,875     —           (144,875

NOW and money market accounts

     (684,518     —           (684,518     —           (684,518

Certificates of deposit

     (319,273     —           (321,739     —           (321,739

Borrowings

     (10,081     —           (10,111     —           (10,111

Accrued interest payable

     (186     —           (186     —           (186

 

     December 31, 2011  
     Carrying
Amount
    Estimated
Fair Value
 

Financial assets

    

Cash and cash equivalents

   $ 120,704      $ 120,704   

Securities

     92,832        92,832   

Loans held-for-sale

     1,918        1,918   

Loans receivable, net of allowance for loan losses

     1,227,391        1,217,377   

FHLBC stock

     16,346        N/A   

Accrued interest receivable

     5,573        5,573   

Financial liabilities

    

Noninterest-bearing demand deposits

   $ (142,084   $ (142,084

Savings deposits

     (144,515     (144,515

NOW and money market accounts

     (681,542     (681,542

Certificates of deposit

     (364,411     (365,952

Borrowings

     (9,322     (9,412

Accrued interest payable

     (212     (212

For purposes of the above, the following assumptions were used:

Cash and Cash Equivalents: The estimated fair values for cash and cash equivalents are based on their carrying value due to the short-term nature of these assets.

Loans: The estimated fair value for loans has been determined by calculating the present value of future cash flows based on the current rate the Company would charge for similar loans with similar maturities, applied for an estimated time period until the loan is assumed to be re-priced or repaid. The estimated fair values of loans held-for-sale are based on quoted market prices.

FHLBC Stock: It is not practicable to determine the fair value of Federal Home Loan Bank of Chicago (“FHLBC”) stock due to the restrictions placed on its transferability.

 

36


Table of Contents

BANKFINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share data)

(unaudited)

 

NOTE 5 – FAIR VALUE (continued)

 

Deposit Liabilities: The estimated fair value for certificates of deposit is determined by calculating the present value of future cash flows based on estimates of rates the Company would pay on such deposits, applied for the time period until maturity. The estimated fair values of noninterest-bearing demand, NOW, money market, and savings deposits are assumed to approximate their carrying values as management establishes rates on these deposits at a level that approximates the local market area. Additionally, these deposits can be withdrawn on demand.

Borrowings: The estimated fair values of advances from the FHLBC and notes payable are based on current market rates for similar financing. The estimated fair value of securities sold under agreements to repurchase is assumed to equal its carrying value due to the short-term nature of the liability.

Accrued Interest: The estimated fair values of accrued interest receivable and payable are assumed to equal their carrying value.

Off-Balance-Sheet Instruments: Off-balance-sheet items consist principally of unfunded loan commitments, standby letters of credit, and unused lines of credit. The estimated fair values of unfunded loan commitments, standby letters of credit, and unused lines of credit are not material.

While the above estimates are based on management’s judgment of the most appropriate factors, as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets were disposed of or the liabilities settled at that date, since market values may differ depending on the various circumstances. The estimated fair values would also not apply to subsequent dates.

In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures.

NOTE 6 – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued an accounting standards update to improve the comparability between U.S. GAAP fair value accounting and reporting requirements and International Financial Reporting Standards (IFRS) fair value accounting and reporting requirements. Additional disclosures required by the update include: (1) disclosure of quantitative information regarding the unobservable inputs used in any fair value measurement classified as Level 3 in the fair value hierarchy in addition to an explanation of the valuation techniques used in valuing Level 3 items and information regarding the sensitivity in the valuation of Level 3 items to changes in the values assigned to unobservable inputs; (2) categorization by level within the fair value hierarchy of items not recognized on the Statement of Financial Position at fair value but for which fair values are required to be disclosed; and (3) instances where the fair values disclosed for non-financial assets were based on a highest and best use assumption when in fact the assets are not being utilized in that capacity. The amendments in the update are effective for interim and annual periods beginning on or after December 15, 2011. The provisions of this update did not have a material impact on the Company’s financial position, results or operations or cash flows. See Note 5 to these Consolidated Financial Statements for the required disclosures.

 

37


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Information

Forward Looking Statements

This Quarterly Report on Form 10-Q contains, and other periodic and current reports, press releases and other public stockholder communications of BankFinancial Corporation may contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. Forward-looking statements may include statements relating to our future plans, strategies and expectations, as well as our future revenues, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects. Forward looking statements are generally identifiable by use of the words “believe,” “may,” “will,” “should,” “could,” “expect,” “estimate,” “intend,” “anticipate,” “project,” “plan,” or similar expressions. Forward looking statements speak only as of the date made. They are frequently based on assumptions that may or may not materialize, and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward looking statements. We intend all forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for the purpose of invoking these safe harbor provisions.

Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or future prospects include, but are not limited to: (i) the failure of the real estate market to recover or further declines in real estate values that adversely impact the value of our loan collateral and OREO, asset dispositions and borrower equity in their investments; (ii) the persistence or worsening of adverse economic conditions in general and in the Chicago metropolitan area in particular, including high or increasing unemployment levels, that could result in increased delinquencies in our loan portfolio or a decline in the value of our investment securities and the collateral for our loans; (iii) results of supervisory monitoring or examinations by regulatory authorities, including the possibility that a regulatory authority could, among other things, require us to increase our allowance for loan losses or adversely change our loan classifications, write-down assets, reduce credit concentrations or maintain specific capital levels; (iv) interest rate movements and their impact on customer behavior and our net interest margin; (v) less than anticipated loan growth due to a lack of demand for specific loan products, competitive pressures or a dearth of borrowers who meet our underwriting standards; (vi) changes, disruptions or illiquidity in national or global financial markets; (vii) the credit risks of lending activities, including risks that could cause changes in the level and direction of loan delinquencies and charge-offs or changes in estimates relating to the computation of our allowance for loan losses; (viii) monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board; (ix) factors affecting our ability to access deposits or cost-effective funding, and the impact of competitors’ pricing initiatives on our deposit products; (x) the impact of new legislation or regulatory changes, including the Dodd-Frank Act, on our products, services, operations and operating expenses; (xi) higher federal deposit insurance premiums; (xii) higher than expected overhead, infrastructure and compliance costs; (xiii) changes in accounting principles, policies or guidelines; and (xiv) and our failure to achieve expected synergies and cost savings from acquisitions.

These risks and uncertainties, as well as the Risk Factors set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled “Critical Accounting Policies” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of

 

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Operations,” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and all amendments thereto, as filed with the Securities and Exchange Commission. There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K.

Overview

During the second quarter of 2012, national economic growth decelerated while local economic conditions continued to stagnate. The principal challenges in the local economy continue to be persistent unemployment and uneven economic growth, both of which continue to impact real estate values. Competitive factors also had an impact during the quarter, as pricing and underwriting competition for multi-family and commercial real estate loans increased and competition for commercial and industrial loans remained intense in terms of both pricing and underwriting.

Loan portfolio balances declined in all categories except consumer loans. Residential loan balances declined due to scheduled loan amortizations and prepayments of our adjustable-rate loan portfolio. Multi-family loan balances declined due to intensified pricing and underwriting competition, including the entry of new competitors into the sector. In approximately 40% of the cases in which we received a payoff on a multi-family loan, we elected not to match the competitor’s offer based on the particular merits of the credit exposure. We believe that the multi-family loan portfolio has good prospects for growth during the remainder of the year. Commercial real estate loan balances declined due to slightly lower loan origination volumes and certain targeted portfolio reductions. We believe that the commercial real estate loan portfolio balances will stabilize at the current levels with some possibility for growth by the end of 2012. Commercial and industrial loan balances declined primarily for cyclical reasons due to state government health care payables practices; we expect these balances to return gradually to their customary balances over the next three to six months. Commercial lease origination volumes improved during the quarter; we expect this portfolio to return to positive growth in the second half of 2012. Our focus for the remainder of 2012 will be to maintain current overall loan portfolio levels and to more aggressively increase originations in certain selected loan categories such as residential loans, multi-family loans, commercial loans and commercial leases consistent with market opportunities.

Loan portfolio quality was stable to trending positive as the first quarter ended. Past due loan trends continued to improve and we continued to experience positive results from borrowers’ fully reinstating loans or continuing their scheduled recoveries to current payment status. We expect further material improvements in our asset quality metrics in the third and fourth quarters of 2012 from resolutions conducted in the ordinary course of business. We believe that unemployment, consumer spending, borrower and investor perceptions of residential and commercial real estate valuations and the pace of judicial proceedings will continue to be the primary factors affecting our asset quality metrics and the pace of classified asset resolutions in 2012.

Dispositions of classified asset collateral and OREO inventory accelerated in the second quarter of 2012. We expect to maintain or accelerate the current pace of non-performing assets resolutions throughout the remainder of 2012.

Our general loan loss reserve requirement remained stable in the second quarter of 2012 due principally to a reduction of loan portfolio balances. Specific loan loss reserves were stable. Our underwriting standards remain consistent with historical standards, although our credit analyses continue to incorporate somewhat more conservative assumptions with respect to effective rents, expenses and occupancy levels given the current economic environment.

Given our excess liquidity position, we continued to reduce our competitive posture with respect to pricing on single-service certificate of deposit accounts, which has been successful in producing a decline in these account balances. Pricing conditions for local deposits, whether low-balance core deposits, certificates of deposit or high-balance, high-yield transaction accounts, remained generally favorable due to very low market yields and continued weak industry-wide loan demand. In addition, many competitors are still evaluating their deposit product configurations in the context of the Dodd-Frank Act and its related regulations; we expect we will adjust our deposit product offerings to explore such competitive advantages as may emerge in this new regulatory and competitive environment.

Our net interest spread and net interest margin declined due to declines in loan yields and the decline in loan balances, but remained favorable at 4.04% and 4.11%, respectively. We anticipate that current market conditions

 

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for new loans and lower effective yields resulting from scheduled loan repayments and loan renewals will likely cause some additional compression of our net interest margin and net interest spread; however, we believe we may be able to offset some of the impact of lower market yields with loan growth in the coming quarters. Given the quantity and volatility of the variables affecting our net interest margin and net interest spread, we are unable to confidently predict what the Company’s net interest margin and net interest spread will be for the remainder of 2012.

Non-interest income was lower in the second quarter of 2012 due to certain transient factors in our mortgage banking operations and some expenses related to facilities management. We continue to evaluate the expansion of non-interest income sources, particularly related to insurance and trust services, to offset any potential future adverse impact associated with the Dodd-Frank Act.

Non-interest expense was higher due to factors relating to OREO operations and valuations, offset by lower compensation expenses. We will continue our review of certain departments and operations for net operating contributions and further operating efficiencies throughout the remainder of 2012.

Selected Financial Data

The following tables summarize the major components of the changes in our balance sheet at June 30, 2012 and December 31, 2011, and in our statement of operations for the three and six month periods ended June 30, 2012 and June 30, 2011.

 

     June 30,
2012
     December 31,
2011
     Change  
     (Dollars in thousands)  

Selected Financial Condition Data:

        

Total assets

   $ 1,522,194       $ 1,563,575       $ (41,381

Cash and cash equivalents

     220,707         120,704         100,003   

Securities

     75,040         92,832         (17,792

Loans receivable, net

     1,118,928         1,227,391         (108,463

Deposits

     1,289,467         1,332,552         (43,085

Borrowings

     10,081         9,322         759   

Stockholders’ equity

     202,943         199,857         3,086   

 

     Three months ended June 30,     Six months ended June 30,  
     2012     2011      Change     2012      2011     Change  
     (Dollars in thousands)  

Selected Operating Data:

              

Interest income

   $ 15,824      $ 19,000       $ (3,176   $ 32,458       $ 34,348      $ (1,890

Interest expense

     1,112        1,910         (798     2,352         3,906        (1,554
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     14,712        17,090         (2,378     30,106         30,442        (336

Provision for loan losses

     1,745        3,175         (1,430     2,741         5,599        (2,858
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     12,967        13,915         (948     27,365         24,843        2,522   

Noninterest income

     1,418        1,879         (461     3,250         3,450        (200

Noninterest expense

     14,044        14,623         (579     27,480         28,878        (1,398
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     341        1,171         (830     3,135         (585     3,720   

Income tax expense (benefit)

     (457     145         (602     —           (834     834   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 798      $ 1,026       $ (228   $ 3,135       $ 249      $ 2,886   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Selected Financial Data (continued)

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Performance Ratios:

        

Return on assets (ratio of net income to average total assets) (1)

     0.21     0.24     0.41     0.03

Return on equity (ratio of net income to average equity) (1)

     1.56        1.62        3.08        0.20   

Net interest rate spread (1) (2)

     4.04        4.27        4.11        3.99   

Net interest margin (1) (3)

     4.11        4.38        4.18        4.11   

Average equity to average assets

     13.42        14.65        13.29        15.49   

Efficiency ratio (4)

     87.07        77.09        82.38        85.21   

Noninterest expense to average total assets (1)

     3.68        3.46        3.58        3.58   

Average interest-earning assets to average interest-bearing liabilities

     123.50        122.55        122.98        122.67   

 

(1) Ratios are annualized.
(2) The net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities for the period.
(3) The net interest margin represents net interest income divided by average total interest-earning assets for the period.
(4) The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.

 

     At June 30,
2012
    At December 31,
2011
 

Selected Financial Ratios and Other Data:

    

Asset Quality Ratios:

    

Nonperforming assets to total assets

     6.00     6.36

Nonaccrual loans to total loans

     6.45        6.11   

Allowance for loan losses to nonperforming loans

     41.67        41.25   

Allowance for loan losses to total loans

     2.69        2.52   

Capital Ratios:

    

Equity to total assets at end of period

     13.33        12.78   

Tier 1 leverage ratio (Bank only)

     11.27        10.50   

Other Data:

    

Number of full service offices

     20        20   

Employees (full-time equivalent basis)

     350        357   

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

Total assets decreased $41.4 million, or 2.6%, to $1.522 billion at June 30, 2012, from $1.564 billion at December 31, 2011.

Net loans receivable decreased $108.5 million, or 8.8%, to $1.119 billion at June 30, 2012, from $1.227 billion at December 31, 2011, due in part to increased pricing and underwriting competition for multi-family and commercial real estate loans and intense pricing and underwriting competition for commercial and industrial loans.

One-to-four family residential mortgage loans decreased $20.0 million, or 7.4%, to $252.0 million at June 30, 2012, from $272.0 million at December 31, 2011, due primarily to scheduled loan amortizations and prepayments of our adjustable-rate loan portfolio. Multi-family mortgage loans decreased $33.5 million, or 7.9%, to $390.1 million at June 30, 2012, from $423.6 million at December 31, 2011, due primarily to intensified pricing and underwriting competition, including the entry of new competitors into the sector. Nonresidential real estate loans decreased $12.0 million, or 3.9%, to $299.6 million at June 30, 2012, from $311.6 million at December 31, 2011, due primarily to slightly lower loan origination volumes and certain targeted portfolio reductions. Construction and land loans

 

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decreased $4.5 million, or 22.5%, to $15.4 million at June 30, 2012, from $19.9 million at December 31, 2011, due to targeted portfolio reductions. Commercial loans decreased by $25.4 million, or 27.1%, to $68.5 million at June 30, 2012, from $93.9 million at December 31, 2011. Commercial leases decreased $13.6 million, or 10.1%, to $121.4 million at June 30, 2012, from $135.0 million at December 31, 2011, due to lease payments’ outpacing originations.

Securities decreased by $17.8 million, or 19.2%, to $75.0 million at June 30, 2012, from $92.8 million at December 31, 2011, due to the maturity of certificates of deposit totaling $21.2 million and the receipt of principal repayments in the amount of $9.7 million in our residential collateralized mortgage obligation portfolio.

We owned $10.1 million of common stock of the Federal Home Loan Bank of Chicago (“FHLBC”) at June 30, 2012, compared to $16.3 million at December 31, 2011. The decrease resulted from the FHLBC’s redemption of $6.2 million of our excess FHLBC stock at par value in 2012. During 2012 and 2011, the FHLBC declared and paid a cash dividend.

Cash and cash equivalents increased $100.0 million, or 82.9%, to $220.7 million at June 30, 2012, from $120.7 million at December 31, 2011.

Total deposits decreased $43.1 million, or 3.2%, to $1.289 billion at June 30, 2012, from $1.333 billion at December 31, 2011, primarily due to our decision to reduce our competitive posture with respect to pricing on single-service certificate of deposit accounts. Certificates of deposit decreased $45.1 million, or 12.4%, to $319.3 million at June 30, 2012, from $364.4 million at December 31, 2011. Of the $45.1 million decrease in certificate of deposit accounts, $4.4 million represented wholesale certificate of deposit accounts.

Core deposits remained stable during the quarter. Noninterest-bearing demand deposits decreased $1.3 million, or 0.9%, to $140.8 million at June 30, 2012, from $142.1 million at December 31, 2011. Savings accounts increased $360,000, or 0.2%, to $144.9 million at June 30, 2012, from $144.5 million at December 31, 2011. Money market accounts increased $2.9 million, or 0.8%, to $347.9 million at June 30, 2012, from $345.0 million at December 31, 2011. Interest-bearing NOW accounts increased $97,000, to $336.6 million at June 30, 2012, from $336.5 million at December 31, 2011. Total core deposits (savings, money market, noninterest-bearing demand and interest-bearing NOW accounts) increased as a percentage of total deposits, representing 75.2% of total deposits at June 30, 2012, compared to 72.7% of total deposits at December 31, 2011.

Borrowings increased $759,000, or 8.1%, to $10.1 million at June 30, 2012, from $9.3 million at December 31, 2011.

Total stockholders’ equity was $202.9 million at June 30, 2012, compared to $199.9 million at December 31, 2011. The increase in total stockholders’ equity was primarily due to net income of $3.1 million, partially offset by our declaration and payment of cash dividends totaling $422,000. The unallocated shares of common stock that our ESOP owns were reflected as a $12.7 million reduction to stockholders’ equity at June 30, 2012, compared to a $13.2 million reduction to stockholders’ equity at December 31, 2011.

Comparison of Operating Results for the Three Months Ended June 30, 2012 and 2011

Net Income. We had net income of $798,000 for the three months ended June 30, 2012, compared to $1.0 million of net income for the three months ended June 30, 2011. Our earnings per share of common stock were $0.04 per basic and fully diluted share, respectively, for the three months ended June 30, 2012 compared to $0.05 per basic and fully diluted share for the three-month period ended June 30, 2011.

Net Interest Income. Net interest income decreased by $2.4 million, or 13.9%, to $14.7 million for the three months ended June 30, 2012, from $17.1 million for the three months ended June 30, 2011. The decrease reflected a $3.2 million decrease in interest income and a $798,000 decrease in interest expense. Our net interest rate spread decreased by 23 basis points to 4.04% for the three months ended June 30, 2012, from 4.27% for the same period in 2011. Our net interest margin decreased by 27 basis points to 4.11% for the three months ended June 30, 2012, from 4.38% for the same period in 2011.

Interest income decreased $3.2 million, or 16.7%, to $15.8 million for the three months ended June 30, 2012, from $19.0 million for the three months ended June 30, 2011. The decrease in interest income was primarily attributable

 

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to the impact of a lower average yield on interest-earning assets and a decrease in average interest-earning assets. The average yield on interest-earning assets decreased 45 basis points to 4.42% for the three months ended June 30, 2012, compared to 4.87% for the same period in 2011. Total average interest-earning assets decreased $124.1 million, or 7.9%, to $1.440 billion for the three months ended June 30, 2012, from $1.564 billion for the same period in 2011. The decrease in average interest-earning assets was due primarily to a $149.4 million, or 11.2%, decrease in average loans receivable, and a net decrease of $35.6 million, or 31.6%, in the average balance of securities, partially offset by a net increase of $66.7 million, or 66.2%, in the average balance of interest-bearing deposits held in other insured depository institutions.

Interest income from loans, the most significant portion of interest income, decreased $2.8 million, or 15.7%, to $15.3 million for the three months ended June 30, 2012, from $18.2 million for the same period in 2011. The decrease in interest income from loans resulted primarily from a decrease in average loans receivable to $1.185 billion for the three months ended June 30, 2012, from $1.334 billion for the same period in 2011, and a 26 basis point decrease in the average yield on loans to 5.20% for the three months ended June 30, 2012, from 5.46% for the same period in 2011.

Interest income from securities decreased by $381,000, or 49.6%, to $387,000 for the three months ended June 30, 2012, from $768,000 for the same period in 2011. The decrease in interest income from securities was primarily due to a 71 basis point decrease in the average yield on securities to 2.02% for the three months ended June 30, 2012, from 2.73% for the same period in 2011. The decrease in the average yield of securities was also affected by a decrease of $35.6 million, or 31.6%, in the average outstanding balance of securities to $77.1 million for the three months ended June 30, 2012, from $112.6 million for the same period in 2011.

Interest income on interest-bearing deposits held in other insured depository institutions increased by $43,000, or 58.9%, to $116,000 for the three months ended June 30, 2012, from $73,000 for the same period in 2011. The increase in interest income from interest-bearing deposits was primarily due to an increase of $66.7 million, or 66.2%, in the average outstanding balance of interest-bearing deposits in other insured depository institutions to $167.5 million for the three months ended June 30, 2012, from $100.8 million for the same period in 2011. The average yield on interest-bearing deposits decreased by one basis point to 0.28% for the three months ended June 30, 2012 from 0.29% for the same period in 2011.

Interest expense decreased $798,000, or 41.8%, to $1.1 million for the three months ended June 30, 2012, from $1.9 million for the three months ended June 30, 2011. The decrease in interest expense was due to a decrease in the weighted average interest rates that we paid on deposit accounts and on borrowings, and a decrease in the balance of our average interest-bearing liabilities. The cost of our average interest-bearing liabilities decreased by 22 basis points to 0.38% for the three months ended June 30, 2012, from 0.60% for the same period in 2011. Our average interest-bearing liabilities decreased $110.3 million, to $1.166 billion for the three months ended June 30, 2012, from $1.276 billion for the same period in 2011.

Interest expense on deposits decreased $765,000, or 41.4%, to $1.1 million for the three months ended June 30, 2012, from $1.8 million for the three months ended June 30, 2011. The decrease in interest expense on deposits reflected a 21 basis point decrease in the average rate paid on interest-bearing deposits to 0.38% for the three months ended June 30, 2012, from 0.59% for same period in 2011. The decrease in the average rate paid on interest-bearing deposits was also affected by a $106.5 million, or 8.4%, decrease in average interest-bearing deposits to $1.156 billion for the three months ended June 30, 2012, from $1.263 billion for the same period in 2011.

Interest expense on money market accounts decreased $104,000, or 25.1%, to $311,000 for the three months ended June 30, 2012, from $415,000 for the three months ended June 30, 2011. The decrease in interest expense on money market accounts reflected a 11 basis point decrease in the interest rate paid on money market accounts to 0.36% for the three months ended June 30, 2012, from 0.47% for the same period in 2011, and a $10.6 million, or 3.0%, decrease in the average balance of money market accounts to $343.4 million for the three months ended June 30, 2012, from $354.0 million for the same period in 2011.

Interest expense on interest-bearing NOW account deposits decreased $44,000, or 29.7%, to $104,000 for the three months ended June 30, 2012, from $148,000 for the three months ended June 30, 2011. The decrease in interest expense on interest-bearing NOW accounts reflected a five basis point decrease in the interest rates paid on interest-bearing NOW account deposits to 0.13% for the three months ended June 30, 2012, from 0.18% for the same period

 

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in 2011, partially offset by an increase of $3.8 million, or 1.2%, in the average balance of interest-bearing NOW account deposits to $333.3 million for the three months ended June 30, 2012, from $329.5 million for the same period in 2011.

Interest expense on certificates of deposit decreased $592,000, or 48.4%, to $632,000 for the three months ended June 30, 2012, from $1.2 million for the three months ended June 30, 2011. The decrease in interest expense on certificates of deposit was due to the combined effect of a 37 basis point decrease in the interest rates paid on certificates of deposit to 0.76% for the three months ended June 30, 2012, from 1.13% for the same period in 2011, and a decrease of $101.6 million, or 23.4%, in the average balance of certificates of deposit to $333.2 million for the three months ended June 30, 2012, from $434.9 million for the same period in 2011.

Interest expense on borrowings decreased $33,000, or 54.1%, to $28,000 for the three months ended June 30, 2012, from $61,000 for the same period in 2011. The decrease in interest expense on borrowings was due to the combined effect of a $3.7 million, or 27.8%, decrease of our average borrowings to $9.8 million for the three months ended June 30, 2012, from $13.5 million for the same period in 2011, and a 66 basis point decrease in interest rates paid on borrowings to 1.15% for the three months ended June 30, 2012, from 1.81% for the same period in 2011.

 

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Average Balance Sheets

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, because the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans have been 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, where applicable, the effect of deferred fees and expenses, discounts and premiums, and purchase accounting adjustments that are amortized or accreted to interest income or expense.

 

     For the three months ended June 30,  
   2012     2011  
   Average
Outstanding
Balance
    Interest      Yield/Rate
(1)
    Average
Outstanding
Balance
    Interest      Yield/Rate
(1)
 
     (Dollars in thousands)  

Interest-earning Assets:

              

Loans

   $ 1,184,803      $ 15,312         5.20   $ 1,334,239      $ 18,155         5.46

Securities

     77,077        387         2.02        112,636        768         2.73   

Stock in FHLB

     10,741        9         0.34        16,562        4         0.10   

Other

     167,526        116         0.28        100,807        73         0.29   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     1,440,147        15,824         4.42        1,564,244        19,000         4.87   
    

 

 

        

 

 

    

Noninterest-earning assets

     85,479             125,443        
  

 

 

        

 

 

      

Total assets

   $ 1,525,626           $ 1,689,687        
  

 

 

        

 

 

      

Interest-bearing Liabilities:

              

Savings deposits

   $ 146,404        37         0.10      $ 144,519        62         0.17   

Money market accounts

     343,415        311         0.36        354,030        415         0.47   

Interest-bearing NOW accounts

     333,299        104         0.13        329,482        148         0.18   

Certificates of deposit

     333,237        632         0.76        434,852        1,224         1.13   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total deposits

     1,156,355        1,084         0.38        1,262,883        1,849         0.59   

Borrowings

     9,756        28         1.15        13,507        61         1.81   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     1,166,111        1,112         0.38        1,276,390        1,910         0.60   
    

 

 

        

 

 

    

Noninterest-bearing deposits

     135,252             141,185        

Noninterest-bearing liabilities

     19,554             19,238        
  

 

 

        

 

 

      

Total liabilities

     1,320,917             1,436,813        

Equity

     204,709             252,874        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 1,525,626           $ 1,689,687        
  

 

 

        

 

 

      

Net interest income

     $ 14,712           $ 17,090      
    

 

 

        

 

 

    

Net interest rate spread (2)

          4.04          4.27

Net interest-earning assets (3)

   $ 274,036           $ 287,854        
  

 

 

        

 

 

      

Net interest margin (4)

          4.11          4.38

Ratio of interest-earning assets to interest-bearing liabilities

     123.50          122.55     

 

(1) Annualized.
(2) Net interest rate 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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Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations to maintain the allowance for loan losses at a level we consider necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonaccrual and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or later events change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.

Based on our evaluation of the above factors, we recorded a $226,000 credit to the general portion of the allowance for loan losses and reduced the specific portion of the allowance for loan losses that we allocate to impaired loans by $534,000.

A loan balance is classified as a loss and charged-off when it is confirmed that there is no readily apparent source of repayment for the amount of the loan that is classified as loss. Confirmation can occur upon the receipt of updated third-party appraisal valuation information indicating that there is a low probability of repayment upon sale of the collateral, the final disposition of collateral where the net proceeds are insufficient to pay the loan balance in full, our failure to obtain possession of certain consumer-loan collateral within certain time limits specified by applicable federal regulations, the conclusion of legal proceedings where the borrower’s obligation to repay is legally discharged (such as a Chapter 7 bankruptcy proceeding), or when it appears that further formal collection procedures are not likely to result in net proceeds in excess of the costs to collect.

Past Due Loans

The following table reflects investment and business loans past due less than 90 days at June 30, 2012, excluding purchased impaired loans.

 

     Loan Balances  
     30 - 59 Days
Past Due
    60 - 89 Days
Past Due
    Total
30 - 89  Days
Past Due
 
     (Dollars in thousands)  

Multi-family mortgage loans

   $ 301      $ 957      $ 1,258   

Nonresidential real estate loans

     585        —          585   

Construction and land loans

     —          —          —     

Commercial

     100        27        127   
  

 

 

   

 

 

   

 

 

 

Past due investment and business loans

   $ 986      $ 984      $ 1,970   
  

 

 

   

 

 

   

 

 

 

Matured loans

   $ 451      $ 959      $ 1,409   

% of past due investment and business matured loans

     45.73     97.41     71.55

At June 30, 2012, our past due multi-family, nonresidential real estate, construction and development and commercial loans totaled $2.0 million. Of the $2.0 million in past due loans, $1.4 million, or 71.6%, were “Pass” rated matured loans that were in the process of renewal. The remaining $561,000 of the past due loans were subject to informal collection activities intended to bring the loan current.

 

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Nonperforming Loans and Assets

We review loans on a regular basis, and generally place loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, the Company places loans on nonaccrual status when we do not expect to receive full payment of interest or principal. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance before the loan is eligible to return to accrual status. We may have loans classified as 90 days or more delinquent and still accruing. Generally, we do not utilize this category of loan classification unless: (1) the loan is repaid in full shortly after the period end date; (2) the loan is well secured and there are no asserted or pending legal barriers to its collection; or (3) the borrower has remitted all scheduled payments and is otherwise in substantial compliance with the terms of the loan, but the processing of loan payments actually received or the renewal of the loan has not occurred for administrative reasons. At June 30, 2012, we had one loan totaling $252,000 in this category and we had three loans totaling $350,000 in this category at December 31, 2011.

We typically obtain new third–party appraisals or collateral valuations when we place a loan on nonaccrual status, conduct impairment testing or conduct a TDR unless the existing valuation information for the collateral is sufficiently current to comply with the requirements of our Appraisal and Collateral Valuation Policy (“ACV Policy”). We also obtain new third–party appraisals or collateral valuations when the judicial foreclosure process concludes with respect to real estate collateral, and when we otherwise acquire actual or constructive title to real estate collateral. In addition to third–party appraisals, we use updated valuation information based on Multiple Listing Service data, broker opinions of value, actual sales prices of similar assets sold by us and approved sales prices in response to offers to purchase similar assets owned by us to provide interim valuation information for consolidated financial statement and management purposes. Our ACV Policy establishes the maximum useful life of a real estate appraisal at 18 months. Because appraisals and updated valuations utilize historical or “ask–side” data in reaching valuation conclusions, the appraised or updated valuation may or may not reflect the actual sales price that we will receive at the time of sale.

Real estate appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property) and the cost approach. Not all appraisals utilize all three approaches. Depending on the nature of the collateral and market conditions, we may emphasize one approach over another in determining the fair value of real estate collateral. Appraisals may also contain different estimates of value based on the level of occupancy or planned future improvements. “As-is” valuations represent an estimate of value based on current market conditions with no changes to the use or condition of the real estate collateral. “As-stabilized” or “as-completed” valuations assume the real estate collateral will be improved to a stated standard or achieve its highest and best use in terms of occupancy. “As-stabilized” or “as-completed” valuations may be subject to a present value adjustment for market conditions or the schedule of improvements.

As part of the asset classification process, we develop an exit strategy for real estate collateral or OREO by assessing overall market conditions, the current use and condition of the asset, and its highest and best use. For most income–producing real estate, we believe that investors value most highly a stable income stream from the asset; consequently, we perform a comparative evaluation to determine whether conducting a sale on an “as–is”, “as–stabilized” or “as–improved” basis is most likely to produce the highest net realizable value. If we determine that the “as–stabilized” or “as–improved” basis is appropriate, we then complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of the expected costs to sell. As of June 30, 2012, substantially all of our impaired real estate loan collateral and OREO were valued on an “as–is basis.”

Estimates of the net realizable value of real estate collateral also include a deduction for the expected costs to sell the collateral or such other deductions from the cash flows resulting from the operation and liquidation of the asset as are appropriate. For most real estate collateral subject to the judicial foreclosure process, we apply a 10.0% deduction to the value of the asset to determine the expected costs to sell the asset. This estimate includes one year of real estate taxes, sales commissions and miscellaneous repair and closing costs. If we receive a purchase offer that requires unbudgeted repairs, or if the expected resolution period for the asset exceeds one year, we then include, on a case-by-case basis, the costs of the additional real estate taxes and repairs and any other material holding costs in the expected costs to sell the collateral. For OREO, we only apply a 7.0% deduction to determine the expected costs to sell, as expenses for real estate taxes and repairs are expensed when incurred.

 

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Nonperforming Assets Summary

The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets, excluding purchased impaired loans, at the dates indicated.

 

     June 30,
2012
    March 31,
2012
    Change  
     (Dollars in thousands)  

Nonaccrual loans:

  

One-to-four family residential

   $ 14,214      $ 11,602      $ 2,612   

Multi-family mortgage

     12,640        13,264        (624

Nonresidential real estate

     30,096        32,892        (2,796

Construction and land

     4,005        3,263        742   

Commercial

     3,533        3,527        6   

Commercial leases

     159        22        137   

Consumer

     13        8        5   
  

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     64,660        64,578        82   

Other real estate owned:

      

One-to-four family residential

     3,365        4,251        (886

Multi-family mortgage

     2,645        3,005        (360

Nonresidential real estate

     4,496        4,756        (260

Land

     1,665        1,712        (47
  

 

 

   

 

 

   

 

 

 

Total other real estate owned

     12,171        13,724        (1,553
  

 

 

   

 

 

   

 

 

 

Nonperforming assets (excluding purchased impaired loans and purchased other real estate owned)

     76,831        78,302        (1,471

Purchased impaired loans

      

One-to-four family residential

     2,297        3,670        (1,373

Multi-family mortgage

     1,491        1,454        37   

Nonresidential real estate

     2,661        3,308        (647

Construction and land

     2,324        4,859        (2,535

Commercial

     677        841        (164
  

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     9,450        14,132        (4,682

Purchased other real estate owned:

      

One-to-four family residential

     535        721        (186

Nonresidential real estate

     927        2,264        (1,337

Land

     3,618        3,480        138   
  

 

 

   

 

 

   

 

 

 

Total other real estate owned

     5,080        6,465        (1,385
  

 

 

   

 

 

   

 

 

 

Purchased impaired loans and other real estate owned

     14,530        20,597        (6,067

Total nonperforming assets

   $ 91,361      $ 98,899      $ (7,538
  

 

 

   

 

 

   

 

 

 

Ratios:

      

Nonperforming loans to total loans

     6.45     6.51  

Nonperforming loans to total loans (1)

     5.63        5.34     

Nonperforming assets to total assets

     6.00        6.38     

Nonperforming assets to total assets(1)

     5.05        5.05     

 

(1) These asset quality ratios exclude purchased impaired loans and purchased other real estate owned resulting from the Downers Grove National Bank acquisition.

 

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Loans on Nonaccrual Status

Non-accrual loans were stable in the second quarter of 2012. A number of successful non-performing asset resolutions occurred, but their impact was offset by an increase in past due owner-occupied residential loans and the implementation of new FFIEC guidance concerning certain loans secured by junior liens on residential property. Specifically, as required by regulatory guidance published during the first quarter of 2012, we conducted an additional review of loans secured by junior liens on residential property. Of these loans, we placed $883,000 on non-accrual status based on updated credit indicators such as credit score and senior lien payment status; however, all but one borrower, totaling $74,000, were current on their scheduled loan payments as of June 30, 2012.

Material activity related to significant non-performing assets previously disclosed was as follows:

 

   

We negotiated final consensual resolutions of several non-performing loan exposures during the first quarter of 2012. Of these consensual resolutions, $2.9 million closed during the second quarter of 2012 as scheduled. Of the remaining consensual resolutions, one credit exposure for $1.4 million is pending bankruptcy court approval.

 

   

We have a $6.1 million total credit exposure consisting of seven loans that are secured by industrial/flex suburban Chicago commercial real estate owned by a family-owned entity. As most recently disclosed in the first quarter of 2012, four properties with a total loan balance of $2.9 million have sufficient net operating income to make scheduled loan payments. Two of these four loans are performing as agreed; the other two loans matured in the second quarter of 2012. The remaining three loans have aggregate loan balances of $3.1 million and are in payment default. The properties that secure these three loans do not produce sufficient net operating income to make scheduled loan payments. At December 31, 2011, we elected to place these three loans on non-accrual status and established a special valuation allowance of $479,000 pending the verification of the sources of continuing debt service support. The borrower has since entered into a contract to sell one of the properties subject to certain contingencies. During the second quarter of 2012, we proposed renewal terms for these loans that would ultimately fully resolve the basis for classification or a non-judicial resolution that would accelerate the disposition of the collateral properties; we have not received a response from the borrowers that meets the required elements for acceptance. Based on these developments and the structure of the related credits, we placed the two matured performing loans, which have a total loan balance of $1.2 million, on non-accrual status as of June 30, 2012. The possibility remains that we will reach a consensual resolution with the borrower, but we are also planning to commence formal collection action on the five loans if necessary.

 

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Other Real Estate Owned

Real estate that is acquired through foreclosure or a deed in lieu of foreclosure is classified as OREO until it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less the estimated costs of disposal as discussed above. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.

 

     Balance at
March  31,
2012
     Additions      Write-
downs  and
receipts
    Sale     Balance at
June 30,
2012
 
     (Dollars in thousands)  

One-to-four family residential

   $ 4,251       $ 103       $ (219   $ (770   $ 3,365   

Multi-family mortgage

     3,005         —           (288     (72     2,645   

Nonresidential real estate

     4,756         859         (389     (730     4,496   

Land

     1,712         —           (47     —          1,665   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     13,724         962         (943     (1,572     12,171   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Acquired other real estate owned:

            

One-to-four family residential

     721         905         (35     (1,056     535   

Nonresidential real estate

     2,264         —           (12     (1,325     927   

Land

     3,480         772         (61     (573     3,618   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     6,465         1,677         (108     (2,954     5,080   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total other real estate owned

   $ 20,189       $ 2,639       $ (1,051   $ (4,526   $ 17,251   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

We closed sales of OREO in the amount of $4.5 million of net book value in the second quarter of 2012, compared to sales in the amount of $2.9 million of net book value in the first quarter of 2012. Based on current ordinary liquidation activity, we estimate that OREO sales of approximately $5.5 million will close in the third and fourth quarters of 2012.

We market real estate for sale based on an estimate of its net realizable value. Depending on the levels of market interest received during the initial period of market exposure, we may reduce the offering price in subsequent periods; if we do so, the new offering price becomes the new net realizable value. We may also accept an offer to purchase a given real estate asset at a price below the net realizable value if there has been limited interest at the original offering price and we conclude that further market exposure time (even at a price lower than the current offering price but higher than the proposed actual sales price) will not produce materially better results given the holding costs and property management risks incurred over time.

 

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Table of Contents

Troubled Debt Restructurings

The Company had $13.9 million of TDRs at June 30, 2012, compared to $16.8 million at March 31, 2012, with $292,000 in specific valuation allowances allocated to those loans at June 30, 2012 and $1.1 million at March 31, 2012. At June 30, 2012, the Company had no outstanding commitments to borrowers whose loans are classified as TDRs.

The following table presents loans by class classified as TDRs:

 

     June 30,
2012
     March 31,
2012
 
     (Dollars in thousands)  

One-to-four family residential real estate

   $ 4,380       $ 5,447   

Multi-family mortgages

     5,369         5,771   

Nonresidential real estate

     1,012         1,017   

Commercial loans – secured

     195         215   
  

 

 

    

 

 

 

Troubled debt restructured loans – accrual loans

     10,956         12,450   

One-to-four family residential real estate

     1,018         358   

Multi-family mortgage

     1,605         1,217   

Nonresidential real estate

     296         2,786   

Commercial loans – secured

     —           —     

Consumer loans

     3         3   
  

 

 

    

 

 

 

Troubled debt restructured loans – nonaccrual loans

     2,922         4,364   
  

 

 

    

 

 

 

Total troubled debt restructured loans

   $ 13,878       $ 16,814   
  

 

 

    

 

 

 

 

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The following table summarizes noninterest income for three-month periods ended June 30, 2012 and 2011:

 

     Three months ended
June  30,
       
     2012     2011     Change  
     (Dollars in thousands)  

Noninterest income:

      

Deposit service charges and fees

   $ 521      $ 691      $ (170

Other fee income

     383        413        (30

Insurance commissions and annuities income

     112        155        (43

Gain on sale of loans, net

     118        39        79   

Loss on disposition of premises and equipment, net

     (157     (10     (147

Loan servicing fees

     119        137        (18

Amortization of servicing assets

     (67     (51     (16

Impairment of servicing assets

     (31     —          (31

Earnings on bank owned life insurance

     120        162        (42

Trust income

     190        216        (26

Other

     110        127        (17
  

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 1,418      $ 1,879      $ (461
  

 

 

   

 

 

   

 

 

 

Noninterest Income. Noninterest income decreased $461,000, or 24.5%, to $1.4 million for the three months ended June 30, 2012, from $1.9 million for the same period in 2011. Deposit service charges and fees decreased $170,000, or 24.6%, to $521,000 for the three months ended June 30, 2012, from $691,000 for the same period in 2011. Income from insurance and annuity commissions decreased $43,000, or 27.7%, to $112,000 for the three months ended June 30, 2012, from $155,000 for the same period in 2011. Gains on sales of loans increased by $79,000 to $118,000 for the three months ended June 30, 2012, from $39,000 for the same period in 2011. In the second quarter 2012, we recorded a pre-tax provision of $31,000 on our mortgage servicing rights portfolio, compared to no provision or recovery for the same period in 2011. Earnings on bank-owned life insurance were $120,000 for the three months ended June 30, 2012, compared to $162,000 for the same period in 2011. Trust department income was $190,000 for the three months ended June 30, 2012, compared to $216,000 for the same period in 2011.

The following table summarizes noninterest expense for the three-month periods ended June 30, 2012 and 2011:

 

     Three months ended
June  30,
       
     2012      2011     Change  
     (Dollars in thousands)  

Noninterest Expense:

       

Compensation and benefits

   $ 6,461       $ 7,120      $ (659

Office occupancy and equipment

     1,755         1,736        19   

Advertising and public relations

     217         260        (43

Information technology

     1,146         1,091        55   

Supplies, telephone and postage

     408         439        (31

Amortization of intangibles

     157         470        (313

Nonperforming asset management

     1,117         1,279        (162

Loss (gain) on sale of other real estate owned

     54         (61     115   

Operations of other real estate owned

     601         617        (16

Write down of other real estate owned

     1,036         299        737   

FDIC insurance premiums

     309         186        123   

Acquisition expenses

     —           230        (230

Other

     783         957        (174
  

 

 

    

 

 

   

 

 

 

Total noninterest expense

   $ 14,044       $ 14,623      $ (579
  

 

 

    

 

 

   

 

 

 

Noninterest Expense. Noninterest expense decreased to $14.0 million for the three months ended June 30, 2012, from $14.6 million for the three months ended June 30, 2011, due primarily to a decrease in expenses for compensation and benefits, amortization of intangibles and nonperforming assets. Compensation and benefits expense decreased $659,000, or 9.3%, to $6.5 million, from $7.1 million for the same period in 2011. Noninterest expense for the three months ended June 30, 2011 included expenses relating to the acquisition of Downers Grove National Bank.

 

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Net expense from nonperforming asset management decreased to $1.1 million for the three months ended June 30, 2012, from $1.3 million for the same period in 2011. Net expense from nonperforming asset management for the three months ended June 30, 2012 included legal expenses of $612,000, compared to legal expenses of $207,000 for the same period in 2011, and real estate tax expenses of $275,000, compared to real estate tax expenses of $532,000 for the same period in 2011.

We recorded a loss from sales of OREO in the amount of $54,000 for the three months ended June 30, 2012, compared to a gain in the amount of $61,000 for the same period in 2011. Net expense from operations of OREO was $601,000 for the three months ended June 30, 2012, compared to $617,000 for the same period in 2011. Net expense from operations of OREO for the three months ended June 30, 2012 included legal, insurance, real estate tax and receiver expenses of $327,000, compared to $543,000 for the same period in 2011. Maintenance and repair expense for OREO was $44,000 for the three months ended June 30, 2012, compared to $37,000 for the same period 2011. Write-downs on OREO for the three months ended June 30, 2012 were $1.0 million, compared to $299,000 for the same period in 2011.

Income Tax Expense (Benefit). We recorded an income tax benefit of $457,000 for the three months ended June 30, 2012 compared to an income tax expense of $145,000 recorded for the same period 2011. The effective tax rate for the three months ended June 30, 2011 was 12.4%.

Comparison of Operating Results for the Six Months Ended June 30, 2012 and 2011

Net Income. We had net income of $3.1 million for the six months ended June 30, 2012, compared to net income of $249,000 for the six months ended June 30, 2011. Our earnings per share of common stock for the six months ended June 30, 2012 was $0.16 per basic and fully diluted share, compared to $0.01 per basic and fully diluted share for the six months ended June 30, 2011.

Net Interest Income. Net interest income decreased by $336,000, or 1.1%, to $30.1 million for the six months ended June 30, 2012, from $30.4 million for the six months ended June 30, 2011. The decrease reflected a $1.9 million decrease in interest income, and a $1.6 million decrease in interest expense. Our net interest rate spread increased by 12 basis points to 4.11% for the six months ended June 30, 2012, from 3.99% for the same period in 2011. Our net interest margin increased by seven basis points to 4.18% for the six months ended June 30, 2012, from 4.11% for the same period in 2011.

Interest income decreased $1.9 million, or 5.5%, to $32.5 million for the six months ended June 30, 2012, from $34.3 million for the six months ended June 30, 2011. The decrease in interest income was primarily attributable to the impact of a lower average yield on interest-earning assets and a decrease in average interest-earning assets. The average yield on interest-earning assets decreased 13 basis points to 4.51% for the six months ended June 30, 2012, compared to 4.64% for the same period in 2011. Total average interest-earning assets decreased $46.3 million, or 3.1%, to $1.447 billion for the six months ended June 30, 2012, from $1.493 billion for the same period in 2011. The decrease in average interest-earning assets was due in substantial part to a $17.5 million, or 1.4%, decrease in average loans receivable, and a net decrease of $33.0 million, or 28.5%, in the average balance of securities, partially offset by a net increase of $8.1 million, or 6.0%, in the average outstanding balance of interest-bearing deposits held in other insured depository institutions.

Interest income from loans, the most significant portion of interest income, decreased $1.2 million, or 3.5%, to $31.4 million for the six months ended June 30, 2012, from $32.6 million for the same period in 2011. The decrease in interest income from loans resulted primarily from a decrease of $17.5 million, or 1.4%, in average loans receivable to $1.210 billion for the six months ended June 30, 2012, from $1.228 billion for the same period in 2011, and a net decrease of 13 basis points in the average yield on loans to 5.22% for the six months ended June 30, 2012, from 5.35% for the same period in 2011.

Interest income from securities decreased by $761,000, or 47.9%, to $829,000 for the six months ended June 30, 2012, from $1.6 million for the same period in 2011. The decrease in interest income from securities was primarily due to a 75 basis point decrease in the average yield on securities to 2.02% for the six months ended June 30, 2012

 

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from 2.77% for the same period in 2011. The decrease in the average yield of securities was also affected by a decrease of $33.0 million, or 28.5%, in the average outstanding balance of securities to $82.7 million for the six months ended June 30, 2012, from $115.7 million for the same period in 2011.

Interest income on interest-bearing deposits held in other insured depository institutions increased by $7,000, or 3.8%, to $192,000 for the six months ended June 30, 2012, from $185,000 for the same period in 2011. The increase in interest income from interest-bearing deposits held in other insured depository institutions was primarily due to an increase of $8.1 million, or 6.0%, in the average outstanding balance of interest-bearing deposits to $141.7 million for the six months ended June 30, 2012, from $133.6 million for the same period in 2011. The average yield on interest-bearing deposits decreased by one basis point to 0.27% for the six months ended June 30, 2012, from 0.28% for the same period in 2011.

Interest expense decreased $1.6 million, or 39.8%, to $2.4 million for the six months ended June 30, 2012, from $3.9 million for the six months ended June 30, 2011. The decrease in interest expense was due to a decrease in the weighted average interest rates that we paid on deposit accounts and on borrowings, and a decrease in the balance of our average interest-bearing liabilities. The cost of our average interest-bearing liabilities decreased by 25 basis points to 0.40% for the six months ended June 30, 2012, from 0.65% for the same period in 2011. Our average interest-bearing liabilities decreased $40.6 million, to $1.177 billion for the six months ended June 30, 2012, from $1.217 billion for the same period in 2011.

Interest expense on deposits decreased $1.5 million, or 38.7%, to $2.3 million for the six months ended June 30, 2012, from $3.7 million for the six months ended June 30, 2011. The decrease in interest expense on deposits reflected a 23 basis point decrease in the average rate paid on interest-bearing deposits to 0.40% for the six months ended June 30, 2012 from 0.63% for same period in 2011. The decrease in the average rate paid on interest-bearing deposits was also affected by a $34.4 million, or 2.9%, decrease in average interest-bearing deposits to $1.167 billion for the six months ended June 30, 2012, from $1.202 billion for the same period in 2011.

Interest expense on money market accounts decreased $231,000, or 27.0%, to $624,000 for the six months ended June 30, 2012, from $855,000 for the six months ended June 30, 2011. The decrease in interest expense on money market accounts reflected a 13 basis point decrease in the interest rate paid on money market accounts to 0.36% for the six months ended June 30, 2012, from 0.49% for the same period in 2011, and a $4.2 million, or 1.2%, decrease in the average balance of money market accounts to $344.4 million for the six months ended June 30, 2012, from $348.6 million for the same period in 2011.

Interest expense on interest-bearing NOW account deposits decreased $99,000, or 32.9%, to $202,000 for the six months ended June 30, 2012, from $301,000 for the six months ended June 30, 2011. The decrease in interest expense on interest-bearing NOW accounts reflected a seven basis point decrease in the interest rates paid on interest-bearing NOW account deposits to 0.12% for the six months ended June 30, 2012, from 0.19% for the same period in 2011, partially offset by an increase of $15.8 million, or 5.0%, in the average balance of interest-bearing NOW account deposits to $332.4 million for the six months ended June 30, 2012, from $316.5 million for the same period in 2011.

Interest expense on certificates of deposit decreased $1.1 million, or 43.3%, to $1.4 million for the six months ended June 30, 2012, from $2.5 million for the six months ended June 30, 2011. The decrease in interest expense on certificates of deposit was due to a 39 basis point decrease in the interest rates paid on certificates of deposit to 0.82% for the six months ended June 30, 2012, from 1.21% for the same period in 2011, and a decrease of $65.8 million, or 16.0%, in the average balance of certificates of deposit to $344.5 million for the six months ended June 30, 2012, from $410.3 million for the same period in 2011.

Interest expense on borrowings decreased $103,000, or 65.6%, to $54,000 for the six months ended June 30, 2012, from $157,000 for the same period in 2011. The decrease in interest expense on borrowings was due to a $6.2 million, or 39.7%, decrease of our average borrowings to $9.5 million for the six months ended June 30, 2012, from $15.7 million for the same period in 2011, and an 87 basis point decrease in interest rates paid on borrowings to 1.15% for the six months ended June 30, 2012, from 2.02% for the same period in 2011.

 

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Average Balance Sheets

The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, because the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans have been 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, where applicable, the effect of deferred fees and expenses, discounts and premiums, and purchase accounting adjustments that are amortized or accreted to interest income or expense.

 

     For the six months ended June 30,  
   2012     2011  
   Average
Outstanding
Balance
    Interest      Yield/Rate
(1)
    Average
Outstanding
Balance
    Interest      Yield/Rate
(1)
 
     (Dollars in thousands)  

Interest-earning Assets:

              

Loans

   $ 1,210,376      $ 31,424         5.22   $ 1,227,877      $ 32,565         5.35

Securities

     82,732        829         2.02        115,726        1,590         2.77   

Stock in FHLB

     12,296        13         0.21        16,138        8         0.10   

Other

     141,690        192         0.27        133,618        185         0.28   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     1,447,094        32,458         4.51        1,493,359        34,348         4.64   
    

 

 

        

 

 

    

Noninterest-earning assets

     86,544             120,766        
  

 

 

        

 

 

      

Total assets

   $ 1,533,638           $ 1,614,125        
  

 

 

        

 

 

      

Interest-bearing Liabilities:

              

Savings deposits

   $ 145,976        74         0.10      $ 126,191        128         0.20   

Money market accounts

     344,372        624         0.36        348,601        855         0.49   

Interest-bearing NOW accounts

     332,384        202         0.12        316,545        301         0.19   

Certificates of deposit

     344,516        1,398         0.82        410,292        2,465         1.21   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total deposits

     1,167,248        2,298         0.40        1,201,629        3,749         0.63   

Borrowings

     9,471        54         1.15        15,701        157         2.02   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     1,176,719        2,352         0.40        1,217,330        3,906         0.65   
    

 

 

        

 

 

    

Noninterest-bearing deposits

     133,591             124,729        

Noninterest-bearing liabilities

     19,501             18,918        
  

 

 

        

 

 

      

Total liabilities

     1,329,811             1,360,977        

Equity

     203,827             253,148        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 1,533,638           $ 1,614,125        
  

 

 

        

 

 

      

Net interest income

     $ 30,106           $ 30,442      
    

 

 

        

 

 

    

Net interest rate spread (2)

          4.11          3.99

Net interest-earning assets (3)

   $ 270,375           $ 276,029        
  

 

 

        

 

 

      

Net interest margin (4)

          4.18          4.11

Ratio of interest-earning assets to interest-bearing liabilities

     122.98          122.67     

 

(1) Annualized.
(2) Net interest rate 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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Provision for Loan Losses. We recorded a provision for loan losses of $2.7 million for the six months ended June 30, 2012, compared to a provision for loan losses of $5.6 million for the six months ended June 30, 2011. We recorded a $253,000 credit to the general portion of the allowance for loan losses and reduced the specific portion of the allowance for loan losses that we allocate to impaired loans by $595,000.

 

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Nonperforming Assets Summary

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

 

     June 30,
2012
    December 31,
2011
    Change  
     (Dollars in thousands)  

Nonaccrual loans:

      

One-to-four family residential

   $ 14,214      $ 10,709      $ 3,505   

Multi-family mortgage

     12,640        14,983        (2,343

Nonresidential real estate

     30,096        30,396        (300

Construction and land

     4,005        3,263        742   

Commercial

     3,533        2,940        593   

Commercial leases

     159        22        137   

Consumer

     13        3        10   
  

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     64,660        62,316        2,344   

Other real estate owned:

      

One-to-four family residential

     3,365        5,328        (1,963

Multi-family mortgage

     2,645        3,655        (1,010

Nonresidential real estate

     4,496        4,905        (409

Land

     1,665        2,237        (572
  

 

 

   

 

 

   

 

 

 

Total other real estate owned

     12,171        16,125        (3,954
  

 

 

   

 

 

   

 

 

 

Nonperforming assets (excluding purchased impaired loans and purchased other real estate owned)

     76,831        78,441        (1,610

Purchased impaired loans

      

One-to-four family residential

     2,297        3,941        (1,644

Multi-family mortgage

     1,491        1,418        73   

Nonresidential real estate

     2,661        3,375        (714

Construction and land

     2,324        4,788        (2,464

Commercial

     677        1,078        (401
  

 

 

   

 

 

   

 

 

 

Total nonaccrual loans

     9,450        14,600        (5,150

Purchased other real estate owned:

      

One-to-four family residential

     535        327        208   

Nonresidential real estate

     927        2,546        (1,619

Land

     3,618        3,482        136   
  

 

 

   

 

 

   

 

 

 

Total other real estate owned

     5,080        6,355        (1,275
  

 

 

   

 

 

   

 

 

 

Purchased impaired loans and other real estate owned

     14,530        20,955        (6,425

Total nonperforming assets

   $ 91,361      $ 99,396      $ (8,035
  

 

 

   

 

 

   

 

 

 

Ratios:

      

Nonperforming loans to total loans

     6.45     6.11  

Nonperforming loans to total loans (1)

     5.63        4.95     

Nonperforming assets to total assets

     6.00        6.36     

Nonperforming assets to total assets(1)

     5.05        5.02     

 

(1) These asset quality ratios exclude purchased impaired loans and purchased other real estate owned resulting from the Downers Grove National Bank acquisition.

 

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Other Real Estate Owned

Real estate that is acquired through foreclosure or a deed in lieu of foreclosure is classified as OREO until it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less the estimated costs of disposal as discussed above. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.

 

     Balance at
December 31,
2011
     Additions      Write-
downs  and
receipts
    Sale     Balance at
June 30,
2012
 
     (Dollars in thousands)  

One-to-four family residential

   $ 5,328       $ 388       $ (219   $ (2,132   $ 3,365   

Multi-family mortgage

     3,655         113         (288     (835     2,645   

Nonresidential real estate

     4,905         1,089         (573     (925     4,496   

Land

     2,237         —           (47     (525     1,665   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     16,125         1,590         (1,127     (4,417     12,171   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Acquired other real estate owned:

            

One-to-four family residential

     327         1,299         (35     (1,056     535   

Nonresidential real estate

     2,546         —           (294     (1,325     927   

Land

     3,482         877         (168     (573     3,618   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     6,355         2,176         (497     (2,954     5,080   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total other real estate owned

   $ 22,480       $ 3,766       $ (1,624   $ (7,371   $ 17,251   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

We closed sales of OREO in the amount of $7.4 million of net book value in the first half of 2012, compared to sales in the amount of $2.2 million in the first half of 2011.

Troubled Debt Restructurings

The following table sets forth troubled debt restructurings by loan category:

 

     June 30,
2012
     December 31,
2011
 
     (Dollars in thousands)  

One-to-four family residential real estate

   $ 4,380       $ 5,619   

Multi-family mortgages

     5,369         5,783   

Nonresidential real estate

     1,012         2,220   

Commercial loans – secured

     195         238   
  

 

 

    

 

 

 

Troubled debt restructured loans – accrual loans

     10,956         13,860   

One-to-four family residential real estate

     1,018         556   

Multi-family mortgage

     1,605         717   

Nonresidential real estate

     296         2,960   

Commercial loans – secured

     —           —     

Consumer loans

     3         3   
  

 

 

    

 

 

 

Troubled debt restructured loans – nonaccrual loans

     2,922         4,236   
  

 

 

    

 

 

 

Total troubled debt restructured loans

   $ 13,878       $ 18,096   
  

 

 

    

 

 

 

 

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The following table summarizes noninterest income for six-month periods ended June 30, 2012 and 2011:

 

     Six months ended
June 30,
       
     2012     2011     Change  
     (Dollars in thousands)  

Noninterest income:

      

Deposit service charges and fees

   $ 1,078      $ 1,303      $ (225

Other fee income

     768        795        (27

Insurance commissions and annuities income

     234        324        (90

Gain on sale of loans, net

     385        58        327   

Loss on disposition of premises and equipment, net

     (157     (20     (137

Loan servicing fees

     247        269        (22

Amortization of servicing assets

     (136     (105     (31

Impairment of servicing assets

     (44     —          (44

Earnings on bank owned life insurance

     246        320        (74

Trust income

     374        292        82   

Other

     255        214        41   
  

 

 

   

 

 

   

 

 

 

Total noninterest income

   $ 3,250      $ 3,450      $ (200
  

 

 

   

 

 

   

 

 

 

Noninterest Income. Noninterest income decreased $200,000, or 5.8%, to $3.3 million for the six months ended June 30, 2012, from $3.5 million for the same period in 2011. Deposit service charges and fees decreased $225,000, or 17.3%, to $1.1 million for the six months ended June 30, 2012, from $1.3 million for the same period in 2011. Income from insurance and annuity commissions decreased $90,000, or 27.8%, to $234,000 for the six months ended June 30, 2012, from $324,000 for the same period in 2011. Gains on sales of loans increased by $327,000 to $385,000 for the six months ended June 30, 2012, from $58,000 for the same period in 2011. In the first half of 2012, we recorded a pre-tax provision of $44,000 on our mortgage servicing rights portfolio, compared to no provision or recovery for the same period in 2011. Earnings on bank-owned life insurance were $246,000 for the six months ended June 30, 2012, compared to $320,000 for the same period in 2011. Trust department income was $374,000 for the six months ended June 30, 2012, compared to $292,000 for the same period in 2011.

The following table summarizes noninterest expense for the six-month periods ended June 30, 2012 and 2011:

 

     Six months ended
June 30,
       
     2012     2011     Change  
     (Dollars in thousands)  

Noninterest Expense:

      

Compensation and benefits

   $ 13,120      $ 13,720      $ (600

Office occupancy and equipment

     3,498        3,604        (106

Advertising and public relations

     311        497        (186

Information technology

     2,407        2,039        368   

Supplies, telephone and postage

     838        814        24   

Amortization of intangibles

     320        852        (532

Nonperforming asset management

     2,357        1,734        623   

Gain on sale other real estate owned

     (85     (113     28   

Operations of other real estate owned

     903        943        (40

Write down other real estate owned

     1,425        478        947   

FDIC insurance premiums

     657        753        (96

Acquisition expenses

     —          1,771        (1,771

Other

     1,729        1,786        (57
  

 

 

   

 

 

   

 

 

 

Total noninterest expense

   $ 27,480      $ 28,878      $ (1,398
  

 

 

   

 

 

   

 

 

 

Noninterest Expense. Noninterest expense decreased to $27.5 million for the six months ended June 30, 2012, from $28.9 million for the six months ended June 30, 2011, a decrease of $1.4 million, or 4.8%. The decrease reflected a decrease in expense for compensation and benefits and amortization of intangibles, which was partially offset by an increase in nonperforming asset and OREO expense, and the impact that expenses relating to the acquisition of Downers Grove National Bank had on noninterest expense the six months ended June 30, 2011. Compensation and benefits expense decreased $600,000, or 4.4%, to $13.1 million, from $13.7 million for the same period in 2011.

 

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Information technology expense increased $368,000, or 18.0%, to $2.4 million, from $2.0 million for the same period in 2011. This increase reflects software upgrades combined with increases in equipment and processing costs associated with the two Downers Grove National Bank branches that we acquired in March, 2011.

Net expense from nonperforming asset management increased to $2.4 million for the six months ended June 30, 2012, from $1.7 million for the same period in 2011. Net expense from nonperforming asset management for the six months ended June 30, 2012 included legal expenses of $976,000 for legal expenses for the six months ended June 30, 2012, compared to legal expenses of $351,000 for the same period in 2011, and real estate tax expenses of $840,000 for real estate taxes for the six months ended June 30, 2012, compared to real estate tax expenses of $833,000 for the same period in 2011.

We recorded a gain from sales of OREO in the amount of $85,000 for the six months ended June 30, 2012, compared to a gain in the amount of $113,000 for the same period in 2011. Net expense from operations of OREO was $903,000 for the six months ended June 30, 2012, compared to $943,000 for the same period in 2011. Net expense from operations of OREO for the six months ended June 30, 2012 included legal, insurance, real estate tax and receiver expenses of $640,000, compared to $887,000 for the same period in 2011. Maintenance and repair expense for OREO was $146,000 for the six months ended June 30, 2012, compared to $48,000 for the same period 2011. Write-downs on OREO for the six months ended June 30, 2012 were $1.4 million in write-downs, compared to $478,000 for the same period in 2011.

Income Tax Expense (Benefit). We recorded no income tax expense or benefit for the six months ended June 30, 2012, compared to an income tax benefit of $834,000 for the six months ended June 30, 2011. The effective tax rate for the six months ended June 30, 2011 was 142.6% due to the impact of permanent book versus tax differences in relation to pre-tax income. As a result of the Illinois corporate income tax rate increase, we recorded an additional tax benefit of $227,000 for the six months ended June 30, 2011 related to the write-up of state deferred tax assets.

Liquidity and Capital Resources

Liquidity. The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of lending and investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, wholesale borrowings, the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, and proceeds from borrowings are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments and mortgage loan sales are greatly influenced by market interest rates, economic conditions and competition. The Bank is a member of the FHLBC, which provides an additional source of short-term and long-term funding. The outstanding borrowing from the FHLBC was $3.0 million at June 30, 2012, at an interest rate of 2.99%; this borrowing will mature in less than one year. The outstanding FHLBC borrowing was $3.0 million at December 31, 2011.

The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends to stockholders and stock repurchases. The primary source of liquidity for the Company currently is $11.0 million in cash and cash equivalents as of June 30, 2012 and cash dividends from our subsidiary, the Bank.

As a result of the regulatory restructuring occasioned by the Dodd-Frank Act, the Company is now subject to Federal Reserve Board Supervisory Letter SR 09-4, which provides that a holding company should, among other things, inform the Federal Reserve Bank prior to declaring a dividend if its net income for the current quarter is not sufficient to fully fund the dividend, and inform the Federal Reserve Bank and consider eliminating, deferring or significantly reducing its dividends if its net income for the current quarter is not sufficient to fully fund the dividends, or if its net income for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends. The Company declared and paid cash dividends of $422,000, or $0.02 per share, to our stockholders during the first half of 2012.

 

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As of June 30, 2012, we were not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of June 30, 2012, we had no other material commitments for capital expenditures.

Capital Resources. Total stockholders’ equity was $202.9 million at June 30, 2012, compared to $199.9 million at December 31, 2011. The increase in total stockholders’ equity was primarily due to net income of $3.1 million, partially offset by our declaration and payment of cash dividends totaling $422,000. The unallocated shares of common stock that our ESOP owns were reflected as a $12.7 million reduction to stockholders’ equity at June 30, 2012, compared to a $13.2 million reduction to stockholders’ equity at December 31, 2011.

Our Board of Directors has authorized the repurchase of up to 5,047,423 shares of our common stock. The authorization permits shares to be repurchased in open market or negotiated transactions, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The authorization may be utilized at management's discretion, subject to the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements, and to price and other internal limitations established by the Board of Directors. The repurchase authorization will expire on November 15, 2012, unless extended by the Board of Directors. As of June 30, 2012, the Company had repurchased 4,239,134 shares of its common stock out of the 5,047,423 shares that have been authorized for repurchase. No shares were repurchased during the six months ended June 30, 2012. Federal Reserve Board Supervisory Letter SR 09-4 provides that holding companies experiencing financial weaknesses such as operating losses should consult with the appropriate Federal Reserve supervisory staff before redeeming or repurchasing common stock. The Company has not initiated discussions with the Federal Reserve supervisory staff with respect to common stock repurchases, and has no plans to initiate such discussions in the immediate future. Due to the Company’s operating loss in 2011, the Company will not undertake any further share repurchases without engaging in discussions with the Federal Reserve supervisory staff.

On June 6, 2012, the OCC and the other federal bank regulatory agencies issued a series of proposed rules to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”). The proposed rules would apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the proposed rules establish a new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital requirement, and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The proposed rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rules will become effective on January 1, 2013, and the changes set forth in the final rules will be phased in from January 1, 2013 through January 1, 2019.

The Company and the Bank have adopted a Capital Plan that requires the Bank to maintain a Tier 1 leverage ratio of at least eight percent (8%) and a total risk-based capital ratio of at least twelve percent (12%). The minimum capital ratios set forth in the Capital Plan will be increased and other minimum capital requirements will be established if and as necessary to comply with the Basel III requirements as such requirements become applicable to the Company and the Bank. In accordance with the Capital Plan, neither the Company nor the Bank will pursue any acquisition opportunity or growth that will cause the Bank’s total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels after taking into account any additional sources of capital that will be utilized in the funding of the acquisition. In addition, the Bank, will not declare or pay a dividend or make another type of capital distribution to the Company unless the Bank would remain in compliance with the established minimum capital levels immediately following the declaration or payment of the dividend or capital distribution. Finally, the Company will continue to maintain its ability to serve as a source of financial strength to the Bank by holding at least $5.0 million of cash or liquid assets for that purpose.

 

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At June 30, 2012 and December 31, 2011, the Bank’s actual regulatory capital ratios, the minimum capital ratios required to be considered well-capitalized in the Prompt Corrective Action rules and the minimum capital ratios established under the Bank’s Capital Plan were:

 

     Actual Ratio     Minimum
Required to Be
Well Capitalized
Under Prompt
Corrective  Action
Provisions
    Minimum Capital Ratios
Established under Capital
Plan
 

June 30, 2012

      

Total capital (to risk-weighted assets)

     16.69     8.00     12.00

Tier 1 (core) capital (to risk-weighted assets)

     15.43        4.00        8.00   

Tier 1 (core) capital (to adjusted total assets)

     11.27        4.00        8.00   

December 31, 2011

      

Total capital (to risk-weighted assets)

     14.73     8.00     12.00

Tier 1 (core) capital (to risk-weighted assets)

     13.47        4.00        8.00   

Tier 1 (core) capital (to adjusted total assets)

     10.50        4.00        8.00   

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative Analysis. We believe that our most significant form of market risk is interest rate risk. Interest rate risk results from timing differences in the maturity or repricing of our assets, liabilities and off balance sheet contracts (i.e., forward loan commitments), the effect of loan prepayments and deposit withdrawals, the difference in the behavior of lending and funding rates arising from the use of different indices and “yield curve risk” arising from changing rate relationships across the spectrum of maturities for constant or variable credit risk investments. In addition to directly affecting net interest income, changes in market interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available-for-sale and the flow and mix of deposits.

The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy and then manage that risk in a manner that is consistent with our policy to reduce, to the extent possible, the exposure of our net interest income to changes in market interest rates. Our Asset/Liability Management Committee (“ALCO”), which consists of certain members of senior management, evaluates the interest rate risk inherent in certain assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit gathering strategies accordingly. The Board of Directors’ Asset/Liability Management Committee then reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios as well as the intrinsic value of our deposits and borrowings, and reports to the full Board of Directors.

We actively evaluate interest rate risk in connection with our lending, investing and deposit activities. In an effort to better manage interest-rate risk, we have de-emphasized the origination of residential mortgage loans for our loan portfolio, and have increased our emphasis on the origination of nonresidential real estate loans, multi-family mortgage loans, commercial loans and commercial leases. In addition, depending on market interest rates and our capital and liquidity position, we generally sell all or a portion of our longer-term, fixed-rate residential loans, usually on a servicing-retained basis. Further, we primarily invest in shorter-duration securities, which generally have lower yields compared to longer-term investments. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Finally, we have classified all of our investment portfolio securities as available-for-sale so as to provide flexibility in liquidity management.

 

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We utilize a combination of analyses to monitor the Bank’s exposure to changes in interest rates. The economic value of equity analysis is a model that estimates the change in net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. In calculating changes in NPV, we assume estimated loan prepayment rates, reinvestment rates and deposit decay rates that seem most likely based on historical experience during prior interest rate changes.

Our net interest income analysis utilizes the data derived from the dynamic GAP analysis, described below, and applies several additional elements, including actual interest rate indices and margins, contractual limitations such as interest rate floors and caps and the US Treasury yield curve as of the balance sheet date. In addition, we apply consistent parallel yield curve shifts (in both directions) to determine possible changes in net interest income if the theoretical yield curve shifts occurred instantaneously. Net interest income analysis also adjusts the dynamic GAP repricing analysis based on changes in prepayment rates resulting from the parallel yield curve shifts.

Our dynamic GAP analysis determines the relative balance between the repricing of assets and liabilities over multiple periods of time (ranging from overnight to five years). Dynamic GAP analysis includes expected cash flows from loans and mortgage-backed securities, applying prepayment rates based on the differential between the current interest rate and the market interest rate for each loan and security type. This analysis identifies mismatches in the timing of asset and liability repricing but does not necessarily provide an accurate indicator of interest rate risk because it omits the factors incorporated into the net interest income analysis.

Quantitative Analysis. The following table sets forth, as of June 30, 2012, the estimated changes in the Bank’s NPV and net interest income that would result from the designated instantaneous parallel shift in the US Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

 

Change in Interest Rates

(basis points)

   Estimated Increase in NPV     Decrease in Estimated Net
Interest Income
 
   Amount      Percent     Amount     Percent  
     (dollars in thousands)            (dollars in thousands)        

+400

   $ 4,566         2.49   $ (1,320     (2.59 )% 

+300

     3,943         2.15        (864     (1.70

+200

     3,216         1.75        (453     (0.89

+100

     2,029         1.11        (231     (0.45

      0

     —           —          —          —     

The Company has opted not to include an estimate for a decrease in rates at June 30, 2012 as the results are not relevant given the current targeted fed funds rate of the Federal Open Market Committee. The table set forth above indicates that at June 30, 2012, in the event of an immediate 200 basis point increase in interest rates, the Bank would be expected to experience a 1.75% increase in NPV and a $453,000 decrease in net interest income. This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on NPV and net interest income, if any.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The NPV and net interest income table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the NPV and net interest income table provides an indication of our sensitivity to interest rate changes 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 interest income and will differ from actual results.

 

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ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2012. Based on that evaluation, the Company’s management, including the Chairman, President, and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended June 30, 2012, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

 

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are subject to various legal actions that are considered ordinary routine litigation incidental to the business of the Company, and no claim for money damages exceeds ten percent of the Company’s consolidated assets. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.

 

ITEM 1A. RISK FACTORS

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

  (a) Unregistered Sale of Equity Securities. Not applicable.

 

  (b) Use of Proceeds. Not applicable

 

  (c) Repurchases of Equity Securities.

The Company’s Board of Directors has authorized the repurchase of up to 5,047,423 shares of our common stock. In accordance with this authorization, the Company had repurchased 4,239,134 shares of its common stock as of June 30, 2012. The Company did not conduct any repurchases during the second quarter of 2012. The current share repurchase authorization will expire on November 15, 2012, unless extended.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

 

ITEM 5. OTHER INFORMATION

None

 

ITEM 6. EXHIBITS

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      BANKFINANCIAL CORPORATION
      (Registrant)
Date: August 1, 2012      
     

/s/    F. MORGAN GASIOR

     

F. Morgan Gasior

     

Chairman of the Board, Chief Executive Officer and President

     

/s/    PAUL A. CLOUTIER

     

Paul A. Cloutier

     

Executive Vice President and Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit
Number

  

Description

31.1    Certification of F. Morgan Gasior, Chairman of the Board, Chief Executive Officer and President, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2    Certification of Paul A. Cloutier, Executive Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1    Certification of F. Morgan Gasior, Chairman of the Board, Chief Executive Officer and President, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Paul A. Cloutier, Executive Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   Interactive data as required by regulation S-K will be filed by amendment to this Quarterly Report on Form 10-Q.

 

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