Annual Statements Open main menu

BankFinancial CORP - Quarter Report: 2013 September (Form 10-Q)


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 September 30, 2013
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)
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 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. At October 28, 2013, there were 21,101,966 shares of Common Stock, $0.01 par value, outstanding.





BANKFINANCIAL CORPORATION
Form 10-Q
September 30, 2013
Table of Contents
 
 
Page
Number
 
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 
 


Table of Contents
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share data) - Unaudited


 
September 30, 2013
 
December 31, 2012
Assets
 
 
 
Cash and due from other financial institutions
$
18,068

 
$
20,361

Interest-bearing deposits in other financial institutions
225,410

 
255,403

Cash and cash equivalents
243,478

 
275,764

Securities, at fair value
83,409

 
77,832

Loans held for sale
15

 
2,166

Loans receivable, net of allowance for loan losses:
September 30, 2013, $15,876 and December 31, 2012, $18,035
1,035,331

 
1,030,465

Other real estate owned, net
5,403

 
10,358

Stock in Federal Home Loan Bank, at cost
6,068

 
8,412

Premises and equipment, net
36,154

 
38,251

Accrued interest receivable
3,576

 
4,146

Core deposit intangible
2,583

 
3,038

Bank owned life insurance
21,881

 
21,645

FDIC prepaid expense

 
2,658

Other assets
4,050

 
6,457

Total assets
$
1,441,948

 
$
1,481,192

 
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
133,094

 
$
134,597

Interest-bearing
1,116,739

 
1,147,754

Total deposits
1,249,833

 
1,282,351

Borrowings
2,883

 
5,567

Advance payments by borrowers for taxes and insurance
5,825

 
10,705

Accrued interest payable and other liabilities
9,096

 
9,679

Total liabilities
1,267,637

 
1,308,302

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;
21,101,966 shares issued at September 30, 2013 and 21,072,966 shares at
December 31, 2012
211

 
211

Additional paid-in capital
193,567

 
193,590

Retained earnings (deficit)
(8,425
)
 
(9,796
)
Unearned Employee Stock Ownership Plan shares
(11,501
)
 
(12,233
)
Accumulated other comprehensive income
459

 
1,118

Total stockholders’ equity
174,311

 
172,890

Total liabilities and stockholders’ equity
$
1,441,948

 
$
1,481,192


See accompanying notes to the consolidated financial statements.

1

Table of Contents
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data) - Unaudited

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
11,680

 
$
13,978

 
$
35,812

 
$
45,402

Securities
241

 
342

 
710

 
1,171

Other
186

 
148

 
574

 
353

Total interest income
12,107

 
14,468

 
37,096

 
46,926

Interest expense
 
 
 
 
 
 
 
Deposits
880

 
1,010

 
2,799

 
3,308

Borrowings
2

 
26

 
12

 
80

Total interest expense
882

 
1,036

 
2,811

 
3,388

Net interest income
11,225

 
13,432

 
34,285

 
43,538

Provision (recovery) for loan losses
(437
)
 
4,453

 
491

 
7,194

Net interest income after provision (recovery) for loan losses
11,662

 
8,979

 
33,794

 
36,344

Noninterest income
 
 
 
 
 
 
 
Deposit service charges and fees
520

 
548

 
1,528

 
1,626

Other fee income
373

 
374

 
1,158

 
1,142

Insurance commissions and annuities income
106

 
125

 
301

 
359

Gain on sale of loans, net
32

 
210

 
1,445

 
595

Loss on disposition of premises and equipment, net

 
(7
)
 

 
(164
)
Loan servicing fees
112

 
124

 
349

 
371

Amortization and impairment of servicing assets
(43
)
 
(55
)
 
(152
)
 
(235
)
Earnings on bank owned life insurance
84

 
109

 
236

 
355

Trust
172

 
171

 
536

 
545

Other
183

 
232

 
513

 
487

         
1,539

 
1,831

 
5,914

 
5,081

Noninterest expense
 
 
 
 
 
 
 
Compensation and benefits
6,143

 
6,353

 
19,581

 
19,513

Office occupancy and equipment
1,797

 
1,904

 
5,550

 
6,041

Advertising and public relations
195

 
145

 
609

 
475

Information technology
817

 
880

 
2,382

 
2,553

Supplies, telephone, and postage
382

 
372

 
1,246

 
1,124

Amortization of intangibles
149

 
156

 
455

 
476

Nonperforming asset management
682

 
1,728

 
2,031

 
4,085

Operations of other real estate owned
476

 
2,742

 
1,409

 
4,985

FDIC insurance premiums
476

 
642

 
1,445

 
1,299

Other
1,045

 
1,110

 
3,207

 
2,961

 
12,162

 
16,032

 
37,915

 
43,512

Income (loss) before income taxes
1,039

 
(5,222
)
 
1,793

 
(2,087
)
Income tax expense

 

 

 

Net income (loss)
$
1,039

 
$
(5,222
)
 
$
1,793

 
$
(2,087
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
0.05

 
$
(0.26
)
 
$
0.09

 
$
(0.11
)
Diluted earnings (loss) per common share
$
0.05

 
$
(0.26
)
 
$
0.09

 
$
(0.11
)
Weighted average common shares outstanding
20,048,058

 
19,914,992

 
20,002,381

 
19,871,368

Diluted weighted average common shares outstanding
20,054,092

 
19,914,992

 
20,005,197

 
19,871,368


See accompanying notes to the consolidated financial statements.

2

Table of Contents
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands) - Unaudited

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
1,039

 
$
(5,222
)
 
$
1,793

 
$
(2,087
)
Unrealized holding gain (loss) arising during the period, net of tax
(215
)
 
210

 
(659
)
 
174

Amount reclassified from accumulated other comprehensive income

 

 

 

Net current period other comprehensive gain (loss)
(215
)
 
210

 
(659
)
 
174

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
824

 
$
(5,012
)
 
$
1,134

 
$
(1,913
)


See accompanying notes to the consolidated financial statements.

3

Table of Contents
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except per share data) - Unaudited


 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Deficit)
 
Unearned
Employee
Stock
Ownership
Plan
Shares
 
Accumulated
Other
Comprehen-sive
Income
 
Total
Balance at January 1, 2012
$
211

 
$
193,801

 
$
17,946

 
$
(13,212
)
 
$
1,111

 
$
199,857

Net loss

 

 
(2,087
)
 

 

 
(2,087
)
Other comprehensive income, net of tax effects

 

 

 

 
174

 
174

Nonvested stock awards-stock-based compensation expense

 
41

 

 

 

 
41

Cash dividends declared on common stock ($0.03 per share)

 

 
(633
)
 

 

 
(633
)
ESOP shares earned

 
(88
)
 

 
733

 

 
645

Balance at September 30, 2012
$
211

 
$
193,754

 
$
15,226

 
$
(12,479
)
 
$
1,285

 
$
197,997

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
$
211

 
$
193,590

 
$
(9,796
)
 
$
(12,233
)
 
$
1,118

 
$
172,890

Net income

 

 
1,793

 

 

 
1,793

Other comprehensive income, net of tax effects

 

 

 

 
(659
)
 
(659
)
Nonvested stock awards-stock-based compensation expense

 
62

 

 

 

 
62

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

 

 
(422
)
 

 

 
(422
)
ESOP shares earned

 
(85
)
 

 
732

 

 
647

Balance at September 30, 2013
$
211

 
$
193,567

 
$
(8,425
)
 
$
(11,501
)
 
$
459

 
$
174,311


See accompanying notes to the consolidated financial statements.

4

Table of Contents
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) - Unaudited

 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities
 
 
 
Net income (loss)
$
1,793

 
$
(2,087
)
Adjustments to reconcile to net income (loss) to net cash from operating activities
 
 
 
Provision for loan losses
491

 
7,194

ESOP shares earned
647

 
645

Stock–based compensation expense
62

 
41

Depreciation and amortization
3,285

 
3,417

Amortization of premiums and discounts on securities and loans
(606
)
 
(2,185
)
Amortization of core deposit and other intangible assets
455

 
476

Amortization and impairment of servicing assets
152

 
235

Net change in net deferred loan origination costs
(157
)
 
81

Net loss (gain) on sale of other real estate owned
182

 
(126
)
Net gain on sale of loans
(1,445
)
 
(595
)
Net loss on disposition of premises and equipment

 
164

Loans originated for sale
(9,876
)
 
(13,806
)
Proceeds from sale of loans
10,750

 
15,768

Other real estate owned valuation adjustments
471

 

Net change in:
 
 
 
Accrued interest receivable
570

 
1,178

Earnings on bank owned life insurance
(236
)
 
(355
)
Other assets
3,749

 
2,380

Accrued interest payable and other liabilities
(583
)
 
(1,462
)
Net cash from operating activities
9,704

 
14,740

Cash flows from investing activities
 
 
 
Securities
 
 
 
Proceeds from maturities
25,422

 
22,424

Proceeds from principal repayments
10,571

 
15,413

Purchases of securities
(42,351
)
 
(26,659
)
Loans receivable
 
 
 
Principal payments on loans receivable
345,906

 
394,621

Purchases of loans

 
(3,190
)
Originated for investment
(353,764
)
 
(255,751
)
Proceeds from sale of loans
2,868

 

Proceeds of redemption of Federal Home Loan Bank of Chicago stock
2,344

 
7,279

Proceeds from sale of other real estate owned
7,542

 
9,872

Purchase of premises and equipment, net
(24
)
 
(1,885
)
Net cash from (used in) investing activities
(1,486
)
 
162,124



Continued

5

Table of Contents
BANKFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) - Unaudited

 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from financing activities
 
 
 
Net change in deposits
$
(32,518
)
 
$
(54,181
)
Net change in borrowings
(2,684
)
 
(2,376
)
Net change in advance payments by borrowers for taxes and insurance
(4,880
)
 
(3,649
)
Cash dividends paid on common stock
(422
)
 
(633
)
Net cash used in financing activities
(40,504
)
 
(60,839
)
Net change in cash and cash equivalents
(32,286
)
 
116,025

Beginning cash and cash equivalents
275,764

 
120,704

Ending cash and cash equivalents
$
243,478

 
$
236,729

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
2,849

 
$
3,432

Income taxes paid

 

Income taxes refunded
461

 
1,406

Loans transferred to other real estate owned
3,268

 
6,236



See accompanying notes to the consolidated financial statements.

6

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 nine-month periods ended September 30, 2013 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2013.
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, goodwill, other intangible assets, stock-based compensation, impairment of securities and 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, 2012, as filed with the Securities and Exchange Commission.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued an amendment to improve the reporting of reclassifications out of accumulated other comprehensive income. ASC Topic 220, “Comprehensive Income” amended prior guidance to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under GAAP. The Company adopted this new authoritative guidance on January 1, 2013, and it did not have an impact on the Company's statements of operations and financial condition as the Company did not have any amounts reclassified during the three or nine month periods ended September 30, 2013 and 2012.



7


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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss) available to common stockholders
$
1,039

 
$
(5,222
)
 
$
1,793

 
$
(2,087
)
Average common shares outstanding
21,101,966

 
21,072,966

 
21,087,838

 
21,072,966

Less:
 
 
 
 
 
 
 
Unearned ESOP shares
(1,028,158
)
 
(1,157,974
)
 
(1,072,180
)
 
(1,198,988
)
Unvested restricted stock shares
(25,750
)
 

 
(13,277
)
 
(2,610
)
Weighted average common shares outstanding
20,048,058

 
19,914,992

 
20,002,381

 
19,871,368

Add - Net effect of dilutive stock options and unvested restricted stock
6,034

 

 
2,816

 

Diluted weighted average common shares outstanding
20,054,092

 
19,914,992

 
20,005,197

 
19,871,368

Basic earnings (loss) per common share
$
0.05

 
$
(0.26
)
 
$
0.09

 
$
(0.11
)
Diluted earnings (loss) per common share
$
0.05

 
$
(0.26
)
 
$
0.09

 
$
(0.11
)
Number of antidilutive stock options excluded from the diluted earnings per share calculation

 
141,000

 

 
141,000

Weighted average exercise price of anti-dilutive option shares
$

 
$
17.21

 
$

 
$
17.21

 



8


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 3 - SECURITIES

The fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income are shown below.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
September 30, 2013
 
 
 
 
 
 
 
Certificates of deposit
$
34,533

 
$

 
$

 
$
34,533

Municipal securities
350

 
9

 

 
359

Equity mutual fund
500

 
5

 

 
505

Mortgage-backed securities - residential
28,864

 
1,273

 
(111
)
 
30,026

Collateralized mortgage obligations - residential
17,983

 
38

 
(72
)
 
17,949

SBA-guaranteed loan participation certificates
37

 

 

 
37

 
$
82,267

 
$
1,325

 
$
(183
)
 
$
83,409

December 31, 2012
 
 
 
 
 
 
 
Certificates of deposit
$
33,456

 
$

 
$

 
$
33,456

Municipal securities
350

 
19

 

 
369

Equity mutual fund
500

 
28

 

 
528

Mortgage-backed securities - residential
32,572

 
1,661

 

 
34,233

Collateralized mortgage obligations - residential
9,111

 
95

 
(2
)
 
9,204

SBA-guaranteed loan participation certificates
42

 

 

 
42

 
$
76,031

 
$
1,803

 
$
(2
)
 
$
77,832

Mortgage-backed securities and collateralized mortgage obligations reflected in the preceding table were issued by U.S. government-sponsored entities or agencies, Freddie Mac, Fannie Mae and Ginnie Mae, and are obligations which the government has affirmed its commitment to support. All securities reflected in the preceding table were classified as available-for-sale at September 30, 2013 and December 31, 2012.
The amortized cost and fair values of securities 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.
 
September 30, 2013
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
34,703

 
$
34,704

Due after one year through five years
180

 
188

 
34,883

 
34,892

Equity mutual fund
500

 
505

Mortgage-backed securities - residential
28,864

 
30,026

Collateralized mortgage obligations - residential
17,983

 
17,949

SBA-guaranteed loan participation certificates
37

 
37

 
$
82,267

 
$
83,409




9


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 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
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities - residential
$
3,004

 
$
(111
)
 
$

 
$

 
$
3,004

 
$
(111
)
Collateralized mortgage obligations - residential
11,881

 
(72
)
 

 

 
11,881

 
(72
)
 
$
14,885

 
$
(183
)
 
$

 
$

 
$
14,885

 
$
(183
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Collateralized mortgage obligations - residential
$

 
$

 
$
1,956

 
$
(2
)
 
$
1,956

 
$
(2
)
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 a collateralized mortgage obligation that the Company holds in its investment portfolio remained in an unrealized loss position at September 30, 2013, 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 these securities before their anticipated recovery occurs.
There were no sales of securities during the three and nine months ended September 30, 2013 or 2012.
NOTE 4 - LOANS RECEIVABLE
Loans receivable are as follows:
 
September 30,
2013
 
December 31, 2012
One-to-four family residential real estate loans
$
204,205

 
$
218,596

Multi-family mortgage loans
375,786

 
352,019

Nonresidential real estate loans
246,524

 
264,672

Construction and land loans
6,429

 
8,552

Commercial loans
52,978

 
61,388

Commercial leases
161,822

 
139,783

Consumer loans
2,561

 
2,745

Total loans
1,050,305

 
1,047,755

Net deferred loan origination costs
902

 
745

Allowance for loan losses
(15,876
)
 
(18,035
)
Loans, net
$
1,035,331

 
$
1,030,465




10


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 4 - LOANS RECEIVABLE

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
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
41

 
$
1

 
$
3,804

 
$
3,846

 
$
4,952

 
$
405

 
$
198,848

 
$
204,205

Multi-family mortgage loans
469

 

 
4,406

 
4,875

 
12,248

 

 
363,538

 
375,786

Nonresidential real estate loans
224

 

 
4,569

 
4,793

 
5,358

 
1,611

 
239,555

 
246,524

Construction and land loans
37

 

 
561

 
598

 
1,021

 

 
5,408

 
6,429

Commercial loans
29

 

 
910

 
939

 
272

 
22

 
52,684

 
52,978

Commercial leases

 

 
728

 
728

 

 

 
161,822

 
161,822

Consumer loans

 

 
97

 
97

 

 

 
2,561

 
2,561

 
$
800

 
$
1

 
$
15,075

 
$
15,876

 
$
23,851

 
$
2,038

 
$
1,024,416

 
1,050,305

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
 
 
 
 
902

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
(15,876
)
Loans, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,035,331

 
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
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
137

 
$
5

 
$
4,584

 
$
4,726

 
$
5,256

 
$
380

 
$
212,960

 
$
218,596

Multi-family mortgage loans
729

 

 
3,851

 
4,580

 
4,801

 

 
347,218

 
352,019

Nonresidential real estate loans
401

 
8

 
5,136

 
5,545

 
11,918

 
2,568

 
250,186

 
264,672

Construction and land loans
294

 
96

 
641

 
1,031

 
2,210

 
1,021

 
5,321

 
8,552

Commercial loans
23

 
1

 
1,300

 
1,324

 
256

 
20

 
61,112

 
61,388

Commercial leases

 

 
666

 
666

 

 

 
139,783

 
139,783

Consumer loans

 

 
163

 
163

 

 

 
2,745

 
2,745

 
$
1,584

 
$
110

 
$
16,341

 
$
18,035

 
$
24,441

 
$
3,989

 
$
1,019,325

 
1,047,755

Net deferred loan origination costs
 
 
 
 
 
 
 
 
 
 
 
 
 
745

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
(18,035
)
Loans, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,030,465




11


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 are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Beginning balance
$
17,097

 
$
30,878

 
$
18,035

 
$
31,726

Loans charged offs:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
(528
)
 
(3,145
)
 
(1,073
)
 
(4,408
)
Multi-family mortgage loans
(902
)
 
(2,159
)
 
(1,512
)
 
(2,848
)
Nonresidential real estate loans
(138
)
 
(5,435
)
 
(370
)
 
(8,070
)
Construction and land loans
(16
)
 
(806
)
 
(943
)
 
(1,038
)
Commercial loans
(131
)
 
(3,536
)
 
(363
)
 
(3,705
)
Commercial leases

 
(68
)
 

 
(68
)
Consumer loans
(38
)
 
(72
)
 
(50
)
 
(95
)
 
(1,753
)
 
(15,221
)
 
(4,311
)
 
(20,232
)
Recoveries:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
108

 
7

 
435

 
192

Multi-family mortgage loans
3

 
11

 
219

 
491

Nonresidential real estate loans
329

 
7

 
451

 
322

Construction and land loans
193

 
6

 
196

 
248

Commercial loans
335

 
421

 
356

 
610

Consumer loans
1

 
26

 
4

 
37

 
969

 
478

 
1,661

 
1,900

Net charge-off
(784
)
 
(14,743
)
 
(2,650
)
 
(18,332
)
Provision (recovery) for loan losses
(437
)
 
4,453

 
491

 
7,194

Ending balance
$
15,876

 
$
20,588

 
$
15,876

 
$
20,588

Impaired loans
Several of the following disclosures are presented by “recorded investment,” which the FASB defines as “the amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment.” The following represents the components of recorded investment:
Loan principal balance
Less unapplied payments
Plus negative unapplied balance
Less escrow balance
Plus negative escrow balance
Plus unamortized net deferred loan costs
Less unamortized net deferred loan fees
Plus unamortized premium
Less unamortized discount
Less previous charge-offs
Plus recorded accrued interest
Less reserve for uncollected interest
= Recorded investment



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 loans individually evaluated for impairment by class of loans, excluding purchased impaired loans:
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
 
Nine months ended September 30, 2013
 
Loan
Balance
 
Recorded
Investment
 
Partial Charge-off
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
5,157

 
$
3,903

 
$
1,219

 
$

 
$
3,780

 
$
12

 
$
3,774

 
$
38

One-to-four family residential real estate loans - non-owner occupied
614

 
543

 
40

 

 
688

 

 
576

 

Multi-family mortgage loans
8,405

 
7,464

 
823

 

 
7,735

 
20

 
5,903

 
82

Wholesale commercial lending
990

 
996

 

 

 
996

 

 
398

 
11

Nonresidential real estate loans
3,708

 
3,113

 
113

 

 
3,389

 
1

 
4,212

 
11

Land loans
307

 
294

 
8

 

 
230

 

 
188

 

Commercial loans - secured

 

 

 

 
131

 

 
85

 

Commercial loans - unsecured

 

 

 

 
39

 

 
47

 

 
19,181

 
16,313

 
2,203

 

 
16,988

 
33

 
15,183

 
142

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans - non-owner occupied
572

 
501

 
61

 
41

 
470

 

 
381

 
2

Multi-family mortgage loans
4,089

 
2,766

 
1,300

 
373

 
2,999

 
8

 
2,882

 
88

Wholesale commercial lending
1,038

 
982

 
47

 
96

 
740

 
2

 
493

 
21

Nonresidential real estate loans
2,611

 
2,223

 
299

 
224

 
2,494

 
1

 
2,464

 
5

Land loans
922

 
724

 
197

 
37

 
1,117

 

 
1,488

 

Commercial loans - secured
462

 
273

 
190

 
29

 
223

 

 
344

 
1

 
9,694

 
7,469

 
2,094

 
800

 
8,043

 
11

 
8,052

 
117

Total
$
28,875

 
$
23,782

 
$
4,297

 
$
800

 
$
25,031

 
$
44

 
$
23,235

 
$
259




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)

 
Loan
Balance
 
Recorded
Investment
 
Partial Charge-off
 
Allowance
for Loan
Losses
Allocated
 
Average
Investment
in Impaired
Loans
 
Interest
Income
Recognized
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
5,250

 
$
4,216

 
$
1,027

 
$

 
$
2,814

 
$
149

One-to-four family residential real estate loans - non-owner occupied
567

 
534

 
34

 

 
4,322

 
90

Multi-family mortgage loans
2,959

 
2,106

 
819

 

 
9,303

 
189

Nonresidential real estate loans
11,850

 
9,220

 
2,490

 

 
6,218

 
347

Land loans

 

 

 

 
409

 

Commercial loans - secured

 

 

 

 
137

 

Commercial loans - other
529

 
52

 
477

 

 
25

 
21

Non-rated commercial leases

 

 

 

 
23

 
3

 
21,155

 
16,128

 
4,847

 

 
23,251

 
799

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans

 

 

 

 
2,500

 

One-to-four family residential real estate loans - non-owner occupied
626

 
499

 
128

 
137

 
1,996

 
13

Multi-family mortgage loans
3,182

 
2,645

 
521

 
729

 
6,562

 
20

Nonresidential real estate loans
2,825

 
2,549

 
266

 
401

 
21,077

 
20

Land loans
3,812

 
2,210

 
1,602

 
294

 
2,933

 
113

Commercial loans - secured
386

 
204

 
182

 
23

 
1,849

 

Commercial loans - unsecured

 

 

 

 
267

 

Non-rated commercial leases

 

 

 

 
36

 

Consumer loans

 

 

 

 
2

 

 
10,831

 
8,107

 
2,699

 
1,584

 
37,222

 
166

Total
$
31,986

 
$
24,235

 
$
7,546

 
$
1,584

 
$
60,473

 
$
965

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 are as follows:
 
September 30,
2013
 
December 31, 2012
One-to-four family residential real estate loans
$
405

 
$
380

Nonresidential real estate loans
1,611

 
2,568

Land loans

 
1,021

Commercial loans
22

 
20

Outstanding balance
$
2,038

 
$
3,989

Carrying amount, net of allowance ($1 at September 30, 2013, $110 at December 31, 2012)
$
2,037

 
$
3,879




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)

Accretable yield, or income expected to be collected, related to purchased impaired loans are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Beginning balance
$
100

 
$
832

 
$
196

 
$
2,270

New loans purchased

 

 

 

Disposals

 
249

 

 
771

Reclassifications from nonaccretable difference
(2
)
 

 
1

 

Accretion of income
48

 
179

 
147

 
1,095

Ending balance
$
50

 
$
404

 
$
50

 
$
404

For the above purchased impaired loans, the Company decreased the allowance for loan losses by $51,000 for the three months ended September 30, 2013 and $109,000 for the nine months ended September 30, 2013. The allowance for loan losses was decreased for the above purchased impaired loans by $5,000 for the three months ended September 30, 2012 and was increased by $219,000 during the nine months ended September 30, 2012.
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:
 
September 30, 2013
 
December 31, 2012
Contractually required payments receivable of loans purchased:
 
 
 
One-to-four family residential real estate loans
$
1,143

 
$
1,143

Nonresidential real estate loans
1,999

 
3,884

Land loans

 
1,600

Commercial loans
222

 
597

 
$
3,364

 
$
7,224

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.



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)

Nonaccrual loans
The following tables present the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans, excluding purchased impaired loans:
 
Loan Balance
 
Recorded
Investment
 
Loans Past
Due Over 90
Days, Still
Accruing
September 30, 2013
 
 
 
 
 
One-to-four family residential real estate loans
$
5,428

 
$
4,168

 
$

One-to-four family residential real estate loans – non owner occupied
1,372

 
1,230

 
89

Multi-family mortgage loans
12,196

 
9,935

 
235

Wholesale commercial lending
2,029

 
1,978

 

Nonresidential real estate loans
7,292

 
5,335

 
431

Land loans
1,229

 
1,018

 
119

Commercial loans – secured
461

 
272

 
5

Commercial loans – unsecured

 

 
86

Consumer loans
2

 
2

 

 
$
30,009

 
$
23,938

 
$
965

December 31, 2012
 
 
 
 
 
One-to-four family residential real estate loans
$
7,286

 
$
6,154

 
$
70

One-to-four family residential real estate loans – non owner occupied
1,420

 
1,145

 

Multi-family mortgage loans
5,246

 
3,517

 
242

Nonresidential real estate loans
12,249

 
8,985

 

Land loans
3,817

 
2,210

 

Commercial loans – secured
386

 
204

 

Commercial loans – unsecured
552

 
52

 
17

 
$
30,956

 
$
22,267

 
$
329

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 classified impaired loans.
The Company’s reserve for uncollected loan interest was $1.3 million and $942,000 at September 30, 2013 and December 31, 2012, respectively. Except for purchased impaired loans, when a loan is on non-accrual status and the ultimate collectability of the total principal of an 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.



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)

Past Due Loans
The following tables present the aging of the recorded investment of loans at September 30, 2013 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
One-to-four family residential real estate loans
$
1,034

 
$
212

 
$
3,205

 
$
4,451

 
$
143,459

 
$
147,910

One-to-four family residential real estate loans - non-owner occupied
85

 
172

 
1,015

 
1,272

 
54,770

 
56,042

Multi-family mortgage loans

 
1,621

 
9,364

 
10,985

 
292,774

 
303,759

Wholesale commercial lending

 

 
1,643

 
1,643

 
68,798

 
70,441

Nonresidential real estate loans
2,759

 
400

 
5,513

 
8,672

 
235,174

 
243,846

Construction loans

 

 

 

 
1,390

 
1,390

Land loans

 

 
1,137

 
1,137

 
3,898

 
5,035

Commercial loans:
 
 
 
 
 
 

 
 
 

Secured
84

 
17

 
277

 
378

 
17,821

 
18,199

Unsecured

 

 
84

 
84

 
3,480

 
3,564

Municipal loans

 

 

 

 
4,222

 
4,222

Warehouse lines

 

 

 

 
3,767

 
3,767

Health care

 

 

 

 
17,176

 
17,176

Other

 

 

 

 
6,198

 
6,198

Commercial leases:
 
 
 
 
 
 

 
 
 

Investment rated commercial leases

 

 

 

 
122,138

 
122,138

Below investment grade

 

 

 

 
8,809

 
8,809

Non-rated

 

 

 

 
28,905

 
28,905

Lease pools

 

 

 

 
2,934

 
2,934

Consumer loans
3

 

 
2

 
5

 
2,566

 
2,571

 
$
3,965

 
$
2,422

 
$
22,240

 
$
28,627

 
$
1,018,279

 
$
1,046,906

 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
Purchased impaired loans
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans - non-owner occupied
$

 
$

 
$
405

 
$
405

 
$

 
$
405

Nonresidential real estate loans

 

 
163

 
163

 
1,446

 
1,609

Commercial loans – secured

 

 
22

 
22

 

 
22

 
$

 
$

 
$
590

 
$
590

 
$
1,446

 
$
2,036




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)

The following tables present the aging of the recorded investment of loans at December 31, 2012 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
One-to-four family residential real estate loans
$
1,584

 
$
778

 
$
4,463

 
$
6,825

 
$
153,279

 
$
160,104

One-to-four family residential real estate loans - non-owner occupied
855

 
579

 
249

 
1,683

 
55,906

 
57,589

Multi-family mortgage loans
5,393

 
3,049

 
3,218

 
11,660

 
291,103

 
302,763

Wholesale commercial lending
1,481

 

 

 
1,481

 
44,342

 
45,823

Nonresidential real estate loans
863

 
398

 
5,508

 
6,769

 
252,368

 
259,137

Land loans
702

 
1,220

 
630

 
2,552

 
4,956

 
7,508

Commercial loans:
 
 
 
 
 
 

 
 
 

Secured
659

 
3

 
204

 
866

 
22,336

 
23,202

Unsecured
81

 
78

 
16

 
175

 
5,774

 
5,949

Municipal loans

 

 

 

 
4,752

 
4,752

Warehouse lines

 

 

 

 
2,989

 
2,989

Health care

 

 

 

 
17,601

 
17,601

Other

 

 

 

 
6,977

 
6,977

Commercial leases:
 
 
 
 
 
 

 
 
 

Investment rated commercial leases

 

 

 

 
102,724

 
102,724

Below investment grade

 

 

 

 
9,294

 
9,294

Non-rated

 

 

 

 
25,657

 
25,657

Lease pools

 

 

 

 
3,028

 
3,028

Consumer loans
15

 

 

 
15

 
2,741

 
2,756

 
$
11,633

 
$
6,105

 
$
14,288

 
$
32,026

 
$
1,005,827

 
$
1,037,853

 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
Greater
Past Due
 
Total Past
Due
 
Loans Not
Past Due
 
Total
Purchased impaired loans
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential real estate loans - non-owner occupied
$
327

 
$

 
$
53

 
$
380


$

 
$
380

Nonresidential real estate loans

 

 
1,125

 
1,125


1,443

 
2,568

Land loans

 

 
1,021

 
1,021



 
1,021

Commercial loans – secured

 

 
20

 
20



 
20

 
$
327

 
$

 
$
2,219

 
$
2,546

 
$
1,443

 
$
3,989


Troubled Debt Restructurings
The Company evaluates loan extensions or modifications in accordance with FASB ASC 310–40 with respect to the classification of the loan as a 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 other 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.



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)

The Company had $5.3 million of TDRs at September 30, 2013, compared to $11.2 million at December 31, 2012, with $94,000 in specific valuation reserves allocated to those loans at September 30, 2013 and $318,000 in specific valuation reserves allocated at December 31, 2012. The Company had no outstanding commitments to borrowers whose loans were classified as TDRs at either date.
The following table presents loans classified as TDRs:
 
September 30, 2013
 
December 31, 2012
One-to-four family residential real estate
$
3,040

 
$
2,802

Multi-family mortgage
1,169

 
1,201

Nonresidential real estate

 
5,189

Troubled debt restructured loans – accrual loans
4,209

 
9,192

One-to-four family residential real estate
617

 
767

Multi-family mortgage
449

 
938

Nonresidential real estate

 
270

Troubled debt restructured loans – nonaccrual loans
1,066

 
1,975

Total troubled debt restructured loans
$
5,275

 
$
11,167

Periodically, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the A note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or nonperforming) through the calendar year of the restructuring that the historical payment performance has been established. These notes will be no longer included in the above tables as a TDR in the subsequent calendar year.
During the three and nine months ending September 30, 2013 and 2012, 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.
The following tables present TDR activity:
 
Three Months Ended September 30,
 
2013
 
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

 
$

 
$

 
17

 
$
1,441

 
$
1,441

 
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 September 30, 2012
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
1,441

 
$

 
$
1,441

The TDRs described above had no impact on interest income, resulted in no change to the allowance for loan losses and resulted in no charge-offs for the three months ended September 30, 2013 and 2012.



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)

 
Nine Months Ended September 30,
 
2013
 
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
3

 
$
950

 
$
950

 
24

 
$
2,100

 
$
2,100

Multi-family mortgage

 

 

 
1

 
700

 
500

Total
3

 
$
950

 
$
950

 
25

 
$
2,800

 
$
2,600

 
Due to
reduction in
interest rate
 
Due to
extension of
maturity date
 
Due to
permanent
reduction in
recorded
investment
 
Total
For the Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
One-to-four family residential real estate
$

 
$
950

 
$

 
$
950

Total
$

 
$
950

 
$

 
$
950

For the Nine Months Ended September 30, 2012
 
 
 
 
 
 
 
One-to-four family residential real estate
$
504

 
$
1,596

 
$

 
$
2,100

Multi-family mortgage

 

 
500

 
500

Total
$
504

 
$
1,596

 
$
500

 
$
2,600

For the nine months ended September 30, 2013 the TDRs described above had no impact on interest income, resulted in no change to the allowance for loan losses and resulted in no charge-offs. For the nine months ended September 30, 2012 the TDRs had no impact on interest income, but increased the allowance for loan losses by $198,000 and resulted in charge-offs of $470,000.
The following table presents TDRs for which there was a payment default during the nine months ended September 30, 2013 and 2012 within twelve months following the modification.
 
2013
 
2012
 
Number
of loans
 
Recorded
investment
 
Number
of loans
 
Recorded
investment
One-to-four family residential real estate

 
$

 
5

 
$
864

Nonresidential real estate

 

 
4

 
3,308

Total

 
$

 
9

 
$
4,172

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
TDRs that subsequently defaulted increased the allowance for loan losses by $1.1 million during the nine months ending September 30, 2012.
The terms of certain other loans were modified during the three and nine months ending September 30, 2013 and 2012 that did not meet the definition of a TDR. These loans had a total recorded investment of $1.1 million and $328,000 at September 30, 2013 and 2012. 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.



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)

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:
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/Performing. Loans categorized as Substandard/Performing continue to accrue interest, but exhibit a well-defined weakness or weaknesses that may jeopardize the liquidation of the debt. The loans continue to accrue interest because they are well secured and collection of principal and interest is expected within a reasonable time. The risk rating guidance published by the Office of the Comptroller of the Currency 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.
Nonaccrual. An asset classified Nonaccrual has all the weaknesses inherent in one classified Substandard/Performing 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.



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)

As of September 30, 2013, based on the most recent analysis performed, the risk category of loans by class of loans are as follows:
 
Pass
 
Special
Mention
 
Substandard/Performing
 
Nonaccrual
 
Total
One-to-four family residential real estate loans
$
143,054

 
$
325

 
$
969

 
$
3,386

 
$
147,734

One-to-four family residential real estate loans - non-owner occupied
54,206

 

 
628

 
1,637

 
56,471

Multi-family mortgage loans
281,964

 
7,472

 
5,262

 
10,310

 
305,008

Wholesale commercial lending
64,659

 
2,706

 
1,766

 
1,647

 
70,778

Nonresidential real estate loans
213,221

 
10,908

 
15,427

 
6,968

 
246,524

Construction loans
1,388

 

 

 

 
1,388

Land loans
2,958

 

 
1,062

 
1,021

 
5,041

Commercial loans:
 
 
 
 
 
 
 
 

Secured
17,761

 

 
97

 
294

 
18,152

Unsecured
2,305

 
284

 
964

 

 
3,553

Municipal loans
4,192

 

 

 

 
4,192

Warehouse lines
3,747

 

 

 

 
3,747

Health care
17,159

 

 

 

 
17,159

Other
6,175

 

 

 

 
6,175

Commercial leases:
 
 
 
 
 
 
 
 

Investment rated commercial leases
121,439

 

 

 

 
121,439

Below investment grade
8,739

 

 

 

 
8,739

Non-rated
28,722

 

 

 

 
28,722

Lease pools
2,922

 

 

 

 
2,922

Consumer loans
2,559

 

 

 
2

 
2,561

Total
$
977,170

 
$
21,695

 
$
26,175

 
$
25,265

 
$
1,050,305

 



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)

As of December 31, 2012, based on the most recent analysis performed, the risk category of loans by class of loans are as follows:
 
Pass
 
Special
Mention
 
Substandard/Performing
 
Nonaccrual
 
Total
One-to-four family residential real estate loans
$
152,711

 
$

 
$
1,428

 
$
6,158

 
$
160,297

One-to-four family residential real estate loans - non-owner occupied
51,849

 
1,486

 
3,440

 
1,524

 
58,299

Multi-family mortgage loans
275,338

 
6,139

 
21,128

 
3,559

 
306,164

Wholesale commercial lending
44,074

 

 
1,781

 

 
45,855

Nonresidential real estate loans
199,802

 
30,898

 
22,345

 
11,627

 
264,672

Construction loans

 

 

 

 

Land loans
2,769

 
158

 
2,394

 
3,231

 
8,552

Commercial loans:
 
 
 
 
 
 
 
 

Secured
19,579

 
2,418

 
988

 
225

 
23,210

Unsecured
4,061

 
323

 
1,497

 
52

 
5,933

Municipal loans
4,751

 

 

 

 
4,751

Warehouse lines
2,971

 

 

 

 
2,971

Health care
17,566

 

 

 

 
17,566

Other
6,957

 

 

 

 
6,957

Commercial leases:
 
 
 
 
 
 
 
 

Investment rated commercial leases
102,101

 

 

 

 
102,101

Below investment grade
9,205

 

 

 

 
9,205

Non-rated
25,466

 

 

 

 
25,466

Lease pools
3,011

 

 

 

 
3,011

Consumer loans
2,742

 

 
3

 

 
2,745

Total
$
924,953

 
$
41,422

 
$
55,004

 
$
26,376

 
$
1,047,755

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).



23


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 5 - FAIR VALUE (continued)

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, management measures impairment in accordance with ASC Topic 310. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Impaired loans carried at fair value generally require a partial charge-off and a specific valuation 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. Although the fair value of the property normally will be based on an appraisal (or other evaluation), the valuation should be consistent with the price that a market participant will pay to purchase the property at the measurement date. Circumstances may exist that indicate that the appraised value is not an accurate measurement of the property's current fair value. Examples of such circumstances include changed economic conditions since the last appraisal, stale appraisals, or imprecision and subjectivity in the appraisal process (i.e., actual sales for less than the appraised amount). Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining 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 3).



24


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 5 - FAIR VALUE (continued)

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)
 
Fair
Value
September 30, 2013
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
34,533

 
$

 
$
34,533

Municipal securities

 
359

 

 
359

Equity mutual fund
505

 

 

 
505

Mortgage-backed securities – residential

 
30,026

 

 
30,026

Collateralized mortgage obligations – residential

 
17,949

 

 
17,949

SBA-guaranteed loan participation certificates

 
37

 

 
37

 
$
505

 
$
82,904

 
$

 
$
83,409

December 31, 2012
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
33,456

 
$

 
$
33,456

Municipal securities

 
369

 

 
369

Equity mutual fund
528

 

 

 
528

Mortgage-backed securities - residential

 
34,233

 

 
34,233

Collateralized mortgage obligations – residential

 
9,204

 

 
9,204

SBA-guaranteed loan participation certificates

 
42

 

 
42

 
$
528

 
$
77,304

 
$

 
$
77,832




25


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

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)
 
Fair
Value
September 30, 2013
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$

 
$

 
$
512

 
$
512

Multi-family mortgage loans

 

 
3,279

 
3,279

Nonresidential real estate loans

 

 
1,999

 
1,999

Construction and land loans

 

 
687

 
687

Commercial loans

 

 
244

 
244

 
$

 
$

 
$
6,721

 
$
6,721

Other real estate owned:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$

 
$

 
$
713

 
$
713

Nonresidential real estate

 

 
946

 
946

Land

 

 
2,509

 
2,509

 
$

 
$

 
$
4,168

 
$
4,168

Mortgage servicing rights
$

 
$

 
$
185

 
$
185

 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$

 
$

 
$
410

 
$
410

Multi-family mortgage loans

 

 
1,916

 
1,916

Nonresidential real estate loans

 

 
3,102

 
3,102

Construction and land loans

 

 
2,841

 
2,841

Commercial loans

 

 
181

 
181

 
$

 
$

 
$
8,450

 
$
8,450

Other real estate owned:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$

 
$

 
$
1,503

 
$
1,503

Multi-family mortgage

 

 
720

 
720

Nonresidential real estate

 

 
3,649

 
3,649

Land

 

 
3,496

 
3,496

 
$

 
$

 
$
9,368

 
$
9,368

Mortgage servicing rights
$

 
$

 
$
208

 
$
208

Impaired loans, including purchased impaired loans, which are measured for impairment using the fair value of the collateral for collateral–dependent loans, with specific valuation allowances, had a carrying amount of $7.5 million, with a valuation allowance of $801,000 at September 30, 2013, compared to $10.0 million, with a valuation allowance of $1.2 million at June 30, 2013, and $10.1 million and a valuation allowance of $1.7 million at December 31, 2012, which had the effect of decreasing the provision for loan losses by $448,000 for the three months ended September 30, 2013 and $893,000 for the nine months ended September 30, 2013.



26


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

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 September 30, 2013:
 
Fair Value
 
Valuation
Technique(s)
 
Significant Unobservable
Input(s)
 
Range
(Weighted
Average)
Impaired loans:
 
 
 
 
 
 
 
One-to-four family residential real estate loans
$
512

 
Sales comparison
 
Discount applied to valuation
 
6%-98%
(69%)
Multi-family mortgage loans
3,279

 
Sales comparison
 
Comparison between sales and income approaches
 
9%-98%
(46%)
 
 
 
Income approach
 
Cap Rate
 
6.7% to 12%
(7.64%)
Nonresidential real estate loans
1,999

 
Sales comparison
 
Comparison between sales and income approaches
 
3%-99%
(57%)
 
 
 
Income approach
 
Cap Rate
 
9.25%
(9.25%)
Construction and land loans
687

 
Sales comparison
 
Discount applied to valuation
 
10%-93%
(59%)
Commercial loans
244

 
Sales comparison
 
Discount applied to valuation
 
10%-91%
(75%)
Impaired loans
$
6,721

 
 
 
 
 
 
Other real estate owned:
 
 
 
 
 
 
 
One-to-four family residential real estate
$
713

 
Sales comparison
 
Discount applied to valuation
 
7%-34%
(18%)
Nonresidential real estate
946

 
Sales comparison
 
Comparison between sales and income approaches
 
7%-29%
(16%)
Land
2,509

 
Sales comparison
 
Discount applied to valuation
 
7%
(7%)
Other real estate owned
$
4,168

 
 
 
 
 
 
Mortgage servicing rights
$
185

 
Third party
valuation
 
Present value of future servicing income based on prepayment speeds
 
11.5 % - 22.9%
(15.34%)
 
 
 
Third party
valuation
 
Present value of future servicing income based on default rates
 
12%
The carrying amount and estimated fair value of financial instruments are as follows:



27


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 5 - FAIR VALUE (continued)

 
 
 
Fair Value Measurements at
 September 30, 2013 Using:
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
243,478

 
$
18,068

 
$
225,410

 
$

 
$
243,478

Securities
83,409

 
505

 
82,904

 

 
83,409

Loans held for sale
15

 

 
15

 

 
15

Loans receivable, net of allowance for loan losses
1,035,331

 

 
992,939

 
6,721

 
999,660

FHLBC stock
6,068

 

 

 

 
N/A

Accrued interest receivable
3,576

 

 
3,576

 

 
3,576

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
(133,094
)
 
$

 
$
(133,094
)
 
$

 
$
(133,094
)
Savings deposits
(146,685
)
 

 
(146,685
)
 

 
(146,685
)
NOW and money market accounts
(690,797
)
 

 
(690,797
)
 

 
(690,797
)
Certificates of deposit
(279,257
)
 

 
(279,812
)
 

 
(279,812
)
Borrowings
(2,883
)
 

 
(2,896
)
 

 
(2,896
)
Accrued interest payable
(119
)
 

 
(119
)
 

 
(119
)
 
 
 
Fair Value Measurements at
 December 31, 2012 Using:
 
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
275,764

 
$
20,361

 
$
255,403

 
$

 
$
275,764

Securities
77,832

 
528

 
77,304

 

 
77,832

Loans held for sale
2,166

 

 
2,166

 

 
2,166

Loans receivable, net of allowance for loan losses
1,030,465

 

 
1,017,637

 
8,450

 
1,026,087

FHLBC stock
8,412

 

 

 

 
N/A

Accrued interest receivable
4,146

 

 
4,146

 

 
4,146

Financial liabilities
 
 
 
 
 
 
 
 

Noninterest-bearing demand deposits
$
(134,597
)
 
$

 
$
(134,597
)
 
$

 
$
(134,597
)
Savings deposits
(144,726
)
 

 
(144,726
)
 

 
(144,726
)
NOW and money market accounts
(697,775
)
 

 
(697,775
)
 

 
(697,775
)
Certificates of deposit
(305,253
)
 

 
(306,859
)
 

 
(306,859
)
Borrowings
(5,567
)
 

 
(5,608
)
 

 
(5,608
)
Accrued interest payable
(157
)
 

 
(157
)
 

 
(157
)
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 repriced 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 FHLBC stock due to the restrictions placed on its transferability.



28


Table of Contents
BANKFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

NOTE 5 - FAIR VALUE (continued)

Deposit Liabilities: The estimated fair value for certificates of deposit has been 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.
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 the level of 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



29


Table of Contents


Dodd-Frank Act and Basel III, 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, 2012, 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 Operations,” in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and all amendments thereto, as filed with the Securities and Exchange Commission.
Overview
Loan origination activity continued to improve in the third quarter of 2013, especially in the residential loan, multi-family loan and commercial loan categories. Continued improvement in loan origination volumes remains essential to offsetting the ongoing effects of yield compression on our net interest income. Net loan payoffs increased in the third quarter of 2013 due to the reduction of lesser-quality loan balances.
Asset quality improved during the third quarter of 2013 due in part to our focus on accelerated resolution methodologies. In addition, we continued to reduce OREO balances at an acceptable rate with minimal impact to earnings and capital during the quarter.
Noninterest income remained stable in the third quarter of 2013 due to slightly higher deposit services fee income and higher insurance-related revenues.
Noninterest expense declined in the third quarter of 2013 despite the continuing impact of credit resolution expense. As the remainder of 2013 progresses, we expect that noninterest expense related to information technology expense and nonperforming assets management expense will begin to trend downward.




30


Table of Contents


SELECTED FINANCIAL DATA
The following summary information is derived from the consolidated financial statements of the Company. For additional information, reference is made to the Consolidated Financial Statements of the Company and related notes included elsewhere in this Quarterly Report.
 
September 30, 2013
 
December 31, 2012
 
Change
 
(Dollars in thousands)
Selected Financial Condition Data:
 
 
 
 
 
Total assets
$
1,441,948

 
$
1,481,192

 
$
(39,244
)
Loans, net
1,035,331

 
1,030,465

 
4,866

Loans held for sale
15

 
2,166

 
(2,151
)
Securities, at fair value
83,409

 
77,832

 
5,577

Core deposit intangible
2,583

 
3,038

 
(455
)
Deposits
1,249,833

 
1,282,351

 
(32,518
)
Borrowings
2,883

 
5,567

 
(2,684
)
Equity
174,311

 
172,890

 
1,421


 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Change
 
2013
 
2012
 
Change
 
(Dollars in thousands)
Selected Operating Data:
 
 
 
 
 
 
 
 
 
 
 
Interest and dividend income
$
12,107

 
$
14,468

 
$
(2,361
)
 
$
37,096

 
$
46,926

 
$
(9,830
)
Interest expense
882

 
1,036

 
(154
)
 
2,811

 
3,388

 
(577
)
Net interest income
11,225

 
13,432

 
(2,207
)
 
34,285

 
43,538

 
(9,253
)
Provision (recovery) for loan losses
(437
)
 
4,453

 
(4,890
)
 
491

 
7,194

 
(6,703
)
Net interest income after provision (recovery) for loan losses
11,662

 
8,979

 
2,683

 
33,794

 
36,344

 
(2,550
)
Noninterest income
1,539

 
1,831

 
(292
)
 
5,914

 
5,081

 
833

Noninterest expense
12,162

 
16,032

 
(3,870
)
 
37,915

 
43,512

 
(5,597
)
Income (loss) before income tax expense
1,039

 
(5,222
)
 
6,261

 
1,793

 
(2,087
)
 
3,880

Income tax expense

 

 

 

 

 

Net income (loss)
$
1,039

 
$
(5,222
)
 
$
6,261

 
$
1,793

 
$
(2,087
)
 
$
3,880





31


Table of Contents


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Selected Financial Ratios and Other Data:
 
 
 
 
 
 
 
Performance Ratios:
 
 
 
 
 
 
 
Return on assets (ratio of net income (loss) to average total assets) (1)
0.29
%
 
(1.39
)%
 
0.16
%
 
(0.18
)%
Return on equity (ratio of net income (loss) to average equity) (1)
2.38

 
(10.20
)
 
1.37

 
(1.36
)
Average equity to average assets
12.13

 
13.62

 
12.03

 
13.40

Net interest rate spread (1) (2)
3.21

 
3.69

 
3.28

 
3.97

Net interest margin (1) (3)
3.26

 
3.76

 
3.34

 
4.04

Efficiency ratio (4)
95.28

 
105.04

 
94.32

 
89.50

Noninterest expense to average total assets (1)
3.38

 
4.26

 
3.48

 
3.81

Average interest-earning assets to average interest-bearing liabilities
121.95

 
123.54

 
121.33

 
123.16

Dividends declared per share
$

 
$
0.01

 
$
0.02

 
$
0.03

Dividend payout ratio
N.M.

 
N.M.

 
N.M.

 
N.M.

 
At September 30, 2013
 
At December 31, 2012
Asset Quality Ratios:
 
 
 
Nonperforming assets to total assets (5)
2.18
%
 
2.59
%
Nonperforming loans to total loans
2.47

 
2.67

Allowance for loan losses to nonperforming loans
61.08

 
64.39

Allowance for loan losses to total loans
1.51

 
1.72

Capital Ratios:
 
 
 
Equity to total assets at end of period
12.09
%
 
11.67
%
Tier 1 leverage ratio (Bank only)
10.10

 
9.60

Other Data:
 
 
 
Number of full-service offices
20

 
20

Employees (full-time equivalents)
308

 
352

(1)
Ratios 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.
(5)
Nonperforming assets include nonperforming loans and other real estate owned.

N.M. Not Meaningful

Comparison of Financial Condition at September 30, 2013 and December 31, 2012
Total assets decreased $39.2 million, or 2.6%, to $1.442 billion at September 30, 2013, from $1.481 billion at December 31, 2012. The decrease in total assets was primarily due to a decrease in cash and cash equivalents, other real estate owned, and FDIC prepaid insurance, partially offset by increases in loans receivable and securities. Net loans increased $4.9 million to $1.035 billion at September 30, 2013, from $1.030 billion at December 31, 2012. In December 2012, we designated certain owner-occupied and investor-owned one-to-four family residential loans with a carrying value of $7.5 million as “held for sale” in preparation for a bulk sale. The bulk sale of these one-to-four family residential loans was completed in February 2013. Securities increased $5.6 million to $83.4 million at September 30, 2013, from $77.8 million at December 31, 2012. Net cash and cash equivalents decreased by $32.3 million to $243.5 million at September 30, 2013, from $275.8 million at December 31, 2012.




32


Table of Contents


In December 2009, the Bank was required by an FDIC rule requiring insured depository institutions to prepay their estimated quarterly risk-based assessments in the fourth quarter of 2009, to prepay $6.8 million in estimated assessments through 2012. On June 29, 2013, the Bank received a $2.7 million refund, which represented the unused portion of the FDIC prepaid assessments.
Total liabilities decreased by $40.7 million, or 3.1%, to $1.268 billion at September 30, 2013, from $1.308 billion at December 31, 2012. Total deposits decreased $32.5 million, or 2.5%, to $1.250 billion at September 30, 2013, from $1.282 billion at December 31, 2012, primarily due to pricing adjustments that we made on certificates of deposit and other interest-bearing deposits in anticipation of additional excess liquidity resulting from loan payments and bulk loan sales. Certificates of deposit decreased $26.0 million, or 8.5%, to $279.3 million at September 30, 2013, from $305.3 million at December 31, 2012. Core deposits increased to 77.7% of total deposits at September 30, 2013, from 76.2% of total deposits at December 31, 2012. Noninterest-bearing demand deposits decreased $1.5 million, or 1.1%, to $133.1 million at September 30, 2013, from $134.6 million at December 31, 2012. Savings accounts increased $2.0 million, or 1.4%, to $146.7 million at September 30, 2013, from $144.7 million at December 31, 2012. Money market and interest-bearing NOW accounts decreased $7.0 million, or 1.0%, to $690.8 million at September 30, 2013, from $697.8 million at December 31, 2012.
Total stockholders’ equity was $174.3 million at September 30, 2013, compared to $172.9 million at December 31, 2012. The increase in total stockholders’ equity was primarily due to the $1.8 million net income that we recorded for the nine months ended September 30, 2013, which was partially offset by the $422,000 in dividends that were paid to our stockholders. The unallocated shares of common stock that our ESOP owns were reflected as a $11.5 million reduction to stockholders’ equity at September 30, 2013, compared to a $12.2 million reduction at December 31, 2012.
Operating results for the three months ended September 30, 2013 and 2012
Net Income. We had net income of $1.0 million for the three months ended September 30, 2013, compared to a $5.2 million loss for the three months ended September 30, 2012. Earnings per basic and fully diluted share of common stock were $0.05 for the three months ended September 30, 2013, compared to a loss of $0.26 per basic and fully diluted share of common stock for the three months ended September 30, 2012.
Net Interest Income. Net interest income was $11.2 million for the three months ended September 30, 2013, compared to $13.4 million for the same period in 2012. The decrease reflected a $2.4 million, or 16.3%, decrease in interest income and a $154,000, or 14.9%, decrease in interest expense.
The decrease in net interest income was primarily attributable to a lower level of average interest-earning assets and a decrease in the yield on interest-earning assets. Total average interest-earning assets decreased $55.2 million, or 3.9%, to $1.365 billion for the three months ended September 30, 2013, from $1.420 billion for the same period in 2012. Our net interest rate spread decreased by 48 basis points to 3.21% for the three months ended September 30, 2013, from 3.69% for the same period in 2012. Our net interest margin decreased by 50 basis points to 3.26% for the three months ended September 30, 2013, from 3.76% for the same period in 2012. The decrease in the net interest spread and margin was a result of lower yields on interest-earning assets, which was partially offset by the decreased average balance and yields of our interest-bearing liabilities. The yield on interest-earning assets decreased 53 basis points to 3.52% for the three months ended September 30, 2013, from 4.05% for the same period in 2012, and the cost of interest-bearing liabilities decreased five basis points to 0.31% for the three months ended September 30, 2013, from 0.36% for the same period in 2012.



33


Table of Contents


Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs, and certain other information. No tax-equivalent yield adjustments were made, as the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and expenses, discounts and premiums, purchase accounting adjustments that are amortized or accreted to interest income or expense.
 
Three Months Ended September 30,
 
2013
 
2012
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
(Dollars in thousands)
Interest-earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,019,402

 
$
11,680

 
4.55
%
 
$
1,125,600

 
$
13,978

 
4.94
%
Securities
68,109

 
241

 
1.40

 
74,260

 
342

 
1.83

Stock in FHLBC
6,068

 
5

 
0.33

 
9,614

 
8

 
0.33

Other
271,046

 
181

 
0.26

 
210,355

 
140

 
0.26

Total interest-earning assets
1,364,625

 
12,107

 
3.52

 
1,419,829

 
14,468

 
4.05

Noninterest-earning assets
75,936

 
 
 
 
 
84,609

 
 
 
 
Total assets
$
1,440,561

 
 
 
 
 
$
1,504,438

 
 
 
 
Interest-bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
147,230

 
38

 
0.10

 
$
143,248

 
37

 
0.10

Money market accounts
340,578

 
280

 
0.33

 
346,523

 
318

 
0.37

NOW accounts
344,571

 
88

 
0.10

 
335,346

 
106

 
0.13

Certificates of deposit
283,775

 
474

 
0.66

 
316,738

 
549

 
0.69

Total deposits
1,116,154

 
880

 
0.31

 
1,141,855

 
1,010

 
0.35

Borrowings
2,813

 
2

 
0.28

 
7,449

 
26

 
1.39

Total interest-bearing liabilities
1,118,967

 
882

 
0.31

 
1,149,304

 
1,036

 
0.36

Noninterest-bearing deposits
132,120

 
 
 
 
 
135,352

 
 
 
 
Noninterest-bearing liabilities
14,684

 
 
 
 
 
14,925

 
 
 
 
Total liabilities
1,265,771

 
 
 
 
 
1,299,581

 
 
 
 
Equity
174,790

 
 
 
 
 
204,857

 
 
 
 
Total liabilities and equity
$
1,440,561

 
 
 
 
 
$
1,504,438

 
 
 
 
Net interest income
 
 
$
11,225

 
 
 
 
 
$
13,432

 
 
Net interest rate spread (2)
 
 
 
 
3.21
%
 
 
 
 
 
3.69
%
Net interest-earning assets (3)
$
245,658

 
 
 
 
 
$
270,525

 
 
 
 
Net interest margin (4)
 
 
 
 
3.26
%
 
 
 
 
 
3.76
%
Ratio of interest-earning assets to interest-bearing liabilities
121.95
%
 
 
 
 
 
123.54
%
 
 
 
 
(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.



34


Table of Contents


Provision for Loan Losses
We establish provisions for loan losses, which are charged to operations in order 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 nonperforming 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 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.
The recovery for loan losses totaled $437,000 for the three months ended September 30, 2013, compared to a provision for loan losses of $4.5 million for the same period in 2012. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased $773,000, or 4.9%, to $15.1 million at September 30, 2013, compared to $15.8 million at June 30, 2013. The growth in our loan portfolio is focused on loan types with lower loss ratios based on our historical loss experience.  Our loan portfolio increased by $21.7 million in the quarter; however, all of the loan growth occurred within lower-risk loan types.  Accordingly, the improvement in the overall risk composition of the loan portfolio and the reduction in portfolio loss ratios due to the weighted-average aging of loss occurrence timing more than fully funded the allowance required for the loan growth experienced during the quarter. Net charge-offs were $784,000 for the three months ended September 30, 2013, which was partially offset by the decrease in the reserve established for loans individually evaluated for impairment of $448,000 for the three months ended September 30, 2013. The allowance for loan losses as a percentage of nonperforming loans was 61.08% at September 30, 2013, compared to 57.05% at June 30, 2013.
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 portion 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.
Noninterest Income
 
Three Months Ended September 30,
 
 
 
2013
 
2012
 
Change
 
(Dollars in thousands)
Deposit service charges and fees
$
520

 
$
548

 
$
(28
)
Other fee income
373

 
374

 
(1
)
Insurance commissions and annuities income
106

 
125

 
(19
)
Gain on sale of loans, net
32

 
210

 
(178
)
Loss on disposition of premises and equipment

 
(7
)
 
7

Loan servicing fees
112

 
124

 
(12
)
Amortization of servicing assets
(49
)
 
(61
)
 
12

Recovery of servicing assets
6

 
6

 

Earnings on bank owned life insurance
84

 
109

 
(25
)
Trust income
172

 
171

 
1

Other
183

 
232

 
(49
)
Total noninterest income
$
1,539

 
$
1,831

 
$
(292
)
Noninterest income decreased by $292,000 to $1.5 million for the three months ended September 30, 2013, from $1.8 million for the same period in 2012. Noninterest income for the three months ended September 30, 2013, included a $32,000 gain on sale of loans, compared to a $210,000 gain on sale of loans that was recorded for the same period in 2012.



35


Table of Contents


Noninterest Expense
 
Three Months Ended September 30,
 
 
 
2013
 
2012
 
Change
 
(Dollars in thousands)
Compensation and benefits
$
6,143

 
$
6,353

 
$
(210
)
Office occupancy and equipment
1,797

 
1,904

 
(107
)
Advertising and public relations
195

 
145

 
50

Information technology
817

 
880

 
(63
)
Supplies, telephone and postage
382

 
372

 
10

Amortization of intangibles
149

 
156

 
(7
)
Nonperforming asset management
682

 
1,728

 
(1,046
)
Loss (gain) on sale other real estate owned
64

 
(42
)
 
106

Valuation adjustments of other real estate owned
241

 
2,352

 
(2,111
)
Operations of other real estate owned
171

 
432

 
(261
)
FDIC insurance premiums
476

 
642

 
(166
)
Other
1,045

 
1,110

 
(65
)
Total noninterest expense
$
12,162

 
$
16,032

 
$
(3,870
)
Noninterest expense decreased by $3.9 million, or 24.1%, to $12.2 million for the three months ended September 30, 2013, from $16.0 million for the same period in 2012. Compensation and benefits expense included $18,000 in severance expense for the three months ended September 30, 2013, compared to $89,000 for the same period in 2012. Noninterest expense for the three months ended September 30, 2013 included $1.2 million of nonperforming asset management and OREO expenses, compared to $4.5 million for the same period in 2012. Nonperforming asset management expenses decreased $1.0 million, or 60.5%, to $682,000 for the three months ended September 30, 2013, compared to $1.7 million for the same period in 2012, primarily due to the decline in nonperforming assets and a decline in expenses relating to resolutions and accelerated dispositions of nonperforming assets. OREO expenses decreased $261,000, or 60.4%, to $171,000 for the three months ended September 30, 2013, compared to $432,000 for the same period in 2012, primarily due to a significant decline in the OREO portfolio which totaled $5.4 million at September 30, 2013, compared to $15.0 million at September 30, 2012. The three months ended September 30, 2013 included a $241,000 valuation adjustment to OREO properties, compared to a $2.4 million valuation adjustment to OREO properties for the same period in 2012.
Income Taxes
For the three months ended September 30, 2013 and 2012, we recorded no income tax expense or benefit due to the full valuation allowance we have established for deferred tax assets.
Operating results for the nine months ended September 30, 2013 and 2012
Net Income. We had net income of $1.8 million for the nine months ended September 30, 2013, compared to a loss of $2.1 million for the nine months ended September 30, 2012. Our earnings per basic and fully diluted share of common stock was $0.09 for the nine months ended September 30, 2013, compared to a loss of $0.11 per basic and fully diluted share for the same period in 2012.
Net Interest Income. Net interest income was $34.3 million for the nine months ended September 30, 2013, compared to $43.5 million for the same period in 2012. The decrease reflected a $9.8 million decrease in interest income and a $577,000 decrease in interest expense.
The decrease in net interest income was primarily attributable to a lower level of average interest-earning assets and a decrease in the yield on interest-earning assets. Total average interest-earning assets decreased $65.4 million, or 4.5%, to $1.372 billion for the nine months ended September 30, 2013, from $1.438 billion for the same period in 2012. Our net interest rate spread decreased by 69 basis points to 3.28% for the nine months ended September 30, 2013, from 3.97% for the same period in 2012. Our net interest margin decreased by 70 basis points to 3.34% for the nine months ended September 30, 2013, from 4.04% for the same period in 2012. The decrease in the net interest spread and margin was a result of lower yields on interest-earning assets, which was partially offset by a lower cost of funds. The yield on interest-earning assets decreased 75 basis points to 3.61% for the nine months ended September 30, 2013, from 4.36% for the same period in 2012, and the cost of interest-bearing liabilities decreased six basis points to 0.33% for the nine months ended September 30, 2013, from 0.39% for the same period in 2012.



36


Table of Contents


Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs, and certain other information. No tax-equivalent yield adjustments were made, as the effect of these adjustments would not be material. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and expenses, discounts and premiums, purchase accounting adjustments that are amortized or accreted to interest income or expense.
 
Nine Months Ended September 30,
 
2013
 
2012
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
Average
Outstanding
Balance
 
Interest
 
Yield/Rate (1)
 
(Dollars in thousands)
Interest-earning Assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,020,932

 
$
35,812

 
4.69
%
 
$
1,181,807

 
$
45,402

 
5.13
%
Securities
66,119

 
710

 
1.44

 
79,877

 
1,171

 
1.96

Stock in FHLBC
6,961

 
17

 
0.33

 
11,392

 
21

 
0.25

Other
278,480

 
557

 
0.27

 
164,830

 
332

 
0.27

Total interest-earning assets
1,372,492

 
37,096

 
3.61

 
1,437,906

 
46,926

 
4.36

Noninterest-earning assets
79,460

 
 
 
 
 
85,848

 
 
 
 
Total assets
$
1,451,952

 
 
 
 
 
$
1,523,754

 
 
 
 
Interest-bearing Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Savings deposits
$
147,248

 
113

 
0.10

 
$
145,057

 
111

 
0.10

Money market accounts
343,104

 
886

 
0.35

 
345,097

 
943

 
0.37

NOW accounts
345,834

 
289

 
0.11

 
333,382

 
308

 
0.12

Certificates of deposit
292,028

 
1,511

 
0.69

 
335,155

 
1,946

 
0.78

Total deposits
1,128,214

 
2,799

 
0.33

 
1,158,691

 
3,308

 
0.38

Borrowings
2,954

 
12

 
0.54

 
8,790

 
80

 
1.22

Total interest-bearing liabilities
1,131,168

 
2,811

 
0.33

 
1,167,481

 
3,388

 
0.39

Noninterest-bearing deposits
129,563

 
 
 
 
 
134,184

 
 
 
 
Noninterest-bearing liabilities
16,487

 
 
 
 
 
17,915

 
 
 
 
Total liabilities
1,277,218

 
 
 
 
 
1,319,580

 
 
 
 
Equity
174,734

 
 
 
 
 
204,174

 
 
 
 
Total liabilities and equity
$
1,451,952

 
 
 
 
 
$
1,523,754

 
 
 
 
Net interest income
 
 
$
34,285

 
 
 
 
 
$
43,538

 
 
Net interest rate spread (2)
 
 
 
 
3.28
%
 
 
 
 
 
3.97
%
Net interest-earning assets (3)
$
241,324

 
 
 
 
 
$
270,425

 
 
 
 
Net interest margin (4)
 
 
 
 
3.34
%
 
 
 
 
 
4.04
%
Ratio of interest-earning assets to interest-bearing liabilities
121.33
%
 
 
 
 
 
123.16
%
 
 
 
 
(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.



37


Table of Contents


Provision for Loan Losses
The provision for loan losses totaled $491,000 for the nine months ended September 30, 2013, compared to $7.2 million for the same period in 2012. The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment decreased $1.3 million, or 7.7%, to $15.1 million at September 30, 2013, compared to $16.3 million at December 31, 2012. The growth in our loan portfolio is focused on loan types with lower loss ratios based on our historical loss experience.  Our loan portfolio increased by $2.6 million for the nine months ended September 30, 2013; however, the loan growth occurred within lower-risk loan types.  Accordingly, the improvement in the overall risk composition of the loan portfolio and the reduction in portfolio loss ratios due to the weighted-average aging of loss occurrence timing more than fully funded the allowance required for the loan growth experienced during the quarter. Net charge-offs were $2.7 million for the nine months ended September 30, 2013, compared to $18.3 million for the same period in 2012. The allowance for loan losses as a percentage of nonperforming loans was 61.08% at September 30, 2013, compared to 64.39% at December 31, 2012.
Noninterest Income
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Change
 
(Dollars in thousands)
Deposit service charges and fees
$
1,528

 
$
1,626

 
$
(98
)
Other fee income
1,158

 
1,142

 
16

Insurance commissions and annuities income
301

 
359

 
(58
)
Gain on sale of loans, net
1,445

 
595

 
850

Loss on disposition of premises and equipment

 
(164
)
 
164

Loan servicing fees
349

 
371

 
(22
)
Amortization of servicing assets
(193
)
 
(197
)
 
4

Recovery (impairment) of servicing assets
41

 
(38
)
 
79

Earnings on bank owned life insurance
236

 
355

 
(119
)
Trust income
536

 
545

 
(9
)
Other
513

 
487

 
26

Total noninterest income
$
5,914

 
$
5,081

 
$
833

Noninterest income increased by $833,000 to $5.9 million for the nine months ended September 30, 2013, from $5.1 million for 2012. Noninterest income for the nine months ended September 30, 2013, included a $1.4 million gain on sale of loans which included recurring loan sale activity combined with the completion of the sale of the owner-occupied and investor-owned one-to-four family residential loans that we designated as held for sale at December 31, 2012. The completion of this sale represented approximately $1.3 million of the $1.4 million gain on sale of loans that we recorded for the nine months ended September 30, 2013.



38


Table of Contents


Noninterest Expense
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Change
 
(Dollars in thousands)
Compensation and benefits
$
19,581

 
$
19,513

 
$
68

Office occupancy and equipment
5,550

 
6,041

 
(491
)
Advertising and public relations
609

 
475

 
134

Information technology
2,382

 
2,553

 
(171
)
Supplies, telephone and postage
1,246

 
1,124

 
122

Amortization of intangibles
455

 
476

 
(21
)
Nonperforming asset management
2,031

 
4,085

 
(2,054
)
Loss (gain) on sale other real estate owned
182

 
(126
)
 
308

Valuation adjustments of other real estate owned
471

 
3,777

 
(3,306
)
Operations of other real estate owned
756

 
1,334

 
(578
)
FDIC insurance premiums
1,445

 
1,299

 
146

Other
3,207

 
2,961

 
246

Total noninterest expense
$
37,915

 
$
43,512

 
$
(5,597
)
Noninterest expense decreased by $5.6 million, or 12.9%, to $37.9 million for the nine months ended September 30, 2013, from $43.5 million for the same period in 2012. Compensation and benefits expense included $161,000 in severance expense for the nine months ended September 30, 2013, compared to $123,000 for the same period in 2012. Noninterest expense for the nine months ended September 30, 2013 included $3.4 million of nonperforming asset management and OREO expenses, compared to $9.1 million for the same period in 2012. Nonperforming asset management expenses decreased $2.1 million, or 50.3%, to $2.0 million for the nine months ended September 30, 2013, compared to $4.1 million for the same period in 2012, primarily due to the decline in nonperforming assets and a decline in expenses relating to resolutions and accelerated dispositions of nonperforming assets. Noninterest expense for the nine months ended September 30, 2013 included a $471,000 valuation adjustment to OREO properties, compared to a $3.8 million valuation adjustment to OREO properties for the same period in 2012. OREO expenses decreased $578,000, or 43.3%, to $756,000 for the nine months ended September 30, 2013, compared to $1.3 million for the same period in 2012, primarily due to the decrease in OREO. Noninterest expense for the nine months ended September 30, 2013 also included the payment of $203,000 of settlements concerning two sold mortgage loans. The first settlement was based on our inclusion of an ineligible retirement plan in calculating the borrower's available liquidity, and the second involved a servicing error relating to the premature termination of private mortgage insurance. Noninterest expense for the nine months ended September 30, 2013 included a provision of $86,000 for the establishment of a mortgage representation and warranty reserve for mortgage loans sold. The amount of the warranty and representation reserve was calculated by applying published Fannie Mae data relating to the percentage of loans that it required to be repurchased due to breaches of warranties and representations to the Bank's outstanding sold loans.
Income Taxes
For the nine months ended September 30, 2013 and 2012, we recorded no income tax expense or benefit due to the full valuation allowance we established for deferred tax assets.
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 September 30, 2013, we had 12 loans totaling $965,000 in this category.



39


Table of Contents


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 September 30, 2013, substantially all 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 generally 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 generally apply a 7.0% deduction to determine the expected costs to sell, as expenses for real estate taxes and repairs are expensed when incurred.



40


Table of Contents


Nonperforming Assets Summary
The following table below sets forth the amounts and categories of our nonperforming loans and nonperforming assets.
 
September 30, 2013
 
June 30, 2013
 
December 31, 2012
 
Third Quarter Change
 
Year to Date Change
 
(Dollars in thousands)
Nonaccrual loans:
 
 
 
 
 
 
 
 
 
One-to-four family residential
$
5,398

 
$
5,399

 
$
7,299

 
$
(1
)
 
$
(1,901
)
Multi-family mortgage
11,913

 
12,204

 
3,517

 
(291
)
 
8,396

Nonresidential real estate
5,335

 
7,037

 
8,985

 
(1,702
)
 
(3,650
)
Construction and land
1,018

 
1,601

 
2,210

 
(583
)
 
(1,192
)
Commercial
272

 
689

 
256

 
(417
)
 
16

Consumer
2

 
1

 

 
1

 
2

 
23,938

 
26,931

 
22,267

 
(2,993
)
 
1,671

Loans held for sale
15

 
15

 
1,752

 

 
(1,737
)
Other real estate owned:
 
 
 
 
 
 
 
 
 
One-to-four family residential
808

 
1,316

 
1,760

 
(508
)
 
(952
)
Multi-family mortgage
195

 

 
720

 
195

 
(525
)
Nonresidential real estate
1,047

 
1,757

 
3,504

 
(710
)
 
(2,457
)
Land
919

 
933

 
1,323

 
(14
)
 
(404
)
 
2,969

 
4,006

 
7,307

 
(1,037
)
 
(4,338
)
Nonperforming assets (excluding purchased impaired loans and purchased other real estate owned)
26,922

 
30,952

 
31,326

 
(4,030
)
 
(4,404
)
Purchased impaired loans:
 
 
 
 
 
 
 
 
 
One-to-four family residential
405

 
396

 
380

 
9

 
25

Nonresidential real estate
1,611

 
1,607

 
2,568

 
4

 
(957
)
Construction and land

 
997

 
1,021

 
(997
)
 
(1,021
)
Commercial
22

 
21

 
20

 
1

 
2

 
2,038

 
3,021

 
3,989

 
(983
)
 
(1,951
)
Purchased other real estate owned:
 
 
 
 
 
 
 
 
 
One-to-four family residential
201

 
179

 
320

 
22

 
(119
)
Nonresidential real estate
372

 
372

 
462

 

 
(90
)
Land
1,861

 
1,705

 
2,269

 
156

 
(408
)
 
2,434

 
2,256

 
3,051

 
178

 
(617
)
Purchased impaired loans and other real estate owned
4,472

 
5,277

 
7,040

 
(805
)
 
(2,568
)
Total nonperforming assets
$
31,394

 
$
36,229

 
$
38,366

 
$
(4,835
)
 
$
(6,972
)
Ratios:
 
 
 
 
 
 
 
 
 
Nonperforming loans to total loans
2.47
%
 
2.91
%
 
2.67
%
 
 
 
 
Nonperforming loans to total loans (1)
2.28

 
2.62

 
2.29

 
 
 
 
Nonperforming assets to total assets
2.18

 
2.48

 
2.59

 
 
 
 
Nonperforming assets to total assets(1)
1.87

 
2.12

 
2.11

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



41


Table of Contents


Nonperforming Assets
Nonperforming assets decreased by $4.8 million and $7.0 million, respectively, for the three and nine months ended September 30, 2013. Nonperforming assets totaled $31.4 million at September 30, 2013, $36.2 million at June 30, 2013 and $38.4 million at December 31, 2012. The decrease in nonperforming assets for the nine months ended September 30, 2013 reflected the disposition of $7.7 million in OREO, the disposition of the $1.7 million of one-to-four family mortgage loans that we designated as held for sale in the fourth quarter of 2012, and various other nonperforming asset resolutions, including the successful restructuring (followed by a sustained period of performance) of a $6.1 million total credit exposure that initially consisted of seven loans secured by industrial/flex suburban Chicago commercial real estate owned by a family-owned entity. These actions were by the placement of $16.4 million of loans on nonaccrual status during the nine months ended September 30, 2013. The increase in loans held for sale at December 31, 2012 reflected the impact of a decision that we made in the fourth quarter of 2012 to take affirmative steps to accelerate the resolution certain performing classified and nonperforming multi-family and nonresidential real estate loans. Specifically, we determined that for certain performing classified and nonperforming multi-family and nonresidential real estate loans, the most cost-effective and expeditious resolution method was to decline to renew the loans upon maturity, or to utilize other remedies provided by our loan documents to accelerate the maturity date of the loans, coupled with an attempt, in appropriate cases, to negotiate a final resolution in the form of a deed-in-lieu of foreclosure. Of the $16.4 million in loans placed on nonaccrual in 2013, $9.0 million related to affirmative expedited resolution cases. Of this amount, $7.4 million involved multi-family loans to ten unaffiliated borrowers. We are pursuing various actions to attempt to obtain title to these multi-family properties so that they can be marketed for sale.
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. If the fair value of the property is less than the loan balance, the difference is charged against the allowance for loan losses.
The following tables represent the rollfoward of OREO and the composition of OREO properties:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in thousands)
Beginning balance
$
6,262

 
$
17,251

 
$
10,358

 
$
22,480

New foreclosed properties
512

 
2,470

 
3,268

 
6,235

Payments received
(3
)
 

 
(28
)
 
(198
)
Valuation adjustments
(241
)
 
(2,352
)
 
(471
)
 
(3,777
)
Gain (loss) on sale of other real estate owned
(64
)
 
42

 
(182
)
 
126

Proceeds from sales of other real estate owned
(1,063
)
 
(2,417
)
 
(7,542
)
 
(9,872
)
Ending balance
$
5,403

 
$
14,994

 
$
5,403

 
$
14,994




42


Table of Contents


 
September 30,
2013
 
December 31, 2012
 
(Dollars in thousands)
One-to-four family residential
$
808

 
$
1,760

Multi-family mortgage
195

 
720

Nonresidential real estate
1,047

 
3,504

Land
919

 
1,323

 
2,969

 
7,307

Acquired other real estate owned:
 
 
 
One-to-four family residential
201

 
320

Nonresidential real estate
372

 
462

Land
1,861

 
2,269

 
2,434

 
3,051

Total other real estate owned
$
5,403

 
$
10,358

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 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, as well as 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. We anticipate that we will have sufficient funds available to meet current loan commitments and lines of credit and maturing certificates of deposit that are not renewed or extended. We generally remain fully invested and utilize additional sources of funds through FHLBC advances. We had no outstanding advances at September 30, 2013.
As of September 30, 2013, we were not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on our liquidity. As of September 30, 2013, we had no other material commitments for capital expenditures.
Capital Management
Capital Management - Bank. The overall objectives of our capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. We seek to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.
The Bank is subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the Office of the Comptroller of the Currency that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Adequately capitalized institutions require regulatory approval to accept brokered deposits. If undercapitalized, a financial institution’s capital distributions, asset growth and expansion are limited, and for the submission of a capital restoration is required.
The Company and the Bank have adopted Capital Plans that require the Bank to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of at least 12%. The minimum capital ratios set forth in the Capital Plans will be increased and other minimum capital requirements will be established if and as necessary to comply with the Basel III requirements as such



43


Table of Contents


requirements become applicable to the Company and the Bank. In accordance with the Capital Plans, neither the Company nor the Bank will pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels. In addition, 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.
Actual capital ratios and minimum required ratios for the Bank were:
 
Actual Ratio
 
Minimum required to be Well Capitalized Under Prompt Corrective Action Provisions
 
Minimum Capital Ratios Established under Capital Plans
September 30, 2013
 
 
 
 
 
Total capital (to risk-weighted assets)
15.58
%
 
8.00
%
 
12.00
%
Tier 1 (core) capital (to risk-weighted assets)
14.33

 
4.00

 
8.00

Tier 1 (core) capital (to adjusted total assets)
10.10

 
4.00

 
8.00

December 31, 2012
 
 
 
 
 
Total capital (to risk-weighted assets)
15.32
%
 
8.00
%
 
12.00
%
Tier 1 (core) capital (to risk-weighted assets)
14.07

 
4.00

 
8.00

Tier 1 (core) capital (to adjusted total assets)
9.60

 
4.00

 
8.00

The Bank was notified that, as of September 30, 2013 and December 31, 2012, it was considered well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since those notifications that management believes have changed the Bank’s prompt corrective action capitalization category.
In July 2013, the Federal Reserve Board, the Office of the Comptroller of the Currency and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.  The final rule also requires unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised.  The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
The final rule becomes effective for the Bank on January 1, 2015.  The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also implements consolidated capital requirements for savings and loan holding companies, such as the Company, effective January 1, 2015.  Management is in the process of evaluating the expected impact of these new capital requirements on the Company's and the Bank's regulatory capital position.



44


Table of Contents


Capital Management - Company Total stockholders’ equity was $174.3 million at September 30, 2013, compared to $172.9 million at December 31, 2012. The increase in total stockholders’ equity was primarily due to the $1.8 million net income that we recorded for the nine months ended September 30, 2013, which was partially offset by the $422,000 in dividends that were paid to our stockholders. The unallocated shares of common stock that our ESOP owns were reflected as a $11.5 million reduction to stockholders’ equity at September 30, 2013, compared to $12.2 million at December 31, 2012.
Quarterly Cash Dividends. As a result of the regulatory restructuring occasioned by the Dodd-Frank Act, the Company is subject to Federal Reserve Board Supervisory Letter SR 09-4, which provides that a holding company should, among other things, notify and make a submission to 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 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 will continue to consult with, and seek the prior approval of, the Federal Reserve Bank prior to declaring any dividends.
Stock Repurchase Program. Our Board of Directors had authorized the repurchase of up to 5,047,423 shares of our common stock. The repurchase authorization expired on November 15, 2012. The authorization permitted 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 was 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. As of September 30, 2013, the Company had repurchased 4,239,134 shares of its common stock out of the 5,047,423 shares that had been authorized for repurchase. Federal Reserve Board Supervisory Letter SR 09-4 provides that holding companies experiencing financial weaknesses such as operating losses should notify and make a submission to the Federal Reserve Bank before redeeming or repurchasing common stock. The Company has no plans to conduct such discussions with the Federal Reserve supervisory staff or engage in stock repurchases at this time.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Qualitative Analysis. A 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, 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 as available-for-sale so as to provide flexibility in liquidity management.
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.



45


Table of Contents


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 U.S. 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 September 30, 2013, the estimated changes in the Bank’s NPV and net interest income that would result from the designated instantaneous parallel shift in the U.S. 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.
 
Estimated Decrease in NPV
 
Decrease in Estimated
Net Interest Income
Change in Interest Rates (basis points)
Amount
 
Percent
 
Amount
 
Percent
 
(dollars in thousands)
+400
$
(22,534
)
 
(13.72
)%
 
$
(5,609
)
 
(13.22
)%
+300
(10,295
)
 
(6.27
)
 
(4,011
)
 
(9.45
)
+200
(7,325
)
 
(4.46
)
 
(2,584
)
 
(6.09
)
+100
(3,370
)
 
(2.05
)
 
(1,308
)
 
(3.08
)
0

 

 

 

The Company has opted not to include an estimate for a decrease in rates at September 30, 2013 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 September 30, 2013, in the event of an immediate 200 basis point increase in interest rates, the Bank would be expected to experience a 4.46% decrease in NPV and a $2.6 million 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.
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 September 30, 2013. 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 September 30, 2013, 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.



46



PART II
ITEM 1.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. 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 had authorized the repurchase of up to 5,047,423 shares of our common stock. The repurchase authorization expired on November 15, 2012. In accordance with this authorization, the Company had repurchased 4,239,134 shares of its common stock as of September 30, 2013. The Company has no plans to engage in stock repurchases at this time.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
ITEM 4.
MINE SAFETY DISCLOSURES
ITEM 5.
OTHER INFORMATION
None
ITEM 6.
EXHIBITS
Exhibit Number
 
Description
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101
 
The following financial statements from the BankFinancial Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated statement of conditions, (ii) consolidated statements of operations, (iii) consolidated statements of cash flows and (iv) the notes to consolidated financial statements.









*
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



47



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
BANKFINANCIAL CORPORATION
 
 
 
 
 
 
 
Dated:
October 30, 2013
 
By:
/s/ F. Morgan Gasior
 
 
 
 
 
F. Morgan Gasior
 
 
 
 
 
Chairman of the Board and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
/s/ Paul A. Cloutier
 
 
 
 
 
Paul A. Cloutier
 
 
 
 
 
Chief Financial Officer
 




48